The ‘new oil’ is shaped like a chip and puts the world economy in the hands of just two countries

Taiwan and Korea produce 83% of all processor chips

Back in the 70s and 80s, the Organization of the Petroleum Exporting Countries (OPEC) had the ability to generate major global crises with its decisions. The cartel countries controlled more than 50% of world oil production, which allowed them to exert enormous influence on their prices (to maximize profits) by cutting back on pumping in certain periods. As a consequence of this ‘oligopolistic’ policy, strong increases in inflation were  generated in the West, which eventually triggered major crises (stagflation in the 1970s and 1980s). Today, the new oil is in the form of a chip, and right now it is also scarce and controlled by a few countries(all in Asia). The global shortage of semiconductors is weighing on the production of the automotive industry and other technology-intensive goods.

The 2019 data from the Observatory of Economic Complexity reveals that between Taiwan, South Korea and Singapore they account for almost 50% of all world exports of integrated circuits (microchips), the semiconductor used in telephones, car components, and computer equipment. medical diagnosis … Integrated circuits have become essential for the world and it seems that they will be even more so in the short and medium term. At this time, the countries that lead the production of these microchips cannot keep up with the increasing demand, which is creating bottlenecks in global supply chains.

“The global shortage of semiconductors for car components is forcing major automakers to cut back on vehicle production . This is a clear warning, although disruptions in the global supply chain have eased considerably since last spring, still they have not disappeared, “explains Stephan Foreman, an industry economist at Oxfod Economics.

This expert predicts that most of the interruption will be limited to the first months of 2021, with an estimated impact of 1 million units in the world production of light vehicles during this period and some possible secondary effects in the second quarter. However, “we also expect chipmakers and automakers to regain lost ground once disruption subsides.” Today it seems that everything has an integrated circuit.

The structural change in the demand for semiconductors has become one of the main focuses of global finance due to the dependence of two Asian economies for certain semiconductors. Within some specific types of integrated circuits the situation is extreme, generating an abysmal dependence on Taiwan and South Korea. “Taiwan and Korea are to chips what OPEC was to oil in its day,” say Rory Green and Steven Blitz, economists at TS Lombard.

These experts explain in a note that “the rapid acceleration of what is known as the Internet of Things places semiconductors ahead of oil as the key input for world growth . The current severe shortage of chips that is halting production Automotive underscores the speed and scale of this change.

While US companies lead the world in semiconductor development and sales, accounting for between 45% and 50% of global turnover,  manufacturing has moved to Asia  enough that the business position of Taiwan and Korea represents  83% of world processor chip production and 70% of memory chip production. The region’s leadership will continue to expand with the increasing technical and capital intensity required for future semiconductor production. “

The strong boom in demand for semiconductors is generating a new geopolitical weight. Taiwan and South Korea are on the front lines of the battle between the US and China. It is complex and curious at the same time, but these countries (traditional allies of the US) depend on China to grow economically, while the US continues to be the guarantor of their national security (and sovereignty after all). “However, their dominance in chipmaking can be used strategically for economic and political gain,” say analysts at TS Lombard.

A clear domain … for now

In summary, TS Lombard experts claim that  Taiwan and South Korea are the ‘new OPEC’ : supply, demand and obstacles to global growth will revolve around the production of chips from Taiwan and South Korea. They won’t maintain effective monopoly power over production forever, but their technological leadership, R&D spending, and investment plans preclude any change in the duopoly in at least five years.

Shortages created by rapidly booming demand could generate inflationary forces ( Taiwanese producer TSMC will increase prices by 10-15%) in the global economy. This would be a sharp turn for a product whose prices have maintained a constant decline. However, these higher prices may also spell the beginning of the end of the dominance of Taiwan and South Korea, as it was for OPEC to let oil exceed $ 100 a barrel. “Rising prices encourages competition, but barriers to entry remain high, and if price spikes are managed, its global hegemony over chip production can remain for a long period.”

Oxford Economics believes that “bottlenecks also offer an opportunity for other chipmakers to boost production and gain market share. For example, Globalfoundries (California) currently has a much smaller market share in automotive chips. than TSMC, but is increasing its global operations at an unprecedented rate and prioritizing auto chips to meet demand, “Foreman says.

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