Symbiotic relationship between semiconductor & IT - system thinking analysis for the future

System thinking analysis for the future of the symbiotic relationship between semiconductor and IT 

1. FRAMING

Since mankind invented the computer, transistors have been continuously evolving. Now, transistors have evolved into semiconductors based on ultra-high-density integrated circuits, and they have become the most important component that enables absolutely all computing tasks around us, not just simple computers. In fact, semiconductors are essential not only in mainframe computers, personal computers, and mobile devices, but also in various electronic machines. Moreover, in recent years, it has become a key component that enables connection/communication between electronic devices.

Another great recent change is taking place in the automotive industry. The internal combustion engine vehicle, which has been pointed out as one of the main culprits of global warming due to CO2 emissions, is rapidly being replaced by electric vehicles that operate based on computing technology and battery technology. In addition, the characteristic of electric vehicles is that they operate not only on battery power, but also that they are equipped with an artificial intelligence function that analyzes the surroundings through various sensors and drives the machine alone without human intervention.

This electric vehicle market is even just entering the early stages of growth. Accordingly, as the demand for semiconductors for automobiles is rapidly increasing, the supply shortage of semiconductors, which has been suffering from shortages in recent years, is becoming more serious. Such global semiconductor production and supply is monopolized by a very small number of countries such as Taiwan, Korea, China and the United States, and the IT industry and the automobile industry are in serious competition to occupy this volume. Moreover, the trade war between countries is intensifying due to the “domestic priority” that is spreading centering on the United States and China, and semiconductors are in the middle of this trade war (especially between the United States and China).

Therefore, this Foresight analysis focuses on the dynamics of semiconductor demand and supply centered on the IT industry and electric vehicle industry, which are rapidly increasing in recent years, and the impact of trade wars between countries. The initiative of this analysis activity was started by referencing the following article.

https://www.cnbc.com/2021/05/07/chip-shortage-is-starting-to-have-major-real-world-consequences.html

 

2. HISTORY AND CURRENT CONDITIONS / CURRENT STATE OF PLAY

What are the main components of the issue – the actors, organizations, resources, etc., and their relationships and interactions? This is equivalent to your exploratory influence map.

2.1. Early semiconductors period:

This was the period when the global semiconductor industry was first formed. In fact, while there were many different chip makers in the market, there were not many customers who needed semiconductors. At best, calculators and basic machine makers needed simple semiconductors. The Japanese and American companies were leading the way. As of 1995, the proportion of non-memory chips was high among semiconductor companies. Chip producers receive orders from customers, establish a production plan limited to the order quantity, produce chips and supply them to customers.

2.2. Semiconductor medium term:

Over time, there was more and more demand for chips within the market. With the rapid use of chips in various machines such as personal computers and mainframes, market demand is starting to exceed chip production. It wasn't long before the semiconductor supercycle began, centered around memory chips. Within the market, chip shortages began to occur. The first game of chicken between chip suppliers occurred around 2007, with Taiwan and Korea winning. (Unfortunately, in this business war, Germany's Qimonda went bankrupt, and Korea's Hynix and US' Micron suffered serious losses.) In the second chicken game in 2010, Japan's Elpida went bankrupt. Now, the memory semiconductor market has been reorganized into Samsung, SK, and Micron's Big Three.

 

2.3. Recent Chips Market:

Semiconductors are no longer just used for IT products. In the automobile industry, as the internal combustion engine disappears and electric vehicles appear, the demand for the foundry semiconductor market is exploding. With the recent rapid growth of the electric vehicle market, electric vehicle manufacturers such as Ford, BMW and Volkswagen are sucking up most of the world's chip supply.

As a result, chip makers are increasing the production/supply ratio of high-value-added electric vehicle chips instead of lowering the supply ratio of existing electronics manufacturers. At the same time, each chipmaker is struggling to capture more market share. It's unclear how the market will play out in the future, but in any case, chipmakers are trying their best to expand their production lines first to boost production. Fortunately, Taiwan's TSMC, which has been steadily increasing its production capacity since the mid-80s, occupies more than half of the market share. In addition, in recent years, existing semiconductor manufacturers such as Intel have also entered the foundry business, and eventually some EV manufacturers (Apple, Tesla, etc.) are preparing their own chip production.

On the other hand, major Korean chip makers (Samsung Electronics, SK Hynix) account for a very large portion of the global chip supply. However, due to political issues, Japan recently decided to completely ban the export of core semiconductor materials to Korea. As a result, the global semiconductor market is concerned about the risk of a serious supply shortage.

Electric vehicle manufacturers are increasing car production in response to the exponentially increasing market demand, but the shortage of chip makers is deteriorating the utilization rate of car factories. Due to worsening factory conditions, automakers are reducing their factory workforce. The advent of electric vehicles is changing not only the automotive retail market, but also the rental car market. Car rental companies are starting to replace their service vehicles with electric vehicles from internal combustion engines. This is making it even more difficult for electric vehicle manufacturers and chipmakers who are experiencing a supply shortage.

The global electric vehicle market is dominated by the US and China. The United States is striving to secure a stable supply of automotive chips by continuing strategic partnerships with Taiwan and Korea. At the same time, it is putting pressure on Taiwanese and South Korean chip makers to restrict exports to China to keep China in check.

Consumer purchasing power has declined significantly as the recent global pandemic of COVID-19 has prevented many people from engaging in economic activity. This recession has reduced demand in almost every area, including IT devices and EVs.

3. ISSUE STRUCTURE AND DYNAMICS

Within the overall system, are there areas of runaway growth or runaway decline, that is, reinforcing loops that are amplifying changes?

Within the overall system, are there goal-seeking structures, that tend to pull the system back to certain outcomes, or tend to stabilize around specified values, that is, goal-oriented balancing loops?

Are their familiar sounding problem stories that indicate one of the archetype structures may be present in this system, eg, escalation, limits to growth, fixes that fail?

 

3.1. Reinforcing System #1: Apple's TSMC (Global Largest Foundry Company) Supply Monopoly

Background

Currently, the global market is suffering from a severe shortage of semiconductor chips. The biggest reason for this is that the demand for semiconductors is increasing as the proportion of semiconductor parts in electric vehicles and SET IT products (such as TVs, mobiles, home appliances, etc.) increases. Global semiconductor production is monopolized by a few companies in Korea and Taiwan, and competition among manufacturers is intensifying to receive their supply.

Most of the production capacity of TSMC, the world's largest chip supplier, is under contract with Apple. While global semiconductor demand is increasing, TSMC's production capacity is not increasing.

Description

• The higher stable and sufficient chip supply from TSMC, the higher the chip supply shortage of Apple's competitors, which is being pushed back in the chip supply priority.
• The more Apple's competitors' chip supply shortage, the less the market supply of these companies' products.
• The less the market supply of Apple's competitors, the higher Apple's global market share.
• The higher Apple's global market share, the more Apple's sales.
• The more Apple's sales, the higher Apple's chip purchasing power.
• The higher Apple's chip purchasing power, the more TSMC’s supply of Apple's orders.

3.2. Reinforcing System #2: Impact of changes in semiconductor supply on the market

Background

The semiconductor components produced by the chip makers are supplied to many manufacturers (such as refrigerators and washing machine manufacturers) all over the world. Many of these suppliers not only manufacture and sell their products, but also employ a large number of people. If there is a problem with the supply of semiconductor components, it could have an impact not only on the final electronic product, but on the entire market.

Description

• Starting point: Semiconductor chip production and supply do not meet demand.
• The less semiconductor supply, the more supply shortage the SET electronics producers make.
• The worse the production disruption of SET electronic products, the less the factory utilization rate of electronic product manufacturers.
• The less the factory utilization rate of electronics manufacturers, the higher the number of layoffs of employees within these companies.
• The higher the number of electronic product producers' layoffs, the less the unemployed people’s (and also consumers') disposable income.
• The less the disposable income of consumers, the less the purchasing power of consumers.
• The less consumers' purchasing power, the less the demand for SET electronic products.
• The less the demand for SET electronics products, the less the quantity of orders to be produced by electronics manufacturers.

 

 

3.3. Balancing System #1: Balanced Relationship Between Shortage of Chips for Electric Vehicles and Inflation

Background

Currently, the global automobile market is rapidly moving from conventional internal combustion engine vehicles to electric vehicles. As a result, the purchase demand for electric vehicles is growing rapidly, but the supply of semiconductors, a key component of electric vehicles, is not meeting the demand. On the other hand, the supply shortage of electric vehicles is raising the prices of electric vehicle products, and according to The Wall Street Journal, this increase in electric vehicle prices is pointed out as one of the main reasons for the increase in the Consumer Price Index (CPI) in May 2021. A rise in the CPI raises the risk of inflation, and the FED is considering at least one rate hike this year to prevent inflation. If rapid rate hikes are repeated in the future, EV manufacturers are likely to cancel their investments in R&D/production, and the financial conditions of these companies are expected to deteriorate further. In the worst case, large-scale unemployment could occur, which would worsen consumer purchasing power in the market. Ultimately, there is a risk that the demand for electric vehicles and the demand for bar conductors will decrease.

Description

• The more Electric Vehicle demand, the more EV semiconductor demand.
• The more EV semiconductor demand, the less chip supply rate of EV manufacturers.
• The less chip supply rate, the less EV production amount.
• The less EV production amount, the higher EV product price in the market.
• The higher EV product price, the higher market inflation %.
• The higher market inflation %, the more likely to increase interest rate from FED.
• The higher interest rate from FED, the less likely to borrow money for (R&D/production) investment from EV manufacturers.
• The less (R&D/production) investment from EV manufacturers, the less competitive EV companies become.
• The less competitive EV companies become, the more layoffs from EV companies.
• The more layoffs from EV companies, the less purchasing power of consumers.
• The less purchasing power of consumers, the less EV demand.

 

3.4. Balancing System #2: Chip makers’ production capacity expansion to achieve semiconductor target supply

Background

Due to the current shortage of semiconductors in the market, major semiconductor manufacturers around the world are making rapid investments to expand their factory lines. If the production capacity of major manufacturers increases in the future, the current semiconductor shortage is expected to be resolved to some extent.

Description

• Starting point: Chip suppliers desire (certain) chip supply amount.
• However, the current supply does not achieve the target supply, so a GAP occurs between the desired chip supply and the actual supply amount.
• Chip manufacturers decide production plants and lines expansion to minimize GAP.
• At the same time, chip suppliers extend existing chip production operation hour to minimize GAP.
• Due to the expansion of chip production lines and extended operating hours, chip suppliers are producing and supplying more chips.

 

4. COMPLEXITY, ADAPTABILITY, EMERGENCE

Is this a complex adaptive system? Describe it in terms of the characteristics of a complex adaptive system – intelligent actors; rule-based interactions; distributed decision-making; goal-setting; manipulates its environment; etc. Over time, what emergent properties have evolved? How has this system adapted in the face of change in the past?

The biggest stress factor that runs through this report is 'shortage of supply in the semiconductor market due to a surge in global demand'. It can be defined as an unstable state in which there is an imbalance between supply and demand. This imbalance/stress condition will never be resolved unless demand decreases or supply increases. In other words, there is a risk that these massive and complex systems will evolve in the direction of increasing stress. In fact, demand for IT and EV products accounts for the largest portion of global semiconductor demand. Among them, the EV market is in the very early stages of its development, and it is difficult to even approximate how much it will grow in the future.

Fortunately, however, a number of areas within the market are making various efforts to increase supply. Existing chip design companies (Fabless) are applying various techniques to achieve sufficient performance with minimal production. Integrating as many circuits as possible within a chip or attempting to stack existing single-layered chips into vertical multi-layers are representative examples of new technologies.[1] In addition, chip makers are investing heavily in the construction of new factories and new lines to meet the explosively growing demand. Finally, some of the existing chip demanding customers such as Tesla and Apple are preparing to produce their own chips and supply them on their own.[2]

These various efforts can be interpreted as a movement to stabilize the system in response to large changes in the overall market, which falls under the category of 'self-stabilizing' from the perspective of Complex Adaptive Systems. In a situation where there is a huge stress of a global chip shortage, various players in the market try to come up with various countermeasures to relieve this stress. For example, chip designers are working to bring chips to the world that can deliver improved performance in fewer production steps. In addition, chip producers build additional production facilities to prevent shortage across the market. Finally, some of the chip consumers are no longer looking to produce their own chips to reduce their dependence on producers for supply and demand.

  

5. EMERGING CHANGE

Be a futurist – identify 6-8 trends or emerging changes that could potentially affect or disrupt this system.  Looking at your system map, identify where each change would ‘hit’ the system – what relationships (causal arrows) might each change disrupt? would any of the changes disrupt actors or components of the system – render them obsolete or transform them in any way?

5.1. Change #1: COVID-19 will be prolonged

As the corona pandemic prolongs, people are limited in their production activities. Many businesses experience declining sales, and many people lose their jobs. Consumers who have lost their income will lose their purchasing power.

Currently, internal combustion vehicles occupy most of the roads, and electric vehicles that are newly launched on the market are still considered a luxury consumption. Therefore, EV demand does not increase due to consumers with reduced purchasing power.

On the other hand, as most of our daily life is done non-face-to-face due to the corona pandemic, people buy more IT devices. In the end, chipmakers decide to produce more chips for IT devices instead of chips for EVs, and the overall semiconductor shortage does not deepen.

 

5.2. Change #2: Evolution of AI autonomous driving function

Most of the electric vehicles currently on the market are equipped with the autonomous driving function of stage 2 out of the final 5 stages. The current AI-based autonomous driving function will continue to evolve, and autonomous vehicles that require no human intervention will be released around 2030.

When driverless cars are commercialized, there will be major changes in almost all industries that require human driving. In fact, trucking, food delivery and taxi drivers will lose their jobs, and even those without a driver's license will be able to freely use the rental car service.

Those at risk of losing their jobs due to the unmannedness of these cars will fiercely resist and oppose change, but eventually they will be reabsorbed into other industries.

 

5.3. Change #3: China’s absorption of Taiwan by force and unification

Currently, Taiwan's TSMC accounts for more than 50% of the total foundry supply. On the other hand, China, located right next to Taiwan, has also made many efforts to improve semiconductor competitiveness for a long time, but most of these efforts were unsuccessful. Moreover, the United States imposes strong restrictions to prevent China from supplying semiconductors from overseas suppliers. In this situation, China is meeting domestic demand for IT and EV through its own semiconductor supply. Currently, China has a huge IT device market, and the EV market is also growing rapidly.

Recently, China forcibly absorbed Hong Kong as part of its Chinese territory, and recently, various pressures and efforts have been made to forcibly absorb Taiwan. If Taiwan is incorporated into Chinese territory, TSMC, the largest supplier of the foundry market, will also come under Chinese control. In this scenario, TSMC is likely to become a Chinese state-owned enterprise.

The US, which has been supplied with a large number of chips from TSMC, may experience serious supply disruptions and may seek to improve relations with the Chinese government. This means that the long-running trade war between the US and China could develop into a new phase. In addition, for major US customers who do not receive chips from TSMC, chip makers in Korea and the US can become alternative suppliers. Nevertheless, these alternative suppliers will not be able to sufficiently fill TSMC's chip supply gap.

 

5.4. Change #4: Sudden collapse of the Chinese government and civil war

Currently, China is ruled by a permanent dictatorship led by Xi Jinping. Since Xi Jinping recently became China's ruler, the Chinese government has increased its surveillance and pressure inside China. Given the similar history of the past, the possibility that this dictatorship will be overthrown by sudden opposition cannot be ruled out.

If China's current Xi Jinping government is overthrown by a coup d'état by opposition forces, China is likely to plunge into sudden chaos. In the midst of chaos, it is possible that anti-government forces will dissolve the Chinese government and become China's new regime. However, the possibility that the present single China will be divided into several countries cannot be ruled out. In fact, considering that the Chinese government has forcibly annexed various ethnic groups (such as Tibet) and countries (Hong Kong and Taiwan) around China, China's division is one of the most feasible scenarios.

If China were to be divided into several local government-centered countries, each local government could not handle the debt it had accumulated over the years and could cause a series of defaults. China's economy will be in trouble in the short term, and consumer demand in the market will disappear quickly. This economic shock will lead to a decrease in IT and EV production, and the demand for semiconductors will also disappear.

In addition, major producers remaining in China (IT/home appliance companies such as Haier, EV manufacturers such as BYD, etc.) are eventually poured out for sale in the global M&A market due to the sudden deterioration of profitability due to unrest in domestic demand and disruption of supply chains. Existing semiconductor chip makers in Europe, the US, Korea and Japan do not miss this opportunity and acquire these companies in China.

 

5.5. Change #5: Emergence of entirely new computing technologies

Current semiconductors and processors operate on transistor-based binary computing technology. Such semiconductor integration technology is almost reaching its limit with current technology. To overcome these technological limitations, leading tech companies such as IBM, Intel, and Google and numerous universities have been researching quantum computing technology.

If a quantum semiconductor with a structure different from that of the current chip is commercialized, major changes may occur in most markets using information technology. If this scenario becomes a reality, foundry companies such as TSMC and Samsung will enter into a new production line investment competition to respond to a new type of semiconductor supply market. Moreover, TSMC, which has been continuously expanding its production facilities since the 1980s, and currently owns the world's largest transistor-based chip production facility, will have the burden of replacing its existing production facilities with a new type of quantum chip production facility.

Amid the rapid turmoil in the new type of semiconductor market, numerous chip-to-order start-ups may find business opportunities. In the market, competition between the established strong chipmakers and new competitors will begin. It is also possible to consider the possibility that some of the new entrants will receive large investments and grow into global quantum chip manufacturers.

5.6. Change #6: Huge damage to semiconductor manufacturing plants due to sudden climate change/natural disaster

As the “Ring of Fire” around the Pacific begins to act rapidly, mega-earthquakes occur in neighboring Japan and Taiwan. The national roads of these two countries will be devastated, and in particular, Taiwan's chip manufacturing plants such as TSMC and Japan's major chip core material manufacturing plants such as Showa Denko of Japan are highly likely to be severely destroyed.

In the near future, the global semiconductor market will not be able to avoid a direct hit from chip supply interruptions from Japan/Taiwan. Actual world chip production will drop by about half or less. Global semiconductor prices are rising rapidly, and IT manufacturers and EV manufacturers, which are major consumers of semiconductors, are struggling with serious chip supply shortfalls.

Major semiconductor companies in Japan and Taiwan decide to build new factories in other countries while repairing damage to existing manufacturing plants that have been destroyed. The EU, China, and US governments lure these companies by offering large-scale national investment support to build new factories in their countries.

However, at least five years are required for the factories of these companies to be restored or newly built and to reach stable production, during which all industries using semiconductors are stagnant.

In the end, most industries stagnate in growth and a serious global recession occurs as a large number of unemployed people are created.

 

6. COMPLEX ADAPTIVE SYSTEMS + DISRUPTIVE CHANGE = CHAOS

Which of the emerging changes identified in your horizon scan is most disruptive for your system? How might that disruptive change tip the system into chaos? How might the system respond or adapt or reorganize?

Among the disruptive changes listed above, if the [Change 6: Huge damage to semiconductor manufacturing plants due to sudden climate change/natural disaster] scenario becomes a reality, it could plunge the global economy into extreme chaos. Currently, one of the largest areas driving the global economy is information technology, and it is semiconductors that process this information. In other words, human civilization, one of the largest ecosystems of the planet Earth, operates based on information and maintains a balance through interworking based on information and communication technology. If a sudden change or shock is applied to the current global civilization, the great order can suddenly collapse. This disruption of order could affect the entire global economy, not just a few specific industries involved.

In the short term, our world will not be able to avoid enormous stress from the collapse of the semiconductor-driven global economy. Various scientific technologies and civilizations, including information technology, which had grown like crazy just before, will suddenly stop growing. Humanity will be very embarrassed that the world is no longer growing like a runaway. However, they will not give up on responding to sudden stress and trying to make the world a better place. They will struggle for a long time to create a substitute for semiconductors that can advance information and communication/mechanical technology. As such a market for substitutes for semiconductors is formed, there is a possibility that the relationship between suppliers, consumers, and helpers in the semiconductor market will be formed into a new post-semiconductor market structure.

After all, rapid change/chaos can happen in all areas such as economy, politics, and society that surround us, and the direction and scale of this chaos cannot be predicted by anyone.

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[1] The world’s short on chips, the semiconductor industry is up for the challenge (ASML)

https://www.asml.com/en/news/stories/2021/global-chip-shortage-challenge

[2] Tesla is making its own AI chips (MIT Technology Review)

https://www.technologyreview.com/2018/08/02/66667/tesla-is-making-its-own-ai-chips/