Chip Choke: microchip supply chains, Groq and “technological sovereignty”

As international circumstances make at-home semiconductor and chip development all the more important, “technological sovereignty” is going to become more than a buzzword

“Chip choke.” It sounds like a fast-food safety hazard, but it’s actually one of several words and phrases chosen by the Financial Times to capture the zeitgeist of 2022. The phrase refers to the USA’s attempts to outmanoeuvre China on the increasingly important geopolitical issue of microchip production (for those interested, some other entrants to the list were “Trussonomics”, “polycrisis” and “quiet quitting”), and if current trends are anything to go by, it’s one that will be used with increasing frequency in the coming few years. There are several reasons why, and as an investor in cutting-edge chip manufacturer Groq, NJF Capital decided to take a look at why.

Since 2021, unpredictable global events have led global policymakers to focus on “technological sovereignty” – the idea that states shouldn’t be too reliant on others for their tech or the materials used to make it. It’s not dissimilar to the theory of food security, which emphasises being able to feed a population with food produced within its own borders (the UK, for example, produces about half of the food it consumes, and imports the rest).

The first of these unpredictable events was Covid-19, which saw global supply chains break down with worrying ease. If you rely too heavily on overseas factories to produce your chips, the logic goes, you’re vulnerable to those factories shutting down at extremely short notice – particularly if the country that produces them has a very strict national zero-Covid policy. Apple is one consumer electronics business that was burned by this – the vast majority of iPhones are assembled at the massive Foxconn plant in Zhengzhou in China, where production was hit by Covid-19 lockdowns and subsequent protests against them. The company has since indicated that it will look at moving some production to India or Vietnam.

Likewise, Sony has struggled to meet demand for the PS5 since its global release in November 2020. The games console’s rollout was hit by both supply chain issues caused by Covid and a reported 13 per cent increase in demand for home PCs – which use the same chips – over 2020 as people began to work from home. Then, droughts in Taiwan led to shortages in production of the ultra-pure water needed to wash the silicone wafers that make up chips. PS5 supply has only recently begun to normalise.

And on the subject of Taiwan, the second contributor to the trend towards technological sovereignty has been less accidental and more a consequence of realpolitik. Russia’s invasion of Ukraine, while having a bigger direct impact on global grain supply chains, quicky had American hawks in Congress looking at Taiwan. Long considered a potential invasion target for the People’s Republic of China as a non-communist success, the Republic of China in Taiwan is also responsible for the production of around 60 per cent of the world’s semiconductors (which are used to make chips). Coupled with South Korea, another regional country at risk of conflict – in this case with the North – and some 80 per cent of the world’s supply of chips comes from places the West has reason to feel slightly nervous about.

The American diplomatic response to Russia’s invasion was quick: the then-Speaker of the House of Representatives Nancy Pelosi visited Taiwan in August 2022, and there has been a subsequent ramping-up of both the effort to “decouple” American and Chinese supply chains and rhetoric over what would happen if China were to take military action on the island. But, ultimately, security can’t truly be assured until chips are produced on ground that is not physically threatened by invasion.

So how exactly are countries planning to achieve technological sovereignty? The USA, the EU, China, India and Japan have promised to invest a collective $190bn between them in subsidies for their respective industries over the next decade. China already produces a lot of its own chips domestically (about six per cent), but in America, the Taiwanese chip-making behemoth TSMC has opened a plant in Arizona that will spearhead an eventual investment of $40 billion, including a planned second plant. For American companies like Groq, who produce beautifully simple chips optimised for future tech like AI and machine learning (they are produced in America, incidentally), it’s a great time for investment to flood into the market, be it in production, like that of TSMC, or through venture funding.

At a macroeconomic level, the grand trend of technological sovereignty is an interesting rebuttal to the globalising trends of the 1990s, when developed countries overwhelmingly rushed to outsource their industrial production, including of high-end goods. Back then, it was widely believed that “the End of History” would mean the triumph of liberal democracy and the erosion of borders, and that free trade would lift the world out of poverty and propel us all into the future. To an extent, it has done – but there’s still something to be said for making things at home.