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Security concerns over chip shortage are pushing governments to act, Moody’s says

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Key Points
  • More countries are pushing to produce their own semiconductor chips, which are in short supply globally, because "it's a matter of national security," according to Timothy Uy from Moody's Analytics.
  • Memory chips are crucial for making a wide range of products. They are in smartphones, gaming consoles like PlayStation 5s, household appliances like fridges and washing machines, alarm clocks, and even cars.
  • Some reports say the chip shortage may last until 2023.
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Chipmakers are prepared for wave of demand in the next few years: Moody's

More countries are pushing to produce their own semiconductor chips, which are in short supply globally, because "it's a matter of national security," said an analyst at Moody's.

Memory chips are crucial for making a wide range of products. They're in smartphones, gaming consoles like PlayStation 5, household appliances like fridges and washing machines, alarm clocks, and even cars. They are also used in data centers, which are full of computer servers.

"I think the main problem really is that new supply is hard to come by and the surge in demand is not going to be abating anytime soon," Timothy Uy, an associate director at Moody's Analytics, told CNBC's "Squawk Box Asia" on Monday.

"On both the supply and demand sides, I think companies are adjusting. Governments are also getting in on the action because they view this as, in some sense, kind of a matter of national security," he added.

A wafer is processed in a single wafer diffusion mechanism inside the GlobalFoundries semiconductor manufacturing facility in Malta, New York on March 16, 2021.
Adam Glanzman | Bloomberg | Getty Images

Semiconductor chips are ubiquitous — without them, a lot of products will not work.

This is already being felt by the auto industry, where carmakers have been forced to stall production as a result of the global chip shortage.

Some reports say the chip shortage may last until 2023.

Why there's a global chip shortage

Manufacturing semiconductor chips is an intricate, capital-intensive process that involves weeks of production, Uy said last week in a note. It takes even longer time to distribute them, he said.

He explained that new supply cannot be created instantly — and sometimes, it may take years for new supply to come online as factories need to be built and fitted with the proper technology.

The capital-intensive nature of semiconductors also concentrates manufacturing into the hands of a few companies, and the barriers to entry for new companies rise with new generations of chips.

The production process for each generation of semiconductor chips is different. Newer chips have bigger margins— that gives the major manufacturers more incentives to invest in their production instead of diverting resources to increase capacity for older generation chips, Uy said.

That's partly why the auto industry is struggling, he explained. Cars require thousands of predominantly older-generation chips compared to smartphones and other gadgets that need a handful of newer ones.

Still, Uy told CNBC there is a lot of new supply coming online as the biggest chipmakers — like Taiwan Semiconductor Manufacturing Company, Samsung Electronics, and UMC — are investing capital to build new plants.

What countries are doing to boost chip supplies

Governments have committed to capital spending and are pursuing policies to increase chip-making capacities as well as create local supply chains that can circumvent bottlenecks.

South Korea, for example, has announced a program worth about $450 billion until 2030 that includes corporate investments. It has also beefed-up tax benefits to make its chipmakers more competitive.

China has set up multibillion dollar national funds to invest in local chipmakers as it aims to catch up with the likes of the U.S., South Korea and Taiwan.

The United States passed a tech and manufacturing bill that includes $52 billion to fund semiconductor research, design and manufacturing initiatives. The European Union is also prepared to commit significant funds to expand the EU's semiconductor manufacturing.

Government involvement could help level the playing field and alleviate some of the shortage pressure — especially the price of memory chips, since only a handful of global companies dominate the supply chain, Uy told CNBC.

Once governments are "essentially subsidizing and providing a lot of indirect support as well to local, smaller enterprises to get in on the manufacturing of lower-end chips, that basically increases the supply," he said, adding it could fill the supply shortage for automakers.

Correction: An earlier version gave an erroneous transcription of a quote by Moody's Timothy Uy. He said "demand is not going to be abating anytime soon."