Semiconductors have become an essential component in the digital age, rivalling oil and gas in terms of their importance to international relations. This high dependency is reflected in the revenue figures from the global semiconductor industry, which reached $47.6 billion in January 2024, marking a 15.2% year-on-year increase. According to McKinsey, the industry is projected to become a $1 trillion market by the end of the decade.
Alec Russell, executive director of marine cargo at Gallagher Specialty, identifies the likely sources of external disruption to semiconductor supply chains in the near term. Of particular concern is the potential for disruption to trade passing through the Straits of Taiwan. Current estimates indicate that upward of 50% of global marine trade passes through the South China Sea.
“The situation in the Red Sea has underwriters issuing notices, citing heightened risks, and cancelling existing insurance coverage,” Russell said. “They are also charging higher premiums for shipping through the region. However, we feel that the market already holds a sufficient war premium to cover potential losses.”
During the pandemic, global demand for semiconductors surged by as much as 17% between 2019 and 2021. However, supply could not keep up and even slowed due to country lockdowns, a contraction in global shipping, and logjams around major ports.
Disruptions to the semiconductor supply chain impacted multiple industries, including electronics, automotive, manufacturing, and defence. Analysis by the US Department of Commerce found that chip shortages shaved an estimated $240 billion off US GDP in 2021, equivalent to 1% of the total GDP that year. The auto industry alone produced nearly eight million fewer vehicles as a result.
“Speaking from a global standpoint, and considering the potentially devastating impact on our cargo, the market has a substantial or satisfactory premium to cover any potential losses adequately,” Russell said. “Cargo owners, shippers, and ship owners are making the decision on whether to continue shipping through the area, inciting the argument that those who choose to continue without taking precautions should be penalized.”
Natural disasters, geopolitical conflicts, and demand fluctuations are common sources of bottlenecks. Taiwan plays a pivotal role in semiconductor design and manufacturing, producing over 90% of the world’s most advanced semiconductors. This is a major vulnerability given the country’s exposure to natural catastrophes and shifting geopolitics. The M7.4 earthquake on April 3 highlighted the world’s dependence on Taiwanese chipmakers.
Current and future threats to semiconductor supply chains include growing climate extremes and geopolitical threats. From drought impacting water levels in the Panama Canal to ongoing attacks in the Red Sea, any blockage of key marine chokepoints can significantly affect global shipping and trade flows. It is almost impossible to anticipate where the next disruption may arise.
The past three years, marked by the global pandemic and Russia’s invasion of Ukraine, have shown sustained bombardment of supply chains. Given the interconnected nature of global trade, a major event in one region can ripple across the world, causing both direct and contingent business interruption. Volatility in supply is expected to remain, even with well-thought-out contingencies in place.
The long-term impact of geopolitical factors on the semiconductor supply chain depends on how events unfold, particularly tensions between China and Taiwan. Geopolitical disputes can result in trade sanctions, tariffs, and civil unrest, all of which influence businesses’ ability to access materials and components and fulfill orders.
“In terms of the position of Taiwan in the global supply chain, it’s so deeply embedded that it’s almost impossible for anyone to know just how impactful it would be if you had a scenario, such as a blockade in the Taiwan Straits,” AnotherDay CEO Jake Hernandez said.
“An organization can probably map out all the critical components of its supply chain, what physical assets it has in Taiwan. For example, we have some big global technology-manufacturing clients, where 80% to 100% of their manufacturing is done in Taiwan. So that’s easy to identify,” he said.
The Suez Canal, the shortest shipping route between Europe and Asia, is facing a new threat impacting the movement and pricing of goods and components, including semiconductors. Since the outbreak of war in Israel and Gaza, the Houthi group in Yemen has been targeting mainly Western cargo vessels passing through the Red Sea.
The continuous attacks from drones and missiles are causing losses and turmoil in one of the world’s most important waterways. A coalition of countries has deployed naval forces to protect commercial ships, but many are opting to reroute vessels around South Africa’s Cape of Good Hope. This has implications for insurance costs, freight rates, and the delivery of goods.
“The problem comes in when you get into the second- and third-order effects. If, say, for example, you’re relying on the import of food and you don’t know whether the suppliers that manage that are reliant on Taiwanese technology to carry out fulfillment or to grow the food itself,” Hernandez said.
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