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Russia-Ukraine crisis puts pressure on microchip supply chain

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THE already-stretched semiconductor industry is expected to suffer more interruptions from the current conflict in Eastern Europe, as Ukraine and Russia provide the bulk of the world’s supplies of neon and palladium, vital for the production of microchips.

Neon, critical for the lasers used to make chips, is a by-product of Russian steel manufacturing. It is then purified in Ukraine. Palladium is used in sensors and memory, among other applications.

The current global chip shortage will worsen if the standoff persists as more than 40% of the world’s supply of palladium comes from Russia, while Ukraine produces 70% of the global supply of neon, according to Moody’s Analytics.

“During the 2014-2015 war in Ukraine, neon prices went up by several times over, indicating how serious this can be for the semiconductor industry: semiconductor-exposure companies make up 70% of total neon demand, as it is an integral part of the lithographic process for making chips,” Tim Uy of Moody’s Analytics wrote in a recent report, seen by the Business Standard.

The ongoing chip shortage severely hit global producers during the Covid-19 pandemic in 2020-21 after remote work and mobility restrictions triggered an acceleration of digitization across the world.

Moody’s expects the chip crunch to deepen if a deal is not brokered in the coming months, with industries highly dependent on semiconductors to be impacted accordingly.

“This means significant risks are ahead for many automakers, electronic device manufacturers, phone makers, and many other sectors that are increasingly reliant on chips for their products to work,” the experts warn.

Global semiconductor sales

Global computer chip industry sales reached the highest-ever annual total of $555.9 billion last year, the Semiconductor Industry Association (SIA) reported this week. The figure represents an increase of 26.2% compared to the 2020 total of $440.4 billion.

The association went on to report that the industry shipped a record 1.15 trillion units in 2021 in response to high demand.

In 2021, amid the ongoing global chip shortage, semiconductor companies substantially ramped up production to unprecedented levels to address persistently high demand, resulting in record chip sales and units shipped,” said SIA president and CEO John Neuffer.

SIA predicts that demand for semiconductors will “rise significantly” in the coming years, as chips become heavily embedded in the essential technologies.

Millions of products, such as cars, smartphones and washing machines, rely on computer chips.

When the coronavirus pandemic began in 2020, some tech firms started stockpiling chips or ordering them in advance, which led to many companies struggling to buy the components. As lockdowns forced millions to work from home, demand for laptops, tablets and webcams skyrocketed. At the same, labor shortages at chip factories lead to shortages worldwide.

The situation has led governments and lawmakers to work on securing the supply chain and bringing the manufacture of semiconductors closer to home, as some of the biggest chip makers are located in Asia.

Last year, US President Joe Biden pledged $50 billion for semiconductor manufacturing and research with a bill known as the CHIPS for America Act.

Earlier this month, the EU announced a new European Chips Act that will see €15 billion ($17.11 billion) of additional investments in the industry until 2030.

SIA represents 99% of the US semiconductor industry by revenue and nearly two-thirds of non-US chip firms.