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China Stockpiles Chips Used In American Autos, Etc. In Retaliation For U.S. Sanctions

China is taking decisive steps to protect itself from a widening U.S. technology ban, with imports of computer chips and the machines that make them surging last year. China Stockpiles Chips Used In American Autos, Etc. In Retaliation For U.S. Sanctions

Chinese businesses bought almost $32 billion of equipment used to produce computer chips from Japan, South Korea, Taiwan and elsewhere, a 20% jump from 2019, a Bloomberg analysis of official trade data shows.

And with companies like Huawei Technologies Co. stockpiling supplies ahead of U.S. sanctions, imports of computer chips climbed to almost $380 billion — making up about 18% of all of China’s imports for the year.

The U.S. has steadily restricted Chinese firms’ access to American technology, pushing Beijing to redouble efforts to develop a domestic chip industry after years of slow progress. The Trump administration’s actions exposed China’s vulnerability in this key sector — and even with President Joe Biden now in office, Beijing is pushing ahead with a sweeping new plan to become self-sufficient in semiconductors.

“In the near term, China is dependent on imports to advance its semiconductor manufacturing,” said Dan Wang, a technology analyst at Gavekal Dragonomics in Shanghai. “China does not yet have the capability to produce the advanced chipmaking equipment it needs. The country is investing heavily, but success will require more than a decade-long effort.”

Chinese companies like Semiconductor Manufacturing International Corp. have ramped up their purchases of the machines needed to make silicon wafers and computer chips. China became the largest market for such equipment in 2020, according to a December report from SEMI, an industry association.

Updated: 2-14-2021

How Car Makers Collided With A Global Chip Shortage

Auto demand rebounded from a coronavirus slowdown for Ford, GM, VW and others, but the industry misjudged supply lines of semiconductors that control engines, airbags, touchscreens.

Executives at auto makers like Volkswagen AG and General Motors Co. were upbeat about the industry’s recovery in early fall. Demand was rebounding from pandemic lows, and their factories were humming again.

Then came the warnings. Like the one in a Nov. 12 Skype call between VW’s logistics head and officials at car-parts supplier Continental AG . The supplier said it wouldn’t deliver a range of core components VW needed because of a global semiconductor shortage, said people familiar with the call.

Other car makers were getting similar alerts from suppliers.

In December, the parts flow from Continental, Robert Bosch GmbH and other suppliers had so dried up that VW announced it would stop production of bestselling brands such as Audi and its namesake VW brand at plants in Europe, China and North America. Audi, citing a chip shortage, furloughed 10,000 factory workers for the first time since the spring lockdowns. Ford Motor Co. , Honda Motor Co. and others soon reduced output of vehicles from big pickups to compact sedans.

Continental began informing customers in the fourth quarter about supply-chain issues, a company spokesman said, declining to comment on specific customers calls. Bosch declined to comment on exchanges with suppliers. VW, GM, Ford and Honda said they are closely monitoring the situation and working to limit the impact.

Today’s cars use chips that help control elements from engines and transmissions to cruise controls, air bags, brakes and power seats. The chip count has increased as cars become more digital, including with entertainment systems with screens that have become a growing competitive battlefield.

So the chip-shortage fallout—swift and global—has cast a pall on the industry, exposing structural problems for car makers as semiconductors become more integral. Chip makers and auto manufacturers largely don’t expect the situation to normalize until at least the second half of the year. Some industry officials and analysts expect chip shortages could remain a problem into next year.

Ford CEO Jim Farley said on an earnings call this month: “We cannot afford to be in the situation we are with semiconductors right now.”

The White House this week said President Biden was working to remedy chip shortages in the auto industry.

German Economy Minister Peter Altmaier has been in contact with his counterpart in Taipei since January to urge the Taiwanese government to ensure the country’s semiconductor industry provides more chips to German auto makers, according to the two governments. Chinese regulators met with chip makers to address the issue on Tuesday, asking them to allocate more production to China, said the country’s Ministry of Industry and Information Technology, adding that they “recommended that auto chip suppliers attach a great importance to the Chinese market.”

Supply-chain Break

Auto manufacturers have spent decades streamlining their supply chains, using their muscle over parts makers to reduce their own costs by carrying little inventory and relying on suppliers to deliver components “just in time.” But car makers are finding they can’t dictate terms in the same way to the chip industry with its far-broader customer base, particularly now that chip demand is booming globally among a swath of industries.

Auto-industry officials say car makers’ top echelons don’t have as much certainty about whether their suppliers can procure the chips they need as they do over their traditional car-parts suppliers’ ability to procure components. Unlike with some other parts, said Mike Hogan, a senior vice president overseeing the automotive business unit at contract chip maker Globalfoundries Inc., “They don’t know how the sausage gets made at the bottom.”

Some car makers blame the shortage on parts suppliers, which generally do most of the chip buying—they build the chips into the parts they then sell car makers—including so-called tier-one suppliers that sell directly to auto makers. “We expected a very strong recovery after the summer and we expressed that quite clearly to our tier-one suppliers,” said Audi’s procurement chief, Dirk Grosse-Loheide.

Bosch CEO Volkmar Denner this month told reporters: “The shortage concerns the entire industry and we are in very close collaboration with our customers and suppliers to mitigate the topic in order to ensure as much supply as possible.”

The shortage will drive the global auto industry to produce nearly 700,000 fewer cars than planned for the first three months of 2021, said research group IHS Markit Ltd. Auto makers, citing the shortage, have furloughed tens of thousands of workers.

This week, GM expanded the downtime at plants in Kansas, Canada and Mexico to mid-March, citing the chip shortage, and said it expected lost production from the shortage to erode its bottom line by $1.5 billion to $2 billion this year. GM said it is reallocating chips to pickup trucks and big SUVs and working with suppliers to mitigate the impact. “The situation is very fluid,” GM Chief Financial Officer Paul Jacobson said on an earnings call this week.

Ford has slashed or stopped production of some models, blaming the shortage, including America’s top-selling vehicle, the F-150 pickup. It said it expected the chip shortfall to dent vehicle output by up to 20% in the 2021 first quarter. Honda said it was working to blunt the impact and has adjusted production, with most North American plants running at reduced output.

Toyota Motor Corp. has fared better, saying this week on an earnings call that its parts stockpile helped it through the shortage as it boosted its profit outlook. Chinese auto makers are expected to be less affected because they typically carry more inventory, credit-ratings firm Fitch Ratings said in a Jan. 29 report.

Self-inflicted Wound

The car-chip pain is partly a self-inflicted wound that traces to the pandemic’s early days. When the global economy went into stasis, preparations for future car production halted. Auto-parts suppliers in February and March reduced orders for electronics, according to industry executives, betting that large volumes wouldn’t be needed well into the future.

Some companies halted shipments by invoking legal clauses in their contracts that let them change terms because of circumstances beyond their control, such as natural disasters, said Ganesh Moorthy, CEO-elect of Microchip Technology Inc., an auto-chip supplier based in Arizona. The car-industry’s thinking, he said, was that demand wouldn’t rebound to its earlier peak for years.

Chip makers chose not to stockpile parts and wait for car makers’ orders—a decision made easier by surging demand from companies that benefited from the work-from-home era fueling sales of laptops, servers, smartphones and other electronics.

The rollout of superfast 5G networks has also helped absorb global chip-production capacity, and videogaming consoles have been flying off the shelves, creating a chip-supply shortage there, too.

“It’s everywhere,” said Michael Hurlston, CEO of Synaptics Inc., which makes touchpads and other sensor electronics requiring specialized chips. “It’s hitting us in mobile, it’s hitting us in automotive—it’s just semiconductors in general.”

Still, the car industry largely operated as if electronics suppliers were at its mercy, said Michael Schallehn, a Bain & Co. partner specializing in semiconductors. “Normally, when they are calling on their suppliers, everyone is excited about the large volumes,” he said. “But compare that to the billions of smartphones and PCs that are being sold.”

The auto industry bought roughly $43 billion of chips in 2019, roughly a tenth of the global market semiconductor market that year, according to Bain’s data. Taiwan Semiconductor Manufacturing Co., the world’s largest contract semiconductor maker by sales, is the largest single producer of the microcontrollers at the heart of the car industry’s supply shortage, according to IHS Markit.

TSMC in its latest earnings report said the car industry accounted for 3% of its quarterly revenue—dwarfed by customers such as Apple Inc. and smartphone-chip company Qualcomm Inc.

TSMC said that the automotive industry is an important area for it and that it treated its customers fairly and equally.

Early Recovery

VW in spring 2020 began telling Bosch and other major suppliers to expect a strong post-lockdown recovery, begging them to secure component supplies, according to internal documents reviewed by The Wall Street Journal.

Signs the industry rebound would be swift emerged soon after car companies in May ramped up operations after a nearly two-month factory shutdowns in North America. GM, Ford and other car companies said in June they wanted to reach near-pre-pandemic production levels by July 4.

U.S. auto sales rebounded faster than expected over the summer, with buyers snapping up sport-utility vehicles and trucks—big profit generators. In July, VW management again told suppliers that production would return near pre-pandemic levels by year’s end, according to the people familiar with the discussions.

Some parts suppliers were skeptical that new-car demand would fully rebound and were reluctant to order chips in the volumes the car companies directed, said John Trentacosta, a Detroit-area attorney representing suppliers.

“A lot of suppliers didn’t think things were going to ramp up that quickly and just didn’t manufacture to full volumes,” he said. “And then all of a sudden, demand is back on in a big way.”

ON Semiconductor Corp. , a U.S. company with about a third of sales to the auto industry, started notifying customers about lean inventories late last summer, said CEO Hassane El-Khoury, but buyers were reluctant to place orders, citing their lack of certainty about the economy and the coronavirus.

The chip problem largely remained hidden, as auto-parts suppliers through the summer and fall strained to get production back to normal, hit by other parts issues and absenteeism. That made it more difficult than normal to anticipate a potential semiconductor shortage that was still months out, said a senior executive at a Detroit auto maker.

Auto makers and tier-one suppliers “got into this mode of scrambling to fix and repair these disruptions on a daily basis,” the executive said. “That partially masked the bigger systemic issues with microchips.”

Then car-chip orders started coming in at volumes that swamped chip vendors. By late summer, nearly every other chip-consuming segment was seeing historically high demand. Spare capacity at chip-making factories tightened or hit shortages, according to semiconductor-research firm VLSI Research Inc.

Microchip Technology warned auto-industry customers its factories were strained. “The result of so many short lead time orders is that we are having to disappoint you with delivery dates,” Microchip said in a July letter, asking customers to provide clarity about their chip requirements covering at least 12 weeks on their need for standard products and imposing fees for expedited orders.

Several older chip factories in the U.S., Japan and Europe put closure plans on hold because their businesses suddenly became profitable, said Bruce Kim, CEO of Surplusglobal Inc., a South Korean broker of used chip-making equipment.

Late last year, the car industry’s panic grew. GM, which had given a bullish outlook to suppliers over the summer, in December sent a letter to its suppliers asking them to secure a year’s supply of semiconductors to meet its needs, according to a copy the Journal reviewed. GM declined to comment on the letter, saying it has been working with suppliers to avoid production cuts.

Detroit-area attorney Dan Sharkey, who represents suppliers, said one client in early January scoured the internet for chips to fulfill orders.

The car industry is rethinking its supply chains. VW officials said they are talking not just with suppliers but now also with chip vendors—rather than relying on parts makers to strike deals. VW officials said the company was considering buying chips directly or reserving capacity with chip manufacturers that it would then make available to component suppliers.

A more likely outcome, said Mr. Grosse-Loheide, the Audi purchasing chief, is that car makers will demand greater transparency from their partners about supply-chain risks. “I don’t think we have to rethink our sourcing,” he said. “We have to have a better understanding of the risks in the supply chains of our suppliers.”

Car companies, the executive at one Detroit auto maker said, will probably need to work more directly with chip suppliers and stockpile inventory in some cases. With chips increasingly crucial to cars, Globalfoundries’ Mr. Hogan said, there is little choice.

“The intimacy and importance of semiconductor technology to autos has crossed over a magic line,” he said. “Now we are here in a new automotive world order.”

Updated: 2-21-2021

Renault Battles Daily For Enough Chips To Keep Car Plants Open

Renault SA Chief Executive Officer Luca de Meo warned that a global shortage in semiconductors could result in more plant closures and dent the French carmaker’s production this year.

Securing enough chips is “a daily fight,” de Meo said Friday when presenting the company’s full-year results. The semiconductor bottleneck is expected to peak in the second quarter and could shave 100,000 cars off Renault’s output this year, the company said. Renault sold 2.95 million vehicles in 2020.

Renault is the latest automaker to warn of lasting effects from the supply-chain snarls that are reverberating throughout the industry, idling factories and adding to damage from the pandemic. The French company has already idled plants in Europe and northern Africa this year.

General Motors Co. has predicted the shortage will shave $1.5 billion to $2 billion off its adjusted earnings in 2021. Ford Motor Co. said first-quarter production could be cut by as much as a fifth and reduce adjusted earnings before interest and taxes this year by an estimated $1 billion to $2.5 billion.

The predictions of overall damage to the sector are grim. Consultant AlixPartners said the global chip shortage could cost automakers $61 billion in lost sales this year. IHS Markit expects that almost 1 million vehicles will be delayed from production in the first quarter.

“It will get worse before it gets better,” Phil Amsrud, an IHS Markit analyst, said in a report published this week. “Longer term, the automotive industry needs to make supply assurance as high a priority as cost savings.”

Updated: 2-28-2021

Chip Shortage Exposes Vulnerable Supply Chains

The world is running low on semiconductor chips, and automakers aren’t the only ones who should worry.

Hoping to address supply-chain disruptions following the pandemic, President Joe Biden on Wednesday ordered a wide-ranging review of U.S. reliance on foreign sources for critical goods such as pharmaceuticals, rare-earth metals and high-capacity batteries. On the most urgent matter — a shortage of semiconductors that has upended production at American automakers — he needs to think bigger.

Last spring, car sales collapsed as the coronavirus took hold. Expecting an extended downturn, automakers reduced orders for supplies, including parts that require semiconductors. At the same time, demand for the higher-margin chips used to make laptops, smartphones and other devices soared as much of the country began working from home.

When the economy bounced back more quickly than anticipated, the result was a supply crunch for car companies. It may be months before production is back to normal.

In the short term, Biden can’t do much to resolve this problem. Some companies were prepared for such disruptions — Toyota Motor Corp., for instance, had an ample chip stockpile — and others weren’t, but a government intervention at this late stage won’t get additional capacity online any time soon. That’s best left to the forces of supply and demand.

In the longer term, though, this incident highlights a serious vulnerability. Semiconductors play a crucial role in the U.S. economy. They turbocharge labor productivity and power everything from medical devices to consumer electronics to artificial intelligence.

Yet the share of global chips produced domestically has declined from 37% in 1990 to 12% today. Industry groups reckon that only about 6% of new capacity will be built in the U.S. over the next few years, compared to some 40% in China.

Left unaddressed, that will further concentrate the business in East Asia, increase supply-chain risks for U.S. companies, and potentially undermine America’s leadership. It’s also a threat to national security: The military requires about 1.9 billion chips a year for (among other things) weapons, communications and intelligence systems.

An essential first step, as Biden seems to recognize, is devising a new strategy with America’s allies. Japan, South Korea, Taiwan and Europe all contribute significantly to the global semiconductor business. They should create a strategic supply-chain alliance that would allow them to collaborate on R&D efforts, coordinate export controls, expand “trusted foundries” programs and take other steps to increase mutual resilience.

Next, federal funding for semiconductor research — which has flatlined in recent years — should be boosted significantly. By one estimate, every dollar invested in such programs yields $16.50 in additional gross domestic product. Perhaps more important, added investment should boost self-sufficiency, help build a skilled workforce, and lay the groundwork for industries of the future.

A much harder task is to encourage companies to make chips domestically. Although two top manufacturers have recently said they’re building or considering new plants in the U.S., the reality is that America is at a steep disadvantage due to high labor costs and government support overseas.

One study found that the total expense of owning a new chipmaking facility in the U.S. is 30% higher over 10 years than in Taiwan or South Korea, and 50% higher than in China. Government incentives amounted to as much as 70% of the difference.

Congress should seek to lessen this imbalance. Last month, lawmakers authorized a range of programs to promote domestic chip manufacturing, encourage public-private partnerships, boost efforts to acquire secure chips and more. They should ensure that these efforts are funded.

An investment tax credit for chip facilities and equipment might also help. The goal of these efforts should not be job creation — such facilities will be heavily automated — or propping up individual companies. Rather, it should be leveling the playing field, creating more resilient supply chains, and protecting national security.

Getting this right won’t be easy. But for the country that invented the integrated circuit, it shouldn’t be impossible.

Updated: 3-11-2021

Chip Shortage Strains Heavy-Duty Truck Makers

Surging orders for big rigs have the backlog at factories growing while key components are in short supply.

The global semiconductor crunch is reaching assembly lines for heavy-duty trucks, as the shortfall in chips and other components hits manufacturers trying to fill surging orders from operators of big rigs.

North American production of Class 8 trucks, the biggest freight-carrying vehicles on highways, “has basically been flat since September in a market where more trucks are needed quickly,” said Don Ake, vice president of commercial vehicles at transportation research firm FTR.

He said the backlog of orders at truck manufacturers has grown from 89,300 last June, after truckers had pulled back capacity plans in the wake of coronavirus lockdowns, to 205,000 in January, the most recent month for which those figures were available. Fleet operators ordered 44,000 heavy-duty trucks last month, more than triple the number they ordered in February 2020, according to preliminary data from FTR.

“The backlog is going to keep going up until production is able to do better,” Mr. Ake said.

Truck manufacturers say the semiconductor shortage, which has pushed automobile manufacturers including Ford Motor Co. , General Motors Co. and Honda Motor Co. to cut back factory shifts and reduce production, is part of a broader shortfall in components hitting their supply chains.

“Like the rest of the industry, we are navigating our way through a number of supply constraints, including those involving semiconductors, due to the steep ramp-up of production across the globe,” Martin Weissburg, president of Mack Trucks and chairman of Volvo Group North America, said in a statement.

“We’ve been able, thus far, to work our way through the issues without interrupting production,” he said. “The situation is fluid, and we’re continuing to do everything we can to minimize the impact on customers.”

A spokesman for Daimler Trucks North America LLC, whose brands include Freightliner, said labor and raw-materials shortages “continue to present challenges in our supply chain,” but said the company has been able “to keep full vehicle production moving close to plan.”

Columbus, Ind.-based engine maker Cummins Inc. is dealing with longer lead times on many components as well as absenteeism due to Covid-19, executives said in a Feb. 4 earnings call, adding the company expects the supply strains to ease in the second half of the year.

“It just feels like it’s a whack-a-mole, right?” Srikanth Padmanabhan, vice president of Cummins’s engine business, said at a March 1 investor conference. “Every day that we think of, there is a problem that we’ve solved and something else turns up… We’ve been working like this for the last 12 months and it’s going to be another 18 months and the entire supply chain is just exhausted,” Mr. Padmanabhan said.

A spokesman said Cummins is working with suppliers and customers to mitigate supply-chain pressures and keep up with demand, adding that the company relies on multiple suppliers in a variety of markets. The company expects to meet its guidance.

Mr. Ake said manufacturers are dealing with shortages and rising prices on items from steel to the wiring harnesses that connect electronic components.

The crunch comes as tight trucking capacity is driving up shipping rates for companies rushing to restock pandemic-depleted inventories. That is giving fleets more cash to invest in new vehicles after a roller coaster year when freight volumes plunged in the early months of lockdown, then roared back as businesses reopened.


Intel, Ford Urge Tax Benefits For Chips, U.S. Manufacturing

Foreign producers of semiconductors, electric car batteries and pharmaceuticals will continue to squeeze U.S. manufacturing unless Congress provides more incentives for domestic production, representatives from Intel Corp. and Ford Motor Co. said Tuesday.

George Davis, Intel’s chief financial officer, told the Senate Finance Committee that lawmakers should consider a wide range of measures, including grants and refundable tax credits, for U.S. to produce the advanced microprocessing chips that both Democrats and Republicans say is critical to national security.

“If you look to China, Taiwan, South Korea — all the areas where there has been substantial growth in the semiconductor manufacturing taking place — it has been with a coordinated set of policies taking place to incentivize investment.” Davis said. “The US has not taken that position.”

There is bipartisan support for bolstering domestic manufacturing, with Senate Majority Leader Chuck Schumer and Republican Senator Todd Young working on measures to boost U.S. competitiveness with China. The Senate could take up the proposal within months, which would provide new grants for semiconductor manufacturers to build new plants and create regional innovation hubs.

“The supply chain crisis setting off the most alarm bells deals with semiconductors,” Senate Finance Chair Ron Wyden said at the hearing. “They are a key component of cars, medical devices, appliances, phones and computers, defense technologies, you name it. Americans don’t roll out of bed without flipping some switch or checking some device that relies on semiconductors.”

Wyden said in a statement Tuesday he is working with two Democrats, Debbie Stabenow of Michigan and Michael Bennet of Colorado, on legislation that would provide benefits for domestic manufacturing and renewable energy.

The legislation “would expand production of critical technologies like semiconductors, batteries and solar components,” the Senators said in a statement. “These proposals would significantly increase federal investment in both the technology needed to transition to a net-zero emission economy, and the workers needed to develop and produce that technology.”

President Joe Biden’s infrastructure plan that the White House wants to advance this year could include tax help for companies moving jobs back onshore and expanding domestic manufacturing. As a candidate, Biden called for a 10% tax penalty on U.S. companies that move operations overseas and a 10% “Made in America” tax credit for companies that create jobs in the U.S.

“There needs to be stability and certainty in the tax code,” Jay Timmons, president and Chief Executive Officer of the National Association of Manufacturers, said in Tuesday’s hearing. “We want to make sure that research costs remain a deduction. We believe there needs to be a broad-based investment tax credit.”

Jonathan Jennings, Ford’s vice president for global commodity purchasing and supplier technical assistance, said Congress should preserve the 21% corporate tax rate. The Biden administration is considering raising the rate to 28% as a way to offset costs of an infrastructure plan.

Jennings also told the panel that Congress needs to pursue legislation that would head off a change to the research and development credit set to take effect at the end of the year.

That change would make the tax credit for research costs less valuable starting in 2022, requiring companies to amortize the cost over several years, rather than allowing them to write off the expenses in the year they are incurred. The provision was included in former President Donald Trump’s 2017 tax overhaul to reduce the cost of that law.

Bipartisan legislation introduced this week would double the value of the R&D credit for some businesses and also allow companies to immediately deduct the costs.

Updated: 3-21-2021

Stellantis NV, The World’s Fourth-Largest Automaker Delays Production of Trucks Amid Global Chip Shortage

Stellantis NV, the world’s fourth-largest automaker, said production of its Ram Classic pickup trucks in Warren, Michigan, and Saltillo, Mexico, will be affected for “a number of weeks” because of the global chip shortages.

The company, formed from this year’s merger of Fiat Chrysler Automobiles NV and PSA Group, said it will complete the vehicles when the component that requires the chip becomes available, according to an emailed statement from the company Saturday.

“We continue working closely with our suppliers to mitigate the manufacturing impacts caused by the various supply chain issues facing our industry,” it said.

The global shortage in semiconductors is spreading to industries from automakers to consumer electronics producers. Even Samsung Electronics Co., one of the world’s largest makers of chips and consumer electronics, warned this week that the crunch could pose a problem to its business next quarter.

Carmakers’ Chip Shortages May Last into Late 2021, Renesas Says

On Friday, Toyota Motor Corp. said it’s suspending operations at a plant in the Czech Republic for two weeks due to chip shortages.

On March 11, a Chinese semiconductor industry group said it’s agreed to work with its U.S. counterpart on chip-related issues, a rare example of bilateral cooperation in an area that’s become a focal point of tensions between Washington and Beijing.

Samsung Warns of Severe Chip Crunch While Delaying Key Phone

Samsung Electronics Co. warned it’s grappling with the fallout from a “serious imbalance” in semiconductors globally, becoming the largest tech giant to voice concerns about chip shortages spreading beyond the automaking industry.

Samsung, one of the world’s largest makers of chips and consumer electronics, expects the crunch to pose a problem to its business next quarter, co-Chief Executive Officer Koh Dong-jin said during an annual shareholders meeting in Seoul. The company is also considering skipping the introduction of a new Galaxy Note — one of its best-selling models — this year, though Koh said that was geared toward streamlining its lineup.

Industry giants from Continental AG to Renesas Electronics Corp. and Innolux Corp. have in recent weeks warned of longer-than-anticipated deficits thanks to unprecedented Covid-era demand for everything from cars to game consoles and mobile devices. Volkswagen AG said this week it’s lost production of about 100,000 cars worldwide.

In North America, the silicon shortage and extreme weather have combined to snarl more production at Toyota Motor Corp. and Honda Motor Co. The fear is the crunch, which first hit automakers hard, may now disrupt the much larger electronics industry.

“There’s a serious imbalance in supply and demand of chips in the IT sector globally,” said Koh, who oversees the company’s IT and mobile divisions. “Despite the difficult environment, our business leaders are meeting partners overseas to solve these problems. It’s hard to say the shortage issue has been solved 100%.”

Samsung, the world’s largest smartphone maker, is working with overseas partners to resolve the imbalance and avert potential setbacks to its business, its co-CEO said. Its shares slid 0.6% in Seoul on Wednesday, while suppliers and Asian chipmakers including Taiwan Semiconductor Manufacturing Co. and SK Hynix Inc. also fell.

Chipmakers like Samsung and TSMC are at the forefront of a global effort to plug a shortfall in supply of semiconductors, the building blocks of a plethora of consumer gadgets.

The deficit has closed auto plants around the world and now threatens supply of other products. While the Korean company is the leading maker of made-to-order silicon after TSMC, it relies on external suppliers and manufacturers for certain parts like power management and radio chips.

Larger-than-anticipated Covid-era demand for smartphones has also stretched stores of Qualcomm Inc.’s Snapdragon chips, the go-to processors for mobile devices. Qualcomm designs the chips, known as app processors, but relies on Samsung and TSMC to produce them and the Taiwanese chipmaker’s capacity has been strained.

“The tightened supply of Qualcomm AP chips produced by TSMC is affecting everybody except Apple,” said MS Hwang, analyst at Samsung Securities. “PCs will soon be hit due to the short supply of display driver ICs, and the profitability of TV will be affected by soaring LCD panel prices.”

Compounding matters, Samsung’s own production got sideswiped last month. Its fab in Austin, Texas — which makes chips both for internal and external consumption — was sidelined in February by statewide power outages and hasn’t resumed full production.

The resulting shortfall in production of Qualcomm 5G radio frequency chips could reduce global smartphone output by 5% in the second quarter, research firm Trendforce estimates. But the outage there is likely to affect Samsung’s mid-tier phones and laptops more than its top-of-the-range models or server chips, said Greg Roh, a senior vice president at HMC Securities.

“If Samsung is publicly talking about future products, you know that the silicon crunch is serious,” said Avi Greengart, analyst and founder of consultancy Techsponential.

Carmakers got hit first by the chip crunch in part because of poor inventory planning and are expected to miss out on $61 billion of sales this year alone. Honda Motor Co. on Wednesday said it will temporarily suspend some production next week at a majority of U.S. and Canada plants, underscoring the deepening crisis.

Why Computer Chips Are Like Toilet Paper And Gasoline

Hoarding can generate “phantom demand” that stimulates overproduction.

There’s no question that there’s a global shortage of computer chips. What we don’t fully know is how much of it is caused by hoarding. As with other essential supplies—toilet paper and gasoline, to name two—people tend to over-order when they fear running out.

That generates phantom demand. Suppliers that don’t realize the demand is fleeting can ramp up production too much, leading to the bust in a boom-bust cycle. “We believe the industry may be over-shipping to true demand,” senior analyst Chris Rolland of Susqehanna Investment Group wrote in a client note that was cited by Bloomberg earlier this month.

Techies with long memories may recall that happening two decades ago to Cisco Systems Inc., which had bragged of its unique ability to see deep into its supply chain. It heavily ordered components to keep up with soaring demand for its routers and other networking gear in 2000, only to crash when its order book evaporated.

It “ended up having to write off $2.2 billion in inventory and lay off 14% of its staff,’ BusinessWeek reported at the time.

Another famous example of panic-induced shortages was the long gas lines of the 1970s. By topping up tanks that used to be about half-full, drivers absorbed a huge amount of gasoline, helping to cause gas stations to run out.

Bloomberg’s excellent QuickTake explanation of the chip shortage makes clear that hoarding—politely known as stockpiling—is a factor in the shortage. “TSMC executives said in recent earnings calls that customers have been accumulating more inventory than usual as a hedge,” the article says. “PC makers began warning about tight supply of semiconductors early in 2020.

Then by mid-year, Huawei Technologies Co.—a major smartphone and networking gear maker—began hoarding components to ensure its survival from U.S. sanctions that threatened to cut it off from its primary suppliers. Other Chinese companies followed suit, and the country’s imports of chips climbed to almost $380 billion in 2020—making up almost a fifth of the country’s overall imports for the year.”

That’s the part we know about. There could be more hoarding going on that’s not as obvious. Apple Inc., for one, stepped up orders to create a buffer. “There’s a chip stockpiling arms race,” Will Bright, co-founder and chief product officer at Drop, which uses custom chips in headphones and keyboards, told Bloomberg in February.

One of the few companies not having much of a problem with chip supply is Toyota Motor Corp., which has increased its ratio of inventory to sales in recent years—ironic, since Toyota led the world in the move to just-in-time manufacturing. Such a company, with extra components on hand, can afford to draw down its inventory when it has to.

One that’s running super-lean is forced to place orders in the teeth of a panic. Not a good look.

When this shortage ends, it’s almost inevitable that some big suppliers and customers are going to wind up with excess chips on their hands. That’s not nearly as bad as being short. But it will go to show that as with toilet paper, gasoline, and Cisco routers, distinguishing real demand from phantom demand remains a vexing problem.

Why The World Is Short Of Computer Chips, And Why It Matters

Carmakers have been slashing production. PlayStations are getting harder to find in stores. Even aluminum producers warn of a potential downturn ahead. All have one thing in common: an abrupt and cascading global shortage of semiconductors. Also known as integrated circuits or more commonly just chips, they may be the tiniest yet most exacting product ever manufactured on a global scale.

That combination of cost and difficulty has fostered a worldwide dependence on two Asian powerhouses — Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co. — a reliance exacerbated by the pandemic and rising U.S.-China tensions even before the current deficit. Hundreds of billions will be spent by governments and corporations in coming years on a “chip race” with geopolitical as well as economic implications.

1. Why Are There Shortages Of Chips?

A Lot, But Not All, Of The Disruption Can Be Tied To The Pandemic. Here Are Some Factors:

* The stay-at-home era caused by the coronavirus pushed demand beyond levels projected by chipmakers. Lockdowns spurred growth in sales of laptops to its highest in a decade. Home-networking gear, webcams and monitors were snapped up as office work moved out of the office, and Chromebooks as school left school. Sales also jumped for home appliances from TVs to air purifiers, all of which now come with customized chips.

* Uncertainties caused by the pandemic led to sharp swings in orders. Automakers that cut back drastically in the early days of the outbreak underestimated how quickly sales would rebound. They rushed late last year to re-up orders, only to get turned away because chipmakers are stretched supplying smartphone giants like Apple Inc.

* Stockpiling: TSMC executives said in recent earnings calls that customers have been accumulating more inventory than usual as a hedge. PC makers began warning about tight supply of semiconductors early in 2020. Then by mid-year, Huawei Technologies Co. — a major smartphone and networking gear maker — began hoarding components to ensure its survival from U.S. sanctions that threatened to cut it off from its primary suppliers.

Other Chinese companies followed suit, and the country’s imports of chips climbed to almost $380 billion in 2020 — making up almost a fifth of the country’s overall imports for the year.

* Weather: A bitter February cold snap in Texas led to power outages that shut semiconductor plants clustered around Austin; Samsung’s still weren’t fully back online by mid-March.

2. What’s The Upshot?

Some businesses are getting whacked. Chip shortages are expected to wipe out $61 billion of sales for automakers alone this year and delay the production of a million vehicles in the March quarter. Not only cars but possibly a broad spectrum of chip-heavy products from phones to gaming consoles could see shortages or price hikes.

NXP Semiconductors NV and Infineon Technologies AG both indicated that supply constraints have spread. Samsung said in March it expects the “serious imbalance” to pose a problem to its business this year.

3. Who Are The Big Players?

Advanced logic chips grab the headlines as the most expensive and complex pieces of silicon that give computers and smartphones their intelligence. When you hear about Apple or Qualcomm or Nvidia chips, those companies are actually just the designers of the semiconductors, which are made in factories called foundries.

* TSMC leads the industry in production capabilities and everyone now beats a path to its doorstep to get the best chips made in its Taiwan facilities. The company’s share of the global foundry market is larger than its next three competitors combined.

* Samsung, overall a bigger chipmaker because of its dominance in memory chips, is trying to muscle in on that goldmine and is improving its production technology to be widely rated as the best option behind TSMC. Companies such as Qualcomm Inc. and Nvidia Corp. have increasingly turned to Samsung.

* Intel Corp., the last U.S. champion in the field, still has more revenue than any other chipmaker but its market is heavily concentrated in computer processors. Production delays have made it vulnerable to rival designers that are taking share using TSMC.

* TSMC and Samsung do face smaller competitors including Globalfoundries, China’s Semiconductor Manufacturing International Corp. (SMIC) and Taiwan’s United Microelectronics Corp. But those rivals are at least two to three generations behind TSMC’s technology. Famous names such as Texas Instruments Inc., International Business Machines Corp. and Motorola have exited or given up trying to keep up with the most advanced manufacturing.

4. What’s Happening In This Race?

The two Asian giants are spending heavily to cement their dominance: TSMC raised its envisioned capital expenditure for 2021 to as much as $28 billion from a record $17 billion a year prior, while Samsung is earmarking about $116 billion on a decade-long project to catch its Taiwanese arch-rival. But China is pushing hard to catch up. It’s aimed for years to reduce its reliance on US. technology, particularly in chips.

The Trump administration’s efforts to curb China’s technology giants — by barring Huawei’s access to chips and and discouraging American investment in players like SMIC and Xiaomi Corp. — crystallized those fears. But the country has a long way to go.

For instance, in the automotive sector, China has developed a large number of chip design companies in recent years but they’re still not able to make the advanced chips needed for today’s cars. In March, China again pledged to boost spending and drive research into cutting-edge chips as part of its new five-year economic blueprint.

While specifics won’t emerge for months, SMIC has already announced plans for a $2.35 billion plant with funding from the government of Shenzhen. It aims to begin production by 2022 and eventually produce 40,000 12-inch wafers a month. (In 2019, TSMC shipped about 10 million advanced 12-inch wafers.)

5. How About Elsewhere?

Given the difficulty in developing sophisticated chipmaking capabilities, governments are dangling incentives to anyone who will build or expand advanced facilities in their backyards. President Joe Biden in February ordered a government-wide supply chain review for critical goods including chips.

His administration, which is putting together a longer-term plan for chip supply, will play a key role in formulating tax incentives for a proposed $12 billion TSMC plant in Arizona and a $17 billion one Samsung is eyeing, possibly in Texas. And the European Union is considering building an advanced semiconductor factory in Europe with potential assistance from TSMC and Samsung, as part of a goal to double chip production to 20% of the global market by 2030.

6. Why Is It So Hard To Compete On Chips?

Chipmaking is a high-volume business that calls for incredible precision, along with making huge long-term bets in a field subject to rapid change. Chips are made in plants that cost billions to build and equip. They have to run flat-out 24/7 to recoup their investment. But it’s not just that. Yield, or the amount of good chips per batch, determines success or failure. It takes years of know-how and experience to get a yield of 90% out of the complex photolithographic process used to make chips.

Imagine Ford Motor Co. being happy to throw away one car in 10. But chipmakers, who make millions of chips in a process that takes three to four months to complete, are successful if they’re hitting that mark. A foundry gobbles up enormous amounts of water and electricity and is vulnerable to even the tiniest disruptions (whether from dust particles or distant earthquakes).

7. Who Benefits From The Chip Wars?

Even small improvements in semiconductors can deliver substantial savings in energy and cost when multiplied across the full scale of something like Amazon Web Services Inc. As 5G mobile networks proliferate and push up demand for data-heavy video and game streaming and more people work from home, the need for newer, more power-efficient silicon is only going to grow.

One way to measure the sophistication of a chip is so-called line-widths, or the distance between circuits. The current standard in advanced chips is 5 nanometers, or billionths of a meter, about a hundred-thousandth of the width of a strand of hair. TSMC and Samsung are working on 3nm mass production by 2022.

The rise of artificial intelligence is another force pushing chipmakers to innovate: AI relies on massive data processing. More efficient or power-saving designs are also becoming a critical consideration given the so-called internet of things — a universe of smart or connected devices from the beefiest phones to the most common light switches and refrigerators — is expected to swell usage of chips exponentially in coming years.

8. How Does Taiwan Fit Into All This?

The island democracy has emerged as an industry linchpin thanks to TSMC and an entire ecosystem geared toward high-end electronics. U.S., European and Japanese automakers are lobbying their governments for help navigating the chip crunch, with Taiwan and TSMC being asked to step in.

Those pleas illustrate how TSMC’s chip-making skills have handed Taiwan political and economic leverage in a world where technology is being enlisted in the great power rivalry between the U.S. and China — a standoff unlikely to ease under the Biden administration.

Updated: 3-28-2021

Bitcoin Mining Is Creating A Drain On Global Computer Chip Supplies

Producing the cryptocurrency is a massive drain on global power and computer chip supplies. Another way is needed before countries balk.

Many of the complaints about Bitcoin over the years have been overhyped. But the cryptocurrency’s increasing use of real physical resources— energy and computer chips — can no longer be ignored. If Bitcoin wants to avoid government crackdowns, it needs to shift to technologies that don’t require constant massive resource consumption just to maintain the currency’s price.

A real problem with addressing criticism of Bitcoin is that so many people have cried wolf about it in the past. Its initial enthusiasts believed — and many still do — that cryptocurrency is going to undermine central banks and take over from fiat currencies like the U.S. dollar. That has led some to decry Bitcoin as a plot to bring down governments.

That’s a red herring. Bitcoin is not going to become the dominant currency as long as it remains highly volatile. And for it to become less volatile will probably require it to become inflationary — that is, for its price to go down over time.

But the price, though it bounces around and has plenty of bubbles, has kept on going up. That’s great for the people who bought in early and for people in the crypto software industry. But Bitcoin’s high price may now be leading to new problems for the cryptocurrency, because unlike other financial assets, Bitcoin uses more resources as its price goes up. (Disclosure: I own Bitcoin and other cryptocurrencies.)

For normal currencies such as dollars, transactions are logged and verified by a trusted entity like a bank. For Bitcoin, however, transactions are logged and verified by a decentralized network of people called “miners.” Miners compete to be the one to verify each block of transactions by using computers to guess a number. The lucky miner who guesses the number first gets rewarded with a certain amount of new bitcoins.

The higher the price of Bitcoin, the more valuable winning each little lottery becomes. And like an increased jackpot in Powerball, that bigger reward draws more miners into the game, who spend more resources making guesses. Those resources include computer chips and electricity to run the computers.

The whole system creates decentralized trust. No evildoer can come in and change all the transactions so that they get all the Bitcoins — that would require spending enough on computer chips and electricity to outcompete all the other miners. In other words, it’s the cost of the real resources that go into logging and verifying Bitcoin transactions that keeps the network honest and reliable.

So the more Bitcoin’s price goes up, the more resources it consumes. In early 2017, when the price was only about $1,000, the website Digiconomist estimates that Bitcoin mining used about 10 Terawatt-hours per year in electricity. Four years later, the price has gone up by about a factor of 50, and the electricity consumption has risen by a factor of 8 or 9.

This means Bitcoin mining now consumes electricity on par with the country of Finland and almost as much as the entire U.S. federal government.

Bitcoin supporters argue back and forth about how much carbon this emits. But it undoubtedly hogs local power resources, which makes other customers mad. China’s Inner Mongolia recently banned Bitcoin mining, and some regions of the U.S. have moved to limit it as well.

Bitcoin miners are trying to fix this by making use of the excess solar and wind power produced during peak hours, but it remains to be seen how much of this extra energy is just lying around.

Meanwhile, Bitcoin’s demand for computer chips has hogged the production lines at Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co., contributing to a global chip shortage that is costing automakers tens of billions of dollars and threatening the phone industry as well.

This spiraling resource consumption indicates a basic weakness in the technology that supports Bitcoin. For most financial assets, like gold, the cost of storage doesn’t go up much as the price goes up; it’s just about as easy to guard the world’s gold at $2,000 an ounce as at $200 an ounce. And for most currencies, transactions are super cheap.

Because people already trust banks and the government, these centralized institutions can handle massive amounts of transactions with near-costless efficiency. Bitcoin’s decentralized trust, in contrast, keeps getting more expensive as Bitcoin gets more valuable.

That process can’t go on forever. And as the economist Herbert Stein once astutely observed: “If something cannot go on forever, it will stop.” Eventually, lots of places will follow Inner Mongolia’s lead and ban Bitcoin mining, and the governments of South Korea and Taiwan will intervene to stop computer chips from being sold to miners. This will be bad for Bitcoin miners, as well as crypto investors and software developers.

To avert that outcome, the developers who control Bitcoin’s algorithm need to think about switching to a cheaper technology. One alternative is a proof-of-stake system, where mining can only be done by people who already own a lot of the cryptocurrency; this cuts down massively on resource use by limiting competition.

Bitcoin enthusiasts might not like the fact that such a system is more centralized, but if the technology of decentralized trust is inherently expensive, libertarian ideals might have to give way to cold, hard economic necessity.

Updated: 4-1-2021

TSMC To Invest $100 Billion To Increase Semiconductor Output

The investment to meet surging demand builds on a record annual capital-expenditure budget for the world’s largest contract chip maker.

Taiwan Semiconductor Manufacturing Co., a major chip supplier to Apple Inc., said it would invest $100 billion over the next three years to increase production capacity as demand surges.

The planned investment is a record for the world’s largest contract chip maker as well as the broader industry, analysts said, at a time when chips are in short supply around the world. In a statement, the company said it expects strong demand over the next several years, a trend driven by growth in 5G and high computing capabilities and accelerated by the Covid-19 pandemic.

“TSMC is working closely with our customers to address their needs in a sustainable manner,” the company said Thursday.

In a letter to clients seen by The Wall Street Journal, Chief Executive C.C. Wei said that the company hadn’t been able to keep up with demand over the past year despite running its fabrication plants at over 100% utilization. Mr. Wei wrote that TSMC had started hiring thousands of new employees, and planned to both build new fabs and expand existing ones.

The $100 billion allocation for the next three years would be more than double what the company spent in the previous three years, according to New Street Research analyst Pierre Ferragu.

In January, TSMC announced a record capital-expenditure budget for 2021 of $25 billion to $28 billion to develop advanced chips and building plant capacity.

Other chip makers are also pouring money into increasing capacity, though none as heavily and quickly as TSMC. Intel Corp. recently said it would spend $20 billion on two new chip factories in the U.S., starting in 2024. The semiconductor giant had lagged behind competitors such as TSMC and Samsung Electronics Co. in market share and technology capabilities, leading to the ouster of Bob Swan as chief executive.

Samsung plans to invest about $116 billion by 2030 to further diversify its semiconductor production. Globalfoundries Inc., a major U.S.-based contract chip maker, has said it is doubling its capital investment this year to boost capacity.

Semiconductors are an important component in many consumer goods from phones to cars, and the pandemic created new demand for electronics such as work-from-home equipment and gaming consoles. As a result of the supply constraints, auto manufacturers such as Ford Motor Co. and Volkswagen AG have halted production of vehicles that use chips for functions such as engine management, automatic braking and assisted driving.

The shortage has also highlighted the supply chain’s dependence on TSMC and Taiwan’s semiconductor industry. President Biden’s $2.3 trillion infrastructure plan included $50 billion for the U.S. semiconductor industry in an effort to mitigate reliance on overseas suppliers.

TSMC said last year, in a decision praised by the Trump administration, that it would invest $12 billion to build a chip factory in Arizona with the support of the federal and state governments. The two factories that Intel announced in March will also be built in Arizona.

Updated: 4-2-2021

Washington’s Chip Dreams May Need Wall Street’s Help

Acquisitions are a good way to kickstart U.S. plans for reshoring the semiconductor sector. And it’s a much more effective approach than building from scratch.

If the United States is to regain its position in the global semiconductor industry, it may need help from bankers as much as engineers.

Intel Corp.’s bold new plan to expand capacity and get into the foundry business, as well as Taiwan Semiconductor Manufacturing Co.’s pledge to build a new fab in Arizona, are both welcome news. That’s particularly the case in Washington D.C., where the administration and lawmakers have been drumming up plans to retake the lead amid growing competition from Beijing.

But such piecemeal factory projects probably won’t be enough to elevate the nation’s share of global manufacturing capacity, which currently stands at fifth behind Taiwan, South Korea, China and Japan.

That’s where Wall Street can play its part. The possible takeover of Japan’s Kioxia Holdings Corp. is precisely the kind of move that U.S. business and political leaders should get behind. Boise-based Micron Technology Inc., the country’s largest maker of memory chips, and Western Digital Corp., a leader in storage and hard drives, are both exploring the idea of buying the company, the Wall Street Journal reported this week.

A subsequent report from Bloomberg News suggested the target would rather list its shares than be acquired, indicating that a buy out by either foreign firm won’t come easy.

These look like competing deals and, if either is pulled off, could value what was formerly Toshiba Memory Corp. at around $30 billion, the WSJ wrote. A tie-up could also give either buyer an extra 20% of the market for chips used to store data. It would be a rare procurement of semiconductor manufacturing capacity in an industry where the $300 billion in chipmaker acquisitions over the past decade have been chiefly among fabless design companies.

It’s important to note that buying a foreign chipmaker doesn’t automatically bring capacity back home. Kioxia and Western Digital, for example, just announced the expansion of their joint facilities in central Japan’s Yokkaichi city. But doing so would bring more of global supply under nominal control of U.S. companies.

Having American firms own more of the worldwide capacity isn’t just window dressing. The administration arguably has more leverage over U.S. firms than it does over foreign companies, which could pay dividends as President Joe Biden continues his predecessor’s policy of luring the tech supply chain back home.

Both Micron and Intel have significant amounts of manufacturing overseas, diluting any argument they may attempt to make about favoring made-in-America policies. With the possibility of Tokyo objecting to the takeover, diplomatic maneuvering may also come into play.

But these U.S. firms are not beyond flag-waving either, Intel Chief Executive Officer Pat Gelsinger’s March 23 presentation announcing the California company’s move into made-to-order foundries appeared an exercise in patriotism. It looked as much like he was addressing Washington as he was shareholders and employees.

Should either Micron or Western Digital successfully buy out Kioxia, we could expect the winning bidder to stuff its announcement with references to U.S. manufacturing and supply chain security. A call to D.C., and state capitals, asking for incentives would likely follow.

To get there, though, deals need to be sourced and funding secured. With the world awash with cash, and both debt and equity easily obtained, bankers are in a position to make politicians’ chip dreams come true.

Updated: 4-7-2021

Intel’s Plan To Win Big In Chips Is Full Of Big Risks

Despite the fanfare over its grand ambitions to become a heavyweight in making chips, the semiconductor giant faces long odds in rivaling TSMC.

Late last month and with great fanfare, Intel Corp.’s new Chief Executive Officer Pat Gelsinger unveiled an ambitious overhaul of the company’s business model, at the center of which is the creation of a chip-manufacturing business.

In a bid to regain dominance in this area, Intel will spend $20 billion to build two new factories in Arizona, vastly expanding capacity for both internal use and for customers of its new program, called “Intel Foundry Services,” or IFS. On Tuesday, an Intel executive said the company was preparing for “the biggest build-out of technology infrastructure in human history.”

On the surface, Intel’s strategic pivot comes at an ideal moment. The iconic company has fallen behind in recent years, as my Bloomberg News colleagues outlined in a Businessweek feature out Wednesday.

And chip shortages are disrupting production in sectors across the economy, from autos to consumer electronics. But despite its bold vision, Intel is set to face challenges to its grand turnaround plan that will prove extremely difficult to overcome.

Here’s the biggest question for the chipmaker: Can it win a large chunk of business away from market leader Taiwan Semiconductor Manufacturing Co.? During his strategy presentation, Gelsinger confirmed for the first time that the company will be using TSMC to manufacture some of its top-of-the-line CPU processors in 2023.

This is a result of years of Intel delays in moving to the latest chipmaking technologies. With Intel compelled to use TSMC for some of its leading products, it’s going to be difficult at least in the near term for the company to argue that its services are significantly better than its Asian rival.

And then there’s the customer-competition issue. While Gelsinger said Intel will pursue all the major semiconductor players as clients, a company such as Advanced Micro Devices Inc. may not want to partner with IFS as long as it remains a part of Intel — a key rival. The same goes for Apple Inc., which is now making its own chips and is also a Gelsinger target customer.

It’s hard to imagine that the two companies — both of which do big business with TSMC — would want to reveal their proprietary chip designs and product timelines to one of their chief competitors instead. Plus, Apple’s history of requiring the most advanced and power-efficient manufacturing techniques for its iPhone processors will be a tough bar for the new unit to meet.

Updated: 4-8-2021

How Toyota Steered Clear Of The Chip Shortage Mess

The auto industry could lose $60 billion in sales this year because of the scarcity of semiconductors. Toyota’s exhaustive monitoring of small suppliers led it to stockpile early.

When the Tohoku earthquake triggered a tsunami that struck Japan’s northeastern coastline in March 2011, killing more than 15,000 people, Toyota Motor Corp. spent half a year struggling to get back on its feet.

One of the biggest hurdles: Tokyo-based Renesas Electronics Corp., a major producer of chips for the automotive industry, saw its main plant knocked offline for three months after the tsunami, sparking a supply squeeze that rippled through the industry.

As Toyota scrambled to repair its facilities and procure missing parts, it also pored over its supply chain to identify the most at-risk items in the hope of preventing a similar disruption in the future.

The automaker came up with a list of about 1,500 parts it deemed necessary to secure alternatives for or to stockpile. The company also put in place an intricate system to monitor the vast network of suppliers that produce those items—and the smaller companies those suppliers buy materials from—to develop an early-warning system for shortages.

A decade later, that deep contingency planning is being put to the test. The world’s automakers have for months been grappling with a pandemic-induced shortage of semiconductors that threatens to knock about $60 billion off the industry’s global sales this year. On March 19 the situation got even worse, when a fire broke out at a giant Renesas chip plant in Hitachinaka.

The damaged factory, which could take at least 100 days to get back to normal production, accounts for about 6% of global automotive semiconductor output, according to Barclays Plc. Toyota is one of Renesas’ largest customers.

During the industry crisis this time, however, Toyota’s bolstered inventories and steadier control over its supply chain mean it’s better positioned than many of its rivals. Toyota is in the process of gauging the extent to which its output will be affected by the fire but for now says it doesn’t see an immediate need to halt production.

Toyota President Akio Toyoda addressed the chips shortage last month at a briefing in his capacity as chairman of the Japan Automobile Manufacturers Association. Amid a global dearth of semiconductors, “there are automakers that are really struggling and others that are not scarred as deeply,” he said. “What’s proven important: very close communication between automakers, chipmakers, and the part suppliers that rely on those chips.”

Toyota’s ability to carefully manage its supply chains has helped it trudge through not only the chip shortage but also the past year in general, as pandemic-related disruptions threatened the industry’s access to everything from fibers used in air bags to the ships needed to transport its vehicles to foreign markets, says Nakanishi Research Institute head Takaki Nakanishi.

Other automakers haven’t been so lucky. Suzuki Motor Corp. on April 5 said it’s freezing production at two car plants because of chip shortages. Stellantis NV, the parent company of Chrysler and Fiat, on March 26 said it plans to idle five factories in North America starting on March 29 through early to mid-April, while Ford Motor Co. is temporarily shutting its Dearborn, Mich., truck factory. General Motors, Honda, and Nissan have also had rolling stoppages.

“The semiconductor crisis is one that everyone in the world could have avoided,” Nissan Chief Operating Officer Ashwani Gupta says. The problem is many automotive companies didn’t rigorously manage their supply chains when it comes to Tier 3 or Tier 4 suppliers. “We often don’t know the risks down there,” he says. Nissan is now looking to improve its digital supply chain management tools. “Every expert is good at backward analysis,” Gupta says. “It’s harder to look forward. Nissan has learned from this.”

The chip shortage sneaked up on many of the world’s biggest automakers precisely because it originated several layers below the top, among the chipmakers and foundries that big chip manufacturers outsource production to. Giant carmakers generally deal directly with only their first- and second-tier parts suppliers, which include major companies like Continental AG and Robert Bosch GmbH. Those big parts makers in turn communicate with smaller automotive-chip designers.

Toyota asks its Tier 1 suppliers to input detailed information about their most obscure parts and materials providers in a complex database that it maintains. Using this system to glean information about, say, a single headlight Toyota purchases for one of its cars, it can get information as granular as the names and locations of the companies that make the materials that go into surface treatments used on those headlights’ lenses and even the producers of the lubricants used on the rubber pieces in the assembly, Toyota spokeswoman Shiori Hashimoto says.

These lines of communication alerted the company early on that it needed to stockpile chips. “The process of making semiconductors is complex, and the facilities used to create them are specialized,” Hashimoto says. “With that in mind we’ve needed to make sure there’s enough stock to cover a period of potential supply disruption.”

The auto industry has for decades embraced just-in-time inventory management, wherein many components reach assembly facilities only days or even hours before they’re needed. But the Tohoku earthquake’s aftermath pushed Toyota to increase flexibility, and the value of inventory Toyota carries has almost doubled since 2011.

Speaking at a briefing in February, Toyota Chief Financial Officer Kenta Kon said as part of the company’s business continuity plans, it keeps as many as four months of stock for some crucial components such as chips. Toyota didn’t expect the semiconductor shortage to disrupt production in the near term, he said.

That show of optimism came just one day after Japanese rivals Honda Motor Co. and Nissan Motor Co. disclosed they expected to sell a cumulative total of 250,000 fewer cars through March, in large part because of their inability to secure enough chips.

Toyota, by contrast, is likely to account for only a “minor” share of the roughly 500,000 units estimated to be knocked off Japanese automakers’ output amid the shortage, according to a report from Mitsubishi UFJ Morgan Stanley Securities Co.

Toyota appears to be handling the shortages even better than it initially expected. In an email to suppliers seen by Bloomberg last month, Toyota warned that plants in the Czech Republic, Turkey, and the U.K. might have to partially or completely shut because of a shortage of chips.

A Toyota official in charge of purchasing asked all suppliers using semiconductors to, as usual, “re-confirm their supplier delivery commitments are in place to secure supply in the coming months,” according to the memo.

He asked the suppliers to contact Toyota immediately if they encountered any difficulty. A month later, only the Czech plant has been forced to temporarily halt its operations.

This isn’t the first time Toyota has overcome a pandemic obstacle. In early 2020 the automaker quickly learned to maneuver through the lockdowns, implementing infection prevention measures and ramping up production in China, where virus-related disruptions dissipated relatively early on.

That helped it churn out a record number of vehicles each month since August, unseating Volkswagen AG to become the world’s top-selling automaker for the year. Toyota’s “ability to bounce back from supply crunches stands out,” Nakanishi says.

Updated: 4-9-2021

GM To Halt Production At Several North American Plants Due To Chip Shortage

Affected vehicles include Chevrolet Traverse, Cadillac SUV models XT5 and XT6

General Motors Co. GM 0.12% will halt production at several North American factories and extend shutdowns at others because of a chip shortage that has been worsening for U.S. auto giants and poses a threat to a strong sales rebound.

GM said Thursday that three plants previously unaffected by semiconductor supply problems will be idled or have output reduced for one or two weeks, including a factory in Tennessee and another in Michigan that make popular midsize sport-utility vehicles. Models affected include the Chevrolet Traverse SUV and the Cadillac XT5 and XT6 SUVs.

The moves follow news last week that Ford Motor Co. would deepen production cuts in North America, including idling for two weeks a factory near its headquarters in Dearborn, Mich., that makes the F-150 pickup truck, its biggest moneymaker.

Auto makers since late last year have been grappling with a shortage of semiconductor chips, which go into software modules used to control everything from brakes to dashboard touch screens. The companies have been cutting production for months as they move to line up chip supplies, with executives saying the shortage could last several more months.

The chip shortage, also affecting products such as videogames, is among a number of factors hobbling global commerce in recent months, including backups at California ports, plant closures due to the Texas freeze in February and the ship stuck in the Suez Canal last month.

The chip bottleneck has crimped production at virtually every major car company in recent months, including Toyota Motor Corp. , Volkswagen AG , Honda Motor Co. and Stellantis NV.

President Biden has ordered a supply-chain review and met with a bipartisan group of lawmakers to address the issue, White House press secretary Jen Psaki said Thursday. Next week, top administration officials are expected to meet with chip manufacturers to discuss what might be done.

“We fully recognize that this is an issue that is impacting industries across the country, including the auto industry,” Ms. Psaki said.

The problem contrasts with other positives for the auto industry. Continued low interest rates, a fresh round of federal stimulus and pent-up demand have been drawing shoppers to dealerships in large numbers despite economic disruption from the Covid-19 pandemic, dealers have said.

The pace of U.S. vehicle sales in March leapt to its second-highest level ever for that month, the National Automobile Dealers Association said Thursday. That is despite the shriveling discounts available amid tight inventories caused largely by chip-related production problems. The average new-vehicle incentive fell nearly $1,000 last month compared with a year earlier, to about $3,500, the association said.

Mike Stanford, who owns Ford and Lincoln dealerships in southeast Michigan, said customers have been willing to pay more partly because they are getting more for their used vehicles, prices of which have hit record highs recently. He said business has picked up as Covid-19 restrictions ease.

“Customer sentiment has improved,” he said. “I think people are getting more confident.”

But fallout from the chip shortage is worsening the strain on vehicle selection and is likely to erode sales later this spring, the dealer association said. The number of vehicles on dealership lots or en route to stores fell 10% to about 2.4 million by the end of March compared with a month earlier, according to research firm Wards Intelligence.

While sales have held up so far, the cuts to factory output are hurting the bottom line at car companies, which book revenue when vehicles leave the factory. GM has estimated the chip shortage could hurt pretax profit by as much as $2 billion this year. Ford has said its hit could be $2.5 billion.

So far, the companies’ stock prices have outperformed the broader market despite the looming financial hit. That is partly because investors are looking beyond the near-term results to the growth prospects for electric vehicles and other nascent businesses that auto makers are rolling out, RBC Capital analyst Joseph Spak said in an investor note Wednesday.

Shares of GM and Ford have risen more than 40% this year, compared with a 9% increase for the S&P 500. GM closed about 1.2% lower at $60.09 on Thursday.

GM also will extend closures of a factory near Kansas City, Kan., and a plant in Ontario, Canada, until May 10. Both facilities have been closed since February as GM diverts chips from less popular models to large pickup trucks and SUVs, its biggest profit producers. CNBC earlier reported GM’s latest closures.

This year’s production cuts have prompted temporary layoffs of thousands of factory workers at GM, Ford and Stellantis who are represented by the United Auto Workers. In addition to unemployment aid, those workers get supplemental pay under the union’s labor contract.

Meanwhile, GM said it would resume production April 12 at a Missouri factory that makes midsize pickup trucks and has been idled for two weeks due to the chip shortage.

“GM continues to leverage every available semiconductor to build and ship our most popular and in-demand products,” a company spokesman said.

The seeds of the auto industry’s chip shortage were planted last spring, when auto makers and suppliers cut their production schedules as the pandemic clouded the outlook for vehicle sales. When demand picked up, so did the need for chips.

Meanwhile, chip producers have been scrambling to keep pace with strong demand from makers of laptops, gaming systems and other electronic devices that have been in high demand, limiting the supply of automotive chips.

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