The widening use of semiconductors across the global economy is forcing companies and investors to pay closer attention to the availability and sourcing of the raw materials used in chip production.
This is the semiconductor decade. Notwithstanding expectations for a double-digit revenue decline in 2023, semiconductor sales are projected to hit or exceed one trillion dollars by 2030, rising from $556 billion in 2021, and making chipmakers the darling of investors for the immediate future.
Chips have become so ubiquitous that the shortages of some IC components over the last couple of years and the effects of pandemic-related actions hurt sales in many industries, including automotive and industrial equipment, leading to a reduction in global economic growth forecasts.
It’s no wonder, therefore, that the raw materials used in fabricating chips have similarly become hot commodities. Semiconductor industry executives and government officials alike have begun showing greater interest in the sourcing, extraction and processing of the raw materials used in chip production, including silicon, germanium and gallium arsenide.
The industry is also widening research into alternative components that offer better technology advantages and that can be more easily sourced at cheaper costs. As governments globally warily watch the supply chain to assure security of supplies following the recent shortages of chip components, interest in the location and control of the sourcing environment for semiconductor raw materials has also increased. Western governments, for example, are expressing greater concern about the role of regions seen as politically unstable in the electronics supply chain.
In line with the expected strength in demand for semiconductors over the next years, researchers are projecting solid growth for semiconductor raw materials through the rest of the decade. Demand for all semiconductor raw materials is forecast to jump 50 per cent between 2021 and 2030, rising to $87.4 billion, from $58.3 billion, according to Precedence Research. It attributed the increase to widening demand for electronic equipment especially in the communication field, including data center, IoT and the digitization of many segments of the economy.
“Increasing demand for mobile phones and other wireless devices are driving the growth of the semiconductor materials market,” said Precedence, in a research report. “The deployment of 5G technologies, robust investments in cloud services and data centers and the increased digitization of developed as well as developing economies will contribute to the growth of the semiconductor materials market. There’s an increased demand for miniaturization of various electronics [and] this demand is creating more opportunities for the growth of the semiconductor materials industry.”
The geopolitical rivalry between the US and China that ensnared semiconductor suppliers and chip equipment makers in recent years is slowly catching up with raw material suppliers too although it has not been as intense. Supplies of raw materials for chip production is more widespread but China, as in other manufacturing sectors, is also a major supplier. Other countries involved in the supply of semiconductor raw materials include Japan and South Korea.
The Asia Pacific region leads in the production of semiconductor raw materials, in part due to the strong role Taiwan, Korea and China play in IC production. Japan is also strong in the sector and has leading manufacturers like Hitachi High-Technologies, Tokyo Ohka and Mitsui High-Tech operating in the segment.
Other countries are pushing for greater participation of their local enterprises in the sector. India, for example, wants to become more independent in silicon production and has been encouraging Indian businesses to get involved. American enterprises, which once yielded the leading role in the supply of semiconductors, are reviewing their participation in the procurement of raw materials with the support of the US government.
The concerns are not misplaced. Silicon, which is more widely used in the production of semiconductors, is readily available but many in the industry believe it is approaching certain technology limits and would be eventually replaced. However, sourcing the alternatives can be difficult and expensive. Also, the market for some of the alternatives is dominated by China, which has in the past prioritized domestic consumption, according to observers. China has also in the past weaponized the supply chain, punishing Japan in 2010 over a fishing dispute by restricting the supply of rare earth elements or materials (REEs) to the country.
“While some semiconductor materials are both cheap and abundant—silicon being the most obvious example—the REE used in the production of high-k dielectrics and chemical-mechanical polishing can be costly,” said the IEEE, in a report. “Several factors contribute to REE value. The processes required to separate REEs from the rock in which they are found are both difficult and costly, requiring thousands of stages to extract and purify the finished material. China is one of the few nations to focus on REE mining and refining, resulting in the nation producing 85 per cent of the world’s supply of tungsten and molybdenum.”
Concerns about the security of the semiconductor supply chain has increased in recent years especially after severe shortages hit many economic segments starting in 2021. The exposure of the Western economy to supply chain problems originating outside their regions and concerns about China’s lock on the production of chips and materials triggered actions that have since led to a further widening of the gulf between East and West.
The US Chips Act—designed to foster an increase in local semiconductor production—and a similar legislation in the European Union, emerged from Western worries about the security of the supply chain. In addition to offering billions of dollars to support local IC production, the US government has increased its oversight of the sector and added restrictions on the supply of advanced semiconductor manufacturing equipment to China.
The Chips Act and the National Critical Capabilities Defense Act, which tracks overseas investment by American enterprises, are two of the major steps taken in recent years by the US government to protect the country’s information and technology supply chains, according to the Commerce Department. In a statement earlier this year, the Department noted that it had identified areas of the economy that should be protected against dangers inherent in the foreign domination of the electronics industry supply chain.
“The assessment of the current ICT supply chains conditions revealed several risks that threaten to disrupt the broader ICT industry,” said the Commerce Dept, in the report. “These risks, including a lack of domestic production capacity for many product categories, overreliance on single-source and region suppliers, limited use of robust cybersecurity practices, and underinvestment in the domestic workforce threaten to continue to disrupt the ICT industry and the broader economy if left unaddressed.”
Companies like Advanced Micro Devices and Nvidia have been impacted by the new regulatory environment. In October, the two companies said they received communication from the government regarding a ban on the export of their advanced chips to China. The directive impacted high-end server chips from Nvidia used in cloud and data center applications.
Western governments are also placing tighter restrictions on the acquisition of semiconductor enterprises by Chinese companies. Germany, for example, recently blocked the acquisition of two chip manufacturers by Chinese investors due to national security concerns.
Similar objections to the transfer of leading-edge innovations to China are expected to crop up in the semiconductor materials market as suppliers explore innovative solutions, according to industry observers.
Silicon, for instance, is the most widely used raw material in the production of semiconductors but innovative products and potential replacements are already being developed. These include high-power gallium nitride, graphene and pyrite, which is cheaper and widely available and can be used to replace cadmium telluride in solar cells.
“While the most important material in semiconductor manufacture for most of the late twentieth and early twenty-first centuries, silicon is reaching the limit of its usefulness,” the IEEE said, in its report. “Demands for ever-smaller, faster integrated circuits have pushed the material’s efficiency about as far as it can go, with industry experts fearing silicon will soon reach the limits of Moore’s Law. Research into new materials is ongoing, with some materials holding great promise for the future.”