The semiconductor value chain is a complex and highly specialized global ecosystem, with different stages of production often carried out by distinct companies in various countries. This intricate network, while highly efficient, is also vulnerable to geopolitical tensions, trade disputes, and unexpected disruptions.

The multi-stage production process

The creation of a semiconductor chip is not a single process but a series of highly technical and distinct stages.

Design and R&D: This is the initial "upstream" stage where the chip's architecture, circuit layout, and functionality are designed. This stage is dominated by fabless companies like Nvidia and Qualcomm, which specialize in design but do not own manufacturing facilities. These firms rely on Electronic Design Automation (EDA) software from a few key companies that hold a near-monopoly on these essential design tools. They also license intellectual property (IP) from other firms, such as ARM, which provides the foundational architecture for many chips used in smartphones.
Manufacturing (fabrication): This is the most capital-intensive and technologically demanding part of the value chain. It involves fabricating chips in highly advanced facilities called fabs. This stage is dominated by foundries like TSMC and Samsung, which manufacture chips for the fabless design companies. The fabrication process is extremely complex and requires a massive investment in machinery, most notably the advanced lithography machines produced by a single company, ASML. The concentration of advanced manufacturing capabilities in a few locations, such as Taiwan, makes this stage a key geopolitical flashpoint.
Assembly, testing, and packaging (ATP): In this final stage, the finished wafers are cut into individual chips, which are then assembled into a package and tested for functionality and defects. This process is less capital-intensive than fabrication and is primarily carried out by specialized firms in countries like Malaysia, Vietnam, and China.

Global fragmentation and interdependencies

The semiconductor value chain is a prime example of global fragmentation and interdependence. No single country or company controls all stages of the process.

Geographic specialization: The US and Europe are leaders in chip design, R&D, and EDA software, but manufacturing has largely shifted to Asia. Taiwan and South Korea dominate advanced chip fabrication, while countries in Southeast Asia are crucial for assembly and testing.
Supplier concentration: The entire chain is dependent on a small number of companies for key inputs. For example, ASML has a monopoly on the most advanced lithography machines, while a handful of Japanese and German companies supply critical materials like silicon wafers and specialized chemicals. Any disruption to these few suppliers can have a ripple effect throughout the entire global industry.

This fragmented structure, while promoting efficiency and specialization, also creates significant vulnerabilities. The global semiconductor shortage that began during the COVID-19 pandemic highlighted these fragilities, as factory shutdowns and logistical bottlenecks quickly crippled industries that rely on chips, such as the automotive sector.

The geopolitical dimension

The complexity of the semiconductor value chain has turned it into a central element of geopolitical competition. The US-China trade war, for instance, has heavily targeted the semiconductor industry.

Export controls: The US has used its dominance in chip design software and manufacturing equipment to restrict China’s access to advanced technologies. By placing Chinese companies on an "Entity List," the US has limited their ability to acquire the components and machinery needed to produce high-end chips, effectively attempting to slow China's technological advancement.
Industrial policy: In response, countries like the US, China, and the EU are investing billions in domestic industrial policies aimed at "onshoring" or "reshoring" semiconductor production. Industrial policy programs in the US and similar initiatives in Europe and Japan are designed to build a more resilient and self-sufficient supply chains, reducing reliance on key foreign suppliers.

Summary by hfAI and other AI tools, supervised by the Hinrich Foundation team.