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The Big Picture: What Two Hot Wars Could Mean for the Electronics Supply Chain

As we all recall, COVID-19 nearly crippled the electronics supply chain. Many critical chips had multi-year lead times. When we finally thought things were getting back to normal, now we have two hot wars: one in Eastern Europe and now one in the Middle East.

Israel is full of tech talent and is one of the few places outside of East Asia where advanced chip production happens. The tragic events that have led to the rising conflict between Israel and Hamas have not only left thousands of people dead but threaten to further complicate the supply of high-end electronic chips. This is taking a significant economic toll.

Of the many tech regions in Israel, Haifa and Kiryat Gat are critical for Israel’s tech industry. Kiryat Gat is close to the Gaza border, which bore the brunt of the violence inflicted by Hamas. Haifa is a port city near the border with Lebanon where IDF (Israeli Defense Forces) and Hezbollah have been shelling each other in recent days.

Companies such as Intel, NVIDIA, Amazon, Apple, and Microsoft, among others, have key chip design centers in both cities. Intel has over 12,000 employees in Israel, most of whom are now affected by this conflict. Intel has become Israel’s largest privately held employer and exporter, as well as local electronics information and industry leader1. There are significant concerns about the safety of their facilities and their employees.

Among the many Israelis and foreigners kidnapped by Hamas is Avitanan Or, an NVIDIA engineer. As a result, the company has since canceled an AI conference in Tel Aviv. This is just one small example of the devastation this war is bound to have on the electronics supply chain and advanced chip design and manufacturing in particular.

According to a report from logistic and supply chain media outlet DC Velocity, some global companies are already rethinking their supply chains in an effort to avoid potential dangers caused by the deadly conflict. This new war puts even more pressure on a supply chain’s stability when the need for a stable supply is especially critical.

The Russia-Ukraine war has already created problems in supplying specific raw materials used in semiconductor manufacturing, such as neon and palladium. Ukraine produces about 70–80% of the global supply of neon, and Russia produces about 35–45% of the world’s palladium supply. Short term, the impact is manageable, that is, assuming things remain status quo in China. The long-term effects, especially if conflict escalates in China, could be as serious as production line closures, price increases, and decreased output, revenues, and profits2.

“Economies are at a delicate state,” Ajay Banga, the World Bank President, recently told the New York Times. “Having wars is really not helpful for central banks who are finally trying to find their way to a soft landing.”3

The bigger fear is that Israel will be facing a conflict in the north with Hezbollah which will require America to help defend Israel even further and with the likelihood of engaging others in the region into a broader conflict, namely Iran. The tragedy of this situation is that most people just want a safe place to live in peace, and raise a family with better opportunities. A minority of militants has taken that away.

I sincerely hope we find a resolution to these wars soon. Otherwise, we risk further conflict where nations seek to take advantage of chaos in Europe and the Middle East. The last thing we need is an entirely new front in Asia with Taiwan squarely in the target.

We recently discussed with a major customer who is serious about getting out of China because of the conflict building there and what’s happening worldwide. One key supplier in China has already started building a plant in Thailand that will be online next year. There’s a lot of migration into Southeast Asia. We’re aware of other companies looking to build and source outside of China to keep their customers happy. It’s clear that diversifying sourcing is essential in situations like these.

We’re also looking at other sources and will seek additional partners in India and Southeast Asia. We’ve had partners in the past who we can turn to to allay customers’ fears if these conflicts escalate further. It is necessary to have people on the ground who can pivot quickly if needed.

We’re seeing an exodus in the electronics supply chain industry overall. Taiwanese companies have huge investments in China, yet many Chinese companies are targeting Thailand and Southeast Asia. Supply bases have publicly announced they’re building factories in Thailand. Yet if the raw materials are still coming from China, it will be a problem if conflict builds.

I predict these events will further accelerate moving the electronics supply chain to Southeast Asia, India, and perhaps even Mexico. I’ve discussed this in several previous issues, but with recent events, our decision to acquire Spectrum in Malaysia seems to have been exactly the right thing to do. Although we hope for peace in each of these wars, the timeline is uncertain, and we must make the best decisions with the information we have.

References

1.  “War in Israel to Impact Electronics Supply Chain,” by Pablo Valerio, EPS News, Oct. 11, 2023.
2. “Russia-Ukraine war: Impact on the semiconductor industry,” by Lincoln Clark and Scott Jones, KPMG.
3. “Fragile Global Economy Faces New Crisis in Israel-Gaza War,” The New York Times.

Mehul J. Davé is chairman of Linkage Technologies, Inc. 

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