In 2014, political unrest in Eastern Ukraine went hot and a brief shooting war erupted that interrupted operations in the massive, Soviet era steel complexes that are famous in the region. A knock-on effect was the interruption in supply of neon, an industrial gas produced as a by-product of the liquid air distillation used to make the oxygen needed in steelmaking.

Semiconductor industry analysts noted that the majority of the world’s supply of this gas, critical to the lasers used for chip-making photolithography, came from this volatile region. Today, three months into what may become a long war over Eastern Ukraine, and the shortages now hobble a semiconductor industry desperately needed by industries recovering from COVID-19.

Why didn’t anyone heed the 2014 warning? Jim Anderton has a theory.

With the Covid 19 pandemic and war in Ukraine induced supply chain breakdowns, very few people were surprised that computer chips are now in short supply.

For the automotive industry, the main explanation is that Covid 19 changed consumer preferences, and semiconductor manufacturers switched lines from automotive integrated circuits to those suited to smart phones and tablets.

But very few, myself included, imagined that a global chip industry might be humbled by a shortage of neon. Neon? It turns out that in the argon krypton lasers that are essential for the 14 nm chip architecture that's commonly used today, neon, 95% of the gas mixture inside the laser, doesn't do the lasing, but is still essential for the process.

It was described to me years ago by a professor this way: imagine line dancing at Gilley's, which dates me a little, and imagine three people on the dance floor, wide apart. No dance. Then imagine 300 people on the dance floor, jammed together. Still no dance. Space the people apart correctly, and the line dance works. The neon does roughly the same function, keeping the lasing gas atoms just far enough apart to resonate between the mirrors in the tube. Now that's a gross oversimplification, but you get the point. No neon, no laser. Other inert gases might work, but the systems are built around neon.

So how does industry make neon? It's made by extraction from the air, which isn't easy because there's damn little of it in the atmosphere, about 18 ppm by volume. Industrial processes make it by refrigeration of air until it becomes a liquid, then distillation of the liquid to boil off the individual fractions, a little like gasoline refining from crude oil. The process is expensive, too expensive for use solely to get neon, but the steel industry uses this process to make massive quantities of oxygen gas, which is readily available from air. Trace gasses like neon, xenon and others boil off separately and are set aside for other industrial uses.

But steelmaking is geographically scattered, with steel mills operating individually and producing relatively little of these scarce trace gases. To scale the process economically, you would need to concentrate a large number of steel plants in a small area to create a large air distillation feed system. And the Soviet Union, always champions of megaprojects, obliged by building massive, concentrated steel complexes in eastern Ukraine.

So all the ingredients of the crisis were in place. But the odd thing to me is, in 2014 and 2015, there was a brief conflict in eastern Ukraine, and semiconductor industry analyst at that time warned of the consequences of a serious supply interruption of neon. In the intervening eight years, it looks like no one did anything to diversify the neon supply chain, preferring to let one region of Ukraine supply half to three quarters of this critical process gas for the global chip industry.

And it was also widely known that ramping up alternate supply couldn't happen at the flick of a switch. Large-scale distillation of liquid air to separate neon isn't like changing the air filter in your furnace, it requires major capital investment and time. The Chinese are scrambling to ensure that their domestic industry has enough, and of course neon prices are through the roof. The people that make the lasers are looking for ways to reduce the amount of neon gas used in the systems, and it does wear out, and a major ship producer, TSMC, has started a recycling program.

And new, very dense integrated circuits like the new 7 nm and upcoming 2 nm ICs, use a tin plasma process that may eliminate the need for neon altogether. But this is a stupid situation. A mission-critical process gas used by an essential global industry whose primary supply has been known to be in a conflict zone for almost a decade, and no one did anything to diversify the supply. It's not as if modern, global manufacturers don't use very sophisticated hedging strategies to protect themselves against supply interruptions.

I once visited an outstanding operation run by Jabil in the Bay Area, and they had a supply chain team that worked in something that looked like NASA's Mission Control, factoring every risk imaginable, including weather.

But neon is the perfect storm: too expensive to produce to justify large-scale standalone production facilities as a backup to cheap Ukrainian gas, but an absolute showstopper if chipmakers can't get enough. This is a systemic manufacturing breakdown, and it's mirrored by the chipmakers’ customers as well. Automakers, dependent on a handful of global integrated circuit manufacturers, can’t build enough cars to meet demand. And they were well aware of the consequences of excessive reliance on a fragile supply chain with few vendors.

This is short-term, quarter by quarter management and no one knows how many industrial inputs are like neon, essential, and controlled by a small and volatile vendor pool. De-risking these unknown but critical supply chains is essential, and by risk I don't mean insurance coverage, but a real effort to diversify global supplies of critical inputs. Whether it's a Tier 1 supplier jointly owned by the OEMs, or centralized OEM agreement to purchase supply from alternate sources regardless of price to promote a broader supplier base, if something isn't done, we can expect routine supply disruptions of components critical to a consumer economy.

And that's a major factor in the runaway inflation the world is experiencing right now. The world is not a safe place for manufacturing. When a once-in-a-lifetime flood washes away your house, that doesn't mean that the next one won't happen for hundred years. It might happen next year. So the smart homeowner builds higher. High-tech manufacturers ought to think that way too.

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Neon Supply is in Crisis. We Were Warned.