Complexities and Dependencies in the Global Semiconductor Value Chain

3 min read 

Semiconductors are at the center of the public debate about economic and technological sovereignty. They are critical for a diverse set of goods and services, from industrial robots, consumer electronics, defense equipment to health care services. A sequence of supply shortages in 2021 revealed the dependence of modern societies on the tiny chips, and geopolitical tensions further fuel policy efforts to secure access. However, as a new study by the ifo Institute shows, semiconductor types are highly heterogeneous, and their production is characterized by complex and globally fragmented value chains. These factors should be considered in the policy debate surrounding the location of semiconductor production.  

Not all chips are the same

The umbrella term „semiconductors”, also known as “chips”, really refers to a heterogeneous group of products. Semiconductors differ in their functionality from memory chips that store data, logic chips that process data to power transistors that control electronic current. The sub-groups can be further differentiated, for instance by their maturity, material or end-use application.

Chip production is characterized by a complex value chain …

At an aggregate level, semiconductor production can be split into three big steps: design, manufacturing, and finally, assembly, testing and packaging (ATP). Each of the three stages relies on its own specific set of equipment, material and service inputs, which have their own complex value chain. The detailed economic forces binding the different production stages together can differ strongly between chip types.

… on a highly globalized scale

In 2022, about 70 countries participated in semiconductor-related trade, generating about 1.2 trillion USD of trade. Final chips make up the lion’s share of global semiconductor-related trade, and within this group, logic and memory chips are the largest groups. The second most important category is semiconductor-related equipment, where dedicated semiconductor machinery stands out as the largest group.

Global semiconductor trade is highly concentrated

Global semiconductor trade shows an extreme geographic concentration, with three players − China, Taiwan and Korea − accounting for about 50 percent of global final chip exports. The trio’s leadership derives from integrated circuits exports but is contested by the US, Germany and Japan in power and optical semiconductor as well as in sensors. Overall, only nine countries appear consistently as a top-3-supplier for final chips, material inputs or equipment. The concentration of chip exports reflects the importance of comparative advantage thanks to technology, skill and capital for producing these very complex goods, as well as to the importance of economies of scale in chip production.

Chip production is also globally fragmented giving rise to multilateral dependencies

The global semiconductor value chain is geographically rather fragmented. While Korea, Taiwan and China stand out as the key exporters of final chips, the US and Japan, but also Germany and the Netherlands stand out as net exporters of chip-related equipment. Due to this global fragmentation, multilateral dependencies arise.

The complex global chip value chain warrants a nuanced policy debate

Most of the key semiconductor countries have been reacting to a chain of supply shortages of chips in 2021 with a set of industrial and trade policies that are disproportionately targeting semiconductors. The intention behind such government interventions is to achieve technological sovereignty and to strengthen the economy’s competitiveness.

However, as our study shows, designing effective policies to achieve these goals is difficult. First, the complexity of the value chain complicates an assessment of vulnerabilities (Baldwin, Freeman, 2022, Mejean, Rousseaux 2023). Second, to increase sovereignty and build a viable semiconductor industry means to overcome entry barriers which underlie the current geography of the semiconductor industry. Moreover, it is not self-evident what part of the value chain should be targeted to gain in technological competitiveness since innovation occurs along the entire value chain. In light of the complex global semiconductor value chain and, in particular, the multilateral dependencies arising from it, a more nuanced policy approach is warranted for truly effective policies.