EXECUTIVE SUMMARY 

•  The semiconductor industry, projected by the World Semiconductor Trade Statistics (WSTS) to reach approximately $611 billion in value by 2024, is considered the backbone of the Fourth Industrial Revolution, serving as an essential element in modern technology and innovation. 

• Demand disruptions caused by the COVID-19 pandemic in 2020 caused the overall projected revenue of the semiconductor industry to decrease by $55 billion from the forecasted value of $433 billion, thus revealing supply chain vulnerabilities 

• Investments in domestic production of semiconductors are necessary for countries to build supply chain security to protect their economies in case of any economically disruptive world events. 

Introduction 

Today’s globalized economy is built on the backbone of global supply chains and as innovations in research, development, and manufacturing boom, the importance of the semiconductor industry in driving advances in technology for the industry 4.0 (fourth industrial revolution) has led to a rapid growth in demand and increasingly strained supply chains. Recent crises such as the COVID-19 pandemic and geopolitical tensions between the United States and China, have revealed flaws in the global supply chain of semiconductors causing governments to look towards domestic production and reduce dependence on foreign supply through a process called “localization”. Measures such as the CHIPS Act and the Innovation and Competition Act in the United States, the European Chips Act in Europe, and the Semiconductors and Digital Industry Policy in Japan, are indicators of the pursuit of countries to secure their supply chains. As we continue to face new complexities of our globalized economy, strengthening supply chain security to safeguard these critical industries has become a priority for economic resilience, national security and to ensure that future disruptions are minimized. 

Current Supply Chain Vulnerabilities 

The semi-conductor crises show how global shortages (e.g., from the pandemic, tensions with China) have affected industries spanning from military and defense, electrotechnology, automotive, healthcare, and many others. Due to the isolation during the COVID-19 pandemic the demand for electronic devices like laptops and tablets rose but similarly because of halted production processes, the supply of semiconductors could not meet the level of demand in the market earlier in 2020.  

Some effects on the various industries included the 12.5% fall in general smartphone sales in 2020Gartner Says Worldwide Smartphone Sales Declined 5% in Fourth Quarter of 2020; in the gaming industry, Sony’s PlayStation5 target output was cut from 16 million units to around 14.8 million units Sony Cuts PlayStation 5 Production on Chips Shortage – Bloomberg; and as the automotive industry is about 45% electronic the effects were of the semiconductor shortage were grave: the leading global car producer Toyota experienced a reduction in supply from 845,107 units in 2019 to 627,451 units in 2020, resulting in about 20% decline in sales Toyota’s Output Slumps 26% on Prolonged Supply-Chain Snarls – Bloomberg, furthermore Honda dropped production by 4,000 cars in one of their Japanese factories, while Ford shutdown two plants in Kentucky and Germany Covid Pandemic Slows Down Chipmakers, Causes Car Shortage – Bloomberg. 

These vulnerabilities are also caused by bottlenecks. A bottleneck is a disruption that hinders the flow of goods and information within a supply chain. Hence, the COVID-19 pandemic created bottlenecks at various stages of the supply chain through lockdowns, factory closures, and labor shortages leading to product supply shortages, price increases, and longer delivery times. This is particularly worse, because most of the semiconductor production is split between four organizations- TSMC, Samsung, GlobalFoundries Inc., and United Microelectronics Corp, among which TSMC makes about 70 per cent of the world’s semiconductors and has a market share of about 53 percent.  

Governmental Responses and New Regulations 

To address the issue of supply vulnerabilities, countries are actively implementing regulatory frameworks and policies to fortify domestic supply chain security. The U.S. CHIPS and Science Act of 2022 aims to reduce reliance on foreign suppliers and ensure a stable supply of semiconductors for U.S. industries $52.7 billion in government subsidies put towards American semiconductor research, development, manufacturing, and workforce development. Similarly, the European Chips Act  which was approved in July 2023 focuses reinforcing European capabilities in semiconductor manufacturing and future competitiveness, maintain its technological leadership and security of supply, with the overall goal of improving the EU’s global production capacity from below 10% to 20%. 

Challenges in Implementing Supply Chain Regulations 

While securing critical supply chains is essential for national security, these regulations also raise important questions about global trade. The push to localize production may lead to increased costs for companies and consumers, as domestic manufacturing often requires higher labor costs and capital investment. Additionally, the move toward supply chain security could strain international relationships, particularly with countries that have traditionally been key suppliers in these industries. 

In the United States, there have been challenges with implementing the CHIPS Act due to The National Environmental Policy Act (NEPA) which requires environmental assessment and reviews before construction or permitting federal funding for semiconductor manufacturing facilities. In response, an option could be to request the streamlining of NEPA processes for projects with high strategic value, like those under the CHIPS Act. Reducing the documentation requirements and timelines could enable faster construction while still maintaining environmental standards to avoid a similar case of the Council on Environmental Quality (CEQ) Length of Environmental Impact Statements (2013 – 2018) which took about 5 years to complete its Environmental Impact Statements between 2013 and 2018. 

Despite these challenges, the benefits of secure supply chains are undeniable. Governments are now more focused on mitigating risks and ensuring that vital industries are protected from external shocks. Balancing these efforts with global trade commitments will require a coordinated approach, particularly as the world faces new challenges like climate change and evolving geopolitical tensions. 

Conclusion 

Securing the supply chains of semiconductors as well as other critical resources and materials has become a necessity for national security and economic stability. The U.S. CHIPS Act and the European Chips Act represent significant steps toward securing critical supply chains, but more innovation in policy formation is needed to tackle the evolving challenges of globalization and technological advancement. While these measures may come with higher costs, the long-term benefits of stable, secure supply chains will outweigh the immediate challenges, ensuring that key sectors can withstand future crises.