Truth be told, I’m surprised it’s taken this long for America (and even some foreign) manufacturers to have trouble with their chip supplies. I had taken note of America’s dependence on chips made in China and Taiwan before I started blogging, in the mid 2000s. Even though even back then, it was over half, the justification was that those were low-end, commodity chips. Not to worry.
Once in a great while, I would look for data on the percentage of chips used in the US and would come up with nothing more current than shortly after 2010. Now admittedly you have definitional issues: for manufacturers? Or for all uses, meaning OEM and consumer end products? Nevertheless, it was clear that even more chip manufacture was moving abroad and and the Chinese were producing more sophisticated chips.
If you’ve missed it, here’s a short recap of the chip mess. US automakers have had to cut production due to limited supplies. Maybe their project to shorten product lives and restrict consumer repair options by using lots of electronics is proving to have some downsides. Short chip supplies are also hurting some other consumer products companies. From CNBC:
Automakers across the globe are expected to lose billions of dollars in earnings this year due to a shortage of semiconductor chips, a situation that’s expected to worsen as companies battle for supplies of the critical parts.
Consulting firm AlixPartners expects the shortage will cut $60.6 billion in revenue from the global automotive industry this year. That conservative estimate includes the entire supply chain — from dealers and automakers to large tier-1 suppliers and their smaller counterparts, according to Dan Hearsch, a managing director in the New York-based firm’s automotive and industrial practice….
Automakers are scrambling to get supplies of the chips, which have extremely long lead times due to their complexity. The shortage is far down the supply chain, causing a ripple effect through the entire network….
Although major semiconductor suppliers such as Taiwan-based Taiwan Semiconductor Manufacturing and United Microelectronics have announced investment plans to increase production capacities, IHS says such plans will do little to nothing to relieve the short-term shortage.
“Because the cause of these constraints is the result of increasing demand from OEMs and limited supply of semiconductors, it will not be resolved until both forces are aligned,” said Phil Amsrud, IHS Markit’s senior principal analyst for advanced driver-assistance systems, semiconductors and components….
A 26-week lead time is needed to build the chips before they are installed in a vehicle, according to Hau Thai-Tang, Ford’s chief product platform and operations officer.
The origin of the shortage dates to early last year when Covid caused rolling shutdowns of vehicle assembly plants. As the facilities closed, the wafer and chip suppliers diverted the parts to other sectors such as consumer electronics, which weren’t expected to be as hurt by stay-at-home orders.
“Those chip manufacturers as well as wafer manufacturers started redeploying their capacity to like consumer electronics, which was growing because of people working from home and virtual working patterns,” Thai-Tang said during an investor conference last year. “Fast forward, if you add 26 weeks to when they made those decisions, the drop-off or the trough in the supply started to hit automotive the latter half of last year, going into Q1.”
Amusingly, Toyota has no chip problems. Per the Wall Street Journal:
A sharp rebound in car sales has paradoxically threatened the auto sector’s recovery as car makers contend with severe shortages of automotive chips. Except, apparently, for Japan’s automotive colossus: Toyota says it’s doing just fine…
The strong rebound in car sales has brought an unexpected problem, however, for most car makers: a severe chip shortage. A quick recovery after the sharp declines in auto sales early last year means chip makers are now unable to meet sudden new demand from car manufacturers. Adding to the problem, chip manufacturers are already running at capacity to produce components for other gadgets like personal computers and data centers, all of which got a boost from stay-at-home demand. The problem could last for months as it takes time for chip makers to ramp up capacity and readjust their product mix.
Mind you, there’s no way to add capacity remotely quickly enough to solve this problem unless there are mothballed fabs that can be brought on line quickly, and I haven’t seen this idea mentioned as an optioned. It takes two years to build a new fab and ramp up production.
But the Biden Administration has nevertheless decided that handwaving would be a useful contribution. From Bloomberg:
The Biden administration is working to address the global semiconductor shortage that has caused production halts in U.S. industries including autos, White House Press Secretary Jen Psaki said.
The administration is identifying choke points in supply chains and discussing an immediate path forward with businesses and trading partners, Psaki told reporters at the White House on Thursday. In the longer term, policy makers are looking for a comprehensive strategy to avoid bottlenecks and other issues the semiconductor industry has been facing for years…
The order will compel a 100-day review led by the National Economic Council and National Security Council focused on semiconductor manufacturing and advanced packaging, critical minerals, medical supplies and high-capacity batteries, such as those used in electric vehicles, two people familiar with the draft said.
Additional supply-chain assessments are expected within a year, focused on critical products — materials, technology and infrastructure — and other materials tied to defense, public health, telecommunications, energy and transportation…
On Thursday, chief executive officers of chip companies including Intel Corp., Qualcomm Inc. and Advanced Micro Devices Inc. wrote the president, urging him to support domestic production and stop the country from losing its edge in innovation…
U.S. companies mostly outsource production to Taiwan Semiconductor Manufacturing Co. and South Korea’s Samsung Electronics Co. That’s becoming a national security issue as tensions rise between the U.S. and China, which is investing heavily to expand its own chip industry.
In case you don’t recognize the playbook, the Biden Administration is launching a bunch of studies. Studies are the way to pretend you are taking a problem seriously but don’t intend to do much. Because for the US to takes these supply vulnerabilities seriously, it would have to do engage in industrial policy, the formal type, as opposed to our current versions, which is by default, determined by the effectiveness of duels among lobbyists. So our favored sectors – real estate, health care, higher education, finance, oil & gas – are big on extracting rents yet do little to advance being able to defend ourselves in a pinch. And that is not so much about the military as to having access to key supplies as well as adequate domestic manufacturing capability.
Will the Biden assessments show how little in the way of the chips we use are made here? How about our drugs? From a 2018 post:
A recent book, China RX: Exposing the Risks of America’s Dependence on China for Medicine by Rosemary Gibson and Janardan Prasad Singh, appears not to have gotten the attention it warrants. I learned about it thanks to reader Patrick F, who recommended a C-SPAN panel on the book with author Gibson plus other experts, such as former Clinton Administration official Patrick Malloy. If you go to C-SPAN, you can read a transcript auto-generated from the closed captioning. You can also listen Gibson describe some of the key points from her book in the interview below.
The big message of Gibon’s and Singh’s book is that the US relies on China for the production of active ingredients in drugs and in many cases, of the medications themselves, to the degree that we would have a public health crisis if supplies were interrupted. As Gibson said on C-SPAN:
Many people that we spoke to, both former government officials and some in industry said that if China shut the door on exports, within months, pharmacy shelves in the United States to be empty, and hospitals would cease to function.
And don’t assume generics king India would step into the breach. India gets many of the active ingredients for its pharmaceuticals from China. Gibson forecasts that China will overtake India in generics manufacture within a decade.
As Gibson explains, the US no longer makes its own penicillin, in part because China dumped penicillin in 2004, driving the last US plant out of business.
The medications where the US relies on China include heparin, a blood thinner that among other things is used for IV drips. No heparin, no IV treatments. Due to the difficulty in tracing the source of drug company ingredients, the authors could make only case by case investigations, but they China production to be critical for treatments for Alzheimer’s HIV, depression, schizophrenia, cancer, epilepsy, and high blood pressure.
Dependency is not the only risk. US drug companies shifted production to China not just to save cost but to escape regulation. The FDA has only limited access to Chinese factories, with the Chinese having well over 700, yet the FDA able to inspect only 15 a year on average. As Gibson said on C-SPAN:
The FDA is trying to get inspection on site in China. The Chinese have severely restricted the number of inspections that they will allow and the whole program has become completely ineffective.
And the Chinese are often less than cooperative. Gibson describes even then how the agency has been directed to a Potemkin facility, as in the goods were made somewhere else…and the FDA was not able to figure out where. Similarly, reports presented by the health authorities to the FDA is understood to be as reliable as Chinese economic data.
Back to the current post. America buys its military uniforms and boots from China. How smart is that?
And when the US has tried to provide incentives for manufacturing for new high tech industries to stay in the US, our brilliant business elite has turned up its nose. Mariana Mazzucato, in her classic The Entrepreneurial State, describes how the US funded the development of LCD panels and every much wanted to have them manufactured here. Silicon Valley had no interest.
That’s not saying it’s would be impossible to pursue industrial policy in the US, but the odds are vanishingly small. You’d need a President with solid Congressional support to pass legislation that gave our national champions tax breaks and subsidies, just like Big Finance and the medical-industrial complex get now. And it would also need to be explicit that all those government gimmies imposed obligations, like curbs on executive pay, stock buybacks, and offshoring. But implementing a program like that takes a decade-plus time, while our governments can barely hold the course through an election cycle.