[ABS News Service/04.03.2022]
Russia is dependent on Taiwan's semiconductors for everything
from the manufacture of laptops to military equipment. The cutting off of this supply
may be disastrous for Russia.
On
the first day of Russia’s invasion of Ukraine,
the share price of the world’s biggest chipmaker, Taiwan Semiconductor Manufacturing
Company (TSMC), dropped, despite the global semiconductor index (known as the Sox)
being up 3.5%. This sent a clear message that investors are concerned about relations
between China and Taiwan in the wake of Russia’s invasion.
Just
a day after the invasion of Ukraine began,
Taiwan announced it was joining international sanctions
against Russia. To comply with this order, TSMC must halt the export of semiconductors
to Russia. Taiwan holds a prominent position in the global production of both advanced
and lagging-edge chips, according to Ajit Manocha, CEO of Silicon Valley-based
industry association SEMI. “Russia produces an insignificant number of semiconductors
and is heavily reliant on imports,” he adds.
Russia’s reliance on Taiwan for semiconductors
Russia
is wholly dependent on TSMC for the high-end semiconductors required for the manufacture
of anything from laptops and smartphones to equipment for the country’s military
and security services.
TSMC’s
significance for the global semiconductor industry cannot be overstated. The company
is the world’s largest contract chip manufacturer and Asia’s most valuable listed
company, at $600bn.
Almost
all of TSMC's facilities are located in Taiwan. Following the global semiconductor
shortages seen during the Covid-19 crisis, the company announced plans
for more than $44bn of capital investment in 2022. This includes global expansion
of its semiconductor fabs, which is likely to see its
market dominance cemented through foreign direct investment
beyond Taiwanese soil.
Russia’s
dependence on Taiwan for chips was already a problem, according to GlobalData analyst Michal Orme. A global shortage of semiconductors
meant Russia was already struggling for supplies. “As TSMC's business boomed and
shifted very much to leading-edge contract work, most notably for Apple, the small
Russian market simply couldn't compete for TSMC capacity,” says Orme.
From
2018, Russia suffered from not being a top-tier client for TSMC. Since then, TSMC's
high-margin business has exploded, with Apple and a handful of other clients commandeering
TSMC’s capacity and leaving the rest increasingly 'crowded out', says Orme.
TSMC
remains the best global foundry option, despite Russia trying to plug its shortfall
in semiconductor supply with other options such as China's SMIC and US company Global Foundries. “Like everyone else, Russia had to
ease its reliance on TSMC,” says Orme.
Is Russia out of semiconductor options?
Samsung,
Russia’s only real alternative to TSMC for high-end contract manufacturing services,
now comes under South Korea's semiconductor export embargo on Russia. “Russia is
cut off from modern semiconductors as it has no advanced semiconductor industry
of its own and has relied on TSMC entirely to make its leading-edge chips,” says
Orme. TSMC, along with South Korea’s Samsung,
has a monopoly on five-nanometre chips – the most widespread
small chip in circulation used by companies including Apple, Qualcomm and Huawei.
Russia
can still import low-end chips from China, but it is the high-end chips that are
critical for emerging technologies (AI, quantum computing,
augmented reality applications). “High-end chips are also vital for today’s advanced
weapons systems and for high-end smartphones, for example," says Orme. "Everything
else can be done by chips supplied by China."
One
possible repercussion of this new iteration of chip wars may be a battleground of
manufacturing materials. Ukraine is the world’s main supplier of neon gas and Russia
is a key supplier of palladium, both of which are used in chipmaking.
Russia
could retaliate against sanctions by cutting off supplies of the neon gas required
for the lasers used in lithographic chip-making equipment, notably to Dutch semiconductor
company ASML. Ukraine controls about 70% of the global market. Neon gas has been
in widespread use for more than ten years, used in chip plants all over the world,
and GlobalData analyst Anisha
Bhatia believes global supplies could be ramped up to cover the shortfall.
Whatever
the outcome, a tight supply of these raw materials could potentially lead to a rise
in semiconductor prices. "The situation is still evolving and the extent of
the halted sales isn’t yet fully clear," says Bhatia.
Without
an uninterrupted supply of high-end semiconductors it will be extremely difficult
for Russian enterprises, telecommunications companies and cloud providers to maintain
and develop their technology infrastructures going forward. “Just in terms of banks,
for example, it is going to be difficult for any kind of data centre operation to keep going and the effects will be felt
as the sanctions regime continues,” says GlobalData analyst
Emir Halilovic.
The
effect on Russia’s consumer market
will be apparent almost immediately. “There is going to be a real lack of any type
of electronics requiring more sophisticated chips inside,” says Halilovic. This includes laptops, phones and other consumer
items. “I am very sceptical about the future of the the Russian tech industry if this sanctions regime holds for,
let's say, six months, a year or even two years,” Halilovic
adds.
As
the situation unfolds, the effects of Taiwan's ban on semiconductors to Russia will
become apparent. What is clear is that by standing alone, albeit with China as its
ally, the country risks a catastrophic technology crisis it can ill afford in this
digital age.