- The Washington Times - Monday, December 20, 2021

Thousands of new cars are piling up at manufacturers’ lots, the price of electric toothbrushes has surged, coffee machines have disappeared from store shelves, and Apple has drastically cut its iPhone production.

The global computer chip shortage is showing no signs of abating heading into 2022, and the Biden administration’s proposed solution remains years away.

President Biden and his Cabinet have urged Congress to pass legislation that would invest $52 billion to increase U.S. semiconductor chip production.

Supply interruptions have depleted consumer product inventory, and officials say domestic chip production is critical.

The bill, known as the CHIPS for America Act, passed the Senate in July with bipartisan support but stalled in the House.

At a speech last month in Detroit, Commerce Secretary Gina Raimondo implored Congress to pass the bill so the U.S. can “immediately” begin ramping up chip production.

Even if Congress does act urgently, the legislation is no quick fix, analysts say. By the time U.S. semiconductor chip manufacturing can get up to speed, the crisis will have long passed.

“The chip shortage is going to get resolved in the second half of 2022. It takes three years for a new chip [factory] to come to production,” said Gaurav Gupta, vice president of semiconductors and electronics for Gartner, a technology research and consulting company.

Even if the U.S. increases production significantly, he said, it can’t completely remove itself from the global supply chain. The testing and packaging are completed in Southeast Asia, where costs are much lower. 

It costs 30% more to make a chip in the U.S. than in Asia, according to a 2020 report by the Semiconductor Industry Association. That could add $10 billion to $40 billion to production expenses.

“You’ll still send the chips back to Southeast Asia unless you are bringing the complete ecosystem here, and you won’t because it’s impractical to do that,” Mr. Gupta said.

It is not clear whether the federal dollars allocated under the CHIPS Act would be enough to support domestic production. The U.S. share of the global semiconductor manufacturing market dropped from 37% in 1990 to 12% in 2020, according to the industry association. Europe’s share dropped from 44% to 9% in the same time frame. Asia now holds 75% of the world’s semiconductor manufacturing capacity.

“There’s no special sauce down there except money,” said Paul Gratz, who teaches computer engineering at Texas A&M University.

In China, where it costs nearly 50% less to produce a semiconductor than it does in the U.S., the government is spending $150 billion to increase chip production. That is nearly triple the investment under the CHIPS Act.

Some fear the U.S. bid to increase domestic manufacturing will lead to a glut of chips in the market, resulting in falling prices and negative or zero revenue growth.

The revenue of the top 10 semiconductor firms, including Intel and Samsung, declined by 12% in 2019 because of oversupply, according to Gartner’s research.

The potential for overcapacity is on the horizon as automobile and smartphone makers slash inventory because of sluggish sales.

“You have to solve this problem in a systematic manner,” Mr. Gupta said. “You don’t have to go with political sentiment.”

U.S.-based Intel Corp. announced Thursday that it will spend $7.1 billion to build a massive packaging and testing facility in Malaysia, bucking the administration’s call for more domestic manufacturing.

The $7.1 billion is part of Intel’s overall $30 billion investment in Malaysia, which will include a sprawling complex to build chips for cars, computers and other industries.

Mr. Gratz said the U.S. needs to stop relying on Asian countries for semiconductor chips.

South Korea and Taiwan are the world’s two chipmaking powerhouses, combining for roughly 43% of the global market, according to the Semiconductor Industry Association. Both nations, however, are under global threats that could lead to instability. South Korea has repeated conflict with North Korea, and fears of a full Chinese invasion of Taiwan persist.

“In the long term, [the CHIPS Act] is probably beneficial for us because two countries that have the lion’s shares of the market are Taiwan and South Korea,” Mr. Gratz said. “By investing domestically, it is going to give us more of a cushion if there is a geopolitical shake-up.”

Instead of ramping up domestic production, Mr. Gratz said, companies should invest in technologies to use alternate chips.

That strategy would pay off for the auto industry, which has been devastated by the chip shortage.

Automaker Tesla has survived by developing its own semiconductors and changing its software to use fewer chips.

The chip shortage is expected to cost the global automotive industry $210 billion in revenue this year, but Tesla has shown a string of profitable quarters and a growing business.

“What Tesla did was very impressive,” Mr. Gratz said. “They were very flexible with respect to retooling and spent a lot more on software so they can use different processors into their cars.”

Tesla’s technology investment enabled it to increase production while other automakers slowed or shut down production because of the chip shortage.

Toyota cut production targets in the U.S. and overseas by 15% last month. Ford announced this summer that it has 70,000 partially built cars awaiting semiconductor chips. Ford did not respond to repeated requests for comment about the number of vehicles that have been completed.

Other manufacturers are looking into technological investments. General Motors said it will work with chip manufacturers to develop devices that combine several functions previously controlled by chips.

Ford and other automakers are seeking partnerships with semiconductor companies to give them more control over the supply and design of chips.

• Jeff Mordock can be reached at jmordock@washingtontimes.com.

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