The crisis in Ukraine is the next tectonic disruption in an exhausting two-year span for the semiconductor industry — which was already significantly challenged by the COVID-19 pandemic and insufficient capacity to meet surging demand. This latest threat to semiconductor production may be the most significant yet: It is poised to send shockwaves rippling through a range of manufacturing sectors, including high tech, automotive, consumer electronics, and household appliances.
The root of the issue is that Ukraine is a prime supplier of neon gas — which is required to operate the lasers used in the lithography phase, the heart of semiconductor fabrication. Without neon, chip production comes to an abrupt halt. The U.S. has historically sourced as much as 90% of the required semiconductor neon from Ukraine, which has also provided about 70% of the global supply. Ukraine is also a major supplier of xenon and krypton gases, also critical to chip manufacturing.
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The concentration of these strategically essential gases in Ukraine is an accident of manufacturing history. Neon gas is a byproduct of steel production, specifically from older steel mills that today are largely located in eastern Ukraine. The former Soviet Union (which included today’s Ukraine) had many of these large steel mills, which were outfitted with air separation equipment to capture rare waste gases, including neon, krypton, and xenon, for use in experimental high-powered laser weapons, missiles, and satellites. After the dissolution of the USSR in 1991, these older steel facilities were largely replaced with new infrastructure that had no gas-collection technology because the economics did not support it. In contrast, by continuing to operate old-style steel mills, Ukraine became the dominant supplier of these gases that are vital to the global semiconductor industry.
Bracing for Shortages
Russia’s aggression in Ukraine has also exposed several related vulnerabilities to semiconductor supply beyond these gases. Russia today holds 40% of the palladium market, 15% of titanium, 12% of platinum, and 10% of copper, all of which are vital inputs for high-tech products — such as catalytic converters, turbine engines, ion batteries, and circuit boards — and for plating processes in chip manufacturing. The sanctions imposed by the G7 and other nations, fueled by the world’s condemnation of the Ukraine invasion, make Russia a dubious source for such supplies for the foreseeable future.
How soon and how hard might new neon supply disruptions hit the semiconductor industry? Existing supply should continue to buffer the shock in the near term. The larger players — ASML, GlobalFoundries, Intel, Micron, and TSMC — have reportedly built up their stockpiles of neon and other important gases, having learned from COVID-19-triggered supply chain disruptions. Industry observers doubt, however, that the majority of other chip fabricators currently have a similar buffer. The big players will almost certainly leverage their buying power to be first in line for further supply and presumably have assembled more diverse supply sources.
All signs point to a protracted crisis that will challenge supply beyond this three-to-six-month window. No one knows how long the Ukraine conflict will last, how much damage it will cause, or how long economic sanctions may remain in place, but right now the situation continues to look bleak. With no immediate solution in sight, large stockpiles will continue to dwindle. We should be bracing for more shortages of supply and further inflation as the supply chains seek equilibrium.
Could the supply of critical chip fabrication gases be augmented? Yes, with effort and cost. In the wake of Russia’s invasion of Crimea in 2014, some U.S. steel manufacturers adapted their air separation systems to capture neon. (The potential impact on chip supply did not receive the degree of media attention seen today, in part because the main sources of neon and other gases are situated outside Crimea.) Linde, a global industrial gas company, built a neon production site in Texas. China and South Korea also stepped up manufacturing of their own neon supplies.
A similar response today would entail a sprint to install gas collection technology in more steel mills, perhaps via joint ventures between semiconductor foundries or lithography companies and steel producers. That would take time, but considering events in the Ukraine and the world’s response, it is imperative to start now.
Recycling neon is another viable option; companies offering recycling technologies aim for a capture ratio of up to 90%. Recycling is also more CO2-friendly than gas collection from steel mills. Not many chip fabricators have installed recycling units to date; in the past, the cost for neon was deemed too low to justify the investment, but that may soon change. Fabricators that choose to recycle neon will need to shut down their semiconductor production lines while the necessary equipment is installed, slowing output in a chip-hungry world.
Given that semiconductors are so pervasively essential across industries, all companies must immediately assess their risk across multiple levels of their value chains, including, at minimum, secondary and tertiary supply levels, to identify elements that could be critically at risk. Leading companies are already actively communicating with their supply bases to understand their own risk status (and pushing those suppliers to do the same), actively building inventory, and qualifying alternative suppliers. In lieu of advanced analytics and AI platforms, great communication is the best tool for rapidly completing a thorough risk assessment across the entire supply chain.
The past two years have demonstrated that planning pays big dividends for forward-thinking companies that actively seek, uncover, and avoid the snares scattered throughout the globally pinched supply chain. For the many industries dependent on semiconductors, this latest chapter of supply strain makes planning an absolute necessity. Companies like Tesla and General Motors have distinguished themselves during these adversity-filled times by proactively solidifying their raw material supplies. Ultimately, these companies understand that nothing matters more than reliable product delivery. Those organizations investing in forward thinking and scenario planning for even the most basic of raw materials will reap the greatest rewards in the face of the highest risks.