The crisis in Ukraine is a stark reminder of a major flaw in the chip industry’s global supply chain: single sourcing for critical supplies.
As Russia launched an all-out attack against Ukraine early Thursday, semiconductor makers and tech hardware manufacturers were confronting the prospect that a protracted conflict would interrupt the exports of neon gas, a relatively obscure yet vital component of the chipmaking process.
Ukraine is the leading global supplier of purified neon gas used in the majority of advanced chipmaking. Last week, Citi Research analyst Peter Lee warned that any military action in Ukraine could disrupt neon gas supply and interrupt global chip production. While some chipmakers are fortunate to have suppliers outside the region, others are not. According to Lee, makers of memory chips, which are used to store information in electronic devices, hold about six to eight weeks of gas inventory.
Ukraine’s large market share of neon gas is difficult to replace. According to research firm TrendForce, Ukraine accounts for roughly 70% of global neon gas exports. The gas is a byproduct of steel-making in older plants that is then purified.
While China and the US do have some facilities that can handle neon production and purification, it would take a long time to ramp up to meet demand if Ukrainian supplies were blocked. Moreover, manufacturers outside Ukraine will be reluctant to invest in new capacity if they believe the supply interruption will be temporary.
But it’s fair to ask how chipmakers found themselves in this predicament. Although the Ukraine region has been in geopolitical turmoil since Russia annexed Crimea in 2014, the chip industry has done little to diversify its sources of neon. That failure is all the more striking in light of widespread shortages of computing chips due to pandemic-related disruptions. The chips are vital to the production of everything from automobiles to factory equipment to video-game consoles.
This isn’t the only instance where the industry has become overly reliant on a country in a geopolitical hotspot. Taiwan Semiconductor Manufacturing Co. dominates the global market for high-end chips, found in products including processors inside Apple Inc.’s iPhone, smartphone chips used by Qualcomm Inc. and computer processors for Advanced Micro Devices Inc.
US Commerce Secretary Gina Raimondo has repeatedly said that diversifying production away from Taiwan is a matter of national security. But it doesn’t seem like US companies are listening.
The crisis in Ukraine is a reminder that the industry needs to do more to diversify its supply chain, from using more foundries based in other countries to more dual sourcing of essential raw materials. Semiconductor companies have been too complacent for too long. They should realize that viable backup suppliers are essential in an increasingly uncertain world.