The Semiconductor Supply Chain

How computer chips are made through a highly specialised global chain, why a few companies dominate key steps, and why governments now treat chips as strategic.

Computer chips, or semiconductors, are found in phones, cars, washing machines, medical equipment and weapons. Making them relies on one of the most complex and specialised supply chains in the world.

Specialised steps

Chipmaking involves many stages, often in different countries:

Design: companies such as Nvidia, Apple and Qualcomm design chips, often without making them. Design relies on specialised software from a few firms.
Manufacturing equipment: the machines used to make advanced chips come from a small number of firms. The Dutch company ASML is the only maker of the extreme ultraviolet lithography machines needed for the most advanced chips.
Fabrication: chips are made in factories called fabs, which can cost tens of billions of dollars to build. Taiwan Semiconductor Manufacturing Company, or TSMC, is the largest foundry, a company that manufactures chips designed by others, and makes most of the world’s most advanced chips.
Assembly and testing: finished chips are packaged and tested, much of it in countries like Malaysia, China and Taiwan.

Why it is so concentrated

Chipmaking has enormous fixed costs and steep learning curves. Only a few firms can afford the latest factories and the expertise to run them. This leads to high concentration at key steps, which makes the chain efficient but vulnerable.

One company, one machine

ASML's most advanced lithography machines cost well over 100 million dollars each and are shipped in many containers. Without them, no company can make the most advanced chips. This single point of dependence shows how specialised the chain has become, and why governments pay close attention to where these machines can be sold.

Chips become strategic

Because chips are vital to economies and militaries, governments now treat them as a strategic industry. The United States passed the CHIPS and Science Act in 2022, providing around 52 billion dollars to support domestic chipmaking and research. The European Union passed its own Chips Act. India approved major incentives for chip manufacturing and assembly plants, including a large fab project by Tata Electronics in Gujarat. The United States has also restricted exports of advanced chips and chipmaking equipment to China.

Thinking any country can quickly build a chip industry

Building advanced chip factories takes years, huge investment and deep expertise that is hard to acquire. Subsidies can help, but leading-edge chipmaking is concentrated for strong economic reasons, and replicating it elsewhere is slow and costly.

Key takeaways

Chipmaking involves design, equipment, fabrication and assembly, often in different countries.
A few firms dominate key steps, such as ASML for advanced lithography and TSMC for advanced manufacturing.
High fixed costs and learning curves make the chain concentrated and vulnerable.
Governments now subsidise domestic chipmaking and restrict exports for strategic reasons.