What we’re seeing with the chip shortage now is that companies in need of semiconductors – particularly car companies – still have drastically fewer chips than they need for the production they had planned.
How did the chip shortage start in the first place?
- Like most shortages, it was a perfect storm of factors. But first, keep in mind that semiconductors are used in pretty much everything.
- They’re in those little musical birthday cards you can get at the dollar store, as well as the most sophisticated computers out there; they’re in your fridge and they’re in your phone.
- During the pandemic, certain industries, like webcam manufacturers because of the increase in online work, saw lots of growth in demand, while other industries, like car companies because daily commute was less important, saw major decline.
- What this meant was that, on the waiting list for semiconductors, the industries that needed them the most got put to the front, while the ones who didn’t need chips as much voluntarily went to the back of the line.
- But what ended up happening was that the companies that were at the front of the line to get semiconductors have also been hoarding them as best as they can, with the ones at the back of the line being very protective of any chips they can get their hands on.
- The end result is that even the biggest companies out there – think Ford, Samsung and Apple – are having a hard time getting their hands on enough semiconductors to make the products they need to make. That means the prices of products go up, but it also means that, if the shortage goes on for long enough, people get laid off.
How do the US-China tensions contribute to the shortage?
- A big chunk of semiconductors come from a company called Semiconductor Manufacturing International Corp (SMIC), which is based in China. But, SMIC relies on raw materials that are produced largely in the United States and Europe.
- To put pressure on China, the US has made it so that American companies need to go through some extra hoops to provide these raw materials to SMIC.
- The goal here from the US is twofold; first, the new rules businesses have to follow to export materials to SMIC (such as needing to obtain a license from the government) was part of the Trump administration’s strategy of taxing imports from and exports to China. Second, and more importantly, the rules came about because of a need for the US to rely less on China for things like semiconductors in the first place.
- Semiconductors aren’t only found in microwaves and cellphones, but they’re also heavily used in equipment used by the military. A reliance on China for these semiconductors meant that the US military was subject to shaky supply chains, or worse, a country that could potentially halt supply altogether, given the right circumstances.
- All of this means that within the US, the question of becoming more self-reliant as it pertains to semiconductors isn’t just a question of supply chains, but it’s a question of national security, as well as a chance to show strength against China.
So, what’s new with the chip shortage?
- What we’re seeing with the chip shortage now is that companies in need of semiconductors – particularly car companies – still have drastically fewer chips than they need for the production they had planned.
- BMW, for example, said that it’s stopped production at several of its sites, which has so far resulted in 30,000 “units” worth of lost output. “Semiconductor supply is really critical,” said Milan Nedeljkovic, the BMW board member in charge of production.
- Globally, car companies are expecting to produce 3.9 million less cars this year, all due to the semiconductor shortage.
- Ford Motor Company alone is expecting to produce 1.1 million less cars, a US$2.5 billion earnings hit.
- Even Tesla, which managed to have a successful second quarter of sales, was forced to raise prices due to what its chief executive officer Elon Musk labeled as a constricting chip supply chain. “Never seen anything like it,” he said.
- Well, there’s bad news and there’s good news.
- The bad news is that the chip shortage, even if it recovers within the car industry, will likely move to other consumer electronics.
- Analysts estimate that the impact of the auto chip shortage could see ripple effects through the end of the year.
- The good news is that there will hopefully be some more supply-chain stability going forwards. Legislation passed in the Senate puts money into domestic production of semiconductors.
- According to Brian Deese, the White House economic adviser, the White House is hearing signs of improvement about the semiconductor supply, but the issue would need more funding from Congress.
- Basically, the short-term solutions might be quick and dirty, but the long term ones should provide some stability that the semiconductor supply chain hasn’t had.
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