Why Is the Chip Industry So Special?

Microchips constitute the basic ingredients in almost all products that use electricity as a power source, not only revolutionizing how we process information and communicate but also serving as indispensable parts in renewable energy systems and stable power grids. The production of leading-edge chips is of high military importance as support for advanced weapon systems using artificial intelligence and thereby has geopolitical implications. The production of microchips is economically efficient and technologically advanced, made possible through increased specialization and consolidation of activities along the global value chain. This has concentrated essential value chain activities in different geographical regions, including the US, Europe and Japan, with the most advanced, leading-edge production facilities located in Southeast Asia (South Korea and Taiwan). The highly capital-intensive, specialized and concentrated production activities make the global chip value chain tightly coupled and less flexible to withstand major disruptions, as witnessed during the COVID-19 pandemic. One consequence of this is that various governments from the US and Europe, as well as incumbent market leaders in Southeast Asia, attempt to advance their local production capacities, the eventual effects of which remain to be seen.