Wednesday, February 17, 2021

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How a global chip shortage is disrupting multiple industries — and how to fix it

The pandemic has created a global semiconductor shortage that’s disrupted industries ranging from cars to consumer electronics. The easy fix, you’d think, is for manufacturers to build more processors. But the problem is more complex than pumping out more chips.

The unprecedented semiconductor shortage stems from three issues: a slowdown and then rapid recovery in automotive sales, a massive uptick in the demand for consumer electronics, and the long lead times in chip production. That’s led to industries around the world fighting for a limited supply of semiconductors. And auto makers have to fight even harder for chips than tech giants, which tend to be chipmakers' more valued customers.

“Right now [automakers] are competing in the supply base with phones, and notebook computers,” Willy Shih, professor of management practice in business administration at Harvard Business School, told Yahoo Finance. “Apple (AAPL) will sell more iPhones, in the first three months of this year than all the automakers combined will sell vehicles in the whole year. So then if you're a semiconductor maker who's the more important customer?”

A change to supply chain and U.S plants

The chip shortage highlights the single weakest link in the complex automotive global supply chain: it focuses more on getting the lowest price for goods rather than resilience and flexibility. But that’s going to have to change.

“Efficiencies always dominated,” Morris Cohen, Wharton Business School professor of manufacturing and logistics, said. “Now because of COVID, a lot of companies have said ‘You know, we put too much weight on that. You should put more weight on resilience and flexibility.’ And that will, of course, promote bringing manufacturing back [to the U.S.].”

So how does chip manufacturing get rebuilt in the U.S.? With subsidies.

While the U.S. was once the epicenter of chip production, other nations, using generous incentives, have lured chipmakers to their shores. The result: The U.S. produces about 12% of the global semiconductor output. That’s still good enough to make chips the country’s fifth largest export, according to the Semiconductor Industry Association (SIA). But that presence alone couldn’t stave off the current shortage.

“A lot of people...are pointing to these shortages of automotive chips as just harbingers that we don't have control of the supply chain,” Shih said.

It goes beyond the lack of available chip supply. Taiwan Semiconductor Manufacturing Company (TSM) and Samsung now produce some of the most advanced chips in the world, and while they have plants in the U.S., neither is an American firm. And while Intel (INTC) is still one of the premiere chipmakers in the world, it’s been losing ground for years.

To address the chip shortage, a bipartisan coalition of Congressional lawmakers want to pump billions of dollars into drawing chip manufacturing back to the U.S. They're also seeking to fund research and development of more advanced processors through the CHIPS for America Act.

“This legislation would help stimulate advanced semiconductor manufacturing capabilities domestically, secure the supply chain, and ensure [the] U.S. maintains our lead in [chip] design while creating jobs, lowering our reliance on other countries for advanced chip fabrication, and strengthening national security,” Republican Sen. John Cornyn of Texas said in a statement after the bill was introduced this summer.

Automotive and consumer brawling over chips

The chip shortage began at the start of the pandemic, when automakers around the world predicted sales would collapse as consumers locked down. In turn, manufacturers slowed purchases of components including chips.

But demand for autos began to recover far faster than anticipated. According to the SIA, while year-over-year automotive semiconductor sales fell off a cliff in March 2020 and April 2020 as the pandemic took off, they quickly recovered in Q3 and surpassed 2019 sales in Q4.

Automakers famously keep their supply chains lean by limiting the number of parts on hand. That means vehicle manufacturers had little chip inventory, and an immediate need to restock. But they quickly found themselves competing for resources with consumer tech companies, which were seeing a surge in demand of their own.

“As the auto and industrial markets began to rebound in the second half of the year, the available foundry capacity was largely sold out,” Kurt Sievers, CEO of chipmaker NXP, said during NXP’s Q4 earnings call. “As a result, we and others are experiencing significant increases in lead times, and in certain cases, increased cost from suppliers.”

What’s more, according to Morris Cohen, automakers each use customized chips for their vehicles. That means vehicle manufacturers can’t easily swap them, shrinking the available supply of chips.

Semiconductor production isn’t exactly fast, either. According to SIA, producing a processor can take three to four months depending on the chip, with more advanced semiconductors taking a whopping six months.

In other words, even as automakers begin to gain access to chip manufacturing capacity, they’ll still have to wait months for those processors to be built let alone put into a car or truck.

‘It’s going to take time’

For now, automakers will have to contend with idling factories, and leaving thousands without work, until they can access more chips. Moving forward, if they want to avoid a repeat of these shortages, they’ll need to rethink the current supply chain by building up stock of chips for their vehicles rather than running with such lean inventories.

It will take a lot longer for the U.S. to make any broader changes to its chip manufacturing capabilities. While legislators may support such a move, plants cost billions of dollars and take years to build. But as the massive shortages show, something eventually has got to give.

“I think it's just going to take time,” Cohen said. “I think we're gonna put more weight on having resilience, having national security, having the ability to make things closer to where they're demanded. But at the end of the day you have to trade that off against the efficiency of producing it wherever you can.”

By Daniel Howley, tech editor. Follow him at @DanielHowley