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Semiconductor crisis

Silicon Saxony: a beacon of hope for the microchip industry

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The current demand for microchips, which far exceeds supply, is causing major problems for several industries. Right in the middle: the automotive industry.

An exterior view of the Bosch semiconductor factory in Dresden © Bosch

An exterior view of the Bosch semiconductor factory in Dresden © Bosch

Not conductors, but not insulators either: the mediocre conductivity of materials such as silicon or germanium is perfect for applications where the focus is less on strength and more on the precision of the current flow. These so-called semiconductors are used, among other things, in microchips, which are used in almost every technological application. The current demand, which far exceeds supply, poses major problems for several industries. Right in the middle: the automotive industry.

Tension on the world market

There is tension on the world market. While the demands on both the quality and quantity of electronic devices and applications continue to grow unabated, complications on world trade routes and pandemic-related changes in purchasing behaviour are causing serious supply bottlenecks across industries. At the centre of the problem is the electrical and thus also the automotive industry, whose dependence on microchips for driver assistance systems and infotainment is slowing down production in many places and even causing it to be suspended in some areas: According to "Automobilwoche" , Volkswagen alone is already short 100,000 vehicles, although the total value of microelectronics installed in an average vehicle rarely exceeds 600 euros. The German Association of the Automotive Industry (VDA) meanwhile forecasts a production plus of only three percent for the entire German automotive industry compared to the crisis year 2020.

Global chains influence semiconductor production

The reasons for the shortage are complex - and above all global. Particularly obvious is the Corona pandemic, in the course of which the demand for PCs, laptops and tablets increased dramatically. At the same time, this wave of digitalisation is accelerating the growth of cloud service providers, for example, which require large quantities of new hardware and consequently large quantities of microchips, which in turn are largely made of silicon. The effects of such a surge in demand in the digital industry are drastic; after all, according to the German Electrical and Electronic Manufacturers' Association (ZVEI), automotive applications accounted for just over ten per cent of the global semiconductor market in 2020 and therefore have only a limited impact on the chip market. But the pandemic is also being felt in global logistics: hygiene regulations in transshipment ports and the absence of many employees there are causing delays of days on the sea route.

However, the crisis is also a product of political tensions and conflicts. For example, the sanctions policy of former US President Donald Trump, who cut off the People's Republic of China's largest production facility - SMIC - from Western technology in 2020, played an important role. According to Gerd Mischler of the IT news portal Golem, this decision caused Chinese customers to rush to buy from Samsung and the Taiwanese manufacturer TSMC, which, according to Manager Magazin, has a market share of 56 percent ; for particularly modern chips, even more than 80 percent. As a result, global demand for semiconductors was already 30 per cent greater than supply by the end of 2020. Manfred Horstmann, Managing Director of the German branch of the US semiconductor manufacturer Globalfoundries, sums up the situation as follows: "What normally takes ten years has now all taken place within one year."

Unusual weather conditions and severe natural disasters are also having a strong impact on the semiconductor industry at the moment. In Taiwan, the world's most important microchip location not only because of TSMC, about 60 per cent of the usual amount of rain failed to fall at the beginning of the year, which is why the government announced comprehensive austerity measures and obliged companies in several regions of the country to reduce their water consumption by eleven per cent; especially in the water-intensive foundries, a serious cut in production assets. In addition, the operations of TSMC's main supplier, Shin Etsu of Japan, were brought to a halt by an earthquake in February 2021. Fires in production halls and the extreme cold snap in the US state of Texas, where many production facilities are located, further exacerbated the situation.

The manufacturers' reactions are largely uniform: Intel, Samsung and the German manufacturer Infineon as well as the industry leaders TSMC and SMIC are building new production facilities to meet the demand. However, since the production of microchips is a lengthy procedure, an improvement in the situation is hardly in sight. Pat Gelsinger, CEO of Intel , said in April 2021 that it would probably be several years before the semiconductor shortage was over. Phil Amsrud, analyst at the information service provider IHR Markit, goes even further and asserts: The situation will become even more serious before it eases - although TSMC, for example, has announced additional spending of 62 percent compared to 2020.

More independence: "Silicon Saxony" should do the trick

In order to cushion its dependence on Asian suppliers in particular and to be prepared for any exacerbation of the crisis, Germany has been growing steadily for some time. In July 2021, for example, Bosch opened Germany's largest chip factory in Dresden after three years of construction on an area of about seven hectares - at a cost of about one billion euros, also the largest single investment in the company's 130-year history. According to EU Vice-President Margrethe Vestager, 20 per cent of the future-oriented semiconductors are to be manufactured on European soil by 2030 as part of the EU's new digital strategy. Only a few weeks after the start of production, the first microchips from the new factory can be installed in Bosch electrical appliances, with the automotive industry to follow later.

The choice of location was not made by chance, but continues a trend that has been going on for several years: with about 2,500 companies active in the fields of micro- and nanoelectronics, organic electronics, tactile internet / 5G, MEMS / sensors and automation technology, which in turn employ more than 70,000 people, the Chemnitz-Freiberg-Dresden city region is semi-officially called "Silicon Saxony" in reference to the Californian software hotspot. Every third chip produced in Europe is now "Made in Saxony" - and the trend is rising. The aim is to build up future resilience to global trade barriers that could further slow down production.

In the short term, the investments in Silicon Saxony will not be able to bring about a turnaround. Nevertheless, according to German Chancellor Angela Merkel (CDU), it is essential for the German automotive industry to increase its own production capacities. "Nothing works without semiconductors ," she says with regard to the new Bosch factory in Dresden. Only the future can show whether the German automotive industry will recover in the long run. The strengthening of local semiconductor production takes a prominent role in this question.