The US produces just 12% of the world’s computer chip supply. Here’s why it’s trailing China when it comes to manufacturing and how it plans to get ahead.

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President Joe Biden holds a semiconductor chip at the White House in Washington, U.S., February 24, 2021.

  • The US relies heavily on outsourcing chip-making since it’s cheaper and easier to go overseas.
  • The country’s reliance on foreign manufacturers is even more glaring amid the global chip shortage.
  • The solution, as President Biden has said, is to invest in domestic chip production.
  • See more stories on Insider’s business page.

A crushing computer chip shortage continues to choke the global supply chain.

Automakers are producing vehicles without smart technology – which requires chips – Apple’s MacBook and iPad production was reportedly delayed, and PlayStation 5s are being produced in limited amounts due to the squeeze.

It’s an effect caused over time by pandemic-driven shutdowns and soaring demand for products that need chips.

But one question that has emerged during the crisis is where chips are produced – and why the US doesn’t manufacture much of the global supply.

Here’s why it doesn’t.

Chips are difficult to produce, and it’s cheaper for US companies to outsource

In 1990, the US produced 37% of the world’s chip supply, according to a September 2020 report from the Semiconductor Industry Association. But now, the country is responsible for just 12% of global chip production.

Seventy-five percent of the world’s chip manufacturing comes out of Asia, per the report, and China is positioned to become the largest chip producer by 2030.

Why the decline in the US? It became cheaper to build chip facilities in countries outside of the US. Those foreign governments offer more attractive financial incentives to construct semiconductor factories, like tax breaks and grants. There’s also less regulation in places like Asia. On top of that, there aren’t as many jobs in the US created to run such high-tech factories.

There was a recent attempt to do so under the Trump administration – Apple supplier Foxconn was slated to build a Wisconsin facility that would produce large-screen TV displays and said it would create 13,000 jobs, but the whole project never panned out.

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The ground breaking for the Foxconn Technology Group on June 28, 2018 in Mt Pleasant, Wisconsin.

Some of the country’s largest chip manufacturers are also some of the biggest in the world. Intel still produces much of its chip supply at home, as the Wall Street Journal reported. But other major US chip producers outsource manufacturing to companies in Asia due to costs. One of those foreign contract companies is Taiwan Semiconductor Manufacturing Company, which produces more than half of the world’s computer chips and is also Apple’s primary supplier.

Making computer chips is a complex process. It’s also difficult and expensive to build new facilities to manufacture the vital silicon component, which means companies have to rely on existing plants. A new semiconductor factory can cost up to $20 billion, as ON Semiconductor CEO Keith Jackson wrote in Fortune, and that price tag is much higher in the US.

There are economic and national security benefits to ramping up US chip production

There could be risks in depending on foreign chipmakers if the US continues to fall behind China in the chip race, as the Journal notes.

President Joe Biden is aware of the issue and the threats posed by relying too heavily on foreign manufacturing. As part of Biden’s $2 trillion infrastructure plan, there’s a $50 billion allotment for domestic chip manufacturing incentives.

In a Monday meeting, Biden said the key to navigating the current chip shortage crisis is to invest in the country’s chip production.

“We need to build the infrastructure of today and not repair the one of yesterday,” Biden said, according to NBC News. “The plan I propose will protect our supply chain and revitalize American manufacturing.”

But as Recode notes, it won’t be a simple task to transition reliance to homegrown chip production. There will be a handful of factors to consider over time, like weaning off of foreign contract manufacturers and ensuring there are enough US workers to power new facilities.

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The global chip shortage is set to drag on. 4 experts predict how long it could last and how it could affect markets

Semiconductor microchip stock image

Semiconductors are some of the most critical components for the technology the underpins much of modern life.

Smartphones, PCs, electric vehicles, and even your fancy new refrigerator all use the chips to operate. When the supply of these vital products falls, it can become a big issue.

Over the last year, the semiconductor shortage has caused car companies to halt production, made getting graphics cards for PCs headache, and it’s led companies like Apple to face significant supply constraints in its rollout of new products.

Semiconductors are so important that they can even create national security issues when drones, fighter jets, and other critical military components are affected.

That’s one of the reasons why President Biden met with 20 top executives on Monday to discuss what can be done to fix the chip industry’s supply constraints and make sure something like this doesn’t happen again in the future.

President Biden has committed to helping the industry fix the semiconductor shortage with his new infrastructure bill. The $2 trillion infrastructure and jobs package will include some $50 billion for semiconductor research and production.

Still, despite help from the US government, experts say the global chip shortage is set to drag on. Below, Insider details how long four experts expect the crisis to continue and what it could mean for markets.

Ted Mortonson, Baird technology desk sector strategist

In an interview with Insider on April 6, Baird’s Ted Mortonson said he believes the global chip shortage will continue through the rest of the year.

The tech sector strategist said rising demand from the cloud sector, the 5G rollout, telecommunications firms, EV makers, and more is one of the main reasons for the shortage and noted that new capacity will need to come online to offset demand.

Mortonson highlighted semiconductor firms’ recent investments into capacity including Taiwan Semiconductor Manufacturing Co.’s $100 billion investment over the next three years that the company says will “increase capacity to support the manufacturing and R&D of advanced semiconductor technologies.”

However, the strategist said that despite new initiatives, much of the additional capacity won’t come online until the end of the year. Mortonson also noted that most semi companies have instituted “non-cancellable orders” and that lead times range from 15 weeks to over 50 weeks in some cases.

Mark Fields, former Ford CEO and senior advisor at TPG Capital

Mark Fields sat down with CNBC on April 9 to discuss the effects of the global chip shortage on the auto industry. Fields said auto manufacturers lost about 3 million units due to COVID in 2020 and he expects the chip shortage may be just as destructive.

“Through the first quarter, through various forecasts, it looks like about 700,000 units were lost…you can just do the simple math and you could see that the losses could approach the level of the Covid losses for last year,” the advisor said.

Fields also said automakers are trying to maximize their production value by focusing on selling their highest margin vehicles, but that it’s really a “game of whack-a-mole” given the breadth of supply constraints.

Fields added that the situation for automakers should get better in the second half of 2021, but the industry won’t fully recover until well into 2022.

Ganesh Moorthy, chief executive officer at Microchip Technology

Ganesh Moorthy, the CEO of Microchip Technology, spoke with CNBC on Monday about the chip shortage and said it’s the worst crisis he’s seen in the industry in 40 years.

The “imbalance between supply and demand has never been this acute in all my history in this industry,” the CEO said.

Moorthy also said that he believes supply constraints will last through the year and “most likely” continue into next year.

The CEO added that the chip shortage has been “brewing for some time” and said that it started with tariffs during 2018 which caused demand to fall. In response, Moorthy says many chip manufacturers leaned out inventory and idled some factories in response.

Then when the pandemic hit, a swath of new stay-at-home trends caused demand to skyrocket, leading to the shortage.

Moorthy said that it “takes six months of cycle time from when we say go to when production comes online full force,” so he expects the lack of supply to continue moving forward.

Anand Srinivasan, Bloomberg Intelligence analyst

Anand Srinivasan, an analyst with Bloomberg Intelligence, spoke with Yahoo Finance on Monday and said that the chip shortage could persist well into the second half of 2021.

The analyst said investors shouldn’t just be worried about their auto industry holdings due to the semiconductor shortage either.

“In the grand scheme of a $440 billion industry the auto business is only 8%, 9% of semiconductors,” the analyst said.

Srinivasan is “more worried about other areas where the impact could be larger and it affects a lot more people.”

He said a variety of products will be affected by the shortage but argued the two industries he’s most worried about are PCs and smartphones, which make up some 70% of semiconductor demand.

The good news for investors is that Srinivasan believes that the lack of supply will stretch out demand, rather than hurting it. “You’re not going to go out and buy a bicycle because you couldn’t get your Audi A4,” the analyst said.

This means that although production might be hurt in the short-term, over the long haul strong demand will remain, according to the analyst.

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Taiwan Semiconductor slips as Intel announces plans to spend $20 billion on new chip factories

FILE PHOTO - A logo of Taiwan Semiconductor Manufacturing Co (TSMC) is seen at its headquarters in Hsinchu, Taiwan August 31, 2018. Picture taken August 31, 2018. REUTERS/Tyrone Siu
A logo of Taiwan Semiconductor Manufacturing Co (TSMC) is seen at its headquarters in Hsinchu.

Taiwan Semiconductor’s stock slipped on Wednesday after Intel announced plans to spend $20 billion on two new chip factories in Arizona.

Intel’s new CEO Pat Gelsinger laid down plans to directly compete with Taiwan Semiconductor and its South Korean rival Samsung in the foundry business creating chips for companies around the world.

“Intel is back. The old Intel is the new Intel,” Gelsinger said in a March 23 virtual presentation. “We’re going to be leaders in the market and we’re going to satisfy the new foundry customers, because the world needs more semiconductors and we’re going to step into that gap in a powerful and meaningful way.”

Intel is taking advantage of incentives from both federal and local governments to help roll out its new factories after President Biden signed an executive order to bolster US supply chains amid a worldwide semiconductor shortage in late February.

Intel’s Arizona factories will create over 3,000 permanent high-tech jobs, 3,000 construction jobs, and roughly 15,000 local long-term jobs for the region.

Taiwan Semiconductor shares continued their more than month-long fall on Wednesday after the Intel news broke. The stock is down roughly 20% from February 16 record highs.

In a note to institutional investors on Wednesday, Wedbush’s Brad Gastwirth said he believes TSMC’s fall on the Intel news is overdone.

The Chief Technology Strategist said he sees Intel’s new foundry business as an expensive move that could have an “elongated” production timeline, not producing any revenues for Intel until 2022 or 2023.

Taiwanese Economy Minster Wang Mei-hua added a similar opinion when leaving parliament on Wednesday, saying Intel’s $20 billion investment wouldn’t be a challenge to Taiwan Semiconductor and other Taiwanese chip makers, Reuters reported.

Taiwan Semiconductor has enough of its own problems without Intel’s move into the foundry business.

A water shortage has threatened production at TSMC for over a month now, and Bloomberg reported on Wednesday that the water supply to chip makers has been cut entirely as a drought continues to lower water reserves in the island nation.

Taiwan Semiconductor traded down 4.13% as of 9:58 a.m. ET on Wednesday.

TSM chart 2
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Major auto chip supplier Renesas says it expects to resume production in a month following a fire at its factory

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  • Renesas will replace equipment damaged by Friday’s fire.
  • The fire will likely further dent the global supply of chips needed by auto makers, CEO Hidetoshi Shibata said.
  • Halting production at the building will cost around $156 million per month, the company said.
  • See more stories on Insider’s business page.

Japan’s Renesas Electronics, a leading supplier of semiconductors for the automotive industry, will resume production within one month at its N3 Building where a fire broke out last week, the company said on Sunday.

The blaze broke out Friday in a clean room at the company’s main factory in Hitachinaka, northeast of Tokyo. Halting production at the N3 Building will cost around 17 billion yen (or around $156 million) per month, the company said.

The production halt is also likely to further dent the global supply of chips needed by auto makers, CEO Hidetoshi Shibata said.

The clean room will be scoured and the company will procure replacements of the burned equipment, company officials said in a Sunday press conference.

Renesas reported no damage to the building or injures among employees but said that 2% of the manufacturing equipment at the N3 Building has been burned.

The company said that around two-thirds of the products manufactured at the N3 Building can be produced in foundries as an alternative.

Manufacturers in the electronics and auto industry have been struggling with the global chip shortage caused by disruptions in the supply chain during the coronavirus pandemic. This has pushed companies to delay production plans or search for other suppliers.

In February, the Japanese chipmaker bought Dialog Semiconductor, an Apple chip supplier, for 4.9 billion euros ($5.9 billion) in cash.

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Here’s why there’s a global computer chip shortage that is slamming automakers during the pandemic

vauxhall car factory
Vauxhall car factory in April 2020.

  • There’s a computer chip shortage accelerated by pandemic-driven disruptions in the supply chain.
  • Automakers rely on chips for tech in their cars, and the likes of Apple need them to power gadgets.
  • With only so many chips to go around, industries are suffering as they struggle to meet demand.
  • Visit the Business section of Insider for more stories.

A group of lawmakers is asking the Biden administration to intervene in what has become a global computer chip shortage.

“We believe that the incoming administration can continue to play a helpful role in alleviating the worst impacts of the shortage on American workers,” the senators wrote in a letter.

So what’s going on? 

Automakers and consumer electronics companies are vying for computer chips

These chips have become a crucial part of the supply chain.

Car companies like Ford use them to power the modern-day technology in their vehicles – the engine, Bluetooth capabilities, seat systems, collision and blind-spot detection, transmissions, WiFi, and video displays systems all run on the chips.

And the silicon components are what power the high-tech gadgets from companies like Apple that we use every day. The upgraded technology in gaming consoles and 5G smartphones in particular require a lot more power, and therefore rely more on chips than previous generations.

Since March, when the pandemic set in, consumer demand has surged for vehicles and for devices like smartphones and gaming consoles that people can use for entertainment while stuck at home.

Automakers like General Motors, Toyota, Ford, and Subaru, to name a few, were forced to close factories around the onset of the pandemic. When the factories reopened, customer demand for cars had skyrocketed as people, stimulus checks in hand, jumped at the opportunity for low-interest rates and a way to get around that didn’t involve mass transportation.

Automakers responded by ramping up production to maximum levels, further driving up demand – and competition – for computer chips.

Read more: Wall Street is worried that Intel’s disappointing earnings are a sign that its terrible year will only get worse: ‘2021 seems like a messy year’

Meanwhile, chip industry players like Intel were already struggling to keep up with demand, even since before the pandemic. And chipmakers overseas were also experiencing supply chain disruptions as the pandemic forced them to close down factories.

Even with chipmakers that are doing fairly well during the pandemic, like Taiwan Semiconductor Manufacturing Company – which produces more than half of the world’s computer chips and is also Apple’s primary supplier – there still isn’t enough supply to go around.

The shortage doesn’t look like it will let up any time soon

Computer chip makers are running at maximum capacity and it’s not feasible for companies to build factories to compensate for the increase in demand, Bloomberg has reported.

Phone makers like Apple are more prepared to pay higher prices for the chips than automakers are, according to an analyst who spoke to Bloomberg. That doesn’t mean phone makers haven’t been negatively impacted by the chip shortage though – Apple reportedly faced supply issues for chips to power its 5G-equipped iPhone 12 models that debuted in October.

But the auto industry specifically has felt the pinch, and some have even had to halt production due to the shortage. Ford and Fiat are temporarily pausing production because they don’t have enough chips.

With not enough chips in supply, the automaking industry could lose $61 billion in 2021, according to consulting firm Alix Partners as Bloomberg reported.

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