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Semiconductors, energy, food security and climate

Semiconductors, energy, food security and climate - Uncomfortable truths

The Covid pandemic has demonstrated the brittleness of our collective “just in time” global economy. While supply chain bottlenecks have largely dissipated, the systemic shocks caused by 2 key elements- semiconductors and energy – call for a global rethink. Food security has also returned to the forefront, as shown by Russia’s cynical manipulation of Ukraine’s grain exports. Water access is restricted by severe drought affecting hundreds of millions across continents. 

The 3 decades of the post 1989 world saw billions of people durably unshackled from endemic poverty and graduate to political and economic freedom. So-called free trade reconfigured the world economy and set up a global “just in time” system. 

It took COVID in 2020 and Russia’s aggression against Ukraine in 2022 to surface the precarious nature of the “just in time” gospel. Hundreds of millions of Western consumers discovered how utterly dependent they really were on offshore manufacturing and global shipping. Delays for furniture, appliances and just about every modern convenience stretched into weeks. Every level and sub-level of the global economy is reconstituting inventories of semi-manufactured and manufactured products. This is an underreported driver of global growth.  

Semiconductors, which the general public seldom thinks about, were revealed as one of the key elements of our entire consumerist society through an ongoing shortage which financially impacts large industries. General Motors’ Q2 earnings report highlights how central semiconductors have become for the auto sector. 

Energy, its sourcing and pricing, usually escapes the headlines and people’s daily conversations, outside of crises. This year’s sharp rise in the price of crude oil and natural gas is linked to Russian aggression against Ukraine. This energy shock, as well as pent up demand for everything, have turbocharged inflation, which had been tamed to low single digits since the early 1980s in G7 economies. COVID exposed the brittleness of the global supply chain we all rely upon, Russia’s war surfaced the precarious nature of energy sourcing, particularly for Europe and its main manufacturing economy, Germany. 

It’s time to examine a number of uncomfortable truths linked to the trifecta of industrial sovereignty, energy independence and water and food security.


Truth: the “digital” economy is built on complex physical industrial elements Europe and the US need to re-onshore to maintain sovereignty, especially semiconductors.  

50 years ago the Japanese stunned the world by rebuilding their post-WW2 industry in two short decades. Their development model became the centerpiece of countless business school case studies and a number of factors, including the acceleration of cargo shipping, allowed them to preach their “just in time” gospel. Europe and North America, the 2 main hubs for manufacturing since the 19th century, saw a steady rise in offshoring, mostly to Asia. US and EU-based telecoms and electronics corporations – Cisco, Intel, Nokia, Alcatel –  powered the internet and mobile revolutions which accelerated the digitization of our economies. It bears reminding that the FAANG (Facebook, Apple, Amazon, Netflix, Google)’s growth over the past 2 decades is 100% based on high value physical products (routers, servers, mobile base stations, laptops, tablets) assembled in Asia. 

The much vaunted “designed in California, assembled in Asia” rings hollow in a world rocked by COVID and the supply chain woes we all experienced since 2020. The web-based and app economy is said to represent “a $1.7 trillion ecosystem led by U.S. companies”. It has attracted hundreds of billions of $ and euros in VC funding but it cannot function at all without physical elements in the hands of consumers. 

Digital and electronic sovereignty is top of mind for EU and US leaders and COVID showed that it’s predicated on constant and bountiful access to important building blocks such as semiconductors. European giant Philips teamed up with the Taiwanese government in 1987 to start TSMC, which today controls up to 60% of worldwide semiconductors production. EU and US institutions are now working overtime to re-onshore manufacturing as COVID, the Russia-Ukraine war and current tensions in the South China straits pleads for localized production vs distributed manufacturing. “Just in time” has become obsolete. The US Congress overwhelmingly voted for the 280B$ CHIPS Act: a “bipartisan deal to revive American innovation in opposition to growing Chinese technological dominance comes amid an ongoing global semiconductor shortage. The shortage has become an incentive for manufacturers like Intel to invest in new plants to meet the growing demand for tech products like laptops and smartphones worldwide.” 

Truth: globalization 2.0 lifted billions out of poverty and led to Western-based well-paid  industrial jobs to be shipped out. Western consumers long assuaged by low inflation and easy credit will no longer enjoy both.

NAFTA in 1994, China’s inclusion in the WTO in 2000 both served as tipping points to manufacturing jobs disappearing from the US and EU. Investors backed this offshoring strategy as a cost arbitrage play and it had profound consequences. The manufacturing jobs in China, India, Vietnam served as catalysts for further investment and the development of middle classes across the globe. Western leaders sold their countries on this reshuffling of the economic cards by touting that these middle classes would now earn enough to buy more from Western economies and this indeed proved true for luxury and fashion brands in Italy and France, German automakers and Swiss watchmakers. Nonetheless, millions of furloughed blue collar workers in the US Rust Belt couldn’t find commensurate jobs and resorted to credit to keep up. Years of ultra-low interest rates lulled them into continuous debt and as Chinese overinvestment in US Treasuries contributed to ultra-low inflation, which made the flat panel tv sets and laptops assembled in China “affordable” to the masses. 

The economic shock brought by COVID in 2020 and the Russia-Ukraine war in 2022 have brought back scarcity, inflation and a sense that globalization 2.0 wasn’t as advertised. 

Bill Clinton ran for President 30 years ago talking up jobs retraining programs to blunt the effect of increased free trade displacing jobs. A reality check and the uncomfortable truth of that generous vision is needed and it’s not all rosy: too many retraining efforts failed and remain underfunded. The hunt for stable sources after the Russia-Ukraine war exposed the weakness of the energy ecosystem and inflation’s return has spooked markets, governments and citizens alike.

Truth: the vaunted German industrial model has proven hollow because 500B euros spent on renewables cannot 100% replace fossil fuels. Efficient and bountiful energy is the foundation of modern life and a diverse energy mix, without ideology, a prerequisite. 

Germany’s leaders have long deplored their French neighbors’ profligacy, rigid economic ideology and lack of speed when faced with indisputable data. Vaunted “pragmatic” Germans were always quick to shrug France’s political bottlenecks.  It’s past time Germany quit drinking its own Kool-Aid and own up to its massive failed bet on Russian energy to power its economy and crucially, its export-focused industries. Germany spent more than 500B euros on renewables and is still unable to guarantee 24/7 uptime in carbon-free energy production. Its reliance on coal-fired electricity in 2022 is abhorrent and stems from Germany’s own rigidity relative to keeping a diverse energy mix. Energy production and regulation remains one of the relative failures of the European Union’s coordination efforts. The 3 major G7 economies on the continent: Germany (3.5 trillion euros in GDP), France (2.4 trillion) and Italy (1.7 trillion) are linked to each other for energy production and consumption yet have not been able to fully coordinate their energy sectors. German and Italian industry relied until 2022 on a mix of cheap Russian gas and French nuclear energy to keep its production lines humming. 

Truth:  food security means water access security and full-scale mobilization on water issues is still lacking. 

Water rights and water access has underpinned major crises over the past 2 decades:  

Truth: our world is not built for an unstable climate, it’s past time to adapt and rebuild. 

Truth: doomerism is as old as time, it’s time for realistic optimists to band together.

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