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.