Research

Mapping Global Supply Chains – The Case of Semiconductors

14 June 2023 16:02 RaboResearch

In this report, we focus on the international supply chain of semiconductors, also popularly called chips. The supply chain is complex and specialized, resulting in strong global interdependencies.

Central Computer Processors CPU concept. 3d rendering,conceptual image.

Introduction

Currently, most goods and services travel through different countries as intermediate products before they are made into final products. While these global supply chains offer many advantages, events in recent years, such as the pandemic, bluntly demonstrated the inherent vulnerabilities of the entire chain to disruptions in one or more links in that chain. But even before Covid, pressures on supply chains were already looming with the rise of geopolitical tensions. While the threat of Covid has gradually dissipated, geopolitical tensions have intensified, with the outbreak of the Russia-Ukraine war as a sad example. Recent supply chain shocks emphasize the need to develop methods to better understand and quantify the risks that arise when global supply chains are threatened or damaged.

In this report, we focus on the supply chain of semiconductors. Semiconductors are technologically complex and require such high levels of investment in R&D and capital expenditures that there are only a few suppliers of chips in the world. Creating new supply sources is therefore often prohibitively expensive. In addition, semiconductors are strategically important. They are crucial components of some of the newest technologies, including artificial intelligence, quantum computing, and the Internet of Things. Moreover, semiconductors play an important role in the defense industry, as technology itself is becoming weaponized. Recent policies implemented by the EU and the US to develop and control the production of semiconductors emphasize their strategic importance. The global scale, complexity, and indispensability of chips make them a particularly interesting case to demonstrate the potential risks in global supply chains.

In this report, we answer the following questions:

    What are the different stages of the semiconductor supply chain? Who are the important players in each production stage? How do interdependencies and market concentration lead to potential choke points in the supply chain?

We limited this report to the supply chain of semiconductors as defined in Box 1 and do not elaborate on the subcategories. First, we present an overview of the production process of chips and the important producing companies. Then, we dive deeper into the chip supply chain and show which countries are important in the different steps along the chain. In that section, we also highlight the role of the Netherlands within the chain. We conclude by analyzing vulnerabilities in the entire value chain.

What Is a Semiconductor?

Often the terms semiconductor and chip are used interchangeably, which we also do in this report, but they are not quite the same. According to the OECD, semiconductors can be separated into two broad categories: integrated circuits (ICs) and optoelectronics, sensors, and discrete semiconductors (OSDs). Chips (or ICs) can be understood to be a subset of semiconductors (see Figure 1). Though others provide a slightly different definition of semiconductors, we use the definition provided by the OECD because we follow its mapping when assigning products to various production stages.

Our study focuses on chips, which comprised around 83% of all semiconductor sales in 2020 (see Figure 2). Chips can take the form of logic, memory, micro, or analog circuits. While all of these chips are used in final consumer products, they have different functionalities. For example, logic circuits are the so-called brains of computing and function on binary codes. Memory circuits store information that is needed for computations and can be divided into the two most used memory chips: DRAM (dynamic random access memory) and NAND (an abbreviation of “not and”). NAND does not need power to retain data and is usually used for permenant data storage in both portable devices (such as USB flash drives) and hard drives. DRAM is mostly used in personal computers and servers. Micro includes microprocessors and microcomputers, such as central processing units (CPUs), graphic processing units (GPUs), and accelerated processing units (APUs) that combine both CPUs and GPUs. Finally, analog integrated circuits change analog data, like voice recordings, into digitial data. Among all semiconductor categories, logic and memory have the largest market share and consist of more than half of the global market (see Figure 2).

Figure 1: How we define semiconductors

Source: RaboResearch based on OECD (2019) and Ciani & Nardo (2022)

Figure 2: Share of global semiconductor market by product category, 2021

Source: RaboResearch based on WSTS Semiconductor Market Forecast Spring 2022

The Semiconductor Supply Chain

In this section, we study the semiconductor supply chain based on international trade statistics, following the method developed by the OECD. We focus on trade data because the semiconductor production process is sliced up globally. We use the BACI trade database from CEPII. This database provides import and export data for 200 countries and 5,000 products according to the Harmonized System (HS) at a 6-digit level. Although we adopt the OECD’s methodology to map products to specified production stages and where production takes place, we use the BACI database’s more recent trade data (2021). Other data and methods to study global supply chains can be found in Appendix 1.

Semiconductor Production Is Concentrated Among Very Large Firms

Chips are very complex to produce. Depending on the quality of the final chip, the manufacturing process can take up to half a year. The production process has various segments and requires high levels of investment in R&D and fixed capital expenditure. This results in a highly specialized global supply chain.

There are three main stages in the production process of chips: research, design, and manufacturing (see Figure 3). In the first two stages, the chips are developed. Within the manufacturing stage, we can distinguish between front-end (wafer fabrication) and back-end (assembling, packaging, and testing) manufacturing. Generally, in front-end manufacturing, integrated circuits are printed from the chip design into wafers, while the back-end stage converts the wafers into finished chips that are then ready to be assembled into electronic devices.

Figure 3: The semiconductor supply chain

Because of high degrees of specialization and capital-intensive production processes, not many companies are involved in the design and production of chips. The 10 largest companies cover more than 50% of the sales market share (see Table 1). Some companies are involved in all production stages, whereas others focus on one specific stage. Varas et al. distinguish four main types of business models. Integrated device manufacturers (IDMs) are involved in most production stages. Fabless firms focus purely on design. Foundries focus on fabrication. And outsourced assembly and testing (OSATs) firms oversee back-end manufacturing. Semiconductor production is also supported by a broad network of materials, equipment, software design tools, and core intellectual property suppliers. For example, semiconductor manufacturing equipment (SME) vendors specialize in providing the machines necessary to produce chips.

Table 1: Top 10 semiconductor vendors by revenue, 2022

Source: Garner (2023)

Tracking the Chip Production Chain With Trade Data

When measuring R&D as a share of revenue, semiconductors are the most R&D-intensive products to produce, even more than pharmaceuticals and software. Due to these large costs, firms cooperate in conducting research. For example, ASML, Intel, Samsung, and TSMC collaborated to develop extreme ultraviolet (EUV) lithography technology (see the section about the Netherlands in this report). Although research is more difficult to track than products, it is clear that even in the first stages of the semiconductor supply chain the global interdependencies are large.

In Figure 3, we focus on the activities that produce tangible goods in the semiconductor supply chain: stage 3 (manufacturing) and 4 (application). In Figure 4, we group activities into four steps. Following the OECD, we identify a number of raw materials (where applicable), intermediate inputs, equipment, and outputs for each step.

Photographic sheets, chemicals and gases, silicon (as well as other semiconductor materials), and equipment are needed to produce wafers, the output of step one. With additional inputs and equipment, wafers are converted into semiconductors in step 2. In step 3, semiconductors are further processed with inputs like tubes and transistors and used in intermediate electronic goods. The output of step 3 is incorporated into final electronic goods in step 4.

The mapping method described above enables us to show how different segments of the manufacturing process are geographically concentrated in different regions/countries. Since we use trade data, we cannot make any direct claims about which country is producing what. However, when a country/region is importing, for example, a large share of step 1 and exporting a large share of step 2, it indicates that this country/region plays a significant role in the production processes of step 2.

Figure 4: Simplified supply chain of semiconductors in traded goods

Note: The blue boxes contain “new” products integrated in the chain, whereas the orange boxes are the products produced within the supply chain. The HS codes for each step are provided in Appendix 2. Source: RaboResearch based on OECD (2019)

Different Regions Dominate Different Parts of the Supply Chain

Figures 5 and 6 show how the exports and imports per step are divided among various regions or countries. In general, we find that the EU, Japan, and the US are more involved in the upstream segments of the supply chain. Taiwan and South Korea are in the middle segment of the supply chain, and China is in the downstream segment.

In step 1, the EU accounts for the largest share of raw material exports (more than 30%). Japan plays a large role in the export of inputs (such as special gases and chemicals) and equipment. The US also exports a fair share of raw materials and equipment. Notably, Japan’s exports of step 1 inputs account for nearly 40% of globally traded inputs.

In the middle segment of the supply chain stand South Korea and Taiwan, which import wafers and equipment and produce semiconductors. Their share of semiconductor exports (step 2 output) amounts to 35%. A large portion of semiconductor production is exported to China, where it is integrated into consumer and industry electronics. Finally, China re-exports these electronics to other parts of the world.

Figure 5: Shares of exported goods in the semiconductor supply chain

Source: BACI (2021), RaboResearch

Figure 6: Shares of imported goods in the semiconductor supply chain

Source: BACI (2021), RaboResearch

Geographical Interdependencies

To obtain a more detailed picture of geographical interdependencies, we examine the trade of specific categories of products between different countries. We focus on the raw materials used in step 1, the output of step 1 (wafers), the output of step 2 (semiconductors), and outputs for final consumers and industries. Finally, we describe the position of the Netherlands in the chip supply chain.

Germany and the US Are the Largest Net Exporters of Raw Materials

Three products are used as raw materials to produce wafers in step 1: high-purity silicon, silicon carbide, and germanium. If we look at the trade balance of raw materials per country, we find that Germany is the top net exporter and China the largest net importer (see Figure 7). Germany has this position thanks to high-purity silicon exports, which have the highest trading value of the three raw materials. Although silicon is the second-most abundant element (by mass) on Earth after oxygen, there are only a few deposits that can be used for high-tech applications, mainly quartz deposits (chemical: silicon dioxide). High-quality quartz sands are widespread in Germany, as reported by the Federal Institute for Geosciences and Natural Resources (BGR).

A third of global high-purity silicon exports comes from Germany (the German company Wacker Chemie is one of the largest producers worldwide), and more than 70% of German silicon exports goes to China. Although China is one of the world’s major purified industrial silicon producers (7 of the 10 largest polysilicon manufacturers in 2020 were from China), it still imports a sizable amount and is the largest net importer of high-purity silicon. The US also exports a large share of silicon (a quarter of all exports), and Hemlock, based in the US, is one of the largest polysilicon manufacturers.

Of the other raw materials, China exports the largest share, with 35% of global germanium exports and 38% of global silicon carbide exports.

In recent years, the supply of some raw materials has come under increased pressure. For example, high-purity silicon was originally processed from silica sand (silicon dioxide), which was widely available but is now at risk of shortage due to various factors, such as Covid-19 impacts and lower silicon production in China. Germanium, a natural semiconductor and an alternative to silicon, was included by the European Environment Agency in the list of top twenty raw materials identified as critical metals by the European Commission, owing to the risk of supply shortages.

Figure 7: Germany and the US are the largest exporters of raw materials for semiconductors

Source: BACI database (2021) and RaboResearch

Japan and China Are the Largest Net Exporters of Wafers

Silicon and other semiconductor raw materials are melted and cast in the form of a large cylinder called an ingot and then sliced into wafers (ASML). Wafers are then used to create the integrated circuits in step 2. By comparing the trade balance of wafers with that of raw materials, we can see that the top net importers of raw materials are also the top net exporters of wafers, confirming that countries like Japan and China import raw materials for the production of wafers.

Figure 8: Wafers are mostly exported by China and Japan

Source: BACI database (2021) and RaboResearch

These wafers are then mostly imported by Taiwan, followed by South Korea (see Figure 9). Trade data also shows that Southeast Asia plays an active role in the semiconductor industry. While more advanced front-end chip production is centered in Taiwan and South Korea, back-end assembly is centered in Southeast Asia.

Figure 9: Taiwan mostly imports wafers from Japan

Source: BACI database (2021) and RaboResearch

Taiwan and South Korea Lead Semiconductor Exports

Semiconductors, the output of step 2, mainly include the most advanced chips and are mostly exported by Taiwan and South Korea (see Figure 10). These are used in various products and industries, like consumer electronics, the automotive industry, and the space industry (step 3).

Across the globe, only a couple of manufacturers produce semiconductors, as the process requires significant R&D and capital. The Taiwanese company TSMC is by far the leading manufacturer and has a market share of more than 50%. Samsung, in South Korea, is second, with a market share greater than 10% in Q4 2022. Together with Intel, TSMC and Samsung are the only companies that can produce very specific and very small types of chips.

Figure 10: Taiwan and South Korea lead semiconductor exports

Source: BACI database (2021) and RaboResearch

The semiconductors described above consist of five different product types. Taiwan has the largest trade balance in processors and other types of integrated circuits. These processors are then mostly exported to Singapore and South Korea (see Figure 11), whereas other types of integrated circuits are sent mostly to Singapore and China (see Figure 12).

Figure 11: Taiwan exports most of its processors to Singapore and South Korea

Source: BACI database (2021) and RaboResearch

Figure 12: Taiwan exports most of its other types of integrated circuits to China and Singapore

Source: BACI database (2021) and RaboResearch

China Is the Largest User of Semiconductors for Final Electronic Goods Exports

The final product in which semiconductors are integrated (step 4 outputs) can be separated into final goods for consumers and final goods for industry. China has the largest share of exports for both categories.

Final consumer outputs include products like telephones and cameras. Most of China’s exports of these products go to the US (see Figure 13). Japan, the UAE, and the Netherlands also have large import shares. Dubai and Rotterdam are among the largest ports in the world and serve as a transit port for goods in their respective regions.

Final industrial goods contain a range of products, including cash register machines, navigational aid devices, and apparatuses based on the use of X-rays. China exports these machines mostly to the US and Germany (see Figure 14).

Figure 13: China exports the majority of its final consumer goods to the US

Source: BACI database (2021) and RaboResearch

Figure 14: China exports most of its final industrial goods to the US and Germany

Source: BACI database (2021) and RaboResearch

BACI’s dataset does not contain information on which sectors import these goods. But we can get some sectoral information from the OECD’s ICIO tables by looking at which Chinese sectors export electronic and electrical equipment. However, these exports may contain products from other steps, so the analysis is not perfect.

The global interdependence of semiconductor production is reflected in Figure 15, which depicts significant intra-industrial trade between Germany and China in the electronic and electrical equipment sectors. But the German automotive industry (motor vehicles, trailers, and semitrailers) also uses Chinese electronic and electrical equipment as an intermediate.

In the US, we see the same intra-industry trade and use of Chinese electronic and electrical equipment in the automotive industry. But, unlike Germany, the US government imports a large share of products from these Chinese sectors, most likely for the US army.

Figure 15: German sectors that import intermediates from the electronic and electrical equipment sectors in China

Source: ICIO OECD 2018

Figure 16: US sectors that import intermediates from the electronic and electrical equipment sectors in China

Source: ICIO OECD 2018

The Netherlands Holds a Strong Position as an Equipment Provider

According to a DNB analysis, companies in the semiconductor industry account for almost a quarter of the market capitalization of all listed companies that have a registered office in the Netherlands. The Netherlands is involved in almost each step of the semiconductor production chain (see Figure 17). Dutch chip companies ASML, NXP Semiconductors, and STMicroelectronics are major players in the global market. ASML provides equipment for chip manufacturing, NXP designs chips, and STMicroelectronics focuses on manufacturing and design.

The Netherlands has a large trade surplus in equipment for the production of wafers and semiconductors (step 1 and 2 equipment). Almost half of all the EU equipment exports for wafer fabrication (step 1) are from the Netherlands, and about a third of all the EU exports of equipment in semiconductor production (step 2) is originally Dutch and mostly produced by ASML.

ASML itself relies on a broad network of 5,000 suppliers across Europe, the US, and Asia. Cooperation becomes more efficient and innovative when suppliers are highly specialized in providing certain components. For example, ASML’s most important partner, Carl Zeiss SMT of Germany, specializes in high-performance optics and supplies an essential subsystem of ASML’s semiconductor lithography scanners.

We also see large import and export values in step 4, which probably has to do with the port of Rotterdam, the largest port in Europe. From Rotterdam, products from all over the world are re-exported to the rest of Europe.

Figure 17: Dutch export and import values in each step of the semiconductor production chain

Source: BACI database (2021) and RaboResearch

Most of the Dutch equipment used to fabricate wafers (step 1) is exported to Taiwan, but the US and South Korea also receive a large share of Dutch equipment (see Figure 18). We also see some intra-industry trade between the Netherlands and other countries, indicating the global interdependency in this step.

Figure 18: Dutch trade of step 1 equipment

Source: BACI database (2021) and RaboResearch

As indicated by the large trade surplus in Figure 17, the Netherlands plays an even more significant role in semiconductor production (step 2) by supplying the necessary production equipment. Most of the step 2 equipment goes to Taiwan and South Korea (see Figure 19), which are leaders in semiconductor production. In particular, ASML has a monopoly on extreme ultraviolet (EUV) lithography, which is essential for the production of chips smaller than 7 nanometers (nm). This technology provides shrunken transistors, which improve silicon utilization and power efficiency, both of which are important for the mobile, handheld device, and processor industries. For example, TSMC's 4nm process is used to build the A16 Bionic chip that is used in the iPhone 14 Pro. So far, only Taiwan and South Korea can make such advanced chips using lithography equipment provided by ASML.

Figure 19: Most Dutch equipment for step 2 goes to Taiwan

Source: BACI database (2021) and RaboResearch

Vulnerabilities in the Supply Chain

The production of chips is very globalized and at the same time extremely specialized. It necessitates large investments to produce output at the different stages of production and leads to strong global interdependencies. Recent legislative acts in the US and EU confirm the importance the governments place in safeguarding their supply of chips and their understanding of the supply chain’s vulnerability to shocks. In this section, we distinguish several types of shocks that previously affected this supply chain and draw some conclusions about the potential effects of future shocks.

Covid-19 Disruptions

Covid disrupted the semiconductor supply chain from both the demand and supply side. Due to lockdowns, demand for work-from-home (WFH) products grew, which led to an increase in the demand for chips. At the same time, the car manufacturing industry had to shut down factories and cancel chip orders in anticipation of a drop in vehicle demand. But when the car manufacturing industry recovered more quickly than expected, chip makers were unable to meet the increased demand because they had switched production to accommodate demand from other industries.

Pressures on the supply side amplified the problem. Chip manufacturing plants were forced to close due to lockdowns, resulting in reduced semiconductor production and depleted inventories. In addition, fewer flights and airport closures, together with more shipments of items related to Covid-19, led to declining air cargo capacity, which delayed chip shipments.

It is estimated that the 2020 chip shortage affected more than 169 industries, of which the automotive and consumer electronics industries took the largest hits.

Natural Disasters

Natural disasters are usually local but can cause significant disruptions in a supply chain because of the high geographical concentration of activities. For example, the severe winter storm in Austin, Texas in the US in February 2021 forced three plants owned by Samsung, Infineon, and NXP Semiconductors to close due to a loss of electricity. The storm reduced supply from these plants for several months. In the same year, Taiwan experienced its worst drought in more than half a century, leading to shortages among chip manufacturers that use large volumes of ultrapure water to clean their factories and wafers.

Geopolitical Tensions

Geopolitical tensions can also impair global access to certain suppliers and consumers. When geopolitical tensions between Japan and South Korea rose sharply in 2019, Japan imposed export restrictions on more than 1,000 products to South Korea. Among those products were three key chemicals used to produce semiconductors and supplied predominantly by Japan: hydrogen fluoride, fluorinated polyimides, and photoresists. Since South Korea is the second largest semiconductor manufacturer (OECD), the impact from this conflict could easily have gone beyond the semiconductor industry and influenced the entire electronics supply chain. Luckily, these tensions eased before they could really do harm.

Semiconductors are also currently at the center of the escalating trade tensions and intensifying technology rivalry between the US and China. For instance, the US imposed restrictions on exports to the Semiconductor Manufacturing International Corporation, the largest semiconductor firm in China, in September 2020. In October 2022, the US issued new controls on exports of advanced semiconductor manufacturing equipment technology to China. And in January 2023, the US, the Netherlands, and Japan reportedly reached a deal enacting controls on exports of advanced semiconductor equipment to China.

Is It Easy To Diversify the Supply Chain?

Many businesses and governments are aware of vulnerabilities in the semiconductor supply chain. Businesses strengthen their supply positions by diversifying their supply base, boosting regionalization, or increasing their inventories. Governments around the world are attempting to solve this issue by investing in local semiconductor manufacturing facilities and increasing their semiconductor research funding. In addition, governments around the world have introduced policy interventions intended to diversify or localize parts of the supply chain, for example, the Innovation and Competition Act from the US and the European Chip Act.

However, if more than half of the global market share of certain key products is held within one region (such as the three key chemicals coming from Japan, EUV from the Netherlands, or cutting-edge chips from Taiwan and South Korea, as shown in previous sections), it is almost impossible to diversify or find an alternative supplier, at least within a short period of time. Even for less-advanced chips, it is difficult to switch to another supplier. For example, Taiwan and South Korea together account for almost 40% of global chip fabrication capacity. If access to their chips is blocked, it is almost impossible to expand the manufacturing capacity in other regions to compensate for their market share in a short period because of the high R&D and capital expenditure requirements. In addition, it can take several years for fabless companies to switch foundries or for foundries to switch material suppliers because they need to assess and test several rounds to make sure that the products from other sellers meet their quality requirements. Such switching is associated with very high costs.

The risks and vulnerabilities in this supply chain compel businesses and governments to strengthen their positions and invest in more local production. Nevertheless, shifting production stages will be very expensive and therefore not easy.

Bibliography

Ciani, A. and Nardo, M. (2022). The position of the EU in the semiconductor value chain: evidence on trade, foreign acquisitions, and ownership. JRC Working Papers in Economics and Finance, 2022/3.

OECD, 2019. Measuring distortions in international markets: the semiconductor value chain.

Appendices

Appendix 1: Other Data and Methods To Study the Global Supply Chains

Global input-output (IO) datasets, as developed and maintained by the OECD (ICIO) or the University of Groningen (WIOD), provide an alternative and often complementary means to examine global supply chains. These datasets show linkages between different sectors and countries, which makes them useful in the study of supply chains and the impact of shocks on economies in general. However, there are two important disadvantages to using IO tables for this study. First, they do not include enough detail at either the sector or product level. Second, the complexity of collecting and balancing this type of data means that the tables are not timely enough for our current purposes.

Also, firm-level data, for example the Amadeus database, provides an alternative way to analyze the semiconductor supply chain. Ciani and Nardo use firm-level data to map companies in the different segments of the semiconductor supply chain and use turnover to analyze the position of EU companies in different production segments. Our report focuses on products traded between different regions, so firms in the supply chain are beyond our research scope. Nevertheless, results from our analysis tell a similar story to that of Ciani and Nardo’s analysis based on firm-level data.

Varas et al. provide an elaborate analysis of the semiconductor supply chain as well. They have analyzed this chain by using World Semiconductor Trade Statistics (WSTS). Based on sales data provided by global semiconductor companies, their report shows the market sales of a wide variety of products for important regions along the semiconductor value chain, both from the supply and demand side.

Appendix 2: HS Codes Related to the Different Steps in the Supply Chain