Token Scarcity Fuels Frustration, Inflation

Even after its fastest annual growth in 37 years, the US economy is still bogged down by a lingering shortage of computer chips essential to the technology that connects us, transports us and entertains us.

The problem has been building since pandemic-related lockdowns shuttered major Asian chip factories more than two years ago. Now it threatens to expand into the indefinite future, despite the semiconductor industry’s efforts to catch up with demand.

The House of Representatives passed a bill on Feb. 4 that could inject $52 billion in grants and subsidies to the semiconductor industry to help boost U.S. production — a top priority for the Biden administration which must now be reconciled with a Senate version adopted eight months ago. The European Union on Tuesday unveiled its own $48 billion plan to boost microchip production within the 27-nation bloc.

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The shortages have infuriated consumers who can’t find the new vehicles they want at sold-out car dealerships, forcing some to settle for used vehicles sold at abnormally high prices. Unable to secure all the microprocessors needed in today’s cars, the auto industry shut down some factories and ended up making about 8 million fewer vehicles last year than originally planned, driving up prices and fueling the inflation, according to US Commerce Secretary Gina Raimondo.

The insufficient supply of processors has also delayed the production of vital medical devices, smartphones, video game consoles, laptops and other once widely available modern conveniences that have become scarce over the past year. .

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“A COVID outbreak, natural disaster, political instability, anywhere, at any plant, anywhere in the world, is disrupting our US supply chain and there are ripple effects across the economy,” Raimondo told reporters on Friday.

IS THE PANDEMIC TO BLAME?

Yes, but that’s not the only culprit. The pandemic prompted chip factories to start shutting down in early 2020, especially overseas, where most processors are made. By the time they started to reopen, they had a backlog of orders to fill.

Then chipmakers were overwhelmed by unexpected demand from people who had become even more dependent on electronics as they were forced to stay at home.

For example, no one entered 2020 expecting to see an increase in personal computer sales after nearly a decade of steady decline. But the shutdowns got the job done by forcing millions of office workers to do their jobs from home while students mostly attended classes remotely.

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WERE THERE OTHER FACTORS?

Even before the pandemic, chipmakers struggled to balance the production of older types of microprocessors still used on electronics assembly lines and in some automobiles with the need to retool their factories to pump out chips for electric cars and ultra-fast 5G wireless networks under construction. .

Chipmakers have also been repeatedly hit by fires, winter storms and power shortages.

A decades-long shift to lower-cost chip factories in Asia has also worsened the situation in the United States and prompted recent efforts to boost local production. The industry is particularly dependent on Taiwan, which China has long claimed as its own.

“We’re so behind,” Raimondo told reporters on Friday. “We are in such a dangerous place for a matter of national security simply because of our reliance on Taiwan for our most advanced chips.”

The United States’ share of the global chip manufacturing market has fallen from 37% in 1990 to 12% today, according to the Semiconductor Industry Association, a trade group. The main reason: operating a chip factory in the United States for 10 years costs 30% more than in Taiwan, South Korea or Singapore, the group estimates.

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European nations account for just 9% of the global semiconductor market share, but EU officials aim to increase that share to 20% by 2030.

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HOW SERIOUS IS THE SHORTAGE?

The US Department of Commerce estimates that demand for chips in 2021 is up 17% from pre-pandemic levels in 2019 – far more than factories are currently able to produce, even when operating at around 90% of their capacity. Chip buyer inventories fell to a median of about five days from 40 days before the pandemic.

The ministry’s report predicts that shortages will continue through the summer.

The pressure has driven up the price of chips and products that rely on them, especially automobiles. Used car prices soared 37% last year, a key factor in today’s uncomfortably high rate of inflation. The Federal Reserve aims to reduce this by raising interest rates – and borrowing costs.

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IS THERE A RELIEF IN SIGHT?

There are some glimmers of hope, especially in the automotive industry. When General Motors released its latest quarterly results, CEO Mary Barra said chip supply was better in the United States and China than a year ago, leading the automaker to forecast a profit. record operating this year.

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The used-car price spike also appears to be easing a bit based on data compiled by auto-shopping app CoPilot. After peaking during the holiday season, prices for 2015-2021 models have fallen 1% to 4%. “The automotive market is finally beginning its long return to normal,” said CoPilot CEO Pat Ryan.

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CAN WE AVOID FUTURE SHORTAGES?

The chip industry is experiencing unprecedented expansion. Chipmakers are expected to invest $150 billion this year in new factories and other efforts to meet increased demand after spending a similar amount last year, according to the SIA. Prior to the onset of the current frenzy, the industry’s annual capital expenditure never exceeded $115 billion.

The plans include a $40 billion commitment from Intel to build new chip factories in Arizona and Ohio, where for the first time it plans to make microprocessors for other companies besides its own. Samsung, GlobalFoundries and Micron also revealed their US expansion plans. These are positive steps as the United States tries to reduce its reliance on overseas factories where most chips are made, although it will still be years before that production increases.

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Meanwhile, major automakers such as Ford and General Motors are trying to address their shortages by forging partnerships with chipmakers.

The $52 billion in government funding to help expand chip production is part of a larger bill aimed at boosting US competitiveness. While there is bipartisan support for boosting domestic chip production, Senate and House lawmakers have yet to negotiate the differences. The bill also includes $45 billion to bolster supply chains for high-tech products and other priorities that have raised Republican concerns about its cost and scope.

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