White House Press Secretary Jen Psaki earlier this month told journalists that the Biden Administration was prepared to help a battered semiconductor industry beset by challenges that have resulted in a shortage of processors that power everything from laptops to smartphones to autonomous vehicles.
The promise of help came at the same time that the Semiconductor Industry Association (SIA) sent a letter signed by executives from top chip-making companies like Intel, AMD and Nvidia to President Biden pleading for funding that would help expand a shrinking U.S. presence in the global semiconductor market. The letter noted the pervasive nature of chips in modern society and the importance of the processor market to the U.S. economy, national security and worldwide technology leadership.
The government took the first step Feb. 24, when Biden signed an executive order authorizing a 100-day review of supply chains in the semiconductor space as well as three other markets – large-capacity batteries (like those used in electric vehicles), pharmaceuticals and rare earth minerals – that have also been hit with shortages since the onset of the COVID-19 pandemic a year ago.
Before signing the order, Biden said the move was “about making sure that the United States can meet every challenge we face in this new era. The best way to do that is by protecting and sharpening America’s competitive edge by investing here at home.”
Sliding U.S. market share
That focus on home will be important to a U.S. semiconductor industry that has seen production over the last few decades shift sharply to Taiwan and South Korea. The SIA earlier this month noted in a report about the global industry’s 2020 numbers that even as worldwide demand for chips has grown year after year, the share of global chip production in the United States has fallen from 37 percent in 1990 to 12 percent currently.
In a statement, SIA President and CEO John Neuffer said the ongoing “disparity will only intensify without U.S. government action to level the global playing field. It’s imperative the federal government fully fund incentives for domestic chip manufacturing and investments in chip research so the U.S. can benefit from growing demand and produce more semiconductors needed to strengthen our economy, national security, and critical infrastructure.”
This is particularly true as China and other governments grow their investments in their local tech industries and companies.
Congress boosts U.S. chip manufacturing
Biden’s executive order comes a month after Congress, in its annual National Defense Authorization Act of 2021, included provisions that could mean billions of dollars in financial incentives for building and rehabbing chip-making plants in the United States. Lawmakers want to ramp up production in the United States, viewing China’s growing capabilities as a national security issue.
Biden this week also noted that while Congress had authorized the bill, the authorization will need $37 billion to protect the semiconductor industry from future shortfalls, money the president said he would seek in legislation.
Global chip shortage
The worldwide semiconductor market was hit hard by the coronavirus outbreak. The pandemic forced many employees to work from home and pushed students into distance learning environments, which in turn fueled demand for consumer systems like laptops, Chromebooks and tablets. The spiking demand combined with a chip industry that already had seen a slowdown over the past couple of years due to other concerns – including manufacturing issues from Intel – fueled a semiconductor shortage that rippled through not only IT and consumer tech systems but out to other industries, including the automotive space, which increasingly rely on processors for their on-board systems.
There also is concern about the concentration of chip production in Asia. There is a growing reliance by semiconductor companies to outsource much of the production to Taiwan Semiconductor Manufacturing Co. (TSMC) and Samsung in South Korea, which offer the most advanced manufacturing processes. Intel, which for decades relied on its manufacturing capabilities to stay ahead of the competition, has fallen behind in recent years in adopting newer processes, such as the 7-nanometer node. Others like AMD and Nvidia have reached 7nm by relying on TSMC and Samsung, which already are moving to 5nm.
The SIA said that in 2020, global semiconductor industry sales were $439 billion, a year-over-year drop of 6.5 percent. However, the trend appears to be moving in the right direction, with fourth-quarter sales reaching $117.5 billion, 8.3 percent increase over the same period in 2019.
Short term vs. long term
The president’s order is a good first move, Patrick Moorhead, principal analyst at Moor Insights and Strategy, told InternetNews.com, while adding, “it’s not that it’s too little too late, but there is nothing that Biden or anybody can do short term to make any difference in chip availability.”
The shortfall in inventory is here and the question right now is one of distribution. Last spring, as the pandemic tightened its grip on the world, industries that rely on processors for their products had to make decisions. PC makers knew that the work-from-home push would ramp up demand for laptops and tablets and adjusted their orders accordingly.
Conversely, automakers, TV makers and other companies assumed that people who were at home and unemployed or underemployed would not be buying their products. That’s how it played out initially, Moorhead said. Sales of cars, smart TVs and smartphones initially fell. However, thanks in part to the stimulus money the U.S. government put into the economy, people were able to spend once again and demand for those goods rose, he said. The problem was an already tight semiconductor market already was working to meet demand from PC makers.
The impact is already being seen. Telsa this month temporarily shut production at its California plant in part due to supply chain issues, including shortages of chips. At this point it almost becomes an issue of horse trading, trying to shift some of the processors that are now going to such products as PCs and tablets over to automakers and other companies that need them. But there will be industries that feel the sting of a tight semiconductor market.
Longer term, the United States could pursue efforts to build home-grown chip capacity, Moorhead said. It would make sense from a national security as well as market perspective. Right now it’s TSMC and Samsung that have the leading-edge processes. In the United States, GlobalFoundries, based in New York, produces chips for products in such growing markets as the Internet of Things (IoT) and 5G, but they don’t use the leading-edge technologies.
However, building production capacity in the United States will require money, Moorhead said. However, as it is showing with the proposed $1.9 trillion COVID relief package, the Biden administration is willing to spend money to bolster the economy. New fabs would create a gravity of their own, bringing in more investment.
“Regardless of the country and regardless of the city, every company shops around fabs,” Moorhead said. “It does take some payment. But as we saw with the GlobalFoundries and the New York area, it’s investment, meaning you attract companies to support the fab, you attract research dollars, you get tax dollars. And GlobalFoundries is a great example.”
Compared with the massive relief package, bringing leading-edge fabs to the United States would probably mean an investment of between $10 billion and $20 billion, Moorhead said, adding that “it’s a lot of money, but in the grand scheme of the money we’re throwing around for the stimulus, it’s nothing. It’s like a rounding error.”
Falan Yinug, director of industry statistics and economic policy at SIA, wrote in a blog post this month that the semiconductor industry is trying to ramp production as quickly as possible, but that given the time involved – it can take as long as 26 weeks to produce a finished chip – it’s more than flipping a switch. The short-term supply shortage will likely ease in the next few months as supply ratchets up to meet demand, but government investment will be needed for the long term, Yinug wrote.
“Rising overall demand for semiconductors and their ever-increasing importance throughout the economy has captured the attention of policymakers in Washington,” Yinug wrote. “Congress enacted legislation earlier this year calling for federal incentives for domestic chip manufacturing and investments in semiconductor research to meet this growing demand. Policymakers now must appropriate funding for these provisions to reinforce American leadership in semiconductors, strengthen the U.S. economy and job creation, and make semiconductor supply chains more resilient to future crises.”