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US Needs To Invest In Semiconductor Manufacturing — Quickly!

Without it, the Biden administration’s goal of widespread electric vehicle adoption could become just a dream.

The severe shortage in microchips has touched many aspects of our lives in this Year of the Pandemic. The auto industry has been particularly hard hit, due in large part to shifts in US semiconductor manufacturing business models.

But now the US faces disparate challenges — the Biden administration has set a goal of mass electric vehicle (EV) adoption, yet the need for urgent investment in domestic semiconductor manufacturing may make that goal fleeting.

Shortages are common in the semiconductor industry, because producing chips is a lengthy and expensive process that companies have to plan far in advance. Semiconductor factories are extremely expensive and time-consuming to build. While power brokers try to figure out how to bring semiconductor manufacturing quickly to the US, having veered away from significant investments over the last decade, the impacts to automakers have been substantial.

AlixPartners, a global consulting firm, estimates that the shortage will cost the auto industry $210 billion globally in lost revenues this year, up markedly from the firm’s original estimate in May of $110 billion. In terms of vehicles, AlixPartners is now forecasting that production of 7.7 million units will be lost in 2021.

The auto industry drives about 3% of global economic output. The repercussions from the semiconductor manufacturing crisis is leading automakers around the world to reduce worker shifts, halt assembly line production, and infuse uncertainty in auto sales. Its stagnation is alarming companies and communities that depend on cars for careers and income. In Japan, for example, home of Toyota and Nissan, parts shortages caused exports to fall by 46% in September compared with a year earlier.

A recent article in the New York Times explained how difficult it is to calculate just how much auto industry problems will spread to the rest of the economy. However, the ripple effect is “enormous because so many other industries depend on carmakers.” Will semiconductor manufacturing shortages put the world’s economy at risk?

Electric Car Demand Compounds the Semiconductor Manufacturing Deficit

Demand for computer chips is far outstripping supply. The problem will likely intensify with widespread adoption of electric cars, which require more chips per vehicle. “Probably the car you drive now has hundreds of chips,” Commerce Secretary Gina Raimondo told the Detroit Economic Club recently. “The [electric vehicle] that we want you to buy over time has 2000 chips.”

A recent study by IDTechEx, a consultancy based in the United Kingdom, confirmed Raimondo’s statement. They estimated that an EV requires more than twice as many semiconductors as its internal-combustion-engine counterpart, mainly because the EV demands much more use of power electronics.

The chip shortage has invaded every aspect of the car business and is heavily reflected in the JD Power 2021 Sales Satisfaction Index (SSI) Study, released November 10. General Motors, Honda, Nissan, and Stellantis reported significant declines in sales in Q3. Convergence culture is at a beginning stage, so that automakers are just starting to see the benefit of shared electrification R&D. As example, GM saw a drop of one-third from a year earlier due to chip shortages that forced them to idle plants, leaving dealers with fewer vehicles to sell to interested customers.

As an alternative, automakers have attempted to fill needs with electronic components they already have on hand for their most profitable pickup trucks and large sport utility vehicles. Not all the news was bad, however. The average selling price of a new vehicle in September was $42,802, up more than $12,000 from the same month in 2020.

What’s the Semiconductor Stall in Congress, Anyway?

The collapse in auto sales to consumers reduced 2+ percentage points from US gross domestic product growth in Q3.

Commerce Secretary Gina Raimondo has pleaded with the US Congress to support the CHIPS Act — Creating Helpful Incentives to Produce Semiconductors for America — which includes $52 billion in federal investments for domestic semiconductor research, design, and manufacturing provisions.Specifically, the bill provides an income tax credit for semiconductor equipment or manufacturing facility investment through 2026. The bill establishes a trust fund to be allocated upon reaching an agreement with foreign government partners to promote:

  1. Consistency in policies related to microelectronics
  2. Transparency in microelectronic supply chains
  3. Alignment in policies towards nonmarket economies

The US Senate took a significant step on June 8, 2021 by passing the US Innovation and Competition Act (USICA) (S.1260). Senator Charles Schumer (D-NY) led the effort to create this federal investment in domestic semiconductor manufacturing and R&D.

Part of this investment is $10.5 billion in R&D funds through the Department of Commerce, some of which will support the creation of a National Semiconductor Technology Center (NSTC) to conduct research, prototyping, and workforce training in advanced semiconductor technology with the private sector. It would bring together leaders in industry, academia, and government to put the US back in semiconductor research and development.

“We will not hit those goals if Congress does not quickly pass the Chips Act,” Raimondo warned. “We are wasting time, precious time, every day that the Chips Act isn’t passed and appropriated in Congress.” Other countries have subsidized semiconductor manufacturing for years. China, Taiwan, the EU, and others “are incentivizing and subsidizing the production of chips right now, and they have been for a long time,” Raimondo noted.

Asia-Based Semiconductor Manufacturing

Most production is outsourced to foundries in Asia, where Taiwan Semiconductor Manufacturing Company (TSMC) has close to 60% market share, based on revenue. The lack of companies capable of manufacturing chips as well as long lead times to switch between suppliers catches automakers in the middle.

Raimondo said, “I sat down in a roundtable with these huge Japanese companies, consumers [of chips], Sony, Canon, and they want to make sure they can get enough chips on their allied shores, whether that’s in America or their allies.”

Shilpan Amin, vice president of global purchasing and supply chain at General Motors, said the auto industry’s need for chips will double in the next 5 years as electric cars and higher-tech vehicles come to market. Many other industries’ needs for chips also are increasing at a fast rate, he said — faster than chip manufacturers are expanding capacity.

“When people ask us about when this will end, no one really knows,” Amin said.

Image retrieved from NOAA/open source

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Written By

Carolyn Fortuna (they, them), Ph.D., is a writer, researcher, and educator with a lifelong dedication to ecojustice. Carolyn has won awards from the Anti-Defamation League, The International Literacy Association, and The Leavy Foundation. Carolyn is a small-time investor in Tesla. Please follow Carolyn on Twitter and Facebook.


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