As the world grapples with a global shortfall in semiconductors, President Joe Biden has pledged billions of dollars towards securing US supply of vital computer chips in the long term. But questions remain over his ability to ease immediate bottlenecks, while some in the industry have warned Biden against resorting to the same strong-arm tactics as his predecessor. Felix Thompson reports.
When President Joe Biden convened a virtual summit of CEOs and industry leaders at major American companies such as Intel and Ford in April, he made clear that the new US government would work to help domestic firms navigate an ongoing chip crisis that has hampered businesses globally this year.
Semiconductors, essential components in the making of a slew of modern products, from fighter jets to iPhones, have become increasingly sought after since the effects of a global shortage began to spread and worsen in the final months of 2020.
In the US, as with elsewhere in the world, the automotive sector has been one main victim of the global shortage, with consulting firm AlixPartners estimating in a May report that the scarcity of chips will cost automakers globally US$110bn in lost revenues this year, up “markedly” from January’s estimate of US$61bn.
The impact has been visible on factory floors across the US, with both Ford and General Motors (GM) announcing in April that they would idle plants or extend shutdowns at facilities across the US, Canada and Mexico for periods of a week or longer.
A month later, Ford said it would further halt or reduce production at eight North American plants for “varying periods of time through June”.
The stalwart of American car manufacturing ultimately expects to make 1.1 million fewer vehicles this year because of the worldwide shortage of the valuable computer chips, which are used in auto parts such as brake sensors and power steering.
Revenues will take a sizeable hit, too, with GM forecasting that profits will be slashed by as much as US$2bn this year, while Ford said in February that earnings could plunge by US$1bn to US$2.5bn.
Glenn O’Donnell, a vice-president and research director at research and advisory firm Forrester, tells GTR that he expects that while there may be some short-term relief for the auto sector, other industries, such as consumer electronics, could be left in the lurch as a result.
“If you need chips in your product, you’re going to suffer shortages. PC makers have certainly been impacted, as have makers of gaming consoles. I understand it’s very difficult to get your hands on a PlayStation 5 these days,” he says.
Analysts and industry figures suggest that supply issues could well persist into next year, or potentially even longer.
Pandemic-induced
The worldwide shortage of semiconductors since late 2020 has been driven by a perfect storm of factors, experts say, though the overriding damage is rooted in the onset of the Covid-19 pandemic last year.
According to analysis from Washington DC-based trade body, the Semiconductor Industry Association (SIA), “rapid and large” shifts in demand brought about by the pandemic have led to dwindling chip supplies.
As automotive companies “understandably reduced production and chip purchases” in the initial months of the virus, SIA says there was a surge in orders from makers of electronic remote healthcare, home-working and virtual learning products.
Complications then began to arise when orders for semiconductors from automotive companies rallied “much more quickly” than expected after the initial lull in 2020.
“Restoring market balance takes time…. making a semiconductor is one of the most complex manufacturing processes. Lead times of up to 26 weeks are the norm in the industry to produce a finished chip,” the SIA report says.
Experts say that other events this year have also played their part in worsening the global shortage.
Mark Wakefield, a managing director at AlixPartners, said in its May report that the “pandemic-induced crisis has been exacerbated by events that are normally just bumps in the road for the auto industry, such as a fire in a key chip-making fabrication plant, severe weather in Texas and a drought in Taiwan”.
In February, Samsung and other chip makers were forced to shutter production in Texas in the wake of a deep freeze, which affected grid operators and left millions without power across the state. Following more than a month of disruption, Reuters reported in late March that production at the plant in the city of Austin had returned to near-normal levels.
Meanwhile, in Japan, issues emerged in March after a fire at a factory run by semiconductor producer Renesas, which saw its production capacity reduced for several weeks.
Operations resumed in the damaged building around a month after the blaze but, as of June 1, Renesas says that capacity still stands at around 88% and will only fully return in the weeks to come.
The company commands nearly a third of the global market share for microcontroller chips used in cars, according to reports.
Complicating matters further is a drought in semiconductor manufacturing hub Taiwan, where a lack of typhoons and rainfall over the past year has given rise to fears that Taiwan Semiconductor Manufacturing Co (TSMC) could be impacted.
However, Reuters reported in early June that the Taiwanese government had lifted some of its toughest restrictions on water limits after a bout of heavy rain, while TSMC has maintained that it has seen no impact on its production from the drought.
Biden to the rescue?
As US companies reel from semiconductor supply issues, Biden has vowed to help them in the short term.
Signing off an executive order to address the issue in February, Biden said that the White House was “reaching out to our allies, semiconductor companies, and others in the supply chain to ramp up production to help us resolve the bottlenecks we face now”.
Ultimately, however, analysts suggest that Biden’s goals are more longer-term in focus and are aimed at taking on major competitors such as China.
Brian Fleming, a member at law firm Miller & Chevalier, tells GTR: “While Biden’s efforts to onshore semiconductor manufacturing are connected to the shortage, they are fundamentally forward looking and are meant to buttress the US against this type of issue in the future.”
Fleming, an expert in investigations and compliance counselling in matters at the intersection of international trade and national security, adds: “Frankly, they’re aiming to further insulate and disaggregate US from so much dependence on China when it comes to its supply chain needs in this area.”
As part of Biden’s sprawling US$2tn infrastructure-focused “American Jobs Plan”, the White House has said it will put US$50bn towards semiconductor manufacturing and research through the CHIPS for America Act.
Despite being supported by politicians on both sides of the aisle, and having been enacted by Congress in January, funding for the CHIPS Act and its various elements has to be provided through separate spending legislation.
The cash promised by Biden would support various provisions within the CHIPS Act, including a 40% investment tax credit for semiconductor equipment and facilities expenditure in the US, US$10bn in World Trade Organization-compliant grants, US$7bn over five years for semiconductor research, as well as the creation of a National Semiconductor Technology Center.
Biden’s American Jobs Plan would also assign a further US$50bn investment in the National Science Foundation, which the White House says would “focus on fields like semiconductors and advanced computing”.
Such moves have been wholeheartedly welcomed by semiconductor industry bodies, which have long called for the US federal government to ramp up incentives and help the domestic sector take on foreign rivals.
“Funding the chip manufacturing incentives and research investments… will strengthen US semiconductor production and innovation across the board, so all sectors of our economy have the chips they need,” says John Neuffer, CEO and president of the SIA.
SIA has previously appealed for federal manufacturing grants and tax breaks of US$20-50bn, warning in a September 2020 report that the US’ semiconductor manufacturing sector had fallen prey to state-backed foreign competitors.
In praising Biden’s American Jobs Plan pledges, Ajit Manocha, president and CEO of industry group SEMI, points out that the US’ share of semiconductor manufacturing capacity has declined by 50% in the past 20 years.
According to SIA’s analysis, certain governments – namely a handful of nations in Asia – have been providing substantial subsidies to attract the construction of semiconductor manufacturing facilities (fabs).
A new fab in the US can cost around 30% more to build and operate over a 10-year period than in Taiwan, South Korea and Singapore – and as much as 50% more than one in China – SIA says.
It further notes that while the global nature of semiconductor supply chains has brought low costs and benefits to end consumers, the geographic specialisation of the industry could pose problems to the US due to factors such as “high seismic activity and geopolitical tensions”.
The trade group says 100% of the world’s highly advanced – below 10 nanometers – semiconductor manufacturing capacity has been built up in Taiwan (92%) and South Korea (8%).
SIA estimates that 75% of the world’s chip manufacturing is now concentrated in East Asia, while China is projected to have the largest share of production globally by 2030 due to an estimated US$100bn in government subsidies.
No quick fix
While the US is lagging behind Asian competitors, there are signs that government subsidies may convince global semiconductor firms to set up expensive factories locally, offering a boon to the country’s domestic manufacturing capacity.
It’s not certain yet if Biden’s infrastructure bill will pass through Congress – and when – however, both TSMC and Intel are reportedly vying for any government subsidies to set up in the US.
TSMC announced in May 2020, months before the US election took place, that it would build a US$12bn factory in Arizona. Reuters reported in recent months that the firm is planning to build several more semiconductor-making facilities in the state.
Donald Parker, an Intel vice-president, told the New York Times the company hopes to negotiate with the Biden administration for incentives as part of its manufacturing expansion plans.
In March the company outlined a US$20bn commitment to build two new fabs in Arizona, and said it will act as a “foundry” – or a manufacturing partner – to chip design companies that lack production capabilities of their own.
The firm hopes to reverse a trend which has seen competitors in Asia become the foundry of choice for firms such as AMD and Qualcomm.
Nevertheless, Forrester’s O’Donnell notes that any new factories will do little to dispel current supply chain issues.
“Intel announced it is spending US$20bn to build some new manufacturing in Arizona. TSMC, the big Taiwanese company, is investing equivalent amounts of money. But these things do not just pop up in the middle of the desert; it’s going to take at least two years to build one of those factories, and at about US$10bn per factory, it’s just hideously expensive and complicated.”
Industry figures have also said there’s little the White House can do to alter the shortage in the short term, and have even warned the president against wading in too decisively.
In a response letter from US telecoms conglomerate Verizon to a public review into semiconductor supply chains by the Department of Commerce, William Johnson, a senior vice-president at the firm, says that “while the short-term challenges are real, the administration’s ability to increase output in ways that could alleviate the current shortages is limited”.
Johnson adds in the letter that Biden should refrain from attempting to help certain sectors reeling from the semiconductor crisis if it risks hurting companies in other areas – such as communications providers.
“Unfortunately, we do not believe there is much the US government can do to address the current supply constraints. Any efforts to redirect production or sale of semiconductors to help one industry, will only lead to disruptions in other sectors,” he says.
Export controls?
Concerns have also been raised over President Biden’s potential efforts to reshore supply chains in the long term through punitive measures, such as export controls.
The political thrust to the semiconductor debate was highlighted in April, when a bipartisan group of more than 70 House and Senate politicians wrote a letter to Biden urging the president to support the CHIPS Act.
“The Chinese Communist Party (CCP) has aggressive plans to reorient and dominate the semiconductor supply chain, pouring over US$150bn in semiconductor manufacturing subsidies and investing US$1.4tn in their efforts to become the dominate global technological power,” the letter reads.
It adds that the US must “work with our allies and strategic partners to out-scale the CCP in manufacturing capabilities for advanced semiconductors. If we lose these highly skilled jobs and know-how to China, the United States will never recapture them. Further, we risk dependence on a strategic competitor for the advanced semiconductors that power our economy, military, and critical infrastructure.”
But despite such national security concerns, the American semiconductor industry has largely pleaded for Biden to refrain from wielding unilateral export controls on foreign semiconductor companies – as former President Donald Trump did.
SEMI wrote in its response to the Department of Commerce review of semiconductor supply chains that the short-term national security benefits of imposing unilateral export controls on foreign firms erode over time, as companies will likely source equivalent goods from elsewhere.
The letter attacks Trump’s August 2020 expansion of export controls on Huawei, which sought to block the Chinese firm from buying computer chips that used US equipment, materials and design software at any point in the supply chain.
“This dramatic expansion of US controls… creates strong and unique disincentives to purchase US origin items and technology. Purchasers of US origin items reasonably fear losing access to other customers for items with no conventional nexus to national security,” it reads.
Instead, SEMI argues that the US should work with other semiconductor producing countries to roll out “narrowly tailored and multilateral export control policies”.
Biden is yet to dial back export restrictions on Huawei, however, and Reuters reported in March that the administration had amended licenses for firms selling to Huawei Technologies, further restricting companies from supplying items that can be used with 5G devices.
Ultimately, analysts say that Biden may well be tempted to expand export restrictions on foreign entities as he works to onshore semiconductor supply chains in the coming years.
“If the government response to shortages of PPE during the pandemic is any guide of where this all might be heading, I expect that we will see the Biden administration take a ‘carrot’ and ‘stick’ approach, with the infrastructure plan representing a big part of the ‘carrot’. The ‘stick’ could include export restrictions on semiconductor equipment and technology,” Kerry Contini, international trade partner at Baker McKenzie, tells GTR.
Such views are echoed by Miller & Chevalier’s Fleming, who says that the US government will likely continue using the so-called Entity List “pretty aggressively” against foreign firms that run afoul of the White House.
The list, which effectively cuts off a company from using US-origin technology, can cause issues for non-American semiconductor firms in the running of their fabs and chip production.
Most notably, China’s biggest chipmaker Semiconductor Manufacturing International Corporation (SMIC) – a partially state-owned firm – was added to the Entity List in December, and according to Fleming is almost certainly set to remain there for the foreseeable future.
SMIC’s chief financial officer, Gao Yonggang, bemoaned the listing in the group’s Q1 results report earlier this year, saying that there will be “risks and uncertainties” for the firm in the second half of the year.
Nevertheless, revenues for chip companies globally continue to surge.
The shortage may have wreaked havoc for the automotive sector and others globally, yet SIA said in late April that global semiconductor sales had risen 3.6% to US$123.1bn in Q1 this year from Q4 2020. On a year-over-year basis, sales grew 17.8% in the first quarter.
SMIC’s revenue for Q1 2021 came in at US$1.1bn, jumping by 22% from the same period a year earlier. The firm noted that it had profited from an increase in wafer shipments and a bounce in average selling prices.
