When you look back at the 1970s all the way up to the present, the world’s most important (and arguably still the most important) resource was oil. Wars have been fought over it, shortages and prices have crippled economies, and its economic impact has caused recessions. Around 2006 the U.S. started moving towards energy independence and in 2019 net imports of crude oil and finished products moved from negative to positive. That changes now and again but has been fairly positive as of late.

 

But in our tech obsessed world the new black oil of our time is in the area of semiconductor chips. Try buying a car, a video came console or even a large weapons defence system without semiconductors. They power everything. And where U.S. (and other countries) would have gone to war to protect their sources of oil, semiconductors are now at that level of protection.

 

Consider the industry on a global scale. Deloitte says that macroeconomic and geopolitical factors are emerging as the dominant forces that are shaping the semiconductor industry. Global semiconductor revenue is projected to decline 11.2% in 2023, according to the latest forecast from Gartner, Inc. In 2022, the market totalled US$599.6 billion, which was marginal growth of 0.2% from 2021.

The short-term outlook for the semiconductor market has deteriorated further. Global semiconductor revenue is forecast to total US$532 billion in 2023.

 

But even with those slight declines, a lot of that attention is focused on Taiwan. The Economist Magazine says that chip production makes up 15% of the country’s GDP. By the same token, Taiwan produces more than 60% of the world’s semiconductors and over 90% of the advanced ones. Much of this production is linked to one company – Taiwan Semiconductor Manufacturing Crop (TSMC).

 

This has been dubbed Taiwan’s “silicon shield.” Some of that manufacturing or shield has moved off the island. This past December TSMC held a ceremony to mark a new chip plant in Arizona. President Biden and Apple CEO, Tim Cook, were there as was TSMC’s founder Morris Chang. Chang promised to invest US$40 billion into Arizona and open a second plan by 2026.

 

Last October, the U.S. announced a new policy to limit key high-tech exports to China. In January, the U.S. made deals with the Netherlands and Japan to join the arrangement.

 

The Netherlands is important because it is home to ASML, a provider of tools used to fabricate semiconductors. The company’s essential role in advanced chip manufacturing, including its monopoly on extreme ultraviolet lithography equipment, makes the Netherlands a key part of semiconductor supply chains. While that stock peaked somewhat at the end of 2022 and declined throughout the year (in conjunction with the decline mentioned earlier at the macro level), AMSL Holding NV has been on an uptrend since earlier this year. Last summer the stock hovered around US$563 dollars per share. It now hovers near US$723.

 

Some in the industry believe a downturn overall could be an opportunity and act as a “pause” giving companies a chance to consider things like bringing more manufacturing closer to home (which is already happening), manage diversification risks that come with localization, digitize many parts of the process, financial management and supply chain; address talent needs, and look at sustainability goals within the industry.

 

Besides its policy to limit exports to China, President Biden also signed the CHIPS and Science Act – which is set to provide US$52.7 billion for research, enhanced supply chain resiliency and revitalize semiconductor production in the US.

 

In my last two blogs I talked about the growth of Generative AI. That too is fuelling gains for the chip sector. It’s becoming a virtuous circle of growth, expansion and catch-up by the industry to meet exponentially growing technologies. While some dub it the US-China Chip war, it’s clear that this new black oil is something to watch and scrutinize, as the stakes grow even higher, and countries straddle trade with security.

 

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