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The shortage of chips forces a rethinking of the global manufacturing system

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The shortage of semiconductors, from the most advanced and miniaturized chips to the most humble but equally essential, has shown the fragility of the entire hyperspecialized production system. In the case of serious supply problems, as now, the world lacks alternatives to quickly cover one or any of the multiple components or raw materials of integrated production chains. The consequence is that some manufacturers cannot finish the production of a smartphone, a car or a vulgar vacuum cleaner because they are missing one or more components that are not necessarily high-tech but equally critical. If the United States and China continue with their escalation of tension, as they have staged this weekend in Alaska, Europe will have no choice but to re-float its auxiliary industry to regain sovereignty, although initially its costs are less competitive internationally.

Last Wednesday, at the presentation of results, the two top managers of Samsung Electronics, Kim Ki-nam and Koh Dong-sin, were the first optimistic and the second restless about the evolution of the world semiconductor market. Both leaders act as CEOs of the components and mobile divisions, respectively, while the president and heir of the Korean chaebol, Jay Y. Lee, is in prison.

Kim Ki-nam’s optimism is based on the fact that the demand for NAND and DRAM memories is maximum today, due to the fact that 5G networks and smartphones, computers and servers, powered by artificial intelligence, as well as devices IoT, they consume all kinds of chips, and especially memory, of which Samsung is the world’s leading producer. The company plans to expand its components activity to other sectors, such as car manufacturers, and has already started doing so with Audi and Tesla, the executive revealed.

The shortage of chips, especially for cars and smartphones, is aggravated by a fire that has paralyzed a major Renesas factory in Japan, in addition to Samsung’s in Texas.

Koh Dong-sin was more cautious, because he is uneasy about the imbalance between the growing demand for chips to integrate in smartphones and the scarce supply, which is not enough to deliver the orders requested in recent months. The storm that hit Texas in mid-February paralyzed two huge semiconductor plants that Samsung has near Austin, the Texas capital, and it is not expected that they will begin to recover their activity to 90% until the end of this month of March.

One of Samsung’s plants, now without production since February 16, is highly strategic, because it is dedicated to manufacturing and supplying the integrated component (Silicon-on-a-Chip, SoC) that regulates most of the basic functions of a smartphone, such as communications, OLED screens, images, memory system or power management, being the fundamental complement of Qualcomm’s SnapDragon processors, which are manufactured in Taiwan by TSMC, the SoCs that Qualcomm delivers to Apple or those used by Samsung on their own smartphones.

The consultancy TrendForce estimates that in the long month of inactivity of the Samsung chip plant, global production of smartphones will be reduced by 5% in the second quarter, equivalent to about 17 million units, precisely due to the lack of chips. Qualcomm is one of the world’s largest suppliers of integrated components for smartphones, along with MediaTek, and is also the supplier of Apple iPhones. Koh said that everything possible is being done to reduce the impact of the forced stoppage of the Samsung plant, adding that the decision not to present any Note models this year has nothing to do with the plant’s problems, but is due to that Samsung wants to rationalize its current range of smartphones.

On March 10, in the presentation of Qualcomm’s quarterly results, its president Cristiano Amon assured that the demand for his company’s products is “basically greater than the supply” and acknowledged that there was a global shortage of semiconductors worldwide. Amon avoided citing the problem of Samsung’s stopped factory, although he assured that he was confident that the supply of chips will match demand “towards the latter part of 2021” and that he expected demand for chips to continue to be very high in the coming months, due to to the impact of the US sanctions against Huawei.

Fire in a large car chip plant

To further complicate the situation, last Friday one of the large car chip factories that the Japanese company Renesas has north of Tokyo caught fire. Hidetoshi Shibata, CEO of Renesas, warned on Sunday that the fire could interrupt production for at least a month, the Financial Times reported yesterday, which “could have a massive impact on the supply of chips.” Renesas is one of the major manufacturers of automotive chips and on March 11, production had to stop for a few days due to the earthquake that affected the area near Fukushima, where the tragic tsunami and the meltdown of the nuclear reactor now took place. just ten years ago, although the incident ten days ago was not as big as it is now.

The storm and the unusual cold in Texas in February, which left the region without power, also affected the production of the automobile chip factories that Infineon and NXP have near the two of Samsung, compounding the shortage of chips, both for automobiles as for the rest of the industry. The Renesas plant fire, therefore, may add more forced shutdowns of auto plants, unable to get the necessary chip supplies. A few days ago, Honda and Toyota announced that they would have to close their factories in the United States for a week, which with the new supply difficulties will probably be extended and others will be added. Some European car plants have also had to shut down for several weeks since February and what could happen now is unknown. The “massive impact” announced by the head of Renesas does not bode well.

The supply shortage is not limited to chips but also affects raw materials and the entire logistics supply chain. The storm in Texas forced the production of the immense petrochemical complex that Dow Chemical and other companies have in the American state to stop, which is essential for the production of polypropylene and various plastic derivatives, such as PVC. As a consequence, the supply of many plastic raw materials is suffering, apart from the fact that their price is skyrocketing.

China is more confident that it has a strategic advantage over a declining America and is unwilling to let the United States or anyone else meddle in its internal affairs, as it made clear at the Alaska summit.

With the pandemic, the flow of containers between Asia and the West was interrupted and several thousand containers were parked in European and American ports, without returning to Asia. With the return of commercial activity, the ports of Los Angeles and Long Beach, which handle more than a third of all containers in the United States, have been crowded since the end of the year, and more than 40 cargo ships are now waiting offshore. to unload, with 17 other large ships on the way. The entire global supply logistics chain, for one reason or another, is on the brink of collapse.

China and the United States publicly confront each other in Alaska

A week ago, there was a timid hope that the United States and China would agree to a compromise solution to alleviate the serious trade conflict that faces both countries, and that affects the rest of the world, at the meeting held by prominent representatives of both countries in Alaska, but the meeting has only made the situation worse. Antony Blinken, Secretary of State of the United States, skipped the formal speech he was to give before Chinese representatives and in front of the cameras and said that the United States was “deeply concerned with China’s actions in Hong Kong, Xinjiang, Taiwan, the cyberattacks against the United States and economic coercion against our allies ”. And he added that “each of these actions threatens the order based on the rules that maintain global stability.”

Yang Jiechi, a prominent member of the Politburo of the Chinese Communist Party, delivered a speech of 16 minutes and 15 seconds when he heard that Blinken had completely departed from the script envisaged (in the content, not in the two minutes agreed) and accused the United States of have “a cold war mentality.” Yang made it very clear that China will not tolerate, under any circumstances, the United States or anyone else meddling in what he considers to be the internal affairs of his country. “Xinjiang, Tibet and Taiwan are an inalienable part of the Chinese territory. China will firmly oppose US interference in China’s internal affairs. We have expressed our fierce opposition to interference and we will respond with firm action, ”he said defiantly. Blinken, in his opening address, had said that “they were not merely internal matters” and had felt “an obligation to cite these issues.”

“Regarding human rights, we want the United States to do better. China has made progress in human rights and the fact is that the United States has many problems in this area, admitted by itself, “said Yang, adding that” the challenges of the United States in human rights are profound and do not date back to the last. four years, as Black Lives Matter ”. Yang wishes and believes that the two countries should manage their respective affairs well and not blame others. And he ended by assuring that “the United States does not represent international or Western public opinion” nor did he think that the vast majority of countries can recognize the universal values ​​defended by the United States, that the opinion of the United States can represent international public opinion or that the rules made by a small number of people can serve as the basis for an international order.

Afterwards, Wang Yi, Minister of Foreign Affairs, took the floor, as had Jake Sullivan, National Security Adviser, after Blinken’s speech, and succinctly added that “China has not accepted in the past nor will it accept unfounded accusations in the future. of the United States ”. In recent years, he added, “China’s legitimate rights and interests have been suppressed, leading the relationship between China and the United States to a period of unprecedented difficulty.” And he urged the United States to totally abandon the hegemonic practice of interfering in China’s internal affairs, a theme that he considers recurring and that must change. In particular, Wang cited, the people of China are offended by the so-called US sanctions on China on March 17, referring to Hong Kong, and which they strongly oppose from the Chinese side. He did not cite, but it was understood, that what was done with Huawei with its chip supplies is very serious and will have profound and serious consequences, such as having the daughter of Huawei’s president arrested at his home in Canada and wanting to deport her to the United States.

Blinken later requested the right to reply, although it was not foreseen, nor that the speeches of the Chinese representatives had been so long. He assured that “in my brief period as Secretary of State, I have spoken with hundreds of people and colleagues from all over the world and what I have heard is very different from what you have described.” Blinken, however, acknowledged that “we are not perfect”, to conclude that “we have made mistakes and we have taken steps backwards” but “we have always faced these challenges in an open, public and transparent way and not trying to ignore them or pretend that they do not exist ”.

On Friday, after the summit, representatives of the United States wanted to convey the message to the press that behind closed doors, progress had been made in the negotiations between the two countries, but the public reproaches of the top leaders at the beginning of the summit suggest that the Relationships could have deteriorated further. As The Wall Street Journal stated yesterday in its editorial, “a reading of Alaska shows that adversaries see the United States as weak” and that “China is more confident that it has a strategic advantage over a declining America.” And at the end of the editorial, the great problem posed by semiconductors and the great challenge posed by Taiwan, as the nucleus of world semiconductor production, arises again.

The US financial newspaper recalls that “Taiwan is crucial to the economic interests of the United States, as a global producer of semiconductors and as a democratic ally.” But he emphasizes that Chinese President Xi Jinping has made it very clear that recovering Taiwan is a priority for China and is part of its territorial integrity and the Chinese military force is capable of invading it. Xi Jinping, the editorial says, is willing to make promises on climate change if there is an acquiescence by the United States on Taiwan and it is a time of dangerous confrontation between the two powers and a litmus test for the Biden Administration. And he concludes that what was said in Alaska must be taken seriously.

Europe on notice

Europe should also draw its own conclusions from the claims made by China in Alaska. Just yesterday, the European Union sanctioned four senior Chinese officials for the repression of the Uighur Muslim minority in Xinjiang, using a law passed in 2020 to condemn violations of the rights of people in the world and recently used to punish Russian officials implicated in the arrest of opponent Alexei Navalny.

In the opinion of some analysts, a cooling of relations between China and the European Union could jeopardize the weak trade agreement signed on December 31, in the absence of ratification by the European Parliament and the publication of a for now secret annex. The transfer of technology between China and the European Union, the largest trade agreements and the thorny issue of Huawei’s 5G network exports to Europe are highly sensitive issues and on which part of the technological future and European sovereignty depends, despite the firm rejection. of the agreement by the United States.

The intense pressure from the United States to China and Europe with Huawei started with Trump, aggravated by the pandemic, has ended up affecting the entire global logistics and manufacturing system. The president of the United States, Joe Biden, was expected to be less aggressive than Trump, and that Blinken would fix some of the considered nonsense of his predecessor, Mike Pompeo. What happened in Alaska suggests that Blinken will not adopt a more conciliatory tone and that Biden will follow Trump’s footsteps on China.

For now, China has already banned the military and top Chinese officials from buying or using a Tesla, fearing that the movements of the vehicles could be tracked. Elon Musk, owner of Tesla, has been quick to state that he will never share the data, but cannot deny that vehicle movements are always recorded, for safety and ease of handling. And Huawei appears willing to make more of its vast portfolio of 5G patents while deploying a wide range of industrial applications of 5G networks and a number of specific devices in its home country, beyond smartphones. Very turbulent times while the pandemic does not give truce, at least in Europe, and the chips and now the vaccines as a backdrop.