The chips are down

Opportunities and risks in LatAm from the global semiconductor chip shortage.

Since the outbreak of the Covid-19 pandemic in early 2020, a global semiconductor chip shortage has hindered supply chains in the automotive, mobile, computing and home appliance industries. To make matters worse, the War in Ukraine is slowing the export of krypton and neon gases, used in semiconductor chip production, from Russia and Ukraine, and the geopolitical tensions between Taiwan and China could spell further problems on the horizon.

These supply chain disruptions are causing short-term risks for many industries, but are there longer term opportunities for Latin America, particularly given the appetite of the US to onshore or nearshore semiconductor chip production? According to industry sources, by the end of 2023, the world is expected to have 29 additional semiconductors production plants in operation with the main aim being to reduce the Taiwan chip dependency, which accounts for 87% of global production.

According to a director of ABISEMI, the Brazilian semiconductor association, “The global semiconductor industry is facing a shortage of chips until at least 2024 or 2025, we are only just starting to understand the extent of the problem and the timeframe of potential solutions.”

“The global semiconductor industry is facing a shortage of chips until at least 2024 or 2025, we are only just starting to understand the extent of the problem and the timeframe of potential solutions.”

Director, ABISEMI, Brazil

In Latin America, Brazil and Mexico both have the potential to become regional ‘super-producers’: Brazil ended 2021 with a BRL 250 million investment in the semiconductor manufacturing industry which, in turn, generated BRL 4 billion in revenues, reported ABISEMI. A Brazilian industry observer noted, “Fábio Faria [Minister of Communications] announced recently that Brazil signed a memorandum of understanding with Intel and Samsung to set up a semiconductor plant in Brazil. The aim is to become a regional hub and export to certain countries in Asia too. It’s a nice idea but I have concerns about feasibility, I think Brazil should focus on developing a national semiconductor plan before we start considering regional exports.”

Brazil is expecting to manufacture 2.4 million semiconductor chips in 2022, registering a 9.9% increase compared with the previous years. Nevertheless, these local semiconductors are not technically prepared to cater to demand from the automotive industry yet. This is a clear growth opportunity for the country which, in January 2022, passed a new law extending fiscal support for the development of semiconductors.

Mexico is also working hard to develop a national semiconductor industry as many of its other industries are highly dependent on chips. Notably, the country’s automotive sector that represents a 3.5% of GDP with 37 plants that manufacture more than 5 million vehicles per year.

Last week, Tatiana Clouthier, Minister of Economy of Mexico, announced that Mexico would strengthen its semiconductor supply chain with the US. Mexico will provide fiscal incentives to attract investors in the north and south-eastern regions of the country. Notably, the Ministry of Economy is cooperating with Intel to launch a local resource innovation hub based in the company’s facilities in Guadalajara, Jalisco.

The largest risk to the growth plans of Brazil and Mexico’s semiconductor industries could be the onshoring of semiconductor chip production in the US. An industry executive in Mexico warned, “The semiconductor plant being built in Texas with South Korean capital is just the beginning. The challenge is to attract these types of investments to Latin America but in Mexico this is hard when president AMLO keeps the USMCA bathed in uncertainty.”

“The semiconductor plant being built in Texas with South Korean capital is just the beginning. The challenge is to attract these types of investments to Latin America but in Mexico this is hard when president AMLO keeps the USMCA bathed in uncertainty.”

Semiconductor industry executive, Mexico

China may present an alternative option for Mexico, according to the industry executive, “China is interested in setting up semiconductor factories in Mexico to support the major Chinese automotive investment effort in the coming years – they would not want to depend on third countries for semiconductors.”

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