Supply chains and geopolitical crisis

1. Introduction

1.1 Overview of supply chains

Over the past three decades, globalisation has created unprecedented opportunities for economic growth. The progressive integration of the world’s economies, driven by new technologies and liberal trade policies, has created conditions that allow more of the global population to access more advanced consumer goods and services than ever before.

At the centre of this interconnected system are global supply chains. These are the international, interdependent networks of supply and production that support the journey from supplier to consumer. From the late 1990s onwards, considerable attention was devoted to the various ways that “cross-border production and supply chain arrangements … could improve the efficiency of even the most complex manufacturing processes”.¹ Today, these networks “have become the world economy’s backbone and central nervous system”.² Companies now depend on geographically dispersed “chains of specialised suppliers rather than a vertically integrated model of production, where one company performs most tasks”.³

Supply chain arrangements bring enormous benefits in terms of efficiency, speed and flexibility. At the same time, increased interconnectivity and dependencies also raise risks. Global supply chains of growing length and complexity are now more prone to disruption than ever before. Simply put, “you are left vulnerable when you depend on a single supplier somewhere deep in your network for a crucial component or material”.⁴ And the drivers of disruption are many and varied, ranging from natural disasters to cyber-attacks, and from state conflict to public health emergencies.

1.2 Semiconductor supply chains: significance and significant

One specific area of vulnerability is found in semiconductor supply chains. Semiconductors, commonly known as integrated circuits or chips, have been described as the “essential building blocks of electronic devices, forming the foundation upon which modern technology is built”.⁵ They are present in technologies of all kinds, from refrigerators to missile guidance systems, and enable “the creation of increasingly powerful and energy-efficient systems that drive innovation”.⁶

Given their importance and the widespread nature of their use, little surprise that semiconductors hold enormous strategic significance. Thadani and Allen argue that the “semiconductor industry and its supply chain increasingly rival oil and gas in terms of their importance to international relations, the attention they receive from senior leaders in government and business, and their use as a tool of foreign policy.”/sup>7

This strategic dimension to semiconductors means that demand far exceeds supply and there is fierce competition over their acquisition. No single state has developed all the required technologies to produce advanced semiconductors. Production relies on a small number of firms in a handful of countries – mostly in the Indo-Pacific – some of which are at the epicentre of strategic competition between global powers. In short, supply chains involving semiconductors are inherently vulnerable.

With semiconductors, the risks are even more acute. Their centrality to technology means that even minor disruptions could have important consequences and large-scale disruption would be hugely consequential for economic, military and social activity. One industry source, for example, estimates that conflict disrupting and damaging key aspects of the semiconductor supply chain could set the global economy “back at least 20 years”.⁸

1.3 Impact of geopolitical crisis on supply chains

Against this background, this report seeks to explore the intersection of geopolitical crisis and supply chain surety. It considers the potential for geopolitical crises to disrupt semiconductor supply chains. The analysis includes a typology of crises with geopolitical and supply chain implications. The report then considers how supply chain resilience might be enhanced. It draws on international best practice and newly emerging approaches, setting out recommendations for enhanced supply chain resilience.

This report uses Malaysia as a case study to explore the vulnerabilities and mitigation efforts of a medium-sized player in the semiconductor manufacturing sector. Over five decades, Malaysia has emerged as a critical node in global semiconductor supply chains. It is now the world’s sixth largest semiconductor exporter, supplying major markets worldwide while attracting substantial foreign direct investment.⁹ This deep integration, coupled with the industry’s sizeable contribution to the national economy, makes Malaysia both indispensable and exposed to supply chain shifts. As a case study, Malaysia could help illuminate some of the key challenges and risks facing countries that are key players in the semiconductor space.

The report is structured in six parts. Building on the introduction, Section 2 considers the concept of geopolitical crisis and associated risks. To aid discussion, it sets out a loose typology of crises, their likelihood and impact. Building on the crises and potential for disruption, Section 3 moves to focus on supply chains and the vulnerabilities that make them susceptible to disruption. The key question underpinning this section is: what are the factors that contribute to supply chain vulnerability? Section 4 considers the issue of resilience and how this can be developed in global supply chains. Section 5 sets out the case study of Malaysia. The section explores Malaysia’s emergence as a critical node in global semiconductor supply chains and considers some of its risks and vulnerabilities. It also highlights measures being considered or pursued by relevant authorities in Malaysia. Section 6 concludes and presents some recommendations for measures that could enhance supply chain resilience, both in Malaysia and more broadly.