Where the US can beat China: semiconductors

An automotive chip shortage has been plaguing automakers for over a year, bringing global vehicles sales figures down by 10 percent in 2021 (81 million units) compared to pre-pandemic 2019 levels. Analysts project the chip shortage to last well into 2022, only to alleviate toward the end of the year. The Biden administration even emphasized that key chip inventories reached record lows (5-day supply compared to 40-day supply), while lead times for global semiconductor procurement ranges between 25 to 44 weeks for some chips, well beyond normal wait time estimates (10 to 14 weeks).

The pandemic is to blame, to some extent, for this supply-demand gap, as well as a lack of investments in automotive chips over the past years. Others point to the “just-in-time” production method as an additional bottleneck, as the reliance on low stock figures becomes an inhibitor, instead of a contributor, to efficiency, especially in times of key component shortages. The fact that some automakers (i.e., Toyota, Ford, GM, etc.) were more affected than others (i.e., BMW, Tesla, etc.), shows key differences in production methods, supply chain management and software-driven adjustment strategies, which Tesla employed when it recalibrated chips rapidly by rewriting software.

Regardless of what factor is to blame, the result stands the same, multiple factories across the U.S., EU and even China had to temporarily shut down production due to the chip shortage. As a consequence, one chip factory investment announcement has been following the next, almost on a monthly basis. For illustration, U.S.-based companies like Ford, after idling it’s Louisville, Ky. factory for a week, recently announced a partnership with GlobalFoundries to enhance domestic chip manufacturing. GM announced a similar partnership with Wolfspeed in New York State. Beyond automakers, Samsung and Intel announced chip investments in Texas ($17 billion) and Ohio ($20 billion) respectively, while TSMC is constructing a plant in Arizona ($12 billion). On top of that, the Biden administration has finalized a ‘Chips bill’, although it still awaits congressional approval and aims to invest $52 billion to accelerate the U.S.-based chip market.

These measures may alleviate the chip shortage in the medium term. A production method adjustment away from a rigid “just-in-time” manufacturing toward higher stock requirements for key components, a strategy that Ford CEO Jim Farley highlighted in a recent Bloomberg interview, may reduce bottlenecks in the short term. Pivoting toward becoming more software-based companies will give traditional automakers more flexibilities in chip recalibration, which the Tesla example has shown as the company set another electric vehicle (EV) delivery record in 2021 of 936,000. However, as the electric vehicles transition is reaching full momentum, and since EVs require twice the amount of chips than gasoline or diesel vehicles, a long-term strategy is needed.

The geopolitics and economics of chip manufacturing offer some insights. Geopolitically speaking, semiconductor supply is concentrated in the hands of a few key companies, such as TMSC and Samsung, which control 80 percent of the market. From an economic perspective, cell phone chip demand is in direct competition with automotive chip demand as chip manufacturers prefer supplying the former rather than the later due to higher profit margins, explaining why the automotive sector currently accounts for only 8 percent of global semiconductor demand. This gives a key advantage to the U.S., as chip manufacturers are easily attracted to the tech-driven U.S. market rather than to secondary markets such as the EU, an advantage that ultimately trickles down to the automotive sector. This is one of the reasons why the “European Chips Act” was widely criticized, and why billion-dollar semiconductor investments were announced in the U.S. and not the EU. Even Chinese policymakers are getting nervous about a future semiconductor dependency as China already imports more than $300 billion worth of chips from a global industry that relies on the U.S. and its allies.

In the electric vehicle transition, the U.S. is losing the race in terms of battery production, critical minerals extraction and processing to China. Battery components such as lithium, cobalt, nickel, copper and rare earths, are predominantly processed in China (more than 70 to 80 percent), according to the IEA,. On the other hand, despite only controlling 12 percent of the current semiconductor market, a swift capacity ramp-up could have the U.S. deliver one in four global chips within the next five years. As a consequence, the one area the U.S. could hold a key advantage, in and beyond the EV race, is semiconductors, a high value-added and strategic market, which it should expand and leverage in any way possible.

Johan Bracht is a research assistant at New York University’s School of Professional Studies. Bracht previously worked as an EU-policy analyst for Hydrogen Europe in Brussels and for BMW in Geneva and Munich, managing electric vehicle markets.