Tech sovereignty: the solution to semiconductor manufacturing?

By Julian Horne, Partner 

There are many facets to the current semiconductor supply predicament. While the greatest influence continues to be on manufacturing in the automotive sector, the problem is gaining pace in other areas. Mobile phones are of course high on the list of impacted products, but coffee machines, medical equipment and sports equipment to name a few items are all likely to be affected in the short to medium term. The issue in automotive is compounded by manufacturers not using bleeding edge chips and the manufacturers are moving towards higher revenue, more advanced products naturally meaning the investment in older style chips is reduced, slowing production.

Different car manufacturers are publishing quite different responses to the chip supply issue. This could be purely down to supply chain continuity and previous experience of supply chain disruption that has led to better management and protection by certain manufacturers and in certain sovereignties.  Ford noted back in April that the shortage of semiconductors would lead it to manufacture 1.1M less vehicles in 2021, a decrease of 10% in the second half of the year. Counteracting this statement, the FT reports that Toyota has increased production forecasts. This could be solely down to supply chain availability and experience.

We have seen a significant move towards alternative supply strategies in the last 12 to 18 months, when it became apparent that some firms did not have fail safe supply chain solutions in place. In the wake of the pandemic, governments and businesses have been working hard to stabilise and localise supply chains for crucial technologies, including electronics chips and semiconductors. We can forecast further disruption ahead in the short to medium term while supply chain restructuring takes place.

This week, the FT reported Tesla are set to pay for chips in advance to secure their supply chain. There are even reports the company is showing interest in purchasing a chip manufacturing plant outright. This is supposition and there would be significant, possibly prohibitive cost involved, I do think it illustrates quite how seriously the automotive industry understands the situation to be.

China in by far the largest chip manufacturer with the US second. The European Commission has stated publicly it wants to increase manufacturing capacity in order to become more self reliant on what is essentially critical technology. There are reports Intel has offered to support the EU effort, looking for €8BN in public subsidies to build new manufacturing plant in the EU. While the idea of localising technology manufacturing as a simplified strategy sounds appealing, the sheer scale of the operation to achieve this feels somewhat less reassuring. We have talked about coopetition regularly over the last 12 months and I see the localisation of supply chains as a brilliant example of how coopetition could work globally.

Behind the scenes, the focus on ESG is also heightening all the while from an investor perspective and manufacturers are acutely aware of this. A downturn in manufacturing will also squeeze the environmental narrative for manufacturers and drivers alike so it will be interesting to see if this impacts the implementation of tougher environmental standards on motoring in jurisdictions worldwide while we navigate the road to future supply and demand.


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