The Impact of the Israeli-Gaza Conflict on the Global Semiconductor Supply Chain

Overview of Israel's Semiconductor Industry

Israel boasts over 30,000 chip engineers and nearly 200 semiconductor companies, representing approximately 8 per-cent of the world's chip design talent and research and development firms. This unique concentration makes the region highly sensitive to conflicts affecting the semiconductor industry.

 As of 2018, Israel had 163 chip companies and 35 research centres. By the first half of 2021, 37 multinational companies had established semiconductor branches in Israel. As of 2022, there are over 600 semiconductor companies, with nearly 200 specializing in chip design and development. Leading technology giants with significant operations in Israel include Intel, which has been prominent since establishing an overseas base in Haifa in 1974, as well as NVIDIA, Qualcomm, Cisco, Apple, Amazon, and Microsoft, all having significant chip design centres in the country.

Impact of the Israeli-Gaza Conflict on the Semiconductor Industry

Violent events in Gaza resulted in the abduction of engineers and the conscription of employees into the military. Intel, with approximately 12,800 employees in five major locations in Israel, faced challenges as one of its chip production facilities in Givat Shmuel is located southwest of Jerusalem, just 30 minutes from the Gaza border. The conflict also led to the kidnapping of NVIDIA engineer Avinatan Or by Hamas militants. Additionally, many companies reported that their employees were being massively conscripted into the reserves, causing disruptions in the workplace. In addition to this, the Israeli Defense Forces' blockade on Gaza effectively closed all crossing points, preventing thousands of Palestinians from crossing the border for essential services, including transportation, logistics, manufacturing, food, cleaning, and healthcare. This resulted in a lack of personnel needed for the operation of most industries.

Transportation disruptions, including flight cancellations and maritime route blockades, had profound effects on the supply chain. Many airlines suspended flights to and from Israel, causing passengers to be left stranded and impacting cargo transportation. The maritime industry faced additional challenges with the Israeli navy controlling traffic around major ports. Per recent updates from maritime insurance leader North Standard, Ashkelon Port, a key hub for oil tankers in Israel, is now inactive. Simultaneously, Ashdod Port is under an "emergency state." The Israeli navy has assumed control over the maritime traffic in and around the two major ports, exerting authority over the adjacent areas. This situation further complicates the maritime operations and poses challenges to the transportation of goods and resources in and out of the country.

Impact on Major Chip Markets

Israel's semiconductor industry is predominantly focused on design, boasting approximately 8 per cent of the world's chip design talent and R&D companies. The industry comprises fabless chip design firms, multinational research centres, semiconductor equipment enterprises, and a limited number of wafer fabrication plants.

Israel holds a significant position in various chip markets, including the United States, China, and the European Union. During the escalation of tensions between the U.S. and China in 2018, Israel witnessed an 80% surge in semiconductor exports to China. Semiconductors rapidly became a vital component of the economic relationship between China and Israel. Recent data indicates that, as of 2021, China remains Israel's largest export destination for chips. In the 12 months leading up to July 31, 2023, Israeli suppliers accounted for 14% of the EU's imports of computer processors. These imports primarily flowed through manufacturing facilities (fabs) owned by Intel and Tower Semiconductor Ltd., heading to Ireland.

Israel ranked second globally in the number of semiconductor startups in 2020, following the United States. These startups play a crucial role in technological innovation. However, their vulnerability is heightened during the current conflict due to a lack of funding and manpower. Looking ahead, the global semiconductor supply chain, which has just recovered from the impacts of the pandemic, may face further disruptions and damage in the long term.

The Sino-US Technological War: A Shift in the Pattern of South Korea’s Trade

East Asian countries have always been tempted by the profitable market of China, but the importance of the Chinese economy to South Korea seems to be on a decline. According to the Bank of Korea, goods exported from South Korea to China decreased to $122 billion between 2021 and 2022 by 10 per-cent, while goods exported to the United States rose by over 22 per-cent to $139 billion. This marks the first time that the United States overtakes China as the biggest export market of South Korea in nearly 20 years. Such a shift in South Korea’s trade pattern can be ascribed to the economic competition between the eagle and the dragon in the advanced technology war. Their technological war has provided opportunities for South Korea to enhance its business relationships with the United States, while weakening the business prospect in China.

Technology is destined to be the driver of future economic growth. Leading powers have been developing high-tech industries like AI, robotics, biotechnology, and electronics to promote economic development and transformation. China and the United States are no exception. The competition between them is, in fact, particularly fierce because of the escalating tensions between them. To fully develop these high-tech industries and win the technological race, these states will need an essential material, semiconductors. South Korea is an important player in the global semiconductor and advanced chips supply chain. By December 2020, South Korea accounts for 37 per-cent of the production of semiconductor chips with a node size lower than 10 nm. Its two largest manufacturers, Samsung Electronics and SK Hynix, account for 17 per-cent  of the global market share. In 2022, they account for about 50 per-cent of the global market share in NAND flash memory chips and almost 70 per-cent of that in the DRAM segment.

Given that the United States is eager to maintain its advantage in advanced technology development, expanding into the American market is appealing to South Korean manufacturers. The two countries have been each other’s most important allies in managing the stability of the East Asia and Indo-Pacific region. This provides a favorable circumstance for South Korean companies to build stronger trade relations with the United States. Meanwhile, Washington’s ambition to consolidate its leadership in the technological race will also boost the demand for South Korea’s semiconductor and chips, which helps contribute to a greater export of South Korea to the United States.

While South Korea is inclined to export more goods to the United States, the competition can drive China to import fewer goods from South Korea. Admittedly, the Chinese market is a major revenue source for South Korean high-tech giants. The business prospect in China, and Beijing’s eagerness to surpass the United States in the technological race, should drive South Korea to export more goods to China. However, the technology war has caught South Korean manufacturers in the middle between China and the United States. The United States is now implementing export control to suppress China’s access to sensitive technology. The CHIPS Act implemented by Washington does not allow subsidy applicants to engage in certain significant transactions involving expanding semiconductor manufacturing capacity. This limits the export of critical materials and technology from South Korea to China. Fearing the potential retaliation from the United States, South Korean manufacturers are incentivized to avoid over-expanding in the Chinese market and trading sensitive products.

Moreover, under the technological war, American suppression of China encourages the latter to be more self-reliant. Apart from imposing a series of sanctions on Beijing and limiting its access to critical materials, the US is also persuading or pressuring other countries, including South Korea, to side with Washington and not to collaborate with China to develop advanced technology. For example, the United States, South Korea, Japan, and Taiwan have formed the Chip 4 initiative to coordinate policies on supply chain production and research. This has forced China to sharpen its domestic manufacturing capabilities, so as to reduce reliance on foreign technology and promote the development of its own high-tech manufacturing sector. Accordingly, together with the Made in China 2025 strategy released in 2015, China has been making increasing investments to develop its semiconductor, AI, bio-medicine, and other advanced industries. All these could reduce demand for South Korea’s strategic or critical materials.

Ultimately, in the era of the fourth industrial revolution, technological competitions between the leading economic powers appear to be inevitable. As a technological powerhouse, South Korea is also dragged into the technological race and its trade with China and the United States will observe great changes. High-tech manufacturers and relevant industries will therefore have to navigate the changing trade dynamics, so as to prepare themselves to face a further escalation of Sino-US technological war in the future.

The Rise of Nvidia: California’s Second Gold Rush

During a gold rush, sell shovels. Nvidia's success has been likened to the gold rush era, where those who sold the essential tools profited immensely. In this AI gold rush, Nvidia is selling the crucial components required for AI applications. The market for AI chips could reach $60 billion by 2027, with Nvidia already dominating 75 per-cent of the market. The latest H100 processors, optimised for AI architecture, are currently selling at around $40,000 on eBay, further emphasising the market's demand for these cutting-edge chips.

Nvidia, a periphery player in the field of artificial intelligence (AI), has issued a remarkable revenue forecast that far exceeded Wall Street's expectations. While analysts had expected revenues to be $7.2 billion, Nvidia announced a revised forecast of $11 billion bolstered by the rising wave of generative AI systems like ChatGPT. The company has experienced a substantial increase of 27 per-cent in its stock value and is witnessing an unprecedented demand for its products. As a result, Nvidia's total market capitalization has soared to a staggering $960 billion, firmly placing it as one of the most valuable companies in the world just behind the likes of Google, Apple, Saudi Aramco, and Microsoft. On May 30 2023, Nvidia’s market cap hit the $1 trillion mark.

The influence of AI is expanding beyond the tech sector, with financial institutions also embracing its capabilities. JP Morgan, for instance, is developing a ChatGPT-like service that utilises AI to select investments for customers. The company has recently applied for a trademark called IndexGPT, following in the footsteps of other banks like Goldman Sachs and Morgan Stanley, which have been testing AI for internal use. Nvidia's innovative technologies and strategic foresight ensure its pivotal role in revolutionising various industries and pushing the boundaries of artificial intelligence.

To meet the overwhelming demand for its products, Nvidia is significantly increasing its supply. CEO Jen-Hsun Huang has acknowledged the concerns of consumers regarding shortages of Nvidia H100 chips, which are crucial for AI applications. This is due to many of Nvidia's main customers, including consumer internet firms, cloud computing providers, and enterprise clients, rushing to apply generative AI technology to enhance their businesses. While Nvidia's graphics cards were initially targeted at graphics-heavy video games, the company has successfully diversified its consumer base. The launch of generative AI systems like ChatGPT in November has sparked an AI arms race, prompting various industries to adopt these technologies. The widespread adoption has fuelled Nvidia's sales growth and propelled its stock price to achieve the largest one-day increase in a company's value ever recorded.

Nvidia's position in the AI market is solidified by its continuous technological advancements. With the most advanced GPU, networking capabilities, and embedded advanced memory, the company offers a comprehensive solution to fuel any firm’s AI ambitions. Its management team’s foresight has placed Nvidia years ahead of its competition, Intel and AMD. While CPUs developed primarily by Intel and AMD lack the processing power required for AI, Nvidia's GPUs provide the necessary horsepower for AI computing. Nvidia's remarkable revenue forecast and subsequent stock surge signify the company's dominance in the AI market. By capitalising on the growing demand for generative AI systems, Nvidia has positioned itself as a frontrunner, leaving its main competitors behind. As AI continues to shape the future of computing, Nvidia's innovative technologies and strategic foresight ensure its pivotal role in revolutionising various industries and pushing the boundaries of artificial intelligence.