January 16, 2024

Chip Wars 2: the empire strikes back!

Microchips have become an essential technological component, finding applications in a wide range of electronic devices, from simple cell phones to complex Artificial Intelligence (AI) infrastructures.

The global microchip crisis has brought significant tensions to the supply chains of these vital components for the global economy.

Growing demand for microchips, combined with a range of geopolitical and environmental factors, is straining supply chain stability.
China's decision to restrict exports of gallium and germanium, two critical minerals for microchip production, has further complicated the situation, creating potential supply chain bottlenecks and jeopardizing the green transition to a sustainable economy.

We therefore seek to understand what the crucial role of gallium and germanium is in microchip production, what effects could be triggered by China's export control measures, and why microchips are incredibly important for Artificial Intelligence.



The Importance of Gallium and Germanium in Microchip Production

Microchips represent the cornerstone of our digital society. They are present in almost every aspect of our lives, from everyday electronic devices to cutting-edge technologies.
In response to the growing demand for microchips, TSMC – the world's largest chip manufacturer – said it plans to invest $2.9 billion to build an advanced chip plant in Taiwan1.
These chips are the core of generative AI, the type of Artificial Intelligence behind ChatGPT, Google's Bard, Dall-E and many other new AI technologies that can create new content, such as text and images, in response to user requests.

However, the boom in demand for microchips, coupled with a range of geopolitical and environmental factors, is challenging the stability of supply chains, raising questions about the security of supply of critical materials and driving industry to seek increasingly advanced materials.
Gallium and germanium play a crucial role in this scenario.
Germanium is widely used in optical fiber, semiconductors, and solar panels, while gallium is essential for the production of chipsets used in computers, smartphones, and 5G stations. These minerals have become valuable to the technology industry as they enable the development of more powerful and advanced microchips, fueling the digital revolution and green transition in the European Union and other parts of the world.

China's recent decision to restrict the export of these minerals has triggered further concerns about bottlenecks in microchip production.



China's Export Control and Potential Bottlenecks

Gallium and germanium will be subject to export controls starting on August 1 "to protect security and national interests," China's Ministry of Commerce said in a statement released a few days ago2.
Chinese companies exporting these raw materials will have to apply for a "special permit from the state" to ship them out of the country.
China's announcement has obviously raised concerns in the global microchip supply chain landscape.
China is the world's largest producer of gallium and a major exporter of germanium, so it follows that any decision by it to restrict the export of these minerals could result in a reduction in global supply, thus creating potential bottlenecks with certainly not insignificant economic impacts.

The measure is the latest development in the global battle for control of chip production technology, and while it might ostensibly be motivated by a desire to protect and develop China's mining industry, it puts China's national interests and security at the center, so the consequences could be significant for the entire microchip industry.

Because global demand for these minerals is constantly increasing-fueled by the growing demand for advanced electronic devices, the expansion of AI, and other emerging technologies-restricting supply could have a significant impact on global production and supply chains, with possible slowdowns and difficulties in access to these essential materials: although some experts argue that the impact could be limited because silicon remains the predominant material for semiconductors, however, gallium and germanium remain essential components for specific types of chips.

However, there is no need to fall into easy alarmism: if China seriously limits exports of these critical minerals, it could accelerate the diversification of global supply chains, similar to what happened with rare earths.



The significance of microchips for AI

Artificial Intelligence is rapidly transforming our world, with applications ranging from automation to healthcare, finance to e-commerce to self-driving assistance, enabling rapid advances in pattern recognition, neural networks and other AI applications.

Such applications are powered by the computing power provided by microchips, especially high-performance ones.
AI chips play a crucial role in natural language processing, computer vision, and machine learning. As demonstrated by ChatGPT's AI language model and other advanced AI technologies developed by tech giants such as Google, Nvidia and AMD, gallium and germanium are critical to the production of advanced chips used in these innovations, as they enable faster and more efficient processors.
Without a stable supply of gallium and germanium, progress in AI could slow down, limiting the possibilities of developing new applications and innovative solutions.

In addition, AI itself is a major driving force in the growing demand for microchips, as more and more devices require advanced computing capabilities to support complex algorithms and intelligent applications.
The ability of AI technologies to process vast amounts of data quickly and with high efficiency is predicated on the performance of microchips. And so ensuring a stable supply chain for these essential components is critical to the continued advancement of AI and the digital transition more generally.



Conclusions

The global microchip crisis and tensions caused by China's decision to restrict exports of gallium and germanium have raised serious concerns about the safety and stability of microchip supply chains. Microchips are now a crucial component of the global economy and technological progress. The increasing dependence on these components has made it essential to ensure stable and reliable access to critical materials such as gallium and germanium.

International cooperation and a sustainability-based approach are critical to meeting future challenges and maintaining the crucial role of microchips in the development of Artificial Intelligence and other advanced technologies. Only through prudent supply chain management and a long-term vision will we be able to ensure the continuity of manufacturing operations and technological innovation.



Notes

  1. See the article by CNN titled Taiwan’s TSMC to invest $2.9 billion in new plant as demand for AI chips soars
  2. See the article by CNN titled China hits back in the chip war, imposing export curbs on crucial raw materials