Electronics Supply Chain Disruptions: The Saga Continues

By Christopher Tang, Distinguished Professor, UCLA Andersen School of Management

Despite the political rhetoric, the world has continued to rely on China-centric global supply chains over the COVID-19 pandemic.  Shanghai’s 2-month lockdown disrupted operations at the factories and at the world’s largest port, creating even greater ramifications for China and the world than the impact from an earlier lockdown in the tech hub of Shenzhen. In late April, Apple warned that the lockdown in China could affect its revenue by as much as $8 billion.

Now, Shanghai lockdown has ended on June 1, and operations in Shanghai are in overdrive to fulfil backlogs. Therefore, supply chain operations will flow smoothly once again, will it not?

Just when the lockdown clouds moved out from Shanghai, three other supply chain disruptions are affecting the production of many electronics.  Shortages of popular electronics will persist at least for 2022, if not longer.

First, semiconductors are critical for electronic products ranging from cellphones to computers, from electric vehicles to Internet of Things.  This importance has motivated the U.S. House of Representatives and President Biden to support a bill (The U.S. Innovation and Competition Act) in February 2022. This bill  aimed at supporting the U.S. chip industry, including $52 billion to subsidize semiconductor manufacturing and research.  But this plan is stuck in Congress in June as Republicans and Democrats are worrying about different things.

Despite this setback, various capacity expansion plans have been put in place since January 2022. Besides GlobalFoundries, Intel announced its plan to invest $20 billion to build two semiconductor plants in Ohio. However, due to shortages of manufacturing equipment and tools for semiconductor production, Intel CEO Pat Gelsinger expects world-wide shortages of semiconductor will continue until 2024.

Second, even when Intel and other chip manufacturers can secure equipment, Russian’s invasion of Ukraine is disrupting the supply of critical raw materials for chip production.  Ukraine is a critical supplier of neon and argon used in chipmaking.  Ukraine produces 70% of the world’s supply of neon. Neon is used in lithography, which is a crucial step in the chip production process. Argon is used in etching, which is needed for producing semiconductors. Besides Ukraine, Russia supplies 35% of the U.S.’s palladium, a rare metal that is used for semiconductor.  Finding alternative supplies of neon gas and palladium will also take time.  Some suppliers are developing ways to recycle neon and other materials as a stopgap solution.

Besides neon gas and palladium, shortages of process chemicals for semiconductor production are on the horizon.  To retaliate against Europe’s sanctions, Russia state gas company Gazprom slashed flows through the Nord Stream 1 pipeline to Germany by 60% on June 15.  This natural gas crisis is threatening production of process chemicals for the semiconductor processes, including cleaning, etching, and lithography at the world’s largest chemical firm BASF based in Germany.

As the war in Ukraine drags on, these material supply disruptions will prolong the shortages of many products, creating a perfect storm for escalating inflation worldwide.

Third, besides semiconductor shortages, EV batteries shortages are percolating.  In 2022, China produces 76% of world’s lithium-ion batteries and the U.S. makes only 8%.  Most electric vehicles operate on these lithium batteries, but the Uyghur Forced Labor Prevention Act  that took effect on June 21, 2022 is going to disrupt the import of EV batteries from China.  This law was intended to ban imported goods partly or wholly made in the Chinese manufacturing hub of Xinjiang, unless companies can prove the production has no ties to forced labor.

Under this law, all Chinese imports are presumed guilty until proven innocent.  Because global supply chain operations are opaque and complex, it would be an uphill battle for a firm to prove every single transaction along the supply chain has no ties to forced labor in Xinjiang.

To make things worse, the New York Times has alleged “potential coercive labor practices” in China’s EV battery supply chain.  It was reported that the Xinjiang Nonferrous Metal Industry Group and its subsidiaries have employed hundreds of Uyghurs under a “transfer program” that was intended to drastically transform Uyghur society to become richer, more secular and loyal to the Communist Party.  To avoid becoming collateral damage, few U.S. firms would import EV batteries from China, hampering EV adoption in the United States.

The Covid-19 pandemic, the war in Ukraine, and the political rhetoric are disrupting global supply chain operations and hindering the global economic recovery.  Unless the world leaders can develop new rules of engagement, the saga will continue.

Christopher Tang is a UCLA Distinguished Professor and the holder of the Edward W. Carter Chair in Business Administration. In addition to his academic activities at UCLA, he serves as President of the Production and Operations Management Society (2013-2104) and as Chairman of the Advisory Board of the Hong Kong Polytechnic University Business School (2012-2015)