In a new era of semiconductors, manufacturers across industries must fight to stay ahead—and ESG may be the secret weapon.
The geopolitical conversation around microchips is impacting everyone who uses something with a circuit board—from cars to smartphones. In a world that relies on a multitude of moving parts in order to achieve success, semiconductor supply chains were faced with a multitude of challenges in recent years and will continue to be in the future.
So what are today’s challenges for the semiconductor industry, what are possible solutions, and what could the future of microchip manufacturing look like?
What are the chip wars?
The common consumer may not realize that microchips are in almost every product that they use today––everything from phones to furniture to shoes. The trend of making commonly used products smarter with semiconductors will only accelerate. This is why governments are now getting involved in securing supply, just like they do for other vital supply chains like food production and energy.
Governments have a multitude of means to influence these supply chains, such as simple VAT measures, incentivizing local production through access to funds and tax rebates, and broad international alliances or trade restrictions. When not done collaboratively (as is currently the case), they could lead to potentially escalating areas of conflict between allies. These issues have now become front and center of what is being referred to as the “chip wars.”
What sparked the chip wars?
The semiconductor supply chains are unique in that these are highly complex products with equally deep, complex and often opaque supply chains. While much of the IP was developed in North America, the majority of production actually happens in China, Vietnam, Taiwan, South Korea and Japan—which means that those countries are now playing crucial roles in the supply chain. These supply chains grew organically, so inherent weaknesses were never identified, let alone resolved.
This came to light during the Covid-19 pandemic when demand for work-from-home technology increased exponentially, and automakers found themselves competing for the semiconductor capacity in production facilities in ways they never had before. These supply chain issues caused upheaval in the auto industry, holding up production and denting sales.
Adding to the problem, downstream operations in South and Southeast Asia were adversely impacted by the COVID-19 Delta variant, creating further bottlenecks in the supply chain. At the beginning of the pandemic, car companies canceled orders, but as production ramped up again toward the end of 2020, there was no semiconductor supply available.
At the same time, China’s military aspirations are raising tensions globally. These concerns are further exacerbated by various territorial claims they have begun to make, including on the territory of Taiwan, which is a key junction point in the global semiconductor supply chain. China still needs advanced chips and chip manufacturing technologies coming from Western countries to achieve these military goals. The U.S., in addition to taking unilateral steps to prevent this from happening, is also pressuring countries like the Netherlands and Japan from exporting manufacturing technologies to China. This has naturally led to retaliation from China which, among other things, has banned the use of Western-made chips in key infrastructure projects.
These escalating actions are causing more concern and have led to governments attempting to de-risk through national and international policy. The unintended side-effects are that this has put the U.S. and the EU in an awkward position of competing against each other in the new race for dominance in the chip market.
What are the implications for engineering companies?
The looming chip wars are mostly a good thing for manufacturers, but it’s not all roses. On one hand you have incentives like the Chip acts in the U.S. and EU which provide much needed funding to develop capacities and new technologies. On the other hand, they face trade restrictions which may limit business or make it more complicated.
The incentives mainly aim to strengthen R&D to create new chips that are cleaner, more powerful and energy efficient; increase local production capacities; increase transparency in supply-chains; and bridge the skill gap by attracting new talent but also upskill and diversify workforces. The catch is that the incentives only apply if investments are used locally. Companies therefore need to decide where to expand, taking into account not just incentives and limitations on where they can spend that money, but potential limitations they may face on trade.
For R&D, companies that design and sell chips (or products with chips in them) but contract foundries to manufacture them will need to revisit their contracts or create new partnerships that comply with the geopolitical restrictions.
For manufacturers and their supply chains, subsidies to increase local production (fab capacities) or even set up new plants will have to be weighed against the costs of rebalancing globalized manufacturing strategies and the implications on exports of those manufactured products. It will now make more sense to set up their own capacities rather than pursue foundry partnerships, which has been the norm to date.
Being successful will require a rethinking of global strategy as well as a plan for digital transformation, capital project management and financial planning. The evolving politics provides the opportunity to not just create new leaders in the market, but also forces companies to reposition themselves entirely in terms of where they sit in the global semiconductor supply chain.
What does this mean for ESG?
The spur to revisit long-standing partnerships in the light of new incentives means that suppliers will have to position themselves in more favorable ways than just lower cost and supply security.
Both the U.S. and EU chip acts set aside money for transparency in semiconductor supply chains, as well as technologies that contribute to decarbonization. As much as 25% of the total $280 billion in funding under the U.S. Chip Act is allocated to this. Additionally, in the EU, regulations around electronics products like waste directive, product passports and the like are pushing companies to adopt better manufacturing practices, better supply chain policies, and provide transparency around these issues. When put into context of other regulations like the supply chain law or the corporate sustainability reporting directive, it becomes clear that companies have no other option but to address ESG head-on and do so in a strategic way—rather than responding to regulations when they come up one at a time.
Another aspect that piles onto this is that many of the consumer electronics manufacturers, automotive manufacturers and other industries have made climate pledges between 2020 and 2022 and are looking at their supply chains to achieve these goals now. Some of these companies are facing strong revenue headwinds from public procurement and B2B customers that require ESG disclosures in order to do business. They have already put in place ESG requirements on new product development that have begun to strongly disadvantage suppliers that cannot demonstrate ESG performance.
Of note, this even applies to companies that previously held monopolies on technology and therefore had more freedom to decide on things like price, delivery and ESG. The massive increase in funding for new R&D and manufacturing will create new winners that are more willing to play ball with their customers.
What happens when all the dust settles?
There is a storm of carrot and stick regulations that, when seen individually, may not call out ESG specifically. However, when seen in combination with market demand that’s moving towards more ESG requirements, it becomes clear that the semiconductor industry has no option but to move away from its opaque, sometimes dirty past and into a new future of transparency, resiliency and collaboration.
Semiconductors are a complex space, and any movements made now will only bear fruit in the next 10 years. However, let’s not forget that this is the same timeframe that Tesla needed to take the auto industry by storm. We will see a major shift in market share geopolitically and also from the perspective of individual winners and losers, and while there are many things that will play into the final scoreboard, ESG will be one key contributor to success.
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About the author
Neil D’Souza is the CEO and founder of Makersite, a company that uses AI, data, and apps to power sustainable product and supply chain decisions at scale. Formerly CTO at Thinkstep AG, Neil started his career helping companies understand how what you make and where you buy have an impact on issues such as cost, compliance, risk, and sustainability. Working with over 200 companies across multiple sectors, Neil found that the approaches we are using would never scale to the problem at hand. He solved that scaling problem by creating Makersite in 2018.
