MONTHLY BRIEFING

WORLD ECONOMIC SITUATION AND PROSPECTS

Economic Analysis No. 173 | July 2023

Supply chains for microchips

INCREASING USE OF MICROCHIPS
IN DAILY LIFE KEY MESSAGES
» Microchips are central to modern industries, ranging from
Microchips, sometimes also referred to as semiconductors,1
consumer goods, industrial production to national defence. While
are central to modern electronics. They are virtually ubi­
chip supply shortages, notable during the pandemic, have now
quitous in people’s daily lives, being present in smartphones
largely eased, this has been uneven across user sectors.
and other consumer products, industrial machines and
military systems (figure 1). Leibovici and Dunn (2021), based » The microchip supply chain is characterized by geographic
on industrial information in the United States, estimate concentration of key elements, and recent economic and
that about 25 per cent of 226 manufacturing industries use geopolitical developments could lead to a diversification, driven
semiconductors as a direct input; these industries represent by new industrial policies and public investment commitments in
39 per cent of all manufacturing output. These rates are many countries.
expected to increase quickly over time. More importantly, » While such diversification could take years to materialize, the
microchips are essential for countries to transit to a green race to develop new supply chains could come with their own set
economy. They are used in a wide range of renewable energy of challenges. Losing economies of scale, skill shortages, and
technologies, including solar panels and wind turbines. potential protectionism could all increase costs in the short to
They can be also used in a variety of other applications that medium term. In the longer term, greater competition, innovation
contribute to the green transition, such as energy-efficient across the supply chain, new jobs, and improved resilience could
lighting, smart homes and buildings, and electric vehicles. – if realised – result in some benefits at the global level.
Microchips are even more critical to enable technologies of
the future, including artificial intelligence, quantum com­
Figure 1
puting and advanced wireless networks.
Share of semiconductor market revenue worldwide by
application, 2022
MICROCHIP SUPPLY SHORTAGES:
RECENT TRENDS AND IMPACTS 12% 23%
Industrial Smartphone
Microchip supply shortages have become a major challenge electronics
to the world economy in recent years. Researchers have esti­
11%
mated that 169 industries faced a microchip supply crunch, 19%
Consumer
including automobiles, computers, medical equipment Personal
electronics
and other electronic devices (Howley, 2021). The shortages computing
10%
reflected the continued supply and demand imbalances.
Automotive
During the pandemic, demand for electronic goods surged
with increases in telework and home schooling. The sup­ 9% 16%
ply of microchips, however, lagged amid worldwide shut­ Wired and Servers, data
wireless centers, and
downs of factories and staff shortages. In 2022, the war in
infrastructure storage
Ukraine further threatened the supply of a few materials
for microchip manufacturing. For instance, only a handful
Source: UN DESA, based on data from Statista (accessed on 31 May 2023).
of companies in Ukraine supply neon, a critical gas in the
lithography process of microchip manufacturing. Extreme
weather events also caused temporary supply disruptions.
For instance, in 2021, Taiwan Province of China – home to
1 Microchips and semiconductors are not necessarily the same, but the terms are at times the majority of global chip production 2 – experienced its
used interchangeably. Strictly speaking, a semiconductor refers to a material whose
conductivity is between a conductor and an insulator. A microchip refers to a silicon
chip – a semiconductor material – containing an integrated circuit, which is small in size 2 More than 90 per cent of the world’s most advanced semiconductor manufacturing
and is often part of a computer or other electronic equipment. capacity is located in Taiwan Province of China (BCG and SIA, 2021).

The World Economic Situation and Prospects Monthly Briefing is part of the monitoring and analysis activities of the Global Economic Monitoring Branch of the Economic Analysis and Policy
Division of UN DESA. This issue was prepared by Zhenqian Huang and Clarissa Hahn under the supervision of Hamid Rashid, Chief, Global Economic Monitoring Branch, and general guidance of
Shantanu Mukherjee, Director, Economic Analysis and Policy Division. It benefited from comments and suggestions from Ingo Pitterle and Kenneth Iversen. Ian Cox provided research assistance.
Andrea Dominovic provided statistical support. The full series is available from: http://www.bit.ly/wespbrief.
Figure 2 Figure 3
Semiconductors supply shortages and price pressures Average monthly price change in U.S. manufacturing
Supply shortages (left-hand scale) industries
Price pressures (right-hand scale) Industries with no semiconductor dependence
Multiple of long-run average Multiple of long-run average Industries with semiconductor dependence
10 40 Percentage
15
8 30

6 20 10

4 10
5
2 0

0 -10 0

2005 2007 2009 2011 2013 2015 2017 2019 2021 2023

Source: S&P Global (2023). –5

Note: Supply shortage and price pressure indicators are calculated from the number of purchasing
managers that report a specific item to have been in short supply or increased in price during the January July January July January July
survey month. A value of 1.0 means that supply shortages or price pressures are in line with the 2019 2019 2020 2020 2021 2021
long-run average. An index value of 3.0, for example, would signal that reports of supply shortages
or price increases in the reference month are three times the normal amount. Source: Leibovici and Dunn (2021).

worst drought in the past half century, which affected its particularly hard hit during the pandemic, as people’s
microchip exports, as large amounts of water are needed to increased preference for individual mobility led to a
cool manufacturing equipment. faster-than-expected reco­very in the demand for cars
while chip shortages forced automakers to cut produc­
Microchip shortages can have macroeconomic implica­
tion. The automotive industry is estimated to have lost
tions, for example, through potentially slowing growth
more than $200 billion in 2021 due to microchip short­
and fuelling inflation. During 2021 and 2022, the number
ages (Ramachandran, 2022).
of purchasing managers that reported price increases of
semiconductors was 20 to 30 times higher than the normal Global microchips supply began to improve in 2022 and
trend (figure 2). In the United States, while the gap in ave­ the improvement has continued into 2023. In April 2023,
rage monthly price changes between semiconductor-de­ reports of semiconductor shortages were three times the
pendent and non-semiconductor-dependent industries normal amount, much lower than the peak of about nine
had remained close to zero through 2019, it rose to about times in mid-2021 (figure 2). A recent survey suggests that
4 percentage points by September 2021 (Leibovici and the chip industry could be shifting from a constrained
Dunn, 2021) (figure 3). In 2021, consumers needed to pay environment, where it was difficult to get products, to one
4 per cent more on average for a new car worldwide com­ of abundance driven by excess inventory and weakened
pared with a year ago,3 reflecting higher chip prices. demand in 2023 amid global economic weakness (KPMG
and GSA, 2023).
The microchip shortage also separately affected produc­
tion and revenue of related industries. As microchips are However, the stabilization of the global chip supply has
widely used in manufactured goods, shortages delayed happened unevenly across use-sectors. Industrial pro­
the production of cars, home appliances, consumer ducts, smartphones and other consumer electronics
electronics and so on. The average lead time for equip­ have seen relief from chip shortages, thanks to increased
ment manufacturers increased from 3-4 months to 10-12 production capacity and easing demand. Nevertheless,
months in 2022 (Kaur, 2022). The automotive sector was advanced computing products, such as those used in 5G
and electric and autonomous vehicles, could continue
facing difficulties in getting the chips they need (Hoecker
3 UN DESA, based on Statista (accessed on 25 June 2023). and others, 2022; Shein, 2023).

2 Monthly Briefing on the World Economic Situation and Prospects

Figure 4
Share of value addition across the microchip supply chain, by country or country group, 2019

China Europe Japan Republic of Korea United States Taiwan Province of China Others

Percentage 0 20 40 60 80 100
Silicon production a
Raw material
Logic chips

Memory chips
Design
EDA and core IP

Manufacturing equipment
Manufacturing

Front end Materials

Wafer fabrication

Back end Assembly, packaging & testing

Source: UN DESA, based on BCG and SIA (2021) and Statista (accessed on 26 June 2023).
Note: a = “Silicon production” refers to the share of silicon production worldwide in 2022. “Logic chips” process information to complete a task, such as computer central processing units; “memory
chips” store information; “EDA” electronic design automation software tools; and “IP” intellectual property.

MICROCHIP SUPPLY CHAIN AND ITS high geographical concentration means acute events, such
STRUCTURAL WEAKNESSES as COVID-19 lockdowns and extreme weather events in a few
critical places, could easily disrupt the entire supply chain.
The demand for microchips is expected to grow given the Moreover, the chip industry is at the forefront of geopolitical
continuing digital transformation of every aspect of life. competition. The supply chain has become vulnerable to
Tools such as ChatGPT fuels demand for chips with stronger geopolitical fragmentation and tensions between countries.
computing power. Demand for artificial intelligence chips is
forecast to double from 2020 to 2025 (Statista, 2023). Growth
of supply, however, may not be able to keep up. Rapp and POLICY RESPONSES: DEVELOPED
Möbert (2022) estimate that global microchip supply short­ COUNTRIES
ages could exceed $200 billion in market value by 2030.
The strategic importance of microchips to economic
More importantly, the microchip supply chain is subject to competitiveness and even national security has prompted
structural weaknesses. Figure 4 illustrates in a simplified countries worldwide to focus on the resilience of their
way the exceptional degree of global interconnectedness of supply chain. Many developed countries have planned to
the microchip supply chain. In particular, the United States increase investments and build partnerships to diversify
enjoys a clear advantage in intellectual property and chip and re-shore the microchip supply chain, particularly
design. The European Union and Japan play major roles in microchips manufacturing. The United States, for instance,
providing equipment and materials for manufacturing. The introduced the CHIPS and Science Act 2022, which will
Republic of Korea has advantages in memory chip design, direct $280 billion over the next 10 years into microchip
manufacturing, assembly and testing. China is a major research and development (R&D), manufacturing and
exporter of silicon (the raw material to produce chips), one human resources, as well as into tax credit incentives for
of the major manufacturers of mature microchips,4 and a firms. The European Parliament and the EU Member States
leader in assembly, packaging and testing. Taiwan Province agreed on the European Chips Act in April 2023 aiming
of China accounts for a substantive share of chip manufac­ to contribute public investments of €43 billion (about $47
turing. Each of these supply chain components is critical billion) in the sector and double its global market share
and most are highly concentrated in a few places. Such a to 20 per cent by 2030. In May 2023, the United Kingdom
announced a new 20-year plan (the “National Semiconduc­
4 Mature microchips refer to chips with a size greater than 10 manometers. tor Strategy”) – including government investment of up to

Monthly Briefing on the World Economic Situation and Prospects 3

£1 billion (approximately $1.24 billion) in the next decade semiconductors and integrated circuits as key areas for
– to improve access to infrastructure, power more R&D and technological breakthroughs.
facilitate greater international cooperation.
Southeast Asian countries, home to chip production since
Developed countries in Asia, such as Japan and the Republic the 1970s, have been also taking actions to move up the value
of Korea, have also adopted national strategies and increased chain in recent years. For instance, Malaysia’s most recent
fiscal spending to improve national capacity across the five-year plan, which ends in 2025, expects the chip industry
microchip supply chain. Japan’s “Strategy for Semicon­ to contribute to about 8 per cent of the country’s GDP as it
ductors and the Digital Industry” in 2021, which is set to be shifts its focus to higher-value products and attracts invest­
updated in 2023, aims to strengthen semiconductor design ment in design and research. In 2021, Thailand introduced
and technological development and secure domestic pro­ incentives, including tax exemptions, to draw investment,
duction with next-generation manufacturing. The Republic as well as R&D, to its semiconductor and electronics indus­
of Korea’s “K-Semiconductor Strategy”, announced in May tries. Indonesia has identified the semiconductor sector as a
2021, and “Special Act to Protect and Foster National High- priority industry that is generally eligible for tax incentives
Tech Strategic Industry”, that went into effect in August and investment facilities (Ernst & Young, 2022).
2022, provide microchip firms with investments, tax bene­
India is also now seeking to expand microchip manufac­
fits, regulatory concessions, and other preferential treatment
turing, despite having focused earlier on software related
to spur more R&D and increase production output.
know-how. In December 2021, the Government announced
At the same time, developed economies are strengthening support of $30 billion to develop the semiconductor industry
collaboration with strategic partners. The United States in the country and encourage investments across the semi­
proposed the “Chip 4 Alliance” initiative in March 2022, as conductor value chain.5
part of wider plans to enhance the security and resilience
Developing countries outside of Asia – despite their more
of semiconductor supply chains. The initiative includes
limited role in the global microchip supply chains – are
Japan, Republic of Korea and Taiwan Province of China, all
looking for opportunities to enhance their participation,
of which excel in certain segments of the global microchip
especially as developed countries are reshaping the supply
supply chain. In March 2023, the United States and India
chains. Brazil and Mexico, for instance, could benefit from
signed a memorandum of understanding (MoU) to establish
the U.S. reshoring plans due to their geographic proximity.
a semiconductor supply chain and innovation partnership.
In 2021, Brazil extended credit incentives for microchip
Japan and the United Kingdom announced in May 2023 to
manufacturers in the “Program to Support Technological
establish a semiconductor partnership to deliver new R&D
Development of the Semiconductor Industry”. Several
cooperation, skills exchange, and improve the resilience of
African countries are also taking actions. For instance, Kenya
the semiconductor supply chain for both countries.
launched the country’s first semiconductor production unit
in December 2022, aiming to strengthen its position as a
POLICY RESPONSES: DEVELOPING manufacturing hub in East Africa and lead the continent’s
COUNTRIES technological development (Mwangi and Wamutitu, 2022).

Developing countries that are heavily engaged in the micro­

chip global supply chain have also been reassessing their POTENTIAL IMPACTS OF RECENT POLICIES
positions across the supply chain. Many have introduced AND PERSISTENT CHALLENGES
new national industrial policies and increased investment
to enhance R&D and manufacturing capacity within their Despite recent policy announcements and committed new
borders. In China, for instance, the development of the semi­ investments, strengthening the resilience of microchips
conductor industry has long been a priority. As part of the supply chains (including developed countries’ plans of
“Made in China 2025” national strategy, issued in 2015, China reshoring or nearshoring), will likely take years to mate­­rialize.
aimed to improve capacity across the semiconductor supply According to Intel, the construction of a semiconductor fac­
chain. The supply chain improvement gained renewed tory alone could take about three years. This is consistent
urgency over the past years because of trade tensions with with the data which does not show that microchip supply
the United States and the COVID-19 pandemic. In 2020, chain diversification is already taking place for deve­loped
China issued 40 policy measures to provide preferential tax, countries. For the European Union, for instance, the majority
investment and financing support as well as talent recruit­ of its semiconductor devices have been imported from Asia
ment support for firms that focus on integrated circuit for over a decade, particularly from China; such a pattern has
design, software design, material supplies, and microchips continued in the past few years (figure 5).
manufacturing, assembly and testing. The country’s 14th
Five-Year (2021-2025) Plan highlighted “self-controllable, 5 This refers to India’s “Programme for Development of Semiconductors and Display Man-
secure and highly efficient” supply chains, and identified ufacturing Ecosystem”. The Programme was modified and extended in September 2022.

4 Monthly Briefing on the World Economic Situation and Prospects

Figure 5
Net weight of European Union's semiconductor device imports, by region
Africa Asia (excluding China) China Developed economies Economies in transition Latin America and the Caribbean

Billions of kilograms
2.5 4.5

4.0

2.0
3.5

3.0

1.5
2.5

2.0
1.0

1.5

1.0
0.5

0.5

0.0 0.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Source: UN DESA, based on UN Comtrade Database (accessed on 7 June 2023).

Note: Semiconductor devices refer to the products under Harmonized System (HS) Commodity Code 8541, which refers to diodes, transistors, similar semiconductor devices, including unmounted
chips, dice, wafers and so on.

Meanwhile, the race to develop new supply chains – although Semiconductor talent was in short supply in 2022, as
it could enhance resilience – may prolong challenges and labour shortages have prevailed in developed countries
even create new ones for the microchip industry. For one, since the pandemic. The race to localize semiconductor
increased competition, along with geopolitical tensions, supply chains and countries seeking breakthroughs in
could lead to export controls, limited access to certain innovation could intensify the global competition for
technologies, materials, machines, products and markets. talent, and exacerbate the chip talent and skill shortage
This could consequently hinder economies of scale as well issues. Deloitte (2023) estimates that the semiconduc­
as the industry’s R&D levels and production capacity. tor workforce – estimated at more than 2 million direct
semiconductor employees worldwide in 2021 – will need
Moreover, although recent policies may attract domestic to grow by more than 1 million skilled workers by 2030
and foreign investment in the short run, in the long-term to support the industry’s growth. To ensure available
these policies collectively could increase the costs of skilled talent to fill the new jobs, govern­ ments could
microchip products. BCG and SIA (2021) estimates that adopt various policies, including investing further in
developing “self-sufficient” local supply chains would expanding science and engineering education, providing
require at least $1 trillion incremental upfront investment, training in specific technical areas through partnerships
which could result in a 35 to 65 per cent overall increase with universities and industries, and supporting mobility
in semiconductor prices and ultimately higher costs of of skills.
electronic devices for consumers.
As countries build new supply chains and enhance micro­
Furthermore, talent shortages could constrain efforts to chip production capacity, one separate unintended conse­
enhance the resilience of the microchips supply chain. quence could be on the climate. Microchip manufacturing

Monthly Briefing on the World Economic Situation and Prospects 5

causes significant emissions, responsible for as much CO2 Ernst & Young (2022). When the Chips Are Down: ASEAN Could
emissions as half of U.S. households (Mohr and others, 2023). Be the Answer to the Semiconductor Crunch.
If without efforts to reduce greenhouse gas (GHG) emis­
Hoecher, Anne, and others (2022). When Will the Chip
sions along the entire supply chains, chip makers’ carbon
Shortage End? Technology Report 2022. Bain & Company.
footprint could widen significantly in the next few years.
That said, a few major chip manufacturers have announced Howley, Daniel (2021). These 169 Industries Are Being Hit by
ambitions to decarbonize. For instance, Intel commits to The Global Chip Shortage. Yahoo News. 25 April.
net-zero GHG emissions in its global operations by 2040.
Intel (n.a.). What Does It Take to Build a Fab?
Taiwan Semiconductor Manufacturing Company (TSMC)
pledged to reach net zero emissions by 2050. Countries Kaur, Dashveenjit (2022). Chip Shortage: The Lack of “Chips
could also step-up regulatory efforts to encourage chip to Make Chips” Is Exacerbating the Shortage by Another 2
producers to record and minimize emissions across their Years. Techwire Asia.
supply chain.
KPMG and Global Semiconductor Alliance (GSA) (2023). 2023
KPMG Global Semiconductor Industry Outlook: Navigating
Short-Term Volatility in the Semiconductor Industry.
CONCLUSION
Kreps, Sarah and Paul Timmers (2022). Bringing Economics
Microchips are ubiquitous in people’s daily lives and the
Back into EU and U.S. Chips Policy. Brookings Institution.
world economy, and their centrality is set to grow further.
The shortages during recent crises have underscored their Leibovici, Fernando, and Jason Dunn (2021). Supply Chain
importance and encouraged countries to diversify supply Bottlenecks and Inflation: The Role of Semiconductors.
chains and enhance resilience. Both developed and deve­ Federal Reserve Bank of St. Louis. Economic Synopses,
loping countries have taken actions, including committing 2021, Number 28.
new public spending, providing incentives to attract private
Mohr, Jan-Hinnerk and others (2023). For Chip Makers, the
domestic and international investments, and strengthening
Decarbonization Challenge Lies Upstream. Boston Con­
collaboration with strategic partners.
sulting Group.
While such diversification could take years to materialize, Mwangi, Wangari and Kiama Wamutitu (2022). DP Unveils a
the race to develop new supply chains could come with Sh25 Million Semiconductor Manufacturing Unit. Kenya
their own set of challenges. Losing economies of scale, skill News Agency. 20 December.
shortages, and potential protectionism could all increase
costs in the short to medium term. Moreover, there are Ramachandran, Vinodkumar (2022). Way Ahead for Global
opportunity costs to investing in the industry, as well as Automotive Industry Amid Semiconductor Chip Shortage.
mitigating its adverse environmental impacts. In the longer KPMG.
term, greater competition, innovation across the supply Rapp, Hermann P. and Jochen Möbert (2022). 3SM: A Struc-
chain, new jobs, and improved resilience could – if realised tural Semiconductor Sales Model. Deutsche Bank Research,
– result in some benefits at the global level. Germany Monitor.

Shein, Esther (2023). Is the Chip Shortage Over? TechRepublic.

References
Standard & Poor’s (S&P) Global (2023). S&P Global PMI Com-
Boston Consulting Group (BCG) and Semiconductor Industry modity Price & Supply Indicators. News Release. 4 May.
Association (SIA) (2021). Strengthening the Global Semicon-
Statista (2023). Estimated Size of the Artificial Intelligence
ductor Supply Chain in an Uncertain Era.
(AI) Semiconductor Market Worldwide from 2017 to 2025
Deloitte (2023). 2023 Semiconductor Industry Outlook. (accessed on 2 June 2023).

6 Monthly Briefing on the World Economic Situation and Prospects