Global Chip Shortage
Initially centered around the auto industry, a global chip shortage has since been wreaking havoc on the production of a variety of products from washing machines to gaming consoles.
Chips, or integrated circuits, are made up of a set of electronic circuits attached to a semiconductor small enough to be held on the tip of a finger. Despite being such a miniscule device, chips are integral to the function of a vast number of electronics, making their shortage a noticeable issue for the industry.
This shortage was exacerbated when the Covid-19 pandemic incited a surge in consumer spending on personal computers and other electronics as much of the population found themselves working or attending school from their homes. Additionally, the pandemic forced many chip factories to shut down, temporarily halting production at a time when it needed to be ramped up. Despite its undeniable effect on the shortage, the pandemic merely expedited the depletion of the chip supply but was not solely responsible for causing it.
Over time, the structure of the semiconductor manufacturing industry has become divided into companies that design the chips and foundries that manufacture them. In September of 2020, the United States Department of Commerce placed restrictions on China’s largest foundry, Semiconductor Manufacturing International (SMIC), requiring American technology companies to obtain a license before purchasing their products. In December, the United States Department of Defense declared that SMIC was a company “owned or controlled” by the People’s Liberation Army and prohibited any American investments in the company. These restrictions made chips even less accessible and forced American companies to buy from competing foundries such as another China company – TSMC in Taiwan.
According to a report by Bain & Co., TSMC (the Taiwan Semiconductor Manufacturing Company) makes 80% of the microcontrollers used in cars. These chips are responsible for many basic functions of the car, with one car potentially using up to as many as 50 chips. If the car is missing just one semiconductor, the entire car is not yet viable for sale. As TSMC resumed manufacturing following its mandated shutdown during the pandemic, its factories were faced with a backlog of orders and many reconfigured their manufacturing processes to prioritize making chips for personal electronics over making those for cars. In January, TSMC acknowledged the issue stating that “While our capacity is fully utilized with demand from every sector, TSMC is reallocating our wafer capacity to support the worldwide automotive industry.”
Despite this promising statement, TSMC and other foundries are still struggling to meet demand. In fact, due to the prevalence of chips in consumer goods even before the pandemic, foundries had been manufacturing chips at high rates and still barely making enough to satisfy the market. Therefore even as the pandemic is no longer directly affecting chip production, products containing chips are in high demand and short supply leaving consumers waiting longer and paying more for their electronics.
A recent CNN business article cited Goldman Sachs analysts’ concerns that “Even though demand for consumer electronics and cars tends to be quite price sensitive and is likely to moderate with even modest price increases, we estimate reduced supply could boost prices by 1-3% in affected categories”. This price increase could even lead to a temporary increase in inflation later in the year.
Despite the chip shortage complicating and limiting production, big tech companies have still seen substantial profit increases. Earlier in April, Samsung Electronics Co. projected a 44% rise in operating profit even though severe weather in Texas ceased its U.S. chip production for multiple weeks. As Seoul-based analyst with Nomura Securities, CW Chung explains; “People can’t travel, so they’re spending money on durable goods, smartphones, TVs, home appliances.” Partially due to this spending, earlier articles projected the chip shortage lasting into the next couple of years but as the shortage has drawn attention to the many industries that rely on chips for production, the government has been working to resolve the issue and support the U.S. economy.
Domestic efforts to resolve this chip shortage are being bolstered by President Biden’s infrastructure proposal released in March that includes channeling $50 billion into the American semiconductor industry. The money will go towards chip production, research, design, and creation of a National Semiconductor Technology Center. The $2 trillion infrastructure plan supporting a variety of industries will be paid for by raising taxes on companies’ foreign earnings and increasing the corporate tax rate from 21% to 28%.
Support for this plan has been fairly bipartisan as concerns arise that China is channeling money into their own chip production, threatening the U.S. lead in advanced chip technology. Currently both countries each claim a 12% share of the global chip market. But, the United States has seen their share of the global semiconductor market drop from nearly 40% in 1990.
However, some people believe that spending $50 billion on the semiconductor industry is unnecessary or that it should be funded by private enterprises as opposed to taxpayers. Despite these reservations, Biden’s plan is set to strengthen the semiconductor industry, increasing rates of production and bringing the chip shortage to an end earlier than projected.
Global Chip Shortage Written by Alexandra Donovan
Edited by Jimei Shen, Jay Devon, Ramsay Bader & Calvin Ma