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    The U.S.-China Chip War: What it Means for You

    US.China_.ChipWar4.2023

     By Anirudh Munder
    Anyone relying on the chip market – or operating in neighboring markets – will know how disruptive the first half of the year has been.

    Following the initial U.S. restrictions on Chinese businesses and individuals purchasing advanced semiconductors and chipmaking technology, we’re now witnessing back-and-forth retaliation between each party and their allied countries. And the scenario is only escalating.

    Most recently, Beijing has banned chips being bought from the U.S. company Micron, while the rest of China is restricting the export of more and more raw materials. On the other side, U.S. allies such as the Netherlands and Japan are both limiting the export to China of technologies required in the chipmaking process.

    As these restrictions continue to grow, the challenges for companies relying on the semiconductor market will only become harder – and the effects will be felt by companies all throughout the value chain.

    Here’s a closer look at what these disruptions might mean, what we expect to happen, and what you can do to minimize the impact.

    What the chip war means for the market

    One of the biggest factors affecting U.S. supply chains for semiconductors is China’s restriction on the export of key raw materials such as germanium and gallium – key components for semiconductor production.

    China produces around 60 percent of the world’s germanium supplies, with the other 40 percent divided among countries such as Canada, Finland, Russia, and the U.S. And it has an even greater monopoly on gallium, producing around 80 percent. While the export of these materials isn’t completely banned, the new licensing system in place does make it much more difficult.

    With these supplies being restricted by China, many semiconductor-producing regions are struggling to manage their supply chains. They’re being forced to consider other regions producing germanium and gallium, which all come with their own challenges – from supply limitations to geographical risks such as earthquakes and typhoons.

    And for companies that rely on semiconductors – such as those in manufacturing, where they’re used to operate and control complex machinery – this is all having a knock-on effect. Prices are starting to rise, and semiconductors aren’t as readily available.

    What to expect from the conflict

    While these back-and-forth restrictions are continuing to escalate, they’ll need to end at some point. Without a well-established domestic chip industry, China relies on imports of semiconductors to run advanced AI applications. And the level of investment required means China won’t be able to build its own industry quickly.

    Similarly, the U.S. and its allies will eventually need access to China’s germanium and gallium supplies to continue semiconductor production.

    We also saw a similar scenario last year with oil and gas supplies, which gives us an indication of how the U.S.-China chip conflict may play out. Russia initially cut oil and gas supplies to EU countries supporting Ukraine, spiking prices and threatening availability. But as the EU reduced its reliance on Russian supplies and Russia resumed its exports to many countries, prices began to level out. We’re still seeing elevated prices, but nowhere near the peaks of 2022.

    There’s a good chance we’ll see similar compromises made between the U.S. and China over semiconductors. But in the short-to-mid-term, as each party continues to add more restrictions, we’ll likely see the effect on supply chains get worse before we reach a sustainable and profitable scenario for both countries.

    What can you do to mitigate the impact on your business?

    Even if you’re not relying directly on the semiconductor market, this is an issue where the effects will be felt far and wide. But there are some actions you can take to mitigate many of the effects of this ongoing conflict.

    1. Diversify your supply chain

    The most valuable action you can take if you’re heavily reliant on the semiconductor market is to start diversifying your supply chain – especially if you’re currently relying on China. During this process, you’ll want to assess the other regions you can source from and the risks involved in these new suppliers.

    For example, while Taiwan has a well-established semiconductor market and a significant share of the semiconductor supply chain, there is a risk China could invade the country. The region is also prone to geographical risks, such as earthquakes and floods, that could disrupt production.

    Big names such as Dell have already made a conscious effort to phase out all chips made in China by 2024 to avoid future supply chain disruption. Instead, the company plans to make 20 percent of its laptops in Vietnam and has told its suppliers to significantly reduce the amount of other components made in China.

    2. Seek out local suppliers

    Another way to avoid potential disruption is to find local suppliers where possible. While these might offer more limited supplies with reduced assembling and testing facilities, local suppliers could act as a strong short-to-medium-term solution to avoid any breaks in semiconductor supplies.

    In some cases, this might mean actively collaborating with smaller suppliers to help you both achieve your goals – whether that’s helping them build the infrastructure they need to supply you or figuring out specific contract terms that benefit you both.

    Idaho-based company Micron is looking to invest $100 billion in the U.S. as part of its efforts to localize its supply chain, in addition to its new $1bn packaging factory in India to encourage manufacturing outside China.

    3. Continually review the market

    This point isn’t just crucial for companies relying on the semiconductor market, but also those relying on connected markets – such as technology, manufacturing, and automotive – that might be experiencing the effects of semiconductor shortages.

    Ideally, you should have the right risk detection tools in place to identify any factors that might impact semiconductor supply chains and give yourself a chance to respond.

    4. Prepare to respond to any disruption

    There’s no doubt that the U.S.-China chip war will continue to create new challenges for procurement and supply chain teams as the conflict evolves but in order to stay ahead it’s imperative for supply chain and procurement teams to have plans in place for the what ifs.