Semiconductors Drive the Digital Economy: How Will Tariffs Affect the Ride for Chip Makers and Suppliers?
After the tariffs were officially imposed in early April, much of the focus was on the impact the higher prices would have on industries with extensive global production networks and supply chains, such as the automotive, pharmaceutical, and semiconductor industries. While each industry faces its own unique challenges navigating the tariffs, the degree of difficulty may be higher for semiconductor businesses due to the vast amount of componentry that goes into a final chip, and the extensive global sourcing required to get those important pieces.
In this post, we’ll focus on the specific challenges chip makers and suppliers face going forward as they manage through the uncertainty – and also offer some solutions for how they not only can mitigate the effects of the tariffs but come out even stronger as a business over the long term.
The Chips Are on the Table
Automobiles and pharmaceuticals have long been essential, and as we continue to travel through the digital technology revolution, semiconductors have joined this esteemed group. Powerful chips drive the global digital economy, which is on track to reach more than $16 trillion and account for nearly one-fifth (17%) of global GDP by 2028. This growth is rooted in the expansion of e-commerce, increased technology spending generally, and information and communication technology (ICT) exports. The U.S. leads the world in technology spending, while China dominates the e-commerce space.
Production Costs on the Rise
The U.S. has imposed tariffs ranging from 25% to over 100% on semiconductor components, raw materials, and manufacturing equipment – particularly emanating from China, Taiwan, South Korea, and Japan. This will drive up the costs of importing essential inputs such as silicon wafers, photolithography machines, and rare earth materials. For example, a 25% tariff on Taiwanese chips could raise logic chip prices by up to 59%, directly affecting companies’ profit margins and pricing strategies.
While the impact will be unique to every business, industry estimates suggest that big players such as Applied Materials, Lam Research, and KLA may each incur losses of approximately $350 million annually due the price hikes. Smaller firms, too, will pay the price as the tariffs drive up costs for essential chip-making equipment and hinder many from initiating domestic manufacturing efforts.
Tending to Supply Chains
Advanced chip production truly takes a global village. From the raw wafer phase to packaged chips, the process itself often touches five or more countries around the world, and the U.S. is highly dependent on imports and overseas expertise. Along with cutting-edge fabrication facilities, chip production leans on a sophisticated ecosystem of chemical suppliers, specialty materials, photolithography systems, and precision tools. The concern is that the deep interconnectedness within the chip industry – the design, fabrication, assembly, and testing often takes place in different locales – makes the industry more vulnerable to costly bottlenecks and delays.
In this sense, the new tariffs are serving as a catalyst for chip companies around the world to be more proactive in restructuring their global supply chains, and they are taking the initiative to find more local sourcing and new suppliers. More and more companies (61%) report moving away from their usual wait-and-see approaches and taking the bull by the horns to seek out new materials and supplier relationships.
Building Up Domestic Manufacturing
The tariffs aim to encourage reshoring to build up domestic production and decrease dependence. But they also neutralize the benefits of doing so by driving up the cost of building domestic fabs, which are rising by 20%-32% due to higher prices on imported materials and equipment. In fact, these higher costs are already undermining progress and ongoing efforts being made through the CHIPs and Science Act. Several of the largest chip companies in the world – including Taiwan Semiconductor (TSMC) and Samsung – are building fabs in the southwest U.S. and have put plans on hold due to the ongoing tariff and policy uncertainty. (see accompanying callout on TSMC)
Moreover, while some semiconductors are exempt from tariffs, many related products, including GPUs and servers, are not. This selective exemption threatens to impede the U.S.’s goals of revitalizing domestic semiconductor manufacturing and advancing AI infrastructure.
Tackling the Challenges, Creating Opportunities
So how can chip makers and suppliers not only navigate these tricky waters, but potentially mitigate the effects in ways that can ultimately make them stronger when the storm passes? Let us count the ways.
Challenge Begets Opportunity
As global tariffs reshape the semiconductor landscape, chip makers and suppliers face a complex web of challenges—from soaring input costs and fragmented supply chains to reshoring dilemmas and market volatility. Yet within this disruption lies an opportunity. By embracing strategies like total cost of ownership analysis, lean operations, proactive supplier management, and smart technologies, companies can not only weather the storm but strengthen their position for the long term. Those that act decisively—restructuring supply chains, enhancing planning, and investing wisely in domestic capabilities—will be better equipped to lead in a digital economy increasingly dependent on advanced semiconductors.
