Last week, Intel announced a multi-year delay
to an advanced semiconductor fabrication facility it is building in Ohio.  The project, which includes $1.5B in CHIPS
Act funding support, was slated to open in 2025, and is now projected not to
open until 2030 or 2031. This is on the heels of a TSMC facility in Arizona
that failed to open on schedule last December. The delays are currently
indefinite, with no 2025 completion date announced.

For years, the US has recognized that we have
become highly dependent on Asian manufacturing of the devices that are embedded
into just about every consumer, commercial and industrial product. When you
combine advanced (sub 7 nm node size) and more commoditized devices, the US
only accounts for 12% of semiconductor production. Taiwan Semiconductor
Manufacturing Corporation (TSMC) is the global leader, producing 9 of 10
advanced semiconductor devices globally (Samsung in S. Korea is 2nd).

The US has made it a national priority to
reshore semiconductor production stateside. But we are not getting there
quickly. 

While manufacturing dependence has been
greatly reported, there are other choke-points in the semiconductor industry
supply chain that are worth noting. This is a highly interconnected global
network where critical technologies, materials, and expertise are concentrated
in the hands of a few nations and companies. Semiconductors are core to every
product sold today, from satellites and cars to electric toothbrushes and high
end running shoes.  Every industry relies
on semiconductors. Yet the whole supply chain is geopolitically sensitive and
technically challenging.

Let’s take a look at other parts of the supply
chain

Manufacturing equipment

There may be no more important single point of
failure in the semiconductor industry than the town of Veldhoven, (2024 pop.
45,000) near Amsterdam in the Netherlands. 
There, the Advanced Semiconductor Materials Lithiography (ASML) company
manufactures Extreme Ultraviolet (EUV) lithography equipment. Semiconductor
chips are fabricated by shining light on silicon wafers that are covered by a
mask that defines the pattern to etch in the chip. Think of this sort of like
an advanced screen printing process, except instead of pushing paint into a
stencil, you use light to solidify a pattern through the stencil, with the rest
of the silicon then etched away in a chemical process.

To create extremely tiny transistors (3
nanometers or smaller) requires extremely small wavelength light, but still
with enough energy to react with the silicon. EUV equipment shines lasers onto
materials like tin, that then plasmacize, emitting the right kind of light,
which is then focused with lenses and mirrors and directed onto the silicon
wafers.

The point isn’t to explain exactly how
semiconductor chips are made, but rather to point out that ASML is the only
company in the entire world that can make the production equipment that is
utilized by major producers like TSMC. Further, there are key sub-components
that ASML purchases that are also single-sourced. The ultra-pure and precise
lenses are exclusively sourced from Germany’s Carl Zeiss, for example.

The US government is completely dependent on
ASML and its majority of EU subsidiaries. The US convinced the Dutch government
not to agree to export controls disallowing sales of EUV equipment to China, as
part of a global AI capability arms race. [ASML does sell to Taiwan]. The
barrier to entry for new suppliers is extremely high. A single EUV
manufacturing machine costs $380M. But in 2023, Shanghai Micro Electronics
Company filed a patent for an EUV equipment innovation, so China may catch up
soon.

Raw materials

There are two categories of materials to
consider.  First are raw materials, which
are then converted into processed materials. Raw materials, by nature of being
mined, give limited flexibility in where you source them from, unless there are
abundant places around the world where they exist. In today’s paradigm, the
processing of semiconductor-related raw materials is nearly all also anchored
near the mines, so a true marketplace for secondary processing really has not
been established.

●    
Gallium – A byproduct of aluminum
production, extracted from bauxite ore. In 2022, 98% of raw gallium and 86% of
processed gallium came from China.

●    
Germanium – Obtained as a
byproduct of zinc ore processing and coal combustion. China produces 60% of the
global supply, with the balance coming primarily from Canada, Finland and the
US, plus a significant portion from Russia. I wasn’t able to find exact
measures, but would estimate that 25% or less of supply can be sourced in the
US and from US allies.

●    
Tantalum – Extracted from minerals
like coltran, which is predominantly found in China and the Democratic Republic
of the Congo.  These two nations
represent 70% of the global tantalum market.

●    
Rare Earth Elements (REE) – There
are 17 elemental metals critical to semiconductor and advanced electronics
manufacturing.  Examples include
Neodymium, Dysprosium, Praseodymium, Terbium and Yttrium. More than 60% of REEs
are mined in China and 90% are processed there. Other major mines include
Australia’s Mount Weld Mine, the number two producer outside China, and
Myanmar’s Kachin State Mine which exports its REEs to China for processing. The
only major US supply comes from Mountain Pass Mine in California, which is the
only mining and processing operation for REEs in the US, accounting for 15.8%
of global production in 2020.

While there has been significant investment
into finding ways to recycle REEs from used electronics, the industry is still
more “research” than deployment, with less than 1% of annual REE use coming
from recycled materials.  For the
foreseeable future, we will remain reliant on China for these critical
materials.

High purity materials

Beyond the raw materials described above,
there are other constituent materials that are critical to the manufacturing
processes. These also tend to come from an extremely limited number of niche
suppliers with Japan dominating this segment of the vertical supply chain.

●    
Fluorinated Polyimides – FPIs have
novel characteristics that make them instrumental for sub-7 nm node size
semiconductor devices, providing faster chip performance and lower power
consumption critical for 5G radio chips and AI processors. More than 90% of
FPI’s come from Japan, spread primarily across just four key suppliers –
Sumitomo Chemical, Daikin Industries, Mitsubishi Gas Chemical Company and
Kaneka Corporation.

●    
Photoresist – Japan dominates the
photoresist market with Shin-Etsu Chemical capturing nearly 40% of the advanced
semiconductor manufacturing all to itself. Photoresist materials are used to
fabricate the circuit masks I described above.

●    
Hydrogen Fluoride – While Japan
does not have monopoly control of this chemical, it remains a country leading
the supply of hydrogen fluoride specifically for semiconductor production.
Hydrogen fluoride is used for chemical etching and cleaning of silicon wafers.

Why does this all matter?  In the same way the US places export controls
on key suppliers to prevent technology from reaching China, Japan has an
at-times contentious relationship with Korea. In 2019, Japan placed restrictive
export controls on FPIs, photoresist and hydrogen fluoride to Korea, causing
massive supply chain disruptions. While that restriction was lifted in 2023, it
is a reminder of how dependent the industry is on monopoly control of even
materials two or three layers below the final product, and outside the
Taiwan-China-US triangle.

Majorities but not monopolies

●    
Silicon wafers – Wafers are the fundamental
building blocks of semiconductors, and their production is dominated by just a
handful of companies. Japan’s Shin-Etsu and Sumco, Germany’s Siltronic, and
Taiwan’s GlobalWafers supply the majority of the world’s high-purity silicon
wafers.

●    
Fabrication equipment – While Taiwan and South
Korea lead in chip manufacturing, much of the specialized equipment used to
fabricate semiconductors comes from the United States and Japan. US-based
Applied Materials, Lam Research, and KLA manufacture essential tools for deposition,
etching, and metrology. Tokyo Electron and Hitachi High-Tech in Japan play
similarly crucial roles.

●    
Advanced Packaging: While
not critical today, the future of Moore’s Law style performance gains will come
from advanced packaging techniques like 3D stacking. It remains to be seen who
will win the lion’s share of market dominance, but Taiwan’s ASE Group (second
to NTSC for Taiwanese production today), Intel in the US and Samsung in Korea
appear to have the early lead. The US and EU are both investing in R&D in
this area through their CHIPS and Chips Acts respectively.

Where does North Carolina fit in?

Geopolitical strategy