Key Takeaways

• While the COVID-19 pandemic is one of the main culprits, the growing demand from the cloud sector, telecommunications firms, and the roll out of 5G technology has accelerated the shortage of microchips in the United States.
• The automobile industry in the United States is projected to experience $110 billion in revenue losses because of the shortage in microchips, with Ford Motor and General Motors estimating decreases of $2.5 billion and $1.5 billion-$2 billion, respectively, to their earnings.
• "Industry experts expect the overall global chip shortage to last through 2021. However, some expect that the industry will not be able to completely recover until some time in 2022."

Introduction

Overview of the Current Situation

• Semiconductors/microchips are vital components for various forms of technology, including smartphones, electric automobiles, PCs, etc. While the economy in the United States is recovering from the COVID-19 pandemic, the microchips that are needed to power a broad variety of products are currently in short supply, and the situation is worsening.
• The shortage in semiconductors/microchips has led to automobile companies stopping production, complicated the acquisition of graphics cards for PCs, and caused businesses such as Apple to deal with considerable supply limitations in the roll out of new offerings.
• The situation is so dire that President Biden held a meeting with 20 of the top executives in the country to determine ways to fix the supply limitations faced by the chip industry and to ensure that a similar situation does not occur in the future. Despite assistance from the government, experts believe that the chip shortage will continue for some time.

Cause of the Shortage

• There are a variety of factors that have contributed to the shortage of microchips. According to Baird technology desk sector strategist Ted Mortonson, one of the primary reasons why there is a shortage of microchips is the growing demand from telecommunications firms, the roll out of 5G technology, EV makers, and the cloud sector.
• The global COVID-19 pandemic forced manufacturing companies overseas and in the United States to shut down. Meanwhile, demand for microchips actually increased during the pandemic as citizens around the world managed isolation through electronic devices. The demand for vehicles was underestimated by automakers in Q2 2020, who decreased production, further increasing demand for microchips.
• Also, because of the mass production of vaccines to combat the COVID-19 pandemic, the price of silicon (silicon required for the production of vials is utilized to create PCs and chips) rose significantly. As the pandemic has receded, the market has witnessed pent-up consumer demand for products that require microchips such as durable goods and automobiles.
• Moreover, sales in the semiconductor industry increased by 13.2% in January 2021 when compared to January 2020, which has created a "mismatch between supply and demand." The CEO of Llamasoft, Razat Gaurav, claimed that "This is a classic example of the bullwhip effect... Small changes in demand, as they propagate further upstream in the value chain, the variability, and the volatility grows dramatically."
• The United States does not manufacture a sufficient amount of the microchips its industries require or will need for the future. In the United States, semiconductor businesses account for nearly half (47%) of worldwide chip sales. However, just 12% of manufacturing occurs in the country, meaning that 88% of the semiconductor chips utilized by industries in the United States are manufactured outside of the country.
• Also, during the Trump administration, restrictions were placed on the sale of microchips to companies in China, such as Huawei, which stockpiled supplies in order to combat these sanctions. Microchip Technology CEO Ganesh Moorthy stated that this shortage began with the 2018 tarrifs imposed by the U.S. government, which resulted in demand plummeting. In response to these tariffs, chip manufacturers globally idled some of their factories, while leaning out inventory. After the pandemic began, several stay-at-home trends led to demand accelerating, resulting in the microchip shortage.

Impact on the U.S. Economy

• It is projected by AlixPartners, a consulting firm, that the semiconductor chip shortage will cause the global automotive industry to lose about $110 billion in revenue for the year 2021. Ford Motor and General Motors anticipate that the situation will decrease their earnings by $2.5 billion and $1.5 billion-$2 billion, respectively, in 2021. Car manufacturers such as Nissan, Ford, Fiat Chrysler, and Volkswagen had to adapt production in January 2021 because of chip shortages, and some of the manufacturers had to idle plants.
• AlixPartners also estimates that production at automobile factories will be cut by 3.9 million vehicles, which use between 50 and 150 microchips, on average, in 2021 due to the semiconductor chip shortage. Between January and March of 2021, the shortage of microchips decreased the production of automobiles in North America by 100,000 vehicles. AutoForecast Solutions projects that up to 1.452 million vehicles may be lost at plants in North America due to shutdowns brought on by the chip shortage.
• Apple anticipates a revenue shortfall of $3 billion-$4 billion in the upcoming quarter due to supply constraints, including issues with obtaining chips, which would impact its production of Macs and iPads.
• Goldman Sachs has forecasted that there will be an estimated 20% average shortfall for computer chips for the 169 industries in the United States that embed semiconductors into their products. The bank also estimates that prices for consumer electronics and cars could increase by 1%-3%, which may boost inflation in 2021.
• In Q1 2021, chip constraints drove up the average new vehicle price to $37,200, representing a rise of 8.4% when compared to the same period in 2020.

When/How the Shortage is Expected to Ease

• Industry experts expect the overall global chip shortage to last through 2021. However, some expect that the industry will not be able to completely recover until some time in 2022.
• Arthur Herman, a Forbe's contributor who specializes in AI and quantum computing, stated "It's going to require political will and innovative planning, in addition to monetary investment, to turn America’s situation around." The Biden administration is pushing for around $37 billion in funding to bolster domestic chip manufacturing, while Pat Gelsinger, the CEO of Intel, believes that the United States should expand "semiconductor production to one-third of all chips sold" in the country.
• In March 2021, Intel revealed that it is planning to construct two brand-new chip plants, which will be located in Arizona, at a cost of $20 billion. TSMC is also building a plant in the area, and Samsung is constructing a plant in Texas. However, building fabs is a long-term deal, as it can be a five-year process.

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