When you can’t buy that Ford F-150 pickup or Sony PS5, blame the chip shortage. A worldwide problem triggered by the COVID-19 pandemic has metastasized into a years-long disruption of everything electronic. Problems with product supply are impacting the American holiday shopping season, which is the largest exercise of consumer power.
If you can’t buy your preferred game console or laptop, you’re not the only one who’s all riled up. This shortage is driving politicians and the tech industry to attempt to reverse America’s declining importance in the microprocessor market. The US government isn’t happy about how dependent the country’s economy and military is on Asian high-tech production. Chipmakers are taking advantage of government subsidies to fund research and build new factories and are investing like never before.
Overall, the chip shortage is shining a new spotlight on the state of US manufacturing and how much of it has moved out of the country. Intel, which slipped to third place behind Taiwan Semiconductor Manufacturing Co. (TSMC) and Samsung Foundry, hopes to take advantage of the tailwinds — rising demand and government funding — to reclaim its leadership position.
“We don’t want to create a situation where the United States, which created the semiconductor industry and Silicon Valley, would be completely dependent on other nations for that product,” said Al Thompson, who leads Intel’s US government relations.
The chip industry’s new course is part of what some call the decoupling, which at least to some degree is pulling the Chinese and US economies apart. Although no one would expect supply chains to be free of overseas links, the nationalist flavour to the chip shortage response is certain.
As Intel invests in capacity growth,
Asian producers aren’t sitting idle. In January, while reporting record revenue for the fourth quarter of 2021, TSMC said it will invest between $40 billion and $44 billion in new chipmaking plants and equipment in 2022 — an enormous amount.
“Foundry capacity will be precious for the foreseeable future as demand for semiconductors only grows,” said Creative Strategies analyst Ben Bajarin.
Here’s what’s going on and what’s at stake.
What started the chip shortage?
In short, the COVID-19 pandemic and a lot of shock waves that traversed the world’s economy. The demand for work-from home technology such as webcams, PCs, and tablets soared beyond what the semiconductor industry could supply. Not just the large CPU brains of a laptop, but also the multitude of supporting chips needed to make things like dishwashers and baby monitors. People were spending record amounts on home entertainment products, including tablets, games consoles, and graphics cards for gaming computers. This led to a chip shortage that reached beyond remote work and school supplies. Compounding the problem: a fire at Japanese chipmaker Renesas Electronics and crippling winter weather in Texas that knocked more than 70 power plants offline and cut juice to a Samsung chip plant.
COVID lockdowns led automakers to put chip orders on hold. These companies depend on less-expensive processors, which don’t require the most advanced chipmaking technology.
But that was not all. A glut of shipping and dearth of shipping containers has snarled delivery of not just finished goods but also their components and raw materials. Computers and cars require hundreds of electronic parts. However, if one component is missing, the product cannot be sold. There is likely to be only one company that makes advanced processors.
How long will the chip shortage last?
It probably won’t get any worse, but it’ll likely last for several more months. Although chipmakers have tried to squeeze as much capacity out of their “fabs”, it can take years to create new fabs or ramp up production.
Intel Chief Executive Pat Gelsinger told CNET that he thinks we’re almost through the worst of the chip shortage, which’ll last through the second half of 2021. He predicts it’ll gradually ease through 2022 and fade in 2023.
Mismatches between chip demand and supply have been a common occurrence for decades. But not like this. “We’ve always been through cycles. This time it’s different,” AMD CEO Lisa Su said in September at the Code conference. She, too, expects this chip shortage will ease in 2022. But IBM CEO Arvind Krishna thinks it’s more likely the chip shortage will last through 2023 and even 2024.
What’s being affected by the chip shortage?
It’s easier to say what isn’t being affected. Just about anything with a power cord these days uses chips, so the shortage has hit cameras, microwave ovens, TVs, pacemakers, washing machines and more.
Worst hit is the auto industry. The auto industry is the worst hit. Cars now have computer chips that control everything, from antilock brakes to infotainment systems. The situation has gutted their revenue by an estimated $210 billion in 2021, according to a study by AlixPartners, and auto manufacturing could suffer through 2023.
The shortage forced carmakers to halt production, including Ford Motor, General Motors, Toyota, Nissan, Subaru and Stellantis (formerly Fiat Chrysler). Some carmakers have shipped autos without accessories that need missing chips, leaving customers without touchscreens in their new cars. Tesla got credit for weathering the storm better than most, but it’s still suffering from chip constraints.
Gaming consoles also have been hit hard. The chip shortage meant fitful availability and poachers jacking up prices for the Sony PS5 and Microsoft Xbox Series X. The Nintendo Switch and Valve’s Steam Deck arrived late, too.
Even Apple suffered, despite being lead by supply chain guru Tim Cook having the power to place large orders years ahead of time. The iPhone 12 launch was weeks late, and chip shortages continued to hit Apple through 2021.
To cope with the problem, PC maker Framework has had to make “risk buys” by purchasing extra inventory of components well ahead of time, said CEO Nirav Patel, though it’s weathered the storm so far. He said, “It’s certainly a long-term and extended challenge for everybody.”
To secure capacity for future products, “fabless” chip designers like Nvidia, AMD and Qualcomm pay billions of dollars to chip manufacturers. Intel also expects prepayments through its new foundry business. Smartphone chip designer Qualcomm expects sufficient capacity midway through 2022 thanks to such capacity planning. “Our supply has increased significantly,” CEO Cristiano Amon told The Verge in a January interview. “The chip shortage is not over yet, but things are getting much better as we go to the first half of 2022. “
What are chipmakers doing to ramp up manufacturing?
Semiconductor manufacturers are working harder to squeeze every last wafer through their fabs. They can’t do much about the immediate shortage.
It takes years to build a fab. Intel just started building two new facilities, Fab 52 and 62 in Arizona, at a cost of $20 billion. But they won’t begin mass manufacturing until the second half of 2024, said Keyvan Esfarjani, leader of Intel’s manufacturing and supply chain.
But today’s shortage is accelerating tomorrow’s investment. As digital technology expands beyond smartphones and computers, chipmakers such as Samsung, GlobalFoundries and Intel see a surge in demand for semiconductors.
“We see the digitization of everything,” Gelsinger said.
Gelsinger has urged automakers to shift their processors to newer manufacturing technology that, thanks to miniaturization, can squeeze more chips out of a single 300mm-wide silicon wafer. It’s not an easy task, however, as many components in the auto industry have been validated and selected for years. It could help Intel’s effort to become a foundry that builds others’ chips, though, not just its own products.
OK, how expensive is this investment?
Hoo boy. The future capital investments of chipmakers are remarkable. Intel trumpeted $23.5 billion in spending this year in the US, followed by plans for two “megafabs” in coming years totaling $200 billion. “These are big sites — something like over 1,000 acres,” each with room to fit eight fabs, Esfarjani said.
TSMC’s investments include a new fab in Arizona and a new fab partnership in Japan with Sony. Samsung expects to spend $145 billion through 2030.
” Five years ago, people thought we were boring,” Su stated. This is an integral part of what people do. “
In November, Samsung announced that one of its investments is a $17 billion fab in Taylor, Texas.
The shortage also gave new power to lesser-known chipmakers still building chips with earlier-generation “legacy node” manufacturing technology. This includes ST Microelectronics and Onsemi as well as NXP Semiconductors, Infineon, NXP Semiconductors, Microchip and NXP Semiconductors. GlobalFoundries, the manufacturing division AMD spun off in 2018, held its initial public offering despite a lack of profitability and bowing out of the race to keep up with the three leading-edge chipmakers: Intel, Samsung and TSMC.
GlobalFoundries is investing $1 billion to increase its current fab capacity in New York and add another fab there. GlobalFoundries is also expanding its fab in Germany and building another in Singapore.
Companies that build semiconductor manufacturing tools are raking in the money. Globally, spending on chip equipment will rise 10% in 2022 to a record high of $98 billion, the third year of growth in a row, the trade group Semi said in January. The top spenders are South Korea, Taiwan, and China.
Of that, customers in Taiwan and China accounted for the most spending, at $7.7 billion each, followed by South Korea, at $5.6 billion, Semi said. The United States was in fourth place, with $2.3 billion, but its growth rate was fastest, at a 67% increase over the third quarter of 2020.
What are the political repercussions?
US politicians, attuned to economic ebbs and flows, don’t like it when consumers can’t consume. The Biden administration has been trying to respond federally to the supply chain problems. It encouraged companies to be more transparent with their supply and needs, called for Congress to establish the Critical Supply Chain Resilency Program and began working to increase US independence from foreign suppliers.
And there’s been more than a little freaking out that the US military is so reliant on overseas companies. As a 250-page White House report put it in June: “Semiconductors … are fundamental to the operation of virtually every military system, including communications and navigations systems and complex weapons systems such as those found in the F-35 Joint Strike Fighter. They are key to the ‘must-win’ technologies of the future, including artificial intelligence and 5G, which will be essential to achieving the goal of a ‘dynamic, inclusive and innovative national economy’ identified as a critical American advantage in the March 2021 Interim National Security Strategic Guidance. The development of advanced autonomous systems and cybersecurity as well as directed energy are all dependent upon semiconductor technology. “
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The push also dovetails with the Biden administration’s Made in America effort to increase government spending on US-made products and boost US manufacturing more broadly.
The term that encapsulates the desired outcome? Resilience in the supply chain. This means identifying problems earlier, making the government more responsive, and creating supply buffers of inventory to cushion supply chain shocks. This would decrease the severity and likelihood of supply chain surprises.
“The industry is begging for derisking,” said Capgemini analyst Darshan Naik.
What does that mean for chipmakers specifically?
In short, money. Congress authorized $52 billion in subsidies for chipmakers in the CHIPS for America Act, but Congress has yet to actually appropriate the funds. The Senate in June passed the United States Innovation and Competition Act, or USICA, to allocate funds, but it wasn’t until November that House Speaker Nancy Pelosi nudged the chip funding forward in the House of Representatives. On Nov. 29, US Commerce Secretary Gina Raimondo pushed for the funding, saying the US is “vulnerable” without more semiconductor manufacturing since “chips are the building blocks of our entire modern economy. “
If USICA passes, Intel can’t pocket the full $52 billion. But $10 billion of that is earmarked for fab projects, with a cap of $3 billion per project and Intel a likely beneficiary. That 30% discount is comparable to what chipmakers in South Korea and Taiwan get, Gelsinger said.
Some of the tech industry’s biggest names agree. In a Dec. 1 letter, the CEOs of Apple, Google parent Alphabet, Verizon, Dell, HP, Toyota America, Ford, GM, Stellantis and IBM joined chip leaders from Intel, AMD, TSMC, Samsung, GlobalFoundries and others to urge Congress to pass funding for the CHIPS Act.
“Semiconductors are essential to virtually all sectors of the economy — including aerospace, automobiles, communications, clean energy, information technology, and medical devices,” the execs said. The execs stated that the demand for these essential components has exceeded supply, causing a global shortage of chips and leading to lost growth and job losses. This shortage exposed weaknesses in the semiconductor supply chain, and highlights the need to increase domestic manufacturing capacity. “
Intel has said it hopes to announce the location of its new $100 billion US megafab later this year. The company is now more cautious about its plans, as USICA is still not law. Krystal Heaton, spokeswoman for the company, stated that the company plans to announce the US site once the funding for the CHIPS Act is approved.
Gelsinger has argued that only companies headquartered in the United States — which is to say Intel and not Samsung or TSMC — should benefit from US subsidies. “Foreign chipmakers vying for US subsidies will keep their valuable intellectual property on their own shores, ensuring that the most lucrative and cutting-edge manufacturing stays there,” Gelsinger said in a June op-ed.
But even fabs owned by overseas companies can help anchor electronics manufacturing in the US, develop trained workers, and generate economic activity and taxes. Kinam Kim, CEO of Samsung Electronics Device Solutions Division said that, “In addition to our Texas partners, we are grateful for the Biden Administration’s creation an environment that supports companies such as Samsung as we strive to expand leading-edge semiconductor production in the US.”
Intel’s plan is to boost the US share of chipmaking from 12% today to 30% in coming years and the European share from 9% to 20%.
Is this happening just in the US?
Nope. The European Union wants a larger share of the processor production pie.
“This is not just a matter of our competitiveness. This is also a matter of tech sovereignty,” said European Commission President Ursula von der Leyen, proposing a European Chips Act with its own subsidies.
Here, too, Intel is a fan. It plans to build another $100 billion megafab in Europe.
Can you really move the whole electronics industry to the US?
No way. It is much more than making chips. The electronics industry includes upstream supplies like wafers, manufacturing equipment, and downstream activities such as packaging, testing, and assembly. Most of this happens in Asia. Gelsinger stated that there are many other parts of the supply chain and that they need to be balanced.
Here’s where $52 billion starts looking like a small expenditure. The Boston Consulting Group expects it would take $900 billion to $1. 23 trillion in spending to create self-sufficient semiconductor supply chains worldwide. For just the US, it’s $350 billion to $420 billion. This cost is contrary to capitalistic incentives to reward suppliers who are least expensive.
“It’ll definitely create supply chain inefficiencies,” BCG analyst Matt Langione said. “Costs are going to rise. However, there should be greater redundancy within the system. “
Nearshoring, which would move manufacturing operations nearer to the US