Chips Are the New Oil

The world’s largest chip manufacturer, Taiwan’s TSMC, said in July it believed the chip crisis would begin to abate over the course of this quarter, is now announcing a price increase of 10% for its most advanced chips and 20% for those from previous generations, which could translate into an increase in the price of many of the products that use them, such as consumer electronics.

A few months ago, the New York Times headlined that chips were the new toilet paper. A better analogy, I think, would be oil: an industry with relatively few producers, dominated by a single company (TSMC manufactures 92% of the most sophisticated chips, and 60% of other simpler ones), with a significant technological advantage over the competition, and whose price affects a very wide range of products.

The current chip crisis, or chipaggedon, the result of a perfect storm of the pandemic and Donald Trump’s trade war with China, has led to a decline in the production of numerous products — particularly those dependent on just-in-time supply chains such as automobiles — and has generated substantial profits for the few companies involved in their manufacture. With the exception of Tesla, a technology rather than automotive company that was able to rewrite its software to maintain production, the vast majority of car companies have been forced to temporarily shut down their factories and even reduce advertising spending around the world.

But beyond supply chains, chip manufacturing is affecting geopolitics: the United States is announcing investments of up to $52 billion to build between seven and 10 factories, while US player Nvidia is trying to acquire ARM (although the operation is still under review by the British government); while the Chinese government is supporting its industry as it improves its technology and is also making strategic acquisitions to try to gain access to some of the technologies that the West is trying to keep out of its reach. And all of this as South Korea booms and China reiterates its intention to “reunite” Taiwan, a fundamental step toward the “rejuvenation of the nation”.

We are talking about a highly complex industry, where single nanometer defines an immense technological advantage, and in which raw materials are only found in a few places, where the companies that design the architecture of the chips are different from those that design and make the highly specialized machinery to manufacture them, and also different from those that integrate them, assemble them or test them. All of which results in a product that impacts a wide range of products that have progressively incorporated more and more chips. This is a true reflection of the level of sophistication that our society, our products and our supply chains have reached, and of how dependent we can become on one of the products that make them up.

The fact that in just a few decades we have gone from the world’s most strategic product being a smelly liquid extracted from the depths of the earth to something as complex as chips is something I think deserves some reflection.

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This post was previously published on Medium.

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