Connecting ESG & Financial Markets III
WATER’S IMPORTANCE |THE SEMICONDUCTORS INDUSTRY
Environmental challenges have been unexpectedly happening in different parts of the globe. One of those unexpected places is the world of semiconductors, which has become the interstitial tissue of our devices. Semiconductors — or chips — power all around us.
What do the semiconductors’ market dynamics look like?
On demand side, virtual learning, work from home, ventilators, and remote healthcare drove the demand for chips during the COVID-19 outbreak. After the recovery, however, industrial robotics, telecommunications equipment, electric vehicles, and home electronic appliances started to be demanded too.
On the supply side, looking at regions where the production is located, the factories had to shut down their production during lockdowns, which interrupted the supply. It is important to note that the industry is not used to a swing of demand as it relies on seamless collaboration across the supply chain and its production takes a couple of months.
The demand increased both during and post-lockdown. But how are semiconductors put together?
Semiconductors manufacturing is a specialised game, they get done in 2 ways: one is by companies that do all the chip from design to assembling, and the other is by testing IDMs (Integrated Device Manufacturer). Being an IDM is a hard ask, there are many complex processes involved. To split up these, each step is done by single companies or outsourced assembling and test companies — or OSATs, which make the hard work of making and testing the chips.
‘The global semiconductor market is projected to grow from $452.25 billion in 2021 to $803.15 billion in 2028 at a CAGR of 8.6% in forecast period, 2021–2028 […] this growth is attributed to increasnig consumption of consumer electronics devices accross the globe and demand for faster and advanced memory chips in industrial applications will drive the market growth over the forecast timeline.’
Fortune Business Insights, 2021.
We also find the fabless companies — no fabrication, and foundry companies — involving all the assembly after the design, model. Companies’ fabless foundry model allows companies to be great at what they do and maximise the value chain capacity.
From an ESG perspective, we see that water consumption is outsourced from those fabless chip makers to the manufacturers. Fabless companies have low water-reliance levels but at the same time counter manufacturers have huge amounts of water consumption and withdrawal. The specialization across the semiconductor value chain comes accompanied with geographic concentration.
Taiwanese chip makers dominate in the foundry and specialised packaged chain and assembly markets, which are the most water-intensive processes, and this is highly concentrated in one market: Taiwan, a market known by water stress and droughts, leaving risks for the whole supply chain.
The missing piece in the story:
The most decisive parts of the supply chain, which are the ones that require the most water usage, are located in water-scarce areas. According to MSCI, 57% foundry operations are in highly water stress regions, 66% of foundry assets are based in taiwan, accounting for 98% of revenue generated from foundry operations.
Taiwan gets rain, but its terrain is mountainous and makes it complex to store and direct the water, especially during monsoon season. Chip makers have adapted to this risk, chip makers have best risk management scores compared to other chip makers, with water recycling and monitoring mechanisms, but this is not enough. The more sophisticated chips, the more need for water. Climate change will make things more challenging and unpredictable.
VALUABLE DATA
According to the Water Footprint Calculator, it takes more than 3,000 gallons to produce one chip. ‘Water is needed for mining the metal, making the glue and plastic for assembly and packaging, and then diluting the wastewater used throughout the process’ Wishnick, 2021.
The ongoing geopolitical rivarly between the US and China is in large part due to this market. Think about it, data is seen as the new oil and AI as the new electricity, but none can function without semiconductors. This makes from them a resource able to create global risk and instability.
China accounts for 7.6 % of semiconductor sales, but it has invested $150 billion from 2014 to 2030 in the sector according to a July 2021 study by the Semiconductor Industry Association. This was done in an aim to decrease the dependency on global supply chains. Nevertheless, its production requires large amounts of water that China simply lacks.
The 14th Five Year Plan (2021–2025) released, states that semiconductors are one of the top priority “frontier technologies,” which the Chinese State Council developed a whole-of-government approach to carry out. Experts expect to see a mixed success for the Asian giant. It will struggle in certain areas such as cutting-edge foundry process technology and materials and most likely achieve competitiveness in outsourced assembly and testing (OSAT) and chip design.
ChinaWaterRisk estimates that a factory producing 40,000 circuit boards needed for semiconductors would need 4.8 million gallons of water a day, which could supply a city of 60,000.
Floods have been occurring in central China, despite being relatively water insecure. It is home to 20%of the world’s population, but only has 7% of global water resources. Moreover, water is unevenly distributed. The north of China, where much of the semiconductor industry in located, has only one-fifth of the country’s water resources.
LET’S NOT FORGET ABOUT TAIWAN
The company TMSC is based in Taiwan and the one with largest market share. The country owns the foundry market, or the outsourcing of semiconductor manufacturing. Its contract manufacturers together accounted for more than 60% of total global foundry revenue last year, according to data by Taipei-based research firm TrendForce.
TSMC just manufactures and produces most cutting-edge semiconductors. Dan Wang, a technology analyst at research firm Gavekal, said in a podcast by Singapore’s DBS bank.
“So TSMC, if you just have a look at market share, I believe manufactures around 50% of all semiconductors in the world. And I think that still understates how important it is, because these are some of the most advanced chips out there,” said Wang.
“The problem that SMIC is in now, the dilemma, is the U.S. government has put them on the entity list,” he said. “But the bigger picture is that SMIC has been cut off, at least for the moment, from acquiring the really cutting-edge equipment it needs from ASML, which is a Dutch company.
Water is an essential resource. Not only for our planet, but also for the technology we create. Water itself and its management are crucial for the semiconductor industry, which unregulated, creates both pollution and waste.
There might be further innovation to do more with less, but demand goes up, sophistication too, and water goes down.
How will this impact our economies? Our technological progress will still be possible?
Will we face more supply chain disruptions? Or will Arizona’s reality expand throughout the globe?
