You don't buy them directly, but trust me, you need them.

So when the silicon chips are down, what happens?

Well, we're finding out.

The auto sector has been hit hard, with car companies around the world pulling the brakes on production, although they're not the only ones.

Makers of gadgets and popular electronics are feeling it, too.

The chip shortfall is also feeding into existing international relations issues and demand linked to future uses doesn't really look like it's about to slow.

Okay, so maybe that last bit is a bit tangential, but you get the picture.

The chip shortage could be why you're having a hard time finding a PS five or a flex value percent.

About one trillion chips are made a year.

That's about 128 for every person on the planet.

Suffice to say, the world runs on chips slash semiconductors, so why are we coming up short?

Many factors contribute to the chip shortage that we see today.

The Covid 19 pandemic plays a significant role.

The pandemic change consumer behaviors were buying personal computers, new phones, new tablets Xboxes so we can work from home and to cope with the lockdowns and companies upgrading their digital infrastructure to enable remote working.

And all these purchases are driving up the demand for chips at the beginning of pandemic with estimated an economic downturn, industries such as the automakers they slashed the chip purchases.

And but the economy in East Asia bounce back sooner than expected, with more demands for cars.

Car makers keep limited inventory.

So right now they're buying, buying, buying.

As the coronavirus crisis reshaped supply and demand chip companies are scrambling.

And if there's an industry that can't simply quickly ramp up production or ask its clients to do without its products for a while, our shift that's manufacturing elsewhere rapidly, it's the chip industry.

Supply chains have been spread across countries as the cost of communication has gone down, along with, you know, the cost transportation.

So this was largely seen as a good thing to spread the production of semiconductors and other high tech components across countries you know, kind of based on some sort of fundamental theories of economics, and that by doing so, you could reduce the cost of production, thereby increasing efficiency.

But in the past several years, as concerns over technology and, you know, technological sovereignty have grown, uh, this has been coming to be viewed as a geopolitical risk rather than economic benefit.

Hold that thought geopolitical complexity is going to figure in this.

So let's run through the basics.

One every country in the world needs chips to chips are complicated to produce.

And three, because the world economy runs on chips, who makes them and who is able to buy them goes a long way towards defining who stagnates and who progresses.

One expert likens it to one other commodity that's seen its own share of geopolitical contentiousness.

Well, let's put it this way.

The artists have been called the new oil in the Digital Age everything from your phone to your air conditioning and everything in between, of course, uses chips.

And, of course, as technology becomes more central, chips become more important.

And most importantly, the ability to manufacture smaller and smaller chips that can do more is absolutely critical.

Talking about smaller and smaller chips that can do more makes it a good time to introduce this guy.

Gordon Moore, co founder of American chip champion Intel in 1965.

He said that the number of transistors the active component of chips that could fit onto one chip would double every two years or so, meaning computers can be expected to double their efficiency in that time as costs fall by half.

It's not really a law, but it is kind of a guiding principle, increasing power but decreasing size.

You've probably felt that happening.

That's how we went from this to this.

As next generation Super Fast five G connectivity becomes more common, the Internet of things continues to expand an a I powered tech improves.

The appetite for increasingly powerful chips of various kinds is going to grow accordingly, and the more powerful chips become, the more specialized their manufacturer, and the fewer the producers that are able to do it.

Here are the so called Big Three of chips producers Intel from the U.

S.

Samsung from South Korea and TSMC from Taiwan.

They're considered companies at the industry's leading edge, meaning they can make the world most advanced chips.

Mhm.

They're not the same kinds of companies.

Samsung and Intel are what you would call integrated device manufacturers, meaning they can design, manufacture and sell the chips from start to finish.

TSMC is what you would call a foundry, meaning they make chips for companies without factories themselves or fabs, as they're known in industry parlance.

Those fabs, by the way, become more expensive with each generation of chip.

The cost to build a facility with five nanometer production lines is at least $5.4 billion according to consulting firm McKinsey.

One example of that five nanometer chip is the A 14 bionic Apple says it's the fastest available chip on a smartphone, and it's found in the iPhone 12.

Those chips are made by TSMC.

It might not be a household name to most consumers the way Apple is, but Apple couldn't have done it all without TSMC.

For that matter, neither could Apple competitors like Chinese tech giant Huawei.

Now TSMC and its home country, Taiwan, is in a unique position.

This is all part of the geopolitical complexity we were talking about earlier.

So here you have this hugely important industry located in Taiwan.

And Taiwan, of course, is you know, right in the center of this of geopolitical struggle, the Communist Party now make no clams about saying that Taiwan is an inalienable part of China that is only waiting for reunification.

They, whether they have they don't have publicly stated timetable per se, but they make no qualms about it.

They have not renounced violence to reunify the country.

And so you see it and so Taiwan.

You can certainly be see it being a very real flash point, really, whether or not China successfully invaded Taiwan, it's almost guaranteed that the semiconductor industry and you know the global supply chains would be disrupted by this.

There's also some concerns that, if successful, that China would take over Taiwan's manufacturing industry or the semiconductor industry, and because of Taiwan's critical role in the manufacturer of these chips, that could be relatively problematic for the companies that use TSMC, the Taiwan.

So there's some discussions that if China did take over TSMC that China could put members of the Chinese Communist Party on the board or, you know, exert other influence through other ways chips being as important as they are, they figure prominently in the often intertwined discussion of security and technological advancement.

Just think of the US coming up with its special kind of list an entity list that places companies and persons for the for behaviors, contrary to U.

S.

National security interests and foreign policy interests.

So let's say human rights violation will account for one.

Um, I P theft will be another one, and one notable company you may have heard is the Chinese telecom giant Huawei.

In the summer of 2020.

The U.

S.

Also places list of Chinese and Russian military and users to the entity list.

So China SMIC, the Short for Semiconductor Manufacturing International Corporation, also made it onto the list because of its ties with the P l.

A.

By this point, US mid chips are essentially off limits to China.

Incidentally, this also contributed to the massive chip shortage we were talking about earlier when SMIC got blacklisted by the US That meant it couldn't purchase advanced manufacturing gear from the United States.

So the sanctions prompted some of mixed chip buyers to shift their orders to TSMC, thereby helping to create a bottleneck.

China had also been stockpiling chips from elsewhere in order to circumvent US sanctions.

Now, its ambitions to become the world leader in tech are well established and semiconductors are a key part of that.

The restrictions are a threat to that plan, but China has been building its own strategy, So China has worked for several decades to develop its semiconductor industry.

It has poured money into this, but really the past several years this drive has been accelerated as China's vulnerabilities in semiconductors has been made so clear by US sanctions.

We see this by companies like Huawei pouring money into Chinese startups and other semiconductor companies across the industrial value chain.

But it really remains seen whether or not China and the Chinese companies will be successful at doing this.

So they're starting from from certainly a backward position, and then they've got a lot of going to make up, and they also are now entering a phase a phase where there simply isn't the trust that is.

Their chip design relies on a whole slew of components and inputs from global chains of engineers and companies, and that's a chain of trust which China is simply outside at the moment.

So it's going to be very difficult to simply say, in five years we're going to bleeding design companies you can look across the number of industries in China.

Whether you know, high tech industries, difficult industries like airline commercial airlines.

China has been trying to do that for 30 years with very little success for the size of its economy.

It may demand great things that may put them in the plan.

There may be political imperatives, but it takes a lot of work to get there, and there is no certainty they're going to get there from where they are today.

So once again, in broad strokes, the U.

S and China both want to be the tech superpower.

The US has accused China, among other things, of intellectual property theft and of human rights violations, and has blocked certain Chinese companies from accessing U.

S technology.

China is spending billions in order to be able to decrease its dependence on tech imports, thereby also reducing its vulnerability to sanctions put in place in part to punish aggression and deter future belligerence like, say, towards Taiwan.

And that's why chips are the new economic security and geopolitical flashpoint.

The question is what should be done.

I think much of the well the ideas behind some of the U.

S.

Policy were correct.

I think the implementation was poor and certainly the global coordination was poor.

And I think that's something that needs to be addressed.

And again, how do we use these?

Whether is sanctions or how we use this leverage in a positive way to actually get better outcomes?

It is.

And I think that's what's been missing in much of the U.

S.

Policy, a successful policy needs, balance, business interests and also national security concerns.

And an ideal approach will be flora lateral with like minded countries instituting similar policies at the same time, as it so often is, the answer is working together.

Whatever global challenges coming up be at the next pandemic, climate change, food security, technology and therefore chips are going to play an outsized role.

It's in all countries interest to ensure a dependable supply, investing in research and development and manufacturing closer to home.

Having more and varied suppliers and making the supply chain shorter are key.

And while semiconductors are a source of political sensitivity, there also a reminder of an interlinked, interdependent global economy.