Chris Miller – Friend shoring and the semiconductor industry

Today, every major government is trying to reshape their supply chains in a way that insulates them from geopolitical risks, often called for “friend shoring”. Europe is doing this, China is doing this, the US is doing this, and it’s impacting a whole range of manufacturing sectors from high tech products, to autos, to energy transition-related goods. They’re all being impacted by these supply chain shifts which have as their focus not only efficiency – that’s important – but also insurance from geopolitical shocks.

In the semiconductor industry, there is extraordinary concentration in just a couple of companies because there are huge economies of scale. And so the bigger you grow your company, the more efficient and more advanced your manufacturing becomes. And that’s led to a decline in cost of semiconductors, making it possible to put chips in all manner of devices today. But it also means that the whole world is dependent on just a couple of firms, the most important of which is in Taiwan.

If you look at all of the money that governments in the US, in Europe, in Japan are pouring into their chip industries, there’s certainly already visible a major increase in investment and new manufacturing capacity. The question is going to be: is this new capacity going to be market relevant? Will there be customers for this new capacity in the long run? Because it’s one thing to build a new factory, but it’s a different thing to build a factory that has customers and can produce efficiently in a way that drives technology forward.

So the challenge that all the semiconductor investment policies face today is matching the new investment dollars with market opportunities so that we don’t end up with a situation in which there’s lots of new investment, lots of new manufacturing capacity but it’s not actually used in an efficient manner.