The production of important raw materials for chip manufacturing is concentrated in Russia and Ukraine. These countries are major sources of neon gas, the laser used to print tiny circuits on silicon. In addition, the metal palladium used in the later manufacturing stage is also from these two countries.
Analysts and industry consultants estimate that about a quarter to half of the world's semiconductor-grade neon gas comes from Russia and Ukraine, while about a third of the world's palladium comes from Russia. Potential shortages of these materials have sparked concerns among some analysts that an industry already struggling to meet red-hot demand could suffer a production hit.
Those fears may not materialize, at least not in the short term, in part because the industry has been hit by demand and repeated shocks during the pandemic (among them chip factory fires, freezes in Texas, droughts in Taiwan, other setbacks and disruptions to global supply chains) have realigned the way they operate. .
Amid the upheaval, companies have moved to shore up supply chains, in some cases adding alternative suppliers to gain choice. They stock up on neon gas and other vital chip-making materials and now typically have six-week to three-month stockpiles, said Mark Thirsk, managing partner of Massachusetts-based electronic materials consultant Linx Consulting Inc.
Infineon Technologies AG, a large German chipmaker that supplies the auto industry, said it did not expect an impact on production and said it had supply options. "Infineon has also increased inventories of potentially affected raw materials and noble gases," which include neon, a spokeswoman said.
The chip industry generally says it doesn't expect much pain. "If this could have happened 10 years ago, we would probably have suffered more than we do today," said Jimmy Goodrich, vice president of global policy at the Semiconductor Industry Association, a Washington, D.C.-based industry body.
For chip companies, Russia's annexation of Crimea (part of Ukraine) in 2014 provided an early experience in dealing with regional political uncertainty. Because the price of neon gas has risen, chipmakers are looking elsewhere for gas sources.
During the coronavirus pandemic, companies acted to shore up critical supplies amid global logistics disruptions. Then, in early February, when Russian President Vladimir Putin assembled troops on the Ukrainian border, the White House warned chipmakers that export controls and other actions would follow the invasion, according to two people familiar with the matter. A Biden administration builds on close ties with chip companies during the semiconductor supply crisis.
Shortly after the invasion, the United States imposed sanctions on Russia, restricting the sale of chips and other technology to Russian strategic industries. While the restrictions do not require chipmakers to halt all sales to Russia, many have already done so, including market leaders Intel Corp, Nvidia Corp and AMD. Analysts say Russia is not a major market for chipmakers.
While company officials say they are well-prepared, that's not to say an already stretched industry isn't without risk.
Mr Thirsk of Linx Consulting estimates that chipmakers have enough neon in their facilities and gas supply chains to sustain the industry for about six months. After that, analysts say, prices could soar, as they did when Russia annexed Crimea in 2014, taking the commodity on the spot market from 25 cents a litre to 5 a litre . Lower-margin consumers of natural gas -- such as lasers used in eye surgery -- could be frozen before potential shortages spill over to the more profitable semiconductor industry.
IPG Photonics Corp., a U.S.-based company that supplies optical components to industries including semiconductor manufacturing, said last week that U.S. sanctions would increase lead times and shipping costs for products involving its operations in Russia. , the company has about 2,000 employees in Russia.
Even with a 10-fold increase in prices, neon is a small part of the industry's cost structure, Bernstein analyst Stacy Rasgon said in a note. The semiconductor-grade neon gas industry is estimated to be worth about 100 million a year, while global chip revenue exceeds 500 billion.