In a surprising turn of events earlier this week, China derailed a whopping $5.4 billion merger between tech giant Intel and Tower Semiconductor, a company specializing in the production of legacy chips. Unlike their advanced counterparts, legacy chips are built using older technologies, which despite seeming outdated, power two-thirds of the chips sold today. These chips, some of which utilize technologies from the last century, are crucial to several industries, including the automotive, medical devices, consumer electronics, infrastructure, industrial automation, and defense sectors.
The importance of legacy chips is underscored by the fact that the recent COVID-era chip shortage was primarily due to a scarcity of these chips, not the advanced ones. Even the latest iPhone 13 Max saw delays, not because of its advanced workhorse chips, but due to the unavailability of a large number of legacy chips required for its operation. Despite their critical role, legacy chips have been largely overlooked by lawmakers and the industry, primarily because the profits generated mostly come from the expensive advanced chips, with commoditized legacy chips often selling for mere pennies.
The Forgotten Legacy Chips: A Looming Crisis
The Legacy Chip Market
Earlier this week, a $5.4 billion merger between Intel and Tower Semiconductor was blocked by China. Tower Semiconductor’s focus isn’t on creating advanced chips with the latest technologies but rather on manufacturing legacy chips using older technologies. This focus may seem out of place, considering the recent U.S. chip-related efforts, like the CHIPS and Science Act, have largely concentrated on advanced chips. However, it’s important to note that the majority of chips manufactured today aren’t advanced chips but instead, legacy chips. In fact, two-thirds of the chips sold today are made using technologies that were commercialized before 2005, and nearly a quarter are made using technology from the last century!
The Importance of Legacy Chips
Despite their vintage, legacy chips are as crucial as advanced chips in terms of economic significance and national security. About 95% of the chips used in the automotive industry are legacy chips, and several other essential industries, such as medical devices, consumer electronics, infrastructure, industrial automation, and defense, also heavily rely on these chips. In fact, the recent COVID-era chip shortage was primarily a shortage of legacy chips, not advanced ones.
However, legacy chips are often overlooked because the profits are mostly derived from the expensive advanced chips, while commoditized legacy chips often sell for pennies. The average cost of a chip sold today is less than 50 cents, and chips built using pre-2005 technologies make up two-thirds of sales but only a tenth of the overall chip industry’s revenue.
The Growing Demand-Supply Gap
The gap between the demand and supply of legacy chips has been increasing unsustainably. For instance, while the global automotive semiconductor market is expected to grow by over 11% per year for the next few years, the projected annual growth in manufacturing legacy chips is only 2%. This is primarily because it isn’t economically attractive to invest in legacy chip manufacturing, given the high setup costs and low profit margins.
Security and Strategic Autonomy Risks
Nearly three-quarters of the manufacturing capacity for legacy chips is based in Taiwan and China, leading to supply chain dependence similar to that for advanced chips. China has been heavily investing in legacy chip manufacturing, especially in the aftermath of export controls on advanced chips. Some estimates suggest that China might build more legacy chip fabs in the next few years than the rest of the world combined. This situation could potentially compromise America’s security and strategic autonomy.
The Need for Action
The legacy chip market deserves the same level of attention as the cutting-edge semiconductors. Government subsidies, friendshoring, export and import controls, innovation in legacy chips, and control over standards bodies are some of the strategies that could help prevent a severe chip shortage and ensure security in the supply chains.
Takeaways
Legacy chips, despite their age, remain a critical part of various industries and economies. The growing gap between supply and demand, coupled with security risks, calls for urgent attention and action. Policymakers and industry leaders should not overlook these chips, as their importance extends beyond their low price point. The future of various industries, including automotive and defense, could hinge on how this looming crisis is addressed.
