The General Motors plant in Lansing, Michigan, sits on 320 acres and churns out cars and parts across its 3.6 million square foot facility. It has produced more than 2 million cars since opening in 2004, and hosts 3D printing and collaborative robots that get the job done.

But on March 15th this year, amid a global semiconductor shortage, the factory came to a halt and sent its 2500 employees home for a period of weeks, later extended to months.

GM isn’t the only company that has been caught up in the brewing battle over semiconductor chips. The auto industry on the whole under-ordered chips, anticipating a slow-down in sales due to the pandemic. Elsewhere, Sony blames a chip shortage for the scarcity of its PS5 consoles. Even Apple expects to see production of its phones and computers drop. According to Goldman Sachs, at least 169 industries are being impacted by the shortage, including soap manufacturers.

In this, our May issue, we enthusiastically describe an evolving retail landscape that is tech-forward and data-dependent — an algorithmic retail world. But without semiconductor chips to power this inevitability, retail’s evolution will have a rocky go.

A combination of factors are behind the shortage, including an ever expanding tech-enabled world of goods and services that require semiconductors. But the biggest culprit is the brewing geopolitical battle over control of semiconductor manufacturing and distribution.

As the demand for chips grows, governments are stepping in to protect their shares. China, which is only capable of making 6% of the chips it needs, last year bought up $300 billion of semiconductors, in part stockpiling them in response to US laws prohibiting the sale of the chips to certain Chinese companies, including Huawei. The hoarding certainly impacted the world’s supply, but the investment — more than China pays for oil in a year — served to put other countries on notice of its intent around semiconductors.

Taiwan sits at the center of the conflict. While the US is the leading supplier of semiconductor chips, boasting 50% of the world’s market share, many of those chips are manufactured in plants based in Taiwan (just 12% are manufactured in the US). What’s more, the island nation is home to the Taiwan Semiconductor Manufacturing Company (TSMC), the third largest chip maker in the world. If China were to regain control of Taiwan — or at the least, intimidate or manipulate it — it could direct who would get chips and how much, including the US military, which sources its most advanced chips from TSMC.

Market share of semiconductors has been shifting from the US to Taiwan. Source: The Economist

In the US, the White House and Congress are under pressure to put funding and initiatives behind building out manufacturing capabilities at home. Semiconductors were featured in the National Defense Authorization Act, creating incentives for manufacturing and investments in chip research. The US has also blocked sales of chip equipment to Chinese companies. 

More problematic is the Dutch firm ASML, the leading supplier of semiconductor manufacturing equipment. American chip equipment makers are prohibited from selling materials to Chinese companies, but ASML has been supplying China with those goods. ASML is particularly problematic for the US because it produces the raw material needed for the most advanced chips — those used by the military, for example.

For now, the future of semiconductors wrests precariously around Taiwan, where China has been growing increasingly aggressive politically and with its military. Businesses that aren’t paying attention will find themselves caught in the crosshairs. Whoever holds the chips wins.