As I See It: Pass The Chips
March 15, 2021 Victor Rozek
We’re running out of chips. I know what you’re thinking: We absolutely, positively cannot run out of chips. They’re a staple of life in the time of Covid. How will I scoop my guac, you ask? How will I maintain my sodium levels? And what’s the point of salsa without chips? For that matter, what’s the point of binge watching without binging?
Not to worry. Take a deep breath, exhale, do a deep knee bend. It’s not potato or corn chips we’re lacking – it’s computer chips, and they’re way too small for scooping guac.
As we know, computer chips are both pervasive and invasive. From children’s toys to Mars landers, home computers to home appliances, they are ubiquitous and have become perhaps the essential component in the global manufacturing chain. And therein lies the rub. If there are not enough of them, then a bunch of stuff doesn’t get made.
Carmakers are among the major industries sounding the lack alarm. Consider that a single hybrid electric vehicle may contain up to 3500 semiconductors. In a small car that’s probably half the weight. OK, I exaggerate, but that’s a lot of widgets and if only a small percentage is unavailable, production stalls.
This problem for carmakers, like so many economic challenges, began shortly after COVID-19 took hold. Suddenly people were staying home and the global market for automobiles declined sharply. Chip providers stopped producing car parts and amplified their production of processors for home computers and smartphones. These were selling faster than nachos in a sports bar as everyone who could began working from home. The auto industry eventually recovered, but by that time there was a shortage of semiconductors.
The Washington Post reports that Ford was looking at a possible 20 percent cut in production in the first quarter of this year. Likewise, GM saw reduced output from its assembly plants in Canada, the United States, and Mexico. Compounding the problem, domestically, we are no longer able to scale production to meet current demands. In the 1990s the US produced 37 percent of the world’s semiconductors. But as production moved overseas and competition grew, that number fell to a mere 12 percent. We still sell a lot of the world’s semiconductors, but those sales are increasingly under assault.
The Wall Street Journal reports that China recently set up a $29 billion semiconductor fund (after investing $20 billion in 2014) in an effort to overtake America’s advantage in chip technology. And Taiwan, which is becoming increasingly subject to Chinese aggression, already boasts semiconductor manufacturing capacity sufficient to dominate much of the world market.
Side note: Some years ago, I travelled to Taiwan to install a computer system and train the operations staff. While there I asked a cab driver why their freeways were so wide when traffic was comparatively light. He explained they were constructed to land fighter jets in case mainland China preemptively attacked Taiwan’s military airports. A reminder that under the best of circumstances creating cutting-edge technology is risky; but riskier in some places than others.
The healthcare and telecommunications sectors voiced similar concerns, adding their economic gravity to a recent letter sent by lobbying groups to the President asking for guess what? Money. As the Post reports: They are pressing the White House “to work with Congress to provide more funding for domestic chip research and production.”
Their argument is essentially a request to level the playing field. Here’s the crux of their appeal: “While the governments of our global competitors have invested heavily to attract new semiconductor manufacturing and research facilities, the absence of US incentives has made our country uncompetitive and America’s share of global semiconductor manufacturing has steadily declined as a result.”
It’s curious that semiconductor manufacturers now want “incentives” to grow the domestic supply of chips after moving most of their operations offshore. But the nation’s inability to manufacture sufficient PPE during the pandemic, and its dependence on China for everything from medicines to microchips impelled Congress to leap into action.
Well, sort of.
Its goal was well intended: to strengthen domestic manufacturing and R&D. So, as part of the huge National Defense Authorization Act for fiscal 2021, “Congress authorized federal subsidies for companies investing in domestic semiconductor manufacturing and more federal funding for chip research. . .” All of which sounds dandy if there were actual dollars attached to the legislation. So far, zilch.
But the Post reports that there exists bipartisan support for throwing money at the problem. Appropriations could be included quite soon as part of something called the Endless Frontier Act, which, if Congress had a sense of humor, would refer to the national debt. Regardless, leading-edge technology firms are poised to benefit including purveyors of “5G mobile networks” and firms developing “artificial intelligence and quantum computing.”
But just how much they’ll benefit and whether the subsidies will be sufficient to stave off the Chinese charge are questions open to debate. The Post queried semiconductor analysts who pointed out the extreme cost and complexity of manufacturing chips. “These are the most complicated devices that humanity has ever designed and built,” one said, and posited that building the needed manufacturing capacity would require an investment “on the level of the Apollo space program.”
Given the state of the economy and the boatload of other neglected national priorities, that level of investment, I think it’s safe to say, won’t happen.
An alternate approach would rely not purely on subsidies, but also on collaboration. Tech companies, especially those answerable to authoritarian regimes, have essentially become weaponized, and a number of our European allies have expressed concern over China’s aggressive promotion of its technology, and the potential fallout of becoming technologically vulnerable to an adversary.
As a counter measure, another recently introduced bipartisan bill proposes to create an interagency office within the State Department whose task is to form tech partnerships with democratic allies. Included in its portfolio is providing an array of alternate products to nations that might otherwise contemplate purchasing hardware or software from companies controlled by authoritarian regimes.
This sudden awakening, prompting urgent investment in technology, bodes well for IT and related industries. And it all started with a shortage of chips. I can empathize. I’m almost out of chips but I still have a bunch of guac, and it’s starting to feel like a crisis.