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Author: | 2022-08-29

Observation: It is impossible for the semiconductor supply chain to be 100% autonomous and controllable now, and it is also unlikely in the future!

Semiconductor manufacturers are enjoying massive subsidies from China to the U.S. to Europe, but what's the impact?

Source: Nikkei Asia
In mid-June, TSMC urgently dispatched a team to Japan to visit some of the company's equipment suppliers. It wondered, why do these companies say they can't deliver important machines on time? TSMC, the world's largest chipmaker, and its suppliers have been doing their best to deliver on the powerhouse's demands, but this is the first time it has received a message of apology.
This situation is very sensitive. TSMC is in the midst of a $100 billion expansion, boosted by the government after a severe shortage of key chips last year. But the Taiwanese giant found its supply chain plagued by bottlenecks ranging from lenses precise enough to focus a laser beam on a ping-pong ball on the moon, to seemingly mundane valves and pipes.
Ahead of the June mission, the company's head of supply chain management, JK Lin, and a task force traveled to the U.S. in March for a similar visit to investigate why chip-making machines ordered by TSMC in the U.S. took as long as 18 months to arrive. goods.
And in Japan, suppliers including Tokyo Electron, the country's largest chip-making equipment maker, and Screen Semiconductor Solutions told TSMC they may not even meet their promised extended lead times.
Screen, one of the few companies in the world that makes chemical cleaning machines vital to chip fabs, has a list of obscure components that are difficult to source from its own supply chain. Such as valves, pipes, pumps and containers made of special plastics – all of which are in short supply.
These problems are cropping up from supplier to supplier, making it difficult to solve a global shortage of chips, the heart and brain that power electronics from PCs and smartphones to cars.
These difficulties highlight a host of unpleasant truths, not only for TSMC and its competitors and suppliers, but also for policymakers around the world. Governments in China, the U.S., Europe and elsewhere have decided to "localize" semiconductor manufacturing amid U.S.-China trade tensions and the raging Covid-19 pandemic. So-called supply chain resilience has become a central goal of policy. But this resilience is a "myth".
These semiconductor companies receive huge subsidies and state-backed investment aid. The U.S. is expected to vote again on $52 billion in chips. The Japanese government will spend $3.5 billion to support TSMC to build a factory in Japan.

The problem is that these efforts only touch the visible end of the semiconductor supply chain. Behind chip production is a network of supply equipment and other items that include hundreds of raw materials, chemicals, consumables, gases and metals without which the incredibly precise chip-making process cannot function. China has also invested hundreds of millions of RMB to replicate the chip supply chain within its borders.

According to Nikkei Asia's survey and interviews with more than two dozen industry executives, while the globalized semiconductor industry used to function smoothly in dozens of countries, efforts to replicate this architecture within a single country or region have exposed The problem is that this model may exacerbate supply chain bottlenecks, as evidenced by data from major chip economies such as the US, EU, Taiwan and Japan over the past five months. At the same time, questions have been raised over the long-term impact of the policy, with fears that many of these plants could end up sitting idle if they get up and running.
JT Hsu, head of semiconductors and materials at the Boston Consulting Group, said that even the goal of achieving 70 to 80 percent self-reliance "is very difficult ... for any country or region to cover the complete semiconductor production chain It's extremely challenging."
"You need not only a factory where chips are made, but everything involved in the factory," said Jens Liebermann, vice president of semiconductor materials at the German chemical group BASF's Electronic Materials business unit. "All materials, chemicals, gases and their raw materials, It’s all a must. At the end of the day, where is the source, where is the raw material, where is the manufacturing, and who can handle the logistics?”
Zhang Zhongmou, a veteran of the semiconductor industry who founded TSMC and was the CEO of TSMC, pointed this out bluntly in his speech to the United States.
"If you want to rebuild a complete semiconductor supply chain in the U.S., you don't see that as a possible task," he told an industry forum last year. "Even if you spend hundreds of billions of dollars, you'll still find that the supply chain is incomplete, and you'll find that it's very costly, much more expensive than you currently have

upstream bottleneck
As trivial as they may sound, these valves, pipes, pipes, pumps and vessels are case studies of complexity that are troubling executives.
"I'm not kidding! We're still receiving valves and pipes that were ordered over a year ago," said a TSMC supplier executive. "We're often shocked when we open the box. The order is for 100 pieces, and there may only be 10 in the box."

With only a few specialized suppliers able to meet pollution prevention standards and deal with the red tape of manufacturing projects with potential military applications, increasing capacity is no easy task, especially when supplies of raw materials are limited.
These items are made of special plastics called fluoropolymers, which are essential for handling the caustic chemicals and ultrapure water that flow in all chip fabrication facilities and chip fabrication machines, and the standards are continuing improve.
For example, the state-of-the-art chips used to build the latest iPhone and MacBook processors are now at the 5-nanometer level. Nanoscale refers to the width of lines between transistors on a chip. A nanometer is about 1/100,000 the thickness of a sheet of paper or a human hair. The smaller the nanoscale, the more sophisticated and powerful the chip, and therefore more challenging to develop and produce. Chipmakers, in turn, need to put billions of transistors on a chip. Very low tolerance for defects or micro-contamination.
"The size of a new coronavirus is about 100 nanometers," Kevin Gorman, senior vice president of integrated supply chain transformation at Merck & Co in Germany, told the Nikkei. "That way you know how fine-tuned chip fabrication is and why all the materials are critical."
For semiconductor-grade valves and pipes used to handle chemicals, it is critical that they do not become a source of contamination. And only a few suppliers in the world have the ability to meet the stringent requirements. Japan's CKD, Advance Electric, and American Entegris are qualified valve suppliers; Japan's Iwaki is a major supplier of chemical transfer pumps; industry sources say Agru of Austria and Georg Fischer of Switzerland are important suppliers of key piping systems for chip plants .
Wassenaar Arrangement, a multinational agreement signed by more than 40 countries to avoid shipping such components to certain countries for military use, adds red tape and presents another hurdle for new entrants.
Moving up the supply chain, further obstacles have arisen in the manufacture of fluoropolymers for these components. One such material, called PFA, is only available from Chemours in the US and Daikin Industries in Japan. Its processing requires a lot of technology, and there are no competitors.
Other major manufacturers of fluoropolymer materials include Solvay in Belgium, 3M in the US, Gujarat Fluorochemicals in India and HaloPolymer in Russia. But not all are qualified to manufacture semiconductor-grade materials, and they must supply products for a wide range of industries beyond the tech industry. Material from Russia has been reduced due to disruptions and sanctions caused by the situation in Ukraine.
Hsu Chun-yuan, chief business development officer of TSMC's leading cleanroom maker and rival chipmaker Micron Technology, told the Nikkei that "the sources of fluoropolymers are limited" and "driven by the electric vehicle boom, Demand from both the chip and battery industries is increasing.”
What about going further upstream? Fluoropolymers are processed from fluorite, also known as fluorspar, and China controls nearly 60 percent of global production, according to market research firm IndexBox. China has long identified fluorite as a strategic resource, and in the late 1990s restricted exports due to its importance to industries such as agriculture, electronics and pharmaceuticals, aviation, aerospace and defense. This mineral is often labeled as "semi rare earth".

Mexico is the second-largest fluorite producer, accounting for about 10.8 percent of the market last year, followed by Mongolia and South Africa, according to IndexBox. In Europe, Bulgaria and Spain together control about 5% of the global market. In a supply chain review document released by the White House in 2021, the United States flagged the risk of critical materials at foreign disposal and listed fluorite as one of the "shortage strategies and critical materials" list. The report does not point to its deep ties to the chipmaking industry. It said increasing sources of critical minerals, strengthening inventories and increasing North American manufacturing, processing and recycling capacity could reduce disruption during "future global crises".
Similar problems arise when dealing with gases such as neon for lithography and fluorine C4F6 for etching. Both see Ukraine or Russia as the main source of supplies, which have been disrupted by the war. The professional requirements for the equipment to move these gases are also very high.
The Nikkei Asian Supply Chain survey revealed that only a handful of companies — including Luxembourg’s Rotarex and Japan’s BBB Neriki Valve and Hamai Industries — are qualified to supply ultra-high-purity valves for gas cylinders used in the semiconductor industry. Rotarex controls almost 80% of the market and only produces these specific products in Luxembourg.
Made of stainless steel and other alloys, these valves must undergo multiple verification processes and require government certification due to the risk of leaks and explosions. New entrants need "10 to 20 years" to meet certification standards and testing by different government agencies.
Trade tensions, pandemics and wars
In 2019, the administration of former U.S. President Donald Trump cracked down on Chinese tech champion Huawei Technologies on national security grounds and prevented it from using U.S. technology, especially chips, so demands for the chip supply chain emerged in the U.S.-China tech war. The cry for resilience. The move has spurred aggressive production across industries in China to reduce reliance on the United States and create a secure, self-controlled supply chain.

The self-sufficiency movement morphed into a global movement in late 2020, as an unprecedented chip shortage stalled auto production and hurt a wide range of industries, suppressing global economic growth and threatening jobs. The U.S. Commerce Department said the shortages have reduced the country's gross domestic product (GDP) by about $240 billion by 2021. The auto industry alone produced 7.7 million fewer cars than the previous year.
The situation in Ukraine further magnifies the need for supply chain security. The war has pushed up the prices of energy, metals, chemicals and key gases needed by many chip-related suppliers. It also adds to the sense of urgency.
For most major economies, chips are essential for building everything from computers and data centers to appliances and cars. They are at the heart of the battle for supremacy in space, science, artificial intelligence and electric vehicles, and are vital to future military and defense equipment. The U.S. Commerce Department noted in a recent report that advanced chips are integral to a range of critical national security capabilities.
To date, governments have pledged more than $100 billion to subsidize the construction of local chip supply chains. In addition to the U.S. chip bill, the European Union passed the $46 billion European Chip Act, Japan provided a $4.42 billion budget, and India set up a $30 billion funding program for semiconductors and other tech industries.
Major chipmakers from Intel, Micron and Texas Instruments in the US to TSMC and Samsung Electronics in South Korea have each announced investments of more than $650 billion. These include several locations outside of their bases. TSMC is building in the U.S. and Japan, Intel plans to expand in Europe and Southeast Asia, and Samsung has construction plans in the U.S. According to SEMI estimates, around 91 new chip factories will be put into production globally from 2020 to 2024.
When the European Chip Law was enacted earlier this year, European Commission President Ursula von der Leyen acknowledged that “no country — not even a continent — can be completely self-sufficient.”
"Europe will always be committed to keeping global markets open and connected. It's in the world's interest; it's in our own interest," she said. "Europe will have chip partnerships with like-minded partners, like the US or Japan. It's about balanced interdependence, it's about reliability."
US Treasury Secretary Janet Yellen has proposed "friendshoring" as a compromise. "We cannot allow countries to use their market positions in critical raw materials, technologies or products to disrupt our economies or exercise unnecessary geopolitical influence," she said in April. "Let's build and deepen economic integration and the efficiencies it brings under conditions that are more favorable to American workers. Let's work with countries we know we can count on."
Russia's loss of favor with the West shows that alliances can change over time, even among countries ostensibly committed to free trade.
During the 2019 Tokyo-Seoul trade war, Japan restricted exports of photoresist, a key chip-making chemical dominated by Japanese suppliers, to South Korea.
An assessment by BCG identified at least 50 bottlenecks in design tools, manufacturing, packaging, materials and equipment in the semiconductor supply chain.
The U.S. dominates chip design tools and at least 23 basic devices, the study found. Japan is a leader in the production and key formulations of key materials including wafers and photoresists. Europe is a leader in industrial gases.
An extreme ultraviolet (EUV) lithography machine exclusively manufactured by ASML in the Netherlands provides a good example of how difficult it is to switch components in the chip supply chain. Sometimes alternatives simply cannot be found.
EUV machines are essential in the production of cutting-edge chips at 7nm and below, helping to project complex integrated circuit patterns onto the microscale. Production delays have hindered the ability to add new capacity, prolonging the current chip crunch and preventing the introduction of more cutting-edge chips.
ASML has extended wait times to two years for several products, people familiar with the matter told the Nikkei. A company spokesman acknowledged some delays and said restrictions in the industry were "very diverse and involving multiple layers of suppliers".
Manufacturing EUV light in the vacuum chamber of the machine is extremely challenging, with TRUMPF providing a powerful laser source and another German partner, optics specialist Zeiss Group, providing a mirror system that reflects and guides the light.
Since even the smallest irregularities can cause aberrations, Zeiss touts its products as the "most accurate" mirrors in the world. "If one of the EUV mirrors redirected the laser beam and aimed it at the moon, it would be able to hit a ping pong ball on the lunar surface," said CEO Andreas Pecher. ZEISS and ASML have been working together for almost 30 years.

Several executives told the Nikkei that even if ASML wanted to strengthen its own supply chain resiliency and find other optical partners, it would take at least five to 10 years of joint development work to get initial results.
"In fact, it will be almost irreplaceable for many years to come," said an executive at the Japanese lens maker.
There is hardly a single chip manufacturing process that does not require deep specialization, nor is there a supply chain that can be replicated simply and quickly.
The chemicals and solvents used in chip factories need to be in the so-called parts per trillion (PPT) level—one particle to one trillion droplets. In cutting-edge chip production, the gas needs to be as high as 99.9999% pure—so-called 6N. For silicon wafers, the basic substrate material for making chips needs to be 9N, or 99.9999999 percent pure, said an executive at chip material distributor Huali Industries.
"If you want a resilient chip supply chain, you need not only chip factories, but a whole range of suppliers from key chemicals and precision components," said a Daikin executive. "It will take years to build a semiconductor plant, but given the extensive environmental assessment and regulations for handling chemicals, it will take longer to build a chemical plant."

The long road to outsourcing
China's efforts show that the practical difficulties of building a chip supply chain cannot be overcome by investing billions of dollars. As early as 2014, Beijing launched the first phase of the China Integrated Circuit Industry Investment Fund with 138.7 billion yuan and 20.7 billion US dollars. In 2019, an additional 204 billion yuan was added. The first national seed fund has driven private and local governments to invest more than 500 billion yuan; the second phase of the fund is expected to invest another 1 trillion yuan.
Data from IC Insights shows that China has indeed increased its domestic chip production - increasing its share of domestic demand to 16.7% by 2021, up from 12.7% a decade ago.
The mathematical implication of having many countries create new onshore chip supply chains is that the production capacity will be far greater than what the entire world actually needs.
The industry says these are often non-economic investment schemes, and in many cases factories are only built if heavily subsidised. With consumer spending on electronics markedly slowing and talk of a recession lingering, the outlook for actual chip demand has suddenly become uncertain, at least in the short term.
Merck's Gorman acknowledged the question of whether local plants can achieve economies of scale, but said localization still makes sense if its major customers can share the risk.
"Keeping supply lines short is also better for our environment," he told the Nikkei. "Our customers will prefer local supply over supply that has to cross international borders."
BASF's Liebermann told Nikkei that building an onshore chip supply chain is a "very large-scale and long-term journey." "It's going to take a lot of time and a lot of cost, and the cost will only be justified if the utilization of these new plants meets demand and the demand is high enough."
Regardless of the current economic climate, most industry executives believe long-term growth in chip demand will be locked in as everyday objects become more connected and complex, and as cars move toward electrification and eventually autonomous driving. The semiconductor industry, with revenues approaching $600 billion in 2021, is widely forecast to reach $1 trillion by 2030.
Bertrand Loy, CEO of Entegris, told the Nikkei: "If we really believe the industry will reach $1 trillion ... we should be able to achieve some level of manufacturing regionalization and have the right leverage." "But we can't have manufacturing everywhere and get the right leverage. We're investing in some countries, some products, but not all countries for all products because we can't afford to do that."
A spokesman for ASML said regional investments "can coexist if they are connected to a global ecosystem". "Segmentation can lead to suboptimization, leading to higher costs and slower innovation rates for consumers, companies and governments that rely on this innovation."

'It's no longer the era of free trade'
Simon HH Wu, president of Taiwan-based chip manufacturing chemicals supplier Sanfu Chemical, believes that geopolitical conflicts and trade barriers are overwhelming globalization on which the chip industry was built. "This is no longer an era of free trade," he told the Nikkei, warning that policymakers and industry should not have illusions about the difficulties ahead.

"Any country that controls certain natural resources or key technologies wants to protect and utilize those resources for economic and political gain," Wu said. "What companies can do is find allies and partners to mitigate potential disruptions.
"There's always something you need to import and ship from another place, country or even continent. If you don't have phosphate rock, how do you make chips to make phosphoric acid? If you don't have fluorite, how do you make fluoropolymers? At the end of the day, You can't remove all the mines and natural resources."
JT Hsu, head of semiconductors and materials at BCG, said the chip crunch suggested it was time to build some "redundant" capacity to provide the industry with a buffer to absorb the shock. "But," he said, "it's almost impossible and unrealistic for any country or region to be 100 percent self-reliant in terms of everything from chip manufacturing to the end. It's impossible now, and it won't be possible in the future. Not too possible."
*Disclaimer: This article is created by the original author. The content of the article is his personal opinion. Our reprint is only for sharing and discussion. It does not mean that we agree or agree. If you have any objection, please contact the backstage.

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