Ukraine Invasion May Spark Another Microchip Shortage

Ukraine produces the most neon gas in the world, which is critical for the production of new vehicle chips.

byRob Stumpf|
Manufacturing photo

The auto industry has been struggling with a global microchip shortage for almost two years. This has caused widespread supply issues for new vehicles on dealer lots everywhere, and used car prices have been skyrocketing for months on end. But just when prices and availability look as if they're stabilizing, the industry may have yet another hurdle to overcome caused by the Russian invasion of Ukraine.

Ukraine is home to nearly 70 percent of the world's neon gas supply. While this might not immediately seem like a gigantic auto-industry item, this particular inert gas plays a crucial role in the manufacturing of nearly all semiconductors foundries around the world, according to research from TrendForce. And if the supply of neon gas is interrupted, the world may find itself reversing course back to sky-high prices and limited component availability.

via Getty Images

There's no shortage of neon in the air we breathe—in fact, the planet has more than 70 billion tons of this noble gas circulating in the atmosphere. However, extracting neon from the air is a complicated and expensive process called fractional distillation which requires the gas to be extracted from liquefied air. Suppliers in Ukraine extract, refine, and distribute the majority of this gas to the world each year.

Semiconductor foundries represent a large customer base for these suppliers. Neon is a crucial component used by the majority of foundries through a manufacturing process called lithography. This method uses lasers in the ultraviolet spectrum to transfer the circuitry design of a chip onto the physical wafer, and neon is the inert gas used to transport that radiation as it is being generated into a laser beam.

If the Ukrainian tap of neon gas is shut off, the world's largest supply is then shut off as well, resulting in increased demand from the remaining suppliers across the world. If the neon supply stockpiled by major companies begins to dry up in several months, this could result in either skyrocketing manufacturing prices or component shortages.

"Of course, people will look for alternative sources of neon as quickly as they can—but that's not something that can just be switched on," said Carla Bailo, CEO of the Center for Automotive Research, to Automotive News. "Eventually, if semiconductors don't come, we'll be right back to where we were last year."

On top of the chip shortage, Ukraine is also home to companies that produce small components for many global automakers. It also builds around seven percent of all wiring harnesses, which have already been a pain point for many European automakers. Audi, BMW, Porsche, and Volkswagen have all reduced production capacity due to difficulties in obtaining wiring harnesses from suppliers, according to Reuters.

Automakers have fought back against profit loss caused by the new vehicle shortage by focusing on selling profitable items like trucks and SUVs. However, with rising gas prices, consumers may be less likely to purchase these types of vehicles in the near term, meaning that automakers may need to find a new way to circumvent lost revenue.

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