With the world still reeling from a global chip shortage, the recent crisis in Ukraine sends a bleak message to the already floundering industry. The semiconductor chip supply is yet to recover from the shock dealt by the COVID-19 pandemic. This, coupled with an impending war between two states that are contributors to the global supply chain, is detrimental to the industry’s recovery.
The consumer electronics and automotive markets have been massively hit by this chip shortage. Apple, a major manufacturer of mobile phones and laptops, has pushed the release of their new line of MacBook and announced that the number of iPhone models being manufactured would be reduced due to the chip shortage. The automotive sector is still underperforming and major players have yet to resume operations at pre-pandemic levels. The invasion of Ukraine by Russia might have some implications on the global chip supply along with consequences for the Russian semiconductor industry itself.
Neon + Palladium Will Not be a Problem
The semiconductor supply chain remains a complex one. Multiple processes are involved and there is a need for high-end manufacturing equipment. From the recent spotlight on the semiconductor industry by both the Quad and the Indian government itself, it is clear that there exist multiple choke points that can impact the supply of chips across the world.
One such chokepoint remains Neon gas, which is being used as an etching gas in photolithographic tools. This remains a critical aspect during the fabrication process of the chipset. Ukraine remains one of the world’s largest suppliers of Neon gas. Coincidently, the increase in production of Neon gas in Ukraine took place due to increased industrialisation activities in Russia post the break up of the Soviet Union. A by product of steel production, Ukrainian plants and companies were set up to filter the gases released during the manufacturing process of steel. One of these gases was Neon.
Another interesting material Palladium is used for the process of plating (for its conductivity and non-corrosive ability) in the semiconductor industry. Russia remains the world’s largest Palladium exporter and the current export controls on the country might affect the supply.
While all this might seem like the global chip supply is under critical threat due to the war with many articles claiming that this would be a huge problem, it is not necessarily so. The annexation of Crimea in 2014 also saw similar fears post which all semiconductor firms started diversifying the supply of these materials. There still exists global stockpiles for the short-term and alternative suppliers for these materials. Reports mentioned how the US government had already indicated to its chipmakers of possible escalation, asking them to find possible solutions.
The US and UK are major suppliers of Palladium themselves. Other gases, mostly Chlorine- and Fluorine-based ones, can be used as credible (and sometimes even better) alternatives for rare gases like Neon during the etching process. Though Ukraine might supply majority of the world’s Neon gas, the manufacturing process can function efficiently even without the specific gas itself. The so-called choke points affected by the Russia-Ukraine war have been mitigated and are not factors anymore.
What about the Russian Semiconductor Industry?
Though the supply of some critical materials won’t affect the global chip industry, one thing that remains almost certain is the negative impact on Russia’s semiconductor industry itself. The growing sanctions and import/export controls on Russia will cripple its domestic industry and can land a huge blow to its economy.
The Russian government, specifically the Ministry of Industry and Trade of the Russian Federation, had planned to invest large amounts of money in building its domestic semiconductor ecosystem. With no manufacturing capability of its own and its firms producing low-end designs of processors (suitable for consumer electronic goods only), the semiconductor industry will definitely take a hit when trying to import high-end processors and chipsets (which might be needed for advanced defence and space systems).
The sanctions by the United States effectively prevent Russia from importing a range of products, from chips to telecommunications equipment. But what is noteworthy is that the sanctions prevent Russian imports of both American products as well as products manufactured in other countries that use proprietary technology of any American firm or company to manufacture the products under the sanctioned list. This would mean that any firm, located in any country around the world, cannot export certain products even if they have been manufactured on that country’s soil utilising any sort of American technology during the process of design and manufacturing.
This has led to major American companies like Intel and AMD putting a stop to all exports to Russia. Along with the US, the world’s semiconductor manufacturing powerhouse Taiwan has also joined in with sanctions. Taiwanese company TSMC (Taiwan Semiconductor Manufacturing Company) has already suspended deliveries to Russian semiconductor firms like Baikal and Elbrus. Failure to comply with American directives also means that these companies (even if they are not Russian) are liable and at the receiving end of potential sanctions themselves. This would mean that no state and its firms would want to go against the directives of the US government, right now.
However, there is always the issue of China. Russia has historically depended on China for semiconductor imports and over 70 per cent of its finished devices come from its southern neighbour. Here arises the question of whether Chinese firms can still export semiconductor chips to Russia in the current scenario. China’s state-owned and largest semiconductor enterprise, Semiconductor Manufacturing International Corporation (SMIC), also uses American IP related to semiconductor design and manufacturing. What remains to be seen is whether China (and subsequently its firms) go against the levied sanctions and continue to supply Russia with chips. India too has been supplying some chips to Russia and these restrictions might impact the country’s chip exports too.
Even if that happens, Russia’s strategic and defence sectors will take a huge beating because of the non-capability of Chinese firms to manufacture leading-edge chips. Russia will be left with an influx of trailing-edge semiconductor devices meant for civilian and general use. Defence (autonomous weapons) and space (satellites) systems that require special-grade chipsets will still remain out of Russia’s reach, at least for the time being. That might result in Russia not being able to complete their defence and space exports, which form a significant part of their economy as well as national revenue.
The ongoing war in Ukraine will have some effect on the semiconductor industry. But for the time being, the already struggling global chip industry remains out of any future threat arising out of the conflict. Redundancy has been developed to an extent that this conflict will not cause major problems. However, the main impact will be on the Russian semiconductor industry itself, with other sectors that need high-end and better-performing chips feeling the pinch too. These sectors, like defence and space, remain strategically important for Russia and prolonged sanctions will hurt both their economic and strategic interests. It will be interesting to see if chip exporters to Russia like China and India (whose firms rely on American IP) ignore American directives and continue the supply of chips.
Arjun Gargeyas and Aditya Pareek are research analysts at Takshashila Institution. The views expressed in this article are those of the authors and do not represent the stand of this publication.
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