The US and Taiwan have committed to supporting supply chains for chips.
The framework comes amid heightened tensions between China and Taiwan.
US defense official Ely Ratner said Taiwan’s free-market economy is “integral” to the world.
The US and Taiwan have set up a new trade and investment framework as the island’s tensions with China escalate.
The Technology Trade and Investment Collaboration (TTIC) framework was announced in a December 6 call between US Commerce Secretary Gina Raimondo and Taiwan’s Minister of Economic Affairs Wang Mei-hua. The TTIC’s goal is to develop commercial programs and to strengthen critical supply chains, according to a press release from the US Department of Commerce.
In the call, Raimondo and Wang “committed to identifying other steps to support semiconductors and other critical supply chains.”
“Working together, we can build business connections and generate further investments which will ultimately create good-paying jobs, strengthen critical supply chains, and deepen our overall economic relationship,” Raimondo said in the call.
The partnership comes amid escalating tensions between China and independently governed Taiwan, which Beijing views as a breakaway province. China’s air force has been entering Taiwanese airspace frequently in recent months and staging military exercises near the island, prompting fears of a military conflict.
On Wednesday, Assistant Secretary of Defense Ely Ratner told the Senate Foreign Relations Committee that “bolstering Taiwan’s self-defenses is an urgent task.” Ratner referred to China’s actions as “destabilizing” and “intentionally provocative,” according to a transcript of his statement.
Taiwan’s free-market economy is “integral” to the world, added Ratner.
“Indeed, our economy — like many others around the world — has come to count on Taiwan as a critical supplier of high-technology, including semiconductors,” said Ratner.
Taiwan is the world’s largest semiconductor producer, with one firm — TSMC — accounting for over half of the global supply of made-to-order chips. In a July earnings call, TSMC chairman Mark Liu addressed fears over a potential invasion of Taiwan.
“Everybody wants to have a peaceful Taiwan Strait. Because it is to every country’s benefit, but also because of the semiconductor supply chain in Taiwan, no one wants to disrupt it,” Liu said, according to a transcript of the earnings call.
What’s often overlooked is that official US government policy is oriented around making these exact chips harder for China to manufacture. US President Joe Biden is continuing a “trade war” with his Chinese counterpart, Xi Jinping, that began under Donald Trump, and he’s not blinking as the supply-chain crisis endangers Christmas.
The ships-and-chips crisis is another way America and China are on the verge of “decoupling,”as the Trump-era trade war hardens into a new status quo. People hoping for an easier holiday shopping season are overlooking how long and painful this transition could be.
The US-China trade war has left the US short on electronics and cars
The US accounts for just 12% of global chip production, and Asia accounts for a whopping 75%. according to a report from the Semiconductor Industry Association, which projects China becoming the largest chip producer by 2030.
But Donald Trump ran on a largely anti-globalization platform in 2016, with a particular focus on how America is getting “ripped off” by China. Chips were an area of leverage.
China isn’t just an exporter of chips, it also needs a steady supply of particularly sophisticated integrated circuits from other countries, including the US, to fuel its consumer electronics manufacturing machine. In the past decade, China has been importing more and more chips from the US, because it needs to insert them into electronic products that get shipped back around the world.
China is generations behind in making the most cutting-edge chips. For instance, the world’s largest semiconductor firm, Taiwan Semiconductor Manufacturing Corporation (TSMC), is developing ultra-small chips of 3-nanometers and smaller. China’s largest chip firm, Semiconductor Manufacturing International Corporation (SMIC), just began making 14-nm chips in late 2019.
The US is determined to make China’s manufacturing efforts difficult.
Last September, the Trump White House imposed export restrictions on SMIC, forcing it to source parts elsewhere and reconfiguring supply chains in the process.
The Biden administration has been enlisting its allies to freeze China out from the technological equipment it needs, making sourcing even harder for the country.
This all happened after the pandemic shut down semiconductor manufacturing operations for months in 2020, leading to spikes in the prices of new and used cars and shortages of all kinds of electronics.
Biden isn’t changing course
Those hoping for the Biden administration to reject Trump’s playbook have been sorely disappointed.
The president has done little to alter his predecessor’s aggressive trade stance since taking office eight months ago. Katherine Tai, the US trade representative, confirmed the tough policy would continue in a Monday speech.
“For too long, China’s lack of adherence to global trading norms has undercut the prosperity of Americans and others around the world,” she said in a speech at the Center for Strategic and International Studies, adding it’s “increasingly clear” that China hasn’t addressed the US’s concerns.
Biden said earlier this year the key to navigating the current chip shortage crisis is to invest in the country’s chip production, allotting $50 billion in his infrastructure plan for domestic chip manufacturing incentives. “The plan I propose will protect our supply chain and revitalize American manufacturing,” he said in April, during a virtual summit with auto executives and other business leaders. Of course, Biden was talking about “our supply chain” – meaning an American one – and not the globalized “Chimerica” supply chain of the early 2000s.
The Biden administration recently made countering China the centerpiece of its foreign policy agenda, even reorganizing the CIA to make China a principal focus. The CIA described the country as a “key rival.”
The transition to homegrown chip production will be more easily said than done. American manufacturers aren’t used to expensive American labor, so they’ll need time to wean off foreign contract manufacturers, Recode noted. Meanwhile, it can take years to get new production facilities off the ground.
Americans, then, are set to endure a lengthy standoff. A JPMorgan note on Friday by a team led by Jahangir Aziz stated that US-China trade tensions are set to remain a “palpable risk,” as China is in the midst of an “economic-policy regime shift” and “intensified US-China tension since 2018 has entered a relative freeze.”
Speaking on Friday after a disappointing jobs report underscored the difficulties facing the economic recovery, Biden advocated again for his infrastructure plan, which is struggling to make its way through Congress.
He stressed the need for America to regain leadership and become more “competitive,” and he highlighted one country outcompeting and outspending America on its infrastructure and economy: that country was China. That could mean a lot more lean Christmases.
Economist Mohamed El-Erian in an interview Monday took aim at assessments of inflation that describe rising prices as “transitory,” stating that there is a fundamental misunderstanding of what inflation is and how it is already spreading throughout the economy.
“I always laugh when people say, oh, it’s isolated, it’s transitory,” Allianz’s chief economic adviser told CNBC. “I think there’s a fundamental misunderstanding about inflation today because … most people haven’t lived through it for a long time and certainly most traders on Wall Street haven’t traded through it.”
El-Erian pointed to the surge in used cars prices to their highest in more than 60 years, which has been followed by an increase in prices of new cars, and a rise in the price of rental cars. This, he said, shows inflation is not contained.
“There is a logic to these inflation chains. They take time, and most people, unfortunately, haven’t seen them,” El-Erian told CNBC. “So they think everything’s isolated. Actually, it’s not. It’s interconnected.”
El-Erian, who is also the president of Queens’ College, Cambridge University, countered the longstanding narrative of the Federal Reserve that inflationary pressures are temporary.
The central bank slashed rates to historic lows at the start of the pandemic to stimulate economic activity and has signaled its intention of keeping interest rates unchanged until 2023.
Fed Chair Jerome Powell has repeatedly said that inflation will pass as the economy settles into a new normal. However, updated rate-hike projections six weeks ago signal that the central bank could see inflation posing a larger risk than initially thought. Powell is expected to issue a new statement this week, on July 28 at 2 p.m. ET.
“I don’t expect fireworks, El-Erian said. “The Fed has adopted a new framework that is backward-looking. They’re no longer forecast-based; they’re outcome-based.”
El-Erian also maintained that inflation will continue to run higher.
“The big question for me is not whether inflation will be higher than what the Fed expects,” he told CNBC. “It is whether the system is wired loosely enough to adjust to that – and that’s what we going to learn.”
The Consumer Price Index rose 0.9% between May and June, much more than the consensus estimate of 0.5%.
Some car dealers have sold used trucks for more than the original sticker price thanks to rocketing demand and a global shortage of chips needed to make new cars, Fox Business reported.
Used vehicle prices have risen by an average of 30% over the past year, according to automotive data site Black Book, per Fox Business.
Alex Yurchenko, Black Book’s senior vice president of data science, told Fox Business that he had found 73 models of vehicles between one and three years old that were being sold to dealers at auctions for more than their original price.
“The market is very strange right now,” Yurchenko told Fox Business. “Dealers need the inventory, so they are paying lots of money for their vehicles on the wholesale market.”
A vehicle’s sticker price is the manufacturer’s recommended price for retailers.
While many of the models were high-value trucks and SUVs, such as the Ford F-150 Raptor pickup, Yurchenko told Fox Business that he found modestly priced vehicles sold above their sticker price, too. For example, Yurchenko found a 2019 Toyota Tacoma SR double cab pickup, originally priced at $29,000, going for nearly $1,000 more in 2021, Fox Business reported.
“Before we get through this, prices for many mainstream vehicles will get closer to their manufacturer’s suggested retail price,” Yurchenko told Fox Business.
And used vehicle prices have also soared across the Atlantic – the UK’s Vehicle Remarketing Association (VRA) reported double-digit price increases over the past few months, and predicted that prices will rise further.
“We are in a kind of ‘perfect storm’ where stock is in very short supply, demand is high, and buyers are ready to spend freely,” VRA chair Philip Nothard said. Nothard said that dealers are also happy to sell older vehicles than they would’ve done previously.
The increase in used vehicle prices in the US has started to slow, with used cars climbing 0.75% last week – the lowest weekly rise in 17 weeks, Black Book told Fox Business.
Shares of Nio rose 4% on Tuesday after Citi upgraded the Chinese car maker to “buy” from “neutral,” citing a surge in demand for electric vehicles in China.
Citi lifted its 2021 sales estimate for electric vehicles in the country to an estimated 2.52 million units from 1.79 million units. For 2025, the firm also boosted sales estimates to 7.84 million units from 6.86 million units.
Citi said it expects that the uptick in the second quarter order backlogs will increase Nio’s revenue and market share in the second half of 2021.
Citi’s new price target of $58.30, raised from $57.60, represents a potential 50% upside from Friday’s closing price of $38.62. The bullish new target comes despite a rough year so far in 2021 for the electric vehicle maker, and the industry broadly, as supply chain and manufacturing constraints weigh on car makers’ delivery guidance.
“Based on the current production and delivery plan, the company will be able to accelerate the delivery in June to make up for the delays from May,” Nio said in a statement Tuesday. “The company maintains and reiterates the delivery guidance of 21,000 to 22,000 vehicles in the second quarter of 2021.”
Ford plans to temporarily shut eight factories due to a global shortage of semiconductor chips, according to an internal memo viewed by CNBC.
The automaker told CNBC that it plans to cut production due to the chip shortage, including its Ford Mustang, Bronco Sport SUV, and F-150 pickup models.
The eight plants to close include facilities in Chicago, Mexico, and Canada, the memo reportedly said.
“Our teams continue making the most of our available semiconductor allocation and will continue finding unique solutions to provide as many high-quality vehicles as possible to our dealers and customers,” Ford said in a statement to CNBC.
The company plans to close its Dearborn, Michigan truck plant for two weeks starting May 31, and reopen on a reduced schedule from June 14, according to the memo.
Ford recently showed off a fully-electric version of its popular F-150 pickup, the F-150 Lightning EV, which will be produced at the Rouge Electric Vehicle Center in Dearborn, Michigan. This is a separate factory, and was not mentioned in the memo.
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.
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.
Tesla on Friday announced better-than-expected car sales for the first three months of 2021, despite major production and supply-chain headwinds.
The electric-car maker delivered 184,800 vehicles in the first quarter, topping Wall Street’s expectations. The carmaker sold 182,780 of its Model 3 and Model Y, along with 2,020 of its higher-end Model S and Model X. Tesla does not break down its sales by individual model.
Tesla said it saw strong demand for the Model Y in China and that it will continue to speed up production of the refreshed Model X and Model S.
Shares of the automaker sank slightly, about 0.5% in extended trading Friday, though most major stock exchanges were closed for Good Friday. The stock sold off just shy of 1% on Thursday in the lead-up to the announcement.
Overall production numbers came in at 180,338, Tesla said. Both figures could change slightly, about 0.5%, as paperwork is finalized.
The carmaker faced major headwinds in the first quarter including a global shortage of semiconductors that has kneecapped auto manufacturing worldwide, idling production lines and forcing automakers to build cars without certain components as they await chips.
In January, Tesla CFO Zach Kirkhorn warned of obstacles Tesla would face in the first quarter, including the semiconductor issue.
“Specifically for Q1, our volumes will have the benefit of early Model Y ramp in Shanghai,” Kirkhorn said on a conference call. “However, S and X production will be low due to the transition to the newly architected products. Additionally, we’re working extremely hard to manage through the global semiconductor shortage as well as port capacity, which may have a temporary impact.”
In February, Tesla temporarily halted production at its Fremont, California, factory, and CEO Elon Musk attributed the break to “parts shortages.” Production stoppages aren’t uncommon for carmakers, and they’ve become more frequent as the chip shortage drags on.
Wall Street expects Tesla to sell more than 800,000 vehicles in 2021, with production capacity aided by new factories that are set to come online in Germany and Texas.
Wedbush Securities analyst Daniel Ives said in a Friday note that he now expects Tesla to deliver more than 850,000 cars in 2021, as demand for EVs grows globally and as President Joe Biden signals a commitment to green infrastructure.
“We believe these delivery numbers are a paradigm and sentiment shifter for the space going forward. Its been a brutal sell off for Tesla and EVs, but we believe that will now be in the rear view mirror,” Ives said.
When it rains, it pours, and when there’s a drought, prices go up.
In this case, the drought is in Brazil and it has the US running low on coffee. That means your morning cup of joe is about to get more expensive.
The drought has decreased crop production just as congested shipping ports have caused US coffee stockpiles to hit the lowest they’ve been in six years, Bloomberg reported. So far, roasters have been relying on their inventories instead of hiking prices, but that will only last so long and wholesale prices have climbed.
Potential losses from the drought could affect half of Brazil’s coffee crops next year, soft commodities expert Judith Ganes told Reuters in December. She said it was hard to determine how badly Brazil’s Arabica beans were hit, but “there will be major failure,” she said. “I saw areas with 100% losses, 50% losses, 30% losses.”
Arabica-coffee futures in New York have increased by nearly a quarter since the end of October, per Bloomberg. And Marex Spectron recently upgraded its global coffee deficit forecast from 8 million bags to 10.7 million bags, citing the drought.
Logistic problems have only compounded the shortage brought on by declining crops. Some facilities in Dinamo, Brazil, told Bloomberg don’t have enough containers to ship out coffee. Some containers and charter vessels aren’t currently available, causing back ups and delays at shipping ports.
David Rennie, head of Nestle’s coffee brands, told Bloomberg it could take two to three years for take-away coffee to return to pre-Covid levels.
But coffee isn’t the only goods shortage hitting the global economy as it reopens this year.
US shipping ports have become unusually congested as imports pick up speed due to surging and unpredictable consumer demand, delaying shipments of all types, from sneakers to meat. Companies struggled to estimate demand correctly, partly explaining the pileup, while factory production was halted off and on during the work-from-home economy of 2020.
The shortage is particularly acute in certain spaces, such as in the semiconductor chips needed to make personal electronics and products with electronic components such as cars. Finally, February’s Texas Freeze suspended much of the US oil sector and the manufacturers who rely on it, making gas harder to come by and things refineries produce, like plastics, more expensive.
That’s not to mention the shortage of things like bikes, fitness equipment, and even lumber, the latter of which has added to already high housing prices. As supply dwindles, all of these things become things Americans could end up paying more for.
But you know what they say, when it rains, it pours.
Shares of chip maker Nvidia fell 3% in premarket trading on on Thursday as investors’ concerns over the global chip shortage weighed on fiscal fourth-quarter earnings that beat expectations.
Nvidia CEO Jensen Huang during the Wednesday earnings call said he expects the shortage to continue this 2021. But Huang assured investors that the shortage would not affect some segments.
The semiconductor industry in the past year has been struggling to meet global demand, thanks to an unexpected boom in online activity brought about by the pandemic. Nvidia, which outsources from Asia, Taiwan Semiconductor Manufacturing and Samsung Electronics, in particular, is stuck in the middle. Both Asian companies are having difficulty keeping pace with demand, and the bottleneck has trickled down to Nvidia.
Nvidia sells semiconductor parts for gaming, artificial intelligence, data centers, and automobiles, among other sectors.
The company reported that revenue jumped 61% to $5 billion for the quarter ending January 31 and adjusted earnings of $3.10 per share, both considerably higher than Wall Street’s $4.82 billion and $2.81 per share estimates.
For the current fiscal first quarter, the chip maker set a forecast of $5.3 billion in revenue versus analysts’ expectations of $4.49 billion.
For the coming year, the Santa Clara, California-based company remains bullish. Nvidia announced that it is working on graphic cards for mining cryptocurrencies like ethereum, even if the CEO said it will not be a huge part of its business.
Last year, Nvidia announced plans to buy Arm, Softbank’s chip division, for $40 billion. Arm is not a chip maker, but licenses chip designs, widely used in mobile phones, to customers such as Apple, Samsung, and Intel.