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President Biden intends to tackle many long-standing issues, such as climate change, wealth inequality, unaffordable health care and the housing shortage. But he has been unable to solve a problem that is dragging the US economy back in real time, right now: the global shortage of semiconductors, key processors in thousands of consumer and industrial products.
Various factors have combined with the coronavirus pandemic to create more demand for semiconductors than manufacturers can meet. The shortfall has devastated the auto industry, forcing manufacturers like Ford (F), General Motors (GM) and Chrysler to stop production of some of their most popular models. The pace of US auto sales in August was the lowest in 15 months, in large part because automakers can’t produce all the vehicles consumers want to buy.
Some video game consoles cannot be found. Home appliances also have chips and there are delays in deliveries of refrigerators, microwaves and washing machines. Apple (AAPL) said chip shortages could affect the availability of iPhones this fall. The shortages are depressing economic output and forcing economists to lower their growth expectations for the remainder of 2021. They are also pushing up prices, contributing to inflation that now stands at 5.4%.
Biden is fully aware of the problem. A June White House report on supply chain vulnerabilities identified semiconductors as one of four priority areas in which the United States must develop new national capabilities. But this report recognized that “the private sector must take the lead in addressing the shortage” and identified the role of government as one of assistance. Meanwhile, manufacturers such as Intel (INTC) and Micron (MU) are reluctant to add new production capacity, which is expensive and requires frequent retooling. The chip industry also experiences boom and bust cycles that can brutalize producers who find themselves with overcapacity during downturns. For manufacturers, light supply, including shortages, is better than overinvestment and large losses in the future.
Yet another American company that has gone overseas
Like other industries, the semiconductor industry has grown in America and migrated overseas. US companies still account for about half of all global semiconductor sales. But giants such as Intel, Micron, Broadcom (AVGO), Qualcomm (QCOM) and Texas Instruments (TXN) now produce some of their chips overseas or outsource production to overseas producers. The semiconductor industry claims that the share of chips made in the United States has increased from 37% in 1990 to around 12% today. There are still 20 manufacturing plants, or “fabs,” producing the most common chips in the United States, with production centered in California, Texas, Oregon, and Arizona. But South Korea, Taiwan, and Japan all have a larger global share than the United States, and China is just behind.
It’s a familiar story. Labor and regulatory compliance costs are higher in the United States than abroad. In addition, foreign governments subsidize semiconductor production much more than in the United States. A 2020 study by the Boston Consulting Group and the Semiconductor Industry Association claims that the 10-year cost of a chip manufacturing plant in the United States is 30% higher than in Taiwan, South Korea. and Singapore, and up to 50% higher than the cost in China.
The chip industry in the United States wants $ 50 billion in federal subsidies to make domestic chip manufacturing competitive with overseas production. He could get it. In June, the Senate passed the CHIPS law, in a rare bipartisan vote. The legislation would provide $ 52 billion in federal subsidies until 2027 for the production of crisps on U.S. soil. The biggest incentives are tax breaks, and Washington would fund expensive research and match national and local incentives for building high-tech factories.
If the House passes the CHIPS Act and President Biden signs it – which he says he will do – it will help fund the construction of 19 new factories in the United States, according to industry analysis, and will help create 280,000 new jobs, many of which are high. paid technological positions. Without the funding, the same analysis shows that the US share of new semiconductor capacity could drop to 6% by 2030.
But that won’t help with the current shortage. “It takes three to four years to set up a factory,” explains Pedro Pacheco, senior research director at the Gartner Group. “This will not solve the microchip crisis. There really isn’t much that can be done to resolve this crisis in terms of capacity building. It takes too long for the capacity to be available.
There are also the usual questions about subsidizing private industry with taxpayer dollars. With China aggressively subsidizing key industries, and many other countries following suit, it may be time for the United States to adopt a more formal industrial policy than in the past. But more government subsidies would still leave US factories with higher labor and regulatory costs than their competitors based elsewhere, and there is no guarantee that US automakers and other domestic manufacturers would prefer state-made chips. -United.
“Manufacturers care about the performance of the microchip and, of course, the cost, which is extremely important,” says Pacheco. “If you do it in the US but it’s not cheaper or better, it will have a big impact on their decision.”
Government grants can also lead to demands for political involvement in business decision-making, and worse overall outcomes. Liberal Senator Bernie Sanders, for example, said the government should get a “share of the stock” – a share of the profits – in exchange for billions of aid.
Washington has already subsidized the US semiconductor industry, as in the 1980s and 1990s, when Japan worried about Japan’s growing role in the market. Some industry executives have argued that changes in US policy to protect domestic industry favor a handful of large companies while punishing small businesses and startups that were not entitled to the same level of aid. . Most of the grants from that time have expired.
The US chip industry will not die off completely if Washington does not help it. Arizona is courting chipmakers, and Taiwanese giant TSMC plans to build a $ 12 billion plant there. Intel announced earlier this year that it would spend $ 20 billion to build two new factories in Arizona. But subsidies could determine how much those facilities end up producing, and there are other risks, such as a lack of workers in the U.S. workforce with the requisite technological skills.
Analysts believe the current chip shortage will last for a good part of next year and perhaps return to equilibrium by the end of 2022. So new factories that take three or four years to build don’t will not help. Most semiconductors are purchased under contracts that manufacturers have with suppliers, so it’s not as if governments can step in and reassign chips to privileged customers or industries. With maximum capacity everywhere, making more chips available to one industry or country would simply distract them from other parts of the global economy.
Smaller measures to alleviate the shortage
There are a few small steps Biden could take. President Trump’s trade war with China included a 25% tariff on semiconductors imported from China, effectively making them more expensive for U.S. buyers. Chinese semiconductors only make up about 5% of all imported chips, but Trump tariffs have always contributed to current shortages, according to trade expert Chad Bown of the Peterson Institute for International Economics.
Trump has also banned the sale of US-made components, including semi-trailers, to Chinese telecommunications giant Huawei. Huawei started sourcing chips from vendors in Japan and South Korea that weren’t subject to the ban. China has also increased its own production of chips, to hedge against the risk of even more punitive US action. American chipmakers, meanwhile, have lost a huge customer. All of this has contributed to the disruptions that are happening now. Biden could relax or repeal both of Trump’s measures, and there have been indications that he may.
The bigger lesson, however, is that global supply chains are more vulnerable to shocks than anyone thought as large companies got used to sourcing components wherever they could get them cheaply and easily. And no government can easily undo 30 years of economic change. Biden needs to let voters know he’s working on the chip shortage, but it might be easier to cut healthcare costs or boost green energy and hope he gets credit for it at the square.
Rick Newman is the author of four books, including “Rebounders: How Winners Go From Failure To Success.»Follow him on Twitter: @rickjnewman. You can also send confidential advice, and click here to receive Rick’s stories by email.
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