America, and the world, are confronting a microchip shortage that’s retarding the ability of economies to come back from the COVID-19 virus, and affecting every economic sector from automobiles and smart phones to TV’s and game consoles. It began last year – Apple, the world’s biggest buyer of semiconductors to the tune of $58 billion annually, had to delay the launch of iPhone 12 by two months due to the shortage—and it shows no sign of abating anytime soon.
But the key lesson to be learned from this goes beyond microchips, however indispensable they are to high-tech economies and lifestyles. It’s also about what happens when America stops making things, and comes to rely on others for manufacturing supply chains that can be unreliable and vulnerable, with potentially catastrophic consequences.
It’s not surprising the lesson begins here in the microchip business. Chips are the oxygen of our digitally-driven world, yet many of the top semiconductor companies are now “fabless,” which means that they only design the chips and the technology in them. Other companies, known as foundries, are contracted to make the chips. Two of the largest, TSMC in Taiwan and Samsung in South Korea, are making chips as fast as they can but they have been overwhelmed by the sudden soaring of demand. For example, Samsung is the world’s second-biggest chip manufacturer as well as the second-largest buyer of chips. Yet the company can’t find enough chips for its new high-end smart phone, and may have postpone its much-anticipated launch.
How big is the demand surge of this $433 billion industry? According to the Semiconductor Industry Association, global semiconductor industry sales for January 2021 rose 13.2% over the January 2020 total. The mismatch between supply and demand has many causes. Some of it has been the COVID-19 pandemic adversely affecting production of all goods, while a major fire in March shut down production at one of Japan’s leading fabs. At the same time, demand jumped during COVID as people turned to electronic devices to mitigate their isolation. Now, as the pandemic abates, we’re seeing pent-up consumer demand for cars and other durable goods putting a similar strain on existing supply. Some also blame the Trump administration’s restrictions on chip sales to Chinese companies like Huawei, which began stockpiling supplies to beat the sanctions.
But these all miss the main point. America simply doesn’t produce enough of the microchips it needs, and will need in the future. U.S. semiconductor companies account for 47% of global chip sales, but only 12% of global manufacturing is actually done in the United States. That means 88% of the semiconductor chips used by U.S. industries, including the automotive and defense industries, are fabricated outside the U.S.
The Biden administration is realizing this is a national security, as well as economic security issue, and scrambling to make up the difference. It held a summit at the White House last month, with CEOs from Google, Intel, HP, Dell, Ford and General Motors all invited to ponder the problem. President Biden wants $37 billion in funding to gear up domestic chip manufacturing. Intel’s CEO Pat Gelsinger says he hopes the U.S. could increase its semiconductor production to one-third of all chips sold in the U.S. Incidentally, that’s still below where we were in 1990, when the U.S. made 37% of the world’s chips.
Currently, four new factories are slated to be built in the country, two by Intel Corp and one by TSMC in Arizona, and another by Samsung in Texas. But as we’ve pointed out in previous columns, building fabs is an expensive (up to $20 billion per fab) and long-term (up to five years) process. It’s going to require political will and innovative planning, in addition to monetary investment, to turn America’s situation around.
But this issue isn’t just limited to semiconductors. We saw it hit home with pharmaceuticals and PPE’s in the wake of COVID; we’re seeing it with solar panels. We face a similar dilemmas when it comes to batteries for electric vehicles, which will be increasingly indispensable for keeping America mobile and our Defense Department equipped with the latest weapons systems.
In all three cases, the supply chain has a bad habit of winding up in China. For example, China has direct or indirect control of 70 percent of the world’s lithium supply, 61 percent of the cathodes and 83 percent of the anodes used in batteries.
Meanwhile, the U.S. has only one commercial lithium-mining operation in the entire fifty states.
Batteries are becoming as important a strategic asset as microchips. Watch this space for updates on both, and recommendations on how we can bring our manufacturing and innovation skills back where they belong, here in the U.S.A.
Read in Forbes