The Great Semiconductor Shortage

You probably are not terribly familiar with semiconductors – those chips that are insider everything from your kid’s toys to the cars you buy. But that doesn’t mean that you can ignore them.

A series of disasters from the Texas ice storm to fires to earthquakes is contributing to a worldwide shortage of chips.

That is making automakers cut back on their production lines. It caused Samsung to CANCEL their newest phone and it is causing products like the Playstation 5 to become the PAYstation 5 on ebay.

The last one is the problem. I don’t particularly care whether you can buy a Playstation, but that problem is causing businesses everywhere that depend on semiconductors either for the things that they make OR for the things that they use to have a supply chain meltdown.

Part of it is also related to the economic war that the last administration started with China. Years ago, U.S. companies decided that they could not compete against Chinese government subsidized chip factories and since the U.S. government didn’t seem to care – under multiple democratic and republican administrations – U.S. chip makers did not get any help from the government. As a result most chips that are essential to U.S. businesses are not made in America. While the last administration started an economic war with China, they did nothing to kickstart chip production in the U.S.

While there were problems prior to Covid, it has gotten worse recently with the Texas power fiasco (there are a few chip plants in Texas) and a fire at a chip plant in Japan.

This points out that the JUST IN TIME supply chain model that has been popular here for a couple of decades because it reduces costs, makes the business that uses it very fragile when the supply chain is interrupted.

The current administation wants Congress to spend $50 billion on the U.S. semiconductor industry to make us more self-sufficient. While this may help us compete with China, it probably takes 4 years or more to build a new semiconductor plant.

One part of the problem is the ban on selling chip tech to Taiwan Semiconductor put in place by the last administration’s bid to hurt China. Unfortunately, they make chips that are used in F-35 jets, iPhones and computer servers, things the lack of which hurt us. Taiwan semiconductor accounts for over 50% of chip manufacturing revenue worldwide.

This will likely be worked out in the next 5-10 years, but in the mean time, expect to see more delivery disruptions and price increases as the market sorts itself out.

One more factor in this global supply chain mess is rare earth minerals. They are required to make chips. Guess who controls this? Yup, China. Last year China mined 140,000 metric tons. The U.S. was number two at 38,000 metric tons. While China is unlikely to start an all out trade war by banning the export of these minerals, they could figure out a way to favor their domestic users and hurt us.

There is no easy answer and politicians are wonderful at dealing with complex problems that they don’t understand. They lean toward simplistic solutions that have unintended consequences. Credit: Vice