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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.


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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.

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

“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: 3-24-2021

Auto Dealerships Can’t Keep Up With New Models. The Global Chip Shortage Is To Blame

Car industry entered 2021 hoping to restock, but supply-chain problems are extending the crunch—meaning slimmer pickings, higher prices and longer waits.

Utah dealer Stephen Wade is running out of pickup trucks—and fast.

Normally he keeps about 200 Ram pickups in stock at his dealership in St. George, Utah. As of this week, he had only 25. The situation is even more dire at his nearby Chevrolet business: He has only four Silverado trucks on the lot and isn’t sure when he will get more.

“We seemed to have reasonable inventory at the end of last year,” said Mr. Wade, who has eight dealerships in southern Utah. “But it’s just gotten shorter and shorter.”

Auto executives and dealers entered 2021 hoping to restock dealerships depleted by pandemic-related factory shutdowns last spring. Instead, parts shortages and other factors disrupting production have extended the inventory crunch, and auto retailers said it could be months before relief comes.

For buyers, there are slimmer pickings, higher prices and longer waits, dealers and analysts said. Many consumers have had to order models from the factory or pick from vehicles still in transit to the dealership, rather than immediately driving their new rides off the lot.

The lack of new cars stands as a barrier to what could be a strong bounceback year for the industry. Analysts said pent-up demand, continued low interest rates and a new round of stimulus checks going to consumers should help lift showroom traffic in the coming months as the industry’s spring selling season gets under way.

A monthslong shortage of semiconductors has forced auto makers to cut production of even their most-lucrative vehicles. Winter storms in Texas last month disrupted plastics production, leading to shortages of seat foam and other materials, car makers and suppliers have said. A backup at West Coast ports is delaying vehicle-part shipments from Asia.

The supply-chain disruptions began late last year and have hit almost every major auto manufacturer in recent months, from Volkswagen AG and Nissan Motor Co. to General Motors Co.

Honda Motor Co. and Toyota Motor Corp. were the latest to be affected, halting production at some North American factories in recent days. The companies said a confluence of factors led to the work stoppages, including chip shortages, freak weather and port backups.

Meanwhile, car buyers have continued snapping up vehicles, propelling U.S. auto sales to near-normal levels after sales tanked early in the pandemic. The stronger-than-expected demand has led to months of tight inventories thanks to a nearly two-month factory shutdown last spring.

Auto makers started the year making some headway replenishing U.S. dealership lots. Worsening supply-chain problems have erased that progress.

At the end of February, dealers had 2.7 million vehicles in stock or being shipped to stores, a 26% drop from the same month last year, according to Wards Intelligence. That is nearly as low as last summer, when U.S. car factories were stirring back to life after the shutdown.

“Stimulus is flowing, tax refunds are being issued, and consumer sentiment is recovering,” said Jonathan Smoke, chief economist at research firm Cox Automotive. Because consumer demand for new vehicles is expected to strengthen this spring, the inventory crunch is likely to get worse, he added.

For buyers, bargains are becoming harder to find. Many auto makers have curtailed the deep discounts they offered early in the pandemic. Car companies on average spent about $3,562 per vehicle on discounts and other sales incentives in February, a $600 drop from the same month a year earlier, according to research firm J.D. Power.

The lack of availability has been most acute for crossover and SUV models, including Jeep’s Wrangler and Chevrolet’s Tahoe, stocks of which are running between 43% and 70% lower than a year ago, respectively, according to Wards Intelligence data.

GM and Ford Motor Co. have closed some North American factories for several weeks because of the chip shortage, crimping supply of several sport-utility models. GM has said the lost production could hurt pretax profit by as much as $2 billion this year; Ford pegged the hit at up to $2.5 billion.

In recent weeks the chip shortage has disrupted the profit center for U.S. auto makers: pickup trucks.

For months, GM, Ford and Ram-brand owner Stellantis STLA -3.50% NV had been able to sustain pickup-truck deliveries by diverting computer chips from other, less-profitable vehicles. But in recent weeks, each said it has started building trucks without the chips and parking them as they await shipments.

Dealers had about 414,000 pickup trucks at the end of February, roughly half the number from a year earlier, according to Wards Intelligence.

Some dealers are shifting would-be new vehicle buyers to the used-car lot, but even that is becoming more difficult, dealers said, as they seek out used cars to offset the inventory problem in new vehicles.

Abel Toll, a dealer with stores in the Northeast, said his used-vehicle inventory is running low. Reliable sources for preowned models such as vehicle trade-ins and gently used rental cars from auctions have shriveled, he said, creating a supply issue and a surge in prices.

“Inventory will be the big challenge of this year,” he said.

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.

Ford Prolongs Shutdowns At Several U.S. Plants Due To Chip Shortage

Auto maker extends downtime that will affect production of its popular F-150 truck.

Ford Motor Co. is planning more downtime at five North American factories due to a global semiconductor shortage, further disrupting output of a popular sport-utility vehicle and the F-150 pickup truck, the company’s biggest moneymaker.

The Dearborn, Mich., auto maker said Wednesday that factories in Chicago, suburban Detroit and Kansas City, Mo., will be idled for an additional two weeks, extending the closures through May 14. An SUV plant in Ontario will also take an extra week of downtime in early May.

The latest shutdowns further curb production of the Explorer full-size SUV and Transit vans. Output of the F-150 also will remain limited. Work resumed Monday at Ford’s truck plant near its headquarters in suburban Detroit after a two-week pause, but production was halted at its second pickup plant, in Kansas City last week, and that site will remain down through May 10.

Since early this year, the semiconductor shortage has forced global auto makers to intermittently cancel factory shifts and shuffle production schedules to divert chips to high-priority vehicles, primarily pickup trucks and larger SUVs that generate bigger profits.

Still, Ford has been forced to cancel weeks of production at its two F-150 plants, crimping supply of a model that generates the bulk of its global profit.

Ford estimated in February that the disruption from the chip shortage could hurt operating profit by $1 billion to $2.5 billion this year. The company is expected to update investors when it reports first-quarter earnings next week.

General Motors Co. has halted production at at least a half-dozen North American factories this year because of the chip shortage. It has managed to avoid downtime at the four plants that make big pickups or full-size SUVs, the company has said. GM relies on those models for most of its bottom line.

Toyota Motor Corp. , Volkswagen AG and Stellantis NV, formerly Fiat Chrysler, have halted or altered production due to supply-chain snags in recent weeks.

Analysts have estimated the chip shortage could cost the auto industry tens of billions of dollars in 2021.

Ford also said Wednesday a heavy-duty truck plant near Cleveland will continue to produce only select models through mid-May. It also announced additional downtime and altered schedules at several factories in Europe.

Hourly workers at GM, Ford and Stellantis factories in the U.S. are represented by the United Auto Workers union and are placed on layoff status during unscheduled downtime. In addition to unemployment benefits, the companies provide unionized workers with supplemental pay under their labor contracts.


Updated: 4-19-2021

TSMC Says Trade Tensions Could Disrupt Supply of Chip Equipment

Taiwan Semiconductor Manufacturing Co., the world’s largest contract chipmaker, warned for the first time that trade tensions may disrupt its access to key production equipment and hit its operations, amid increasing friction between the U.S. and China.

The company, which produces semiconductors for Apple Inc. and other major global tech companies, said in its annual report released on Friday that “ongoing trade tensions or protectionist measures could result in increased prices for, or even unavailability of, key equipment.” It pointed to factors such as delays or denials of export licenses, additional export control measures, and other tariff or non-tariff barriers.

TSMC relies on equipment from U.S. suppliers including Applied Materials Inc. and Lam Research Corp. for production. The company said trade tensions could also prevent it from securing raw materials required for production, repeating a point it mentioned in the previous annual report.

Semiconductors have become a key area of increasing U.S.-China competition with chips used in a wide range of products from missiles and cars to smartphones. China is eager to foster a domestic semiconductor industry to cut its reliance on foreign technology as the U.S. tightens control on chip-related exports to the Asian country, including key equipment sales to Chinese chipmaker Semiconductor Manufacturing International Corp.

Earlier this week, two U.S. Republican lawmakers — Texas Congressman Michael McCaul and Arkansas Senator Tom Cotton — urged the State and Commerce departments to find a better way to “mitigate the risk of Taiwanese companies providing services and technologies to entities of concern,” adding that TSMC shouldn’t be making advanced chips for China’s military.

The South China Morning Post reported this week that TSMC suspended new orders from Tianjin Phytium Information Technology Co., one of the companies blacklisted by the U.S., over concerns it’s involved either with building supercomputers used by China’s military actors, its military modernization efforts or weapons of mass destruction.

The Taiwanese chipmaker warned new measures adopted by China to counter U.S. sanctions could affect its operations. In January, China adopted a blocking statute that “entitled Chinese entities incurring damages from a multinational’s compliance with foreign laws to seek civil remedies,” it said.

“Measures adopted by an affected country to counteract the impacts of another country’s actions or regulations could lead to significant legal liability to multinational corporations including our own,” TSMC said in the report.

Why The Chip Shortage Is So Hard To Overcome

Semiconductor producers are trying to increase output, but the small gains are unlikely to fix the shortfalls hampering production of everything from cars to home appliances to PCs.

The world’s leading suppliers of semiconductors are pushing to overcome the prolonged chip shortage that has hampered production of everything from home appliances to PCs to autos.

Chip makers are trying to eke out more supply through changes to manufacturing processes and by opening up spare capacity to rivals, auditing customer orders to prevent hoarding and swapping over production lines. The bad news is, there are no quick fixes, and shortages will likely continue into next year, according to the industry’s executives.

On top of a spike in demand, producers have been hamstrung by a series of freak events that have knocked out supply, while ongoing U.S.-China political frictions and concerns of a prolonged shortage have prompted some manufacturers to stockpile chips.

The current shortfall includes the less-advanced chips that the industry’s biggest players have been pulling away from to pursue higher-margin, cutting-edge chips. Building new production capacity usually takes years.

That could slow down the post-pandemic recovery for certain industries that use the chips that are looking to take advantage of rising consumer spending. It also feeds into inflation concerns as higher chip costs can stoke prices throughout the economy.

Racing to fill orders, GlobalFoundries Inc., based in Santa Clara, Calif., one of the world’s largest contract chip manufacturers, is dispatching its engineers to find ways to squeeze out even the smallest amount of extra production from its factories in the U.S., Singapore and Germany. Among the solutions: delaying certain maintenance tasks and speeding up—by a fraction—the rate at which wafers move along the line.

“We’re working immensely hard to figure out how to do more, build more,” said chief executive Thomas Caulfield.

Last Tuesday, President Biden called for a bipartisan push to strengthen the U.S. semiconductor industry during a meeting with automotive and tech executives. He has earmarked $50 billion to boost America’s semiconductor production as part of a $2.3 trillion infrastructure plan. The spending isn’t expected to push the needle far: making the U.S. self-sufficient for its chips would require more than $1.4 trillion in investments and government incentives over a decade, according to the Semiconductor Industry Association, an industry group.

Chip makers can add only incremental boosts to capacity from existing plants, executives say. Building a new fabrication plant can take years because of the scale and complexity of equipment and space needed to make semiconductors.

Major chip makers made big strategic bets on the more-profitable advanced chips needed for things such as 5G and servers.

The approach hit a glitch when the coronavirus plunged the global economy into one of its worst recessions, rattling supply chains and consumer spending patterns. That left chip makers ill-equipped to deal with the high demand for older, less-sophisticated semiconductors used widely in products such as cars, computer monitors, speakers and appliances—products that have been hoovered up during the pandemic.

The supply crunch was exacerbated by U.S.-China trade tensions, especially during the past year, including Washington policies that gradually restricted the sale of American-designed or -made chips to some Chinese buyers. Fears of sanctions prompted tech companies in China to stockpile chips and prepare for the worst, Huawei Technologies Co. deputy chairman Eric Xu said last week. The Chinese company uses a range of chips in its telecommunication products and consumer gadgets, and aggressively stockpiled components to protect against U.S. export restrictions.

“Now [the Chinese companies] are stockpiling for one month, three months, or even six months, and they have disrupted the whole system,” Mr. Xu said. China’s semiconductor imports soared 15% last year and hit a record $35.9 billion in March, Chinese customs figures show.

Chip production was disrupted by events including a plant fire in Japan and freezing weather in the southern U.S. that shuttered production lines. A drought in Taiwan, a major chip-making hub, threatens to further reduce the industry’s output, since large amounts of water are used in the process.

Manufacturers of products that use chips are stepping up production in expectation of a post-pandemic economic recovery.

The surge in chip demand is pushing up prices and extending already historically long wait times. Auto makers including Toyota Motor Corp. and General Motors Co. have been forced to idle or reduce production at some plants.

Some buyers say they face delays of half a year or longer. “You ask on Monday, it’s a 12-week lead time. Then you ask on Wednesday and it’s a 27-week lead time,” said Liam Bates, chief executive officer of Kaiterra, a Swiss-based maker of air-quality tracking devices.

Kaiterra, which manufactures in southern China, is beefing up contingency plans to make its supply chain “future-proof.”

Engineers who focus on building new products now allocate a chunk of time to redesigning existing ones to operate on different chips, in case the ones needed don’t arrive. Recently, the company decided to stock up a year’s worth of inventory for some parts.

Semiconductors are the lifeblood of many industries—ranking as the world’s fourth-most traded product counting imports and exports, after crude oil, refined oil and cars.

For years, the world’s biggest chip makers plowed investment into capacity to feed demand for the next generation of semiconductors, and shifted their focus away from the production of more-basic chips.

But autos and home electronics are packed with lots of the more rudimentary components. These include power-management chips, a basic chip that regulates the flow of electricity in a device, and microcontrollers, the workhorses that run a host of functions.

“There isn’t an electronic device that doesn’t have a microcontrollers in it,” GlobalFoundries’ Mr. Caulfield said. “This is pervasively in short supply.”

Even advanced electronic gadgets need some basic chips to operate, and in fact increasingly use more of them to run more sophisticated technology. A typical 5G smartphone can hold as many as eight power-management chips, compared with two to three in a 4G phone, according to Hui He, an analyst at research firm Omdia.

Last year, 27% of all spending on chip-making equipment went to tools for building the industry’s most-advanced chips, according to research firm Gartner Inc., which are often used in smartphones, high-end PCs and data centers. Less than half that portion, about 11%, went to equipment for cranking out more commoditized chips

The world’s largest contract chip maker, Taiwan Semiconductor Manufacturing Co. , told investors in January that it is working with customers to upgrade some of the chips they are using so that they can be built on its more-advanced manufacturing lines, where there is more capacity. On Thursday, executives told investors that customers have been stockpiling higher levels of inventory due to the pandemic and geopolitical tensions.

Switching existing production lines from making one type of chip to another isn’t easy because different types of chips require different equipment to make, though there can be some overlap.

There hasn’t been a time when the shortage has affected so many types and brands of chips all at once, said Marcus Chen, vice president of sales for the Asia-Pacific at Fusion Worldwide, one of the many global distributors who act as middlemen to supply electronic components to buyers.

It usually takes at least two years to build and equip a semiconductor fabrication plant, known as a “fab,” which can cost billions of dollars. The most advanced machines that can be installed in the plants can top $100 million and are so large they require as many as three 747s to deliver.

Once fabs are built, a chip typically takes three months to make—or longer for the most-advanced ones.

Semiconductor makers must decide whether to make multibillion-dollar bets on whether this surge will last or taper off by the time new plants are up and running. Many are reluctant to alter long-term spending plans based on demand surges that could be short-lived.

Still, the biggest semiconductor companies are setting aside huge sums to boost overall capacity. TSMC earlier this month unveiled the industry’s largest-ever investment, allocating $100 billion over the next three years to boost capacity. Most of the company’s near-term spending, however, will go toward building the most-advanced chips. In the U.S., Intel Corp. last month pledged $20 billion for two sites in Arizona and signaled further investment commitments are to come this year.

South Korea’s Samsung Electronics Co. has earmarked $116 billion in investment by 2030 to diversify chip production.

In China, President Xi Jinping has for years made the country’s independence in advanced technologies such as chips a national priority. Yet the goal remains elusive. One key player in the country’s self-reliance push defaulted on billions of dollars in debt. Others have been hobbled by U.S. export controls restricting access to advanced chip-making technology.

China’s biggest chip maker, Semiconductor Manufacturing International Corp. , last month committed $2.35 billion with a government partner to build a new factory focused on older chip-making processes. The company anticipates the new facility to start production next year. But delays in getting new chip-making equipment is an obstacle to increasing output, the Shanghai-based company’s co-CEO, Haijun Zhao, told investors in February.

Chip makers are seeing a doubling, if not quadrupling, of delivery times for the machinery required to make semiconductors, said Bruce Kim, chief executive officer at SurplusGlobal Inc., which sells used chip-making equipment.

At GlobalFoundries, Mr. Caulfield said the firm plans to invest $1.4 billion to expand capacity at existing facilities this year, and will likely double that figure next year. Some of his customers have pledged investment capital to secure future capacity, accounting for 30% of the company’s capital expenditure this year, he said. Before the pandemic, the number was zero.

“You’re seeing a lot of customers saying, ‘I’m not going to let that happen again, my business is too important,’ ” Mr. Caulfield said.

At Intel, Chief Executive Pat Gelsinger said the company would make some of its production capacity available to produce chips in particular short supply and needed by auto-component makers. Supply could start improving in six to nine months, Mr. Gelsinger said in an interview.

Guy Eristoff, chief strategy officer at Israel-headquartered foundry Tower Semiconductor Ltd. , said chip production can be sped up to 3.5 times the usual time in rare cases by sorting production lines so that high-priority chips pass through quickly. Some equipment can be operated for longer before going into preventive maintenance, though this can come at the cost of lower yields.

Altogether, these measures mean some chips can be churned out in 30 to 40 days from the usual 120 days, Mr. Eristoff said. But doing so increases overall production times for other chips. The tweaks can at best increase a fab’s production capacity by 5% and be sustained for only up to six months.

“There are all sorts of little things you can play with,” said Mr. Eristoff. “But without buying more equipment, you cannot, in a sustained manner, run that much more than you are running right now.”

Suppliers are wary that the surge in demand may not last, with panicked buyers increasing order volumes or placing orders with multiple companies. San Jose, Calif.-based Broadcom Inc., one of the world’s leading chip companies, is trying to ensure orders coming in reflect actual demand. It recently reminded investors that it doesn’t allow customers to cancel chip orders to deter some buyers from making purchase commitments out of fear of shortages.

“We see customers accelerating their bookings for early deliveries and attempting to build buffers and creating the demand-supply imbalance,” CEO Hock Tan told investors. The company is nearly 90% booked for the year.

Auto makers are among the buyers that have felt the shortage most acutely, as cars need more semiconductors than ever before. Electronics made up more than 40% of a car’s total cost in 2017, doubling from that in 2007, according to consulting firm Deloitte.

Their use is expected to grow, along with costs. German auto-chip maker Infineon Technologies AG said it expects the cost of chips in autonomous vehicles to jump to about $1,200 by 2030 from about $170 currently required for “Level 2” vehicles, or partly automated cars.

Nanoleaf, a Canada-headquartered smart-lighting maker that primarily produces its products in Dongguan, southern China, said its lead time for receiving chips used to be around two to four months. Now, vendors are asking Nanoleaf to place orders it should expect to receive in January or May 2022.

“Money is almost not even an issue these days. It’s about what you can get,” said Christian Yan, Nanoleaf’s chief operations officer. He said he doesn’t know how many microchips his company can get in the second half of this year. “You have to plead your case,” he said.

For Tower Semiconductor, meeting customers’ demands has turned into a delicate balancing act that requires looking into factors such as customers’ margins, order volumes, loyalty and business potential.

“It’s an incredibly difficult decision to make,” Mr. Eristoff said. “Somebody’s business can get hurt.”

Updated: 4-20-21

AutoNation CEO Says Chip Shortage Could Drag On for A Year

The global semiconductor shortage that’s crippling the auto industry could drag on for as long as a year, according to Mike Jackson, chief executive officer of AutoNation Inc., the largest car-dealer chain in the U.S.

AutoNation expects the industry’s vehicle shipments in the second quarter to be double what they were a year ago, but that’s barely enough to keep dealer lots full, Jackson, 72, said in an interview.

“The supply chain is fragile and disrupted because of the chip shortages and still dealing with the pandemic,” he said.

Low interest rates, stimulus checks, and a desire for private transportation during the pandemic are fueling demand for vehicles, while assembly plants are sitting idle because of a lack of chips. AutoNation has been increasing used-car sales to make up for the lack of new supply.

“I see it continuing for at least the next year, the extraordinary demand, and I see no resolution on the microchip side for six to nine months, or a year,” Jackson said.

AutoNation posted adjusted earnings from continuing operations of $2.79 a share in the first quarter, more than triple a year ago and ahead of analysts’ estimates. Revenue from existing stores grew 27% to $5.9 billion, also beating projections.

More than half of AutoNation’s sales now originate online, Jackson said, helping to cut costs and juice profit as vehicle demand has rebounded.

The company’s shares pared an early gain of as much as 2.3%, trading up less than 1% to $97.84 at 9:53 a.m. in New York. The stock is up about 40% so far this year.

Updated: 4-21-2021

How A Chip Shortage Snarled Everything From Phones To Cars

A six-decade-old invention, the lowly chip, has gone from little-understood workhorse in powerful computers to the most crucial and expensive component under the hood of modern-day gadgets.

That explosion in demand—unexpectedly goosed during the Covid-19 pandemic for certain industries like smartphones and PCs—has caused a near-term supply shock triggering an unprecedented global shortage.

In February, lead times—the duration between when an order for a chip is placed and when it actually gets filled—stretched to 15 weeks on average for the first time since data collection started in 2017, according to industry distributor data from Susquehanna Financial Group. Lead times for Broadcom Inc.—a barometer for the industry because of its involvement across the supply chain—extended to 22.2 weeks, up from 12.2 weeks in February 2020.

A six-decade-old invention, the lowly chip, has gone from little-understood workhorse in powerful computers to the most crucial and expensive component under the hood of modern-day gadgets.

That explosion in demand—unexpectedly goosed during the Covid-19 pandemic for certain industries like smartphones and PCs—has caused a near-term supply shock triggering an unprecedented global shortage.

In February, lead times—the duration between when an order for a chip is placed and when it actually gets filled—stretched to 15 weeks on average for the first time since data collection started in 2017, according to industry distributor data from Susquehanna Financial Group. Lead times for Broadcom Inc.—a barometer for the industry because of its involvement across the supply chain—extended to 22.2 weeks, up from 12.2 weeks in February 2020.

Patiently Waiting

Lead times for chips surpassed their 2018 peak in February.

The crunch has sideswiped the General Motors and Volkswagens of the world and swung politicians from Washington to Beijing into crisis control. It’s also catapulted Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co. to the top of investor and government agendas. Asia’s two largest chipmakers are responsible for making the vast majority of the world’s most advanced silicon, yet don’t have the capacity to sate all demand. It’s a bottleneck that could last several quarters—or into next year.

Alarm bells are ringing. A growing number of industry players from Continental AG to Innolux Corp. and Renesas Electronics Corp. have in recent weeks warned of longer-than anticipated deficits snarling production—potentially well past the summer. Samsung flagged a “serious imbalance” globally, the largest company so far to warn of fallout from the crunch.

Broadcom Chief Executive Officer Hock Tan in March said his company is sold out this year and customers were “willing to book out for delivery of those products out through the rest of 2021.” And on Friday, Nio Inc.—the Chinese EV company sometimes compared with Tesla—became the first high-profile automaker from the country to suspend production because of shortages.

A Pandemic that Reshaped Demand

Overall demand for semiconductors of all stripes—from basic microcontrollers and memory chips to the most sophisticated high-performance processors—has grown over the past decade, as smartphone usage and computing power boomed. A steady rise in semiconductor sales faltered in 2019, but was then boosted 5.4% by 2020’s shelter-in-place demand for home gadgets, IDC data shows.

At the same time, once largely mechanical machines like cars have become smarter, entailing the use of many more chips. Automotive electronics, which may include everything from displays to in-car systems, are set to account for an estimated 45% of a car’s manufacturing cost by 2030, according to a Deloitte report. The cost of the semiconductor-based components used in those electronics is estimated to jump to $600 by 2030 from $475 in 2020.

On the other end of the supply chain, chipmaking capacity has kept pace with the growth in sales over past years, according to SEMI data, suggesting buyers are taking up capacity as soon as it comes online—a sign that semiconductor demand has in general been on par with available production resources. But advanced manufacturing has become concentrated in the hands of fewer and fewer players.

Industry experts say an imbalance is particularly apparent in so-called 200 millimeter wafers, from which lower-end chips are made. Those include power management chips and display ICs (or integrated circuits), required in a wide range of sectors from automotive to consumer electronics, but are in a short supply at the moment.

Uncertainties caused by the pandemic also led to sharp swings in orders last year, which in turn muddied the waters for chipmakers trying to match capacity with demand. That’s why carmakers have had to halt production in 2021 and why Playstations and Xboxes are getting harder to find in stores.

Carmakers got hit first in part because of poor inventory planning. The industry underestimated vehicle consumption and thus the amount of chips they needed when the pandemic hit. They are now expected to miss out on $61 billion of sales this year alone. But TSMC executives said on their two most recent earnings calls that customers across many sectors have been accumulating more inventory than normal to hedge against the unknown.

The problem gets further magnified by the fact that the cost of chipmaking and keeping pace with technology advancements has increased exponentially this decade—making the business of manufacturing semiconductors a rarefied field for the deepest of pockets. As an illustration, TSMC raised its envisioned capital expenditure for 2021 by as much as 63% to $28 billion, while Samsung is earmarking about $116 billion on a decade-long project to catch its Taiwanese arch-rival.

Industry Bottlenecks

The most complex and expensive pieces of silicon these days are logic chips from Qualcomm, Nvidia or Apple that give computers and smartphones their intelligence. But these “fabless” companies don’t operate their own fabrication plants; they just design the semiconductors. Manufacturing happens at advanced factories called foundries that produce the designs of those big-name electronics companies.

This is another key bottleneck. Just three or four foundries now account for the majority of global chip fabrication—TSMC and Samsung and their more distant rivals, California-based Globalfoundries Inc., controlled by Abu Dhabi’s investment arm, and United Microelectronics Corp. Looking at it another way, an estimated 91% of the contract chipmaking business is housed within Asia, the lion’s share of which is divided between just two regions: Taiwan and South Korea, home to TSMC and Samsung, respectively.

An opportunity for the U.S. to regain chip independence might come from Intel Corp., which last week unveiled a $20 billion plan to set up its own foundry business. Intel, the largest chipmaker by revenue, designs and manufactures its own chips, but this expansion would enable it to produce chips for other companies as well.

TSMC is the undisputed leader of that triumvirate, in terms of sheer scale, sophistication and reach, cranking out millions of wafers every year for marquee clients in just about every industry imaginable. TSMC’s total wafer shipments were 12.4 million 12-inch equivalent wafers in 2020, up from 10.1 million in 2019. Taiwan’s largest company has spent more than three decades to perfect its chipmaking craft and billions in past years to ensure it remains at the forefront of technology.

According to Bloomberg supply-chain estimates, 25% of all TSMC’s business comes from Apple, the highest-profile client it directly manufactures chips for. However, TSMC’s importance lies in the critical role it plays in the entire semiconductor supply chain; it also manufactures chips for other chipmakers or for fabless chip designers, such as Broadcom, Qualcomm, Nvidia, AMD or Texas Instruments. They are in turn supplying the world’s biggest consumer electronics, communications equipment and auto parts companies.

Bottlenecks can appear in other parts of the supply chain, too. The Netherlands-based ASML Holding NV has a virtual monopoly on advanced photolithography equipment required to print patterns of cutting-edge chips onto the wafer.

Companies from Japan, such as Shin-Etsu Chemical Co., dominate the market for chemicals used in semiconductor manufacturing. And manufacturing cannot start in the first place without access to electronic design automation software, a segment led by the U.S.’s Cadence Design Systems Inc. and Synopsys Inc.

Officials from the U.S. and Europe have beseeched Taiwan’s officials for help in resolving the global chip crunch, and are pushing for the creation of domestic chipmaking capabilities. Yet research from Sanford C. Bernstein shows there isn’t much that governments can do to address the current shortages. It takes years to build a new fabrication facility and get it operating smoothly—regardless of where it is located.

Detroit Jeep Plant Faces Temporary Layoffs On Chip Shortage

Stellantis NV is planning to temporarily lay off workers at a Jeep plant in Detroit during April and May due to a shortage of semiconductor chips, the company confirmed.

Stellantis will cut two work crews at its Jefferson North plant in Detroit for three weeks starting April 26, then call them back and lay off a third crew from May 17 through the week of May 31, according to a schedule obtained by Bloomberg News. The plant on Detroit’s east side normally operates two shifts with three work crews six days a week to keep it running 20 hours a day.

“Stellantis continues to work closely with our suppliers to mitigate the manufacturing impacts caused by the various supply chain issues facing our industry,” company spokeswoman Jodi Tinson said in a statement. “Due to the unprecedented global microchip shortage, Jefferson North will adjust its production schedule through the end of May.”

The plant, known as JNAP, employs about 4,800 hourly workers and makes the Jeep Grand Cherokee, the top-selling Jeep model last year, and the Dodge Durango SUV. A redesigned version of the Grand Cherokee is scheduled to start production in August, according to researcher AutoForecast Solutions.

Stellantis, formed from the merger of Fiat Chrysler Automobiles NV and PSA Group, is trying to protect production of its profitable Jeep and Ram brand vehicles from the global semiconductor shortage plaguing the auto industry.

The company already idled half of its 10 North American plants this month due to the shortage. It is also grappling with an uptick in coronavirus cases — production at its Sterling Heights assembly plant, which makes the newer, pricier version of the Ram 1500 pickup, has been hampered in part by Covid-related absences, Bloomberg reported last week.

Michigan has become the worst virus hotspot in the U.S. as more contagious variants spread, while vaccine hesitancy and pandemic fatigue have undermined efforts to contain the virus.

Stellantis plans to begin offering vaccines to employees and their families at local union halls from this Friday.

Chip Machinery Makers Emerge as Big Winners In Supply Crunch

The sudden shortage of semiconductors is disrupting automotive production and limiting revenue growth for Apple Inc. It’s created a stock market boon, however, for the makers of chip production equipment.

Those companies have emerged as the biggest winners from the supply crunch as chipmakers rush to add more factory capacity. Applied Materials Inc., the world’s biggest equipment maker, has seen its shares advance 36% this year, making it the best performer in a semiconductor index.

Brooks Automation Inc., Lam Research Corp. and KLA Corp. are each up more than 19%, nearly twice the gain in the Philadelphia semiconductor index. The stocks fell on Tuesday amid a broad technology slump following a two-day rally.

Expanding equipment budgets by major chipmakers and governments concerned about foreign dominance of production facilities are giving Wall Street increasing confidence that the rally has staying power.

“Over the next three to five years, this is definitely very bullish for semicap equipment in terms of overall tightness and focus on domestic supply,” said Krish Sankar, an analyst with Cowen & Co.

The shortfall is a problem that seemed unthinkable a year ago when a rapidly spreading Covid-19 virus sent economic activity plummeting as companies began efforts to reduce production in anticipation of ebbing sales. Instead, after an initial shock, sales in many industries surged and companies scrambled to boost inventories. Many chipmakers are now producing at maximum capacity and governments are suddenly looking at a dearth of homegrown plants as a national security risk.

Supply Crunch

U.S. President Joe Biden signed an executive order last week to review the country’s supply chains for semiconductors and other products. While there aren’t expected to be any quick fixes, industry watchers say the long-term trend is clear: more equipment will be needed.

“The semiconductor industry is running on all cylinders, and you’re seeing companies that might in the past have been reluctant to commit to capex (capital expenditures) now all of a sudden trying to ramp up as quickly as they can,” said Daniel Morgan, a senior portfolio manager with Synovus Trust Co., which owns shares of Applied Materials.

Taiwan Semiconductor Manufacturing Co., which produces chips for Apple and Broadcom Inc., plans to spend $12 billion to construct a plant in Arizona. Some of the costs for that facility were included in the company’s capital spending plans for 2021 that sparked a rally in chip related stocks around the world in January. Broadcom’s capital outlays could total as much as $28 billion, up from $17 billion in 2020.

Huge manufacturers like Taiwan Semi building smaller plants in new regions creates particularly attractive opportunities for Applied Materials, Chief Executive Officer Gary Dickerson said on the Santa Clara, California-based company’s earnings call last month.

“You have to look at the scale of the factories they’re building and at least what’s been announced is smaller scale,” he said. “That somewhat less efficient factory size is a positive for Applied.”

In addition to Applied Materials, top picks for Cowen’s Sankar include Lam Research and MKS Instruments Inc.

“You have an environment where demand is very strong, supply is constrained and then you add to it domestic supply build out,” the analyst said in an interview. “At some point these things will normalize, but it won’t be any time soon.”


Ford Says Chip Shortage Forcing Production Halt At Several Plants

Auto maker is scheduling more downtime at some U.S. factories, including its two major truck sites.

Ford Motor Co. is scheduling more downtime at several U.S. factories, including its two major truck plants, as a global shortage of semiconductors upends vehicle manufacturing for car makers in North America.

The company said Wednesday that it would halt production for two weeks in April at its truck plant in Dearborn, Mich., and take a week of downtime on the truck side of its Kansas City, Mo., assembly plant, starting Monday. It also plans to suspend work temporarily and cancel planned overtime at several other factories in North America, attributing the work stoppages to tight chip supplies.

Like other car companies, Ford has been struggling to secure enough semiconductor chips as makers of those components have been slammed with surging demand from other industries.

Ford in February said it planned to reduce production of its F-150 pickup truck—the nation’s top-selling vehicle and the company’s biggest moneymaker—because of the shortage. It also said at the time that global production losses from the chip shortfall in the first and second quarters could cut $1 billion to $2.5 billion from its pretax bottom line this year.

On Wednesday, Ford reaffirmed its early guidance and added that it would provide an update on the financial impact of the semiconductor shortage when it reports quarterly results April 28.

Factory workers at the affected plants will be put on layoff status during the downtime, a Ford spokeswoman said. In addition to unemployment benefits, Ford provides unionized workers with supplemental pay in keeping with the labor contract, she added.

The actions Ford is taking now illustrate how global car companies still confront a bumpy recovery from the pandemic, which last spring led to widespread factory shutdowns in the auto industry as businesses worked to contain the coronavirus.

While car and truck production bounced back in the second half of last year, the auto industry has encountered a new round of challenges at the start of 2021 with supply-chain snags and port backups disrupting assembly lines.

Stellantis NV, the maker of Ram, Jeep and Chrysler, said Friday that it would halt production at five North American plants through mid-April because of the lack of semiconductors. Honda Motor Co. and Toyota Motor Corp. idled some U.S. factories in March, citing the chip shortage, as well as freak weather and port backups.

General Motors Co. also has been hit by the semiconductor shortage, leading it to close some North American plants for several weeks. GM has said the lost production could hurt pretax profits by as much as $2 billion this year.

For months, GM and Ford have been able to sustain pickup-truck production by diverting computer chips away from other, less-profitable vehicles. But more recently, they said they have started building some trucks without the chips and parking them as they await new shipments of the parts.

The Long-Term Costs Of Shortcuts In The Semiconductor Crisis

Companies should be using this time to learn that skimping on investment and relatively minor components will have consequences.

The chip shortfall is persisting and spreading. Makers of cars, phones and computers still can’t get their hands on the semiconductors they need. Their suppliers don’t have the components to produce chips either. And it doesn’t look like solutions will emerge anytime soon. Such makeshift fixes only stand to make the problem worse. Meanwhile, few companies are using the crisis to prepare for future shortages.

Take General Motors Co. It said it would go ahead and make its 2021 light-duty full-size pickup without a fuel management chip — part of a complicated system that controls and helps manage the vehicle’s engine cylinders. Its absence would result in a reduction in the pickup’s fuel economy.

Rather than roll out potentially sub-par products, wouldn’t it have been better to rein in production altogether and get sustainable chip plans in place to make the right kind of cars in the future? Isn’t that something customers would prefer?

While the automaker shut down some facilities because of a chip deficit, it plans to keep making all truck models because they are its most profitable vehicles. Indeed, U.S. annualized car sales are at their highest since 2017.

The lack of a fuel-management chip, GM says, won’t have a major impact on its greenhouse gas compliance numbers. But it’s telling what the company is willing to give up to keep its profits.

Why aren’t more corporations using this opportunity to plan for the next chapter in this shortage saga, to get ahead of it now?

Consider the growing shortage of yet another part necessary for chipmaking — substrates, which act as insulation in semiconductors. They aren’t sophisticated but lead times are now at 52 weeks for the highest-end variety, and those delays stand to affect behemoths like Nvidia Corp. and Advanced Micro Devices Inc.

Six months ago, there were signs substrate production was going to come up short. But the relatively low-margin business was almost a managed market, set up around long-term demand and contracts. Few companies invested in new production. It takes approximately $500 million to build a new substrate facility. Now the shortage is expected to get worse.

The only way this gets better is if the deepening shortage upends the lazy, laissez-faire approach of supply chains and planning. Firms need to go beyond the reactive responses and consider how they got to a shortage in the first place. Was it really just demand spurred by the pandemic that threw everything into a tizzy?

Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co. are investing billions into cutting edge semiconductors. But the production of relatively moderate technology — like substrates and fuel management chips — would have helped in this crisis. And this period should be used to learn how to avoid shortages.

Sustainable solutions are needed. If companies don’t start making decisions for the future now, and short-sightedness persists, supplies are bound to get worse. Reform doesn’t require massive overhauls. For starters, being conservative with production forecasts and promises of beating profit goals is one way, even if investors won’t be happy. Companies can also bake in longer lead times, diversify suppliers and build larger inventories.

The world has been in this long enough. It’s worth investing time to figure out solutions now so we can get out of the shortages and avoid them in the future.

Updated: 4-23-2021

Biden Reassures Chip Summit of Bipartisan Support For Funds

President Joe Biden told companies vying with each other for a sharply constrained global supply of semiconductors that he has bipartisan support for government funding to address a shortage that has idled automakers worldwide.

During a White House meeting with more than a dozen chief executive officers on Monday, Biden read from a letter from 23 senators and 42 House members backing his proposal for $50 billion for semiconductor manufacturing and research.

“Both sides of the aisle are strongly supportive of what we’re proposing and where I think we can really get things done for the American people,” Biden said. “Now let me quote from the letter. It says, ‘The Chinese Communist Party is aggressively — plans to reorient and dominate the semiconductor supply chain,’ and it goes into how much money will be they’re pouring into being able to do that.”

Chief executives including General Motors Co. CEO Mary Barra, Ford Motor Co. CEO James D. Farley, Jr., and Sundar Pichai, CEO of Alphabet and Google participated in the virtual summit.

White House Press Secretary Jen Psaki said the meeting showed the administration is serious about addressing supply-chain constraints and softening the blow for affected companies and workers.

National Economic Council director Brian Deese and National Security Adviser Jake Sullivan hosted the meeting, with Commerce Secretary Gina Raimondo also participating.

Companies invited to join included Dell Technologies Inc., Intel Corp., Medtronic Plc, Northrop Grumman Corp., HP Inc., Cummins Inc., Micron Technology Inc., Taiwan Semiconductor Manufacturing Co., AT&T Inc. and Samsung Electronics Co., as well as GM, Ford and Alphabet Inc.

Intel CEO Pat Gelsinger said in an interview after the meeting that the White House and Congress are working aggressively to support the semiconductor industry with more domestic manufacturing, research and development as well as efforts to build the workforce. Taiwan’s TSMC also voiced its support.

The contract chipmaker, which plays a central role in manufacturing most of the world’s most advanced semiconductors, has secured government incentives to begin building a $12 billion Arizona plant this year.

“TSMC is confident that our 5nm advanced fab plan in Phoenix Arizona — one of the largest foreign direct investments in U.S. history — will be successful in partnership with the U.S. government,” it said in a statement.

The administration intended to highlight elements of the president’s proposed $2.25 trillion infrastructure-focused plan that they believe would improve supply-chain resilience, a White House official said. The agenda also included discussions about the auto industry’s transition to clean energy, job creation and ensuring U.S. economic competitiveness, the official added.

Many of the lawmakers supporting additional funding for semiconductors want to see the measure in a standalone competitiveness bill aimed at China, not as part of Biden’s infrastructure package, as it is now. The China bill has some bipartisan support and could have a quicker path through Congress.

Intel, Micron, GM, A&T on Roster for White House Chips Meeting

But exactly how to spend and allocate the semiconductor funding is a source of debate among automakers and other consumers of chips, as well as the semiconductor companies themselves.

Carmakers are pushing for a portion of the money to be reserved for vehicle-grade chips, warning of a potential 1.3 million shortfall in car and light-duty truck production in the U.S. this year if their industry isn’t given priority.

Yet makers of other electronic devices affected by the chip shortage, such as computers and mobile phones, have taken issue with the carmakers’ demands, worried their industries will suffer. The debate was also a factor in the White House meeting.

“There were many, many voices saying, ‘hey, we can’t just start carving things up for particular industries. We need a solution that works in the medium and long term and that are sensitive to some of the unique challenges of the immediate term,’” Gelsinger said in the interview. “I think we’re working pretty well through that process right now. Nobody will be entirely happy but we’re heading in a good direction.”

The White House has not taken a public position on the issue but has indicated privately to semiconductor industry leaders that it would not support special treatment for one industry, according to people familiar with the matter.

Matt Blunt, president of the American Automotive Policy Council, which lobbies for Ford, General Motors and Stellantis NV (formerly Fiat Chrysler Automobiles), expressed optimism that the Biden administration would at least consider his industry’s arguments.

Congress Weighs Countering China on Chips, GOP Wary of Cost

He said the White House has not endorsed any specific plans for setting aside money for carmakers, but administration officials “understand why the proposal was made.”

To avoid future chip shortages, Blunt’s group proposed that at least 25% of any federal support for the construction of semiconductor factories must go to U.S. facilities that commit to allocating at least 25% of their capacity to automotive-grade chips.

John Neuffer, president and chief executive officer of the Semiconductor Industry Association, said the industry understands “the difficulty the auto sector is feeling right now, and chipmakers are working hard to ramp up production to meet demand in the short term.”

For the long term, he said, the industry needs a boost in domestic production and innovation across the board “so all sectors of our economy have access to the chips they need, and that requires swiftly enacting federal investments in semiconductor manufacturing and research.”

Intel CEO Sees Prolonged Chip-Supply Constraints

‘This is a pivotal year for Intel,’ CEO says after first-quarter earnings retreat.

Intel Corp.’s new chief executive said a global chip-supply shortage could stretch two more years as the U.S. semiconductor giant posted weaker quarterly earnings.

Pat Gelsinger said the supply constraints that have affected some sectors of the global economy for months will continue until more capacity comes online to meet chip demand for everything from automobiles to electronics.

“This will take a while until people can put more capacity in the ground,” he said in an interview. “It’s just the way it is when you’re building new factories.”

The global shortage of semiconductor chips has disrupted manufacturing across various sectors, leading to temporary shutdowns of automobile factories and reduced supply of items such as computers and some appliances. Chip companies have been scrambling to help overcome the shortage.

The White House this month met with executives from the chip and other industries to help determine what action it should take to address the shortage and strengthen the domestic chip-building industry. President Biden previously pledged to fix the chip shortages and included $50 billion for the semiconductor industry in his expansive infrastructure-spending package.

“The investment needed at the scale required is immense,” Mr. Gelsinger said.

The CEO, on the job since February, also pledged to make some production capacity available swiftly to help alleviate the chip shortage.

Mr. Gelsinger, who is fast-tracking efforts to re-energize the company, said the outlook projecting sales of $77 billion this year, $500 million higher than previously expected, is a “supply-constrained guide” for the year.

Intel on Thursday said first-quarter sales fell 1% to $19.7 billion, beating Wall Street estimates. Net income, weighed down by costs of a legal settlement, was $3.4 billion. Excluding the pending sale of its memory business and other items, Intel said revenue was $18.6 billion and net income was $5.7 billion.

Intel’s stock fell around 3% in after-hours trading.

Mr. Gelsinger this month laid out an ambitious strategy for Intel to become a major contract chip maker in addition to making semiconductors to satisfy its in-house requirements. The plan includes a $20 billion spending commitment to build two new semiconductor plants in Arizona. “This is a pivotal year for Intel,” he said Thursday.

Intel’s sales drop comes despite strong demand for chips broadly. Vivek Arya, a semiconductor analyst at Bank of America, said ahead of Intel’s results that the company is being held back by several factors.

Among those are that a surge in demand for personal computers is centered largely on lower-end devices like Chromebooks, while Apple Inc. AAPL 1.80% is ditching Intel for in-house chip designs on some of its equipment. And after a strong year of spending on data centers, outlays this year are expected to advance at a slower pace, he said.

Mr. Arya expects Intel’s sales growth to trail that of the broader sector, which he projects will increase around 15% this year.

Mr. Gelsinger is trying to rebuild a company that has suffered repeated setbacks in making its most advanced chip and that has lost ground to Asian rivals. Mr. Gelsinger last month said the company was making progress on its newest chips, though analysts have said they want more detail.

Intel also has said it would increase outsourcing of some chip production to keep pace, he said.

The company also is contending with increased competition. Nvidia Corp. —which last year overtook Intel as American’s most valuable chip company—and Advanced Micro Devices Inc.  have taken market share. Nvidia this month also said it would start selling central-processing units for data-centers, a market Intel has long dominated. Intel this month introduced an enhanced data-center chip.

Mr. Gelsigner said that despite projecting slower sales growth than its rivals, Intel aims to recapture lost ground. “We are out to gain market share,” he said.

Intel had $5.6 billion in sales in the data-center business, missing analysts expectation of $5.9 billion. Profitability of that business was hammered by research and development spending, the company said, and costs associated with ramping up production of a new chip.

Sales for the segment including laptop chips rose more than 8% to $10.6 billion, driven by the boom in remote learning and working from home during the pandemic. “We see no signs of PC demand slowing,” Mr. Gelsinger said.

Intel’s effort to become a contract chip maker also isn’t without hurdles. The company has tried to break into that market before, with little success. And its chief rivals, Taiwan Semiconductor Manufacturing Co.  and Samsung Electronics Co. , are readying their own multibillion-dollar spending plans to expand.

TSMC last week raised its capital-expenditure plan for this year to $30 billion while lifting its sales forecast. Samsung has earmarked $116 billion in investment by 2030 to diversify chip production.

Mr. Gelsinger has said Intel is planning additional chip investments. The company could benefit from the bipartisan support in Washington for U.S. chip companies. For instance, Intel is bidding on a Pentagon contract to help fund domestic chip-making to meet government security needs.

Intel said it expects revenue for the current quarter of $18.9 billion.

Intel Says Global Chip Shortages to Last Two More Years as Car Makers Endure

New Intel Chief Executive Pat Gelsinger said on Thursday that supply constraints, and the “immense” investment needed to meet demand, mean that the chip shortages affecting the automobile industry and other sectors are likely to last two more years.

It “will take a while until people can put more capacity in the ground,” he explained, as Intel announced first-quarter results that beat sales and earnings expectations, but warned its profit margin would shrink this year.

TSMC Wins Approval From Phoenix For $12 Billion Chip Plant

City officials in Phoenix, Arizona approved a slate of financial incentives and government support for Taiwan Semiconductor Manufacturing Co.’s planned $12 billion chip plant, a step toward bringing high-tech manufacturing to the U.S. and addressing national security concerns over the industry supply chain.

The city agreed to provide about $200 million to develop roads, sewers and other infrastructure, according to a notice from the city council. At least one additional traffic light will be included for a cost of approximately $500,000. The company is conducting due diligence on several locations in Phoenix with a final decision to be made later.

The decision to locate a plant in Arizona came after the Trump administration warned about the threat inherent in having much of the world’s electronics made outside of the U.S. TSMC, the primary chipmaker for companies like Apple Inc., had negotiated a deal with the administration to create American jobs and produce sensitive components domestically for national security reasons. The Phoenix project is projected to create about 1,900 new jobs over five years, the company said.

“We appreciate the continuous bipartisan support from the U.S. federal, state and city governments,” a spokeswoman for the company said. “It gives TSMC and its supply chain partners the confidence this and other future investments will be successful.”

TSMC Scores Subsidies and Picks Site for $12 Billion U.S. Plant

TSMC has said that it hopes to convince its own suppliers to set up operations in the vicinity of its new fabrication facility over time. Chip giants Intel Corp. and Micron Technology Inc. already operate facilities in the western state and have helped build a vibrant local semiconductor industry over the years.

TSMC had said that subsidies would be critical in setting up a fab in the U.S., given the additional expenses involved. While Phoenix has approved its infrastructure spending, TSMC is still waiting on state and federal subsidies and incentives that could surpass by far the city’s expenditures.

A representative for the city council declined to comment beyond statements in public documents.

“It is remarkable that this came to fruition during a pandemic,” said Mayor Kate Gallego in a statement. “The payoff is huge. TSMC will create 1,900 high-tech jobs and foster thousands more related jobs in the semiconductor supply chain ecosystem.”

Land Rover Succumbs To Chip Shortage Sweeping The Car Industry

Jaguar Land Rover Automotive Plc joined the growing list of carmakers idling factories over the global semiconductor shortage, a sign the supply-chain challenge is intensifying.

JLR plans to halt output at its Castle Bromwich and Halewood factories in the U.K. for a “limited period” from April 26, the manufacturer said Thursday in an emailed statement.

The company’s first such move adds to evidence that the shortage that has pummeled the auto industry since late last year may get worse before it gets better. French manufacturer Renault SA earlier Thursday said the bottleneck’s effects could last beyond this quarter and refrained from offering a financial outlook for the year.

German parts maker Robert Bosch GmbH warned the auto industry will probably have to deal with an “unsatisfactory situation for many months to come.”

JLR makes the Range Rover Evoque and Land Rover Discovery Sport models at Halewood, and Jaguar XE, XF and F-Type cars at Castle Bromwich.

Automakers from Volkswagen AG to Ford Motor Co. have been forced to idle factories as surging demand for electronic equipment during the pandemic overwhelmed suppliers. Winter storms in Texas and a fire at Renesas Electronics Corp.’s automotive chip plant in Japan exacerbated the situation this year.

“The visibility is deteriorating,” Renault’s Deputy Chief Executive Officer Clotilde Delbos said when presenting the company’s first-quarter revenue. “Two months ago we said we think the peak will be in the second quarter, but we think there will be a lingering effect at least in the third quarter if not further.”

The Guardian reported the factory halts earlier Thursday.

Updated: 4-28-2021

Global Chip Drought Hits Apple, BMW, Ford As Crisis Worsens

The global chip shortage is going from bad to worse with automakers on three continents joining tech giants Apple Inc. and Samsung Electronics Co. in flagging production cuts and lost revenue from the crisis.

In a dizzying 12-hour stretch, Honda Motor Co. said it will halt production at three plants in Japan; BMW AG cut shifts at factories in Germany and England; and Ford Motor Co. reduced its full-year earnings forecast due to the scarcity of chips it sees extending into next year. Caterpillar Inc. later flagged it may be unable to meet demand for machinery used by the construction and mining industries.

Now, the very companies that benefited from surging demand for phones, laptops and electronics during the pandemic that caused the chip shortage, are feeling the pinch. After a blockbuster second quarter, Apple Chief Financial Officer Luca Maestri warned supply constraints are crimping sales of iPads and Macs, two products that performed especially well during lockdowns. Maestri said this will knock $3 billion to $4 billion off revenue during the fiscal third quarter.

“It’s a fight out there and you have to be in daily contact with your suppliers. You need to make sure that you’re important to them,” Nokia Oyj Chief Executive Officer Pekka Lundmark said Thursday on Bloomberg Television. “When there is a shortage in the market, it is things like how important you are in the big picture, how strong your relationships are and how you manage expectations.”

Meanwhile, companies that supply chips are reporting surging sales and pledging to invest billions to expand capacity as they struggle to keep up with demand. Qualcomm Inc., the world’s largest smartphone chipmaker, said demand for handsets is surging back as life returns to normal in some markets that had been locked down by the Covid-19 pandemic.

STMicroelectronics NV, a key chip supplier for carmakers, said profit for its auto and power unit jumped 280% in the first quarter. CEO Jean-Marc Chery credited a surprise rebound in demand as well as the industry’s adoption of new, digital features that require more chips for the latest wave of supply chain constraints.

Samsung, which is both a producer and user of chips, said Thursday that component shortages will contribute to a slide in revenue and profit this quarter at its mobile division, which produces its marquee Galaxy smartphones.

The shortfall of critically needed semiconductors has forced the entire auto industry to cut output, leaving thin inventories at dealerships just as consumers emerge from Covid-19 lockdowns. In just the past week, Jaguar Land Rover Automotive Plc, Volvo Group and Mitsubishi Motors Corp. have joined the list of manufacturers idling factories.

“The second quarter is going to be worse for automakers than the first quarter,” said Song Sun-jae, an analyst at Hana Daetoo Securities Co. in Seoul. “The chip-shortage problem could end up lasting longer, maybe into next year.”

Beyond Apple, whose high-specification iPhones and aggressive demands typically place it at the front of the line, the dearth of chips threatens to dampen a nascent rebound in the entire smartphone market. Worldwide shipments surged an estimated 27% to 347 million devices in the first quarter, aided by a plethora of new models and China’s swift post-pandemic recovery. A shortage of components such as app processors could sap that momentum over the rest of 2021.

“Covid-19 is still a major consideration, but it is no longer the main bottleneck,” Canalys Research Manager Ben Stanton wrote Thursday. “Supply of critical components, such as chipsets, has quickly become a major concern, and will hinder smartphone shipments in the coming quarters.”

At Ford, the shortage will likely reduce production by 1.1 million vehicles this year, CFO John Lawler said on a call with reporters. The carmaker expects a $2.5 billion hit to earnings due to scarce chip supplies.

Tesla Inc. CEO Elon Musk earlier this week called the chip shortage a “huge problem.” NXP Semiconductors NV said it’s expecting supply to be tight all year and warned constraints for the auto industry could extend into 2022.

“There are too many uncertainties about when chip supplies will improve, and that’s making it difficult for automakers,” said Lee Han-joon, an analyst at KTB Investment & Securities Co. in Seoul. “For semiconductor makers, the auto industry isn’t really seen as one of their key customers and that’s putting the carmakers in a much tougher position in securing supplies.”

Updated: 4-28-2021

Apple Finally Feels The Effects Of The Global Chip Shortage

Apple Inc.’s latest quarter was a blockbuster, with soaring revenue, record Mac sales, and stronger-than-anticipated iPhone demand. There was only one major snag: The global chip shortage is finally catching up to the company.

On a call with analysts, Chief Executive Officer Tim Cook and Chief Financial Officer Luca Maestri warned that supply constraints are crimping sales of iPads and Macs, two products that performed especially well during pandemic lockdowns. Maestri said this will knock $3 billion to $4 billion off revenue during the fiscal third quarter.

The executives blamed “semiconductor shortages that are affecting many industries” and “very, very high” demand for iPads and Macs. Cook said the component shortages were for “legacy nodes,” implying the setbacks are for products using older generation processors. He wouldn’t specify how long the shortages will last, but noted that Apple did not experience this problem during the previous quarter.

The electronics and automotive industries are among those that have been hurt by chip shortages since last year, when a sudden rebound in orders took the semiconductor industry by surprise. It takes months to ramp up production at chip factories, so demand is still outstripping supply.

Apple had avoided any major impact from this phenomenon, until now. The company recently announced new iMac models and iPad Pros with custom M1 processors, but neither product will begin shipping until the second half of May — an unusually long delay.

Still, the company’s main product, the iPhone, seems unscathed at the moment.

Consumers, businesses and schools have been snapping up millions of iPads and Macs for remote work, and Cook suggested on Wednesday that the momentum won’t necessarily slow down after the Covid-19 pandemic ends. He said many businesses will shift to hybrid models with employees working at home and in the office. That could support continued demand for the devices.

The Cupertino, California-based technology giant didn’t provide specific revenue guidance for the fiscal third quarter. Analysts estimate revenue will top $68.7 billion, according to data compiled by Bloomberg mostly before Wednesday’s results.

In Apple’s fiscal second quarter, the Mac generated a record $9.1 billion in sales, while the iPad topped Wall Street expectations with $7.8 billion in revenue.

Updated: 5-5-2021

Chip Shortage Gets Worse For Car Giant, With No End In Sight

Stellantis NV warned the global semiconductor shortage will deteriorate further from the first three months of the year, when the crunch curbed planned output by 11%.

The company formed from the merger between Fiat Chrysler and PSA Group said things will get worse in the second quarter before showing some signs of improvement in the latter half of the year, according to an earnings statement Wednesday.

Speaking on a call, Chief Financial Officer Richard Palmer cautioned that the effects could linger into 2022.

“The visibility is still relatively limited,” Palmer said. “It would be imprudent to assume that the issue is just going to go away.”

The chip shortage roiling carmakers around the world adds to challenges for Chief Executive Officer Carlos Tavares as he seeks to achieve billions of euros in savings from the tie-up between the two carmakers. Palmer said integrating the two companies remains on track, though it will take time to realize the full benefits of the combination.

Stellantis rose as much as 1.4% to 14.10 euros in Paris. The stock has gained about 10% this year.

First-quarter revenue increased 14% to 37 billion euros ($44.5 billion) on a pro-forma basis, while consolidated vehicle shipments on that basis rose 11% to about 1.57 million units. The semiconductor shortage clipped planned production by 190,000 units in the period amid rolling halts of some assembly lines, and Palmer said the hit will likely be more pronounced still in the second quarter.

Industry Fallout

In response to the shortage, the automaker has standardized electronic components across its portfolio rather than using special versions on some models, according to Palmer. Eight of its 44 sites worldwide are currently affected, he said.

Stellantis doesn’t report earnings on a quarterly basis. In Europe, BMW AG and Daimler AG have published better-than-expected results for the quarter, while Ford Motor Co. forecast a $2.5 billion hit to earnings from scarce chip supplies. Volkswagen AG reports earnings Thursday.

Ford Chief Executive Officer Jim Farley said last week that the automaker expects to lose about 50% of planned second-quarter production, up from 17% in the first quarter, and that the issue could stretch into 2022.

Renault SA has also predicted that the biggest hit on output would come this second quarter, with lingering effects spilling over to the following three months. The French company has made production of higher-margin cars a priority, something Stellantis is also doing.

Stellantis maintained its outlook for adjusted operating income margin of 5.5% to 7.5%, up from 5.3% last year. About 80% of its targeted 5 billion euros in annual savings will be achieved by the end of 2024, the company has said.

The manufacturer reiterated that it expects industry sales to grow by 10% in Europe this year and 8% in North America. The company said its new Jeep Grand Wagoneer and a next-generation Grand Cherokee remain on track for production late in the second and third quarters, respectively.


Hyundai’s Record April Aided by Chip Strategy, COO Munoz Says

Hyundai Motor Co. and Toyota Motor Co. kept ordering semiconductors last year even after the pandemic crushed auto sales. Both were rewarded with record April deliveries.

South Korea’s Hyundai sold 77,523 units last month, up 128% from a year ago. The Japanese auto giant’s U.S. sales grew 183% to 239,311 vehicles, including the Toyota and Lexus brands.

Automakers around the world idled plants a year ago as part of the broader shutdown to curb Covid 19. Many carmakers slashed orders for semiconductors to keep a lid on costs. Now, with auto demand roaring back and consumer-electronics companies gobbling up all the excess chipmaking capacity, they’ve been caught flat-footed.

Last week, Ford Motor Co. said it would have to cut production by half in the second quarter due to chip shortages.

“Most of our competitors decided to cut the orders,” Jose Munoz, Hyundai’s global chief operating officer, said in an interview. “We saw the market differently.”

Hyundai’s deliveries are up 48% for the year, led by the new Tucson compact sport utility vehicle and redesigned Elantra sedan.

The automaker hasn’t been completely unscathed by the shortage — its Korean plants have lost about 45,579 units as of April 30, according to researcher AutoForecast Solutions.

But the company’s sole U.S. plant in Montgomery, Alabama, which makes the Sonata and Elantra sedans and the Santa Fe SUV, hasn’t had to halt production, the data show.

Toyota’s Decision

Toyota, which also touted its decision to keep plenty of chips on hand, likewise reported record U.S. sales in April. Most automakers reveal deliveries on a quarterly basis only.

Foreign brands may be especially keen to keep their U.S. plants running, said Joe McCabe president of AutoForecast.

“Foreign-based manufacturers competing in North America need to maintain their current foothold to keep customers as loyal as possible,” McCabe said. “If they don’t have the inventory to get it done, then they’re at a high risk of losing market share.”

Updated: 5-9-2021

Intel CEO Says Chip Shortage Will Persist For ‘Couple of Years’

The global semiconductor shortage roiling a wide range of industries likely won’t be resolved for a few more years, according to Intel Corp.’s new Chief Executive Officer Pat Gelsinger.

The company is reworking some of its factories to increase production and address the chip shortage in the auto industry, he said in an interview with CBS News, based on snippets from its “60 Minutes” program. It may take at least several months for the strain on supply to even begin easing, he added.

“We have a couple of years until we catch up to this surging demand across every aspect of the business,” Gelsinger said.

Demand for semiconductors was boosted in 2020 as consumers scooped up home gadgets during the pandemic. But meeting that increase has been hard, thanks to shuttered plants, among other factors. Companies worldwide say they expect supply-chain constraints due to logistics backlogs and the chip shortage to continue for much of 2021.

The global crunch has catapulted semiconductor firms into the limelight and to the top of political agendas. The Biden administration last month told companies vying with each other for semiconductors that he has bipartisan support for government funding to address the shortages.

Gelsinger said U.S. dominance in the industry had dwindled so much that only 12% of the world’s semiconductor manufacturing is done in the country today, from 37% a quarter of a century ago. Intel is the only manufacturer of high-end, cutting edge chips, he told CBS.

“And anybody who looks at supply chain says, ‘That’s a problem,’” he said. “This is a big, critical industry and we want more of it on American soil: the jobs that we want in America, the control of our long-term technology future.”

He added that his company won’t be “anywhere near as focused” on its share repurchase program as it’s been up to now.

The supply constraints are hitting a wide array of industries, with tech firms and automakers alike flagging production cuts and lost revenue from the fallout.

It has forced the entire auto industry to cut output, with Ford announcing the shortage will likely reduce production by 1.1 million vehicles this year. Jaguar Land Rover Automotive Plc, Volvo Group and Mitsubishi Motors Corp. recently joined the growing list of manufacturers idling factories. Apple Inc. warned supply constraints are crimping sales of iPads and Macs.

Meanwhile, Mark Liu, chairman of Taiwan Semiconductor Manufacturing Co., told CBS his company, having heard about shortages at the end of last year, tried to “squeeze” out as many chips as possible for car companies.

“Today, we think we are two months ahead, that we can catch up (to) the minimum requirement of our customers — by the end of June,” he said.

The supply shortage may only be alleviated by the end of the year or early 2022, CBS said.

“There’s a time lag,” Liu said. “In car chips particularly, the supply chain is long and complex.”

Liu also sought to ease concerns that U.S. companies are relying on Asian suppliers, which account for 75% of manufacturing, according to CBS.

“This is not about Asia or not Asia, because a shortage will happen no matter where the production is located,” he said. “Because it’s due to the Covid.”


The Chip Shortage Keeps Getting Worse. Why Can’t We Just Make More?

Shortages of semiconductors are battering automakers and tech giants, raising alarm bells from Washington to Brussels to Beijing. The crunch has raised a fundamental question for policymakers, customers and investors: Why can’t we just make more chips?

There is both a simple answer and a complicated one. The simple version is that making chips is incredibly difficult—and getting tougher.

“It’s not rocket science—it’s much more difficult,” goes one of the industry’s inside jokes.

The more complicated answer is that it takes years to build semiconductor fabrication facilities and billions of dollars—and even then the economics are so brutal that you can lose out if your manufacturing expertise is a fraction behind the competition. Former Intel Corp. boss Craig Barrett called his company’s microprocessors the most complicated devices ever made by man.

This is why countries face such difficulty in achieving semiconductor self sufficiency. China has called chip independence a top national priority in its latest five-year plan, while U.S. President Joe Biden has vowed to build a secure American supply chain by reviving domestic manufacturing. Even the European Union is mulling measures to make its own chips. But success is anything but assured.

Manufacturing a chip typically takes more than three months and involves giant factories, dust-free rooms, multi-million-dollar machines, molten tin and lasers. The end goal is to transform wafers of silicon—an element extracted from plain sand—into a network of billions of tiny switches called transistors that form the basis of the circuitry that will eventually give a phone, computer, car, washing machine or satellite crucial capabilities.

So Small Yet So Complex

Most chips are groups of circuits that run software, manipulate data and control the functions of electronic devices. The arrangement of those circuits gives them their specific purpose. Below is Nvidia’s GeForce RTX 3090, currently the best at turning computer code into realistic video game graphics.

Chip companies try to pack more transistors into chips, enhancing performance and making devices more power efficient. Intel’s first microprocessor—the 4004—was released in 1971 and contained only 2,300 transistors with a node size of 10 microns, or 10 millionths of a meter.

But Intel’s undisputed leadership of the following decades ended between 2015 and 2020 when rivals Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co. started building chips with better transistors: ones with dimensions down to 5 nanometers, or 5 billionths of a meter (for comparison, an average human hair is 100,000 nanometers wide.)

Cleaner Than a Surgery

Before you put silicon into chipmaking machines, you need a clean room. A very clean room. Individual transistors are many times smaller than a virus. Just one speck of dust can cause havoc and millions of dollars of wasted effort. To mitigate this risk, chipmakers house their machines in rooms that essentially have no dust.

To maintain that environment, the air is constantly filtered and very few people are allowed in. If more than one or two workers appear on a chip production line—wrapped head-to-toe in protective equipment—that could be a sign something’s wrong. The real geniuses behind semiconductor design and development work miles away.

Even with all those precautions, the wafers of silicon can’t be touched by humans or exposed to the air. They travel between machines in cartridges carried by robots that run on tracks in the ceiling. They only emerge from the safety of those cartridges when they’re inside the machines and it’s time for a key step in the process.

Atomic-Level Manufacturing

Chips consist of as many as 100 layers of materials. These are deposited, then partially removed, to form complex three-dimensional structures that connect all the tiny transistors. Some of these layers are just one atom thin. Machines made by Applied Materials Inc., Lam Research Corp. and Tokyo Electron Ltd. juggle a host of variables, such as temperature, pressure, and electrical and magnetic fields, to make this happen.

One of the most difficult parts of the process is lithography, which is handled by machines made by ASML Holding NV. The company’s gear uses light to burn patterns into materials deposited on the silicon. These patterns eventually become transistors. This is all happening at such a small scale, the current way to make it work is to use extreme ultraviolet light, which usually only occurs naturally in space.

To recreate this in a controlled environment, ASML machines zap molten droplets of tin with a laser pulse. As the metal vaporizes, it emits the required EUV light. But even that is not enough. Mirrors are needed to focus the light into a thinner wavelength.

Burdensome Economics

Chip plants run 24 hours a day, seven days a week. They do that for one reason: cost. Building an entry-level factory that produces 50,000 wafers per month costs about $15 billion. Most of this is spent on specialized equipment—a market that exceeded $60 billion in sales for the first time in 2020.

Heavy Duty

Sales Of Equipment Used In Chip Manufacturing Have Doubled Since 2015

Three companies—Intel, Samsung and TSMC—account for most of this investment. Their factories are more advanced and cost over $20 billion each. This year, TSMC will spend as much as $28 billion on new plants and equipment. Compare that to the U.S. government’s attempt to pass a bill supporting domestic chip production. This legislation would offer just $50 billion over five years.

Once you spend all that money building giant facilities, they become obsolete in five years or less. To avoid losing money, chipmakers must generate $3 billion in profit from each plant. But now only the biggest companies, in particular the top three that combined generated $188 billion in revenue last year, can afford to build multiple plants.

The more you do this, the better you get at it. Yield—the percentage of chips that aren’t discarded—is the key measure. Anything less than 90% is a problem. But chipmakers only exceed that level by learning expensive lessons over and over again, and building on that knowledge.

The brutal economics of the industry mean fewer companies can afford to keep up. Most of the roughly 1.4 billion smartphone processors shipped each year are made by TSMC. Intel has 80% of the market for computer processors. Samsung dominates in memory chips. For everyone else, including China, it’s not easy to break in.

Updated: 5-16-2021

Automotive Chip-Shortage Cost Estimate Surges To $110 Billion

As the semiconductor shortage hobbling the global automotive industry has worsened, its cost as a hit to sales has almost doubled to $110 billion, up from an earlier estimate of $61 billion.

That’s the latest assessment of AlixPartners, a global consulting firm closely monitoring the widening crisis. It also now says the world’s carmakers will lose 3.9 million vehicles of production to the chip shortage this year, more than its prediction four months ago of 2.2 million. That’s about 4.6% of the 84.6 million vehicles that AlixPartners had projected in total production for 2021.

Automakers issued warnings in earnings reports in recent weeks that the chip shortage would get worse before it gets better. Ford Motor Co. and General Motors Co. each predicted the second quarter would be the worst of the calamity, as they are forced to idle factories for lack of the essential components. But the industry isn’t likely to see signs of recovery until the end of the year, according to the AlixPartners assessment.

“It’s still deeply impacting the third quarter,” Mark Wakefield, head of the firm’s global automotive practice, said in an interview. “We don’t really have it getting into a recovery mode at all until the fourth quarter.”

The timing takes on added importance because the chip-related production cuts are driving up prices of new and used vehicles, contributing to higher inflation in the U.S. Another researcher, LMC Automotive, predicts global production will be cut by almost 3 million vehicles in the year’s first half alone.

Ford Chief Executive Officer Jim Farley said Thursday the company is redesigning its vehicles to use the most common and “accessible” chips. It also is planning to boost semiconductor inventory and sign contracts directly with chipmakers, rather than go through an auto supplier.

“We really see the second half improving,” Farley said at Ford’s annual shareholders meeting. “We’re starting to get more confidence in the chip supply.”

The crisis that grew out of pandemic-related production cuts has been exacerbated by a fire at semiconductor factory in Japan and this winter’s historic cold snap in Texas that curtailed output.

Updated: 5-20-2021

Chip Crisis In ‘Danger Zone’ As Wait Times Reach New Record

Shortages in the semiconductor industry, which have already slammed automakers and consumer electronics companies, are getting even worse, complicating the global economy’s recovery from the coronavirus pandemic.

Chip lead times, the gap between ordering a chip and taking delivery, increased to 17 weeks in April, indicating users are getting more desperate to secure supply, according to research by Susquehanna Financial Group. That is the longest wait since the firm began tracking the data in 2017, in what it describes as the “danger zone.”

“All major product categories up considerably,” Susquehanna analyst Chris Rolland wrote in a note Tuesday, citing power management and analog chip lead times among others. “These were some of the largest increases since we started tracking the data.”

Chip shortages are rippling through industry after industry, preventing companies from shipping products from cars to game consoles and refrigerators. Automakers are now expected to lose out on $110 billion in sales this year, as Ford Motor Co., General Motors Co. and others have to idle factories for lack of essential components. That’s undercutting economic growth and employment, as well as raising fears of panic ordering that may lead to distortions in the future.

The chip industry and its customers watch lead times as an indicator of the balance between supply and demand. A lengthening of the gap indicates that buyers of semiconductors are more willing to commit to future supply to avoid a recurrence of shortfalls. Analysts track these numbers as a harbinger of hoarding that can lead to the accumulation of too much inventory and sudden declines in orders.

The Chip Shortage Keeps Getting Worse. Why Can’t We Just Make More?

“Elevated lead times often compel ‘bad behavior’ at customers, including inventory accumulation, safety stock building and double ordering,” Rolland wrote. “These trends may have spurred a semiconductor industry in the early stages of over-shipment above true customer demand.”

The situation has been complicated by a resurgence of coronavirus cases in Taiwan, a key location for chip manufacturing. The country has closed schools, curbed social gatherings, and shut museums and public facilities. While businesses and factories are operating, the government may have to consider broader restrictions.

TSMC Is Stuck In The Middle Of A Global Panic Over Chip Supply

The country is home to Taiwan Semiconductor Manufacturing Co., which is the world’s most advanced chipmaker and counts Apple Inc. and Qualcomm Inc. among its many customers. Local manufacturers also produce less glamorous — but equally critical — chips, such as display driver ICs that have been a particularly painful bottleneck for global production.

On Wednesday, Taiwan’s Centers for Disease Control raised the island-wide alert level, extending Covid-containment measures to the whole country. The same day, the Water Resources Agency said Taiwan needs to tighten water-saving measures because little rain has fallen during the traditional rainy season, aggravating a drought that has also threatened production.

TSMC said in a statement that it will continue to tighten its water usage and does not anticipate the measures will affect its operations.

In his report, Rolland wrote that the current wait level of 17 weeks climbed from the 16-week level and marks a fourth consecutive month of “sizable” expansion.

Lead times for certain products are increasing sharply, even after months of shortages. Power management chips, for example, spiked to 23.7 weeks in April, a wait time about four weeks longer than a month earlier, according to Susquehanna. Industrial microcontrollers order lead times extended by three weeks, some of the steepest increases Rolland has seen since he began tracking the numbers in 2017, he wrote.

Delays are often worse for smaller manufacturers, with headphone makers facing lead times longer than 52 weeks, according to people familiar with the supply chain. This has forced companies to redesign products, shift priorities and, in at least one case, completely abandon a project, said one of the people, asking not to be named because the information is not public.

About 70% of the companies that Rolland tracks have expanding lead times, compared with 20% that have seen lead times contract. NXP Semiconductors NV, a major auto chip supplier, has lead times of more than 22 weeks now, up from around 12 weeks late last year. STMicroelectronics NV, another key auto chip supplier, saw lead times rise by more than four weeks in April to more than 28 weeks.

Such outsized increases may reflect over-ordering by some customers, who could be concerned about the impact of shortages on their businesses. Historically, companies have been able to cancel chip orders without penalty, although that has begun to change.

“Beginning with January data, we have witnessed numerous large JUMPS in reported LTs,” Rolland wrote, referring to lead times. “Whereas in prior years, an individual company would typically move their stated LTs up and down just a few days in a given month, starting this year we have seen significant jumps in LTs that have skewed our data.”

Updated: 5-30-2021

Carmakers Forced by Chip Crisis To Rethink Just-In-Time Ordering

A century after automakers showed the world the value of assembly-line manufacturing, a shortage of semiconductors is teaching the industry a painful new lesson in what it takes to build a car.

For most of its history, the industry has relied on a distinct approach to buying car parts, procuring components from suppliers right at the moment they’re needed. It’s referred to as just-in-time manufacturing and is designed to streamline production and eliminate the costs of keeping warehouses stocked with parts waiting to be used.

But the shortcomings of that system were made starkly clear this year as the automakers confronted a dearth of the chips they need to build advanced functions into their vehicles, and found themselves near the bottom of chipmakers’ customer lists because of their just-in-time approach.

That shortage is threatening to cut $110 billion in sales from the industry, and forcing auto manufacturers to overhaul the way they get the electronic components that have become critical to contemporary car design.

“Customers need to change,” said Hassane El-Khoury, chief executive officer of ON Semiconductor Corp., which gets more than a third of its revenue from the automotive market. “That just-in-time mindset doesn’t work.”

Semiconductor makers are demanding guaranteed, long-term orders rather than the short-term flexibility the carmakers are used to. The chipmakers’ assertiveness, even under pressure from lawmakers, underscores the rebalancing of power from the companies whose logos are on the cars to those that provide the advanced technology that runs them.

As these components play a bigger role in everything from in-car entertainment to self-driving functions, chip manufacturers say they’re willing to invest in expanding production to head off a repeat of shortages that have forced the industry to mothball factories and furlough workers — if the carmakers give them orders that can’t be canceled and commit to long-term agreements.

“Why would I have invested a single dollar when my customer can cancel within 30 days and it takes me two years to build capacity?” ON Semiconductor’s El-Khoury said.

There are signs the industry is listening. Last week, Ford Motor Co. Chief Executive Officer Jim Farley indicated a new willingness to reverse decades of outsourcing for parts.

“As the industry changes, we have to in-source now, just like we in-sourced powertrains in the ’20s and ’30s,” said Farley, who has shut down half his factories and seen his dealers’ lots emptying because of a dearth of chips.

Most components used by the auto industry are part of a discrete food chain, and carmakers are at the top, able to orchestrate their suppliers’ actions in a system that delivers them a set of components that can be put together quickly and cheaply into a finished vehicle.

Electronics makers, who’ve fared much better in the chip supply crunch, regard semiconductors as essential systems, and they work directly with chipmakers to secure products and often design their devices around the chips themselves.

Automakers can no longer “assume the dominance of an 800-pound gorilla” in negotiations with chip companies and battery makers, said Mark Wakefield, head of the auto practice at consultancy AlixParters.

Pioneered by Toyota Motor Corp. in the 1960s, just-in-time is a system where components suppliers are required to turn up with whatever the carmakers want at the last possible moment in a process that pares costs to the very minimum.

That strategy has served the industry well, saving money and helping it organize a system for sourcing the 40,000 or so components that go into a modern vehicle, many of which can be made in a matter of days.

But semiconductors — the heart of sensors, engine management and battery controllers, infotainment and eventually systems that will pilot vehicles — are created in a process that takes months. And building and equipping a factory to produce them requires years.

Today’s cars contain an average of 1,400 semiconductors — and that puts the chipmakers at an advantage. Ford’s Farley said he’s now negotiating contracts directly with chipmakers — bypassing his traditional auto suppliers — while building up inventory of the precious pieces and even redesigning models to accommodate the semiconductor companies.

“We have learned a lot through this crisis that can be applied to many critical components,” Farley told analysts last month as he announced Ford would lose half its production in the second quarter and take a $2.5 billion hit to earnings this year, citing a lack of chips. “We’re also thinking about what this means for the world of batteries and silicon and all sorts of other components that are really mission critical for our company.”

Ford is not alone in seeking solutions that upend long-time industry practices. Automakers from General Motors Co. to Volkswagen AG to Tesla Inc. are looking for ways to get closer to the chipmaking process, which could include forming partnerships with semiconductor companies, bringing chipmaking in-house and even building their own foundries. Nothing is off the table.

“Cars are only going to get more technical and they’re going to need more chips,” said Sam Fiorani, vice president of vehicle forecasting at consultant AutoForecast Solutions. “All of the vehicle manufacturers are looking at every possible scenario for getting it solved for the long-term.”

But according to some chipmakers, the auto industry has embraced new technology but failed to understand those that supply it.

“There is a huge difference between manufacturing a car and manufacturing a chip,” said Kurt Sievers, CEO of NXP Semiconductor NV, the biggest maker of auto chips. “We’ve been working for years closely with the auto OEMs directly when it comes to R&D and innovation — however, not at all for supply chain and volume forecasting.”

Sievers said the chip industry wants specific forecasts that stretch out in years and binding commitments to buy chips that last that long. The way automakers, referred to as original equipment manufacturers or OEMs, and semiconductor vendors work together needs to change, he said.

And the car companies have little choice but to do so. Consumers are increasingly choosing vehicles based on functions such as connectivity, entertainment and advanced automated safety features. The auto industry is steadily shifting away from gasoline to battery power. All of that requires more chips.

“It’s no longer this subsystem that no one cares about,” said Victor Peng, CEO of Xilinx Inc. a chipmaker whose products are uses in advanced driver-assistance systems. “The electronics is really going to shape the customer experience.”

The semiconductor industry has plenty of other orders to fill. In 2020 automakers bought almost $40 billion worth of chips, little changed from the prior year, even amid the crash of the pandemic. By comparison, the computer industry bought 17% more chips than it did in 2019, for a total of $160 billion. Phone makers, meantime, provided the chip industry with $137 billion in revenue, a jump of 12%.

Earlier this year, automakers lobbied U.S. lawmakers to intervene to help them with the shortage, arguing that chipmakers were unfairly prioritizing customers building less important consumer electronics over cars.

The automakers argue their industry creates more than 7 million jobs in America and is critical to national security. And they’ve found a sympathetic ear in President Joe Biden, who was supported by the United Auto Workers in the 2020 election, and is working to help the auto industry navigate the chip crisis.

Still, consumer electronics buys $20 billion more chips a year than the auto industry, and Big Tech has plenty of clout in Washington, too.

Chipmakers are also in no hurry to add new factories to meet this year’s chip rush. Though 2020 was a good year and 2021 is shaping up to be even better, they don’t have to look back very far to be reminded of the difficulties of matching supply with short-term fluctuations in demand. In 2019 industry sales shrank 12% as customers slashed orders to work through stockpiles.

Many investors and analysts are already concerned that what now looks like insatiable demand is customers double-ordering: asking for twice the amount they need so they can at least get the number they want. In the past, such heavy ordering has proved to foreshadow industry gluts, with demand eventually easing and buyers tapping the brakes as they worked down accumulated inventory.

“We came out of 2018 guns blazing, everybody hoarded, and then 2019 was an awful year of demand because they already had chips,” said ON Semiconductor’s El Khoury. “Here we are today with people looking at us and asking, ‘why haven’t you invested?’”

The type of chip automakers want also works against them. Much of what they use — things such as sensors and power regulators — can be made on what’s called lagging nodes, or production technology that hasn’t been state-of-the-art for years.

While that makes it cheaper, chipmakers are reluctant to expand capacity of technology that’s closer to being obsolete.

“The chips that the automotive industry uses are older than the ones you’d find in your cell phones or in your video games,” said AutoForecast Solutions’ Fiorani. “That makes them less of a priority to the companies that produce them.”

Fiorani said carmakers would be better served forming joint ventures with chipmakers to tap their expertise and lock down a dependable source of supply. But doing that would involve going around traditional suppliers such as Continental AG and Robert Bosch AG and turning back the clock to a more expensive time when companies like Ford had to deal with suppliers for raw materials.

Some auto suppliers are already taking steps to make sure they don’t get cut out. Parts supplier Robert Bosch is opening a new chip factory in Dresden that it says is the first of its kind dedicated to manufacturing semiconductors for automotive uses. Still, some automakers are already talking openly about cutting out those middlemen in order to keep up with the speed of change.

“We will be the one who has the commercial relationship with the chipmaker,” Volvo Cars CEO Hakan Samuelsson said at a mobility conference in Tel Aviv this month. “When we want a change and you have to talk to suppliers, it is too slow.”

Ford’s Farley said he’s consulted with tech companies and discovered how common it is in other industries to keep “buffer stock” and to buy directly from chip manufacturers.

“Even if the company still buys the components with chips on them from a supplier, they still negotiated a direct deal,” he told analysts, describing something that’s common practice for companies like Apple Inc.

Ford learned that nine of its tier-one component suppliers rely on just one Renesas Electronics Corp. factory in Japan for chips, a plant that suffered a fire, he said.

Some automakers have made rapid progress in understanding their newer suppliers and are negotiating long-term deals.

Others are sticking to the belief that they can dictate how their suppliers should act, according to ON Semiconductor’s El-Khoudry.

Learning from their current difficulties is the key to turning around the current crisis and avoiding the next, according to Xilinx’s Peng. Toyota, the inventor of just-in-time, said it expects to return to pre-pandemic levels of profitability as soon as this year, helped by factories that continue to churn out vehicles because the company made the decision to accumulate stockpiles of chips.

“People have to think differently or they’re going to be left behind,” Peng said.

Updated: 6-13-2021

Musk Says Panic-Buying of Chips Is Like Rush On Toilet Paper

Elon Musk said the chip shortage is wreaking havoc on Tesla Inc.’s supply chain and blamed companies ordering more microcontrollers than they need, much like consumers hoarded toilet paper in the early days of the pandemic.

“Our biggest challenge is supply chain, especially microcontroller chips. Never seen anything like it,” the chief executive officer tweeted Wednesday. “Fear of running out is causing every company to overorder – like the toilet paper shortage, but at epic scale.”

Our biggest challenge is supply chain, especially microcontroller chips. Never seen anything like it.

Fear of running out is causing every company to overorder – like the toilet paper shortage, but at epic scale.

That said, it’s obv not a long-term issue.
— Elon Musk (@elonmusk)
June 2, 2021

Musk, 49, said during Tesla’s first-quarter earnings call in April that the chip shortage was a “huge problem” and one of the most difficult supply-chain challenges the company had ever experienced. Last month, the consulting firm AlixPartners estimated automakers will lose about $110 billion of sales this year due to the dearth of semiconductors, almost double an earlier projection.

Musk, 49, said during Tesla’s first-quarter earnings call in April that the chip shortage was a “huge problem” and one of the most difficult supply-chain challenges the company had ever experienced. Last month, the consulting firm AlixPartners estimated automakers will lose about $110 billion of sales this year due to the dearth of semiconductors, almost double an earlier projection.

Taiwan Semiconductor Manufacturing Co. said last month it plans to increase production of microcontroller units by 60% this year to help relieve carmakers. Still, chip companies, auto manufacturers and their parts suppliers have warned chip supplies will remain tight into next year.

Tesla has been raising vehicle prices because of rising raw-material costs and supply-chain pressures, Musk tweeted earlier this week. The company also elected to remove a lumbar-support feature from the passenger seats of the Model 3 sedan and Model Y SUV, though the CEO said this was related to limited customer usage.

Other carmakers have stripped out features such as navigation systems and blind spot-monitoring mirrors due to the chip shortage.

Updated: 6-14-2021

How To Win The Global Battle For Microchip Dominance

Creating new markets with novel products will keep the U.S. a step ahead of China and other rivals.

The world is gearing up for a titanic battle over semiconductors. To secure its position in this most strategic of all industries, the U.S. will have to weigh its strategy carefully and learn the lessons of the past. The right balance of support for both production and innovation will distinguish the winners.

Of all modern industries, semiconductors — i.e., computer chips — are the most jealously guarded and sought-after by national governments, for many reasons. First of all, they’re militarily important — pretty much all weapons are computerized now, and in a war you need to be able to make your own chips.

On top of that, semiconductor manufacturing is a very high-value activity that generates a lot of revenue and a lot of good-paying jobs. And since computer chips are key inputs into a huge variety of other high-tech industries, having semiconductors located in your country supports an entire ecosystem of high-value economic activity.

Thus it’s no surprise that the Democrats’ newfound embrace of industrial policy would focus first and foremost on semiconductors. Of the $250 billion allocated in the competitiveness bill just passed by the Senate, $52 billion is to boost domestic semiconductor production. Meanwhile, President Joe Biden’s new review of U.S. supply chains singles out computer chips as a key area in need of reshoring.

U.S. leaders have their work cut out for them. They’re up against China, which has rolled out a huge program aimed at boosting its own semiconductor industry to world-beating position. Japan and Europe are trying to claw back some of the market share they’ve lost.

South Korea, whose companies have taken some market share from the U.S. in recent years, is also making its own big push. And Taiwan is home to Taiwan Semiconductor Manufacturing Co., TSMC, which is now regarded as the global technological leader in chip manufacturing after leaving U.S. champion Intel Corp. in the dust.

In other words, everyone is going to be throwing money at chip companies, helping to finance the construction of giant fabricator plants (called “fabs”), doing more research and development, and so on.

If the U.S. is able to simply preserve its market share — currently still the world’s biggest at around 47% — it should be counted as a victory. And if the U.S. can persuade TSMC to locate more of its factories in the U.S., that will count as a major strategic success, even though TSMC is a Taiwanese company.

But what would it take to decisively win the semiconductor wars, rather than just running harder to stay in place? To answer that, the past provides a number of instructive examples — most importantly, the battle over semiconductors in the late 1980s and early 1990s.

In the 1980s, Japan’s memory chip industry caught up with America’s technologically and started taking away market share. The U.S. , which was much more protectionist then than now, freaked out and started a trade war. In the 80s, America used high tariffs to force Japan to agree to set aside a portion of its domestic market for U.S.-made memory chips, and to share some of its technology.

Meanwhile, the U.S. set up Sematech, a government-organized consortium of private semiconductor companies dedicated to maintaining the U.S.’ technological edge.

None of this managed to save domestic producers of memory chips. The U.S. market share in that industry never recovered from the plunge it took in the early 80s. Japan retained its lead for a few years, then was outcompeted by Korea, which spent big to dominate what by then was an increasingly commoditized and low-margin market.

Nevertheless, the U.S. did recover its pole position in the global semiconductor market overall. Because while the world was fighting over memory chips, U.S. companies like Intel switched to making something much more valuable — microprocessors. American CPUs raked in the cash while Asian countries fought over the scraps in the memory industry.

This episode illustrates the importance of innovation. Intel is suffering now, but its multi-decade dominance — which translated into national market dominance — came not via cheap government financing or dogged competition, but by focusing on innovative new types of products.

Similarly, later shifts in the industry have mostly been due not to competition in existing markets, but to novel products: GPUs, low-power chips, mobile chips and TSMC’s foundry model.

As the U.S. heads into the latest semiconductor war, it would do well to remember this basic principle. There will certainly be a temptation to throw money at Intel and other U.S. chipmakers to design the next iteration of their existing products. But while that probably doesn’t hurt, history suggests that U.S. dominance of the industry will depend on new companies creating new kinds of chips.

This means the government needs to support startups in addition to national champions, make research results broadly available instead of letting companies hoard them, and put money toward disruptive innovations with the power to create whole new markets.

If it comes down to a pure contest of subsidies, the U.S., with its deep political divisions and its traditional ambivalence about public-private cooperation, is likely to lose to China — or at best, to spend a lot of money just to fend off the challenge. We innovated our way to victory in the last semiconductor war; we’ll probably have to do the same this time.

Updated: 6-14-2021

Chip Shortage Brings Frustration But More Business To Industry’s Middlemen

Distributors typically able to source hard-to-procure parts can’t find product, even as more buyers ask them to do so.

When buyers need chips in a pinch, they turn to Erik Drown, a middleman who is able to source scarce parts.

Mr. Drown’s decades of experience are now up against one of the worst semiconductor shortages ever. Asked recently by a client to help find 1,200 chips in a matter of days, Mr. Drown scoured his industry contacts. He couldn’t find all the needed chips but was able to get preliminary price quotes on about half.

It is a painful truth for businesses world-wide: They need chips but can’t find them. Making matters worse is that the typical problem solvers—chip brokers and middlemen such as Mr. Drown—find themselves in some cases just as perplexed and empty-handed. Yet they are busier and making more profits than ever.

“A lot of companies that would never go to someone like me, they have to because if they don’t, they’re not going to survive,” said Mr. Drown, global sourcing director at Select Technology Inc., an electronic-components distributor based in Rowley, Mass.

A breakdown in the typical distribution of chips adds extra layers of complication to a monthslong shortage that remains widespread and is likely to continue through the end of the year, say chip makers, wholesalers and buyers.

During normal times, the largest chip makers such as Intel Corp. or Samsung Electronics Co. ship semiconductors directly to their deep-pocketed buyers and contracted wholesalers. Leftover supply generally went to other middlemen that cater to smaller buyers. Most years, there was plenty to go around.

But now, it is a free-for-all. The biggest companies have seen their direct access cut off or limited. As a result, they are looking for extra help from wholesalers contracted by the chip makers, middlemen known in the industry as authorized distributors.

Avnet Inc., an authorized distributor for Intel and Broadcom Inc., has seen a surge in large buyers that previously didn’t need outside assistance locating chips. It is uncharted territory for those clients, having to hedge against supply chain disruptions or keep tabs on a host of different materials, said Peggy Carrieres, Avnet’s vice president for global sales enablement.

“They are wanting us to deal with it,” Ms. Carrieres said.

Despite the scarcity, higher prices and shipping volumes have boosted bottom lines for distributors, which typically take a 10% markup on chips, and even more when providing consulting for alternative parts or product designs, estimated Peter Hanbury, a partner at Bain & Co. who specializes in the semiconductor supply chain.

Arrow Electronics Inc., one of the industry’s biggest players, said global component sales reached a record $6.4 billion in the first three months of the year, up 42% from a year earlier. The Colorado-based firm’s operating income for its global components business rose more than 70% during the same period. For the quarter ended March 31, Avnet said its sales rose 14% from a year earlier to $4.9 billion.

Big buyers have also been forced to use middlemen that rely on indirect methods to procure components, such as purchasing unused chips from goods manufacturers that bought more than they needed. Because the independent brokers aren’t buying directly from chip makers, these secondhand transactions can be costlier and bring greater authenticity risks.

The $442 billion chip industry has traditionally been turbulent. But consumer demand from pandemic shifts to online work and life, coupled with a strong economic recovery, caught buyers and chip makers off guard over the past year. Supply can’t increase quickly enough. So prices have skyrocketed.

Semiconductors that power electronic displays have surged in price by as much as 40% in the first half of 2021 from a year earlier, market researcher Counterpoint Research says. During the same period, some image sensors and processors used in phones and personal computers have seen prices increase by 15% to 20%, Counterpoint estimates, while memory-chip prices have risen 5% to 10%.

The situation is even worse for car makers, which are lacking chips such as microcontrollers used in vehicle ignitions or brake systems. Brokers are quoting prices that are five times higher than they were before the pandemic for auto chips, and in some extreme cases 20 times more, said Ambrose Conroy, founder of Las Vegas-based supply-chain consulting firm Seraph.

Prices have surged so much that Jens Gamperl will show disbelieving buyers the wholesale price that his online-chip selling platform, Sourcengine, pays before taking any markups. For example, one flash-memory chip that would normally cost 50 cents was going for $38 on Sourcengine at one point in April, Mr. Gamperl said. The next day it leapt to $49.50.

“The customer is always suspicious that you try to take advantage of the situation,” Mr. Gamperl said.

Prices are often staying high because companies can’t afford to wait to make purchases. Dan Hetnar, senior buyer for a U.S. circuit-board manufacturer, used a broker to buy some 1,500 microchips—at more than triple the typical price of $2.75 per part.

Otherwise, if pushed to go through an authorized distributor that deals directly with the chip makers, the parts wouldn’t have been available for 45 weeks.

“It’s the one thing I need,” Mr. Hetnar said.

The steep price swings reflect how scarcely available the components are—and even so, how much new business is rolling in for many middlemen. Direct Components Inc., a Tampa, Fla.-based chip broker, has seen a tripling of clients in the past year, including many big buyers that hadn’t reached out before, said the firm’s founder, Aaron Nursey.

“A year ago they really wouldn’t give us the time of day,” he said. “Now they’re coming to us.”

Updated: 6-17-2021

Chipmakers Offered 25% Investment Tax Credit In New Senate Bill

A 25% tax credit is the latest carrot being proposed on Capitol Hill to encourage semiconductor companies to bolster U.S. production.

Under a bipartisan bill introduced Thursday, chipmakers would receive a tax credit for investments in manufacturing equipment and facilities. The proposal from Senate Finance Committee Chair Ron Wyden and Ranking Member Mike Crapo also includes incentives for chipmaking and the construction of special tools used in manufacturing.

The bill is the latest attempt in Washington to bolster domestic chip supplies in response to a global shortage that has disrupted production of automobiles and consumer electronics. The Senate approved $52 billion in funding for the semiconductor industry earlier this month in a broad bill aimed at increasing competition with China. The House is working on its own plan.

“This new legislation will take an additional step in helping American manufacturers make semiconductor chips here at home so this shortage won’t happen again,” Democratic Senator Debbie Stabenow, a co-sponsor of the bill, said in a statement.

Updated: 6-19-2021

The World Relies On One Chip Maker in Taiwan, Leaving Everyone Vulnerable

Taiwan Semiconductor Manufacturing Co.’s dominance poses risks to the global economy, amid geopolitical tensions and a major chip shortage.

Taiwan Semiconductor Manufacturing Co.’s chips are everywhere, though most consumers don’t know it.

The company makes almost all of the world’s most sophisticated chips, and many of the simpler ones, too. They’re in billions of products with built-in electronics, including iPhones, personal computers and cars—all without any obvious sign they came from TSMC, which does the manufacturing for better-known companies that design them, like Apple Inc. and Qualcomm Inc.

TSMC has emerged over the past several years as the world’s most important semiconductor company, with enormous influence over the global economy. With a market cap of around $550 billion, it ranks as the world’s 11th most valuable company.

Its dominance leaves the world in a vulnerable position, however. As more technologies require chips of mind-boggling complexity, more are coming from this one company, on an island that’s a focal point of tensions between the U.S. and China, which claims Taiwan as its own.

Analysts say it will be difficult for other manufacturers to catch up in an industry that requires hefty capital investments. And TSMC can’t make enough chips to satisfy everyone—a fact that has become even clearer amid a global shortage, adding to the chaos of supply bottlenecks, higher prices for consumers and furloughed workers, especially in the auto industry.

The situation is similar in some ways to the world’s past reliance on Middle Eastern oil, with any instability on the island threatening to echo across industries. Companies in Taiwan, including smaller makers, generated about 65% of global revenues for outsourced chip manufacturing during the first quarter of this year, according to Taiwan-based semiconductor research firm TrendForce. TSMC generated 56% of the global revenues.

Being dependent on Taiwanese chips “poses a threat to the global economy,” research firm Capital Economics recently wrote.

TSMC, which is listed on the New York Stock Exchange, reported $17.6 billion in profits last year on revenues of about $45.5 billion.

Its technology is so advanced, Capital Economics said, that it now makes around 92% of the world’s most sophisticated chips, which have transistors that are less than one-thousandth the width of a human hair. Samsung Electronics Co. makes the rest.

Most of the roughly 1.4 billion smartphone processors world-wide are made by TSMC.

It makes as much as 60% of the less-sophisticated microcontrollers that car makers need as their vehicles become more automated, according to IHS Markit, a consulting firm.

TSMC said it believes its market share for those microcontrollers is about 35%. Company spokeswoman Nina Kao refuted the idea that the world depends too much on the company, given the many areas of specialization in the world’s semiconductor supply chain.

The U.S., Europe and China are scrambling to cut their reliance on Taiwanese chips. While the U.S. still leads the world in chip design and intellectual property with homegrown giants like Intel Corp. , Nvidia Corp. and Qualcomm, it now accounts for only 12% of the world’s chip manufacturing, down from 37% in 1990, according to Boston Consulting Group.

President Biden’s infrastructure plan includes $50 billion to help boost domestic chip production. China has made semiconductor independence a major tenet of its national strategic plan. The European Union aims to produce at least 20% of the world’s next-generation chips in 2030 as part of a $150 billion digital industries scheme.

In March, Intel announced a $20 billion investment to build two new chip factories in the U.S. Three months earlier, then-chief executive Bob Swan had flown a private jet to Taiwan to see if TSMC would take over some of the manufacturing for its newest generation of chips, people familiar with the meeting said—a contract potentially worth billions of dollars.

TSMC executives were eager to help but wouldn’t do it on Intel’s terms and disagreed on price, one of the people said. The negotiations still aren’t settled, the person said.

Intel ousted Mr. Swan in January as it tries to recover from missteps that left it potentially reliant on TSMC. Intel’s market cap is around $225 billion, less than half that of TSMC’s.

The Taiwanese maker has also faced calls from the U.S. and Germany to expand supply due to factory closures and lost revenues in the auto industry, which was the first to get hit by the current chip shortage.

A meeting between chip and auto makers facilitated by the Biden administration in May saw some progress but left simmering frustrations, with U.S. auto makers feeling they had yet to get detailed plans on TSMC’s efforts to increase production, said people familiar with the meeting.

TSMC said it has taken unprecedented actions and increased microcontroller production by 60% compared with 2020.

Deep Pockets

Analysts say that broader trends in the industry, along with TSMC’s hard-driving culture and deep pockets, will make it hard to create a more diversified semiconductor supply chain anytime soon.

Semiconductors have become so complex and capital-intensive that once a producer falls behind, it’s hard to catch up.

Companies can spend billions of dollars and years trying, only to see the technological horizon recede further.

A single semiconductor factory can cost as much as $20 billion. One key manufacturing tool for advanced chip-making that imprints intricate circuit patterns on silicon costs upward of $100 million, requiring multiple planes to deliver.

TSMC’s own expansion plans call for spending $100 billion over the next three years. That’s nearly a quarter of the entire industry’s capital spending, according to semiconductor research firm VLSI Research.

Other countries would need to spend at least $30 billion a year for a minimum of five years “to have any reasonable chance of success” in catching up with TSMC and Samsung, wrote IC Insights, a research firm, in a recent report.

Updated: 6-23-2021

Wait Times For Chips Hit Record 18 Weeks As Shortage Deepens

Chip-starved industries from automakers to consumer electronics will need to wait a bit longer for components, as delays in filling orders continue to get worse.

Chip lead times, the gap between ordering a semiconductor and taking delivery, increased by seven days to 18 weeks in May from the previous month, an indication that chipmakers’ struggles to keep up with demand are worsening, according to research by Susquehanna Financial Group. That gap, already the longest wait time since the firm began tracking the data in 2017, is now more than four weeks longer than the previous peak in 2018.

Power management chips, semiconductors that regulate the flow of electricity in everything from industrial machinery to smartphones, are a primary reason for the overall increase. Lead times for those chips hit 25.6 weeks, nearly two weeks longer than a month earlier. Still, the crunch is widespread.

”The broad-based nature of the shortages is highlighted by the data, as most key product categories (power management, discretes, analogs, passives) have seen LT expansion,” Susquehanna analyst Chris Rolland wrote.

Investors watch lead times looking for clues about how demand is trending, but also as sign that chip users may be panicking and ordering too much, which would mean the industry is headed for a glut. Rolland said that point has already passed and he’s concerned there isn’t enough demand for the end devices that rely on the electronic components to support current ordering levels.

While overall lead times stretched for companies such as Broadcom Inc., NXP Semiconductors NV., STMicroelectronics NV and Texas Instruments Inc., some areas are beginning to catch up with demand. Microcontrollers, small processors that direct functions in everything from cars to washing machines, saw their lead times decrease by more than a week, Rolland wrote. Lead times for analog chips, devices that convert real-world phenomena such as touch and sound into electronic signals, increased, but at a slower pace than previously, according to Susquehanna.

Optoelectronic components, including chips that help convert solar energy into electricity in solar panels, are increasingly hard to come by, according to Susquehanna. Most of the companies listed in the report as struggling to keep up with orders count carmakers as major customers.

The Chip Shortage Keeps Getting Worse. Why Can’t We Just Make More?

Shortages of semiconductors have been felt the most in the automotive industry, which is forecast to lose more than $100 billion in sales of vehicles it can’t make. Other areas have felt the pinch, too, with many electronics makers, including the biggest companies such as Apple Inc., unable to meet all of the demand for their products.

Some leaders at chipmakers, such as Broadcom Chief Executive Officer Hock Tan, have cautioned against reading too much into the spike in lead times. They’ve argued that the lengthening period is evidence of a higher level of understanding of the semiconductor industry by their customers and new willingness to commit to long-term supply agreements that can’t be canceled.

Updated: 6-29-2021

Car Dealers Are Selling More Vehicles Above The Sticker Price

It’s a seller’s market, but production shortfalls also mean dealerships must manage with lower sales volume.

The sticker price on cars isn’t sticking. In some cases, it’s going up.

Auto makers typically set what is known as the manufacturer’s suggested retail price, or MSRP, a figure that appears on the window sticker of a new model. But with inventory tight and customers clamoring for cars and trucks, auto dealers are charging more, increasing the price above sticker and in some cases requiring customers buy certain add-ons, such as protective coatings and accessories, as part of the increase.

Some buyers say they have encountered dealerships asking for thousands of dollars above MSRP. And analysts and dealers say the practice is becoming more widespread and occurring on a wider range of vehicles, including more mainstream models that typically wouldn’t be targeted for such price increases.

“I was shocked,” said Ken Baird, a 61-year-old Boca Raton, Fla., resident who was recently shopping for a Kia Telluride. The window sticker on the particular model he was looking at read $45,000, and he said he offered to pay $3,000 over that knowing the vehicle was in high demand.

But the dealership wanted $10,000 above the original sticker. “They said, ‘I’ll get the $55,000 from someone else,’” Mr. Baird said.

He ended up buying a Toyota Highlander from another dealership, paying the manufacturer’s suggested retail price but no more.

A Kia spokesman said the company’s dealers are independent franchisees and react to market demand.

The U.S. car business has sharply shifted to a seller’s market within the past year. A preference for personal transportation during the Covid-19 pandemic boosted vehicle demand; meanwhile, vehicle production faltered. Auto makers have pulled back on discounts, and customers are paying record prices for both new and used cars. The higher auto costs have contributed to broader concerns about inflation as consumer prices rise in other sectors too.

In mid-June, about three-quarters of all vehicles sold in the U.S. went for the sticker price or above, according to research firm J.D. Power. That is up from 67% at the end of May and higher than the average of around 36% before the pandemic, the firm’s data shows.

“That percentage of people paying above sticker for a vehicle has been going up and up and up,” said Ivan Drury, an automotive analyst for car-shopping website “There’s no end in sight because there’s fewer and fewer cars on dealer lots.”

Car companies are still trying to recoup vehicle production lost to last year’s pandemic-related shutdowns. A global computer-chip shortage that slammed the auto industry this year has only further crimped factory output, making it difficult to fully restock sales lots.

Sam Pack, a Texas dealer with six stores in the Dallas area, said he is selling most of his inventory at MSRP, and in very few cases above sticker for certain limited-run, specialized models.

“We’re not negotiating like we used to,” Mr. Pack said. “There’s no room to budge when you don’t know what is coming in.”

A dealer charging above MSRP isn’t anything new. But for the most part it would happen with hard-to-find models, such as specialized sports cars or newly redesigned vehicles that are in high-demand upon their debut, dealers and analysts say.

Because dealers own the vehicles—purchasing them directly from the factory—they determine the final price. Generally, the manufacturer’s suggested retail price is intended as a starting point for negotiations, with buyers in the end paying less than sticker.

Some states, such as California and Connecticut, require dealers to disclose when they are charging above the factory price by affixing a notice to the vehicle, also known as a sticker addendum. These labels must include an explanation of how the dealer arrived at the higher price, whether it reflects an increase in market demand or is the result of adding on certain features and services, such as special wheels and paint protection, consumer lawyers say.

Car retailers tend to profit on selling such features, which are usually optional and pitched to buyers in the finance office. In other cases, customers won’t know the asking price exceeds sticker without inquiring about a particular vehicle.

Some dealers say the above-sticker markups are proliferating now because car retailers are trying to make more profit per vehicle, given that sales are down because of the inventory shortages.

George Waikem II, a dealer in northeast Ohio, said he doesn’t see sales rebounding any time soon, and so he has to find a way to make selling the cars he has more profitable. His salespeople are the same boat because they work on commission and a drop in sales volumes can dent their compensation.

Mr. Waikem said on some high-demand models, such as the Ford Bronco and the Kia Telluride, his dealerships have raised the asking price a few hundred dollars by adding extra features and services, such as paint protection and wheel-well liners, that would have otherwise been optional. The add-ons are a necessary reaction to the current vehicle market, he said.

“We’re not going to grossly overcharge somebody, but this is still a business,” Mr. Waikem said.

General Motors Co. said in a statement that while its dealers are independent and control local market prices, it doesn’t approve of charging over MSRP and its data shows that the majority of its dealers don’t sell above that price.

A spokeswoman for the National Automobile Dealers Association declined to comment.

Some dealers say they avoid asking for more than the sticker price because it can be a turnoff for buyers and hurt existing customer relationships.

“It’s a short-term benefit for a long-term detriment,” said Earl Stewart, a Toyota dealer in Florida. “You might sell them one car today, but you won’t ever sell them another car,” he said.

Jennifer Thompson, a longtime Cadillac owner, said she was stunned when in January a salesperson at her local dealership near Dallas tried to charge her about $10,000 over sticker for a new Escalade.

“I was just at a loss, and asked him why,” Ms. Thompson said. “He looked at me and said ‘because we can.’”

Ms. Thompson eventually decided to order directly from the factory. “I still paid more than I wanted, but at least I knew what I was paying for because I built exactly the car I wanted,” she said.

Updated: 7-8-2021

U.K. Probes Chinese Takeover of Country’s Biggest Chip Plant

Britain’s national security advisor will examine the takeover of the country’s biggest semiconductor plant by a Chinese-owned company after lawmakers said it could threaten the country’s high-tech future.

Nexperia NV acquired Welsh-based Newport Wafer Fab, which makes semiconductors mainly for the car industry, on Monday.

“We are looking into it. I have asked the National Security Adviser to review,” Prime Minister Boris Johnson told Parliament on Tuesday.

The U.K.’s Enterprise Act gives the government 30 days to either allow the deal to proceed or call it in for scrutiny. Nexperia’s parent company Wingtech Technology Co. Ltd. said in a statement earlier that the deal faces “uncertainties.”

Beside supplying automotive plants, Newport Wafer has been focusing on more advanced compound semiconductors that are at the heart of technologies such as 5G and facial recognition. The company also has strong ties to a number of U.K. universities.

Johnson told parliament that National Security Advisor Stephen Lovegrove will “judge whether the stuff that they are making is of real intellectual property value and interest to China, whether there are real security implications.”

On Thursday, a U.K. government spokesman said that “we are going to monitor the situation closely and wouldn’t hesitate to take further action if necessary.”

“The government needs to call this in and block it,” said former Conservative Party leader Iain Duncan Smith in an interview.

“This yet again shows that despite the legislation, despite all the earlier tough talk, the government is looking two ways on China. This sale is an investment disaster.”

Vetoing the deal could antagonize Beijing and signal a hardening of Britain’s stance on Chinese investments in the chip industry, which is at the center of a trade war between the U.S. and China.

While Johnson has blocked China’s Huawei Technologies Co. from taking part in Britain’s 5G wireless rollout, the government has tended to take a lighter-touch approach with chip industry deals.

Officials have waved through the sale of most of the U.K.’s major semiconductor firms including Arm Ltd., acquired by Japan’s SoftBank Group Corp. in 2016, and Imagination Technologies, which went to a Chinese-backed private equity firm in 2017.

A new law was passed this year giving sweeping powers for the government to intervene if takeovers are deemed a threat to national security. Ministers will have five years to scrutinize transactions and have powers to unpick them if they are judged a threat.

“Long-Term Resilience”

Although Newport Wafer is one of the U.K.’s largest fabrication plants — where semiconductors are made — it remains tiny compared to facilities in the U.S. and Asia, with annual revenue of 49.4 million pounds ($68.2 million), according to the latest U.K. accounts.

Nexperia has been a customer of Newport Wafer for several years, a spokesman for Netherlands-based Nexperia said in an emailed reply to questions from Bloomberg.

“Newport has a proven track record and has unparalleled experience with advanced power and semiconductor technologies,” said the spokesman. “With the acquisition, Nexperia is guaranteeing its own supply chain.”

Nexperia was spun out of NXP Semiconductors NV in 2017 and acquired by a Chinese consortium led by Beijing Jianguang Asset Management Co. Ltd. In 2018, Wingtech — which produces mobile phones and tablets — bought a controlling stake in Nexperia for $3.6 billion.

“I think this should be called in under the legislation,” former cabinet minister and Tory MP Damian Green said in an interview, referring to the Newport Wafer sale. “It’s clear this type of manufacturing facility lies at the heart of many industries of the future and it will be very important to our long-term resilience as a high-tech country.”

Updated: 7-12-2021

Chip Shortage’s Latest Toll: A Shortage of Work Trucks

A bottleneck has left small businesses and municipalities competing over scarce supply of commercial vehicles as business rebounds.

Construction contractors, home cleaners and other service-based companies are struggling to find new work vehicles, a potential bottleneck in growing their businesses as demand for their services surges amid the rebounding economy.

A shortage of computer chips that are used for everything from engines to air bags has disrupted vehicle production for months, squeezing dealer inventory and leaving car shoppers with scant selection and elevated prices.

As auto makers prioritize building pricey trucks and SUVs for individual buyers, commercial-fleet operators—which generally favor no-frills models and buy them at a discount—have been disproportionately affected, analysts and dealers say.

The pullback in commercial-fleet sales has left businesses and municipalities competing over scarce supply, often exceeding their budgets to buy vehicles that may not be the best fit for the job. Some fleet operators and dealers say factory orders for pickup trucks and cargo vans have been sitting unfilled for months.

In some cases, the inventory crunch has prevented businesses from buying new vehicles to replace older models. In others, it has hampered their ability to expand operations to satiate booming demand related to an uptick in construction, home renovations and other services.

Randy Blubaugh said his home-cleaning business outside Dallas is receiving between 50 and 70 calls a week from households asking for on-site assessments his business can’t handle without more cars.

“I can’t even get to a fraction of these potential customers,” he said.

His business, a franchise of the Cleaning Authority, currently sends out two-person teams in its 11 Chevrolet Spark small cars, a model also popular with rental-car fleets. The leasing company he works with has had difficulty finding more cars to meet the increased demand, which he said would be enough to potentially double the size of his fleet.

Despite the chip shortage, auto sales overall have largely recovered to pre-pandemic levels in the first half of 2021. But the recovery in sales of commercial vehicles has lagged behind the broader trend.

Overall U.S. vehicle sales of 8.3 million in the first half of 2021 were just 95,000 fewer than they were during the same period in 2019 before the pandemic, according to J.D. Power. The mix, however, is now more heavily skewed toward retail sales to individual buyers. This year, 14% of vehicles sold were to fleet customers, compared with 22% in 2019—a difference of roughly 695,000 vehicles, the firm’s data shows.

Companies are also paying more for work vehicles when they can find them in stock, according to dealers, businesses and leasing agents.

Commercial customers, who are accustomed to getting discounts of 8% or more from the sticker price, are routinely paying above sticker because of tight supply, said Rick Nicoletti, vice president at Napleton Fleet Group.

The Chicago-area group sells about 15,000 vehicles to commercial buyers annually, including construction contractors, insurance firms and delivery companies.

“There’s a huge demand for vehicles right now, and hardly any supply,” Mr. Nicoletti said. “I’ve been doing this for 40 years and never seen anything like it.”

Jeff Barron, who heads fleet leasing at Delaware-based Bancorp Inc., said paying more compounds the budget implications for fleet customers buying in bulk.

“It’s one thing if it’s one vehicle. It’s another if you were planning to buy or lease 15,” he said.

Auto makers, which have shut some factories for months, have said they are allocating what chips they have to higher-end models that are better for their bottom lines. Fleet operators say they have often found themselves pushed to the bottom of the wait list.

‘I’m happy to get the truck that doesn’t meet my needs and that we paid too much for.’
— D. David Dugan, president of Core States Group, an architecture and construction firm

General Motors Co. warned commercial customers early this year that vehicle supplies would be constrained and worked with them to time vehicle orders, a company spokesman said.

“That helped businesses adjust,” he said.

GM’s U.S. sales to fleet buyers, including commercial customers and rental companies, rose sharply in the second quarter compared with a year earlier, when the pandemic froze deliveries. Still, the auto maker’s fleet sales were about 14% of overall vehicle sales in the second quarter, compared with about 20% before the pandemic.

Ford Motor Co. , one of the largest commercial-vehicle sellers, has canceled production of tens of thousands of pickup trucks and vans since the spring, analysts estimate. Commercial-vehicle sales accounted for about 15% of total U.S. sales in March and April, compared with about 20% in the same period a year earlier, according to research firm Cox Automotive.

Wait times for companies and municipalities that order new vans and trucks have stretched from weeks to months, dealers and fleet operators say.

The sheriff’s office in rural Bingham County, Idaho, ordered a new Ford Expedition last September for its K9 unit. The truck was finally delivered from the factory two months ago but still has to be specially refitted before it can be put into service, said Chief Deputy Jeff Gardner. Looking ahead, he worries how his department will turn over its fleet of trucks and cruisers on schedule and on budget, he said.

“It adds a lot of stress to day-to-day operations,” Mr. Gardner said.

Some business owners say they are having to settle for whatever they can find, whether or not the vehicle is the best fit.

D. David Dugan, president of Core States Group, an architecture and construction firm, said his business is booming as clients catch up on projects that had been deferred since the pandemic began. The company operates a fleet of roughly 45 vehicles nationwide, mostly pickup trucks.

Mr. Dugan said his company placed some truck orders as far back as last year, but when he asks about them, dealers say the vehicles are sitting on massive lots, awaiting necessary computer chips. Meanwhile, Core States has resorted to buying some of the vehicles it was leasing and its transportation budget has increased 20% to 30%, he said.

In one case, staff flew to Las Vegas from Southern California to find trucks and bought ones with expensive features that weren’t needed, like four-wheel drive, he said.

Even buying the wrong truck feels like a victory right now, Mr. Dugan said.

“I’m happy to get the truck that doesn’t meet my needs and that we paid too much for,” he said.

Updated: 7-15-2021

What’s Worse Than A Chip Shortage? Buying Fake Ones

Global semiconductor shortage attracts fraudsters, counterfeits; ‘Of course, a bunch of them didn’t work,’ a buyer says.

The global chip shortage has created a gold mine for bad actors.

Businesses in need of chips are taking supply-chain risks they wouldn’t have considered before, only to find that what they buy doesn’t work. Dubious sellers are buying ads on search engines to lure desperate buyers. Sales of X-ray machines that can detect fake parts have boomed.

It is a quality-control crisis created by the world’s scramble to land hard-to-find semiconductors at any cost. Without those essential parts, makers of products as varied as home appliances and work trucks are stuck in neutral as the global economy ticks back to life.

This spring, New York-based BotFactory Inc., a maker of 3-D printers that produce electronic parts, couldn’t source microchips at any of its go-to vendors for weeks. Eventually, it turned to an unknown seller on AliExpress, an online sales platform operated by China-based Alibaba Group Holding Ltd. An early sign of trouble: The orders arrived packed in plastic wrap rather than the usual protective antistatic bags.

X-ray machines, in higher demand this year during the chip shortage, can reveal if the inside of a chip is empty—like the second one from the right—or has inconsistent circuitry.

“Of course, a bunch of them didn’t work,” said Andrew Ippoliti, BotFactory’s lead software engineer.

Mr. Ippoliti suspects the defective parts were fakes. Before making the purchase, BotFactory had been assured the microchips were legitimate, he said—but the seller went silent after the products failed to work. BotFactory filed a dispute with AliExpress, which issued a full refund.

The company finally procured some 200 microchips by ordering direct from the manufacturer.

At ERAI Inc., which maintains records of misbehavior in the electronics supply chain, new complaints arrive almost every day, said Kristal Snider, vice president at the industry watchdog. Buyers from more than 40 countries have filed reports of wire fraud, she added.

The transgressors are generally opportunistic criminals. They lure victims through targeted ads on search engines, direct them to boastful webpages and then disappear after receiving wire payment. ERAI has flagged dozens of high-risk websites, many based in Hong Kong.

One flagged firm is Blueschip Co., which calls itself one of the world’s “largest and fastest-growing” electronics-components distributors. ERAI said the company’s website shares similarities with those of known bad actors—including some guarantees that use the same wording.

Blueschip, in a written response to The Wall Street Journal, said it couldn’t be bothered to respond to ERAI’s claims. “The innocent know their innocence,” the Hong Kong-based company said.

“The number of websites we see popping up offering hard-to-find, allocated and obsolete parts is alarming,” said ERAI’s Ms. Snider in an email. “After 27 years of investigating and reporting fraud in this industry, it takes a lot to alarm me.”

Instances of chip fraud have historically been underreported, industry participants and experts say, because victims are reluctant to publicly admit that they have been duped. Pursuing criminal charges is difficult, particularly across borders.

For counterfeiters and shady distributors, the possibility of getting caught isn’t great enough to alter behavior, said Diganta Das, a researcher at the University of Maryland who studies counterfeit electronics. There are so few convictions, Mr. Das said he could recite them all if he tried.

Counterfeit chips existed before the current shortage. The knockoffs range from sophisticated copies to old parts refurbished to look new. Many buyers have improved testing capabilities, lowering the odds that errant parts could end up in finished products, chip experts said, though counterfeiting techniques constantly evolve.

Most companies encounter counterfeit parts about three times a year, estimates Michael Ford, a senior director at Horsham, Pa.-based Aegis Software Corp., who has worked on industry standards for the quality and tracking of electronic parts. In nearly every case, the fake parts go unreported, he added.

“The whole supply chain does not want to appear as though it’s compromised,” Mr. Ford said.

Given the chaos of this year’s shortage, some buyers are tightening their antifraud measures. The Independent Distributors of Electronics Association said orders for its 250-page manual on identifying suspect parts are coming in at twice last year’s pace. Some buyers are companies that had obtained faulty or suspicious components, said Faiza Khan, the group’s executive director.

At U.K.-based distributor Princeps Electronics Ltd., requests for the most expensive and sophisticated electrical testing have nearly quadrupled this year, said Ian Walker, operations director. Those require a specialized engineer, he said, and in some cases mean a customer is paying tens of thousands of dollars to confirm the authenticity of a $3 chip.

“It is a very difficult thing to totally remove the risk of counterfeit parts in an efficient and cheap way,” Mr. Walker said.

Sales of Creative Electron Inc.’s fraud-spotting X-ray machines, which cost up to $90,000 and can detect whether the inside of a chip is empty or has inconsistent circuitry, have doubled over the past year, according to Bill Cardoso, chief executive of the San Marcos, Calif.-based company.

Astute Electronics Inc., an electronic components distributor, plans soon to buy its fifth X-ray machine for in-house inspection, said Dane Reynolds, vice president of operations. It began the year with two.

As client requests have surged, the firm is analyzing more components, Mr. Reynolds said. “As a result, we are finding more bad parts.”

Updated: 7-19-2021

Used-Car Frenzy Makes For Record Prices, ‘Cutthroat’ Sales Floor

A rush of buyers enjoying loosening pandemic restrictions has added to already strong demand, letting dealers command high prices as they scramble for more inventory.

James Forcinito is itching to replace his 16-year-old Hyundai with almost 200,000 miles on it. The school psychologist browsed at new car dealers, but found few models on the lot and steep prices. So he turned to the all-caps come-ons and flapping flags at the used-car lots lining Northern Boulevard in Queens, New York — but he suffered another round of sticker shock there.

Since the pandemic, Forcinito, 35, says he’s “just spending a lot more of my life in my car, so I want to improve that experience.” But after finding few tires to kick and used cars priced like new ones, he called it quits for the day. “It’s not like there’s a lot of stuff to choose from right now,” he said, shrugging, but vowing to continue the search.

The used-car lot, ordinarily a haven of haggling and wheeling-and-dealing, is now a hotbed for wallet-busting transactions. Soaring used-car prices accounted for more than one-third of the recent increase in the consumer price index, which in June rose at the fastest rate in 13 years. A rush of buyers enjoying loosening pandemic restrictions has put demand in overdrive even as inventory on dealer lots is already running thin.

Average used-car prices reached a record $26,457 last month, up almost 30% from the beginning of last year, according to automotive researcher The run-up is a consequence of how the pandemic has upended the auto industry: Factory shutdowns due to the health crisis and the global semiconductor shortage have hobbled auto production over the past year, with output cut in North America by 5 million vehicles.

That has led to historically low inventory in the new car market and pushed the average price of a new vehicle above $40,000 — an all-time high that would’ve been considered a luxury price tag not long ago.

In turn, would-be new car buyers are taking refuge in used-car lots. Researcher Cox Automotive predicts used-car sales will hit a record 21.5 million vehicles this year, as consumers aim to adapt to lifestyle changes brought on by the pandemic. Some are eager for a new set of wheels as they head back to the office or navigate suburban neighborhoods after escaping big cities to more easily practice social distancing.

There is fresh demand for personal transportation that spares people from sharing space on a train or in an Uber ride. Road trips are on the rise, too, as travelers continue to avoid congested airports and planes.

“All the issues the auto industry is facing right now, both positive and negative, are related directly to the pandemic,” said Jeff Schuster, senior vice president of forecasting at researcher LMC Automotive. “We are looking at a retail market that’s probably the best it’s ever been.”

Indeed, many buyers will not be deterred. It helps that, amid unprecedented prices, car shoppers can keep their monthly payments on a pricey vehicle more manageable thanks to cheap financing and high-trade in values.

“Extraordinarily stimulated demand, combined with extremely tight supply, came together to form the most frenzied spring that you could actually ever have imagined,” said Jonathan Smoke, chief economist for Cox Automotive. “We’ve never seen this kind of run of price increases before.”

In almost 40 years of selling cars, Brian Benstock has never seen anything like this. The general manager of Paragon Honda and Acura in Queens has about one-tenth of the inventory he normally would have. And even though the dealer isn’t negotiating on price, buyers keep snapping up his vehicles.

“Picture a trapeze: a car goes in, a car goes out, a car goes in, a car goes out,” Benstock says in his showroom, surrounded by a sparse supply of vehicles on the lot. “We’re staying at about that six-day supply of cars, which is very, very thin.”

With stock so short, the showroom floor has become something of a cage match among the sales staff.

“It’s really cutthroat,” said Jared Luner, a car salesman at Columbia Honda in Missouri, who recently had a colleague sell one of the lot’s few vehicles out from under him. “Normally we’re all friends and co-workers, but right now, when someone pulls up, it’s a little edgy.”

And if buyers have their hearts set on a specific model in a particular color, Luner says he often has to “shake their hand and tell them ‘Have a good day and good luck.’”

Desperate to fill their used lots, dealers have resorted to bombarding their customers with pleas to part with their existing vehicles, offering generous trade-in prices and even agreeing to buy out leases months before they are set to expire.

CarMax Inc., the largest seller of used vehicles in the U.S., said it bought 236% more cars from its customers this year than last. That has left the nationwide chain with what it says is the country’s biggest used-car inventory of about 40,000 vehicles, but that is still down by 10,000 cars from last year.

“They are often pleasantly surprised with a higher offer than they anticipated,” Jim Lyski, executive vice president of corporate strategy, marketing and product for CarMax, said in response to emailed questions. “We would expect pricing to stay elevated in the near term.”

Even clunkers are worth more than ever. Used vehicles with 100,000 to 109,999 miles on the odometer fetched an average of $16,489 in June, up 31% from $12,626 last year, according to Edmunds. Pickup trucks are the most valuable in the over-100,000-mile (161,000-kilometer) fleet.

A Chevrolet Silverado 1500 that had hit that mark sold for an average of $26,914 last month, up 49% from last year, while a Ford F-150 of similar vintage commanded an average of $25,924, a gain of 43% from a year ago.

“This is breaking down the myth that at 100,000 miles a car is dead and has no value,” said Ivan Drury, an analyst for Edmunds. “Consumers with an old truck in their driveway are in the best position to take advantage of this wild market.”

Dealers aren’t just nabbing inventory from individual consumers; they also depend on auctions to help fill their used-car lots. Even though they have to pay high prices at auction right now and don’t usually drive away with as many models as they’d hoped, they’re stuck scrounging them in order to have something to offer shoppers.

Manheim Auto Auctions, the largest car auctioneer in the U.S., has about one-third as much inventory on its lots as it had two years ago.

The auction lanes — where the action is akin to the trading floor of a stock exchange, except with big vehicles rolling through — have become so pricey that bidders might feel like they’ve walked into a fine art sale.

“There’s a lot of disbelief in the prices they’re seeing — they’re shaking their heads and there’s a lot of reluctance to raise their hand,” said Matt Trapp, a regional vice president for Manheim. “But as soon as they see their competitor from across the street raising their hand on a car, they’re like, ‘Well, shoot, I need cars on my lot.’”

This record run-up in prices has probably peaked, says Cox economist Smoke. Beyond the supply and demand imbalance, the spring selling season was supercharged by government stimulus checks.

“We had the mother of all springs because we had two rounds of stimulus in the first three months of this year, combined with the tax refund season,” Smoke said. “All that cash certainly encouraged the peak frenzy in demand we saw.”

But deals on wheels will remain hard to come by.

“The bad news is I don’t think there’s really a lot of relief coming,” said LMC’s Schuster. “We’re so far from normal that these high used-car prices are projected to be with us certainly for the remainder of the year.”

Chip Shortage Reaches Smartphone Makers

Shipments are slowing and prices are rising as companies hunt for parts; supply-chain wait times enter the danger zone.

The smartphone industry is showing battle scars from the world-wide chip crunch.

Shipments are slowing and customers are seeing their first significant price increases in years. Some companies have had to scale back production and delay new releases. All this has halted what had been a strong start to the year.

Smartphone makers, for much of the year, avoided the parts disruptions faced in the auto, personal computer and home-appliance industries. Phone manufacturers purchase key parts roughly a half a year in advance, but now those stockpiles have shrunk.

For Samsung Electronics Co. , the world’s largest smartphone maker, problems sourcing key parts contributed to an expected 20% drop in shipments from the previous quarter. Alphabet Inc.’s Google said its Pixel 5a 5G device would be available only in the U.S. and Japan, after the prior year’s models were released more widely.

In March, China’s Xiaomi Corp. unveiled its latest flagship device in India called the Redmi Note 10, at a price of roughly $161. But as of this month, the phone retails at $174, about 8% higher than the original price. Xiaomi also launched the Mi 11 Ultra in India in April, but sales were delayed and it was only earlier this month that the phone became available for purchase.

“Many industries in the world have been affected by the chipset shortage,” a Xiaomi spokesman said.

The chip supply struggles aren’t distributed evenly across the smartphone industry. Apple Inc., which accounts for about a sixth of the 1.3 billion smartphones sold annually, has stayed out of trouble given its supply-chain clout, according to industry analysts, as have most of Samsung’s premium devices. But that still leaves more than 80% of the smartphone industry reeling for parts.

Global smartphone shipments for the first three months of 2021 soared 20% from a year earlier and were 4% higher than the comparable period in 2019, according to market researcher Counterpoint Research.

The industry appeared primed for a strong 2021 as Covid-19 vaccines rolled out, economies reopened and people started spending again. Global smartphone shipments had bottomed out last year during the April-to-June quarter as countries locked down. And historically, second quarter shipments have bested first-quarter figures.

This year looks to be an exception, despite the high hopes. Industrywide shipments are expected to drop by 10% in the second quarter from the first, Counterpoint estimates.

Meanwhile, smartphone unit sales for the rest of the year also look relatively flat compared with 2019 and 2020. Counterpoint Research projects global smartphone shipments in the second half of this year will total about 771 million units, up 1.3% from the 761 million units shipped a year earlier. The parts shortages held back what could have been bigger gains in the second half, said Tarun Pathak, a research director at Counterpoint.

Higher component prices brought on by the chip shortages are getting passed through for now by raising device prices. The average wholesale price for phones world-wide went up 5% in the April-to-June quarter, according to market researcher Strategy Analytics. That is a break from recent years when prices didn’t increase by more than 2%.

The phone industry’s pricing power should protect, if not bolster, companies’ bottom lines, and buyers may not push back against the higher costs if they are eyeing new devices that can connect to next-generation 5G networks, said Neil Mawston, executive director at Strategy Analytics.

“Consumers almost expect higher prices,” Mr. Mawston said.

Much of the phone industry is struggling to procure a variety of semiconductors, industry analysts say, with pronounced struggles in sourcing power-management chips, display drivers, application processors, in addition to 4G and 5G chipsets.

As of June, the average lead time for semiconductors stood at 19 weeks, longer than 16 weeks, which is considered a supply-chain danger zone, said Duksan Jang, a research associate at Susquehanna Financial Group. A healthy lead time is considered to be between 12 to 14 weeks.

The supply crunch was made apparent recently in second-quarter earnings results from Taiwan Semiconductor Manufacturing Co. , the world’s largest contract chip maker. TSMC’s total sales rose 20% from a year earlier. But the company’s revenue from smartphone chips declined by 3%.

In the case of Samsung, the South Korean tech giant reported roughly 77 million smartphone shipments in the first quarter, beating market forecasts. But by then, Koh Dong-jin, the company’s mobile chief, had warned that a chip shortage would hurt its business in the April-to-June quarter.

Sanjeev Rana, a Seoul-based senior analyst at brokerage CLSA, initially forecast Samsung would ship about 65 million phones in the second quarter. But he now projects the company missed that mark by 7 million units—with about half of that attributable to component shortages.

“We are closely monitoring the industrywide challenges, and making our best effort to minimize impact on our business,” a Samsung spokeswoman said.

Across the industry, phone makers have also had to deal with continuing Covid-19 outbreaks that not only curbed consumer spending but also affected production in key production hubs in India and Vietnam.

Those delays, combined with the chip shortage, have affected the total number of new phone releases: About 310 phones were launched in the first half of 2021, an 18% drop from 370 devices a year earlier, according to Counterpoint Research.

Any delays are unlikely to affect the U.S., the world’s most profitable smartphone market, though they could reach less-affluent markets and lower-end phones, said Cliff Maldonado, principal analyst at Baystreet Research LLC, which primarily tracks smartphone sales in the U.S.

“If you have limited chips, where will you put them? The ones that give you the most profit,” he said.


Chip Maker GlobalFoundries Revamps Brand Amid Global Chip Shortage

The U.S.-based company’s efforts include a new logo and messaging, as well as ramped-up public affairs.

Chip maker GlobalFoundries Inc. is adopting a new logo and rethinking its marketing approach at a time when a prolonged supply shortage in its industry is hampering production of consumer products from cars to mobile phones.

GlobalFoundries sells chips to more than 250 customers globally, including the U.S. Department of Defense and companies such as Qualcomm Inc., Broadcom Inc., Bosch and Intel Corp. The Wall Street Journal reported Thursday that Intel is in talks to buy GlobalFoundries for around $30 billion.

GlobalFoundries, one of the largest specialist chip-production companies, started thinking about a makeover before the pandemic after talking to customers and realizing it wasn’t clearly or consistently communicating its intended emphasis on innovation, said Michelle Leyden Li, the company’s head of brand and global marketing, in an interview.

Its new marketing efforts are designed to position the company as a leader in producing technology for growth markets such as 5G-enabled smartphones, conveying its role in products that improve people’s lives, and describing innovation that makes chips smarter, not just smaller, she said.

The so-called feature-rich chips that GlobalFoundries makes enable specific features, from touch screens to secure payments.

The company will highlight these messages on social-media platforms and at events. It will also showcase innovation from its customers in areas such as automobiles and data centers.

And the company’s all-uppercase, 1990s-esque logo will give way to one including lower-case letters and a more modern-looking font, said Ms. Leyden Li.

GlobalFoundries more than doubled its marketing budget this year to be more in line with other business-to-business companies’ allocation, which is typically up to 1% of revenue, she said.

The new positioning comes as the company, used to working behind the curtain, finds its industry in the spotlight over the continuing chip shortage affecting businesses and consumers alike. It also comes nearly two years after the company’s chief executive, Tom Caulfield, said the chip maker is aiming for a public offering in 2022.

GlobalFoundries is owned by Mubadala Investment Co., an investment arm of the Abu Dhabi government. The company, which is based in the U.S., has manufacturing plants around the world. It generated approximately $6 billion in revenue last year, it said.

While Covid-19 wasn’t a factor in GlobalFoundries’ decision to rearticulate its brand, the pandemic affected its approach by making it more important to educate customers and lawmakers, according to Laurie Kelly, vice president of global communications at GlobalFoundries.

As such, the company has increased its focus on public affairs and work in Washington to argue that funding chip manufacturers is important in the effort to avoid shortages in the future, she said.

The U.S. Innovation and Competition Act, which was passed by the Senate and endorsed by the White House in June, could allocate funding for domestic chip production to alleviate supply-chain risks and ensure dependable semiconductor sourcing if passed by the House, the company said. The investment could also help GlobalFoundries accelerate plans to expand in the U.S., it said.

Updated: 7-20-2021

Chip Shortage Reaches Smartphone Makers

Shipments are slowing and prices are rising as companies hunt for parts; supply-chain wait times enter the danger zone.

The smartphone industry is showing battle scars from the world-wide chip crunch.

Shipments are slowing and customers are seeing their first significant price increases in years. Some companies have had to scale back production and delay new releases. All this has halted what had been a strong start to the year.

Smartphone makers, for much of the year, avoided the parts disruptions faced in the auto, personal computer and home-appliance industries. Phone manufacturers purchase key parts roughly a half a year in advance, but now those stockpiles have shrunk.

For Samsung Electronics Co. , the world’s largest smartphone maker, problems sourcing key parts contributed to an expected 20% drop in shipments from the previous quarter. Alphabet Inc.’s Google said its Pixel 5a 5G device would be available only in the U.S. and Japan, after the prior year’s models were released more widely.

In March, China’s Xiaomi Corp. unveiled its latest flagship device in India called the Redmi Note 10, at a price of roughly $161. But as of this month, the phone retails at $174, about 8% higher than the original price. Xiaomi also launched the Mi 11 Ultra in India in April, but sales were delayed and it was only earlier this month that the phone became available for purchase.

“Many industries in the world have been affected by the chipset shortage,” a Xiaomi spokesman said.

The chip supply struggles aren’t distributed evenly across the smartphone industry. Apple Inc., which accounts for about a sixth of the 1.3 billion smartphones sold annually, has stayed out of trouble given its supply-chain clout, according to industry analysts, as have most of Samsung’s premium devices. But that still leaves more than 80% of the smartphone industry reeling for parts.

Global smartphone shipments for the first three months of 2021 soared 20% from a year earlier and were 4% higher than the comparable period in 2019, according to market researcher Counterpoint Research.

The industry appeared primed for a strong 2021 as Covid-19 vaccines rolled out, economies reopened and people started spending again. Global smartphone shipments had bottomed out last year during the April-to-June quarter as countries locked down. And historically, second quarter shipments have bested first-quarter figures.

This year looks to be an exception, despite the high hopes. Industrywide shipments are expected to drop by 10% in the second quarter from the first, Counterpoint estimates.

Meanwhile, smartphone unit sales for the rest of the year also look relatively flat compared with 2019 and 2020.

Counterpoint Research projects global smartphone shipments in the second half of this year will total about 771 million units, up 1.3% from the 761 million units shipped a year earlier. The parts shortages held back what could have been bigger gains in the second half, said Tarun Pathak, a research director at Counterpoint.

Higher component prices brought on by the chip shortages are getting passed through for now by raising device prices.

The average wholesale price for phones world-wide went up 5% in the April-to-June quarter, according to market researcher Strategy Analytics. That is a break from recent years when prices didn’t increase by more than 2%.

The phone industry’s pricing power should protect, if not bolster, companies’ bottom lines, and buyers may not push back against the higher costs if they are eyeing new devices that can connect to next-generation 5G networks, said Neil Mawston, executive director at Strategy Analytics.

“Consumers almost expect higher prices,” Mr. Mawston said.

Much of the phone industry is struggling to procure a variety of semiconductors, industry analysts say, with pronounced struggles in sourcing power-management chips, display drivers, application processors, in addition to 4G and 5G chipsets.

As of June, the average lead time for semiconductors stood at 19 weeks, longer than 16 weeks, which is considered a supply-chain danger zone, said Duksan Jang, a research associate at Susquehanna Financial Group. A healthy lead time is considered to be between 12 to 14 weeks.

The supply crunch was made apparent recently in second-quarter earnings results from Taiwan Semiconductor Manufacturing Co. , the world’s largest contract chip maker. TSMC’s total sales rose 20% from a year earlier. But the company’s revenue from smartphone chips declined by 3%.

In the case of Samsung, the South Korean tech giant reported roughly 77 million smartphone shipments in the first quarter, beating market forecasts. But by then, Koh Dong-jin, the company’s mobile chief, had warned that a chip shortage would hurt its business in the April-to-June quarter.

Sanjeev Rana, a Seoul-based senior analyst at brokerage CLSA, initially forecast Samsung would ship about 65 million phones in the second quarter. But he now projects the company missed that mark by 7 million units—with about half of that attributable to component shortages.

“We are closely monitoring the industrywide challenges, and making our best effort to minimize impact on our business,” a Samsung spokeswoman said.

Across the industry, phone makers have also had to deal with continuing Covid-19 outbreaks that not only curbed consumer spending but also affected production in key production hubs in India and Vietnam.

Those delays, combined with the chip shortage, have affected the total number of new phone releases: About 310 phones were launched in the first half of 2021, an 18% drop from 370 devices a year earlier, according to Counterpoint Research.

Any delays are unlikely to affect the U.S., the world’s most profitable smartphone market, though they could reach less-affluent markets and lower-end phones, said Cliff Maldonado, principal analyst at Baystreet Research LLC, which primarily tracks smartphone sales in the U.S.

“If you have limited chips, where will you put them? The ones that give you the most profit,” he said.

Updated: 7-22-2021

Intel CEO Says Chip Shortage Could Stretch Into 2023

Pat Gelsinger is pursuing turnaround while battling heated competition in chip design and production.

Intel Corp. INTC -0.48% Chief Executive Pat Gelsinger sees the global semiconductor shortage potentially stretching into 2023, adding a leading industry voice to the growing view that the chip-supply disruptions hitting companies and consumers won’t wane soon.

The world-wide shortage has fueled rising prices for some consumer gadgets. Meanwhile, the auto industry has been particularly hard-hit as the lack of a key component causes production delays. German car maker Volkswagen AG VOW -1.93% this month warned the global shortage could worsen over the next six months. Others have said they were bracing for problems through next year.

It could take one or two years to get back to a reasonable supply-and-demand balance in the semiconductor industry, Mr. Gelsinger said in an interview after the company posted second-quarter earnings on Thursday. “We have a long way to go yet,” he said. “It just takes a long time to build [manufacturing] capacity.”

Supply shortages should start showing signs of easing later this year, Mr. Gelsinger said, echoing comments from Taiwan Semiconductor Manufacturing Co., the world’s largest contract chip maker. TSMC last week said the chip shortage that has hampered car makers could start to ease in the next few months after it ramped up its production of auto chips.

TSMC and Intel are adding new chip-production plants, though some of that capacity won’t be ready for about two more years.

Since rejoining Intel in February, Mr. Gelsinger has moved aggressively to revive the chip giant after it made a series of missteps. He has committed to establishing a contract chip-making operation, announced major factory expansions and lured back talent to restore the Silicon Valley icon’s technology prowess.

The company also is in talks to potentially buy GlobalFoundries for around $30 billion, The Wall Street Journal has reported, in what would be its biggest-ever acquisition and a signal of how serious Mr. Gelsinger is in making Intel a merchant chip producer.

Mr. Gelsinger declined to address the takeover talks, but said “this will be a consolidating industry for the long term, and we’re one of the companies that can be a consolidator.”

Intel said second-quarter sales and profit were broadly flat from a year earlier at $19.6 billion and $5.1 billion, respectively. Wall Street on average expected sales of $17.8 billion and a $4.2 billion profit, according to analysts surveyed by FactSet.

“The digitization of everything continues to accelerate, creating a vast growth opportunity for us and our customers across core and emerging business areas,” Mr. Gelsinger said in a statement Thursday.

Although Intel’s results and guidance came in ahead of Wall Street’s expectations, the figures suggested that the company’s profit margins could slip toward the end of the year, according to Bernstein Research analyst Stacy Rasgon. Intel shares fell 2% in after-hours trading.

The PC market has been booming and is poised to continue to do well, Mr. Gelsinger told the Journal, as people and companies replace old hardware amid the post-pandemic return to work and the release of Microsoft Corp.’s Windows 11 later this year.

“Even as people go back to work, they’re largely going back to hybrid work,” he said. “We see that continuing, this need for PC density, for [more] PCs per household.”

A recent slowdown in hardware orders from big operators of data centers following a surge last year was largely over, he added.

The company also lifted its full-year outlook, projecting $77.6 billion in revenue, or $600 million above the earlier figure. Analysts had been expecting $72.7 billion in sales this year. The outlook for the current quarter also came in ahead of expectations.

Sales of Intel’s data-center chips in the second quarter fell to $6.5 billion, short of the lofty heights of a year ago, when the pandemic drove rapid uptake in the cloud-computing services that rely on such facilities. Intel also faces stiffer competition from Advanced Micro Devices Inc., which has eaten into its dominant share in data-center chips. Sales for the PC-centered business rose 6% to $10.1 billion from the year-ago period.

Mr. Gelsinger in March first unveiled his turnaround plan, along with more than $20 billion investments in two plants in Arizona. He followed, in May, with a $3.5 billion expansion effort in New Mexico. Additional capacity growth, in the U.S. and abroad, is in the planning stages.

Intel may get help from new government incentives to erect those facilities. A bill earmarking $39 billion for domestic chip manufacturing and billions of dollars more for research and development was approved in the U.S. Senate in June. The House still has to pass its spending measure before it goes to the White House for President Biden’s signature.

Europe and Asian countries are luring chip makers with incentives to land more capacity and ensure access to a technology increasingly viewed as crucial for national security.

Intel faces stiff competition in the chip-building market. TSMC and No. 2 Samsung Electronics Co. are spending big to stay ahead. In April, TSMC said it would spend $100 billion over three years to expand its capacity, while Samsung plans to invest $116 billion by 2030 to move beyond making computer memory chips.

Rival chip designers that largely rely on TSMC and Samsung to make their processors also are pressuring Intel. AMD, long a distant second to Intel in the market for central processing units, had nearly a 20% share in personal computer CPUs in the first quarter, according to Mercury Research. That compares with just 8.5% in 2017.

AMD’s sales have jumped despite facing some of the same challenges as Intel in the shift toward cheaper notebooks and an easing of datacenter buying. In the first quarter, AMD revenue nearly doubled compared to the year prior, and analysts broadly expect a similar performance when it reports quarterly results next week.

Other chip-makers have also reported strong sales during the pandemic’s height and into this year. Texas Instruments Inc. reported a surge in revenue and profit on Wednesday.

Nvidia Corp. , which specializes in graphics processing chips, is working on a CPU for data centers that will compete with Intel’s. Nvidia surpassed Intel last year to become the most valuable U.S. chip maker; it reported record revenue in its latest quarterly results in May.

Intel said sales in the current quarter should reach around $19.1 billion.

Mr. Gelsinger is expected to present more details about the company’s technology plan later this month.

Updated: 7-27-2021

How China Is Trying To Fight Back Against Sanctions

China has created new legal tools to retaliate against sanctions imposed by the U.S. and some of its allies over issues ranging from human rights to national security. This arsenal could put global firms in the crosshairs of a conflict between the world’s two largest economies.

1. What Are The New Tools?

An anti-foreign sanctions law passed in June gives China’s government broad powers to seize assets from, and deny visas to, those who formulate or implement sanctions.

It also empowers individuals and companies to sue “individuals and organizations” in Chinese courts seeking compensation for losses that result from “discriminatory restrictive measures.” Earlier measures included new rules from the Ministry of Commerce to counter “unjustified extra-territorial application” of foreign laws, and an “unreliable entities list” targeting foreign companies.

2. What Does That Mean In Practical Terms?

It’s hard to say because much is left vague. In theory, the anti-foreign sanctions law could make it possible for a person hit by U.S. sanctions to sue a bank for closing his or her account, say, or for a Xinjiang cotton farmer to claim damages if a Western firm cancels a contract. It remains to be seen what types of lawsuits will be accepted by Chinese courts, and investor confidence could suffer. Recent developments present “potentially irreconcilable compliance problems,” said Greg Gilligan, chairman of the American Chamber of Commerce in China.

3. Has China Acted On Its Concerns?

So far China has shown a desire to avoid escalation. For example, the unreliable entitites list was announced in 2019, but Chinese officials have yet to put it into effect or name any targets. Instead, they have focused on tit-for-tat responses with little tangible effect, such as visa and travel bans for foreign officials with few ties to China.

Targets include former U.S. Commerce Secretary Wilbur Ross and others over a Biden administration warning about doing business in Hong Kong, and former Secretary of State Michael Pompeo and other members of President Donald Trump’s administration over their China policy.

Companies including Lockheed Martin Corp. and Boeing Co.’s defense unit were hit with unspecified sanctions for selling arms to Taiwan, which China claims as its territory.

Senators Marco Rubio and Ted Cruz as well as nongovernmental organizations and think tanks such as Human Rights Watch and the Mercator Institute for China Studies were sanctioned over human rights issues. In some of these cases, Beijing explicitly prohibited Chinese citizens and institutions from doing business or having exchanges with sanctioned entities.

4. What Sanctions Does China Face?

* The U.S., the European Union, the U.K. and Canada have all announced sanctions on Chinese officials over their treatment of ethnic minorities in Xinjiang. The U.S. also put import bans on cotton, tomatoes and some solar products originating from Xinjiang.

* President Joe Biden’s administration barred U.S. investment in firms considered to be in Chinese defense and surveillance technology sectors including Huawei Technologies Co. and top chipmaker Semiconductor Manufacturing International Corp.

* The U.S. has sanctioned officials it sees as responsible for cracking down on political dissent in Hong Kong.

* The Biden administration has added companies to an entity list for conducting “activities that are contrary to the national security or foreign policy interests of the U.S.” American firms are prohibited from doing business with those blacklisted entities.

* The U.S. has also sanctioned Chinese officials and blacklisted companies seen as helping China advance territorial claims in the South China Sea.

5. Is There More To Come?

Multiple China-related bills have been introduced in the U.S. Congress including proposals to sanction Chinese officials over the early handling of the coronavirus pandemic. In response to the U.S. blacklisting some Chinese solar firms in June, China’s Ministry of Commerce said it would take “necessary measures” to safeguard the rights and interests of Chinese companies.

Lawyers said more specifics should come if and when the ministry starts issuing “prohibition orders” barring Chinese parties from accepting or complying with certain foreign legislation or measures.

Updated: 7-29-2021

‘Industrial Policy’ Is Back: The West Dusts Off Old Idea To Counter China

The U.S. and its allies have long pressed China to stop helping favored industries with subsidies, government preferences and other interventions.

Now they are beginning to copy it. Last month, the U.S. Senate voted for direct industry subsidies with little precedent: $52 billion for new semiconductor fabrication plants, called “fabs.”

Other regions have done the same. The European Union has committed to nearly doubling its share of global semiconductor manufacturing capacity, to 20%. South Korea approved up to $65 billion in support for semiconductors, and Japan promised to match other countries’ semiconductor aid while planning to turn Japan into an Asian data center hub.

Chip-manufacturing subsidies are the most prominent of a range of interventions Western governments are rushing out to promote industries they deem strategic, from electric-car batteries to pharmaceuticals. Such interventions have increased sharply in both the U.S. and Europe in the past decade, according to Global Trade Alert, a trade-monitoring group.

Collectively, this represents an embrace of “industrial policy,” the idea that governments should direct resources to industries critical to the national interest rather than leaving things to the market.

Advocates say the U.S. has employed industrial policy in some form ever since its first treasury secretary, Alexander Hamilton, used tariffs to nurture manufacturing. Critics call it “picking winners” in ways better left to capital markets, and point to money wasted on past efforts such as supersonic airliners and fast breeder nuclear reactors.

Support now is broadening, straddling the Trump and Biden administrations, driven by pandemic-driven disruptions to supply chains and the rise of China. American officials once assumed that as China’s government matured, the state’s role in the economy would shrink. Now they say the U.S. has to embrace government intervention or watch China dominate vital industries.

“I’ve been impressed with the Chinese model,” said Mark Warner, a former venture capitalist and Virginia governor who as a Democratic senator sponsored the semiconductor legislation. The Chinese state ensures that Chinese, not foreign, companies become the dominant players in its domestic market, effectively guaranteeing them a big share of the world’s market, he said.

“It’s hard to see how a company in America or any normal, traditional market-based economy can compete against that kind of juggernaut and win,” Mr. Warner said.

The biggest hurdle with industrial policy is governments’ inability to predict technological trends, and the West’s new industrial-policy push might prove wasteful and ineffective, which some analysts say is already true of China’s.

“It would be a huge mistake for the U.S. to try and match Chinese government spending,” said Scott Kennedy of the Center for Strategic and International Studies, a think tank. “So much of it is thrown down bottomless pits, leading to over-investment, lower profits, slower innovation and more debt.”

Industrial policy was once commonplace among market-based democracies. Western European governments held controlling stakes in numerous companies. Japan’s Ministry of International Trade and Industry, or MITI, influenced almost every major industry decision.

They pulled back over recent decades. European governments privatized state-owned enterprises, while the European Commission, the EU’s executive arm, imposed strict limits on state aid. MITI’s influence shrank in the 1990s in the face of deregulation and the collapse of Japan’s bubble economy. The creation of the World Trade Organization in the mid-1990s made it harder for governments to protect “national champion” companies.

China, though, never retreated. Even after it introduced market reforms in 1979 and accelerated them after 1992, the state continued to guide economic development through ownership of enterprises and control over credit, government purchases, tax preferences, land and foreign investment. Since 2006 the ruling Communist Party has put priority on catching up to the West technologically.

Previously called “Made in China 2025,” this endeavor was renamed “dual circulation” last year. In a speech, President Xi Jinping said the goal was to eliminate China’s dependence on other countries while increasing their dependence on China. It could then threaten to cut off foreign customers to deter aggression, he said.

China is responding in part to the Trump administration’s barring U.S. companies from supplying critical technologies to Chinese companies such as telecom manufacturer Huawei Technologies. The prospect of China’s doing the same—made more urgent by many countries’ restrictions on exports of medical supplies during the pandemic—has led some skeptics to swallow their reservations about industrial policy.

Sen. John Cornyn, a Texas Republican who co-sponsored the semiconductor legislation with Mr. Warner, said, “What we’re doing is industrial policy unlike anything people with my free-market, conservative background would ordinarily be comfortable with. Our driving impetus is what China is doing and [the security of] the supply chain.”

Current industrial-support efforts are narrower than in the past. Japanese officials say government intervention should be the exception, focusing on “chokepoint” sectors critical to others. A June document from its Ministry of Economy, Trade and Industry, the successor to MITI, described semiconductors as the “brain of industry,” as essential as energy and food, and as meriting an exception. It called for securing “Japan’s strategic indispensability and autonomy in the midst of confrontation between U.S. and China over technological sovereignty.”

In 2014, the EU said exceptions could be made for “important projects of common European interest” that have widely shared benefits and don’t distort competition. One is the European Battery Alliance, a public-private consortium with more than 600 members that is developing batteries for electric vehicles and power grids.

Commission Vice President Maroš Šefčovič said he pitched the plan as an “ Airbus for batteries,” comparing it to Europe’s successful launch of a competitor to Boeing. “In today’s electric vehicle, the battery and the software represent more than half the value of the car,” he said. “You cannot retain your competitive position as proud producers of the best cars in the world if you simply do not master and manufacture the most significant part of the electric vehicle.”

In U.S. there has long been broad support for government funding of basic research and development. One result is that the U.S. still leads in inventing and designing new technology, even though the manufacture of the resulting products moved abroad, mostly to East Asia.

The U.S. led in the development of photovoltaic solar technology, but China dominates the manufacture of their panels. U.S. companies account for half of world semiconductor-design revenue, but U.S. factories make just 12% of semiconductors.

Advocates of industrial policy in Congress and the White House are no longer satisfied simply promoting innovation; they want the resulting products to be made in the U.S. They have multiple goals: to secure U.S. supply, create jobs and ensure that the resulting intellectual property stays in the U.S. rather than being transferred to Chinese competitors via outsourcing.

Last month, the White House proposed a breadth of tools to boost domestic production in four sectors deemed vital to the supply chain: semiconductors, batteries, specialized minerals and pharmaceutical ingredients.

It proposed using several existing federal loan, tax-credit and R&D programs to support electric-vehicle battery manufacturing. To reduce dependence on foreign supplies of neodymium magnets, important components of motors and other devices, it suggested imposing tariffs under the same 1962 national-security law that former President Donald Trump used to impose tariffs on imported steel and aluminum.

The administration also announced plans for a public-private consortium to revive domestic production of 50 to 100 critical drugs, as well as plans for a domestic lithium-battery supply chain.

The return of industrial policy complicates life for businesses. The U.S.-China trade war had already led to tariffs and export controls. Now, industry officials say, decisions previously based on cost and proximity to customers, suppliers and the head office must also take into account political pressure to localize production.

Last year the Trump administration helped persuade Taiwan Semiconductor Manufacturing Co. , the world’s largest chip foundry—that is, a company that makes chips designed by others—to build a fab in Arizona.

“We conveyed to TSMC the importance of securing the semiconductor supply chain, and that the U.S. government as well as their U.S. customers wanted them manufacturing here,” said Keith Krach, who led the negotiations as a State Department undersecretary at the time. “They knew it would strengthen Taiwan-U.S. relations and that it was strategic not just to our national security but also to Taiwan’s.”

TSMC said the Arizona fab is “of critical, strategic importance to a vibrant and competitive U.S. semiconductor ecosystem.”

The arrangement also needed to make economic sense, Mr. Krach said, so obtaining congressional authorization for incentives to TSMC was a key reason the Trump administration pushed for the legislation providing aid to the chip industry. The House has yet to take up the Senate-passed bill.

Separately, when Intel was seeking to sell a memory chip fab in Dalian, China, last year, Mr. Krach said, he and other U.S. officials told the company the U.S. would block a sale to a Chinese company. Intel sold the plant to South Korea’s SK Hynix, a major memory-chip manufacturer.

“While a Chinese buyer likely would have paid more, Intel acted as a responsible corporate citizen,” Mr. Krach said. Intel and SK Hynix both declined to comment.

Multinational companies already locate facilities around the world to be closer to customers, avoid trade barriers and curry local favor. SK Innovation, which like SK Hynix is a unit of South Korean conglomerate SK Holdings, makes batteries for electric vehicles in Hungary, China and South Korea, all to serve manufacturers in those regions. In 2019 it broke ground on a plant in Georgia to supply batteries to Ford Motor Co. and Volkswagen AG .

South Korean rival LG Chem accused SK of making batteries with trade secrets stolen from LG. In February the U.S. International Trade Commission, an independent, quasi-judicial body, ruled in LG’s favor, barring SK from importing components necessary to start production in the U.S. state.

In a presentation to U.S. officials, SK Innovation said the Biden administration should intervene or its priorities would be compromised, including securing supply chains for critical technologies. It said China was the leader in lithium-ion batteries and was targeting 80% global market share in electric-vehicle batteries and motors.

“Chinese EV battery manufacturers are well positioned to fill the void…if SK’s Georgia facility is shuttered,” said the presentation, which The Wall Street Journal reviewed. White House officials helped broker a settlement between the companies in April, allowing the Georgia plant to open on schedule.

Explaining SK Innovation’s decision to put battery production in Georgia, a spokesman said, “Encouraging local production of electric vehicles has become a priority for nations around the world, including the U.S.” He cited President Joe Biden’s decision to replace the federal fleet with electric vehicles, of which more than half the parts must be U.S.-made.

The Georgia plant alone won’t establish an independent battery supply chain; that also requires access to lithium, cobalt and other essential minerals, plus the recycling of spent batteries. China refines 60% of the world’s lithium and 72% of its cobalt, according to last month’s White House supply chain report.

Efforts by the U.S. and its allies to build up industries that can challenge China face several obstacles to success. One is that China’s commitment to industrial policy is deeper and older.

Its support for favored industries is pervasive and opaque, and difficult to challenge as a violation of international trade rules. By restricting the export of raw aluminum, China ensures that aluminum manufacturers have a cheap supply of raw material, said Chad Bown of the Peterson Institute for International Economics, a pro-free trade think tank.

Western governments are reluctant to take ownership of industrial companies, but doing that is central to China’s industrial policy. Not only are many of its largest companies state-owned, but Chinese governments at all levels have established 1,741 industrial guidance funds—in effect, state-sponsored private equity—with plans to deploy $1.6 trillion, according to Georgetown University’s Center for Security and Emerging Technology, a research center.

While often uncoordinated and duplicative, these holdings give Chinese authorities enormous sway over company decisions and blur the line between state and private ownership. State investors also tolerate losses for far longer than Western shareholders.

Government support from 2014 to 2018 was equal to as much as 30% or more of annual revenue for two of China’s two major semiconductor companies, Semiconductor Manufacturing International Corp. (SMIC) and Tsinghua Unigroup, according to the Organization for Economic Cooperation and Development, an association of mostly advanced economies. Other countries subsidize semiconductor fabs through cheap land and tax breaks, but only China provides so much aid in the form of this cheap equity, the OECD said.

Whether China’s spending is effective remains controversial. Chinese chip companies remain well behind leading Western competitors. Mr. Kennedy of the Center for Strategic and International Studies estimated China has injected between $49 billion and $72 billion into state-owned aircraft maker Commercial Aircraft Corporation of China (Comac) in a so-far-unsuccessful effort to make it a competitor to Airbus and Boeing.

Even if other countries spent as much as China, they would likely struggle to achieve truly independent supply chains because China dominates so many of the links. When semiconductor chips are fabricated in the U.S. they still must undergo assembly, packaging and testing, a low-margin business where China is the biggest player.

Often, politics rather than commercial potential determines who gets help. Federal regulations require oil refiners to blend biofuels such as corn-based ethanol with gasoline to benefit farmers even though experts question its environmental benefits. Mr. Biden wants federal support directed to economically depressed communities and colleges that cater to minorities, whereas high-tech companies gravitate toward elite universities and places where similar work is already being done.

In the 1980s the U.S. imposed restrictions on imports from Japan of dynamic random access memory (DRAM) chips to protect U.S. market share, but DRAM chips became a commodity business whipsawed by booms and busts. Production has almost entirely left the U.S.

Mr. Warner knows the lesson well. As governor of Virginia, he, like two predecessors, directed state aid to a memory-chip plant just outside Richmond operated by a spinoff of Germany’s Infineon Technologies AG . In 2009, amid a global glut driving down memory-chip prices, the spinoff entered bankruptcy protection and closed the facility, laying off more than 1,000 employees.

Mr. Warner said U.S. semiconductor subsidies must be allocated through a clear, rigorous process without political interference. But “the truth is you could have a panel that makes exactly the right decisions, technology could leapfrog and, five years later, the valid choices made in 2021 could look pretty stupid,” he said.

Mr. Warner said the U.S. has little choice because semiconductor fabs are going to be built and without federal intervention they’ll go to China. “I was a venture capitalist before I was a politician,” Mr. Warner said. “This is the kind of bet America has to make.”

Updated: 7-30-2021

China Is Still Searching For A Chipmaking Advance That Changes The Game

The country’s attempts to steer its semiconductor industry into relevance are languishing. Vice Premier Liu He is betting on third-generation chips with faster processing speeds.

China’s aspiration to become a true technological rival to the U.S. faces a foundational challenge: The country doesn’t control the semiconductors that are the building blocks for everything from smartphones to automated cars. In 2020 the Chinese economy spent $350 billion buying chips based largely on Western technology—more than it spent on oil.

For decades the government in Beijing has tried, and mostly failed, to create a national operation for designing and manufacturing cutting-edge chips on its own. The country does have a local chip industry, but the most advanced products remain the domain of such companies as Intel, Samsung, and TSMC.

China’s worries grew during the Trump administration, when the U.S. effectively destroyed Huawei Technologies Co.’s global smartphone business by forcing chip suppliers to cut it off, undermining the company’s ability to make devices. U.S.-aligned companies dominate the industry that makes the machinery needed to make chips, further complicating Chinese ambitions for self-sufficiency.

Meanwhile, the semiconductor shortage, the result of Covid-era spikes in demand combined with longer-term trends, has shown how supply disruptions can wreak havoc on the global economy. Chinese officials know the country is vulnerable. “For our country, technology innovation is not just for growth,” Vice Premier Liu He told the country’s top scientists in May. “It’s a matter of survival.”

President Xi Jinping has charged Liu, a childhood confidant and close political ally, with turning things around. Liu has laid out plans to implement what he’s called the “whole nation system.” This harks back to China’s development of the atomic bomb during the rule of Mao Zedong, when the government mobilized scientists, factories, and the military to make weapons aimed to offset U.S. nuclear supremacy.

Although China has largely transformed into a market economy, the chip effort illustrates the extent to which the country retains aspects of its tradition of central planning.

Liu’s strategy relies mainly on chips known as compound semiconductors, or third-generation chips, which are built out of new materials such as silicon carbide and galium nitride, through which electrons can move more quickly, theoretically increasing processing speed. Compound semiconductors present a novel approach, offering China the chance to take the lead in a field where it isn’t as far behind as it is in conventional chipmaking.

It’s far from a sure bet—the U.S. and others also see the potential in compound chips and are racing to develop them. Still, Citigroup Inc. economist Li-Gang Liu sees the opportunity for China to spark rapid technological progress by going its own way instead of trying to piggyback on foreign companies. “Decoupling could be China’s ‘Sputnik Moment,’ an external trigger for an era of fast-track technological progress,” he wrote in a research note in June.

One advantage China has is its huge domestic market. The country plans to spend $1.4 trillion on advanced technologies through 2025. Those technologies could drive demand for third-generation chips, and Chinese chipmakers have already spent about $10.8 billion to expand their ability to build such semiconductors, according to the China Advanced Semiconductor Industry Innovation Alliance. Since 2014, the government has also invested about $53 billion into two separate national funds to help its domestic businesses.

But China’s history with chipmaking shows that money can’t solve all problems. Its chip effort, which started more than 20 years ago, has been marked by unfulfilled promises, stillborn projects, and government waste. And though government initiatives have helped create some large companies, including Huahong Group in Shanghai and Semiconductor Manufacturing International Corp. (SMIC), China hasn’t produced a single chipmaker on the world-beating scale of the major rivals outside its borders. In an industry in which essentially all the economic gains in any category go to the top one or two companies, only the biggest ones can stay relevant.

As a result, China has failed to keep pace. Chips are generally evaluated in nanometers, traditionally the measure of the width of the gates in a chip’s transistors; smaller gates enable faster operations that use less energy. SMIC says it can make 14nm chips, though its main business currently consists of producing 28nm chips and other mature technologies.

By comparison, Taiwan Semiconductor Manufacturing Co. aims to ramp up mass production of 3nm chips in 2022, putting SMIC five to six years behind—assuming it can master the processes that would get it there.

Even with China’s enormous population, looking inward may not be enough to make up ground. The non-Chinese market is still larger than the domestic market, and the few chipmakers that dominate globally are set to make more money than Chinese companies operating primarily at home, says Christopher Thomas, a nonresident senior fellow at the Brookings Institution.

Meanwhile, the barriers Chinese chip companies face outside the country could well increase if geopolitical tensions continue to rise. All of this gives incumbents the resources to develop advanced technologies faster, compounding their advantages. “The economics of an ‘only in China for China’ supply chain do not work,” Thomas wrote on the Brookings website in January.

What’s more, the amount of money the Chinese government pours into chipmaking efforts has distorted its market in ways that may be making it less competitive. Powerful local interests have chased the government’s money by championing unrealistic projects in hopes of securing subsidies and, at times, political prestige. About 15,700 new semiconductor companies registered from January to May, three times the number from the same period the previous year, according to an analysis by the South China Morning Post.

Some of the resulting failures have been spectacular. Take Hongxin Semiconductor Manufacturing Co., a $20 billion chip project in central China’s Wuhan, which the government backed. It promised to make 30,000 wafers monthly for 7nm chips, then collapsed in late 2020 before it had produced a single one. State media blamed the failure of a private investor to provide the capital it had promised, and the government took over.

More government control won’t necessarily improve some of the counterproductive dynamics of the central command model. This approach hasn’t worked so far, and Roger Sheng, a chip analyst in Shanghai for research company Gartner Inc., says there’s reason to be skeptical that will change. “The semiconductor industry is very market-oriented,” he says.

“It isn’t like launching a space station, something you can do by putting together the best technologies. In the chip industry there’s a lot more to consider, from cost to efficiency. These factors are difficult to put in government policies.”

Updated: 8-9-2021

Foxconn To Buy Semiconductor Manufacturing Facility

The world’s largest assembler of Apple iPhones says the purchase will help secure a steady supply of auto chips as it expands further into the electric-vehicle industry.

Foxconn Technology Group, the world’s biggest electronics contract manufacturer, said that it would acquire a semiconductor manufacturing facility, taking the company deeper into the chip business at a time of unprecedented global strain.

Foxconn, best known as the largest assembler of Apple Inc. iPhones, said Thursday that it would buy the Taiwan-based plant, which manufactures six-inch wafers used in cars, a purchase that it said would help secure a steady supply of auto chips as Foxconn expands further into the electric-vehicle industry.

Foxconn, based in New Taipei, Taiwan, said in February that it would assemble cars for electric-vehicle startup Fisker Inc., and in May said it would join forces with Stellantis NV, the maker of Jeep and Chrysler, to develop in-car software.

Foxconn’s deal with Macronix International —which is based in Hsinchu, Taiwan—is small, worth the equivalent of about $91 million. But it positions Foxconn to jump into production of a certain kind of semiconductor that is quickly emerging as a leading technology in the electric-vehicle industry.

The six-inch wafers manufactured at the plant are used primarily for making car-chip components made of silicon carbide, a material that is regarded as offering better performance than traditional silicon for some tasks, such as fast charging. U.S. electric-vehicle maker Tesla Inc. began using silicon carbide components in 2018, making it one of the first in the industry.

Foxconn’s acquisition is expected to be completed by the end of the year, the two companies said Thursday. Young Liu, Foxconn’s chairman, said the plant will be able to churn out enough capacity to supply 30,000 electric vehicles each month. One six-inch wafer can be used to make silicon carbide components for two vehicles.

Mr. Liu was evasive when asked at a Thursday press conference whether Foxconn is making its entry into silicon carbide products to manufacture chips for Tesla. The two companies haven’t announced any supply agreements related to the newly purchased plant, and Thursday’s announcement made no mention of the Palo Alto, Calif.-based auto maker.

“I can’t comment on whether selling stuff to Tesla is the purpose of us [making the deal], but they must have seen the advantage [of such technology],” Mr. Liu said.

Foxconn, formally known as Hon Hai Precision Industry Co., has been looking to move beyond its core business as the world’s major contract manufacturer of consumer electronics, according to a person familiar with the matter, especially as its largest client, Apple, ramps up its own efforts to diversify its assembly supply chain.

For Foxconn, the auto industry has been a natural growth area. Cars require chips for functions including touch-screen display and brake control. Electric vehicles require even more chips than traditional cars.

In addition to Fisker and Stellantis, the company is in talks with a handful of other U.S. firms to take on electric vehicle production, Mr. Liu has said. He didn’t elaborate. Foxconn is considering producing Fisker vehicles in Wisconsin, where the Taiwanese company has a facility, Mr. Liu said.

Foxconn’s newly purchased fabrication plant is located in Taiwan’s Hsinchu Science Park, a central chipmaking hub that includes the headquarters of Taiwan Semiconductor Manufacturing Co. , the world’s largest contract chip maker. Mr. Liu said Foxconn’s purchase would enable it to work more closely with other chip makers.

The inability to secure chip supply has become a major headache this year for a range of industries, chief among them auto makers. A combination of natural and man-made disasters, including the pandemic, fires and a major drought in Taiwan, has served to disrupt global chip production just as demand for products powered by these chips has soared.

Updated: 8-14-2021

Intel CEO Pitches Pricey Chip Plants To Officials At Home and Abroad

U.S. semiconductor maker’s appeal for subsidies plays on national security fears during chip shortage; ‘Never let a good crisis go to waste’

Intel Corp.’s chief executive and other board members met with Biden administration officials last month and held a rooftop reception near the White House to push a multibillion-dollar chip-investment plan, according to people familiar with the event.

The gathering was only one stop for Pat Gelsinger, the Intel boss, in what has become a global tour to get facetime with government leaders—many worried about their countries’ access to chips at an unprecedented time of shortage.

Mr. Gelsinger has struck a common note in those meetings, according to people familiar with the talks and documents, namely that Intel has big plans to build more chip factories that also can help fix an overconcentration of chip-making in Asia driven by lucrative incentives there. All it will take to level the playing field is a few billion dollars in subsidies.

Computer chips have become the 21st century equivalent of oil—a resource so critical to national security and economic growth that no country wants to become dependent on a foreign supplier, especially for the U.S. and Europe if that supplier is China. The chip shortage, which has hampered production of cars and appliances over recent months, has amplified those concerns.

The timing of the shortage could be fortuitous for Mr. Gelsinger, who was hired this year to turn around a company that had lost its technological edge, leading to missteps in making its newest semiconductors. With the chip drought, governments are motivated to spend like never before to avoid a repeat. For Intel, the money could fast-track Mr. Gelsinger’s turnaround plan.

Intel, last year, lost its title as America’s most valuable semiconductor company to graphics-chip developer Nvidia Corp. NVDA 5.14% In the second quarter, Samsung Electronics Co. of South Korea overtook Intel as the world’s top chip maker by revenue.

To get back on top, Mr. Gelsinger is elbowing to be the first in line for U.S. government grants of as much as $3 billion per factory project—potentially more with a presidential signoff—from a program making its way through Congress.

He also is looking for the European Union to help offset the difference in costs between setting up within the bloc as opposed to Asia. That gap could be as much as 40%, mostly reflecting subsidies available in Asia, a company official said.

“Never let a good crisis go to waste,” Mr. Gelsinger said in an interview earlier this year.

Congressional conservatives who once blanched at government funding for company projects now support chip subsidies as a way to slow China’s rise. “I remain skeptical of the government trying to run private businesses,” said Sen. John Cornyn, (R., Texas). “But I think China is playing a different game than we have ever seen before.”

Governments, particularly in Asia, have long wooed semiconductor companies with tax breaks and other incentives. That has contributed to shifting the center of gravity of the chip industry. The U.S. and Europe, which dominated chip production in 1990, have become manufacturing also-rans. The U.S. accounts for about 12% of global chip-production capacity, Europe 9%. Mr. Gelsinger has said he would like to see the U.S. at 30% of global capacity within the next 10 years and Europe at 20%.

To reclaim lost ground, U.S. lawmakers put together an incentive plan last year worth tens of billions of dollars to induce Taiwan Semiconductor Manufacturing Co. , the world’s largest contract chip maker, and Samsung to build new semiconductor plants in the U.S.

Donald Trump as president and then President Biden endorsed the plan, which passed the Senate last month and is expected to clear the full Congress this year. In the initiative’s current form, states would apply for grants for private-company factories that have been announced, suggesting projects already under way could get funding, although the language is subject to change before passage.

Politicians in Taiwan and South Korea have responded with rival subsidy plans worth tens of billions of dollars.

The EU then announced plans in March to spend $150 billion to develop next-generation digital industries.

Soon after, Mr. Gelsinger headed to Germany and to Brussels, where he presented European Commissioner Thierry Breton with a plan suggesting a modern manufacturing site with two factory modules would cost €17 billion, equivalent to roughly $20 billion, according to a presentation seen by The Wall Street Journal. The CEO had already met President Biden to discuss the semiconductor supply chain and Intel’s manufacturing plans.

In June, Mr. Gelsinger took his message to political leaders in France, the Netherlands and Italy. He told French TV that Intel’s plans for European expansion could cost $100 billion in total over 10 years. More visits to Europe are planned later this year, according to an email Intel sent to an EU official, and viewed by The Wall Street Journal.

Any new plants are a core part of Mr. Gelsinger’s turnaround effort that aims for Intel to compete with TSMC in the foundry business—producing chips for other firms on a contract basis—and to return to leadership in chip design in a few years.

Mr. Gelsinger, 60 years old, who spent three decades at Intel before leaving in 2009, has shown he is ready to invest heavily in its revival. And the company has been considering what would be its biggest acquisition ever with a potential $30 billion deal for contract chip maker GlobalFoundries Inc., the Journal has reported.

In an industry long pulled toward Asia by subsidies, Western governments increasingly feel they can’t remain hands-off, Tom Caulfield, GlobalFoundries’ chief executive, said in an interview.

“You’re seeing now the European Union and the U.S. changing industrial policy, recognizing that it’s not what we always wanted it to be, but we will lose this on principle if we don’t change to be more globally competitive,” he said.

In the U.S., Intel is investing $23.5 billion in new factories in Arizona and New Mexico, and nearing completion of a $3 billion expansion in Oregon. It is evaluating sites in states including New York and North Carolina for a future factory complex, according to a person familiar with its plans.

That project could include several co-located factories and cost $100 billion over a decade, Mr. Gelsinger has said, mirroring the scale of Intel’s European plans.

Intel aims to start erecting new U.S. and European plants early next year, Mr. Gelsinger said. “I have more cement trucks working for me than I think any other person on the planet,” he said.

In Asia, Intel has pitched factory projects to governments in China, Singapore, Vietnam, Malaysia and India. Intel would probably focus there on assembling and testing chips, and not its most advanced manufacturing to allay U.S. concerns about relying on Asia for its most cutting-edge manufacturing, according to people familiar with the matter.

In the U.S., chip companies are jointly lobbying for approval of the factory-building and research program, now valued at $52 billion. Mr. Gelsinger joined a July 22 teleconference in which members of the Semiconductor Industry Association discussed the case for the bill with House Speaker Nancy Pelosi.

Other companies also are knocking on doors. TSMC officials have met virtually with Sreenivas Ramaswamy, the Commerce Department adviser setting up the grant program, people familiar with the conversation said. The Taiwan-based company last year committed to spend $12 billion on a chip factory in Arizona. TSMC also recently hired Sen. Cornyn’s former chief staffer on semiconductors, Claire Sanderson, to aid in lobbying U.S. lawmakers.

Mr. Caulfield of GlobalFoundries said he recently met with Commerce Secretary Gina Raimondo to argue that the money should broadly support chip companies, not only those pursuing the most advanced designs. His firm produces older technology chips widely used in cars and other devices.

Overall, about 130 companies, interest groups and universities have been lobbying Congress and the administration this year on semiconductor policy and two related bills, the Endless Frontier Act and the Chips for America Act, according to federal lobbying filings. Typically, only a handful of companies or groups lobby on such issues each year, filings since 2010 show.

In Europe, Samsung and TSMC have held preliminary discussions about building plants. GlobalFoundries wants to expand its Dresden, Germany, plant and is counting on government money to make the facility competitive with Asia. Companies, no matter how deep-pocketed, can’t be expected to go to places where it costs them more money to accomplish something, Mr. Caulfield said.

Updated: 8-19-2021

Toyota Cuts Show Covid Ravaging Even Best Supply Planners

Toyota Motor Corp.’s efforts to stockpile enough chips and other key components to ride out supply disruptions only protected the company so long before it too succumbed to the shortages eviscerating automakers.

The manufacturer will suspend output at 14 plants across Japan for various lengths of time through next month. The impact of these cuts will be harshest in September, with Toyota slashing its production plan by 40%, though risks will carry forward beyond next month.

It’s the latest sign even the best supply-chain planning is proving no match for a pandemic that virtually ground the auto industry to a halt a year ago and has since plagued efforts to restore production. Toyota and BMW AG — two manufacturers least scathed by the semiconductor shortage in the first half — have now warned of significant blows to their operations in the coming months.

“This isn’t a Toyota-only problem,” said Tetsuo Seshimo, a fund manager at Saison Asset Management Co. “But the fact that this is happening at Toyota means that recent worries about the supply chain in Asia being disrupted by the spread of the coronavirus are materializing. There are a lot of companies manufacturing goods in Asia that could be impacted.”

Toyota said 27 production lines in Japan will be impacted, affecting models including the RAV4, Corolla, Prius, Camry and Lexus RX. The news — first reported by the Nikkei newspaper — took the market by surprise, with investors sending Toyota shares down 4.4%, their biggest daily drop since December 2018. They dipped as much as 2.9% Friday morning before recovering some of those losses.

“Especially in Southeast Asia, the spread of Covid and lockdowns are impacting our local suppliers,” Kazunari Kumakura, the chief officer of Toyota’s purchasing group, said Thursday. Going forward, the company will look at ways to further diversify its supply chains and is attempting to find replacement parts from suppliers in other regions.

Production cuts had been factored into earlier forecasts, so Toyota is maintaining its plan to produce 9.3 million vehicles for the fiscal year ending in March. The company maintained its annual operating profit projection earlier this month at 2.5 trillion yen ($22.7 billion) for the fiscal year through March, below analysts’ average projection for 2.95 trillion yen.

In the early months of the chip shortage that began late last year, Toyota faced limited damage due to its supply-chain savvy. The company has an intricate system in place to monitor its vast network of suppliers and an early-warning system for shortages.

But that may be no match for a pandemic that’s confounding scientists, governments and public-health officials, sparking fresh lockdowns around the world and wreaking more havoc on a vast array of industries.

“This is far beyond just microchips, although microchips are the center of most of this activity,” Bob Carter, executive vice president of sales for Toyota North America, said on Bloomberg Television. “But we’re seeing a wide range of supplier disruptions due largely to continued outbreak of Covid.”

National Australia Bank Ltd. senior foreign-exchange strategist Rodrigo Catril said in a note that “supply-chain disruptions, partly stemming from the havoc being wrecked by the delta variant, look set to stay with us for some time yet.”

BMW recently warned of uncertain months ahead as the global chip shortage worsens. After saying early this year it had ordered enough semiconductors and expected its suppliers to deliver, the luxury-car maker now expects production restrictions in the second half.

Volkswagen AG also has flagged worsening supply woes, while Daimler AG dialed back its delivery expectations due to the shortage.

“Consumer demand is going to far exceed supply for the auto industry over the next 60 to 90 days,” Toyota’s Carter said.

According to research by Susquehanna Financial Group, the amount of time it’s taking for chip-starved companies to get orders filled has stretched to more than 20 weeks, indicating the shortages that have held back automakers and computer manufacturers are getting worse.

“Companies were saying it was a problem for the first half, but it’s astonishing what kind of strong figures they reached,” said Frank Schwope, an autos analyst at NordLB in Hanover, Germany. “But now, the chip shortage is coming in dramatically, showing that there must be some serious problems.”

Updated: 8-19-2021

Senate Democrats Ask For Taiwan’s Help With Auto Chip Shortage

Three Democratic senators are asking the Taiwanese government to help the U.S. with a chip shortage that has idled auto plants and sent workers packing throughout the industry as the global economy struggles to recover from the Covid-19 pandemic.

Michigan’s Gary Peters and Debbie Stabenow and Ohio’s Sherrod Brown wrote to Taiwan’s representative to the U.S., Hsiao Bi-khim, expressing concern that the semiconductor shortage is still hurting the auto industry, even though demand for cars and trucks has risen.

“This shortage threatens the U.S. post-pandemic economic recovery, the consequences of which are especially acute in auto manufacturing states like ours,” the senators wrote. “The lack of semiconductor chips is preventing this renewed demand from being met.”

“At a time when our manufacturers should be adding extra shifts, they have had to idle U.S. plants or curtail production,” the letter continues. “The U.S. is now the most impacted region in the world.”

The senators said they have learned that the shortage may continue through 2022 and asked the Taiwanese government to take extra steps to increase production. They also said they supported President Joe Biden’s efforts to make excess vaccines available to Taiwan.

“What we are hearing at this point is that the risk of shortages clearly has extended into 2022, despite the considerable efforts in Taiwan to augment production,” the senators wrote. “We value your efforts to address the shortage and are hopeful you will continue to work with your government and foundries to do everything possible to mitigate the risk confronting our state economies.”

Brown said in a statement that it was important for U.S. officials “to work with allies like Taiwan to help alleviate the worst impacts of the shortage on American workers and manufacturers.”

“Autoworkers in Ohio also shouldn’t have to rely entirely on volatile global supply chains to do their jobs,” he said.

Brown backed legislation the Senate passed earlier this year that would provide more than $52 billion in incentives and grants to semiconductor manufacturers who bring their operations to the U.S. The legislation is still pending in the House.

Updated: 8-20-2021

Volkswagen Cuts Output At Biggest Plant As Chip Shortage Bites

Volkswagen AG plants are set for a bumpy restart after the traditional summer break as the car industry remains in the grip of a chip shortage that most recently engulfed holdout Toyota Motor Corp.

VW’s Wolfsburg plant, the world’s biggest employing some 60,000 people, will restart with only one shift next week Monday through Friday, Europe’s biggest automaker said. Audi, the group’s biggest profit contributor, will extend the summer break by one week at its two factories in Germany as semiconductor supply remains “volatile and tense.”

Carmakers’ recent warnings of rocky months ahead are proving prescient after Covid-19 outbreaks in Southeast Asia forced restrictions at chip-processing plants. VW last month flagged “really constrained” output during the third quarter, while BMW AG predicted ongoing uncertainty.

Toyota will suspend output at 14 plants across Japan for various lengths of time through next month, succumbing to supply issues it had been navigating better than other manufacturers thanks to stockpiles of chips and other key components. The impact will be most severe in September, with Toyota slashing its production plan by 40%.

While carmakers have been forced to dial back sales expectations, higher vehicle prices and a focus on major money makers have helped cushion the blow.

According to research by Susquehanna Financial Group, the amount of time it’s taking for chip-starved companies to get orders filled has stretched to more than 20 weeks, indicating the shortages are getting worse.

Updated: 8-30-2021

World’s Largest Chip Maker (TSMC) To Raise Prices, Threatening Costlier Electronics

TSMC to increase prices of most advanced chips by roughly 10%; less advanced chips will cost about 20% more.

The world’s largest contract chip maker is raising prices by as much as 20%, according to people familiar with the matter, a move that could result in consumers paying more for electronics.

Taiwan Semiconductor Manufacturing Co. plans to increase the prices of its most advanced chips by roughly 10%, while less advanced chips used by customers like auto makers will cost about 20% more, these people said. The higher prices will generally take effect late this year or next year, the people said.

Apple Inc. is one of TSMC’s largest customers and its iPhones use advanced microprocessors made in TSMC foundries. It couldn’t be determined how much more Apple would pay.

A TSMC spokeswoman declined to comment on prices but said the company works closely with customers. An Apple spokeswoman didn’t immediately respond to a request for comment.

The price increases come in the wake of a global semiconductor shortage that has affected Apple and most car makers, including General Motors Co. and Toyota Motor Corp. In August, GM said it had to idle three factories in North America that make large pickup trucks, the company’s biggest moneymaker. Last week, Toyota said it would curb production by 40% in September.

The price increases have a twofold purpose for TSMC as it addresses the shortage. In the short term, higher prices push down demand and preserve supply for customers who have no other choice. Over the longer term, the higher income will help TSMC invest aggressively in new capacity, according to analysts.

The company has said it plans to spend a total of $100 billion over the next three years on new factories and equipment as well as research and development. It is expanding its production capacity in Nanjing, China, and has started construction on a $12 billion facility in Arizona.

Chips are only one of many costs that go into a car or smartphone, but TSMC’s price increases could eventually filter down to consumers next year unless brand-name companies decide to absorb the higher costs.

Already, chip shortages have driven up prices for laptops, which are in high demand because more people are working remotely.

Apple warned in its latest earnings call that the chip shortage, which hit its iPad tablets and Mac computers earlier in the year, would affect iPhone production in the quarter that ends in September.

Andrew Lu, a semiconductor analyst at Sinolink Securities, said price increases would preserve TSMC’s profit margins. He said the Taiwanese company had spent too much of its huge capital budget on the most advanced chips, losing market share in less advanced chips.

“TSMC is finally going to increase their prices to go with the trend, making up for misallocating their capital spending,” Mr. Lu said.

One person whose company is affected by the price increases said they would reach all of TSMC’s customers, including long-term partners. The chip maker usually negotiates prices in August or September for products to be delivered the following year, another person said.

The company’s market dominance gives it more pricing power than suppliers usually enjoy. TSMC accounts for more than half of the global semiconductor foundry market by revenue, according to Taiwanese research firm TrendForce, and it makes more than 90% of the world’s most advanced chips.

In the April-June quarter, TSMC reported net profit equivalent to $4.8 billion on net sales of $13.3 billion. Its net profit margin for the quarter of 36% would be the envy of most companies, but its cash flow is typically well below its profit because it plows much of the money it makes back into new factories and equipment.

Bernstein analysts said the price increases would likely lift TSMC’s revenue by 10% to 15% and increase earnings by 20% to 30%, adding that the impact would be seen in the first quarter of next year.

Before the pandemic, TSMC usually would offer regular discounts for its big customers, but Chief Executive C.C. Wei told clients in a March letter his company would no longer do that starting at the end of this year.

Mr. Wei has said the company is facing rising manufacturing costs because of more expensive raw materials and constant investment to expand production and develop more advanced chips.

Updated: 9-3-2021

Chip Shortage Curtails Heavy-Duty Truck Production

The semiconductor shortfall is cascading into truck factories, cutting into output as demand for big rigs grows.

The semiconductor shortage is short-circuiting heavy-duty truck production as supply-chain disruptions hamper efforts to meet robust demand for new big rigs.

North American production of Class 8 trucks, the big vehicles that haul most domestic freight, sank this summer to its lowest level since May 2020, when the coronavirus had shut down much of the U.S. economy. Equipment makers built 14,920 units in July, the most recent month for which figures were available, while the backlog of trucks ordered but not built nearly tripled from the same month a year ago, to 262,100, according to transportation data provider ACT Research.

The production problems began earlier this year and have persisted for months, driving up the cost of used heavy-duty trucks and straining supply lines ahead of the fall, when fleets typically place big orders for new equipment.

North American trucking companies, pushing to expand capacity to meet strong freight demand, ordered 36,900 heavy-duty trucks in August, the highest level in five months and up 90% from the prior-year period, according to preliminary figures from ACT.

“Everything you want to see for Class 8 demand is there in spades,” said ACT President and Senior Analyst Kenny Vieth. “What’s missing are parts.”

The global chip shortage has caused auto manufacturers to slash car production, including new cutbacks announced this week by General Motors Co. and Ford Motor Co. , and is cascading through factories making heavy-duty trucks. Some equipment makers are moving semiconductors from smaller medium-duty trucks to Class 8 production to maximize the value of the chips, Mr. Vieth said.

While in the past “we simply ordered and received parts, we’re now reaching far down into our supply chain to assist suppliers in planning for shortages, navigating constraints, and working to help them keep the upstream flow of parts moving,” said David Carson, senior vice president of sales and marketing at Daimler Trucks North America LLC, whose brands include Freightliner.

The company is working closely with dealers and customers “to communicate clearly and frequently regarding the status of their orders,” Mr. Carson said.

A spokeswoman for Lisle, Ill.-based truck maker Navistar International Corp. said the company has “been experiencing the same challenges as the rest of the commercial truck and automotive sectors.”

Raw materials shortages and global shipping bottlenecks are also crimping availability of other components like wiring harnesses, truck mirrors and parts made of plastic, said Don Ake, vice president of commercial vehicles at transportation research firm FTR. “On any given week some of these are fine, and then the next week there are new ones,” he said.

Some truck makers aren’t yet booking orders for next year because “component costs are so high right now that it’s difficult for them to quote a good price where it’s profitable for the company but not excessive for the customer,” Mr. Ake said.

The tight labor market is also affecting domestic suppliers that make everything from small components to truck trailers, he said.

Walkouts by unionized workers earlier this year at a Volvo Trucks North America factory in Dublin, Va., disrupted production for weeks. A spokeswoman for the division of Swedish vehicle maker Volvo AB said the factory has been able to avoid supply-related downtime since the strike was resolved in July.

“The plant has been running on two shifts,” she said. “We are working closely with our suppliers to minimize the impact on our customers.”

Updated: 9-6-2021

An $11 Billion Distraction for China’s Chip Ambitions

Beijing wants to boost its semiconductor prowess, but instead the nation’s leading company is doubling down on mediocre technology.

Year after year, we hear about China’s ambitions to become a leading contender in the global chip race. Yet time and again its companies and government make decisions that seem destined to ensure the nation remains an also-ran.

Latest among the befuddling choices is the Shanghai government signing on to own up to 25% of a massive new factory that Semiconductor Manufacturing International Corp. intends to build. The $8.9 billion budget for this facility adds to a $2.35 billion plant that SMIC is already planning 800 miles south in Shenzhen. That earlier project will also be minority held and funded by the local government.

What’s astounding about these plans is that they’ll create a huge amount of manufacturing capacity for technologies that are more than a decade old. Both the Shanghai and Shenzhen fabs will be dedicated to 28-nanometer nodes and above, the kind used for less energy- and resource-sensitive applications such as controlling electric windows or running windshield wipers.

By comparison, world leader Taiwan Semiconductor Manufacturing Co. is making chips for Apple Inc. and Intel Corp. at 5 nanometer, and will introduce the even more advanced 3nm next year.

If SMIC could press the start button on these two new factories today, the total capacity of 140,000 wafers per month would go a long way toward solving the current chip shortage. Auto manufacturers are particularly hard hit because poor planning during the early days of the pandemic last year means they’re now unable to install the sensors, screens and electronics required to build a modern car. Most of those chips are made at the 28-nanometer node.

But two problems come to mind when looking at this large capital allocation. First, it’ll take two to three years for those factories to come on stream, by which time the current shortage will be ameliorated, with a drop in prices a likely result. China’s lack of self-sufficiency in the equipment, materials and software required to build chips will further complicate capacity expansion.

Second, China’s dream isn’t to be a global powerhouse in components that brush water off your car. It wants to design and make the chips that drive a vehicle autonomously. In June, Beijing anointed Vice Premier Liu He to be its new chip czar, in a move that highlights just how seriously President Xi Jinping takes the task of creating a leading semiconductor sector at home.

Despite pumping at least $51 billion into two separate funds since 2014 to help domestic players catch up with overseas rivals, there’s been little progress in closing the gap.

For that you need engineers to be focused on leading-edge and niche products that sell for hundreds of dollars, not mass-market components that go for pennies. Chinese EV player Xpeng Inc., for example, uses artificial intelligence chips from U.S. designer Nvidia Corp. that sell for up to $999 apiece, while parts that control a car’s display cost $1. TSMC makes Nvidia’s best semiconductors; SMIC produces items like screen controllers, among other less-advanced products.

Thus, spending $11 billion on huge factories to churn out generic parts won’t bridge the gap between SMIC and TSMC.

And it’s not just money that’s going to waste. Engineering talent is also in short supply. Turnover at Chinese chip manufacturers is among the highest in the industry, while SMIC pays its staff well below the levels offered at TSMC and nearest rival United Microelectronics Corp., Bloomberg Intelligence analyst Charles Shum wrote. Having your workforce focused on squeezing out efficiency gains will most assuredly boost margins and raise profits, but that also means talent isn’t put toward solving leading-edge challenges in semiconductor manufacturing.

SMIC and its peers, like Hua Hong Semiconductor Ltd. will probably be okay. An increasingly connected world and growing Chinese consumer base means that there’ll always be demand for the low-end products they’ve decided they want to dominate.

They’ll face stiff competition from GlobalFoundries Inc., a U.S. rival that earlier this year announced a $4 billion Singapore expansion aimed at the same broad category of products SMIC is chasing.

But at least it won’t be tackling TSMC head on, nor the other industry leaders, Samsung Electronics Co. and Intel. That’s a safe move. The Chinese leader never has to worry about losing the global chip battle if it doesn’t enter the race. It will have no problem comfortably maintaining its domestic dominance while garnering subsidies and investments from local governments eager to burnish their tech credentials.

Unfortunately for China, writing big checks to fund timid moves will neither make the nation a global semiconductor powerhouse nor further its goals of technology independence. For Beijing to make that happen, it’ll need to find a new national hero.

Updated: 9-7-2021

Intel To Set Aside Production In Ireland For Auto Chips

Intel Corp. will dedicate production at its plant in Ireland for the manufacture of chips for automakers as the company pushes into a growing market currently buffeted by shortages that have crippled vehicle production.

The Santa Clara, California-based chipmaker has a facility in County Kildare in Ireland that has been used for manufacturing its mainstay computer processors. Intel will convert an unspecified amount of that plant’s output to producing other companies’ designs aimed at the automotive industry, Chief Executive Officer Pat Gelsinger said in a presentation in Munich Tuesday.

Automakers are redoubling efforts to secure semiconductors after the pandemic triggered shortages that will cost $110 billion in lost sales this year, according to Alix Partners. The crisis stems from poor planning during the pandemic and limited chipmaking capacity, but it’s been compounded by shrinking available cargo space and new outbreaks of the delta variant that are hobbling factories in Southeast Asia.

Automotive Chip-Shortage Cost Estimate Surges To $110 Billion

At the same time, advanced safety features and a shift to electric vehicles that’s happening faster than anticipated are fueling increased demand for automotive chips. That’s forcing auto executives to overhaul supply chains and rethink how they source the components.

Intel didn’t give a time line for when the capacity and other plants its planning for Europe will come online, meaning it’s not clear whether the initiative can help automakers in the short term with the current issues. Gelsinger reiterated that Intel has plans to build at least two new semiconductor factories in Europe with investments of as much as 80 billion euros ($95 billion) over the next decade.

Longer term, Gelsinger is looking to forge a relationship with a group of companies that are increasingly important to the chip industry in a business that is becoming ever more dependent on the tiny electronic components.

By 2030, more than 20% of the cost to build premium cars will be from chips, up from the current 4%, Gelsinger said. The total market for silicon in autos will reach 11% of the entire semiconductor market, totaling $115 billion, according to Gartner Inc..

Intel said it’s working with automakers and their suppliers to try to provide capabilities that will speed up their ability to make use of its factories. Under Gelsinger, Intel is trying to break into the business of outsourced production and directly take on Taiwan Semiconductor Manufacturing Co. Intel gets the majority of its revenue from selling the computer processors it designs and makes in house. Much of the rest of the chip industry farms out production.

Updated: 9-11-2021

Everything Must Go! The American Car Dealership Is For Sale

A longtime fixture of American life is looking for a new model as more auto purchases move online and national chains gobble up neighborhood showrooms.

For nearly a century, the American car dealership has retained its iconic appearance even as technology transformed every corner of the business landscape. In towns across the country, local business titans lured customers to glass-walled showrooms and large asphalt lots, where buyers bargained for the best price. That model is showing its age.

The way people buy and sell cars is changing. More of it is happening online as buyers get comfortable with completing transactions remotely. It is a shift that started before the pandemic but accelerated over the last 18 months as Covid-19 spurred people to do more of their shopping from home and demand for cars unexpectedly surged.

The auto dealership, as a result, could soon look like other parts of the business world upended by e-commerce. National chains, instead of local small businesses, will set prices and give salespeople less room to haggle.

Dealers will hold fewer cars on the lot and operate more like service-and-delivery centers, using their dealerships as hubs where customers can pick up vehicles ordered online and get them serviced.

Some larger dealership chains flush with cash are already scooping up smaller rivals, hoping that scale will help them dominate this transformation. The number of acquisitions last year hit 289, according to dealership consulting firm Kerrigan Advisors, which was the highest count in years. Deals continued to climb this year, according to Kerrigan, up 27% in the first half of 2021.

“It was my time to ride off into the sunset,” said John Medved, 73, a Denver-area dealer who last year sold his six-store chain to a larger dealership group in Canada. Mr. Medved, a recognizable face and voice on local airwaves, said he wasn’t sure how to connect with consumers who wanted to shop online.

“Nobody’s seen anything. Nobody is touching anything. I can’t do that.”

Cracks Emerge

The local car dealership first became a fixture of American life with the invention of mass auto production and the introduction of the ultra-popular Model T, which first rolled off Ford Motor Co. ’s assembly line in 1908. Auto makers needed retail networks capable of selling large volumes of cars, and they turned to independent dealers to do the hard and expensive work of finding customers, advertising in specific markets and servicing.

That allowed auto makers to book revenue from their cars immediately and avoid the expense of holding assets on their books.

As dealerships proliferated they acquired clout in their communities and state capitals, sponsoring baseball games and fundraisers while also pushing for laws that protected profits.

Zoning restrictions and suburban sprawl encouraged many of these locally-owned businesses to group themselves together in business districts featuring row after row of competing dealerships. By the late 1980s, there were more than 25,000 new-car dealers across the U.S.

Dealerships were long successful at thwarting attempts to upend the status quo thanks to franchise laws that restricted traditional car companies from setting up their own direct-sales operations and made it difficult for any new competitors to enter the market.

But cracks emerged. First the internet made prices more transparent and gave customers the power to shop around, denting profit margins on new-car sales. Dealers began making more of their money from loans and routine maintenance.

Then electric car maker Tesla Inc. challenged the notion that franchise dealers are the way to sell cars to customers. Chief Executive Elon Musk chose instead to operate the company’s own stores. The company faced pushback in several states, such as Texas, where local laws prohibited manufacturers from selling directly to buyers.

Mr. Musk was able to find ways to sidestep the hurdles to build a sales system across the U.S., helped by his aggressive online sales tactics. While he talked about doing away with most physical stores, the company continues to use traditional bricks-and-mortar locations.

Tesla’s no-dealership model now is being adopted by other electric-vehicle startups such as Rivian Automotive and Lucid Group Inc. These fledgling firms, backed by heavyweights such as Inc., are lobbying to change dealer-franchise laws in many states so they also can sell vehicles directly to shoppers.

Another blow to the traditional dealership model came from the surge of online-only used car sellers, which don’t have the same state franchise restrictions as new car sellers. One such upstart was Carvana Co. , an Arizona firm founded in 2012.

While still small—less than 1% of the used-car market—Carvana sold 244,111 vehicles last year, up 37% from in 2019, and its stock popped in recent months. As of Friday, it was worth nearly $57 billion, more than that of Ford.

Nancy Thomas, a Detroit-area resident who bought a 2013 VW Jetta from Carvana, said she was relieved to avoid what she described as pushy salespeople and long visits to the dealership. Carvana also offered her more for her old vehicle than any other dealer, she said.

“I don’t see myself going back to the dealership,” she added.

Despite this surge of online competition, the dealership business is still largely dominated by small, individually held operations. The nation’s top 50 largest dealerships by new-vehicle sales accounted for only about 16% of U.S. new vehicle sales in 2020, according to Kerrigan Advisors.

Some dealers said the rise of online buying won’t diminish the importance of these local businesses to buyers. “Gradually, there’s going to be more and more done digitally,” said Paul Walser, a Minnesota dealer and chairman of the National Automobile Dealers Association.

“But I don’t see a time—at least in the next few years—where the importance of that face-to-face contact is going to be eliminated.” The industry, he added, “ is still very, very dependent upon dealers all across this country, in rural markets in particular, connecting with their consumers.”

One additional challenge comes from big auto makers—longtime partners of local dealers—that are also forcing changes to the old dealership model. Some are planning to permanently stock fewer vehicles at dealerships, having grown accustomed to booking higher profits during the pandemic while inventory levels have been constrained by factory shutdowns and supply-chain issues.

Ford, for instance, recently said it wants to reduce dealership stock levels by as much as one-third over the long term. It wants to instead book more sales through custom orders placed online, giving buyers more flexibility to configure exactly what they want from the factory. Dealers can then deliver the car when it’s ready.

“We have learned that, yes, operating with fewer vehicles on lots is not only possible, but it’s better for customers, dealers, and Ford,” Chief Executive Jim Farley said in July.

Putting On Band-Aids

The pandemic offered dealerships an unexpected boost. Factory shutdowns tightened inventory, causing prices to rise and profitability to surge. The average dealership in the U.S. earned a record $2.1 million in pretax profits last year, up 48% from 2019, according to NADA.

Those conditions aren’t expected to last. “Once inventories come back, and they will, dealers will still face some of the same challenges to profitability in their new car departments that existed before,” said Mark Rikess, chief executive of auto consulting firm The Rikess Group.

Some dealers say the only way to survive long term is to get bigger. One company doing that is Lithia Motors Inc., a large publicly traded dealership chain based in Oregon. In recent years, CEO Bryan DeBoer began scooping up dealerships large and small with the aim of creating a bigger chain with a store within 100 miles of every U.S. vehicle shopper.

In 2020 Lithia also launched Driveway, a website where car shoppers can perform many of the functions they would in a physical car dealership from home, such as getting an estimate on a vehicle trade and arranging for financing to purchase a new vehicle.

Lithia’s acquisition strategy was to have enough back-end infrastructure to carry more inventory and quickly move vehicles across state lines, since most dealers have to trade with each other to relocate stock. Much of the new space Lithia is picking up will be used for logistics and warehousing rather than traditional storefronts, Mr. DeBoer said.

“We basically built everything around the ability to procure inventory like Amazon,” Mr. DeBoer said. “Your logistical infrastructure can make or break you.”

Other big dealership chains such as AutoNation Inc. and Asbury Automotive Group are in the midst of similar expansions. AutoNation, the nation’s largest car-dealership chain by sales, plans to open 130 used car stores nationwide by 2026.

CEO Mike Jackson said those dealerships will operate more like delivery centers, where customers pick up vehicles that were purchased through its website. He also expects this approach will eventually be applied to new vehicles, as well.

“Physical inventories do not need to be what they were in the past,” Mr. Jackson said. “The industry carrying four million vehicles in inventory on parking lots across America was highly inefficient.”

The challenge for those who remain is whether to spend on costly upgrades and technology that may dilute the need for traditional salespeople and showrooms. Three quarters of participating dealers said in a survey by Cox Automotive Inc. released in February that they won’t be able to survive without having robust online offerings.

David Fischer Jr. and his father started looking last fall for a strategic partner who might consider taking a minority stake in their Michigan car dealership group.

Mr. Fischer, a third-generation owner, said he had done all he could to update his business but needed help taking his digital retailing to the next level. He controlled 56 franchises housed in 34 free-standing locations, some of them compounds, as president of the Suburban Collection.

“We were putting Band-Aids on things here,” Mr. Fischer said.

He had always considered Suburban a family business that one of his four children might take over. But when Lithia approached the group in late 2020 with a full acquisition offer, Mr. Fischer decided to relinquish control.

Ultimately, he said, Lithia was better equipped to navigate the industry changes. “When we looked at Lithia, they were creating their own brand, their own online process and their own proprietary software,” Mr. Fischer said. “All of the stuff we couldn’t do.”

Updated: 9-12-2021

Chip Shortage Drives Tech Companies And Car Makers Closer

As vehicles become more digital, the two industries talk about the benefits of cooperation: ‘We need you, and you need us.’

Cooperation between semiconductor companies and the automotive industry is moving into the fast lane, driven by a chip shortage and a recognition that cars are becoming ever-more digital.

More than a year into the crisis, executives from car and chip makers are establishing closer ties to address the shortage and working together to introduce new products. The shift was on display as executives from such chip companies as Intel Corp., Qualcomm Inc. and Nvidia Corp. flocked to Munich last week for an annual auto show, lured by the promise of selling chips for new car displays, driver-assistance features and other vehicle applications.

The chip crisis highlighted to car makers how dependent they have become on semiconductors, but Intel Chief Executive Officer Pat Gelsinger told car industry officials at the event Tuesday that the appetite of the auto industry for processors is making it a more critical customer segment for semiconductor companies. A fifth of the cost of the materials that go into making premium-segment cars, he said, would be semiconductors by 2030, up from 4% in 2019.

“We need you, and you need us,” he said at the event. “This is a symbiotic future that we are off innovating and supplying as the automobile becomes a computer with tires.”

Even as cars started to sport more chips in recent years, the relationship between auto and chip makers often remained indirect. Car makers largely relied on their parts vendors to buy the chips their vehicles needed. That disconnect contributed to the auto industry’s chip crisis of recent months, car and chip-industry executives have said. Those ties are being reset, industry officials are now saying.

Daimler AG CEO Ola Källenius told The Wall Street Journal last week that the company was now in direct contact with chip makers to monitor supply. The German company’s luxury-car business, Mercedes-Benz, has had to juggle chip supplies, encountering delays for some models and giving priority to its most-profitable vehicles for processor allocations.

Cristiano Amon, chief executive of the mobile-phone-chip company Qualcomm, said Wednesday in Munich that the deployment of superfast 5G communications networks would help enable new car features, including the deployment of self-driving cars. Car companies, he said, “should all be seen as technology companies and part of the tech sector.” That means auto makers need to have direct ties to tech companies, he added.

Qualcomm said earlier in the week that its chips would drive infotainment systems in Renault SA’s new electric cars. The chip company agreed in January to expand its work with General Motors Co. on digital-cockpit and driver-assistance features. In another sign of Qualcomm’s interest in the automotive sector, the company last month started a $4.6 billion bid for the Swedish auto-technology company Veoneer Inc.

Analysts expect that the chip and car industries’ interdependence will only accelerate. The research firm IHS Markit Ltd. estimates that the automotive chip market will be worth around $85 billion in 2027, up from around $52 billion this year.

The automotive sector provides chip makers with considerable expansion opportunities, unlike in more-mature semiconductor markets, said Phil Amsrud, an IHS auto analyst. New mobile-phone sales largely rely on people replacing old devices, he said, while chips going into cars are growing in number and sophistication.

At the car event, Mr. Gelsinger said Intel would start a robotaxi service using its Moovit mobility app it acquired a year ago for about $900 million and leveraging the self-driving technology of Mobileye, its roughly $15 billion bet on the automotive sector four years ago. Mobileye, an Israeli autonomous-driving company, supplies technology to established auto makers including BMW AG and Ford Motor Co. for their driver-assistance features.

Mobileye said last week it plans to conduct a trial of autonomous-taxi service in Munich next year in partnership with the European rental-car company Sixt SE. Mobileye will own and supply the autonomous cars, and Sixt will maintain them.

With the distinction between cars and tech blurring, Ford said last week that it had hired Doug Field, a former Apple Inc. and Tesla Inc. executive, to be its chief advanced technology and embedded systems officer, reporting directly to Chief Executive Jim Farley.

Tesla said last month it is developing a supercomputer in-house to run the calculations to train the software for its vehicles in an effort to advance its own driver-assistance technology.

Nvidia, the U.S. chip maker with the biggest market cap, is betting that cars will become a growth center. Danny Shapiro, Nvidia’s vice president of automotive, said recently that the company has a $8 billion auto-business pipeline over the next six years.

“We’re investing, and we realize it’s a long-term game and the business opportunity is huge,” he said.

For car makers, though, the near-term focus remains on the dearth of chips to put in the current generation of vehicles. Toyota Motor Corp. said last month it would idle more than a third of its factory capacity as it coped with chip issues, after it successfully weathered the earlier stages of the crisis.

BMW CEO Oliver Zipse has said the chip shortage could remain critical for another year, while Volkswagen AG CEO Herbert Diess has warned that the auto industry would struggle with chip shortages for years.

Chip makers are responding to help mitigate the pain. Intel said Tuesday it would dedicate some manufacturing capacity at its plant in Ireland to the automotive sector. Robert Bosch GmbH and Infineon Technologies AG are also responding by expanding capacity.


Updated: 9-13-2021

3M Doubles Its Estimated Drop In Car Output On Chip Shortage

3M Co. expects the semiconductor shortage that has idled auto factories worldwide will last into 2022 and the company has doubled its previous estimate for the decline in new-vehicle production in this year’s second half.

The year-over-year drop will be 6%, up from 3%, Chief Financial Officer Monish Patolawala said Monday at a Morgan Stanley conference.

“Until you see the availability of chips go up and a steady supply of all of those chips, you’re going to have auto OEMs have to go through ups and downs to keep their factories running,” he said.

Automakers including Toyota Motor Corp., General Motors Co. and Volkswagen AG have been forced to curtail production due to the chip shortfall. Toyota last week trimmed its annual production forecast due to the constraint and the spread of coronavirus cases in southeast Asia. GM has said it expects the situation to worsen this year before improving in 2022, while VW’s chief executive has warned the shortages could last for years.

Patolawala said the chip issue is one of several supply-chain issues that, along with higher inflation, is likely to negatively affect the St. Paul, Minnesota-based manufacturer’s earnings per share this year. He said that will impact the company on the “high end” of the 65 cents per share to 80 cents per share range. In July, 3M forecast earnings per share of $9.70 to $10.10 for the full year.

3M shares rose 1.8% to $187.82 as of 10:58 a.m. in New York.


Updated: 9-15-2021

EU’s Vestager Warns Against Relying On ‘Very Big Chip Producers’

The European Union should guard against relying on a handful of “very big” chip producers as it weighs billions of euros of potential investment in semiconductors, the bloc’s digital policy chief Margrethe Vestager told Bloomberg TV.

European leaders have called for more investment to alleviate a supply shortage that’s rippled through several industries, and companies like California-based Intel Corp. have been chasing European support to help increase local capacity.

But Vestager, who’s also in charge of competition matters, showed skepticism about funding for production facilities, saying support for semiconductors needs to aim instead for “a much more diversified supply chain.”

“It’s important that we focus on the global market” and “that also European production is meant for a global market, because we get the right competitive pressure,” she said in an interview in Strasbourg, France on Wednesday. “We cannot just have it that we depend on very few, very big chip producers.”

Intel’s smaller European rivals Infineon Technologies AG and STMicroelectronics NV have also expressed doubts about a push for cutting-edge chips, instead of serving up less-advanced semiconductors needed for automotive, industrial and internet-of-things production.

Vestager’s comments come as chip shortages ripple through industry after industry — preventing companies from fulfilling demand for products from cars to game consoles and refrigerators. In response, the EU wants to double its chip production to at least 20% of global supply in the next decade.

European Commission President Ursula von der Leyen called for substantial investment in the semiconductor industry earlier on Wednesday. She said the European Commission would present a new European Chips Act in the coming weeks aimed at linking together world-class research, design, testing and production capabilities.

Vestager is also examining Nvidia Corp.’s bid for U.K.-based chip developer Arm Ltd. Rivals and customers have complained about how the new ownership could alter Arm’s neutral role as the Switzerland of the semiconductor industry in licensing chip designs widely.

Updated: 9-17-2021

Stacy Rasgon On How The Global Chip Crisis May Be Getting Even Worse

Thanks to a unique combination of events and constraints, capacity to make more semiconductors is incredibly tight. One industry that’s lost out significantly is cars, as automakers are still cutting production due to an inability to source chips.

On this episode (and in this article), we have return guest Stacy Rasgon, a Managing Director and U.S. semiconductor analyst at Bernstein to discuss the current state of the industry, and why things are still so messed up. Transcripts have been lightly edited for clarity.

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

Joe Weisenthal:
Hello and welcome to another episode of the Odd Lots podcast. I’m Joe Weisenthal.

Tracy Alloway:
And I’m Tracy Alloway.

So Tracy, you know, obviously all year we’ve been talking about inflation and supply chain issues and shortages, but one of the first areas that we really started talking about had to do with the disruptions in semiconductors.

Yeah. I think this was like our entry into global supply chain issues. We started talking about semiconductors and this idea that there was a shortage of these chips that were needed for all sorts of things. And I think, you know, if you are of a certain age or generation, you tend to think of semiconductors as something that goes into a computer. But of course, nowadays they show up in phones things like refrigerators and of course cars as well, almost every major appliance now seems to have some sort of chip embedded in it.

Right. And we did like a six episode series, I think, earlier this year about chips. But the chip story, even though we haven’t talked about it as much lately, it really hasn’t gone away. And I think I just saw last week, there was a story about some chip manufacturer in Malaysia reducing production.

They’re pretty regular stories. You mentioned automobiles and car companies, still not being able to get an adequate supply of chips and just being forced to cut production. So the issues have not gone away by any stretch.

Yeah. I think Toyota made a massive downgrade to its expected production. But yeah. So this is something that I’ve been wondering about. So on, on the one hand, yes, we have some Covid outbreaks in Asia that have disrupted semiconductor factories or manufacturers, particularly in Malaysia where they manufactured — my understanding is they manufacture some components for semiconductors or something like that. So, okay.

You have the delta variant and that’s knocked production to some extent, but on the other hand, you know, as you said, this issue has been going on for quite some time now, like more than a year. And the big question is why aren’t we getting to a better place in terms of production? At this point, the semiconductor companies know that they need to boost production. They know there’s lots of demand out there. So why isn’t that happening?

Hopefully we are going to get some answers today on the show, why it is that we’re now in the middle of September, we still don’t have something resembling a smooth semiconductor supply chain. We are going to be going back to our first guest that we had on the semiconductor series. I think he actually appeared twice already. Last time was in March. We’re going to be speaking with Stacy Rasgon, who’s managing director and senior analyst at Bernstein covering U.S. semiconductors. He’s going to hopefully answer all of our questions. So Stacy, welcome back to Odd Lots.

Oh, it’s great to be back. Thank you for having me again.

So are we right? I mean, it appears not only are the issues persisting, like in some in some measures, things seem to be getting worse.

Yeah. I mean, so we had hoped that by now things would be getting back to some semblance of normalcy and you’re right. They’re really not, it’s actually getting worse, not better in many parts of the market. So we still are seeing, you know, production shortfalls. We’re still seeing shortages.

You know, we’d been hoping obviously that Covid would be on the decline at this point. It is not. It is still causing disruptions. You mentioned Malaysia and some other areas. So yeah, we’re not back to normal yet. We’re still seeing some of the same issues that we’ve been seeing for quite a while.

So what exactly is driving those disruptions, and so you mentioned some Covid outbreaks in parts of Asia. But it seems to be, you know, you might see some factory closures, some isolated factory closures, but it seems like the issues are sort of more endemic than just an outbreak at a particular factory.

Yeah. So it may be helpful to go back a little bit and talk about what caused these shortages in the first place and I talked about this, I can’t remember, maybe it was the second time that I was on. But if we look at the automotive sector first, that’s where we’re seeing some of the biggest issue. We’ve seen the biggest issues the whole time and you’re right.

We’re still actually seeing production cuts. You mentioned Toyota. We also had recently GM and Ford and a bunch of others and it’s been going. So they’re still seeing shortages. You have to remember the issue there was initial supply chain whipsaws, you know, in the beginning of Covid factories got shut down. You know, people were locked in their houses. They weren’t driving. Demand, at least initially, for a small amount of time plummeted.

And remember the auto vendors canceled all their orders. Demand came roaring back, obviously. The pants started opening up. They went back hat in hand to try to get capacity, to get production and it just didn’t exist. And it was like, well, you know, get in line. It’ll take time. And remember what I said. You know, even if you’re starting, even if you have the capacity available, it takes months to make these chips from a dead start.

And so that caused, you know, cascading effects. I mean, it still has., right? And you know, the other issue at the other end of markets was just demand is very strong. And that was part of the reason we saw issues in auto as well. I mean, the capacity that they were using got back-filled in many cases by other stuff. But just in general, we’ve seen really, really strong demand.

I mean, much stronger than I think anybody thought was going to be possible in things like PCs and like anything that was sort of work from home, study from home, play from home. I think you also need to couple this with the fact that the industry itself, I mean, you know, remember semis, it costs billions of dollars to add capacity and, you know, historically they added capacity to demand that they saw and when demand very, very strong, much stronger than it is, we just didn’t have the capacity that was available.

And because that demand is still strong, you know, we’re still shy, we’re still short, we’re still tight. And so now you have to layer on top of all that though, you know, remember this, this stuff is never smooth. And when you have these kinds of problems, they do cascade and they cause more issues.

And it’s just a big mess. I mean, it still is. And so it didn’t, it hasn’t, we haven’t had time to actually bring enough capacity online to alleviate things and the demand, you know, in most parts of the market, we can talk about where people are worried about, you know, demand may be starting to have to roll over a bit, but in general, demand is still strong. Supply is still tight. And we’ve still got problems. It hasn’t alleviated yet.

And now you throw the resurgencee of delta on top of this and you, again, you mentioned Malaysia. What they do a lot in Malaysia, they do what’s called back-end. It’s a lot of what’s called packaging. So they don’t necessarily, they don’t have like semiconductor factories in Malaysia. They’re not making like chips. Once you actually make the chip in the factory, you have to do what’s called packaging.

You have to put the electrical leads and everything on it, such that you can take that chip and actually put it on a circuit board. So they do that kind of stuff, assembly and testing and other things in Malaysia. And a lot of those issues were impacted and a lot of that stuff’s done in Southeast Asia and a lot of those things were impacted by Covid. So that’s just something else. Icing on the cake, on top of everything else and not getting better.

Yeah. That was one of the things I remember we talked about in one of our s emiconductor episodes with Willy Shih at Harvard Business School. And obviously just like in addition to the sort of technical challenges, any given chip has a highly globalized supply chain.

And so, as you mentioned, maybe it gets manufactured somewhere in Taiwan, but then some sort of packaging happens in Malaysia. And so there must be to some extent these sort of generalized supply chain issues that are affecting more or less everything, must be having some impact on semiconductors specifically.

It is. And so you’re right. So semis are extremely global. I forget how many different borders the average semiconductor crosses like in its lifetime, you know, from initial production to it actually getting sold to the end user, but it’s a lot, right. And you’re right. They can be, you know, it can be a U.S. company that’s using a Taiwanese foundry to make it, where it gets packaged in Malaysia.

And then it goes to a distributor in China and like it’s all over the place. So there’s a lot of that. And there are big logistical challenges that we’re seeing right now. Shipping costs are actually getting much higher. We’ve seen port shutdowns in China and other places as they’re trying to control the spread of delta. We’ve seen container ships site like stacking.

I think maybe, I can’t remember, if the Suez Canal was blocked the last time we chatted, I can’t remember. But we’re seeing tons of logistical challenges. A lot of semiconductors and frankly other companies too, are starting to talk about this as well. Like when they talk on earnings calls and everything.

We’re starting to see some of those costs go up and some of these supply chains are, it’s just a big, hot mess, which I guess shouldn’t really be a surprise. I mean, again, you know, we had a potential global catastrophe. Part of me is like amazed that it’s been as resilient as it has been, frankly, but it is still causing problems.

And it’s funny, like obviously the question I get the most is how long is it going to last? And I wish I had an answer. I don’t, you know. And it’s really funny when you think about the stocks, right. And the companies, I mean, they’re still putting up monster numbers. The sector right now in terms of revenue is on track to grow probably 25% this year and blow past $500 billion for the first time in history. And every quarter the companies are putting up better and better numbers.

And I would say investor conviction is getting less and less, like the higher the numbers go. Because we’ve all seen this movie before. We’ve see this massive strong demand. Nobody really knows how much of it is real and how much of it is phantom. We talked about double ordering and everything else the last time it was here.

You know how this is, when things are uncertain, they order more. And so like,it’s funny, the stocks haven’t done much of anything, you know, even as the numbers have continued to go up and up and up, because people still don’t know how sustainable this strong demand is.

So Stacy, this is something that I wanted to ask you about. So, you know, you mentioned this cascade effect early on, and you didn’t mention it specifically, but there is this bullwhip effect that seems to be at play where everyone was expecting demand to drop, companies cut orders. So the semiconductor manufacturers, sort of backed off from production and then things turned out better than people had expected. And there was loads of demand and the semiconductor companies have been trying to catch up ever since.

But I guess my question is like one, is there something in particular about semiconductors and the manufacturing process that makes them more sensitive to the bullwhip effect, this cascade idea? And then secondly, one of the things that comes into play when there’s a supply shortage is everyone starts stockpiling, right? So it’s hard to tell what’s real demand versus what’s just people hoarding components because they think they’re not going to be able to get them. So what’s your sense of that at the moment, real demand versus stockpiling?

Yeah. So let’s address the first question which was why are semis the bullwhip, right? They’re at the back of the supply chain. So again, you think about them and I’ll take a microprocessor for a PC just as a simple example, you know, like Intel or AMD or whoever makes the processor.

And then who does that get sold to? like a Taiwanese ODM maybe — what’s called an original device manufacturer — who builds like a notebook computer and then they stick it on a plane or a boat, right? And they sell it, you know, they send it off to HP or something like that.

And then HP, you know, sells it to Bestbuy and then Bestbuy sells it to you. Or like, however, there’s probably other steps in there as well, but there’s a lot of points within that chain where you can get inventory building or bleeding or anything else.

And the fluctuations tend to magnify as you work from the front of the chain back. And this is a very well-known thing. You see it all the time and the semis are at the back of that supply chain. So even small fluctuations in end demand, like at the customer level, can propagate backwards and have correspondingly larger impacts the farther back you go in the chain and the semis are just at the back.

And remember, I think we talked about this last time, but you know that the semi companies have to plan in this environment and my opinion at least, is that semiconductor company management teams — their actual visibility into what their end customers are truly doing is precisely zero. They have no idea. They do the best they can. I’m not blaming them. It’s not good or bad, right. It just is.

And the best companies out there are willing to accept this and deal with it. But their actual visibility is not great — but by the way, companies are trying to do some stuff, right.

To get into your second question around potential for double-ordering and stockpiling. And so, so yes, this is a standard kind of behavior, probably not just in semis. I mean, this is normal human behavior. Like when you can’t get something that you need, you tend to order more. And again, this is a phenomenon known as double-ordering.

I mean, a simple example, let’s say you’re making widgets and you need, you know, 100 semiconductors, you know, whatever. Right. And your vendor says, okay, I can’t, I’ll give you 10. I can supply 10 and I’ll give you the other 90, you know, maybe in 50 weeks. So your next step is to order 1,000 semiconductors from wherever you can hope to cobble them together, on the hope that you can build up 100 and then you cancel all the other orders. Right?

And so what semiconductor investors tend to watch — yhis is a phenomenon known as lead times, like how long does it take to get the product after you order it? And those lead times are just stretching out. What investors tend to watch for is when the lead times start to pull back in, because that’s usually when the cancellations start to happen.

And so what a lot of companies are doing right now is they’re actually doing things like putting in long lead time orders, non-cancelable orders, for example, generally in the space. Historically that you didn’t do that. There were no penalties to canceling orders.

Companies now, some companies are starting to put things like non-cancelable orders. Other companies are parsing their orders. It’s like, well, I know this customer is ordering a hundred parts, but I think they only need 30. So I’m going to only ship them 30. Right. We’re seeing some of that as well. And so the companies are doing the best they can in this environment to try to manage through it. Is there stockpiling going on? Undoubtedly there’s stockpiling.

I don’t see how there couldn’t be. Can you measure it? No, it’s hard. So, and I’ll give you an example. Like there are some cases where, again you go look at the auto vendors, even if they’re stockpiling and they may be stockpiling so much, but we still are seeing actual production cuts. So clearly, you know, even if they’re stockpiling some parts, clearly they don’t have enough of what they need to build the cars that they want to, right? So we’re still seeing some primary examples here of situations where actual shortages, where the shortages still seem to be real, because we wouldn’t be having actual production cuts if they didn’t have actual shortages.

Obviously what you sort of described is going on in a range of industries, are we going to hit one day — and could this be a source of investor concern — where like we wake up and there’s just a crazy glut of chips because so many entities, or is capacity so constrained generally that it’s just hard to imagine there ever being a point where there is a huge oversupply,

I mean, never say never, right? And again, the normal practice is, yeah. You’d wake up one day and you’d see a glut. That is normally how this would happen. And again, this is why investors are worried. And this is why, even though the numbers are going up, the stocks aren’t really going up all that much.

Multiples are coming down and people are worried, you know, that we’re getting closer to peak. And I guess mathematically, like by definition, we’re getting closer to peak every day. At the same time, we could be quote unquote, close to peak for quite some time.

Because as long as this stuff’s working and again, the other thing you need to remember with this is, even though demand is really strong, I mean, like you need everything. So that’s the thing it’s like the auto vendors, I’ll pick on the auto vendors again, they could be getting 95% of everything they need, but if they don’t have the 5% that they need, they can’t ship the car. Right?

And you could have a situation where like you have Auto Vendor A you know, they have 95% of what they need and they’re short 5%. And Auto Vendor B has 95% of what they need and they’re short 5%, but it’s a different 5%. Right. So that may be some of what we’re seeing right now. So like, I don’t know, yeah, at some point we may get a glut.

And I know at the same time, you can also argue that like post-Covid some of this demand is real. And so like, I’ll look at PCs, for example. PCs right now, have been incredibly strong. I mean, we were doing 250 to 260 million PCs a year pre-Covid, like in 2019. 20020, we did 300 million. 2021, right now, we’re on track to do probably close to 350 million, which would sort of match the peak in the industry, which was in 2011.

And there’s a big controversy in PCs right now, are PCs going to grow next year or are they going to be down and whatever. But even if they’re down, they’re probably not going back to 250 million. Right? Probably not. Like I could argue that there was a structural case, whatever the normalized run rate of PCs ought to be, it’s probably higher than it was pre-Covid.

And you could make that argument about a number of end markets. And so even if we get a glut, some of these things we probably had pull forward in digitization and everything since pre-Covid, and we’ve got more people doing remote, remote work is going to be a thing from now on like, whether or not people start to go back to the office more. I could argue at some structural level that things should be higher, you know.

In terms of capacity, I think Tracy, you asked during the intro, why isn’t the semiconductor industry added capacity? It just takes time. Right? They’re all trying. I mean, you can go look at like the semi cap guys, like, like Wafer Fab Equipment — WFE — is going through the roof right now. And you’ve got big forecasts from big companies, throwing out big numbers in terms of what they’re planning on spending over the next few years. Capacity probably will get added.

It just takes time to get added. So the worry obviously is that capacity comes online right when demand starts to roll off. And I don’t know what it’s going to look like. This year, we’ll probably be fine still in terms of the fundamentals and the numbers. We’ll see what ‘22 and ‘23 look like. Those are the kinds of timeframes we’re probably talking about in terms of supply coming on. And we’ll see how well-matched it is to demand like when it does.

Hmm. So I wouldn’t expect this to make a massive difference to the supply demand imbalance, but what are the chances that you start to see customers — the people who are actually ordering chips — just back away or decide they’re going to design more analog stuff, you know, in order to avoid this problem?

And I’m thinking specifically, you know, last week Bloomberg ran an article about air conditioning manufacturers, , dropping copper components because the price of copper was so high and they’re all starting to — not all of them, but some of them — are starting to switch to aluminum. So I’m wondering could you see a similar thing with semiconductors or is it just, you know, pretty impossible given the nature of the types of electronics we’re talking about?

What do you mean? Like switching away from semiconductors to something else?

I guess like going analog, right. There were a few car companies that were saying they’re going to like drop some of the complicated electronics in order to…

Well, we are seeing some of that. We’ve seen like cars for example, I’ll make it up, but like, you know, shipping without the electronically controlled rear view mirror or stuff like that. Right? We’re seeing some things like that because remember, you know, if you’re going to ship a car, you kind of need the full kit. If there’s things you could leave out where the car is still saleable and then add them later, like you could do it. We’re seeing some of that.

The other thing we’re seeing with like auto vendors, sometimes is they’re building the car complete, except for the stuff they have, and then they’re parking it so that when they get the part they need then they can ship. I actually suspect we’re seeing this in PCs as well.

My maths — and we published this — my math suggests that as strong as PCs are right now, I think CPU shipments, the microprocessor shipments, are even stronger. And we’ve heard, like HP has sort of talked about this on earnings calls, about building things like strategic inventory. I suspect they’re building kits, you know, and sitting them on the shelf. And so as soon as they get the final parts that they’re missing they can ship.

So we are seeing some of that. So you could call that stockpiling in some sense, right. It’s hard to know how widespread it is and everything else, but I mean, it’s a normal behavior that we might see. In cars we are seeing, to your point, some of these things are getting left out, but the thing with cars, you can’t just, like we can’t go back.

You know, like my first car was a 1978 Toyota Corolla. It didn’t have very much in the ways of semiconductors in it. Right? We’re, we’re probably not going back to something like that. You can’, right? And in fact, so one thing we’re seeing from the auto vendors, the limited supply of semis that they do have, they’re actually selling higher-end cars, right?

They’re actually prioritizing them because the profits are higher. So they’re saving the limited semiconductors that they have to actually make the most money as possible with them. And so in some cases we may be seeing like mix actually going up, rather than down.

Oh yeah. I’ve wondered about that with various industries, the degree to which like, okay, if you have a shortage of components overall, I remember we were talking about this a little bit. We actually did an episode several weeks ago, like on bathtubs and appliances, but I’ve been wondering the degree to which end users of technology or raw materials are changing their mix and prioritizing the production of the higher margin lines?

Stacy :
Yeah. It’s hard to know. I do think in auto we’ve seen that. In other end marketing, again, I could mention graphics cards although, I mean, you can’t even buy a graphics card right now, they’re just selling everything they can make right now. But yeah, I do think we’re seeing some of that anecdotally, we are seeing it.

How much is, you know, obviously on top of everything else, 2021 has seen this incredible crypto boom, how much does that contribute at the margins to tightness in the semiconductor space and how much as a professional semiconductor analyst does that force you to get to know this sort of new industry?

Well, it’s not that new anymore. We’ve seen a number of crypto booms and busts over over the years. I don’t think like, so you can talk about like the crypto impact on shortages in a couple of different ways, like, for example, the shortages of graphics cards, and again, go try to buy one. The other is like taking up capacity at the foundries.

And I remember during 2018 you had a lot of the Bitcoin miners, guys like Bitmain that made custom chips to mine Bitcoin, I think at one point they were a 10% customer of TSMC, like for a heartbeat.

Right? So that was like back during like the 2018 bubble. I don’t think we’ve seen anything near that much for the guys that make the custom mining chips this time. I don’t think TSMC has been prioritizing those guys nearly as much. But in general, I mean, we’ve just got tightness all around at the leading edge and certainly that’s been part of the problem with graphics cards. It’s been hard to get, and obviously the demand has been very strong.

I’d also say like even beyond graphics or even beyond crypto, the gaming cycle this time is much stronger. Obviously we had Covid and people were trapped in their houses and video games were a good way to pass the time so they wanted to buy the cards and the products from both Nvidia and AMD this time were actually much better than the prior cycle, which was kind of like, you know, second half of 2018.

And so there’s actually a lot more, I think, demand from gamers for the parts this time versus last time, where I do think a lot of that incremental demand was from the crypto markets. And so what happened in 2018, 2019, when the miners stopped buying, the gamers, didn’t really want to step up and pick up the slack.

And so obviously we saw some fairly big shortfalls, you know, end of ‘18, beginning of ‘19 for guys like Nvidia. This time, their new cycle it’s called Ampere, is the code name for it. I do think actually gaming demand is quite strong for it. They can’t get the parts. So one hope for Nvidia is if and when the miners stop buying, the gamers will start to pick up the slack. And we’re not there yet in terms of, demand is still like off the charts, I think for, for both Nvidia and AMD for game, for graphics cards.

So let’s talk about, I think actually the first time we had you on it was about like the fall of Intel or Intel’s stumble, that was like the first theme. And of course it had a pretty rough 2020, and they had fallen behind. So then they bounced. Then they hired the new CEO, Gelsinger, and the stock rallied and people like this idea of like, oh, they’re going to like reinvest in production because that’s the core issue that we talked about.

They’re falling behind on productive capabilities. Now the stock has had a pretty rough year once again. So what is the current issue? What are the big concerns right now facing Intel?

It’s a few things. So you’re right the day they hired Pat Gelsiner, I think the stock was up like 20% and I get it. I like Pat. Pat is the guy they probably should have hired two years ago, right? And so he’s the right guy for the job. I think now that being said, he’s not a magician either. And he has to play the hand that he’s been dealt.

And the hand that he was dealt is pretty tough. And I think I said this the first time I was on, but the problems that Intel is having, they didn’t just develop like over the last couple quarters. These have been 10 years in the making and they’re not going to get fixed in a couple of quarters. They will probably take five or 10 years to fix.

And so they’ve done a few things actually, since we chatted, I think that was last November when we chatted. And so they’ve done a few things. Number one, we talked a lot about their difficulties at seven nanometers. So they’re claiming that seven nanometers is now fixed.

They’re claiming the issue was they weren’t using EUV, what’s called extreme ultraviolet lithography, which is a very advanced type of patterning technology to make very small features. And I guess that is their public stance on what the solution was. They’re going to be much bigger using EUV and that’s going to fix the problem.

It’s also, by the way, clear probably why they didn’t want to use it. It’s very expensive. Their capex this year is going up to something like $20 billion. And that’s not foundry that’s their own core business, but they don’t really have a choice.

So they claim that’s fixed. They’ve also now, I don’t know, a month, maybe two months ago they put out a roadmap and this roadmap, they did a few things. Number one is they adjusted their nom[enclature] — and remember we talked about the node nomenclature and how like Intel nodes didn’t correspond to TSMC nodes in terms of process.

So they’ve changed their nomenclature to align. Okay. So what they were talking about with seven nanometers before, that is now Intel 4. Okay. Fine. Whatever, I’m not going to knock for it them because they weren’t gaining anything by being a pedantic about it. So, I mean, okay, fine. But then the other thing is they said they’re going to do kind of like five evolutions in four years. They’re doing 10 now. And they’re going to go to, I think, I can’t remember what it’s called — 10 Enhanced SuperFin — or something.

And then they’re going to go to Intel 4 and then Intel 3, which is like an enhanced 7, and then they’re going to go to something called 20A and 20A is like, back in like 2024, 2025 and 20A technology will have a couple of new innovations. It’s gonna have something called a gate-all around transistor structure, which we can talk about what that is, but it’s a new type of structure on the transistor to get higher performance and everything.

And so that’s one thing. The industry, by the way, is wrestling with that technology. Samsung has their roadmap. Intel’s now putting it on their roadmap and then they’re gonna have something called back backside power, which again, we can talk about, but lots of innovations there.

And what they’re basically saying is by that timeframe, by that sort of like 2024, 2025 timeframe, when we introduced this 20A process using this, you know, this gate-all around architecture, we will have caught up and then surpassed TSMC at that.

So they put up this roadmap that says in like four or five years, we think we can close the gap with TSMC and 2025 and beyond we will surpass it. So couple of things with that, number one, even though it sounds good on paper, it’s a very aggressive roadmap. Like I said, it’s sort of four iterations in five years and they’re their, you know, trajectory and execution of the last like decade, you know, this would be a big change. So more power to them if they can do that.

But the problem is like, even if they can execute on it and it’s not a done deal, they basically came out and told everybody we’re still going to be behind for the next four years. So the window for everybody else to attack us is still open for at least like four years.

So that was the dark side of what they were saying. So even if they execute on it perfectly, the window is still open for four years or more. And if they don’t execute on it, they’re screwed. But he had to come out and put a credible, like a semi-credible, statement out that we can close the gap because the alternative was to lay down and die, right? Because if they can’t catch up by that 2025 or whatever, they’ll never catch up.

So that’s one thing that they’re doing. The other thing they’re doing is they’re making more use of outsourcing. And again, they’re doing a lot of stuff in-house, they’re doing some more, more stuff at TSMC. And so they’re booking capacity, three nanometer capacity at TSMC.

And so we’ll see what kind of products they make. They’re actually doing some graphics stuff over there now, and they’re gonna be doing some other things. And then thirdly, they’re going to be focusing on specialized packaging. What’s called chiplets, where I’m dis-aggregating the chip into various types of functionalities and making each of those smaller pieces potentially at different places.

And then combining those together, and this is something where Intel thinks they have an advantage and they’ve got very good — this is packaging — they’ve got very good packaging technology, but so do others. And so we’ll see how all this works out.

So that that’s sort of the plan, right. And then, they’re going to be building out all this foundry stuff and to do that, they’re going to be getting subsidies, right? So this is the other thing.

So that in general, the strategy, like simplified, is to try to stabilize the roadmap, try to put out some sort of credible path to catching up, and thirdly to beg for money from the government. Which by the way, is not a dumb idea, right? If there’s any time right now to go get money from governments to build out semiconductor capacity, now’s the time.

So this is something that the Biden Administration has been specifically calling out and targeting, the idea of making the U.S. stronger in semiconductor manufacturing. How much of a difference could that make to future supply-demand balance?

Well, right now it’s $52 billion, I think is the number on the table, which frankly is a rounding error. Again, TSMC is talking to one single company they’re going to go spend $50 billion, sorry, $100 billion dollars over three years, one company.

So the U.S. right now is saying $52 billion, which is manufacturing and R&D and a bunch of stuff, over like a five-year period for the entire U.S.-based industry. So, that kind of gives you an idea of the scale. It’s probably not gonna make much of a difference, but it’s a start. You gotta start somewhere.

And then, like I said, we’ll see like how they get spread out between Intel and Samsung and TSMC. And it’s funny, you know, Intel, like they did a paid article in Politico a little while back where, I mean, Gelsinger was basically saying don’t give the money to foreign companies, give it to us because TSMC, they’re going to build, they’re building this factory in Arizona, it’s five nanometers.

By the time they bring it online, that’s going to be lagging edge and they’re going to leave all the leading edge IP off shore. And so you should give the money to us. Effectively, it was saying that.

I personally think if we’re really interested in building up the U.S. supply chain in semis, you need to make it resilient. I don’t think you can bet on one company. I think you needed to spread the wealth around and guys like TSMC and Samsung, they already have customers.

Intel’s talked about they’re going to work with Qualcomm and some others, in like five years, maybe. We’ll see, we’ll see right.

TSMC and these other guys have customers today. So I’m of the opinion it’d probably be better to spread that wealth around and by the way, and we’ll see if $52 billion is where it stops. Like, I don’t know. Like, I think if we really want to make a difference, we need more, but it’s a start.

So we’ll, you know, we’ll see. You know, there’s some other issues with Intel, like we talked about the stock. I mean, the strategy sounds credible. So you could ask why has the stock been like such a dog? The problem is that he’s, you know, they’ve been running around like trying to drum up excitement for what this vision could look like.

And I get that, but I’m of the opinion they were about to, they have to drop a hammer on us because you started thinking about this stuff, like what’s going to happen in terms of capital and capital intensity is going up, free cashflow is going down, gross margins next year are way too high. They need to come down.

They’re talking about, they think PCs are going to grow next year. I personally think that they’re saying that because they’re screwed if PCs don’t grow next year, right? I think numbers need to need a fairly sizeable reset.

An they’ve got an analyst day coming up in November when everybody’s sort of widely expecting them to give us like the model, like what is the vision for what this thing looks like during the transition as we go from where we are now to where maybe we’re going in in five years or whatever.

And people are really hesitant to do anything with the stock in front of that analyst day, because we don’t actually know how low things like gross margins and free cash flow and everything are going to go. But you could make the case that they need to go a lot lower than they’re getting modeled right now.

So this sort of brings back, you know, even prior to, so, okay, during the last 18 months of Covid and so forth, chip industry demand has been extremely strong and that’s contributed to the tightness.

And one of the themes that was discussed even prior to Covid was that the chip industry seemed to be getting less cyclical overall. And so, you know, for years, the eighties and nineties, I think chips were seen as this classic boom-bust industry.

And then for years going, I don’t know, the last decade, there’s just been this secular growth in semiconductors overall because they get put into like everything from cars to refrigerators, to computers, to PCs, to chairs and so forth.

Is that fundamental theme expected to continue? That regardless of what happens, the secular growth of chips is going to continue, or are there concerns that at some point, some of these boom-bust cycles might return?

I don’t think that those two things are mutually exclusive. And so I’ll give you my own views. So number one. Let, me put the near-term cyclical concerns aside for a moment. Long-term, I’m actually more positive on semis coming out of Covid than I’ve been in a long time, in terms of that secular growth. I am.

And look, you know, this is the sector, I mean like last year was $440 billion. And off the 2020 base, even if semis just grew 5% a year over the cycle, you’d have a trillion dollar industry by 2035. And by the way, this year semis are probably not going to grow 5%. They may grow 25% this year. And if they did, we’d get pretty close to $550 billion. And we’ll see what things do, right. But you’re going to have a lot of growth this year.

And so like, even if we go into a downturn next year, who knows, maybe we could. Sure. You think about like that runway, we’re likely to still be well over $500 billion would be my guess, even in a downturn scenario, which is much higher than we were.

And long-term this idea of like, is the industry someday trillion dollar industry, I think absolutely it will be a trillion dollar industry into whether it’s 2030 or 2035, or like, what have you> I think a lot of the trends we’re seeing, this whole idea of content increase and digitization and everything else, I’m a firm believer and more so than I have been.

So I’m pretty positive long-term on semis. Now, the near term cyclical, this is kind of interesting because you kind of mentioned like semis used to be really, really cyclical, and then they got less cyclical.

What we used to see, we used to see these big supply cycles where like supply would exceed demand and pricing would follow when you get these really big swings. And the last really major supply cycle we had was the tech bubble, like 2000, 2001. Mostly since then we had what what are called inventory cycles .

Again semis are at the back of the supply chain and you get fluctuations in demand that can propagate backwards and you get bigger swings. And usually an inventory cycle happens when like the customers of the channel start to bleed or build inventory. And so they reduce purchases of semis for a little bit, and they bleed out inventory where they increase purchases and they build the inventory. And so semis over ship or under ship demand, but it’s much shorter. They tend to last a quarter or two or three, and they show up as kind of like resets.

You sort of reset the base either up or down, rather than these big swings. You look at what’s going on right now, we’re running a good old fashioned supply cycle right now. We haven’t had one of these for a long, long time. So I don’t know how this will end, like historically they tend to end badly, you know? And so we’ll see, although I could also argue that, like I said, maybe some of the secular drivers of the industry are there.

But you know what if you go back to when we used to have big supply cycles, I would argue that secular growth in the industry was pretty strong back then, too. So maybe you have that to try to offset it somewhat. But I mean, we’ve got a supply cycle going on right now. We haven’t seen one of these outside of memory in a long, long time, but you can believe that and be nervous about the near to medium term cyclical and still have a positive long-term view in terms of like secular growth of the industry. They’re not mutually exclusive,

Well, Stacy, any other big sort of thoughts, things that we should watch for next? I mean, you mentioned the Intel analyst day, you know. What else is on your radar?

We should do like a whole one of these calls just probably on semi cap, on wafer fabrication equipment. That’s a whole other part of the industry, right?

Yeah. And I want to do one on, you know, the one that we never did in the original series was the ASML. And so maybe we, at some point, we’ve got to do that one too. That’s like the one big company we’ve never really…

I would be thrilled. Yeah. I don’t cover ASML, I have a colleague of mine that does it, but we can talk about it. And like the semi cap industry in general, I guess it’s even farther back in the supply chain. So you do get cyclicality there, but again like that’s another one of these areas, like long-term, that long-term secular story on semi cap capital intensity going up, which has implications across the value chain, I think is hugely interesting.

Interesting. That’ll be the next one we do.

You let me know when I’ll be there. We can talk about it.

Okay. Stacy, thank you so much for coming back on Odd Lots.

Oh, you bet. My pleasure. Anytime. That was great.

Thanks Stacy!

Tracy. I always like talking to Stacy, obviously, you know, I think one of the interesting things that, you know, he pointed out — which I hadn’t really thought of or appreciated before — was like, just how far deep in the cycle the chipmakers are and how little visibility they have into end demand. And so on top of everything else, you can really see why so deep into this crisis things aren’t really smoothed out yet.

Yeah. And also of course, now you have this issue of double ordering and how much of the demand is real versus people stockpiling. It feels like that’s just going to cloud it up and make it much more difficult in the future.

And you know, it kind of reminded me of, this is very like geeky Odd Lots stuff, but it reminded me a little bit of the corporate bond market where, when there’s a big sale of like a bond that everyone wants to get, people normally put in like padded orders so that they can get quite a lot.

So, you know, they might not actually need $500 million or something like that, but they’ll put in a massive order hoping that they get some of that. I kind of wonder like maybe that started because there was one really hot deal and then it just became normal behavior in the corporate bond market? I kind of wonder if this is a permanent shift for customers who are ordering semiconductors.

Yeah. You should write about that. Tracy. That’s a very like quintessential Tracy analogy, the connection between the bullwhip effect in semiconductors and, book building in a big corporate bond sale. You gotta write that.

Yeah, I think the odds of… like I’m imagining the Venn diagram of people who read about semiconductors and corporate bonds.

It’d be the quintessential Tracy Odd Lots post. But no, I mean, I did think that was really interesting also like this idea that, you know, there used to be, free cancellations, and also that the manufacturers then try to game it the other way. So that if, you know, if a client makes a hundred million dollar order, they might only make $50 million on the assumption that, oh, this is really just a $50 million order in disguise.

And so, yeah, you could see why that on top of everything else, and then of course, the emergence of the felta variant, the fact that chips cross so many borders during their manufacturing, just for like the production itself and packaging and put it in components, I’m not surprised — we’re recording this September 13th — that we’re still seeing so many issues.

I mean, one thing I will say is that I think the virus situation is improving in Malaysia. So maybe that will help. And maybe at a minimum as the sort of delta outbreaks start getting under control in Asia, hopefully that’ll allow people to see how much of the current tightness in the market is driven by Covid disruptions versus the bullwhip effect that’s been ongoing for like more than a year now.

Yeah, exactly right. Well, we definitely gotta get Stacy back or the semi cap ASML episode and, you know, this story is not over yet.

No, it definitely isn’t. All right. Shall we leave it there?

Let’s leave it there.

You can follow Bernstein’s Stacy Rasong on Twitter at @Srasgon.


Updated: 9-17-2021

Auto Forecaster Slashes Outlook by Most Since Chip Woes Emerged

A forecaster whose production projections are cited by automakers, suppliers and research analysts the world over just took its biggest chop yet to estimates that have been falling all year due to the global chip shortage.

IHS Markit slashed its production forecast for this year by 6.2% — or 5.02 million vehicles — and lowered its projection for next year by 9.3%, or 8.45 million cars and trucks. The researcher also trimmed its 2023 estimate by 1.1%, or 1.05 million units.

“This is the largest single adjustment to the outlook in what has been a turbulent past nine months,” the research firm said Thursday.

The revisions reflect the challenge the auto industry has had coming to grips with one supply-chain disaster after another. First, the industry cut chip orders too deeply during last year’s initial pandemic lockdowns, ceding its spot in line to sectors that saw demand surge when consumers were forced into quarantine. Then came winter storms in Texas, a factory fire in Japan and Covid-19 outbreaks in Southeast Asia.

The latest disruption originated in Malaysia, a hot spot for semiconductor packaging and testing. The government there has implemented rolling lockdown measures that may prevent the industry from returning to full capacity until late October, IHS said.

Analysts who regularly riff on IHS’s monthly revisions expressed shock on Friday.

“The ’22 cut was the big surprise,” Credit Suisse’s Dan Levy wrote. “As far as we can tell it was IHS’s largest-ever cut for an annual forecast.”

Chris McNally of Evercore ISI called the cuts “huge” and said they suggest that consensus for suppliers’ earnings per share should drop by 15% to 20%.

“The complete and utter lack of current visibility means the group will likely now need Oct/Nov to find a bottom,” McNally wrote.

Used Car Prices On The Rise, Raising Inflationary Specter

Used car prices, one of the biggest drivers of U.S. inflation this year, rose again in early September on a monthly basis after idling over the summer.

The Manheim U.S. Used Vehicle Value Index, a measure of pricing trends, increased 3.6% in the first half of September compared with a month earlier. That puts it on track for the first month-over-month increase since May while extending the string of consecutive monthly of gains on a year-over-year basis that dates back to June 2020.

The index jumped 24.9% from the same period a year ago through the middle of the month. That may be a harbinger of further price hikes to come.

“The latest trends in the key indicators suggest wholesale used vehicle values will likely see further gains in the days ahead,” according to a Manheim report.

The surge in used car prices this year amid supply chain disruptions and a rebounding economy has been a major contributor to the jump in U.S. inflation. The August consumer price index report showed a decline in used car and truck prices, the first since February, but that may have been a temporary pause rather than a peak.

“The main pressure continues to come from new car supply shortages. With the increase of delta variant, many manufacturers have significantly cut their production,” said Brian Benstock, general manager and vice president of Paragon Honda and Acura, a dealership in Woodside, Queens, in New York City. “A story about used cars cannot leave out the story about new cars.”

Carmakers have said production of new vehicles this fall will continue to be constrained by a chip shortage and the spread of Covid-19 in Southeast Asia. IHS Markit slashed its vehicle production forecast for this year by 6.2%, or 5.02 million vehicles, the biggest decrease to the outlook since the chip shortage emerged.

In the latest sign of fallout, General Motors Co. said Thursday it is cutting production at six North American assembly plants.

“Wholesale used vehicle prices rose rather significantly in the first half of September compared to the first half of August,” said Michelle Krebs, an executive analyst at market researcher Cox Automotive Inc. “Dealers appear to be stocking up on used vehicles, which have seen supply stabilize somewhat, to have something to sell because new vehicle inventory remains low.”

The index, which is compiled by Cox Automotive, takes into account data from all U.S. sales through Cox’s Manheim automotive auctions that fall in to one of 20 different market classes, and are adjusted for seasonality and mileage.

Auto Forecaster Slashes Outlook by Most Since Chip Woes Emerged

A forecaster whose production projections are cited by automakers, suppliers and research analysts the world over just took its biggest chop yet to estimates that have been falling all year due to the global chip shortage.

IHS Markit slashed its production forecast for this year by 6.2% — or 5.02 million vehicles — and lowered its projection for next year by 9.3%, or 8.45 million cars and trucks. The researcher also trimmed its 2023 estimate by 1.1%, or 1.05 million units.

“This is the largest single adjustment to the outlook in what has been a turbulent past nine months,” the research firm said Thursday.

The revisions reflect the challenge the auto industry has had coming to grips with one supply-chain disaster after another. First, the industry cut chip orders too deeply during last year’s initial pandemic lockdowns, ceding its spot in line to sectors that saw demand surge when consumers were forced into quarantine. Then came winter storms in Texas, a factory fire in Japan and Covid-19 outbreaks in Southeast Asia.

The latest disruption originated in Malaysia, a hot spot for semiconductor packaging and testing. The government there has implemented rolling lockdown measures that may prevent the industry from returning to full capacity until late October, IHS said.

Analysts who regularly riff on IHS’s monthly revisions expressed shock on Friday.

“The ’22 cut was the big surprise,” Credit Suisse’s Dan Levy wrote. “As far as we can tell it was IHS’s largest-ever cut for an annual forecast.”

Chris McNally of Evercore ISI called the cuts “huge” and said they suggest that consensus for suppliers’ earnings per share should drop by 15% to 20%.

“The complete and utter lack of current visibility means the group will likely now need Oct/Nov to find a bottom,” McNally wrote.

GM Plans ‘Substantial Shifts’ In Supply Chain As Chip Woes Last

General Motors Co. is planning to revamp its supply chain as the pandemic-triggered chip shortage and rising demand for chip-intensive vehicles have demonstrated the need for an overhaul.

The Detroit-based carmaker will make “substantial shifts” in its supply chain, chief executive officer Mary Barra said Friday in a live-streamed discussion with Delta Air Lines Inc. CEO Ed Bastian. While GM generally doesn’t buy chips directly, the company is now “building direct relationships” with manufacturers.

“It’s a solvable problem, but it’s going to be here a little longer,” Barra said.

The semiconductor shortage reflects idiosyncrasies of the global economy in the pandemic and planning decisions made by automakers in the early days of the crisis. But, Barra said, the challenge is also demand-based, with a shift in consumer preferences for vehicles that are becoming more of a software platform.

“We didn’t estimate demand right at the beginning — we’re long past that now even with the long lead time with chips,” Barra said. Demand for vehicles would be higher if the company had enough chips right now, she said.

GM has been working deeper into the tiered supply chain as it seeks a longer-term solution to shortages, Barra said. As the semiconductor crunch persists, automakers are building closer ties with chip companies such as Intel Corp., Qualcomm Inc. and Nvidia Corp. to monitor supply.

U.S. production of new vehicles this fall will continue to be constrained by the chip shortage and the spread of Covid-19 in Southeast Asia. On Thursday, IHS Markit slashed its vehicle production forecast for this year by 6.2%, or 5.02 million vehicles, the biggest decrease to the outlook since the chip shortage emerged.

Updated: 9-21-2021

VW’s Traton Flags Significant Sales Hit From Chip Shortage

Volkswagen AG’s truck division Traton SE became the latest manufacturer to warn the global shortage of semiconductors is jeopardizing deliveries.

Sales in the third quarter will be significantly lower than planned, the truckmaker said in a statement Wednesday. Supply bottlenecks are expected to continue in the fourth quarter and into next year.

Traton’s parent VW, Daimler AG and rivals outside Germany including Toyota Motor Corp. have braced investors for a downbeat quarterly earnings season after Covid-19 outbreaks in Southeast Asia further crimped chip supplies. The chief executives of VW and Daimler recently warned shortages could continue for months or years to come.

Analysts are likely to cut their projections for Traton’s full-year earnings before interest and taxes by about 20%, Citigroup Inc.’s Klas Bergelind said in a note. He estimates the Munich-based manufacturer will deliver around 56,000 trucks this quarter, below consensus of 62,000 units, and assumes the last three months of the year will be similar.

Shares of Traton, which comprises the Scania and MAN vehicle brands as well as U.S. manufacturer Navistar, rose as much as 1.6% in Frankfurt, reversing earlier declines. The stock is up about 2% for the year.

Shortages of semiconductors and other parts have taken a worsening toll on Traton since the end of August. Malaysia has emerged as the main pinch point for its supply chain recently after outbreaks of Covid-19 spurred lockdowns that disrupted chip packaging and testing.

“We have ramped up existing measures in order to mitigate the supply bottlenecks as much as possible,” Chief Executive Officer Matthias Gruendler said in the statement. “There is a lot of demand for trucks from our customers right now, in the aftermath of the Covid-19 economic slump, and we believe they should get their vehicles as quickly as possible.”

Updated: 9-22-2021

Worsening Chip Woes To Cost Automakers $210 Billion In Sales

The cost of the intractable semiconductor shortage has ballooned by more than 90%, pushing the total hit to 2021 revenue for the world’s automakers to $210 billion.

That’s the latest dire forecast from AlixPartners, which predicts global automakers will build 7.7 million fewer vehicles due to the chip crisis this year. That’s almost double the consultant’s previous estimate of 3.9 million. Despite ongoing efforts to shore up the supply chain, semiconductor availability has worsened as automakers exhaust stockpiles and other industries have no more to spare.

“The barrel is empty, there’s nothing left to scrape,” Dan Hearsch, managing director of AlixPartners automotive and industrial practice, said in an interview. “Going forward, sales will suffer. Sales hadn’t suffered because there was enough inventory to draw from. It’s not there anymore.”

Manufacturers have begun warning the problems are metastasizing and could crimp third quarter earnings, with suppliers Faurecia SE and Hella GmbH & Co. on Thursday joining Volkswagen AG’s truck unit Traton SE as the latest to sound the alarm.

Last week, forecaster IHS Markit made the biggest adjustment yet to its auto-production projections, which have been falling all year due to the global chip shortage.

Key supply centers in Southeast Asia have been hit with factory shutdowns as Covid-19 outbreaks spread. It now takes a record 21 weeks to fill chip orders and auto executives say the shortage could last for years.

“It certainly feels like the most protracted supply shortage the industry has seen because it’s not over,” Hearsch said. “It’s certainly the most far-reaching. This is every place. This is everybody.”

As inventory on dealers’ lots has dwindled, car prices have skyrocketed, reaching a record $43,355 in the U.S. in August, according to researcher Cox Automotive. Supply is so constrained, some dealers have resorted to renting cars so they have something to display in their showrooms, Hearsch said.

The chip shortage began late last year when automakers underestimated demand as pandemic restrictions loosened. The crisis has defied resolution, thanks to acts of nature, fire and Covid-19.

This is the third estimate AlixPartners has issued this year on the financial impact of the shortage. It began by predicting in January it would cost the industry $61 billion and then lifted that to $110 billion in May.

Hearsch said he couldn’t guarantee there won’t be further upward adjustments to the forecast given myriad uncertainties facing the industry.

“Frankly, it’s just not getting better,” Hearsch said. “People are adjusting to the fact that this is going to take much longer than we all thought.”

Updated: 9-23-2021

White House To Host Intel, Apple, Microsoft Execs To Discuss Chip Shortage

Representatives of tech companies, auto makers to meet virtually with Biden administration’s economic team.

The CEO of Intel Corp. will join executives from Apple Inc., Microsoft Corp., Ford Motor Co. F, and others at a White House virtual meeting Thursday to address the global chip shortage, Reuters reported Wednesday.

Commerce Secretary Gina Raimondo and National Economic Council Director Brian Deese will lead the meeting, which was announced last week.

Intel’s Pat Gelsinger plans to attend, according to Reuters; it’s unclear if other CEOs will join him. Representatives from Samsung Electronics Co. 005930, -1.21%, General Motors Co., Stellantis NV STLA, -0.21%, Micron Technology Inc. MU, +0.01%, Taiwan Semiconductor Manufacturing Co. TSM, -0.08% and BMW BMW, +1.29% are also expected to attend, according to the report.

The meeting will reportedly focus on how to handle the ongoing semiconductor shortage, and how to ease the production bottlenecks.

Updated: 9-27-2021

The Great Car-Chip Shortage Will Have Lasting Consequences

Semiconductors have become a strategic component for car makers. First they will increase inventories, then some might design their own.

The once-obscure world of automotive microchips will never be the same again.

It has been a difficult month for the car industry. Manufacturers such as Toyota and General Motors have announced sweeping reductions to their fall production schedules for want of parts, particularly semiconductors. Consulting firm AlixPartners said Thursday that the chip shortage would likely cost the industry $210 billion in lost revenues this year, which was almost double its May estimate.

When it finally comes, the new normal that emerges from the current mess won’t look like the old normal. Car makers will go to great lengths to avoid a repeat, particularly as their industry is on the cusp of a digital revolution that will require a massive ramp up in chip supplies.

Higher inventories are the easiest hedge against future shortages. “Just-in-time” automotive supply chains were never a good fit for microchips, which take long lead times and planning to manufacture and little space to store, says Falk Meissner, a partner at management consulting firm Roland Berger.

The irony is that, in the short term, companies building up chip inventories may be making the current shortage even worse, in a dynamic resembling last year’s lockdown rush for toilet paper.

Big car makers are also starting to build relationships directly with semiconductor companies to assure supplies, rather than relying wholly on “tier-one” suppliers such as Continental and Aptiv to integrate chips into ready-to-fit packages.

This level of supply-chain scrutiny is already common with some inputs that can be sensitive to source, such as the precious metals that go into catalytic converters. Now it needs to be applied to microchips, too.

In time, the relationship between chip and car makers will get even closer. As vehicles increasingly resemble rolling computers, semiconductors could become a strategic battleground—a bit like batteries are today. The biggest auto makers may feel the need to design their own, or at least form deep partnerships.

At its “AI Day” in August, Tesla showed off a new microchip for training artificial intelligence networks that it developed in its work toward automating driving. Having previously sourced its most complex chips from Nvidia, Elon Musk’s company started poaching experts and designing bespoke semiconductors back in 2016, using Samsung as its manufacturing partner.

There is the usual mixing of forward thinking with brazen hype in Tesla’s championing of proprietary semiconductor technology for driverless cars, which it is still a long way from making. Still, its contrarian approach sets a marker the wider industry can’t ignore.

Volkswagen has said it will start developing its own bespoke chips for autonomous vehicles, without getting into chip manufacturing itself. Mercedes-Benz, which last year started a partnership with Nvidia, is showing signs of taking the same road.

The trend helps explain Intel’s big commitments to the European car industry at the Munich mobility show—don’t call it a car show—this month. Chief Executive Pat Gelsinger cited a Roland Berger forecast that chips would account for 20% of the bill of materials for premium cars by 2030, up from 4% in 2019.

The company wants to serve this growth market both with its own chips and with new high-tech manufacturing facilities that can accommodate third-party designs.

Other chip makers are also looking for more ways into cars. Qualcomm made a preliminary $4.6 billion offer in August for Veoneer, a Swedish company that sells sensors and software for assisted driving. Veoneer had already agreed to a takeover by Canadian parts supplier Magna International, but investors appear to expect Qualcomm to formalize its higher bid.

The potential deal has echoes of Intel’s 2017 takeover of Mobileye, in a previous rush of enthusiasm for automating driving.

These are very early days for the confluence of the automotive and semiconductor industries. The space is only likely to get buzzier. So far, the noise has come mainly from California and Germany. At some point, Detroit may need to place some chips, too.

Updated: 9-28-2021

Online Used-Car Dealers Thrive in Market Upended by Pandemic

Customers are flocking to websites that will buy their cars and sell them replacements.

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

In December, David Tvaltchrelidze bought a 2016 Mazda Miata for $16,450 from Shift Technologies Inc., one of a crop of startups selling used cars and trucks exclusively online. Seven months later, Shift offered to buy it back for $20,800, which would net Tvaltchrelidze a sporty 26% return. “I wish I had bought 10 of them,” he says.

Despite the markup, Shift would be able to resell the car quickly and still pocket about $2,000 in profit. And Tvaltchrelidze hasn’t yet agreed, given the price he’d have to pay for another used car.

The used-car market has gone crazy over the past year, as social distancing and a global computer chip shortage have upended the auto industry, and companies such as Shift are thriving. The 3-year-old startup sold 10,323 vehicles in the first half of this year, triple the level of the same period in 2020.

Vroom Inc., a competitor, doubled its business, selling almost 34,000 cars and trucks over the same period, while Carvana Corp., the largest of the used-car web dealerships, sold 200,272 vehicles, a company record.

The online used-car trade isn’t new, exactly—web marketplaces such as Craigslist account for about half of the 40 million used cars that trade hands every year in the U.S. But the upheaval of Covid has changed the digital market significantly.

“It’s not that there was a pandemic customer or a nonpandemic customer,” says Vroom Chief Executive Officer Paul Hennessy. “It’s just that there was an event that changed the way people thought about what they would have delivered to their home.”

In part online used-car dealerships benefit by how much many people loathe everything about the traditional rigamarole of buying a car, from the watery coffee to the slick salesmen. Digital dealerships allow easy browsing, home delivery, and no-contact pickup—Carvana’s gimmick is a nationwide network of automotive “vending machines” that spit out SUVs like 5,000-pound bags of chips.

Anyone selling a used car has an added advantage now, because factories are producing fewer new ones. In April, U.S. drivers were on an annual pace to buy 18.5 million new vehicles, but that rate slowed to 13 million as chip shortages shut down assembly lines.

In early September, General Motors Co. said eight of its 14 North American plants would go temporarily dark because of the semiconductor shortage. As of the end of August, the number of cars on U.S. lots—both new and used—had fallen by one-third from the year-ago level, according to Bloomberg Intelligence.

Another strength of digital dealerships is their effectiveness at purchasing a large number of vehicles from individual car owners. Carvana and Vroom buy about 2 out of 3 of their vehicles directly from individual owners. At Shift, almost every car is “self-sourced” from customers like Tvaltchrelidze.

Traditional dealers, by contrast, usually buy cars from wholesale markets where rental fleets or dealerships that accept trade-ins sell their castoffs. Each layer between the original seller and the final buyer eats away at the profit margins for the retail dealers, driving up prices.

Bidding wars at auction markets are breaking out between the thousands of dealerships desperate for products to put on their lots. “They can’t sell what they can’t buy,” says Sam Zales, chief operating officer of CarGurus Inc., a Boston-based platform where both individuals and dealers sell vehicles.

That’s not to say there’s a crisis at traditional used-car dealers. They’re selling vehicles at sky-high prices—the average used car sold for a record $25,410 in the second quarter, a 21% increase over the year-earlier period, according to Inc.—and plenty of customers are still showing up at their lots.

Still, traditional dealers are rushing to refine their ways to allow consumers to unload a 2018 Honda Accord as easily as they would an outdated iPhone. CarMax Inc., the largest dealer group in the U.S., almost tripled the number of vehicles it bought directly from car owners in the quarter ended on May 31, and almost half of those deals were cut on the company’s “instant appraisal” site. “We want to drive that target as high as possible,” CEO Bill Nash told investors and analysts on a June 25 conference call.

AutoNation has stepped up marketing for a 3-year-old e-commerce portal dubbed We’ll Buy Your Car. In the second quarter, 90% of all used cars that it sold were sourced directly from drivers. Lithia Motors Inc., which operates 209 brick-and-mortar dealerships, is making a similar push with Driveway.

The platform sold 550 vehicles in June and hopes to move 15,000 a month by December, which would represent about one-third of its current retail business. Almost every digital customer is new to Lithia, according to Chief Financial Officer Tina Miller.

Lithia says its digital business will scale better than startups because it already has a network of dealerships in place that can be tuned to handle online orders. Still, it’s not a model most old-fashioned car stores are used to. Of the used vehicles sold last year at U.S. franchise car stores, only 7% were bought directly from individuals, according to the National Association of Auto Dealers.

The additional competition may prove a challenge for startups such as Carvana while making things even more lucrative for car owners who’ve decided to sell. “We’re in a pretty simple place right now,” says Ernest Garcia III, CEO of Carvana. “What we want is more.”

BOTTOM LINE – A shortage of new cars has led to a hot used-car market, and online-only startups are providing nimble competition to traditional used dealerships.


Car Companies Buckle Up For Extended Chip Shortage

Bottlenecks in Asia and the challenge of boosting output of the auto sector’s more-basic computer chips could prolong the parts crisis into 2022.

The global chip shortage has slammed the auto sector this year, cutting factory output by several million vehicles and erasing billions in revenue for car companies.

Next year is expected to be nearly as challenging, industry analysts say.

Auto executives for months have expressed optimism that the problem would begin to ease by year’s end. Now, there is an emerging view that the chip shortage has morphed from a short-term crisis into a structural upheaval for the automotive supply chain that could take years to fully overcome.

Further disrupting chip supplies to auto makers are fresh bottlenecks in how semiconductors are tested and packaged in Asia. Meanwhile, semiconductor manufacturers are gradually phasing out the low-tech, low-margin chips that are prevalent in new vehicles, raising concerns about the availability of those chips further out.

Auto makers are faced with a two-pronged challenge: finding the chips they need to keep their factories running today, while game-planning to ensure a longer-term supply, which includes more U.S.-based manufacturing of semiconductors.

“Ultimately, if we don’t make feature-rich chips that only the auto industry uses, all of our jobs are at risk,” Jim Farley, Ford Motor Co. ’s chief executive, said in an interview.

Some auto manufacturers are already redrawing their 2022 plans.

Peter Anthony, chief executive of a Chicago-area supplier, recently cut his volume projections for the first half of next year by 20%. That estimate is an informed guess, though, because his customer orders change day-to-day based on chip availability, he said.

“Nobody knows,” said Mr. Anthony, whose UGN Automotive makes interior carpeting and insulation for several Japanese auto makers. “It’s a total crapshoot.”

The latest indication that the chip-shortage challenges aren’t over is expected to come Friday, when major car companies report third-quarter U.S. sales. Analysts expect a steep drop in third-quarter sales, following a strong spring, as the lack of semiconductors dents vehicle production and leaves dealership lots with little to no stock.

The auto industry’s continuing troubles trace back to the early days of the pandemic, when auto suppliers canceled chip orders because of concern over weak demand, analysts and industry executives say. Consumer-electronics companies soaked up much of that capacity, leaving car companies and their parts suppliers with a dearth of chips when car sales snapped back in the summer of 2020.

Several setbacks further pinched the availability of chips, used in everything from anti-lock brakes to multimedia displays. Power outages, a fire at a major semiconductor manufacturer and other disasters have disrupted chip output from Texas to Germany and Japan.

Now, the industry is confronting bottlenecks further down the supply chain. Semiconductors made by large manufacturers, such as Taiwan Semiconductor Manufacturing Co. , are sent to companies for assembly and testing in Malaysia and other Southeast Asian countries. Those companies have recently been hit with production disruptions due in part to pandemic-related restrictions and increasing Covid-19 outbreaks.

That part of the supply chain is expected to experience an extended backlog for chips used by the auto industry as well as other sectors, even if pandemic restrictions ease, said Phil Amsrud, a senior analyst at research firm IHS Markit who specializes in the automotive-semiconductor market.

“These back-end companies run at much thinner margins” than the semiconductor manufacturers, Mr. Amsrud said. “For them to make a big investment in capacity, they need to be absolutely sure of the short-term and long-term demand.”

Even for companies that are looking to expand capacity, lead times for some manufacturing equipment needed to boost output can stretch nine months, he said.

That holdup is the main reason IHS recently slashed its forecast for global vehicle output in 2022, cutting it by about 8.5 million vehicles from its previous outlook, for a total of 82.6 million. The company blames this year’s production losses from supply-chain disruptions, primarily the chip shortage, at about 10.6 million vehicles.

Consulting firm AlixPartners LLP estimates the chip shortage will cost the industry $210 billion in revenue this year, nearly double its forecast from May.

One factor that leaves the auto sector at a potential disadvantage is its reliance on older chips, called microcontrollers. They have been used for decades to electronically control engines, air bags and other vehicle functions, and are pervasive because of their low cost and reliability.

But of the nearly $400 billion that semiconductor companies have announced in planned capacity expansions, little of it is expected to go toward microcontrollers, according to IHS.

Semiconductor companies lack incentive to invest in additional capacity for older technology, RBC Capital analyst Joseph Spak said. And while auto makers are moving toward more-advanced chips as they introduce electric and connected cars, that upgrade will put them into more-direct competition for chips with makers of consumer electronics, he said.

“We believe there could be structural reasons why semi capacity may limit automotive production over the coming years,” Mr. Spak said.

The shortage’s severity has hit auto makers unevenly. For example, Ford has lost more production in North America than any global car company—about 566,000 vehicles, according to research firm AutoForecast Solutions. But Ford executives have said the situation is improving.

Ford’s Mr. Farley said the company’s near-term tactics include securing backup stocks of chips and signing direct contracts with semiconductors companies, rather than relying on Ford’s direct suppliers. He also has proposed designing some vehicle components to require fewer chips.

Meanwhile, General Motors Co. for much of the year had managed to avoid cutting production of its most profitable vehicles, large pickup trucks and SUVs. More recently, though, it has canceled work shifts at its truck factories, which is expected to dent third-quarter earnings.

GM Chief Executive Mary Barra said in September that the auto maker is working directly with semiconductor manufacturers to secure chips.

“We’re going to make some pretty substantial shifts in our supply chain,” Ms. Barra said in an online interview hosted by Delta Air Lines Inc. Chief Executive Ed Bastian. “It’s a solvable problem, but it’s going to be here a little longer.”

Updated: 10-1-2021

Toyota Outsells GM In The U.S. For Second Quarter In A Row

Japanese auto maker overtakes rival in U.S. sales for third quarter and first nine months of the year, illustrating the disproportionate impact of chip shortage.

For the second quarter in a row, Toyota Motor Corp. has outsold General Motors Co. in the U.S., illustrating how a continuing computer-chip shortage is upending the usual sales pecking order.

In the third quarter, Toyota said it sold 566,005 vehicles in the U.S., beating GM’s sales tally for the period by about 119,000 units. The Japanese auto maker is now in a position to overtake GM for the year, having exceeded its rival’s U.S. sales total for the first nine months.

GM has long led the U.S. market in sales, but a prolonged shortage of semiconductors has continued to have a disproportionate effect on the Detroit auto-making giant, leading to widespread disruptions at its factories. GM sales dropped nearly 33% in the third quarter. By contrast, Toyota was up 1.4% from a year earlier.

Other car companies are also feeling the impact of the parts shortage, and the U.S. auto industry, as a whole, is expected to report its first quarterly sales decline for the year when final sales are tallied.

In September alone, the industry’s annualized selling pace—a measure of the market’s strength month to month—hit 12.2 million, according to research firm Wards Intelligence, the lowest since the early days of the pandemic.

For the third quarter, research firm J.D. Power expects U.S. auto sales to total 3.3 million, a 13% drop from a year earlier.

Ford Motor Co. plans to report third-quarter sales Monday.

The computer-chip shortage, which has stifled auto production throughout the globe, is now starting to have a bigger impact on U.S. sales as the parts crisis continues to dent factory output and leave selling lots with little to no stock.

It is also starting to wear on car shoppers, some of whom are so flustered by the challenges of purchasing a car right now that they are giving up until the situation improves.

Many in the car business expect the challenges to persist well into next year as new supply-chain bottlenecks emerge in Southeast Asia and other parts of the semiconductor industry, dealers, analysts and auto executives say.

For now, Jack Hollis, head of marketing and sales for Toyota’s North American division, said he doesn’t see Toyota’s lead as permanent, saying it is more the result of the unusual market dynamics right now than any longer-term change. “This is an anomaly, and not how it would be if everyone had normal circumstances,” Mr. Hollis said.

With inventory tight, consumers are having to pay top dollar to get the vehicles they want, prompting some shoppers to hold off on purchases. Frustration is occurring among buyers of both new and used cars, as vehicle supplies are scarce across the board.

“Car prices just started going crazy, and I decided I can wait this out,” said Sean Hutchinson, a Chicago writer and teacher who began looking for a vehicle last year to replace his nearly 20-year-old Mercury Grand Marquis. While he was earning more money now and wanted to upgrade, the current car market is too expensive, he said.

“I just stopped looking entirely,” Mr. Hutchinson added.

Auto-industry sales showed signs of slowing heading into the summer months as dealers said they were having trouble keeping cars and trucks in stock. Since then, the semiconductor shortage has continued to take its toll, disrupting auto production throughout the summer in the U.S. and globally.

A Kelley Blue Book survey of U.S. car shoppers in late August found that 48% of respondents were likely to postpone a vehicle purchase because of the chip shortage. Of those shoppers likely to postpone, 40% of them say they are willing to wait seven months or longer.

When this same survey was conducted this spring, 37% of respondents said they were planning to delay a purchase, Kelley Blue Book said.

The lack of semiconductors, used in vehicle components as diverse as touch screens and air bags, is showing little sign of letting up. Jessica Caldwell, an analyst with car-shopping website, said the prolonged challenges are leaving the auto industry in a difficult bind and buyers with few options.

Updated: 10-3-2021

Pacemaker, Ultrasound Companies Seek Priority Amid Chip Shortage

Medical device makers highlight life-saving products to secure supply: ‘Every single chip you give me gives the gift of breath to a person suffocating’.

In the race to secure computer chips amid a global shortage, medical device makers say they have found their ace card: their products save lives.

While only a tiny fraction of the world’s chips end up in medical equipment compared with cars and consumer electronics, the components are key to a range of vital devices like MRI machines, pacemakers and blood-sugar monitors for diabetes. To win priority over larger buyers, medical device makers say their most effective tactic is to raise awareness with executives at chip suppliers.

“Nobody wants to be the person who shuts down critical medical devices in the middle of Covid,” said Mike Arena, vice president of operations for Fujifilm SonoSite, which makes portable ultrasound machines. “When we get to a CEO or senior VP they very much want to help.”

A global supply crunch for computer chips, fueled by soaring demand for electronics as the pandemic expanded home working, has disrupted car production and pushed up the prices of laptops and printers. Medical device makers are also feeling the pinch.

In a recent survey of medical technology companies by Deloitte, commissioned by industry group AdvaMed, every respondent reported supply issues. The most commonly cited problems were delays, cutbacks and cancellations.

“Week to week we’re going through different shortages,” said Mr. Arena, adding that his company recently paid a broker $65 apiece for a part that usually costs $1.49 because it was in such short supply, for an order of 3,000 pieces.

For Fujifilm SonoSite, a U.S.-based subsidiary of the Japanese tech giant, chip shortages have been exacerbated by rising demand for its products amid the spread of the Delta variant.

Portable ultrasound machines are used in emergency rooms and intensive-care units to diagnose respiratory illnesses. “Right now we have more demand than we can get material to satisfy,” said Mr. Arena.

Medical device makers are desirable customers for chip suppliers. They are resilient during recessions, and because their products are heavily regulated they aren’t updated as frequently as consumer electronics, meaning they generate reliable business. Medical device makers also typically pay a little more than companies in other sectors because of the quality they require.

But for all those strengths, the medical technology sector is tiny compared with the giant automotive and consumer electronics industries. In 2020, total medical semiconductor revenue was $5 billion, just 1.1% of the overall chip market, according to Omdia, a technology data company.

“We’re competing for parts against companies that are doing hundreds of millions of dollars worth of revenue,” said Fujifilm SonoSite’s Mr. Arena. “Here we are somebody who represents $50,000-$100,000 a year. It’s very hard to get on their radar.”

To secure supplies, medical device makers are appealing to suppliers’ sense of higher duty. When a supplier recently told Fujifilm SonoSite that an order of 9,000 chips would arrive more than 60 days later than planned, Mr. Arena quickly tracked down the chief executive officer using LinkedIn.

Guessing their email address, he wrote the CEO to let them know that the chips were intended for medical equipment. In response, the supplier reallocated chips from other customers, and 9,000 semiconductors arrived in three separate shipments over the following two weeks.

“What I’m asking them is to take some components from your higher-revenue customers and give some to me so you can do something good for the world,” said Mr. Arena. It helps that the volume of chips he is asking for would barely make a dent in an auto maker’s allocation, he added.

Boston Scientific Corp. , one of the world’s biggest medical technology companies, has also persuaded suppliers to give it priority on the basis that its products improve people’s health, according to Brad Sorenson, its senior vice president of supply chain.

“One of the biggest levers we have is that relationship,” he said. “What we do for patients and to make sure they understand that.”

That message has helped Boston Scientific secure supply as typical lead times for components quintupled from three to 15 months. The company has also embedded its own manufacturing engineers at some key suppliers to speed production and keep lines of communication open.

So far it has kept up with demand for its products, which include pacemakers and brain implants for treating Parkinson’s disease, but only just. “There are times when we’re flying closer to the sun than we’d like to,” Mr. Sorenson said.

Mick Farrell, chief executive of ResMed Inc., which makes ventilators and other breathing aids, is using the same tactic with suppliers. “I lead with the human element,” he said. “People are very much listening to that.”

His pitch: “Every single chip you give me gives the gift of breath to a person suffocating.” That argument helped ResMed keep on top of orders until recently, when a huge recall by its top competitor Royal Philips NV triggered a surge in demand for the devices it makes to treat sleep apnea.

Mr. Farrell said that under normal conditions the company would have been able to meet that new demand within six to nine months. With the supply crunch he expects ResMed’s production to be constrained until the end of spring next year, at the earliest.

One chip maker that has publicly backed medical device makers is Germany’s Infineon Technologies AG . Last year it provided millions of chips to help ResMed increase ventilator production at the outset of the pandemic. A spokesman said Infineon has since given medical device makers priority in some cases when supplies are tight.

Some hospitals are experiencing long order delays because of the semiconductor shortage, according to Mike Schiller, senior director for supply chains at the Association for Health Care Resource and Materials Management, an industry group. He said some members have reported monthslong delays for new CT scanners, defibrillators and telemetry monitors, machines that track patients’ vital signs.

But the medical device makers’ efforts to woo suppliers seem to have prevented widespread shortages. Ed Hisscock, senior vice president of supply chain management at Trinity Health, which operates 90 hospitals across 22 states, said his team has been on “high alert” for shortages of thousands of items containing semiconductors for the past six months, but that none have yet materialized.

“We’re in a decent position,” said Boston Scientific’s Mr. Sorenson. “But the repercussions here could be really significant.”

Updated: 10-5-2021

How A Global Foundry Is Losing Money In A Chip Boom

Companies should be raking in profits. That’s never going to happen if you lack the pricing power and factory utilization needed to make the most of the sunny weather.

The current state of the global semiconductor market has been alternatively labeled by auto makers, politicians and executives as a shortage, a crisis, and even a squeeze. For the companies at the center of it all, the only word to describe what we’re seeing is a chip boom. It’s inexplicable, then, that any company which ought to be bathing in profits could still be losing money.

Enter GlobalFoundries Inc. The New York-based company is the world’s third-largest contract chipmaker and has just filed for a Nasdaq listing. With shares of leader Taiwan Semiconductor Manufacturing Co. up more than double since the darkest days of the Covid-19 pandemic, and nearest rival United Microelectronics Corp. rising almost five fold, investors ought to be clamoring over GlobalFoundries’ $1 billion offering.

Like its rivals, GlobalFoundries manufactures chips based on the designs of clients, most of which don’t have their own factories. Rather than land the most-advanced orders for components like smartphone processors and graphics chips, the company in 2018 reoriented its strategy toward chasing down older product types — which it euphemistically calls “feature rich” — that include parts that convert sound and images to digital signals.

Supplying older semiconductor products doesn’t attract the high prices commanded by TSMC, but they are much cheaper and easier to make. With modern cars lacking much-needed sensors, and even Apple Inc. noting the impact on iPad and iPhone sales, this ought to be a golden era for GlobalFoundries.

But even with manufacturing lead times blowing out to a record 21 weeks and prices being pushed upward — clear signs that demand outstrips supply — the company still can’t manage to make a profit.

Revenue fell 17% last year 1 , a second consecutive decline, and operating loss margins deteriorated. From a potential market of around $54 billion in 2020, it captured just $4.9 billion. Although the bulk of the pandemic-inspired chip boom and shortage has transpired through 2021, the truth remains that this company shrank last year while the foundry sector climbed 23%.

What’s of greater concern is that peaks and troughs are a natural aspect of this industry. New product categories such as PCs, notebook computers, and smartphones all drove past expansions, with declines following when that growth period ended.

This time we’re seeing a super cycle spurred by faster telecommunications networks, cloud computing and streaming content, and electronically equipped cars. That helped GlobalFoundries increase revenue 13% in the first half (TSMC grew 18%.) But even then, it still posted a $198 million loss.

In its prospectus, the company crows about its clients’ increasing reliance on its services: “A key measure of our success as a differentiated technology partner is the mix of our revenue attributable to single-sourced business,” which it defines as “those that we believe can only be manufactured with our technology and cannot be manufactured elsewhere without significant customer redesigns.”

But that customer addiction hasn’t translated into an ability to fill its factories or raise prices to the extent needed to cover costs.

The single biggest expense for a chip foundry is the depreciation of equipment, which means that full or empty, the cost of those factories weighs on the bottom line. Over the past three years, capacity utilization ranged from 70% to 84%, while a rule of thumb for the sector says that you need to hit at least 90% to break even. What you certainly don’t have when equipment lays idle is the negotiating power to ask clients to pay more. By contrast, TSMC is preparing to raise prices by as much as 20%.

And this year may be the top of the current cycle. Although shortages remain, the bulk of the struggles are over and most industries are getting back to normal. The company, citing Gartner Inc., estimates the foundry sector will climb an average 10.1% between 2019 and 2025. With last year coming in at 23% and this year heading for 12% — and TSMC taking most of that expansion for itself — there may not be a lot of momentum left to push GlobalFoundries into profitable territory. And if it does manage to pop its head above water, keeping it there may be a struggle.

Seasonality, industry overcapacity, reductions in demand, and declines in average prices are all outlined in its filing under “risk factors.” If you want a playbook for how to lose money in a chip boom, just read GlobalFoundries’ prospectus.

Updated: 10-8-2021

‘We’re In A Hurry.’ A New CEO Scrambles To Cope With A Global Chip Crisis

Cristiano Amon is the new boss of Qualcomm Inc., a U.S. tech giant that designs semiconductors. His first task: Convince companies to make more chips for him—and fast.

Months before Cristiano Amon started as CEO of Qualcomm Inc., QCOM -0.20% he already was at work on his first crisis. To solve it, he sat in a mostly empty meeting room in Taipei and pleaded with executives from one of the world’s biggest semiconductor makers for more chips.

He needed the help so that Qualcomm, a designer of circuits that go into hundreds of millions of electronic devices every year, could chase new markets and meet demand from big customers such as Apple Inc., Samsung Electronics Co. and China’s top handset-makers.

In fact, he needed the assistance so much that he got permission from the Taiwanese government to arrive in March and then waited through a three-day quarantine. Once he and his team got to the meeting place in a Taipei hotel, they negotiated with counterparts across a large room outfitted with microphones and speakers to communicate.

“I’m a very big believer that sometimes you have to meet folks in person,” said Mr. Amon, who was named CEO in January and officially took over in June.

Many new CEOs across the business world had to adjust to their roles amid unprecedented pandemic-era restrictions, getting to know key employees without ever meeting them in person and managing offices and business relationships from far away. Few can say they had a more tumultuous transition than Mr. Amon, a gregarious Brazilian who revels in person-to-person contact.

He is juggling a cluster of major challenges—a global chip shortage, a sudden shift in a key market, and an unexpected acquisition opportunity—while trying to put his own stamp on a company after working there for more than two decades. He wants to focus on an expansion beyond Qualcomm’s core mobile-phone chip business, a shift that began before he took over.

“I’ve been doing many things in parallel and I want to succeed in them all,” he said in an interview. “I can’t afford not to do them because we’re in a hurry.”

The jury is out on Mr. Amon’s young tenure. Qualcomm’s stock has fallen to $127.84 as of Thursday’s close, from around $152 the day he was announced as the next CEO. Investors are worried about how long the company can benefit from a transition to the superfast, next-generation wireless standard known as 5G, and whether Apple will start making its own mobile-phone communication chips, said SMBC Nikko Securities America analyst Srini Pajjuri.

Mr. Amon’s pursuit of new markets is the right strategy, said Jeffrey Helfrich, a portfolio manager at Dallas-based Penn Davis McFarland, a firm with a Qualcomm stake that is among its largest holdings. But he said the company needs to stay on top technologically and avoid the return of old bugbears, including a legal battle with Apple over how royalties are collected on innovations in smartphone technology. Qualcomm and Apple resolved that fight in 2019.

“Do you think that their dispute with Apple is over forever? I don’t,” he said.

A Short Honeymoon

Mr. Amon, an electrical engineering graduate of Universidade Estadual de Campinas outside of São Paulo, worked at multinational telecom companies in Brazil and had two stints at Qualcomm starting in 1995 and again in 2004. The 51-year-old father of three was a rising star at the company for years, becoming president in 2018.

Qualcomm was founded in 1985 by a group of engineers led by Irwin Jacobs, who became its first CEO. His son, Paul, succeeded him, and handed the reins to Steve Mollenkopf in 2014. Those leaders pioneered ways of connecting cellphones to cell towers and made Qualcomm a ubiquitous player in cellular equipment. Mr. Mollenkopf, known for his reserved demeanor, saw the company through a tumultuous period of lawsuits, antitrust scrutiny and a hostile takeover attempt by rival chipmaker Broadcom Inc.

Mr. Amon strikes a contrast with Mr. Mollenkopf, who retired in June. His outgoing style is well suited for the tasks of courting new customers and scouting for new business. Mr. Amon shook up the company’s management to help with that transformation, bringing in roughly 20 new executives. That group includes people with backgrounds in cloud computing, personal computers and auto technology, he said.

He didn’t have a lot of time to settle into the job. Shortly before getting the nod, he had a bout with Covid-19, which he contracted around Christmas. Once recovered, he resumed globe-trotting to stay ahead of a crippling chip supply crunch that raised prices for electronics and hampered production of everything from cars to home appliances to PCs.

That shortage, which he predicts will ease in the first half of 2022, put Qualcomm in a tricky position. While the company designs communications and data-processing chips, it relies on others to manufacture them, which means it doesn’t fully control its destiny. Securing manufacturing capacity is critical to Mr. Amon’s longer-term aspiration of getting Qualcomm’s chips into more automobiles, drones and other devices.

One of Mr. Amon’s first stops after being named to the corner office was South Korea, which was followed by the trip to Taiwan in March, then back to South Korea in May. Those countries are home to some of the world’s biggest chipmakers and key Qualcomm suppliers, including South Korea’s Samsung Electronics Co. and Taiwan Semiconductor Manufacturing Co.

Before he got the top job, Mr. Amon was a frequent visitor to these places to meet with industrial partners. But the pandemic and the global chip shortage made this year’s sojourn unfamiliar. Everywhere he faced similarly stringent anti-Covid measures, such as a government escort in Taiwan from the airport to the government-approved hotel he couldn’t leave. When in Taiwan, Mr. Amon usually dropped in at the original location of the renowned dim sum restaurant Din Tai Fung. Covid nixed that ritual.

‘Pressure Cooker’

Qualcomm is also vying for a bigger share of the cellphone chip market in China. That battle intensified in the past year after U.S. restrictions on Huawei Technologies Co. crippled the Chinese telecommunications giant. Huawei made many of its own chips, while the companies vying to gobble up its market share sourced from Qualcomm and its competitors.

To encourage suppliers to boost Qualcomm’s manufacturing capacity, Mr. Amon made moves uncommon in the industry, agreeing to pay in advance for supplies and entering into contracts that are longer than typical. Mr. Amon said he felt heat from Qualcomm customers concerned about the chip shortage, even from users of its products that don’t buy directly from the company.

“I cannot find a customer that we’re not getting pressure from directly and indirectly,” he said. “It is a pressure cooker right now.”

Mr. Amon also met or spoke with CEOs of defense contractors, industrial companies and a plethora of auto makers as part of his effort to diversify Qualcomm’s customer base away from phone chips. He reached a deal with French car maker Renault SA to put Qualcomm chips in a coming electric car.

When he took over, people advised against pinning himself too early to a long-term strategy, he said. But he decided to present a detailed five-year plan to all of Qualcomm’s employees anyway during a three-hour presentation this summer. He wanted employees to find motivation in knowing how their work aligned with the company’s goals.

The thinking behind Qualcomm’s auto-industry push is that more car makers now use semiconductors in their dashboard displays, driver-assistance features and other applications.

That strategy produced the biggest surprise of Mr. Amon’s young tenure as CEO—a multibillion-dollar takeover bid for an auto-technology company that makes sensors allowing computers to take a greater role in driving. It had to snatch the company, Sweden’s Veoneer Inc., from a competing bidder.

Qualcomm already had a partnership with Veoneer to work on self-driving systems, but Veoneer’s management wanted a buyer that would give it enough scale to compete with the likes of Tesla Inc. and Intel Corp.’s driving-tech subsidiary Mobileye. When Canadian automotive company Magna International Inc. made a $3.8 billion cash offer to acquire Veoneer in July, it threatened Qualcomm’s self-driving strategy.

Mr. Amon first sought to buy out Veoneer’s share of the self-driving partnership for $2 billion, and then sweetened the offer to $2.5 billion in July. Veoneer’s CEO instead asked that Qualcomm bid for the whole company. In August, Mr. Amon offered $4.6 billion, and this month the Swedish company accepted the bid, which Qualcomm made in partnership with an investment firm.

The deal made for a hectic beginning to Mr. Amon’s tenure as CEO. The one thing Mr. Amon laments about his first few months is how little time he has. “I have a shortage of chips and a shortage of time,” he said. “We’re in a hurry. We have a lot of things to do. We have to diversify and reposition Qualcomm and there’s not a lot of time.”

Updated: 10-20-2021

Micron To Expand Chip Production With $150 Billion In Capital Spending Over Coming Decade

CEO Sanjay Mehrotra says Boise, Idaho, memory-chip maker is seeking clarity on U.S. financial incentives.

The memory-chip maker Micron Technology Inc. plans to boost investment to more than $150 billion over the coming decade to cater to booming demand and is urging Congress to pass legislation that would aid domestic plant expansion.

Micron Chief Executive Officer Sanjay Mehrotra said some of the planned spending would go toward expansion of existing chip-production facilities and potential construction of new ones. “We will be engaging with the governments around the globe, including in the U.S., to address our needs for growing our supply in line with our demand expectations for the 2030 era,” he told The Wall Street Journal.

A global semiconductor shortage has spurred chip makers around the world to plan factory expansions. Intel Corp. in September pledged up to around $95 billion for more chip-making capacity in Europe, after detailing U.S. expansion plans earlier this year.

Taiwan Semiconductor Manufacturing Co. , the world’s leading contract chip maker, said this month it would build a chip manufacturing plant in Japan. Samsung Electronics Co. and GlobalFoundries Inc. have also announced capital investment plans this year.

The chip shortage has highlighted to governments how semiconductors have become more critical to their economies, spurring them to try to assure supply, often by offering subsidies to lure investments. Chip companies are seizing the moment, urging governments to invest.

Intel CEO Pat Gelsinger has been knocking on the doors of government officials around the world, making the case for government inducements to land chip factories. Executives from TSMC, GlobalFoundries and others also are making the rounds.

Mr. Mehrotra said he was supportive of U.S. government proposals from the Biden administration and lawmakers to boost domestic chip production, including bills in Congress that would provide grants for plant investments and long-term tax incentives. “The economics needs to work,” he said, adding that U.S. factories can be 35% to 45% more expensive than in low-cost countries.

The chip industry has long said that higher costs of operating in the U.S. have driven chip-making abroad, lured by a combination of factors such as lower labor costs and often big subsidies. The U.S. and Europe produced more than three-quarters of the world’s semiconductors in 1990. Now, they produce less than a quarter.

The Senate in June passed legislation to increase government spending on technology research and development, and it includes $52 billion to encourage semiconductor production. The House hasn’t yet taken up the measure while negotiations on broader legislation are ongoing. The semiconductor industry is also lobbying for investment tax credits.

Mr. Mehrotra said Boise, Idaho-based Micron is urging clarity on U.S. financial incentives soon. “The decisions regarding investments will need to be made in the coming years, and it takes a while before all that planning can be put in place,” he said.

The company has spelled out plans for up to $12 billion in capital expenditure in the current fiscal year, above its historical average, and targets around $3 billion in research-and-development outlays.

Mr. Mehrotra also said he is seeing signs that the worst chip-supply bottlenecks are starting to ease. “The supply crunch that the industry has been experiencing is already improving some and will continue to improve,” he said, though some shortages might last into 2023.

Updated: 10-29-2021

Global Chip Shortage ‘Is Far From Over’ As Wait Times Get Longer

Nearly a year into the crisis, some customers are finding it is taking months more than expected to get needed parts.

Almost a year into a global chip shortage, the problems are increasing for many customers as delays get even longer and sales are lost.

Manuel Schoenfeld placed an order in May for transmission chips for the utility-monitoring devices made by his New York-based company PowerX. He was told the chips would arrive by summer, then fall, then winter and now doesn’t expect to get them until May 2022.

“This is far from over,” Mr. Schoenfeld said.

The global semiconductor shortage is worsening, with wait times lengthening, buyers hoarding products and the potential end looking less likely to materialize by next year. Demand didn’t moderate as expected. Supply routes got clogged. Unpredictable production hiccups slammed factories already running at full capacity.

What’s left is widespread confusion for manufacturers and buyers alike. Some buyers trying to place new orders are getting delivery dates in 2024, said Ian Walker, operations director at electronic-components distributor Princeps Electronics Ltd., which helps companies find chips.

“It really feels as if we are running out,” Mr. Walker said.

The $464 billion semiconductor industry has been unable to keep pace, leading to lost revenue across the board. The pain is spreading beyond the initially affected—like car makers and home appliance manufacturers—to makers of other products, including medical equipment and smoking devices.

The smartphone industry will grow by just 6% year-over-year, or half the initial forecast from earlier this year, because of chip woes, according to Counterpoint Research, which tracks handset shipments.

Apple Inc. warned Thursday that supply-chain disruptions are hindering iPhone and other product manufacturing ahead of the holiday-shopping quarter, even as the company reported a record 12-month profit.

Chip makers say the lack of supplies has caused them to lose sales. “Trust me, we would be shipping a lot more if we weren’t constrained by the supply chain of these other components in the industry,” Intel Corp. Chief Executive Pat Gelsinger said last week on an earnings call. Mr. Gelsinger has said he expects shortages to last until 2023.

Wait times for chip deliveries have continued to climb above a healthy threshold of 9-12 weeks. Over the summer, the wait stretched to 19 weeks on average, according to Susquehanna Financial Group. But as of October, it has ballooned to 22 weeks. It is longer for the scarcest parts: 25 weeks for power-management components and 38 weeks for the microcontrollers that the auto industry needs, the firm said.

Scott Wren, senior global equity strategist at Wells Fargo Investment Institute, said he would have thought six months ago that chip shortages would start easing by this time. But now he said they will likely last until 2023. Wells Fargo Investment Institute recently revised down its U.S. GDP forecast to 6.3% from 7% as the chip shortage limited the supply of consumer goods.

“This is playing out considerably longer than we initially thought,” Mr. Wren said.

A supply bounceback this year relied on rosy assumptions that already maxed-out production wouldn’t face further setbacks. But the chip-making process is under duress from beginning to end.

Basic building-block materials such as substrates are in short supply. Mishaps from bad weather and fires have interrupted wafer production. The final stage of manufacturing has been undercut by virus outbreaks and subsequent factory closures in Malaysia, which specializes in product packaging.

Global shipping constraints have added to disruptions and delays. Chip assembly can require that parts travel up to 25,000 miles before becoming finished products, according to a report by Accenture and the Global Semiconductor Alliance.

Sourcing chips has turned almost into a lottery, leading to over ordering that creates more supply strain, industry experts say.

“People are buying a lot of parts to have just in case, and that’s exacerbating the shortage,” said Willy Shih, a professor of management at Harvard Business School, who specializes in semiconductors and supply chains.

Stockpiling could also lead to an inflated sense of demand, analysts warned, which has raised concerns that an industrywide ramp-up in supply could lead to a chip glut. Major chip makers such as Taiwan Semiconductor Manufacturing Co. , Samsung Electronics Co. and Intel have announced ambitious investments to increase production, but such facilities cost billions of dollars and take years to become operational.

The auto industry, hit hard and early by the chip shortage, has been the most vocal in calling for increasing supply. The world’s largest contract chip maker, TSMC, has boosted auto-chip production by 60% this year, but car makers have struggled to recover as factory closures continue and estimated losses mount.

On Wednesday, General Motors Co. and Ford Motor Co. each reported steep drops in third-quarter profit as the computer-chip shortage dented factory output. Both companies said they see the semiconductor situation gradually easing next year.

“Nobody expected it to get as challenging as it is right now,” said Ambrose Conroy, founder of supply-chain consulting firm Seraph. “We’re not going to get ahead of this for quite a while.”

Even companies considered to have well-established supply chains, such as Tesla Inc. have noted challenges in meeting customer demand, as a lack of critical components has weighed down production and been a drag on revenue growth. Other businesses have also begun to warn investors of a prolonged impact.

Last week, Philip Morris International Inc. estimated that it missed out this quarter on hundreds of thousands of unit sales of its IQOS smoking devices, a heated tobacco stick marketed as an alternative to traditional or electronic cigarettes. That figure could reach 1.5 million in the second half of the year, executives said.

Chief Financial Officer Emmanuel Babeau said that while the situation could improve in the first half of 2022, it was also possible that problems could persist until 2023. “I have to admit that nothing is totally clear at that stage,” he said.

Royal Philips NV, which makes medical equipment, slashed its sales and profit growth outlook this year, as it suffered €150 million, the equivalent of $174 million, in missed sales in the third quarter, said Chief Executive Frans van Houten during the most recent earnings call.

At PowerX, the utility-monitoring devices company, the lack of components has eaten into the company’s profit margins and cost millions of dollars in unfulfilled device orders. The firm has paid up to five times usual prices to get smaller batches of supply. One manufacturer-promised shipment of 20,000 chips fell through, Mr. Schoenfeld said, because he was told the factory had burned down.

PowerX said it has nearly six months of inventory stockpiled versus six weeks or so what a startup firm like his would have handy.

“We are already concerned about what happens when our chips run out,” he added.

Updated: 10-30-2021

Even Paint Makers Are Feeling The Chip Shortage

3M, Corning and PPG said sales are suffering, as major customers produced fewer vehicles, washing machines, devices; ‘something we can’t control’

The semiconductor shortage is impacting companies that don’t directly rely on computer chips, cutting into sales of glass, paint and industrial sandpaper.

Big users of chips—including automobile, smartphone and appliance manufacturers—are also major buyers of other materials, such as paint and glass. As production of finished goods falls because of the chip shortage, those companies are also cutting purchases of many other components, executives of supplier companies said.

3M Co., Axalta Coating Systems Ltd. and Corning Inc. said this week that their sales are suffering because of the semiconductor shortage, as major customers produced fewer vehicles, washing machines and devices.

Companies that provide services to manufacturers, like water-management company Ecolab Inc. and train operator Union Pacific Corp., are also being affected. Union Pacific said shipments by car and car-part makers fell 18% in its third quarter.

St. Paul, Minn.-based 3M, which makes grinding wheels used to smooth metal and films that brighten electronic displays, said the chip shortage has spread across a broad group of its customers, including those who make vehicles and smartphones.

“Those are significant markets for us,” said Mike Roman, the company’s chief executive officer. “We are seeing the shortage of semiconductors.” The company said some of the decline was offset by auto makers using the chips on hand to make more high-end vehicles, which have extra electronics and larger screens.

Semiconductors have become harder to get after consumers ramped up orders for everything from hot tubs to ATVs faster than producers expected. Chip-making companies already had focused on producing more-profitable, cutting-edge chips over simpler ones used in everyday products, and supplies were further constrained by a factory fire in Japan and by severe winter cold around Texas that temporarily idled factories. Adding substantial new chip-producing capacity usually takes years, the manufacturers have said.

Starting late last year, car makers began cutting back production. U.S. manufacturers assembled vehicles at an annual rate of 7.8 million in September, down from around 10.8 million a year earlier, according to the Federal Reserve. Household appliance production also fell from June to August and from August to September, according to federal data.

Glassmaker Corning said the semiconductor shortage cost the company $40 million in sales in its latest quarter, as its customers made fewer cars. The number of televisions sold has declined by about 10% year over year, the company said, which also cut into revenue.

“This pullback in production began to impact us in the middle of the third quarter, and we expect it to continue for the fourth quarter,” Tony Tripeny, Corning’s chief financial officer, told analysts, referring to car production.

Some companies said the situation was worse than they expected. Automotive supplier Dana Inc. cut its revenue forecast for the year by $100 million on Tuesday to about $8.9 billion, citing the chip shortage.

“The supply chain conditions were expected to improve modestly and the chip famine was presumed to progressively abate,” Jonathan Collins, the Ohio company’s chief financial officer, told analysts. “Unfortunately, none of these came to fruition.”

Manufacturers said there isn’t much they can do to mitigate the semiconductor shortage fallout. Some said they were focused on meeting the demand that does exist, finding new customers for products and doing maintenance that was delayed during recent periods of higher demand.

Ecolab, which helps manufacturers manage water use, runs automotive paint rooms and makes cleaning products, said it was also feeling the lower demand.

“The chip shortage that’s happening out there has nothing to do with our own operation, but it’s reducing the demand,” CEO Christophe Beck said. “That’s something we can’t control, obviously.”

PPG Industries Inc., which makes paints and coatings, said earlier this month that the lack of semiconductors went beyond its car customers, also affecting production of heavy construction equipment and appliances. The Pittsburgh-based company said it doesn’t expect things to get back to normal until the second half of next year.

CEO Michael McGarry said: “There are a lot more chips than people realize in some of these things, like appliances.”

United States Steel Corp. said Friday that some of its car customers are planning to increase production rates over the next six months, starting as soon as November.

“We are delighted to hear from multiple auto customers who are foreshadowing that the trough of the chip shortage could be behind us,” CEO David Burritt said.

Updated: 11-4-2021

GlobalFoundries Hopes To Turn Profitable Amid The Chip Shortage

After years of losses, the newly public company shifted its focus to the low end of the market.

When Apple Inc. reported its most recent quarterly earnings, it said that revenue was $6 billion less than it could have been because it couldn’t get all the chips it needed and that the current quarter would be even worse. In doing so, it was revealing not only that the global semiconductor shortage was affecting one of the world’s most valuable companies, but also how it did so.

Apple’s devices famously use cutting-edge chips that the company designs for its own needs. Those weren’t the problem, according to Chief Executive Officer Tim Cook—it was the simpler chips that carry out mundane functions such as managing power and data. “On legacy nodes, we compete with many different companies for supply, and it’s difficult to forecast when those things will balance,” he told investors on Oct. 28.

The semiconductor industry is forever focused on making even more impossibly advanced chips, but the global chip shortage is most acute when it comes to chips made through processes that haven’t been cutting-edge for years. As a result, chipmakers who can’t compete with the most sophisticated players in the industry have been sharing in the boom in orders over the last 18 months.

This is good news for GlobalFoundries, the New York-based chipmaker owned almost entirely by the investment arm of the government of Abu Dhabi. GlobalFoundries, or GloFo as it’s sometimes called, raised $2.6 billion when it went public the day before Cook’s comments, quietly completing the third-largest initial public offering on a U.S. exchange this year, according to data compiled by Bloomberg. By Nov. 2 its share price had jumped more than 20%.

The company plans to spend $6 billion bolstering production, a small fraction of the commitments from top high-end chip producers TSMC and Samsung Electronics. GloFo, which was founded in 2009 as a spinoff of Advanced Micro Devices Inc.’s manufacturing operations, spent years bleeding cash in an attempt to achieve the scale required to compete with the top tier of chipmakers. In 2018 it gave up on making the most sophisticated chips and switched its focus to easier-to-manufacture parts.

Semiconductor production is costly and time-consuming to set up, and GlobalFoundries kept losing money for years as it reshaped itself. But after a $301 million loss on revenue of about $3 billion in the first half of this year, it has more than $2 billion of commitments from customers to help it expand production, according to Chief Executive Officer Tom Caulfield. He says the growing need for chips in so many areas will translate into a period of sustained expansion for the industry.

“We’re sitting at a half-trillion-dollar semiconductor market, and it took us 50 years to get here,” Caulfield says. “Consensus is we’re doubling in the next 10 years. What’s different this time is we’re going to have to go 10 times faster.”

Still, the chip market lurches in ways that are brutally difficult to time correctly. Periodic supply crunches inspire chipmakers to pour money into increased capacity, only to create a glut when customers pull back, leaving them with no way to recover their investment.

At this confused moment in the global economy, there are signs that Caulfield’s optimism may be misplaced. Chipmaker Texas Instruments Inc., a bellwether for the industry because of its tremendous reach, recently revealed a forecast that suggested the surge in electronic components is already beginning to slow.

GlobalFoundries is in an interesting position related to the other shifting dynamic in the semiconductor world: geopolitics. Its main plant is in upstate New York, near Albany, an attribute that Caulfield, a veteran of IBM’s chip operation, has tried to play to his advantage as he lobbies for subsidies from the U.S. government.

The Biden administration is worried about the lack of control that the U.S. has over the supply chain. But even after its U.S. IPO, GloFo is controlled by Mubadala Investment Co., which owns 80% of the company and whose main investment goal is to diversify Abu Dhabi’s economy away from oil.

All this could muddy up the politics for a semiconductor company trying to navigate an industry that’s shifting in mysterious ways. Now it has to add to its list of tasks the art of pleasing public market investors.

BOTTOM LINE – Demand for less-sophisticated semiconductors has spiked as the pandemic persists, which is good news for a company no longer chasing the industry leaders.


Toyota Profit Zooms Past Chip Shortage

Car maker expects sales and profit to rebound in the year ending March 2022.

Toyota Motor Corp. shrugged off the effects of a semiconductor shortage and reported higher profit in the most recent quarter as well as an improved forecast for the full fiscal year.

Toyota said it expects sales and profit to rebound in the year ending March 2022, with operating profit forecast to rise 12% to the equivalent of $24.5 billion. It maintained its estimate that revenue would reach ¥30 trillion, equivalent to about $263 billion, a figure it last hit in the year ended March 2019.

Although Toyota is getting an assist from a weaker yen, which means the dollars it earns abroad are worth more in local-currency terms, the results overall are another sign of how the world’s largest car maker by vehicle sales is weathering the global shortage of semiconductors better than most of its peers.

“Globally, production volume has declined,” said Kenta Kon, Toyota’s chief financial officer. “But in this situation, our dealers, suppliers and plants world-wide have made great efforts to supply as many cars as possible.”

The shortage didn’t begin to hit Toyota until recently, when a lack of semiconductors caused the company to lose about 40% of its planned production in August and September. As a result, Toyota lowered its fiscal year production forecast to 9 million units from 9.3 million previously. Toyota has said it expects production to begin to return to normal this month.

Toyota’s relative resilience was seen most clearly in the U.S., its biggest market, where it outsold perennial market leader General Motors Co. for the second quarter in a row. Toyota wasn’t hit as hard as many of its competitors—because it began to maintain a stockpile of critical parts such as semiconductors years before the current crisis—allowing it to keep factories running for longer. Other car makers have started to follow Toyota’s example.

Toyota said sales and profit rose in the July to September quarter, in a period when many car makers reported drops in both measures.

Those results were helped by rising prices, particularly in the U.S. New car prices hit a record average of $45,000 in September as thin inventory on dealer lots because of the chip shortage led buyers to shell out more for vehicles, according to Cox Automotive. Toyota’s average transaction price rose 14.2% during that month. Cox said the average Toyota was selling for $38,593 in September.

Car makers have said they expect the effects of the semiconductor shortage to stretch into next year, but Toyota’s Mr. Kon offered a more optimistic outlook. He said he didn’t expect the shortage to cause any further revisions to the company’s production target, which he called conservative.

Increased chip demand from makers of videogame consoles and other electronics helped exacerbate the shortage, but that issue has eased, Mr. Kon said.

While a further hit to production can’t be ruled out, “the risk is going to decrease quite a bit,” he said.

Chipmakers Are Sending A Warning About The Economy

Prices are falling and orders are slowing at semiconductor companies like Texas Instruments. It’s time to stop blaming the supply chain.

It’s transitory. That seems to be the message investors are sending as they push market indexes to new highs daily right after several technology companies warned supply-chain bottlenecks, labor shortages and delivery problems would crimp their holiday results.

But investors might be missing something. Disappointing results from three key chip companies could mean cracks are forming around the bull narrative. And they may turn out to be the warning signs this upturn is nearing its end.

Consider Texas Instruments Inc. The semiconductor stalwart sells the basic building-block chips that go into products in nearly every sector of the economy from autos and industrials to consumer electronics. The broad-based nature of the company’s more than 100,000 customers makes it a reasonable economic bellwether.

That’s why it was a big deal when the company’s management noted last week that it saw a notable behavior change in customer order patterns. On top of providing a lower-than-expected forecast for the December quarter, Texas Instruments said clients were now being “more selective” in asking for rush delivery for chips. This was happening, the company said, across industries and geographies. The company’s stock fell 5% the day after its report.

Texas Instruments wasn’t alone in delivering bad news. Last Thursday, hard-drive and flash memory maker Western Digital Corp. stunned investors with an adjusted earning-per-share projection roughly 20% below expectations, driving its shares 9% lower the following day. It came after memory-chip maker Micron Technology Inc. also provided a worse-than-expected outlook in late September.

Not all semiconductor firms are doing poorly. Nvidia Corp. is thriving with its more expensive and complex graphics chips that are benefiting from the long-term growth of gaming and artificial intelligence, while Advanced Micro Devices Inc. is flourishing by taking market share from Intel Corp. because of its better-performing server processors.

But Western Digital and Micron make cheaper, more commodity-oriented chips that go into a variety of end markets. Their broad use makes them a good indicator of economic trends, too. The two companies defended themselves, saying the weakness wasn’t due to demand but related primarily to shortages for other components experienced by their customers.

It doesn’t add up. First, memory chip prices have been tumbling for months. If this were a short-term phenomenon, buyers would appear at some point. Second, major retailer websites – including Microcenter, Best Buy Co. Inc. and Costco Wholesale Corp. – reveal plenty of discounted laptops and other devices in stock. It feels as if the chipmakers are making excuses by pointing to external factors for their poor performances while hoping things will turn around later.

The semiconductor industry is known for trending in cycles. During upturns, companies tend to “beat and raise” versus Wall Street consensus, meaning they report better-than-expected results and raise their forecasts. Then near the cycle peak, the companies typically overbuild and customers tend to order more chips than they need.

That’s when the cycle reverses, leading to gluts and plunging prices. What other things should we look for to confirm a downturn is underway? Companies missing targets, along with rising inventories on their balance sheets and deteriorating profit margins.

The combination of falling chip prices, changes in order behavior and disappointing forecasts all look like red flags. It is always possible the component shortage explanations will turn out to be accurate and that demand returns next year. But I wouldn’t count on it.


What’s Harder To Find Than Microchips? The Equipment That Makes Them

The world is hungry for semiconductors, and not all of them need to be made with cutting-edge technology. The race is on to find older machines that can still crank out chips.

Stephen Howe is a dealer of expensive antiques of almost unfathomable mechanical complexity that are much sought-after by a discerning and deep-pocketed clientele hailing from nearly every part of the developed world. The need for his wares is at an all-time high, and yet he’s feeling glum: Demand has so outstripped supply that it’s almost impossible for him to get hold of items to sell.

Mr. Howe buys and sells not vintage watches or classic cars but the equipment that makes the microchips that have been so scarce lately. The machines he sells tend to be at least 10 years old, since that’s about how long the best-capitalized chip manufacturers—like Samsung, Intel and Taiwan Semiconductor Manufacturing —hold onto new chip-making equipment. But they can be much older.

The great chip shortage of 2020 and 2021 has crimped the world’s ability to produce everything from automobiles to smartphones. And according to many analysts and semiconductor makers, as well as Mr. Howe, the lack of secondhand equipment for making microchips is one reason the chip shortage has become so acute.

We typically associate microchips with the latest and greatest technology, but it turns out that most of the chips that go into the products we use are made with older manufacturing techniques. No one knows precisely what proportion of the world’s microchips is made on used equipment, but Mr. Howe, owner of SDI Fabsurplus, estimates it might be as much as a third.

More than half the global semiconductor industry’s revenue comes from these older types of chips, says Wayne Lam, director of research at CCS Insight, a technology advisory firm. This, despite the fact that these chips are individually much less expensive than the high-end processors that are the “brains” of smartphones and laptops. A new, advanced Intel laptop processor chip costs hundreds of dollars. In contrast, many of these older-generation chips cost just a few dollars; some as little as pennies.

These chips that use more mature technology go into cameras and other sensors in our phones and cars; power-handling electronics; the logic controllers of factory equipment; the chips that enable wireless communication. It’s a shortage of these chips that is at the root of shutdowns of automobile manufacturing and Apple’s inability to meet demand for the latest iPhone, alike.

The pandemic helped trigger current chip shortages, prompting both shutdowns of factories that are critical to the manufacturing and packaging of these chips and a surge in demand for work-from-home gear and other products that use them. But that is just part of the story.

A longer-term trend, of expanding and insatiable demand for microchips in every electronic device you can name, has for years been taking slack out of the supply chains for the equipment at the heart of the supply chain for microchips.

Mr. Howe, who started his company in 1998, says that typically the semiconductor industry has gone through cycles of boom and bust that by turns fill and then empty his warehouses, which are located in Italy, Malaysia and Texas. But starting in 2016, demand for both new and used equipment for making chips has only grown, he says.

That swelling demand is due in part to the growth of the “Internet of Things” over the past five or so years, says Hassane El-Khoury, chief executive of Onsemi, a Phoenix, Ariz.-based semiconductor manufacturer that specializes in power and sensing technologies for automotive and industrial applications.

It’s not just that so much of what we buy these days has a chip in it—it’s also that some of those things have many more chips than ever before. For Onsemi, the dollar value of microchips in an electric vehicle with a driver assist system is 30 times as much as the cost of the chips in a gas-powered vehicle without such a system, says Mr. El-Khoury.

Chip demand also flows from the rise in popularity of mobile devices and the need for many more servers—aka cloud-computing infrastructure—to support it.

In the second quarter of 2021, the latest for which data are available, the semiconductor industry sold more chips than at any point in history, according to the Semiconductor Industry Association.

Chip manufacturers are responding to all this demand by pledging to make more chips than ever, but ramping up manufacturing of the kinds of chips that so many companies need right now is difficult or impossible, for a number of reasons.

One is that expanding the capacity of a fab—the factory in which microchips are made—takes months even under the best of circumstances, in part because of the almost unbelievable complexity of making chips—even those using somewhat older technology.

Making a chip with cutting-edge technology, on 12-inch circles of ​​pure, crystalline silicon known as “wafers,” requires lasers so precise they can create features on microchips just five nanometers, or billionths of a meter, thick—only slightly larger than the width of a single strand of DNA.

Those chips, which include the processors that Apple and Samsung tout whenever they come out with a new phone, may require more than 1,000 passes through different machines inside a chip-making factory, says Jamie Potter, CEO of Flexciton, a startup that makes software to help chip makers optimize their manufacturing plans.

Making chips based on older technology involves 8-inch wafers and circuitry many multiples thicker, but still requires up to 300 passes through one sort of machine or another, adds Mr. Potter.

This level of complexity means that even if a startup or less-experienced chip manufacturer can obtain chip-making equipment—China has been subsidizing domestic chip manufacturers of this sort for over a decade—it may not be able to make chips well enough to make a profit. Even the best chip manufacturers throw out on average 10% of the chips they make, and getting the percentage that low requires considerable technical expertise.

As the chip shortage has grown acute, bidding wars for used equipment have spiraled, says Mr. Howe. For example, a Canon FPA3000i4, a piece of lithography equipment manufactured in 1995, which is used to etch circuits in chips, was worth as little as $100,000 in October 2014, and today goes for $1.7 million, he adds.

Potential buyers are now left with a difficult choice if they want to expand their capacity to make older chips: either pay exorbitant prices for old equipment, assuming they can even find it, or get on a waiting list for new equipment, which often stretches to six months and beyond.

TSMC is expanding its capacity to make older chips by building a new plant for that purpose in Japan. Intel has no plans to build new capacity for manufacturing older kinds of chips, and continues to concentrate on making bleeding-edge chips, says Lisa Spelman, a vice president in Intel’s data-center group.

Continuing to build more fabs that make the newest generations of chips could help alleviate the chip shortage by creating more global capacity overall, she adds. But taking advantage of that newer capacity requires manufacturers to migrate their designs for chips from the older technology to the newer kind, says Gaurav Gupta, an analyst at Gartner covering semiconductors and electronics.

This is expensive and takes time, in part because manufacturers of chips for automobiles, for example, must verify the longevity and safety of their chips every time they come out with a new generation of them. Intel has set up a team to help automakers transition to newer chip tech.

In products where the technology has been certified for safety and durability, older chip tech is favored, says a spokeswoman for Infineon, which manufactures a variety of chips for the automotive industry. The electronics that handle the overhead lights in your car—or the chips that control your automatic windows—don’t need to be on the very latest chip tech, she adds.

Unless chip suppliers update more of their products to at least somewhat newer manufacturing technology—Dr. Gupta says that the 28 nanometer level is optimal for a number of reasons—they are left jostling for capacity at the fabs that make older-style chips, which typically have individual features that are up to 140 nanometers wide.

Even the companies that make chips are themselves affected by the chip shortage. Infineon, for example, has adequate capacity for making its own power-handling chips, but can’t get enough of the older-style microcontroller chips that its systems also require, and which it has long outsourced to third-party manufacturers like TSMC, says the spokeswoman.

The supply shocks and demand spikes of the pandemic, on top of years of growing demand for chips and the tools to make them, has represented “a complete reset of the entire semiconductor supply chain,” says Mr. Lam of CCS Insight. “Just the scale of it—I don’t think people appreciate how dramatic it has been,” he adds.

Updated: 11-9-2021

Semiconductor Industry Isn’t Spending Big On Scarce Old-Tech Chips

Less than $1 of every $6 being invested is earmarked for the ‘legacy chips’ facing the longest backlogs.

The semiconductor industry’s bets for tomorrow aren’t addressing the problems of today.

Global chip manufacturers are projected to pour about $146 billion into capital expenditures this year, a roughly one-third rise from the previous year and 50% higher than pre-pandemic 2019, according to Gartner Inc., a tech-market researcher. That investment is more than double the industry spending of five years ago.

But less than $1 of every $6 is earmarked for the so-called legacy chips facing the longest backlogs right now, Gartner estimates.

The small investment reflects how the scarcest chips—many sold for just a few dollars apiece—get made with older technology and equipment that requires less money to procure. But it also shows that many semiconductor makers are cautious about making multibillion-dollar bets on the needed chips given the slim profits and risk of falloff in demand.

Three firms— Taiwan Semiconductor Manufacturing Co. , Samsung Electronics Co. and Intel Corp. —account for about three-fifths of all 2021 spending, Gartner says. Nearly all of that is going toward new capacity for chips built on cutting-edge technology, the type that have largely remained plentiful.

The spending direction likely means a continually tight supply of run-of-the-mill chips used in cars, home appliances and gadgets, according to industry analysts. It also suggests the wait for orders may remain long, they say.

On Tuesday, TSMC and Sony Group Corp. said they would build a $7 billion chip plant in Japan to make semiconductors based on older technology, in an effort to fill some of the gap. The plant isn’t set to start mass production until late 2024, so it won’t help solve the problems hitting production of cars and electronics. While a significant outlay, it also doesn’t move the needle much in terms of overall global investment.

The mismatch reflects the imbalance in the world’s chip-supply problem: Not all chips are created equal in the $464 billion semiconductor industry.

The gap in financial rewards between the two worlds of chip production, newer and older, is stark. A 5-nanometer wafer for advanced chips—which allow apps to run on the latest smartphones such as the iPhone 13—sells for about $17,000 as of this year, according to Bain & Co., a management-consulting firm. That price compares with roughly $3,000 for a 28-nanometer wafer for “legacy” semiconductors that perform simpler functions such as connecting devices to Wi-Fi networks.

The semiconductor world categorizes itself by nanometers, or the size of the transistors used for production. The smaller the transistor, the newer and more advanced the process technology and the greater the number of chips that can be made on a single silicon wafer.

The chips made using the 28-nanometer process or larger are generally considered legacy chips, with higher numbers denoting older technology. Chips made using smaller-nanometer processes are seen as advanced, with the most cutting-edge chips being produced on single-digit nanometer processes.

Spurred by economic reopenings and rebounding consumption, companies around the world in various sectors have begun a “red-hot capex cycle,” according to Morgan Stanley estimates. Global investment will return to pre-pandemic levels this year and surpass them next, Morgan Stanley says.

But no industry right now is accelerating investments the way chip makers are. Of the 20 industries with the biggest capex outlays, the semiconductor sector’s year-over-year leap in capital expenditures this year is the largest at 32%—about 2.5 times bigger than the average, according to S&P Global Ratings, based on analysis of the world’s 2,000 largest nonfinancial public companies.

The semiconductor world’s spending on advanced chips is often planned and executed in close coordination with the needs of buyers. “They’ve generally done a good job” historically, said Christopher Taylor, a director at market-researcher Strategy Analytics who focuses on tech components.

The uptick reflects how much next-generation semiconductors cost to produce. A single chip-making plant, or fab, can cost up to $20 billion.

Setting up “clean rooms”—needed to ensure the chips stay free of impurities—can cost half a billion dollars. A single photolithography machine, which imprints chip designs on a silicon wafer, can stretch to $150 million. Even process-control equipment can total $10 million apiece. The latest advanced fabs may have hundreds of these types of machines.

Makers of semiconductor equipment are flourishing. Lam Research Corp. , a Fremont, Calif.-based firm that makes wafer-processing equipment, has reported six straight quarters of record revenue. Netherlands-based ASML Holding NV, the only producer of the industry’s most advanced lithography equipment, is fully booked through the start of 2023.

“I would not think of this as a peak,” said ASML Chief Executive Peter Wennink on a recent earnings call. Sales could climb through 2025, he said.

Going forward, the restrained bets on the hardest-hit types of semiconductors mean that the world’s legacy-chip supply won’t catch up with projected demand through 2024, Counterpoint Research, a tech-market researcher, estimates.

Many legacy-chip makers are hesitant to make big investments for new capacity because by the time a new factory starts production in a few years, there may not be the same demand, resulting in underused plants and losses. “If you think about oversupply, that’s very scary,” said Dale Gai, a Taiwan-based research director at Counterpoint who focuses on semiconductors.

Also, a new factory for older-technology chips, such as a 28-nanometer facility, would lose money because of the upfront costs and lower production yields at the start—something the biggest competitors, operating depreciated machinery in years-old factories with efficient cost structures, wouldn’t face, said Peter Hanbury, a partner at Bain who specializes in semiconductors.

Taiwan-based United Microelectronics Corp. , a major producer of the world’s legacy chips, has noted how such market considerations make it challenging to expand capacity for older-technology chips made on 8-inch and 12-inch wafers.

“If the economics stays the same, it will be very difficult to have a justified return on investment,” UMC Co-President Jason Wang told investors in July.

Government subsidies can play a role in motivating chip manufacturers to build new plants, but they are concentrated on next-generation chip technologies. In June, the U.S. Senate approved $52 billion in funding to support semiconductor research and production, but just $2 billion was earmarked for legacy chip production.

Some legacy-chip makers are boosting investments to levels they say reflect a prudent response to demand. UMC has pulled the trigger on a $2.3 billion expansion this year—but only after securing advance bookings from customers and locking in pricing.

Two auto-chip players, STMicroelectronics NV and Infineon Technologies AG , plan to invest $2.1 billion and $1.2 billion respectively this year for capacity expansions, according to Gartner. Texas Instruments Inc., which manufactures analog chips for automotive and industrial applications, has spent $1.2 billion in capital expenditure this year through the end of September.

Still, many legacy-chip makers are inclined to hold off on big bets because “rational capacity” is a principle that has shaped the industry for decades, Bain’s Mr. Hanbury said. “The last thing you want to do is spend billions on a new plant and not have it loaded” with orders, he said.

Updated: 11-11-2021

There’s A Glut Brewing In A $161 Billion Slice Of The Chip Sector

Accounting for almost 30% of the global market, memory semiconductors are facing oversupply and falling prices.

A crucial part of the semiconductor sector will likely be hit by an oversupply next year, pushing prices down and highlighting the vagaries of an industry that’s now facing a debilitating shortage of other components. That may mean falling earnings for some companies, but likely won’t make your new car arrive any sooner.

Prices of DRAM, the most ubiquitous of chips, will likely fall 15% in 2022 after buyers stocked their shelves this year to cope with global supply chain snarls. These semiconductors play a crucial role in all electronics by temporarily holding information used by a system’s processor.

But they’re also a commodity product, making the market susceptible to even minor swings in the supply-demand balance — and that’s what we’re likely to see over the coming 12 months, according to industry researcher TrendForce Corp.

While demand is forecast to climb 17.1%, supply growth will be stronger at 18.6%, the Taipei-based company noted recently. But even that small difference is enough to drive prices down. A similar phenomenon is likely to occur in the other major memory chip category of NAND, which is used to store data in smartphones and computers, though with a less-severe decline of up to 5%.

Samsung Electronics Co., the biggest maker of both types, is already bracing for the downturn. Last month the South Korean company forecast shipments of DRAM, measured in bits, would be unchanged this quarter. In a sector where technological progress leads to unstoppable supply inflation, zero growth is a sign of downturn. Even in NAND the global leader will likely manage to boost volume by less than 10% for the period.

It’s not alone. Micron Technology Inc., the biggest U.S. supplier, in September forecast revenue well below expectations for the quarter ending this month, prompting a sell off in the company’s shares. The Boise, Idaho-based company pointed to slowing PC demand, after a blockbuster 18 months driven by the pandemic-inspired shift to work-from-home.

SK Hynix Inc., the world’s second-largest, is more optimistic. A possible inventory correction, as customers digest existing stockpiles, coupled with continued supply chain uncertainty, will continue to weigh on demand. Yet the South Korean company sees hope as data centers and cloud-computing providers continue expansion, and thus buy memory chips.

Unfortunately, such oversupply doesn’t afford much opportunity for these companies to divert capacity at their multi-billion dollar factories to churn out the semiconductors that remain in shortage.

That’s because the $161 billion memory sector — which accounts for 29% of the global chip market — is so specialized that the equipment used to make such chips can’t be readily switched to produce other types, such as processors or sensors. And simply turning off the spigot won’t help much because their major cost is depreciation, which shows up on the earnings statement whether they make a billion chips or just one.

Instead, memory-chip makers will be left churning out their commodity components, while making strategic tweaks such as redirecting capacity to specialized versions used in smartphones or cars. But even that approach may have limited effect if the rest of the supply chain can’t keep up, leaving piles of memory waiting to be installed in devices.

So while one part of the industry struggles to keep up, another will be trying to slow down, and the world is left ruing the fact that not all chips are created equal.

Updated: 11-12-2021

TSMC Founder Says Free Trade Recently Comes With ‘Conditions’

Taiwan Semiconductor Manufacturing Co. founder Morris Chang reiterated the value of free trade to solve supply problems in the critical chip industry, while cautioning that’s been accompanied by more conditions of late.

Chang, who was speaking as Taiwan’s envoy to the Asia-Pacific Economic Cooperation leaders’ meeting, on Friday said there’s concern that “recently ‘free trade’ seems to carry more conditions and qualifications than it used to.” Such “conditions” referred to the U.S. planning to make more chips domestically, he later told a media briefing.

His comments come as Taiwan’s dominant position in the semiconductor business has come under pressure, amid the persistent global chip shortage and calls in Washington and Beijing for domestic chipmakers to increase self-reliance. TSMC itself, as the world’s biggest chipmaker, will build a plant in Japan and is considering a new factory in Germany.

“While shortage of any critical component is a serious problem, free market, which includes free trade and free competition, is still the best solution,” Chang said. He has previously warned that efforts by governments around the world to build domestic chip supply chains could push up costs and still fail to achieve self-sufficiency.

Chang said that the stepped-up building of chip making capacity, in response to recent shortages, underscores the importance of the free market. The shortage is a culmination of an original under-estimation of demand, natural disasters, logistical jams and a surge in digital demand, he said.

White House Spurns Intel Plan To Boost Chip Production In China

The Biden administration spurned a plan by Intel Corp. to increase production in China over security concerns, dealing a setback to an idea pitched as a fix for U.S. chip shortages, according to people familiar with the deliberations.

Intel, the world’s largest chipmaker, has proposed using a factory in Chengdu, China, to manufacture silicon wafers, said the people, who asked not to be identified because the discussions were private. That production could have been online by the end of 2022, helping ease a global supply crunch. But at the same time, it’s been seeking federal assistance to ramp up research and production in the U.S.

When presented with the plan in recent weeks, Biden administration officials strongly discouraged the move, the people said.

The situation underscores the challenges of the chip shortage, which has hobbled the tech and auto industries, cost companies billions in lost revenue and forced plants to furlough workers. The administration is scrambling to address constraints, but it’s also trying to bring production of vital components back to the U.S. — a goal Intel’s China plan didn’t serve.

In a statement, Intel said it remains open to “other solutions that will also help us meet high demand for the semiconductors essential to innovation and the economy.”

“Intel and the Biden administration share a goal to address the ongoing industrywide shortage of microchips, and we have explored a number of approaches with the U.S. government,” the company said. “Our focus is on the significant ongoing expansion of our existing semiconductor manufacturing operations and our plans to invest tens of billions of dollars in new wafer fabrication plants in the U.S. and Europe.”

The episode comes as the White House is debating whether to restrict certain strategic investments into China. National Security Adviser Jake Sullivan has said the administration is considering an outbound investment screening mechanism and is working with allies on what it could look like. President Joe Biden also is set to meet virtually with Chinese President Xi Jinping on Monday.

A representative for the White House declined to comment on specific transactions or investments, but said the administration is “very focused on preventing China from using U.S. technologies, know-how and investment to develop state-of-the-art capabilities,” which could contribute to human rights abuses or activities that threaten U.S. national security.

Like other chip companies, Intel is eagerly waiting for Congress to pass $52 billion in funding for domestic research and manufacturing. That proposal, called the CHIPS Act, has been lingering in the House for months. The president and Commerce Secretary Gina Raimondo have been pitching the measure as a way to compete with China — as well as preventing supply crunches in the longer term.

Following deliberations with the Biden team, Intel has no plans to add the production in China at the moment, a person familiar with the decision said. Still, such scenarios could arise again, and the administration may need to decide what rules come attached to the grant money.

Some Republican lawmakers have said that the money shouldn’t come without strings attached. They’ve pushed for guardrails to prevent companies from taking the grants and then still increasing their presence in China.

The purpose of the CHIPS bill is to “ensure less dependence on vulnerable supply chains, including with respect to semiconductors,” according to the White House statement. When asked about potential guardrails in the implementation of the bill, the representative said Congress hasn’t yet appropriated the funding.

At the same time, shortages have become a bigger political issue. Carmakers are losing more than $200 billion in revenue because of the lack of chips, and workers at idle plants have lobbied politicians to do something about it. Even giant companies with fine-tuned supply chains aren’t immune. Apple Inc. expects to miss out on more than $6 billion of sales this quarter because it can’t get enough components.

Intel Chief Executive Officer Pat Gelsinger, meanwhile, is trying to cope with the heightened level of public and governmental scrutiny surrounding the chip industry. The $400 billion business has become a key battleground in the increasing rivalry between China and the U.S., forcing companies operating in the Asian nation to navigate more obstacles.

The chip industry has a complicated relationship with China, one that became much more difficult during the Trump administration’s trade war.

China is the biggest consumer of semiconductors for local use, and it serves as the assembly center for much of the world’s electronics. To help with logistics and to keep Beijing happy, chipmakers — including Intel — have located plants there. But they face longstanding U.S. government restrictions that prevent them from exporting cutting-edge semiconductors to the country.

Intel also is trying to take on the world’s biggest contract manufacturers of semiconductors, increasing its production needs — and its potential reliance on China. To challenge the leaders in that industry, Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co., Intel needs to be able to support Chinese customers or lose out on a huge chunk of the market.

Intel’s plants have previously only manufactured chips of its own designs, mainly the processors used by the personal-computer industry. But it faces mounting competition from products made by TSMC and Samsung, so Gelsinger’s strategy is to challenge them at their own game.

Intel is already opening two new plants near an existing site in Arizona to help with these efforts. The company has also said it will be building in Europe.

Gelsinger has argued that relying too much on outsourced production in Asia is a supply chain risk. He’s lobbied for public money around the world to support spreading chipmaking capabilities to different areas. But TSMC and Samsung aren’t standing still themselves: They’re expanding in new areas too, including by adding new plants in the U.S.

U.S. Companies Aid China’s Bid For Chip Dominance Despite Security Concerns

Silicon Valley venture-capital firms and chip-industry giants are ramping up deals in China’s semiconductor industry, alarming U.S. officials.

U.S. firms and their China affiliates are ramping up investment in Chinese semiconductor companies, aiding Beijing’s bid for chip-sector dominance and complicating Washington’s efforts to preserve America’s lead in the critical technology, a Wall Street Journal investigation has found.

U.S. venture-capital firms, chip-industry giants and other private investors participated in 58 investment deals in China’s semiconductor industry from 2017 through 2020, more than double the number from the prior four years, according to an analysis of deals data by New York-based research firm Rhodium Group done at the Journal’s request.

Major chip company Intel Corp. is among the active investors, backing a Chinese company now called Primarius Technologies Co., which specializes in chip-design tools that U.S. companies currently lead in making, a separate Journal review of data from analytics firm PitchBook Data Inc. shows.

Beyond that, the China-based affiliates of Silicon Valley venture firms Sequoia Capital, Lightspeed Venture Partners, Matrix Partners and Redpoint Ventures have made at least 67 investments in Chinese chip-sector companies since the start of 2020, the Journal found.

While the sums invested in many of the deals aren’t disclosed, the investors participated in financing rounds that overall raised billions of dollars for China chip startups, the Journal found.

The investment wave is hitting a flashpoint in the competition between the U.S. and China to dominate technologies they see as pivotal to future geopolitical primacy. Semiconductors underpin everything from mobile phones and autos to artificial intelligence and nuclear weapons, and since last year they have been in short supply around the globe.

Alarmed by the spate of deals, some officials and lawmakers in Washington are considering closing gaps in regulation. National security adviser Jake Sullivan said in a speech in July that the Biden administration is “looking at the impact of outbound U.S. investment flows that could circumvent the spirit of export controls or otherwise enhance the technological capacity of our competitors in ways that harm our national security.”

Beijing is in the midst of a full-throttle, heavily subsidized drive to become self-sufficient in chips, and U.S. national-security officials and industry consultants said the U.S. investment is assisting that push. China’s governing State Council and its Ministry of Industry and Information Technology didn’t respond to requests for comment.

“It’s a capital-intensive sector, and capital matters to picking the winners,” said Nathan Picarsic, co-founder of Horizon Advisory, a China-focused research and consulting firm.

Overall, the U.S. companies investing in China’s chip sector said those deals pale next to their domestic investments. Intel Capital, the chipmaker’s venture-capital wing, said its China investments are less than 10% of the deals in a global portfolio designed to support its business and generate returns.

Sequoia and Redpoint said the China deals were done by their China-based counterparts independent of the Silicon Valley offices and from separate funds. Lightspeed, via a spokeswoman, declined to comment. Matrix didn’t respond to a request for comment.

Washington has tried to stymie China’s progress, placing tougher controls on exports of software, equipment and other technology used to make chips in recent years and crafting new policy and plans to spend billions to strengthen the U.S.’s edge in semiconductor manufacturing and design.

White House National Security Council officials have met with aides to Sens. Bob Casey (D., Pa.) and John Cornyn (R., Texas), who are sponsoring legislation that would screen outbound U.S. investments and the offshoring of critical supply chains and tech-industry resources to adversaries like China and Russia, one of the aides said.

The bill aims to scrutinize outbound investment currently not covered by export controls or the Committee on Foreign Investment in the U.S., an interagency panel that reviews deals with U.S. companies for national-security concerns.

“For too long, corporate interests have prioritized their bottom lines without regard to the broader American economy or our national security,” Mr. Casey said in a statement.

Business groups including the U.S. Chamber of Commerce and the U.S.-China Business Council are lobbying against the Casey-Cornyn bill, according to another congressional aide.

A spokesman for the U.S.-China Business Council said that “regulation of outbound capital flow is unprecedented in 250 years of American history” and that current export controls are sufficient to protect national security. The U.S. Chamber didn’t respond to requests for comment.

Meanwhile, Beijing is turning to making more-advanced chips, focusing on areas of the semiconductor supply chain where China is weak and the U.S. is dominant, such as electronic design automation (EDA) software tools for designing and testing chips.

In August 2020, China’s State Council upgraded a set of financial incentives that highlight EDA software companies, offering years of generous tax breaks.

That prospect of near-guaranteed government support is attracting the U.S. companies, China analysts and technology investors said. A chip startup, they said, would almost certainly be able to get government funding to boost its valuation and accelerate its growth or, at a minimum, keep it from going belly-up.

“China’s semiconductor industry is an industrial-policy-driven bubble,” said Thilo Hanemann, a partner with Rhodium Group, the research firm. He noted that published statistics from the U.S.’s Semiconductor Industry Association put the number of new Chinese semiconductor companies established in 2020 at more than 22,000, an increase of 200% from the year before.

In 2020, the number of China’s chip-sector deals that U.S.-based venture capitalists and other private investors participated in hit an all-time high of 20, Rhodium found. There have been an average of 14 to 15 deals a year since 2017—a period when U.S. policy makers began trying to block China from investing in U.S. chip companies or buying their products. The prior four years, during which the U.S. was more open to Chinese investment, saw five or six such deals a year, according to the Rhodium data.

San Francisco-based Walden International is among the most prolific U.S. investors in Chinese semiconductors. During the 2017-20 period it made 25 investments in Chinese chip companies, according to the data, participating in more than 40% of the total deals Rhodium tracked.

Executives at Walden didn’t respond to requests for comment. In a speech last month, Walden’s managing director in China, Hing Wong, alluded to U.S.-China tensions, saying “the impact from various geopolitical events has in fact accelerated the upgrade of Chinese semiconductor companies.”

The data Rhodium analyzed focuses on U.S.-domiciled entities making equity investments in China. It doesn’t include other types of investment that national-security officials see as relevant, such as investments by China-based affiliates of U.S. venture-capital firms or U.S. limited-partner contributions to Chinese funds.

Sequoia Capital’s China unit has made at least 40 investments in Chinese chip-sector companies since 2020, the Journal found, including several aiming to build the advanced tech where the U.S. wants to preserve its lead.

Those deals include investments in MetaX Integrated Circuits (Shanghai) Co. and Moore Threads Intelligent Technology Beijing Co., according to PitchBook. Both Chinese firms specialize in graphics-processing units, a chip technology that is used to train artificial intelligence and that U.S. company Nvidia Corp. dominates.

A spokeswoman for Sequoia Capital said that each of Sequoia’s investing units, which invest in different geographies, has a separate team that makes its investment decisions independently under the Sequoia brand.

The startups backed by Sequoia Capital China have touted their high-profile funder and suggested the investment will be used to further Beijing’s technology objectives.

MetaX’s founder and CEO, Chen Weiliang, said in a speech last month that the company is working with the government and others “to help our country get rid of its dependence on foreign high-performance chips,” according to the company’s account on the WeChat social-media service.

A post on Moore Threads’s WeChat account seeking job candidates said that within just 100 days of its launch in October 2020, it raised billions of yuan from investors like Sequoia Capital China and that its “core members are mainly from Nvidia” and other top U.S. tech companies.

A MetaX spokeswoman asked the Journal to remove all mention of the company and its CEO from this article. Moore Threads didn’t respond to requests for comment.

National-security specialists and venture capitalists with expertise in China say companies like Sequoia and Lightspeed can’t sever themselves from their China-based counterparts. Chinese startups, they say, seek out these highly regarded firms for their U.S. connections, and the limited partners who invest in China-based funds often include U.S. investors.

The Chinese funds of Sequoia and others can also lean on their U.S. flagships for operational expertise, relationships with U.S. customers and other resources.

“These are great brand names there,” said Winston Ma, adjunct professor at New York University School of Law and a former executive at China’s sovereign-wealth fund. “It’s more about the glamour of the Sequoia headquarters than Sequoia China.”

Chip Shortage Sparks War of Words Between Top EU Officials

France’s top European Union official took a thinly veiled swipe at EU antitrust chief Margrethe Vestager’s “naive” and “narrow-minded” stance in a clash over how to tackle a dearth in semiconductor supplies.

Thierry Breton, the European Commission’s internal market chief, said Friday the EU should grab the chance to become a global powerhouse for chips. His words echo a French push for more state funding to help European companies succeed internationally.

“Believing Europe should depend on others for chips is an illusion,” he said at an event in Dresden, Germany. “Believing we could be satisfied with the partial control of this strategic supply chain is naive” and “believing we should miss out” on producing for the EU and rest of the world “would be narrow-minded.”

Breton’s comments came just hours after Margrethe Vestager, the EU’s powerful antitrust chief, said “self-sufficiency is an illusion” and “no country and no company can do it alone.” She cautioned against huge unfocused subsidies that could see taxpayers pick up the bill for business risks.

The war of words highlights a split between France and Germany against the EU’s restrictive state aid rules as the region struggles with a shortage of chips for cars and devices. Both countries have called for more room to help their companies build innovative technology and catch up with Chinese rivals that get generous government help.

Semiconductor shortages have forced European car plants to lay down tools and made politicians call for greater chip production in Europe. Governments have talked about spending billions of euros to expand chip production at home. Intel Corp. has discussed building a European plant if it secures state support.

Breton said Europe needed “full production capacity” and rules that allowed that to happen, a direct attack on Vestager’s control of subsidies. She can stop state aid judged to unfairly favor one firm over others.

The European Union would need to invest up to 330 billion euros ($378 billion) upfront to fully supply its own chip demands, Vestager said. Such a move would lead to “more expensive chips and a negative impact on all kinds of markets.”

Vestager has previously voiced skepticism at channeling funds to “very big” chip producers, echoing calls from smaller European chipmakers that they also need help to provide chips for industries hurt badly by shortages.

Updated: 11-18-2021

GM Will Co-Develop Chips With Several Producers To Secure Supply

General Motors Co. President Mark Reuss said Thursday the company will co-develop semiconductors with several producers to make chips that can handle more electronic features in its vehicles, a revamp of strategy that comes as a shortage of these items continues to roil the global auto industry.

GM currently uses a wide assortment of semiconductors in its cars. It now plans to reduce the types of chips it uses to just three families of semiconductors over the next several years. That would reduce the variety of chips GM orders by 95%, making it easier for producers to fulfill the company’s needs and boosting margins, Reuss said at the Barclays Auto Conference.

Reuss said GM needs to cut down on semiconductor complexity because the rapid increase in high-tech functions in its new models, along with the company’s rapid push into electric vehicles, means the automaker needs a lot more chips.

“We see the semiconductor requirements more than doubling over the next several years as the vehicles we produce become more of a technology platform,” Reuss said.

GM will be working to develop the chips with Qualcomm Inc., STMicroelectronics NV, Taiwan Semiconductor Manufacturing Co., Renasas Electronics Corp., ON Semiconductor Corp., NXP Semiconductors NV and Infineon Technologies AG, Reuss said.

The Detroit automaker last month reported its third-quarter sales fell 33% and profits were almost half what they were a year ago because of lost production due to a lack of chips. Chief Executive Officer Mary Barra said in October that she expects the semiconductor shortage to last into the second half of 2022.

Ford Explores Buying Chips Directly From Globalfoundries To Offset Shortage

Ford Motor Co., responding to a global semiconductor shortage that’s crimped profits and production, will explore buying chips directly from GlobalFoundries Inc.

The automaker said Thursday it’s forming a “strategic collaboration” with GlobalFoundries, which went public in a $2.6 billion listing last month and recently moved its headquarters from California to Malta, New York, where it’s expanding a foundry to add capacity.

“If everything progresses as we hope, Ford and GlobalFoundries will team up to grow the supply for Ford’s current vehicle lineup, and also do R&D work together,” Chuck Gray, vice president of embedded software and controls for the Dearborn, Michigan-based automaker, said in an interview. “It’s an important step in our plans to vertically integrate key technologies.”

The chip shortage has dented profits at carmakers including Ford, and cost the global auto industry $210 billion in lost production, according to the consulting firm Alix Partners. The crisis has also forced auto executives to rethink their supply-chain strategies and consider doing chip design in-house as computing and software become central to modern vehicles.

Ford Chief Executive Officer Jim Farley has called the chip shortage “the biggest supply shock” he’s ever seen, and said the company would get more deeply involved in semiconductor production, dealing directly with chipmakers, rather than relying on so-called Tier One suppliers to act as middlemen.

Ford already uses chips from GlobalFoundries, but the crisis forced the two companies to speak directly and forge a closer relationship, said Mike Hogan, head of automotive at the chipmaker.

The agreement marks one of the first direct tie-ups between a major automaker and a chip producer to result from the semiconductor shortfall.

Shares of GlobalFoundries pared an early gain of as much as 7.5% to trade up 5.8% to $66.34 as of 9:39 a.m. in New York. Ford rose 1% to $20.06.

The two companies announced the nonbinding collaboration the same week that governors from nine states, led by Michigan Democrat Gretchen Whitmer, sent a letter to top congressional leaders urging them to advance legislation that would provide $52 billion in aid to semiconductor producers and ease a shortage for manufacturers.

GlobalFoundries, which hosted Ford executives at its plant in New York this summer, would be a potential beneficiary of such legislation. The company, which has plants in Europe, Asia, and the U.S., was created through the purchase of the manufacturing operations of Advanced Micro Devices Inc. in 2009 and later combined with Singapore’s Chartered Semiconductor.

Updated; 11-19-2021

Japan Looking To Pay At Least Half Setup Costs of Chip Fabs

Japan is looking to stump up around half the setup costs of semiconductor factories built in the country and attract U.S. manufacturers as it looks to shore up its chip supplies, according to senior Japanese officials.

Prime Minister Fumio Kishida’s record 56 trillion yen ($490 billion) fiscal stimulus unveiled Friday didn’t specify how much money would be made available, but the premier promised his government would keep looking to attract chipmakers to set up production facilities in Japan.

Those facilities include a new $7 billion chip factory in western Japan planned by Taiwan Semiconductor Manufacturing Co. and Sony Group Corp.

“TSMC has been a big topic recently for our national economic security,” Kishida said Friday. “But it doesn’t end there. It’s important we attract U.S. chipmakers and take other action to increase possibilities for the private sector.”

Trade minister Koichi Hagiuda meanwhile hinted that Japan was willing to pay half the costs or more, while confirming that the final amount to be set aside has yet to be decided.

The comments come amid local media reports that the government is planning to budget around $6.7 billion in an upcoming extra budget to support efforts to enhance the nation’s chip facilities.

Shoring up Japan’s chip fabrication expertise and capacity would provide essential support for the needs of domestic companies like Toyota Motor Corp., Nintendo Co. and Sony, each of which has faced severe production challenges due to silicon shortages. The task has become a national priority for Kishida as he emphasizes the importance of economic security.

“Given a trend for countries to provide half the initial setup costs or more, we’d also like to think along those lines for new chip fabs,” Hagiuda said.

The first recipients of government help are likely to be Sony and TSMC for their factory, which Kishida promised to help get built.

TSMC approved an initial investment of up to $2.12 billion to create a Japan-based subsidiary, the Taiwanese chipmaker said earlier this month, with Sony Semiconductor Solutions Corporation investing $500 million in that subsidiary. However, the government hasn’t so far made clear how much of the remaining $4.4 billion it will pay or which other companies are investing.

As the car industry’s move toward more automated and electric vehicles accelerates, each vehicle will require more semiconductors for sensors and processing of environmental data, escalating the need for chips.

Local media in Japan and in Taiwan have reported that Denso Corp., one of Japan’s largest autoparts companies, may be among the potential partners in the TSMC deal.

Denso declined to comment on the reports, as did all the other major Japanese car manufacturers.

Construction of the TSMC fab is set to begin in 2022 with production expected to start by the end of 2024. The chip plant is expected to create about 1,500 jobs with a monthly capacity of 45,000 12-inch wafers initially made with mature 22- and 28-nanometer technologies.

Japan’s plans to reboot its industry come as China, the U.S. and even the European Union also look to strengthen their own domestic sectors.

U.S. Commerce Secretary Gina Raimondo said this week that the U.S. wanted to both increase its own chip output and work closer with its allies on securing supplies, creating opportunities for Japanese industry to collaborate and expand.

Semiconductor Stocks Soar As Chip Shortage Persists

Nvidia, Qualcomm and AMD are all up more than 30% over the past month, far outpacing the S&P 500.

The global chip shortage has been bad news for people trying to buy cars and companies looking to manufacture appliances. But it has been great news lately for investors in semiconductor stocks, some of which have been performing at the top of the S&P 500 over the past month.

Shares of Nvidia Corp. have gained 48% over the past month, while shares of Qualcomm Inc. have risen 40% and shares of Advanced Micro Devices Inc. have added 34%. The S&P 500, by comparison, has risen 3.9% over that time.

For months the global semiconductor shortage, driven by factors on both the demand and supply sides of the economy, has limited production of cars and affected makers of home appliances, heavy equipment and data servers. In recent weeks, reports from semiconductor companies during earnings season have spurred analysts’ expectations that demand for chips will exceed supply for even longer.

Three months ago, semiconductor companies generally expected that supply and demand might reach a balance by the middle of 2022, said Chris Caso, an analyst covering semiconductors at Raymond James. Earnings season shifted that forecast further out.

“When we talk about the supply and demand balance, which is where we kind of get back to normal, we probably are not going to see normal for most of 2022,” Mr. Caso said. He said the imbalance might even stretch into 2023.

The group of stocks got another boost this past week after Nvidia reported higher-than-expected sales and earnings. Business has boomed since the pandemic drove up demand for videogames and digital services that run on data centers. The company’s shares rose 8.2% Thursday and 4.1% Friday.

Such strong financial results have buoyed the group. Analysts expect that earnings from semiconductor and semiconductor-equipment companies in the S&P 500 grew 56% in the third quarter from a year earlier—more than the 40% profit growth projected from the full membership of the stock index, according to FactSet. Sales growth from the group is also expected to exceed that of the S&P 500.

“You keep reading about all the shortages and the problems that are happening in the auto industry—that’s kind of the poster child for the shortages—but the sector as a whole is actually pretty healthy in terms of revenue and earnings growth,” said Daniel Morgan, senior portfolio manager at Synovus Trust Co.

After two straight months of declines, industrial production of motor vehicles rose 18% in October, according to Federal Reserve data released Tuesday.

Qualcomm shares rose to records this week after the company’s chief executive shared ambitious targets for his plan to diversify from cellphone chips into sales for cars and connected devices.

Semiconductor stocks also have benefited from expectations that economic growth will reaccelerate after a slowdown caused by the Delta-driven surge in Covid-19 cases and supply-chain bottlenecks.

“The semiconductors, they’re basically like cogs in the machine, meaning industrial production or auto production,” said Diane Jaffee, a senior portfolio manager on TCW’s relative value team. “If those machines are not cranking at a steady pace, they are much more subject to big swings up and big swings down in terms of their demand.”


Updated: 11-21-2021

Samsung To Name U.S. Plant Location This Week, Yonhap Says

Samsung Electronics Co. will announce the location of its new chip plant in the U.S. this week, following Vice Chairman Jay Y. Lee’s trip to the country and Canada, Yonhap News reported.

Taylor, Texas, northeast of Austin, is thought to have the inside track for the new plant after offering incentives. Samsung is also considering nearby Manor, Texas, as well as Phoenix, or a location in Upstate New York, Yonhap reported.

Lee met with White House officials to discuss ways to resolve global chip shortages and incentives to be offered for the tech giant if it builds a plant in the U.S., Yonhap said, citing unidentified people at the South Korean company.

Lee, de facto head of the chipmaker, will announce the location this week after he returns to Korea, Yonhap said, citing an unidentified U.S. Congressional source.

Lee left on Nov. 14 for his first overseas business trip since his release from prison on parole in August. During his trip, he met with Satya Nadella, chief executive officer at Microsoft Corp. and Andy Jassy, CEO of Amazon Inc., Samsung said in a statement.

Updated: 11-22-2021

Samsung To Choose Taylor, Texas, For $17 Billion Chip-Making Factory

Announcement is expected at Tuesday event to be attended by Texas Gov. Greg Abbott.

Samsung Electronics Co. plans to build a roughly $17 billion chip-making plant in Taylor, Texas, according to people familiar with the matter, a mega investment by the South Korean tech giant, as the Biden administration pushes for an expansion of U.S. semiconductor production.

An announcement could come as early as Tuesday, people familiar with the matter said. Gov. Greg Abbott is scheduled to make an “economic announcement” Tuesday at 5 p.m. local time.

The Taylor facility, located in central Texas, plans to create around 1,800 jobs, though chip production isn’t expected to start until the end of 2024, according to documents Samsung had previously filed with Texas authorities. To woo Samsung, Taylor had offered incentives that include the equivalent of property-tax breaks of up to 92.5% for the first 10 years, with the write-offs gradually declining over the next several decades.

“A final decision has not yet been made regarding the location,” a Samsung spokeswoman said.

Samsung’s doubling down on Texas where it already has a footprint comes amid a year of historic spending for the semiconductor industry, spurred by government incentives seeking to attract local production. A global chip shortage has undercut many industries from smartphones and home appliances to cars.

Samsung, the world’s largest semiconductor maker by revenue, plans to invest more than $205 billion over the next three years, with chip-making a priority. Taiwan Semiconductor Manufacturing Co. has earmarked more than $100 billion over the next three years to build new chip factories. Intel Corp. has also unveiled more than $100 billion worth of semiconductor factory investments plans in the U.S. and Europe over the coming decade.

Bolstering American production of chips has been a priority for both the Biden administration and Congress, which have set in motion legislation to provide funding to stimulate investment in the U.S. In June, the Senate approved $52 billion in direct industry subsidies for new semiconductor-making factories, though the House has yet to take action.

The U.S. has fallen behind in semiconductor manufacturing, accounting for just 12% of world-wide production capacity in 2020—down from 37% in 1990, according to the Semiconductor Industry Association. China, Taiwan and South Korea have become larger production hubs for computer chips that lawmakers have come to see as a resource critical to national security and economic growth.

Before landing on Taylor, Samsung had previously scouted locations in Arizona, New York and Florida, according to people familiar with the process. The company had also considered Austin, Texas, where Samsung has operated its sole U.S.-based chip-making plant for decades, the people said.

Taylor, a town of about 16,000 people in Williamson County, is about 30 miles away from Austin. The planned site of roughly 1,200 acres is much larger than Samsung’s property in Austin.

The Taylor factory is expected to serve as an advanced chip-making facility for Samsung’s contract-manufacturing operations that make semiconductors designed by other firms. Such high-end manufacturing is attracting the bulk of semiconductor industry investment. The types of chips with the longest backlogs tend to be lower-priced and haven’t been the focus for massive expansion.

The Samsung investment also represents another victory for Texas’s ambitions as a tech hub. In October, Tesla Inc. said it was moving its headquarters to Austin, coming months after Chief Executive Elon Musk had moved to the Lone Star State. Intel has said it would hire about 1,700 people for a downtown Austin design campus.

Samsung’s decision on the location of its new U.S. chip plant comes months after the parole of the South Korean conglomerate’s de facto leader, Lee Jae-yong in August. Mr. Lee had been behind bars after being convicted of bribing South Korea’s former president in exchange for government backing for a 2015 merger between two Samsung affiliates that helped cement his ownership of the conglomerate. He was released about a year early.

The return of Mr. Lee, the 53-year-old grandson of Samsung’s founder, had come with expectations for bold moves after his supporters argued that South Korea’s largest business conglomerate had become indecisive in his absence. The Justice Ministry pointed to “economic factors” when granting Mr. Lee parole. Major decisions at Samsung require Mr. Lee’s signoff.

In recent days, Mr. Lee has been on a business trip in the U.S., with Samsung sharing photos of visits with the CEOs of Moderna Inc. and Verizon Communications Inc. Mr. Lee also met with White House officials and lawmakers as well as Microsoft Corp. Chief Executive Satya Nadella, the company said. Mr. Lee is unlikely to be in Texas for the Tuesday event, according to a person familiar with the situation.

South Korean foreign direct investment to the U.S. hit $62.4 billion in 2020, an increase of 14% from the prior year, according to U.S. Commerce Department data. In May, South Korean President Moon Jae-in met President Biden at the White House, where the two countries pledged deeper cooperation on supply-chain issues. South Korean firms at the time also outlined U.S. investment plans.

Samsung’s Texas Deal Shows It Makes More Than Great Chips

Corporate welfare is alive and well in the U.S., and now the Lone Star state has a semiconductor factory it may have won anyway.

Lobbyists for Samsung Electronics Co. deserve to drink magnums of the finest champagne after pulling off a fabulous deal.

Taylor, Texas, won the the right to host the South Korean giant’s latest semiconductor factory, the company said Tuesday local time. Locations in Phoenix and upstate New York also vied to host the new plant. Phoenix recently enjoyed its own economic victory, besting Oregon as the site of Taiwan Semiconductor Manufacturing Co.’s new U.S. facility.

Upstate New York has been home to various chip factories including those operated by GlobalFoundries Inc., so that area was also in with a shot.

Under the plan Samsung will spend $17 billion on facilities and equipment to create more than 2,000 new high-tech jobs with production to commence by the end of 2024. The news was announced at a press conference in Texas featuring Governor Greg Abbott, Senator John Cornyn and Samsung Vice Chairman and Chief Executive Officer Kinam Kim.

What makes this such a great outcome for Samsung is that it was most likely going to expand in that region anyway. But by pressing various locales for incentives including tax breaks and subsidies, Samsung was able to test the waters to see how eager other governments might be. This is how corporate welfare has operated for decades, and in this case the company worked the system perfectly.

History doesn’t look kindly on such competitive auctions, though. Local governments often get pitted against each other, only to find the sums they commit don’t translate into their purported economic benefits. Foxconn Technology Group’s expansion in Wisconsin is the most infamous, with the Midwestern state offering a record $2.9 billion in incentives. 1 But the Taiwanese supplier to global clients like Apple Inc. ended up falling far short of its committed goals and had to drastically scale back its plans.

Samsung Austin Semiconductor LLC has been churning out chips in the region for a quarter-century. Last year it purchased 258 additional acres of land close to its existing campus, the Austin Business Journal reported in December. Executives at the time said that no expansion was imminent, and the purchase was merely to allow flexibility.

But you don’t buy a huge tract of land for flexibility unless you have an intention of using it. Samsung is an electronics maker, not a real estate speculator.

In the end it settled on a site 15 miles northeast of its current location and extracted commitments from the local government of Williamson County to build around 10 miles of new roads and prepare the land for Samsung’s arrival.

The company got almost everything it asked for. According to the local Community Impact Newspaper, it had rejected $650 million in incentives, which would have been 10 times larger than the package it got in 2006 for its existing chip plant. Instead, Samsung sought a 100% reimbursement on property taxes for 20 years. What it got was 90% for the first 10 years and 85% for the subsequent decade, plus all those new roads.

Also significant is the fact that it managed to circumvent a 50% limit imposed on such reimbursements for business expansion. Instead, Community Impact Newspaper wrote in January, Samsung seems to have convinced local officials that its plans represent either a relocation or are of high enough importance to warrant an exception to the rule.

Williamson County is convinced that it’s a good idea. Or at least it wants the rest of us to believe so. To support their decision to offer such sweeteners, local officials assert that Samsung “made a $4.5 billion economic impact” in central Texas in 2019 alone, having “supported” 10,000 jobs and paid $445 million in salaries. In other words, Samsung had $450,000 of economic impact per worker. Taxpayers aren’t supposed to question these numbers.

Although it does make sense for Samsung to expand in Texas, there also are good reasons not to. A vast power outage in February that shut its plants was a huge blow to production, and it helped exacerbate the global chip shortage. It’s ironic that it’s expanding in the U.S. to ameliorate supply-chain disruptions when Samsung’s biggest problem in the past year was caused by poor American infrastructure.

New York state probably wouldn’t have been the best choice, but politicians there don’t want to give up on the notion that the region can be a player. Arizona, meanwhile, has quietly grown into the true Silicon Valley, since there are more chips made there than in California. With TSMC’s new factory and major Intel Corp. facilities, that state already has the suppliers in place.

Whichever location Samsung chose, it was in a no-lose position thanks to economic policies that have governments pay to compete with each other. Now Texas gets the chip plant it was likely to get anyway, and the lobbyists receive congratulations for a job well done.

Updated: 11-24-2021

More Chips Will Be Made In America Amid A Global Spending Surge

Samsung’s $17 billion bet on Texas mirrors large spending increases in Asia and elsewhere.

Investment in U.S. chip production is on the rise. But so too, is semiconductor spending elsewhere.

Samsung Electronics Co. ’s planned $17 billion chip factory in Texas is expected to crank out top-end semiconductors that are essential to 5G cellular networks, self-driving cars and artificial intelligence. It follows hefty bets on U.S. soil by Intel Corp. , Taiwan Semiconductor Manufacturing Co. and Texas Instruments Inc.

The new factories won’t be operational for years. But the investment promises to boost America’s production foothold in advanced chip making after decades of ceding ground to locations in Asia like Taiwan, South Korea and China. It comes at a time, though, when chip makers are investing heavily in these locations, too.

A chip shortage has snarled global business and amplified calls from governments world-wide to boost local production of the tiny tech components in devices that power much of our daily lives. Component shortages have hit everything from car production to availability of some consumer goods, raising the stakes for politicians—particularly in the U.S. and Europe—to reduce their reliance on Asian suppliers.

That has triggered a spree of record chip investment—and driven governments to offer financial incentives to secure these new factories.

U.S.-based companies represent about half of the $464 billion semiconductor industry, according to the Semiconductor Industry Association and market-researcher International Data Corp. But many of the biggest names, like Qualcomm Inc. and Nvidia Corp. , design chips but don’t manufacture the parts themselves, choosing instead to outsource the work. And that is often done overseas.

About three-quarters of global semiconductor production capacity sits in just four Asian locations: Taiwan, South Korea, China and Japan, according to the Semiconductor Industry Association. The U.S. represents just 13%.

Global chip manufacturers are projected to lay out $146 billion in capital expenditures this year, about 50% higher than before the Covid-19 pandemic began and double the level of just five years ago, according to Gartner Inc., a market researcher.

The U.S. is capturing just about a seventh of that global investment, a level similar to two years ago, Gartner said. Asia, by contrast, represented more than 80% of the total spending. The ratios are expected to be similar through 2025, Gartner says.

Earlier this month, TSMC and Sony Group Corp. said they would build a $7 billion chip plant in southern Japan, a project that is expected to receive billions of dollars in subsidies from the government in Tokyo.

In September, China’s Semiconductor Manufacturing International Corp., which is partially state owned, said it would spend nearly $9 billion on a new plant outside Shanghai. In May, South Korea unveiled a road map to support local semiconductor companies’ plans to invest roughly $450 billion by 2030.

Only about 6% of new semiconductor global capacity added over the next 10 years is expected to be located in the U.S., according to a Monday report from the U.S. Chamber of Commerce, which urged Congress to pass legislation that provides $52 billion in direct subsidies for new chip factories.

“While U.S. domestic manufacturing flatlined, China, South Korea and others are investing heavily in their own industries, aiming to ensure global manufacturing leadership and leave the United States behind,” the report said.

The U.S. brings advantages as a host country for cutting-edge chip factories, from access to skilled workers, protection of intellectual property and proximity to buyers, the Semiconductor Industry Association says.

But the U.S. also has drawbacks. The costs of owning a new chip factory are roughly 30% higher than in South Korea, Taiwan or Singapore, and are as much as 50% more than in China, according to the SIA report published last year. The cost differences are largely attributable to the availability—or absence—of government incentives, the SIA said.

In a speech last month, Morris Chang, the founder of TSMC who retired three years ago, warned that manufacturing chips in the U.S. was more costly and posed supply-chain challenges when compared with Taiwan.

“Even after you spend hundreds of billions of dollars, you will still find the supply chain to be incomplete and costs to be higher than what you currently have,” Mr. Chang said.

The Taiwanese government over the years has showered subsidies on its local chip industry that leaders refer to as Taiwan’s “silicon shield,” helping protect it from military conflicts. China is in the middle of a heavily subsidized drive to become self-sufficient in chips. Private investment has also grown in recent years, as U.S. companies and their Chinese affiliates have ramped up investment in Chinese semiconductor companies, according to a Wall Street Journal investigation.

South Korea, aiming to double annual chip exports from today to $200 billion by 2030, has offered billions of dollars in tax breaks, lower interest rates and other investments. President Moon Jae-in’s administration has pledged to cut regulations and asked local governments over the next decade to ensure adequate water supply—a key resource for chip making.

Earlier this year, Japan’s Ministry of Economy, Trade and Industry said investment of up to 1 trillion yen, or the equivalent of $8.6 billion, may be necessary to reduce the country’s reliance on foreign-made chips. New Prime Minister Fumio Kishida, vowed to revive Japan’s semiconductor industry and has created a new spot in his cabinet for a minister of economic security.

The U.S.’s gains, for now, are tilted more toward quality than quantity. By 2027, the U.S. is projected to possess about 24% of the world’s production capacity for the most cutting-edge chips—those that use circuitry measured at 10 nanometers or below—according to Counterpoint Research, a market-research firm. That would be up from 16% at present.

More countries have come to see an overreliance on Asia-based chip factories as a national security risk, said Dale Gai, a Taiwan-based director at Counterpoint Research covering semiconductors and components.

In addition to Samsung’s Texas bet, TSMC is currently building a $12 billion chip manufacturing facility in Phoenix. Intel has pledged to spend $20 billion on two plants in Arizona and a $3.5 billion expansion effort in New Mexico.

The Biden administration welcomed Samsung’s investment in Texas and added that it is working around the clock with Congress, allies and partners to boost American manufacturing capacity, according to a joint statement late Tuesday from National Economic Council Director Brian Deese and national security adviser Jake Sullivan.

“More work remains to be done to ensure America remains the most innovative and productive nation on Earth,” the statement read.

Texas Put Up Millions To Lure A Samsung Plant And Won. Will It Pay Off?

Landing Samsung Electronics Co.’s massive new chip plant didn’t come cheap for Taylor, Texas. The question now is whether the investment will pay off.

State and local officials offered a raft of incentives to lure the plant to the town, which is in Austin’s northeastern suburban fringe. It all could amount to hundreds of millions of dollars for what’s expected to be one of the largest foreign investments in the U.S.

The approach underscores a debate that’s raged for years about heavily subsidized economic development projects. Research suggests they don’t always deliver, despite the eye-popping numbers in pitch decks and the politicians racing around to take credit for delivering jobs.

“The benefit of capital-intensive manufacturing is generally the tax revenues,” said Nathan Jensen, a professor at the University of Texas at Austin, who studies subsidy programs. “But these tax revenues are exactly what the state and local governments are giving back to companies.”

Few states are as finely tuned as Texas when it comes to landing big, new business investments. Its low taxes and light regulations have attracted companies for decades, including tech giants like Apple Inc., Tesla Inc. and Inc., which have all expanded in the state.

But Texas also knows how to close the deal with generous incentives. In total, the state has given out almost 6,300 awards that amount to more than $8 billion in subsidies, according to data from Good Jobs First, a Washington-based policy resource center. Texas ranks seventh in the nation for total dollars given. New York leads the nation with a total of $40.8 billion.

“Texas has a long history in the business-development game and has used tax incentives and subsidies, as well as its low-tax environment, to lure factories and other businesses from elsewhere in the U.S. since the 1980s,” said Margaret O’Mara, a history professor at the University of Washington, who studies the tech industry.

“This promotion, of course, comes at the expense of tax revenue and investment in other public infrastructure and services,” she added.

For an example of how tax breaks to lure business can backfire, consider Wisconsin’s $4.5 billion deal with Taiwan’s Foxconn to build a high-tech manufacturing hub that turned into a fiasco as the Apple supplier fell short of hiring goals.

The plant in Taylor will significantly augment Samsung’s already sizable presence around Austin, where it has a sprawling complex that houses more than 3,000 employees and fabricates some of the country’s most sophisticated chips. The South Korean tech giant plans to invest an additional $17 billion in the new factory, which is expected to create more than 2,000 jobs.
Investment Risks

Local officials worked diligently to land the investment, as Samsung weighed incentives from communities in New York and Arizona, as well as nearby Travis County, home to Austin.

A key consideration was making sure the plant would have consistent electricity after power outages last winter knocked Samsung’s Austin facility offline for more than a month. Officials even helped broker a deal to make sure that water could be piped in from a nearby county, according to the Austin Business Journal.

The plan includes waiving 90% of property taxes for a decade, and 85% for the following 10 years. An incentive program that reduces the taxes Samsung would pay for schools is estimated to cost $314 million.

In addition to those abatements, the state is giving Samsung a $27 million grant from its Texas Enterprise Fund, which is aimed at luring projects that create jobs. The company could also get help with the construction and operation of the facility, such as exempting sales tax on materials used for building.

“It’s safe to say this is one of many subsidies they are going to enjoy,” said Kasia Tarczynska, a research analyst with Good Jobs First.

Of course, finding so many workers in the middle of a labor shortage presents a host of challenges. And then there are the risks communities face in adding thousands of new residents, including traffic snarls, escalating home prices and other burdens on the region’s infrastructure.

Taylor is planning to issue revenue bonds supported by Samsung’s utility payments to cover the cost of infrastructure, the city’s spokesperson Stacey Osborne wrote in an email.

It’s expecting to issue an estimated $17 million to $18 million in debt in the first quarter of next year, but she added that the city could pursue a negotiated private placement, and the overall amount could change depending on adjustments in construction costs. Taylor has close to $51 million of outstanding debt.

In a statement announcing the deal Tuesday, Governor Greg Abbott said the plant will bring “countless opportunities” for Texans and “play a major role in our state’s continued exceptionalism in the semiconductor industry.” Taylor Mayor Brandt Rydell called it “the single most significant and consequential development for the local economy since the International & Great Northern Railroad laid tracks here in the 1870s.”

Samsung is “laying the groundwork for another important chapter in our future,” said Kinam Kim, vice chairman and head of the company’s Electronics Device Solutions division. “We are also proud to be bringing more jobs and supporting the training and talent development for local communities.”

The investment stands to put Taylor — and Texas — at the vanguard of an industry of increasing geopolitical importance. Chip shortages this year have had sweeping economic consequences, leading the Biden administration and Congress to push for new domestic production.

Booming Region

Taylor sits in a region that’s experiencing booming growth, and its tight labor market suggests workers will have to be brought in from elsewhere. Even so, the addition of a major new factory will almost certainly give an extra jolt to a small town known for its barbecue.

The investment may also come in handy for Abbott as he ramps up his bid for reelection next year.

“It will help Abbott build a narrative that the state is open for business and drawing in corporate investment,” said Cal Jillson, a professor of political science at Southern Methodist University in Dallas.

The governor has presided over some of the fastest economic growth in the country as financial services firms and tech giants expand in the state. But he’s also embraced a conservative social agenda that has generated pushback from corporations concerned that it could make it harder to operate in Texas and attract the best talent.

“This is a very visible way for the governor to show that he is creating jobs,” said University of Texas’s Jensen. “Governors get a considerable increase in support from voters — in particular more moderate voters — from these kinds of wins.”

Subsidy programs are hardly a Texas phenomenon — or one that’s exclusive to Republican politicians, said Brett Theodos, a senior fellow at the Urban Institute. He pointed to the lucrative film tax credits commonplace in Georgia and the nearly $900 million Tennessee lawmakers greenlit earlier this year for a Ford Motor Co. plant near Memphis.

“This is something that Republicans and Democrats have done — it’s not confined to one party,” he said. “It’s not fully resistible when multinational corporations can play cities and states off each other.”

America’s Microchip Resurgence Runs Through New York

The U.S. used to produce 37% of the world’s semiconductors; today the figure is 12%. Congress and innovative states can reverse the slide.

As the U.S. economy continues to recover from Covid-19, one critical shortage in the global supply chain is touching every aspect of our lives: a severe lack of microchips.

The U.S. Senate, under the leadership of Majority Leader Chuck Schumer of New York, has passed bipartisan legislation containing provisions for the CHIPS Act, which stands for Creating Helpful Incentives to Produce Semiconductors for America.

It would invest $52 billion to create a pipeline of chip manufacturing across the country. It would also form a National Semiconductor Technology Center that would bring together leaders in industry, academia and government to put the U.S. back in the lead in semiconductor research and development.

CHIPS is that rare thing: a significant bill with true bipartisan support. Now it is up to the House to pass companion legislation, quickly. Expanding the U.S. semiconductor industry isn’t a moonshot — and New York State can play a large role.

Americans are struggling to buy everything from automobiles to cell phones to home appliances. Devices run by semiconductors are vital for doctors and first responders; they protect the integrity of the financial industry and are a key driver of America’s global competitiveness and national security. Industry estimates suggest chip manufacturing accounts for over 250,000 direct and nearly 1.6 million indirect jobs nationwide.

Several elements are contributing to the chip shortage, but a lack of domestic production is a driving factor. As we experienced more broadly during the Covid epidemic, when critical supplies are scarce, national borders matter and reliance on imports is costly.

According to the Semiconductor Industry Association, the U.S. share of semiconductor manufacturing shrank from 37% in 1990 to just 12% today. The proliferation of overseas chip fabrication plants has been accelerated by government subsidies. China is investing an estimated $150 billion into new fabrication plants over 10 years to reach national self-sufficiency.

South Korea, Japan and the European Union are stepping up efforts to secure their own production. And the global leader, Taiwan, also provides state subsidies. The U.S. must compete, and federal incentives have a role.

New York has been preparing to meet this moment for decades. As a lifelong New Yorker, I have seen the effects that the loss of domestic manufacturing in all sectors has had on families, especially upstate, where such jobs were the lifeblood of many communities.

New York has been a leader in computing design, development and manufacturing since the opening of IBM’s Watson Computing Laboratory in 1945 in New York City. More recently, the state has invested hundreds of millions of dollars under a succession of governors and legislatures into developing shovel-ready sites for chip plants — more than any other state in the nation.

New York has built the necessary complex infrastructure, including low-cost, reliable power and plentiful water and wastewater capacity. For example, over the last decade, GlobalFoundries Inc. has invested $15 billion in its semiconductor plant in Malta, New York, and recently announced plans to build a second factory on the same campus. But that may depend on CHIPS passing.

In addition to its potential for manufacturing sites, New York is the logical headquarters for the act’s National Semiconductor Technology Center. The multibillion-dollar Albany Nanotech Complex, affiliated with the State University of New York, is the most advanced, publicly owned, 300-millimeter semiconductor R&D facility in North America.

Global industry leaders like IBM, Applied Materials Inc., Tokyo Electron Ltd., Intel Corp. and Wolfspeed Inc. collaborate every day with state engineers and scientists on technological breakthroughs, such as IBM’s recent development of the world’s first 2-nanometer chip.

The House needs to follow the Senate’s lead, pass CHIPS and make the U.S. again the global leader in chip manufacturing. New York is ready to do its part.

Updated: 11-29-2021

Raimondo Links Chips Act To Jobs, Urges Quick House Approval

Commerce Secretary Gina Raimondo made a whistle-stop trip to Detroit to build momentum for government investment in the semiconductor industry, a move that’s fast becoming a key issue for Democrats.

Raimondo pressed Congress to pass legislation that would put about $52 billion toward U.S. chip manufacturing in a speech to the Economic Club of Detroit during a visit to the city that’s the capital of American auto manufacturing.

Earlier Monday, she led a roundtable discussion on semiconductors with Michigan Democrats, including Senators Debbie Stabenow and Gary Peters and Representatives Debbie Dingell, Dan Kildee and Rashida Tlaib, among others.

With President Joe Biden’s approval rating slipping and Michigan’s Democratic Governor Gretchen Whitmer seeking re-election next year, the party is trying to show it’s pushing for a solution to the microchip shortage that has hit production of vehicles and other industrial products. Michigan is a vital battleground state and has endured layoffs and lost profits at the auto companies due to the shortage.

“We can’t wait because the rest of the world isn’t waiting,” Raimondo told the Detroit Economic Club. “China, Taiwan — they are incentivizing the production of chips right now and have been for a long time. We need the House to pass the Chips Act immediately because the stakes are just that high.”

The worldwide auto industry has been suffering production disruptions for almost a year from the global chip shortage, leading to furloughs for American autoworkers. The Biden administration has acknowledged there’s no quick fix.

Raimondo said money from the Senate-passed legislation would provide incentives for manufacturers to build at least a dozen semiconductor facilities in the U.S. She said funds would come with strings attached but didn’t elaborate.

“We’re creating a fund to incentivize companies to create manufacturing in America and to employ Americans,” Raimondo said.

United Autoworkers President Ray Curry attended the roundtable, as did representatives of automakers Ford Motor Co., General Motors Co. and Stellantis NV.

Dingell said the goal is to get the bill, which the Senate passed this summer, approved in the House and on Biden’s desk before Christmas so the Commerce Department can start allocating the money.

Earlier this month, Senate Majority Leader Chuck Schumer and House Speaker Nancy Pelosi announced plans to negotiate a bill aimed at countering China’s rise.

The House has debated several related measures but doesn’t have a cohesive legislative package to mirror the Senate legislation, which includes the chips manufacturing money and several other provisions aimed at boosting U.S. competition.

Raimondo is leading the Biden administration’s response to the shortage. Her department recently asked companies in the semiconductor supply chain for information to detect bottlenecks and potential hoarding of supplies.

The submissions of more than 150 companies from around the world exceeded Raimondo’s expectations, she said. Her team is still evaluating the responses and plans to share a high-level summary of the findings in coming weeks.

The Biden administration is working with allies to develop new capacity to ensure early detection of supply-chain disruptions and prevent future shortages.

None of the legislation can resolve the near-term shortage because it takes at least a year and a half to build a new plant, said Kildee, a Democrat.

“It’s tough,” he said. “Everything is at least 18 months out.”

Updated: 11-29-2021

Cyber Daily: Inside Intel’s Secret Warehouse in Costa Rica

Intel has been storing older CPU’s and then using them for security testing well after they become EoL, because a lot of businesses still use older processors/devices.

Warehouse is in Costa Rica, with remote access to the test machines. Intel says they have company research that shows their customers are more likely to buy products from a company that continues to test and ensure security of their products through their lifespan.

Intel says their lawyers insist they continue to test and ensure the security of their products throughout their lifespan to keep their pesky customers from suing them out of existence.

Updated: 12-2-2021

Chips Stacked High At GlobalFoundries

Newly public chip manufacturer looks richly valued, but large base of noncancelable orders offsets risk.

It’s a good time to be a chip maker. Any kind of chip maker.

GlobalFoundries has been a hot property since going public in late October. The stock had risen 47% from its listing price ahead of the company’s third-quarter report late Tuesday.

That made the company one of the most richly valued in the semiconductor space at nearly 78 times forward earnings—a notable premium for a chip maker that stepped out of the race to make the most-advanced processors a few years back. Taiwan Semiconductor Manufacturing, which dominates contract chip manufacturing, trades at less than one-third that multiple.

But that also set a challenging stage for the company’s first earnings report. GlobalFoundries said that third-quarter revenue was up 56% from a year earlier, at $1.7 billion, and projected a 71% jump for the current quarter. Both barely exceeded Wall Street’s expectations, though. The company also reminded investors that it plans to more than double capital expenditures next year as it races to build up more production capacity. The stock fell more than 4% on Wednesday.

Still, most of the Street is staying positive: 81% of analysts rate GlobalFoundries as a buy, according to FactSet. The current chip shortage has drawn particular attention to key products for smartphones, data centers and cars that are still made on older production processes—GlobalFoundries’ sweet spot. The company said on its earnings call that its chip-fabrication facilities are “above 100% utilization,” despite recent capacity additions.

The shortage also has allowed GlobalFoundries to effectively book business that is years out. The company says it now has more than $20 billion in “long-term agreements” that can’t be canceled, which is nearly four times its current base of trailing 12-month revenue. And Chief Financial Officer Dave Reeder said on the call that a large percentage of that business is “single-sourced” deals—offsetting the risk that chip buyers will call off orders because they found supply elsewhere.

GlobalFoundries still has to compete with much deeper pockets in a tight market for both tools and talent. Indeed, the $4.5 billion in capital expenditures the company plans for next year looks puny beside the $26 billion and $35 billion projected for Intel Corp. and TSMC, respectively.

And a rich multiple increases the volatility for the stock—especially if U.S. lawmakers fail to pass the Chips for America Act that would provide subsidies for domestic chip makers.

But having such a strong base of future business already in the books should help GlobalFoundries grow into its valuation. In fact, the stock’s multiple against projected 2023 earnings is roughly on par with TSMC’s. The shortage won’t last forever, but it will likely go long enough for GlobalFoundries to cash in a few chips.

Updated: 12-6-2021

The World’s Relentless Demand For Chips Turns Deadly In Malaysia

While companies and governments push to keep supply chains running, ordinary people are the ones putting their lives at risk.

Hani Bin Sha’ari spent more than two decades rising through the ranks at STMicroelectronics NV’s facility in Malaysia. He prided himself on working hard to provide for his wife and four children. So when the chip plant remained open through a spike in Covid-19 infections this year, he kept doing his job.

Then one July morning, the 43-year-old woke up with a fever. His wife Nancy took him to a local clinic, requesting a coronavirus test because of infections at the plant. The results came back positive. Hani was soon quarantined in a hospital. He lost so much weight he started avoiding video calls so he wouldn’t alarm his family. When the couple spoke by phone later, Hani was out of breath and she urged him to rest. It was their last conversation.

“My four-year-old son keeps asking, ‘Where is ayah? Where is ayah?’” Nancy, 41, said in an interview, using a Malay word for dad.

Hani was one of at least 20 workers at STMicro’s facility in the Malaysian district of Muar who died from Covid-19 after the delta variant raged through the country this year. The company kept its chip assembly and testing plant running while the virus was killing workers, as the company raced to meet surging demand from automakers and other customers.

Authorities in Malaysia, like in many other countries, were concerned about keeping their economy on track during the pandemic and they granted chipmakers exemptions while much of the country locked down.

“I’m really upset because if ST shut down the plant when people were getting infected in June, I don’t think my husband would have died,” said Nancy.

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

While Covid-19 killed millions of people around the globe, deaths at the Muar facility were substantially higher than averages in the rest of the country and the world. One in 1,100 people in Malaysia died from the virus since the start of the pandemic, according to the country’s Ministry of Health, while it was at least one in 210 at the plant, according to Bloomberg News reporting. STMicro declined to comment on the specific number of workers who died at the Muar location.

“Since the beginning of the pandemic in January 2020, ST’s actions and strategy have been driven first and utmost by the will to maximize the prevention of infection and supporting our employees and their families,” the company said in a statement to Bloomberg News. “To do so, the company deployed a broad range of measures in close collaboration with the relevant public health authorities in every country it operates, and also relied on expert third-party guidance.”

Before this year, no one worried too much about the global supply chain, beyond specialists in the field. The role of developing nations like Malaysia or the Philippines warranted little attention. But the coronavirus outbreak has been a wake-up call for chief executives, prime ministers and consumers around the world, as shortages disrupted production of everything from iPhones and F-150 pickups to Nike sneakers.

The tragedy in Muar shows the little-understood human cost of keeping supply chains running in a pandemic. While politicians in Washington and Paris urge suppliers to step up production of semiconductors and government officials in countries like Malaysia give special exemptions to powerful corporations, employees like Hani put their lives at risk.

“The duty of the government is to look after the workers’ interest more than the country’s or the companies’ interest,” said Zaid Ibrahim, a former law minister in Malaysia. “Of the three — the government, companies and workers — the most vulnerable are the workers. I wish we could have avoided these tragedies.”

Malaysia is a case study in the conflict between people and profit. The government spent decades attracting foreign investment and diversifying its economy beyond rubber and tin. The country now accounts for 13% of the world’s chip testing and packaging, a key step in producing the semiconductors that go into automobiles, smartphones and other devices.

Some 575,000 people were employed in the electrical and electronics industry in 2020, working with global chipmakers such as STMicro, Infineon Technologies AG, Intel Corp. and Renesas Electronics Corp.

The country’s government was slow to react to the crisis this year. As Covid infections surged early this year, then-Prime Minister Muhyiddin Yassin said in a televised address he wouldn’t impose a full lockdown — even though the health ministry had said that would be the best way to stop the virus — because such a step would have negative repercussions for the economy.

Then the delta variant sent infections to a record of more than 20,000 cases a day over the summer. The administration scrambled to put more restrictions in place. But it was too late. Deaths spiked. Battered by public anger over the government’s handling of the virus and political infighting, Muhyiddin and his entire cabinet resigned in August.

“In Malaysia, where the electronics industry is such a big economic source for the country, it’s a tricky balance,” said Peter Hanbury, a partner at Bain & Co. in San Francisco, who specializes in the semiconductor supply chain. “It gets pretty challenging for folks to make a call” between shutting down a factory or keeping it open.

Companies like STMicro had every incentive to keep operating. The French-Italian chipmaker has to answer to customers like Apple Inc., Tesla Inc. and tier one auto components companies such as Continental AG and Robert Bosch GmbH — all of which got caught in the supply chain squeeze.

STMicro, run by Chief Executive Officer Jean-Marc Chery, faced extra pressures this year from politicians around the world who grew alarmed that shortages were shutting down auto plants and other factories. And of course, staying open benefits the company financially. The day Hani died, STMicro reported robust financial results that sent its stock to a record high.

The families of the people who died in Muar have avoided talking publicly about their tragedy. Nancy decided to speak out to honor the memory of her husband: She sees Hani as a good man who was caught between powerful forces of government and corporations, a man who didn’t have to die.

The city of Muar sits on the west coast of the Malay peninsula about halfway between the capital of Kuala Lumpur to the north and Singapore to the south. Hani Bin Sha’ari was born about 25 kilometers away in Bukit Gambir, the son of a rice farmer and a homemaker. Hani — whose name translates simply to Hani, son of Sha’ari — was the fourth of nine children.

In 1981, Hani turned three and Mahathir Mohamad began what would become a 22-year run as prime minister. The politician’s landmark achievement was an economic plan aimed at changing Malaysia from an agricultural country to an industrial one. Foreign direct investments from the likes of Intel, Infineon Technologies and STMicro helped fuel rapid economic growth in the 1990s just as Hani was finishing school.

Gross domestic product growth averaged 9.2% from 1990 to 1997, prior to the Asian financial turmoil in 1998. STMicro was one of the more prestigious employers in town for a young man like Hani. The company set up operations there in 1974 and now has about 4,200 workers and a 5.3-hectare site.

Hani applied for a job at STMicro after getting an electronic engineering certificate from one of the public education institutions the government set up to train people in the field of engineering. He started as a trainee at STMicro in 1998 and his life soon ended up revolving around the company.

It was at the factory that he met Nancy, a talkative contract worker from Indonesia who was working on the machine next to his. While he was a man of few words, she wasn’t afraid to speak her mind. On their first date in December 2000, she hopped on Hani’s motorbike and they went to the beach. They strolled along the Malacca Strait and watched the sunset. When Nancy’s two-year contract ended and she returned to Indonesia, she suggested they tie the knot rather than bothering with a long-distance relationship.

“Okay!” he replied with a big smile.

Together, they built a happy life. After they moved into a single rented room, with nothing but a bed and cabinet, Hani promised he’d work hard to buy them their own place one day. Their first child was born a couple of years into their marriage, followed by three more. Nancy focused on raising the kids and managing their finances, while Hani spent long hours at STMicro. She resisted letting the family get a television until two years ago, when STMicro gave Hani one as a gift for his 20-year anniversary.

Hani worked his way up at the chipmaker, eventually becoming a chief technician. In 2006, Hani bought the family a home for 35,000 ringgit or about $8,300.

With his success, Hani began looking out for those less fortunate in his community. He led prayers at the neighborhood surau, a Muslim worship hall. When Covid arrived, he organized a program to provide free food for people who had lost their jobs or needed help feeding their families. He donated his blood regularly — 35 times in all.

The first Covid cases hit Malaysia on January 25, 2020, after three Chinese nationals from Wuhan entered the country. The initial infection at STMicro’s plant was identified in March, the same month as the first deaths from the virus in the country.

The government quickly imposed nationwide restrictions, ordering businesses to halt operations. By July 1, 2020, local transmissions fell to zero. But the success didn’t last. Subsequent waves of Covid pushed daily infections into the thousands in January and again in May.

This time, the Malaysia Semiconductor Industry Association, a powerful group of about 140 international and local companies, repeatedly urged the government to allow semiconductor and electronics factories to keep operating during the pandemic. When the government imposed a two-week “total lockdown” from June 1, it excluded essential businesses — including the technology giants.

The association “is grateful that the Malaysian government has taken our inputs into account and decided not to have a total lockdown and allowed 60% of the workforce to work,” the trade group said in a statement on May 27.

The country’s factories do serve a critical step in the global supply chain. The most sophisticated semiconductors are made in countries like Taiwan and South Korea. Then they are shipped to Malaysia for final testing and assembly into the components customers can use. Only afterward can they be integrated into final products like automobiles for features such as steering, brakes and infotainment systems.

And just as Malaysia was contending with its second Covid surge, an acute shortage of chips was setting off alarm bells in the upper echelons of government in the U.S., Japan and Europe. The wait times for chips reached a record 18 weeks. President Joe Biden suggested the U.S. would spend $50 billion on domestic semiconductor capacity. On June 30, Ford Motor Co. said it would halt production for two weeks at the Michigan factory that just began building its highly anticipated Bronco sport utility vehicle.

The Malaysia Semiconductor Industry Association argued it had to do its part to address the crunch.

“The supply chain of this industry is highly integrated, be it within its own industry or with other industries, locally and worldwide,” the association said on July 7. “The global semiconductor and electronics industry plays a critical role in the global economy.”

STMicro’s plant in Muar stayed open as Malaysia’s health ministry reported daily Covid infections of more than 9,000 in early July.

Some STMicro employees were able to work from home. But workers on the production floor, like Hani, had to go in. In fact, Hani worked overtime so the company could meet customer demand, 12 hours a day for four straight days.

Then he would take two days off, before going into the night shift, working from 7 p.m. to 7 a.m., for four consecutive days. Only when the company detected confirmed cases would it partially close an area for disinfection.

STMicro had procedures in place for Covid, but they weren’t very rigorous earlier this year, according to another worker at the factory who asked not to be identified for fear of retaliation. The company, for example, just took workers’ temperatures as they entered rather than testing them, and didn’t have advanced tracking systems to determine which workers were in close contact with infected colleagues.

On July 9, the health ministry confirmed the existence of a cluster called “Persiaran Agas” — named after the address of STMicro’s Muar facility with 18 positive cases during the first round of screening. By then, at least two STMicro workers had already died from Covid-19. Three days later, Hani came home with a headache.

STMicro declined to discuss specific safety measures in use at that time. The company said that the configuration of the Muar site, with seven different buildings, enabled it to close certain buildings as required during the outbreak “under the guidance, approval and control of the Malaysian health authorities.”

The death rate at the facility appears to be higher than at similar companies in Malaysia. At Unisem Bhd., a domestic semiconductor firm, three of 3,500 employees died — roughly matching the national rate — according to Chairman John Chia.

During his many years working at the Muar facility, Hani developed a predictable routine. When he was on the day shift, he got up at 5 a.m., showered and performed a tahajjud or night prayer. Nancy would get up with him, working in the kitchen to stir-fry rice for his favorite breakfast, the hearty nasi goreng.

“Jumpa lagi,” he’d say, meaning “see you soon” as he kissed her goodbye. He’d leave home around quarter to six.

His first stop was the nearby surau for morning prayer. After reaching the company’s parking lot, he would eat his breakfast from home inside the car before starting his day.

When Hani came home with a headache on July 12, he figured it was probably because he got caught in the rain. He took some Panadol and went to bed early. By morning, the fever had started.

Meanwhile, a sense of crisis began to grip Malaysia. New Covid infections passed 11,000 a day in mid-July. Struggling families hung white flags outside their homes in an appeal for help and the hashtag #benderaputih — meaning white flag — gained traction online.

Nancy and the children also tested positive for Covid and were quarantined in a different facility. They were planning to have a video call in the evening of July 26. But a doctor called her from the hospital and said Hani had to be intubated immediately. Three days later, the hospital arranged for Nancy to see her husband via a video call as he was unconscious and dying in the intensive care unit. He passed away on July 29.

The day of his death, state politicians called for action to prevent further casualties at STMicro’s factory.

“We are not asking the factory to close for 14 years but only 14 days for the safety of the public,” the president of a non-governmental organization said, according to local media.

In a letter to STMicro, IndustriALL Global Union, a global union federation, called on the company to put workers before company profits. “We urge STM to walk the talk on its sustainability strategy, which emphasizes putting people first and protecting everyone’s life,” Kan Matsuzaki, electronics director of IndustriALL, said in the letter.

That day, the Ministry of International Trade and Industry ordered a full shutdown of the plant until August 4.

The nation of about 32 million people hit a record 21,000 daily cases in August, the highest per capita average in the region. The public grew furious. A new flag movement sprung up — #benderahitam, or black flag, this time — calling for the premier’s resignation. On Aug. 21, Ismail Sabri Yaakob was sworn in as Malaysia’s third prime minister in 18 months.

“There were so many deaths,” said Lim Guan Eng, secretary-general of the opposition Democratic Action Party. “We were in a very dark period.”

By mid-August, about a third of the population was fully vaccinated. The Ministry of International Trade and Industry announced manufacturing companies could bring in 60% their workers depending on the percentage of vaccinated employees.

At a conference in September, STMicro CEO Chery addressed analyst questions about the situation in Malaysia and the prospects for returning to full capacity.

“I feel entitled to speak about Malaysia because this morning, I landed from Malaysia,” he said. “We faced many, many days of total or partial closure, numerous people were under quarantine and, very sadly, some fatalities.”

Chery added that 99% of the workforce in Malaysia had been vaccinated and that the factory has implemented a new system for tracking employees. Workers also now take PCR tests regularly. Procedures have become much more rigorous since the summer, said the worker who asked for anonymity.

The changes in government and corporate policies ultimately came too late for Nancy and Hani. She says that STMicro — as well as Malaysian International Trade and Industry Minister Mohamed Azmin Ali, who allowed the plant to keep operating — have robbed her family of its happiness. The ministry didn’t return requests for comment.

The company initially didn’t provide financial support to some bereaved families, Nancy said, explaining the cases were not necessarily connected to the plant. After she began speaking out, STMicro offered her some compensation: 10 months of his basic salary of 3,425 ringgit ($820) plus death allowance of 5,000 ringgit and life insurance payout of 45,000 ringgit. The total is about $20,000. Her four children will get about $120 a month each until they turn 20.

Some families of workers who died told Nancy they were offered similar payments only after she got hers. STMicro has made the compensation package standard for families of workers who died of Covid-19.

In early October, Nancy wrote to STMicro’s management seeking more compensation; Hani’s monthly basic salary of about $820 until he would turn 60 plus health care for her family. After a month, she contacted the company and was then told her request was rejected.

Chery made $5.7 million in total compensation in 2020, or about $16,000 a day.

STMicro declined to comment on specific compensation offers or on the timing of its decision to provide payments. “The company is supporting the families of our colleagues who passed away due to COVID-19 with a comprehensive financial package which includes a number of things which are standard across the company globally, as well as specific measures taking into account the situation of our employees in Muar, notably support for the education of the children of those families affected,” the company said.

While 20 deaths may not seem a lot, politicians and corporate executives need to recognize the pain behind such statistics to understand how Covid devastated families and decimated communities, said Zaid, the former Malaysian law minister.

“The tales of the human tragedies are rarely told, and unless they are explained, we cannot learn from our mistakes,” Zaid said. “This is a lesson for the future.”

Nancy has struggled to recover from Covid-19 herself. She grapples with grief and depression, seeking solace by visiting his grave and surau. One of his last wishes was for Nancy to stock enough food there for the poor.

The couple’s 20th wedding anniversary was Oct. 3. Nancy said Hani would have bought some fried chicken from KFC and she would’ve made some soup and veggies to celebrate with their kids at home, as they usually did on special occasions.

“It would have been a day filled with happiness,” she said.


Updated: 12-7-2021

Intel Will Race To Cash In Its Car Chips

Spinning Mobileye into a hot auto tech market makes sense—if it can be done in time.

Intel Corp. knows when it has a hot hand, but not how long it will last.

The chip maker announced plans late Monday to take its Mobileye business public. Intel is aiming for an initial public offering of the unit in mid-2022 and believes it can land a valuation of around $50 billion, according to reporting by The Wall Street Journal. Intel would retain majority ownership of Mobileye, which would be run by the self-driving-car unit’s current management team and include the recently acquired Moovit business as well as other Intel teams working on technology related to autonomous driving.

Mobileye specializes in chip-based camera systems that power automated driving features in cars. A $50 billion valuation would be a nice return for a business acquired in 2017 for a little over $15 billion. It also would normally be a heady multiple for a business generating just a little over $1 billion in annual revenue now. But this isn’t a normal market—at least when it comes to anything touching the future of cars.

A raft of companies in the electric-vehicle and autonomous vehicle spaces have gone public this year, either through the traditional route or through special-purpose acquisition companies.

Electric-car makers Rivian Automotive and Lucid Group are now fetching market values of between $70 billion and $100 billion despite just barely shipping their first cars. Tesla, of course, is now valued at over $1 trillion—more than the combined market value of the world’s 10 largest auto makers by annual revenue.

Intel’s own shares rose more than 4% Tuesday morning, adding nearly $9 billion to the struggling chip maker’s market value and thus affirming the basic logic of the move. The ultimate success of the listing, though, will depend on the auto-tech market remaining hot.

That is no sure thing, given the high degree of speculation underpinning current valuations. Tesla alone has fallen 14% over just the past month as founder and Chief Executive Elon Musk has sold more than $10 billion worth of his stake. Rivian has plunged 33% from the high the stock touched last month following its Nov. 10 listing.

The move also won’t solve Intel’s core problem of catching up its chip manufacturing process to rivals’—though it will give the company a larger war chest to put toward that expensive task. The company says it will use the proceeds from the IPO to fund capital investments as part of its ambitious turnaround plan.

Intel is close to spending nearly $19 billion a year now, and its capital expenditures are projected by analysts to shoot up to more than $26 billion next year. But that will still badly lag the $35 billion-plus that chip-making rivals Taiwan Semiconductor Manufacturing and Samsung are each projected to spend next year.

Still, Intel is right to try to unlock some value here given its own depressed multiple of 14 times earnings—44% below the chip sector’s average. Mobileye is expected to grow revenue by more than 40% this year. It also has shown a steady operating profit for the past three years—something that has eluded many of the hot auto tech names.

The company’s focus on assisted-driving systems is less speculative than other areas of the market. In a call Tuesday, Intel Chief Executive Pat Gelsinger called Mobileye “the most successful acquisition that Intel has ever made”—a telling admission from a company with a decidedly mixed record in deal making. Just how successful remains to be seen.

Updated: 12-9-2021

Raimondo Says U.S. Chip Funding Needs Rules To Bar Use In China

U.S. Commerce Secretary Gina Raimondo said legislation to spur domestic semiconductor manufacturing needs rules to prevent funds from going toward production in China but deferred to Congress on the details of such provisions.

“Congress will decide what, if any, legislative guardrails they want to put on this, versus if they want to defer on that and let Commerce handle it in the regulations,” Raimondo said Thursday during an interview with Bloomberg reporters and editors in New York. “But it’s something we have to grapple with. The intention is to protect ourselves from China.”

The administration and Congress “will figure out the guardrails,” she said, but it’s too soon to talk about specifics given that negotiations on the final bill are ongoing.

The Biden administration recently spurned a plan by Intel Corp. to increase production in China over security concerns, dealing a setback to an idea pitched as a fix for U.S. chip shortages, Bloomberg News reported last month.

Intel, the world’s largest chipmaker, had proposed using a factory in Chengdu, China, to manufacture silicon wafers, people familiar with the matter said. Company executives proposed the China plan as a way to help ease a global supply crunch of semiconductors. At the same time, Intel is seeking funds from the Chips Act to expand its footprint in the U.S.

Following deliberations with the Biden team, Intel has no plans to add the production in China at the moment, a person familiar with the decision said.

Possible Template

The scenario showcased a potential template for other companies that plan to apply for both American taxpayer dollar-funded grants to expand in the U.S. in addition to increasing their manufacturing in China. Until now, the administration has not said whether it would support rules that come attached to the grant money.

Raimondo said “the whole point” of the $52 billion program is to provide companies an alternative to China.

The Commerce chief said she has frequently discussed this with companies and her message is always the same: “Long-term national security interests matter more than short-term profits. So let’s think carefully about the decisions we make.”

“American companies have a role to play in helping us collectively advance our national security interests,” Raimondo said.

The consequences for the U.S. economy and national security would be “devastating” if there’s a significant delay in passing the chips legislation, she said.

“If it can’t be done before Christmas, it has to be done in January because the consequences of not facing this problem long run are really quite devastating to our economy and our national security,” she said Thursday in a Bloomberg Television interview with Emily Wilkins and Joe Mathieu.

Legislative Limbo

Despite bipartisan support, the legislation has been in limbo for months. In November, Senate Majority Leader Chuck Schumer and House Speaker Nancy Pelosi announced an agreement to craft a version of the bill that could pass in both chambers. So far, that has not yielded any new proposals.

Texas Republican Senator John Cornyn said Wednesday that the timing will likely slip to February.

“We shouldn’t wait till February,” Raimondo said. “There’s no reason to.”

The Commerce Department recently asked companies in the semiconductor supply chain for information to detect bottlenecks and potential hoarding of supplies.

Her team is “pretty pleased” with the information provided by the roughly 150 firms but it’s still evaluating the responses and what conclusions can be drawn from them. It’s not yet clear how her agency will use the data to address a lack of transparency and supply disruptions for semiconductor makers and users.

Many companies initially were reluctant to share the requested data but some now are thanking her “for making us do this,” she said of her conversations with executives, because the process provided firms “with valuable information to help us work through the bottlenecks and choke points.”

Updated: 6-23-2022

Intel Warns US Lawmakers Factory Plans Hinge On Stalled Chip Bill

Intel Corp. Chief Executive Officer Pat Gelsinger said US politicians are reaching the last moment to pass a bill aimed at revitalizing the country’s chip industry, putting the company’s domestic expansion plans in doubt.

“It’s time to get all the chaff out of the way, get to the core issues, get decisions made over the next two weeks,” Gelsinger said in an interview Thursday. “I think both sides of the aisle now — both bipartisan and bicameral — feel the urgency of getting this done before the August recess.”

Gelsinger was on Capitol Hill to press members of both parties to pass something before the midterm elections in November.

Shortly before sitting down for an interview with Senator Rob Portman and Representative Ro Khanna, his company announced that the “scope and scale” of its investment in the US will depend on whether the funding gets passed.

Intel has vowed to build one of the world’s largest chipmaking hubs in Ohio — spending up to $20 billion — with multiple fabrication sites, or fabs. But Intel canceled a planned groundbreaking for the complex Thursday and warned it may have to lower its ambitions without help from the legislation, known as the CHIPS Act.

“We’re going slow and small or we’re going to go big and bold based on the CHIPS Act,” Gelsinger said. “We’re committed to go build two fabs there. I don’t want a two-fab site there. I want an eight or 10 fab site there.

I want this to become a tech hub that is the largest manufacturing location and one of the great tech hubs of the world. That is our objective.”

During the interview, Gelsinger had to pause to take a call from a senior White House official who was concerned about Intel scaling back its plans.

The urgency of the call underscores the stakes for an administration looking for a legislative win ahead of a midterm election that is expected to wipe out Democratic control of Congress.

“My view is we have to compromise,” said Khanna, a Democrat from California. Congress needs to send the CHIPS Act to the president’s desk, he said. “It’s been way too long. I’ve been advocating that within my caucus and will continue that.”

Portman, an Ohio Republican whose state stands to gain from Intel’s investment, also sees the August recess as the “drop dead” moment to get the legislation done. “We should push against this deadline to get as many decisions made as we possibly can,” he said.

Intel Delays Mega-Site Groundbreaking As Congress Stalls On Chip Funding

Intel is delaying the groundbreaking ceremony for a planned chip-making facility in Ohio, in an expression of frustration over Congress’ slow action on new funding for the chip industry.

Intel (ticker: INTC) announced its plans to build the Ohio plant, which will be located just outside of Columbus, in January with an expected initial investment of more than $20 billion.

The project will be the largest single private-sector investment in Ohio history, according to the company, and the initial phase is expected to create more than 10,000 jobs.


Updated: 7-1-2022

Chipmakers’ Struggles Have Wall Street Worried About a Recession

* Micron Issues Profit Warning On Cooling Semiconductor Demand
* ‘Semis Are A Red Flag Because They’re Really In Everything’

Semiconductor stocks took a beating Friday after a grim profit warning from Micron Technology Inc. sparked fresh worries about Corporate America’s earnings power with the US potentially heading for a recession.

Despite the broader stock market rally, the Philadelphia Stock Exchange Semiconductor Index dropped 3.8% after Micron, the largest maker of memory semiconductors in the US, flagged that demand was cooling for chips used in computers and smartphones.

The index — which is home to chip giants Advanced Micro Devices Inc. and Nvidia Corp., as well as Micron — is down 38% in 2022.

Historically, semiconductor stocks have been a key barometer for the broader stock market and economy. Chips are used in a broad range of industries that are important for growth: appliances, data centers, gaming and artificial intelligence.

If conditions are weak for chips, it raises questions about demand in other corners of the economy, which is a troubling harbinger for the stock market, according to Matt Maley, senior strategist at Miller Tabak + Co.

“We had nowhere near enough chips, and now the demand is falling,” Maley said. “What signal does it send? It highlights a growing concern that the slowdown we’re going through will turn into a recession.”

The global semiconductor shortage, driven by factors on the demand and supply sides of the economy, has eased somewhat, but there is still limited production for certain chips used in cars and home appliances.

Troubling reports from semiconductor companies ahead of their second-quarter earnings are spurring fears that demand will exceed supply for even longer.

“What this weakness indicates is that the economy is slowing, and there’s potential for a recession,” said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder. “Semis are a red flag because they’re really in everything.

They’re so integral to everything that’s sold today. They’re the most rudimentary equipment, so this is a major negative for the economy.”

Worst Over?

Even so, signs are emerging that companies may be able to combat ongoing supply-chain woes. On Friday, General Motors Co. said it expects second-quarter sales and profit to take a hit due to chip-supply snags, but the company reinforced that it can make up for delayed production later this year and reaffirmed its full-year earnings guidance.

With shares of the automaker jumping as much as 3.5% on Friday, it may signal that the worst is over for semiconductor producers.

In fact, stock market valuations for chip stocks like Micron appear “incredibly cheap,” according to Siddharth Singhai, chief investment officer of IronHold Capital, a value-based hedge fund.

“Things are getting sold irrationally due to passive investing and the fact that rates are high and inflation is high,” Singhai said. “It’s all driven by fear rather than a real understanding of fundamentals.”

That said, betting against chipmakers was a winning bet last quarter as the market weakened and stocks tanked. And bears are raising their bets that the rout has further to go.

Short interest in the $6.2 billion iShares Semiconductor exchange-traded fund, ticker SOXX, jumped to 10% of the free float in late June, the highest level since December 2020, data compiled by S3 Partners show. The ETF is down around 4% on Friday and has lost 38% this year.

So looking ahead, the risk for chipmakers and the rest of Corporate America remains a recession in the US.

“Supply will start to come back at some point,” Ghriskey said. “But if the economy is weak, there will be a follow-on demand issue, so investors and companies could get hit twice.”

Chip Sector Drops Nearly 10% On Week As Micron Outlook Points To Declining Demand

Suppliers to chip industry hit hardest following Micron outlook.

The semiconductor sector logged one of its worst weeks in an already lousy year following more evidence that the COVID-19 chip sector boom was drawing to a close.

On Friday, the PHLX Semiconductor Index dropped as much as 5%, and finished the session down 3.8%, as chip stocks fell across the board.

Shares of chip-equipment maker Lam Research Corp. led decliners falling 7.3%, with NXP Semiconductors the sector’s best performer with a 1.3% loss on the day.

That gave the SOX index its second worst week of the year with a 9.6% drop, the sector’s worst performing week since the week ending Jan. 21, when the index fell 11.9%, according to FactSet data.

The chip index is already down 37.7% for 2022, compared with a 19.7% loss on the S&P 500 index and a 28.9% drop on the tech-heavy Nasdaq Composite Index.

Late Thursday, Micron Technology Inc. stoked Wall Street fears that customers may have loaded up on chips during the COVID-19-triggered shortage, and were now holding significant inventories, after the memory-chip maker forecast quarterly sales that were more than $1.5 billion below expectations.

Analysts on Friday wondered if weakness in the PC and consumer markets could also extend to data-center sales. Micron shares finished down 3% Friday.

Heading into Micron’s earnings, analysts were looking for more clues as to whether chip demand had peaked given the pessimism about the sector that Wall Street has held over the year.

What the industry and Wall Street want to avoid is a situation like 2018, when chip prices soared, along with chip-maker stock prices, and customers double- and triple-bought chips to lock in prices before they could shoot any higher.

As a result, sales eventually cratered and chip makers were stuck with huge inventories that took months to unload. Given that chip makers reported record sales in 2021, and their stocks reached record highs late in the year, investors are being extra cautious this time around.

Like Lam, suppliers to the chip-making industry were hit the hardest Friday with shares of KLA Corp. finishing down 7.2%, Applied Materials Inc. down 5.2%, and ASML Holding NV off 5.5%.

This past earnings season Applied Materials, ASML, Lam, and KLA all lamented that continuing supply-chain issues were hurting sales.

Next, were shares of third-party fab giant Taiwan Semiconductor Manufacturing Co., which closed down 5.8%.

Meanwhile, shares of Nvidia Corp. fell 4.2% Friday, while Advanced Micro Devices Inc. declined 3.7%, Texas Instruments Inc. declined 3.3%, Qualcomm Inc. fell 3.3%, GlobalFoundries Inc. declined 3.8%, Intel Corp. shares declined 2.9%, Marvell Technology Inc. shares fell 2.3%, and Broadcom Inc. shed 1.6%.

In comparison, the S&P 500 closed up 1.1% and the Nasdaq finished up 0.9% Friday.

Additionally, the sector was under pressure as Senate Republican leader Mitch McConnell threatened to derail a bill for $52 billion in funds earmarked to build up U.S. semiconductor manufacturing if Democrats revived their stalled climate and social policy package.

For the year, some of the worst performers on the SOX index include Marvell with a 51.4% drop, Nvidia down 50.6%, AMD down 48.8%, Applied Materials down 45.2%, Lam down 45.1%, ASML down 43.5%, and Micron down 42.4%.

Updated: 7-4-2022

Chip Boom Loses Steam On Slowing PC Sales, Crypto Rout

Intel, Nvidia are among semiconductor makers warning of rockier times ahead after two years of surging demand.

The pandemic-era boom in semiconductors that spurred a global shortage is showing its first signs of weakness, driven by a slump in personal-computer sales and a rout in cryptocurrency markets.

The frenzy to buy laptops and other gadgets early in the Covid-19 pandemic has vanished as inflation dissuades people from upgrading machines that they bought in the past couple of years amid the shift toward remote work and learning.

The fading of the crypto boom has also put an end to early pandemic scenes of people camping outside computer stores to buy chips for cryptocurrency mining and high-end videogaming.

The pressure still isn’t easing in some in-demand areas, such as chips for cars and data centers, but the chillier consumer climate has prompted some giants such as Intel Corp. and Nvidia Corp. to warn of rockier months ahead after two years of surging demand across their product lineups.

David Zinsner, Intel’s chief financial officer, said in June that the outlook for the second half of this year had gotten “a lot noisier” over the previous month, and that the company would look to align spending and investments to that reality.

Intel temporarily froze hiring in its PC-chip division in June, among other belt-tightening measures.

Memory maker Micron Technologies Inc. last week issued a muted sales outlook as Chief Executive Sanjay Mehrotra warned that “the industry demand environment has weakened,” with PC and smartphone sales declining.

The company said it was cutting back on some spending plans to adjust to the new market dynamics.

Chip executives, computer retailers and distributors say the market malaise has gotten worse in recent months—more sluggish than many were expecting at the beginning of the year as U.S. inflation hit 8.6% in May, the highest in more than four decades, leading the Federal Reserve to raise interest rates.

“The up went way up, and the down went way down,” said Kent Tibbils, vice president of marketing at ASI Corp., a major electronics distributor based in California, pointing to a falloff in demand for computers around March. “Usually there’s more of a gradual line, but it’s been a little bit more volatile than what we might normally expect.”

Nvidia said it is dialing back hiring as the chip maker braces for slowdowns in two of its key areas, crypto mining and videogames.

The company’s chips are used for the heavy-duty computational work required to mine new cryptocurrency tokens, and they are prized by videogamers who bought its graphics cards during a pandemic-era surge in home-based entertainment. Both areas are weakening, and Nvidia’s stock fell 48% in the first half of the year.

Chester Yeung, an executive at California-based retailer Central Computers, said consumers endured about two years of waiting lists, raffles and quotas just to have the opportunity to buy Nvidia’s latest graphics hardware.

Now, the retailer has well-stocked shelves, and the rationing his company introduced during the pandemic was dropped this year.

“You have crypto prices tanking but also tanking along with the stock market, which means less disposable income for a lot of people, because they saw their savings or 401(k)s taking a huge dive,” he said.

Personal computer shipments are expected to retreat by 8.2% this year to 321.2 million units, according to International Data Corp., which cut its forecast in June. Those numbers are a sharp reversal from the height of the pandemic, when shipments grew 13% in its first year and 15% in the second.

Advanced Micro Devices Inc. Chief Executive Lisa Su said last month that the company already had taken a conservative view of the PC segment for this year and expects computer demand to be roughly flat over the next few years.

Computer-makers HP Inc. and Dell Technologies Inc. said they are seeing principally lower-end consumer PC demand softening, slightly offset by healthy sales to companies.

PC shipments have been hit by not just softening appetite for new devices, but also supply-chain snarls from Covid lockdowns in China, where many computers are assembled, and the fallout from Western sanctions on Russia after the country’s invasion of Ukraine.

Analysts have grown more pessimistic about chip companies’ sales prospects. In February, analysts estimated Intel would generate sales of around $18.4 billion in the second quarter, according to FactSet.

Now the average estimate is for less than $18 billion, below what Intel has projected. Estimates for Nvidia’s sales have also decreased 4% over the period, and are in line with the company’s $8.1 billion sales guidance for the current quarter.

“Semi downturns happen every 3-4 years, and we could be due for another one,” Bank of America analysts said last week.

It isn’t just chip makers that are resetting their expectations. Microsoft Corp. lowered its earnings outlook in June, citing a stronger dollar that has dented the value of its sales in foreign countries, and the company has slowed hiring.

A potential silver lining for those customers who are still in shopping mode is that wait times for some semiconductors are starting to ease after swelling during the two-year-long chip drought.

Chip lead times overall were at a near-record 27 weeks in May, according to Susquehanna Financial Group, but wait times for microcontrollers—ubiquitous chips that have been a bugbear for auto makers and others—shortened.

The pressure of chip demand may also ebb with smartphone sales weakening. IDC expects shipments of those devices to fall this year.

Akash Palkhiwala, chief financial officer of San Diego-based Qualcomm Inc., a leading maker of chips for smartphones, said in June that supply and demand would come into better balance in the second half of the year.

Even with some demand softness, none of the big companies is projecting an end to the semiconductor drought soon. Demand remains hot for chips used in the servers, the powerful computers used in data centers, said Ms. Su of AMD, helping offset some of the PC weakness.

And shortages also could remain for older-style chips that have been at the heart of the two-year scramble among car makers, gadget producers and others to secure adequate supply.

Chip executives say long-term shifts in the electronics industry, including the shift toward electric vehicles that require more chips, are one reason the shortage may not abate soon.

While companies brace for a choppier future, the overall chip market remains constrained. Chip factories globally were running near full capacity in the first quarter, according to Gartner statistics.

World-wide, chip sales grew 12% year-over-year in April, according to World Semiconductor Trade Statistics figures, the latest data available.


Updated: 7-5-2022

US Wants Dutch Supplier To Stop Selling Chipmaking Gear To China

* Washington Wants To Curb Beijing’s Plan To Foster Chip Sector
* Dutch Firm Is A Leading Maker Of Equipment For Producing Chips

The US is pushing the Netherlands to ban ASML Holding NV from selling to China mainstream technology essential in making a large chunk of the world’s chips, expanding its campaign to curb the country’s rise, according to people familiar with the matter.

Washington’s proposed restriction would expand an existing moratorium on the sale of the most advanced systems to China, in an attempt to thwart China’s plans to become a world leader in chip production.

If the Netherlands agrees, it would broaden significantly the range and class of chipmaking gear now forbidden from heading to China, potentially dealing a serious blow to Chinese chipmakers from Semiconductor Manufacturing International Corp. to Hua Hong Semiconductor Ltd.

American officials are lobbying their Dutch counterparts to bar ASML from selling some of its older deep ultraviolet lithography, or DUV, systems, the people said.

These machines are a generation behind cutting-edge but still the most common method in making certain less-advanced chips required by cars, phones, computers and even robots.

Shares of ASML gained as much as 2.6% in Amsterdam on Wednesday. Its American Depository Receipts closed down 3.9% on Tuesday following Bloomberg’s initial report. Nikon Corp., a smaller rival to the Dutch firm in that sphere of chipmaking gear technology, closed down 5.1% in Tokyo on Wednesday.

The issue arose during US Deputy Commerce Secretary Don Graves’s visit to the Netherlands and Belgium in late May and early June to discuss supply chain issues, said the people, who asked not to be identified because the discussions were private.

During that trip, Graves also visited ASML’s headquarters in Veldhoven and met Chief Executive Officer Peter Wennink.

What Bloomberg Intelligence Says

ASML’s sales could narrow by 5-10% if it’s banned from selling deep ultraviolet tools in China. As the chip equipment maker’s revenue already reflects a ban on extreme ultraviolet tool shipments to the country, it may experience less impact vs. peers such as Applied Materials which derives 25-30% of its sales from China.

– Masahiro Wakasugi And Brian Moran, Analysts

The Dutch government has yet to agree to any additional restrictions on ASML’s exports to Chinese chipmakers, which could hurt the country’s trade ties with China, the people said.

ASML is already unable to ship its most advanced extreme ultraviolet, or EUV, lithography systems, which cost about 160 million euros ($164 million) per unit, to China as it cannot obtain an export license from the Dutch government.

The US push on ASML comes as President Joe Biden separately considers easing some of the Trump-era tariffs on consumer goods from China.

While China may welcome such a move at a time of tense relations between the two powers, Biden’s administration has continued his predecessor’s efforts to restrict China’s access to US technology.

The US Department of Commerce and the Dutch Ministry of Foreign Affairs declined to comment.

“The discussion is not new. No decisions have been made and we do not want to speculate or comment on rumors,” an ASML spokeswoman said.

ASML is the world’s top maker of lithography systems, machines that perform a crucial step in the process of creating semiconductors. ASML’s dominance of the market for that type of equipment means that further cutting China off from access to its products would undermine the Asian country’s ambitions to make itself more self-sufficient in production of the crucial electronic components.

“China’s share of the global chip-equipment market is negligible,” said Alex Capri, a research fellow at the Asia-based Hinrich Foundation, characterizing chip production as “a choke point” in China’s plans to bulk up its semiconductor muscle.

The older generation of machinery, DUV, is less capable than more advanced EUV lithography equipment but remains indispensable in manufacturing many of the types of chips that are currently experiencing acute shortages.

Washington is focused on banning sales of the most advanced type of DUV technology, immersion lithography machines, the people said.

American officials are also trying to exert pressure on Japan to stop shipping the same technology to Chinese chipmakers, one of the people said. Japan’s Nikon competes with ASML in this area.

Immersion lithography is also known as argon fluoride immersion, or simply ArFi. According to China-based Founder Securities, ASML sold 81 ArFi systems in 2021, compared with four from Nikon, giving the Dutch firm a 95% market share.

“We have no information regarding this matter,” a Nikon spokeswoman said.

Dutch Prime Minister Mark Rutte said in June he is against reconsidering trade relations with China and called for the EU to develop its own policies toward Beijing. China is the Netherlands’ third-biggest trade partner after Germany and Belgium.

ASML opposes a ban on sales of DUV lithography equipment to Chinese customers because it is already a mature technology, Wennink said earlier this year.

Chinese-based facilities, run by either domestic or foreign companies, account for 14.7% of ASML’s total revenue in 2021, according to company disclosures and data compiled by Bloomberg.

ASML is also alleging potential IP infringement by a Chinese tech firm supported by the country’s government.

US efforts to block the export of chipmaking equipment began under the Trump administration. Washington pressured the Dutch government to prevent sales of EUV lithography systems, which are required to produce the most sophisticated semiconductors and in which ASML has a monopoly.

Major US chip-equipment makers including Applied Materials Inc. and Lam Research Corp. are already banned from selling certain advanced products to SMIC due to national security concerns. The potential DUV ban could further hit SMIC and its Chinese peers.

“Lithography equipment is the most difficult equipment for China to replace when it comes to semiconductor production,” said Johnson Wang, an analyst at Taiwan Institute of Economic Research. “Without access to foreign DUV lithography equipment, the progress of China’s chip industry could come to a halt.”

Updated: 7-7-2022

TSMC Sales Soar 44% In Another Sign Of Resilient Tech Demand

* Revenue Beats Expectations A Day After Samsung Outperformed
* Investors Grappling With Longer Term Economic Uncertainties

Taiwan Semiconductor Manufacturing Co. reported better-than-expected quarterly revenue, providing another signal that electronics demand is holding up better than feared.

The world’s largest contract chipmaker booked NT$534.1 billion ($17.9 billion) of revenue for the second quarter, according to Bloomberg’s calculations, compared with the average analysts’ estimate of NT$519 billion.

The results from Apple Inc.’s most important chipmaker may allay investors’ worst fears about the impact of weakening demand and soaring costs on the $550 billion semiconductor industry.

On Thursday, Samsung Electronics Co. also reported a better-than-anticipated 21% jump in revenue, triggering an Asian stock rally.

While concerns linger about the longer-term impact of a potential global recession, investors seized on Samsung’s top-line expansion as a sign that chip stocks may have been oversold. TSMC may be able to exceed its goal of growing sales by 30% in US dollar terms this year, said Jeff Pu, an analyst with Haitong International Securities.

“TSMC’s second-quarter sales is slightly lower than the most recent market expectations,” Pu said. “But the company’s third quarter revenue may outperform consensus, aided by its price hike and Apple’s new product launch.”

TSMC, the world’s most advanced maker of silicon chips, has benefited from its most important customer. Over the past year and a half, Apple has launched five types of Mac chips. The Taiwanese firm also continues to ride the auto industry’s growing demand for semiconductors as cars become more digitized.

Signs are emerging that the chip supply issues that plagued gadget companies and automakers for more than a year are easing. Auto executives have said they are seeing an improvement in component supply, while delivery times for chips fell by one day in June.

Shares of TSMC closed up 2.1% on Friday ahead of the revenue announcement, but are still down 24% this year after a broader tech selloff on recession worries.

“Robust demand for high-performance computing and automotive chips should prevail, while negative impacts from a weaker smartphone-chip demand outlook may not kick in until 4Q,” Bloomberg Intelligence analyst Charles Shum wrote in a note ahead of TSMC’s Friday announcement.

Memory-Chip Prices Fall From Pandemic Highs

Prices have come down to levels that suggest the demand boom is likely over.

Prices of memory chips, stuffed into nearly every electronic gadget, enjoyed a meteoric rise throughout the pandemic. Now prices have come down to levels that suggest the demand boom is likely over.

The average contract price for a major type of memory, called DRAM, fell by 10.6% during the April-to-June quarter versus the prior year, the first such decline in two years, according to TrendForce, a Taiwan-based market research firm. Prices are expected to decline even more dramatically in the months ahead.

Prices of DRAM, which enables devices to multitask, peaked last fall and began sliding on a quarter-to-quarter basis, though still remained higher than the prior-year periods until recently.

It is the latest indication of a slowdown in a semiconductor industry that reaped major financial gains in recent years. The pandemic created extra demand for PCs, gadgets and data servers that help power online activity. That helped fuel a historic supply shortage—and a further skyrocketing of prices.

Memory chips are used in everything from automobiles to smartphones to refrigerators. They represent about 28% of the $595 billion semiconductor industry, which includes microprocessors and image-sensor chips, according to Gartner Inc., a market researcher.

Some of the most acute shortages have affected relatively low-cost parts like power-management chips or microcontrollers needed by auto makers.

Three of the semiconductor industry’s top four players by annual revenue last year were memory makers: South Korea-based Samsung Electronics Co. and SK Hynix Inc., plus Boise, Idaho-based Micron Technology Inc.

The memory industry’s weakened pricing power reflects slowdowns in sales of smartphones, PCs and other gadgets, as consumers increasingly feel the sting of inflation. Chip buyers, facing slowing demand, have curbed production, which has cooled semiconductor demand and replenished supply levels.

“Normally, the memory market goes in a cycle,” said Brady Wang, a Taiwan-based associate director at Counterpoint Research, a tech-market researcher.

The shifting dynamics are affecting the financial prospects of some of the chip industry’s biggest players. On Thursday, Samsung, the biggest memory-chip maker, forecast revenues for the April-June period to decline from the prior quarter—in what would snap a string of three quarters of record sales.

Micron, the No. 3 player in memory, recently issued revenue guidance well below analysts’ estimates and said it would cut back on manufacturing expansion plans and reduce capital expenses.

There were signs earlier this year that consumer demand had weakened, and Micron’s customers—which include PC and smartphone manufacturers—were expected to start reducing their inventories of chips, said Micron Chief Executive Sanjay Mehrotra.

“These inventory adjustments will really come in through the second half of this year,” Mr. Mehrotra said.

Companies that make other types of chips have also issued dimmer forecasts for the rest of the year. Intel Corp., which specializes in computer processors, told analysts last month that the outlook for the second half had gotten “a lot noisier” and that it would adjust its spending and investments accordingly.

Nvidia Corp., which specializes in graphic cards, said it was bracing for slowdowns in two of its key areas—crypto mining and game consoles.

The other major type of memory, called NAND flash, which provides content storage, has seen prices fluctuate over the past two years, according to TrendForce data.

They were up again in the opening months of the year due to a contamination issue at two flash-memory factories, which temporarily lowered supply.

DRAM, which represents nearly three-fifths of global memory sales, began to fall on an annual basis in recent months. But further declines are coming:

Average contract prices of DRAM are projected to slide by 21% in the July-September quarter from the same period a year ago, while similar prices for NAND flash during the same time frame are expected to fall about 18%, according to TrendForce forecasts.

At the beginning of this year, memory-chip makers held off from lowering prices of DRAM, expecting demand to pick up in the second half of the year, said Avril Wu, a research director at TrendForce.

“But now it’s clear that demand will be negative” in the coming months, Ms. Wu said.


Updated: 7-11-2022

Chip Giants To Build Factory In France As Global Supply Race Rolls On

GlobalFoundries, STMicro to build plant backed by the French government aimed at boosting supply-chain security.

GlobalFoundries Inc.and STMicroelectronics two of the world’s largest chip makers, said they would team up to build a semiconductor factory in France, leaning on government subsidies in what has become a global race to strengthen control over technological supplies.

The factory in Crolles in southeastern France would be jointly operated by the two chip makers and receive what they described as major financial support from the French government.

The three parties plan to invest a total of more than $5.7 billion in the plant, which they said should open by 2026 and create more than 1,000 jobs. They didn’t detail how the investment would be divided.

Both chip makers and the French government said Monday that a goal was to support the European Union’s ambition of becoming less dependent on other countries for important technologies.

The expanding footprint of New York-based GlobalFoundries would help provide its customers with supply-chain security, said Chief Executive Thomas Caulfield, adding that it would have been a challenge to do the project without French governmental support.

Over the past two years, the U.S., China and European countries have raced to strengthen their domestic chip-making abilities because of a confluence of factors.

Though the U.S. and Europe have leading companies in developing semiconductor technology, many of the actual chip manufacturers are based in East Asia, including Taiwan, the self-ruled island that Beijing claims and has vowed to unite with mainland China, by force if necessary.

The global chip shortage, which has only recently shown signs of starting to abate, and a pandemic that caused world-wide shipping delays further spurred politicians to take steps to localize what has long been a globally integrated semiconductor supply chain.

The EU earlier this year introduced a plan to make available about $49 billion to boost European chip research and production. Shortly after, Silicon Valley giant Intel Corp. announced its intention to build plants for advanced chips in Germany and suggested the project would be contingent upon the government support coming through.

Intel is also building facilities in Ohio, saying the scope and pace of those plans depend on how quickly Congress allocates about $52 billion in funding for expanding U.S. chip production and research and development.

In 2019, China set up a government-backed $29 billion fund to boost its domestic chip industry, and last year it announced plans to speed up development in advanced technologies, including chips, by 2025.

The U.S. government has sought to block Chinese chip companies from importing foreign components they need to make advanced semiconductors.

GlobalFoundries and STMicroelectronics—which is based in Switzerland—said the new French plant would focus on making chips for automotive, communications and industrial uses.

The office of French President Emmanuel Macron said he planned to visit the site of the planned facility on Tuesday.


Updated: 7-18-2022

Tech Bill Aims To Block U.S. Aid For Companies That Build Advanced Chips In China

Draft legislation headed for Senate vote would provide roughly $52 billion to boost U.S. semiconductor manufacturing.

A bill providing roughly $52 billion to boost U.S. semiconductor manufacturing would impose so-called guardrails aimed at ensuring adversarial countries such as China don’t benefit too, according to the draft legislation.

The chip legislation has been narrowed from a broader bill to help the U.S. better compete in advanced technology, and details are still being hashed out ahead of expected procedural votes in the Senate as soon as Tuesday.

As drafted by Senate Majority Leader Chuck Schumer (D., N.Y.) and other lawmakers, the bill would provide around $52 billion in subsidies for attracting advanced semiconductor manufacturing to the U.S.

It would seek to prevent companies from using the subsidies if they also were building or expanding advanced semiconductor manufacturing plants in China or other potentially unfriendly countries, according to a draft reviewed by The Wall Street Journal.

Some companies including Intel Corp. have been encouraging lawmakers to ease standards for qualifying for the subsidies for companies doing business with China, according to people familiar with the matter.

Asked if it was encouraging a more flexible standard, Intel said in a statement that it along with others has been providing input “to ensure that we have the best legislation possible and don’t inadvertently undermine the global competitiveness of companies that receive CHIPS funds.”

The Semiconductor Industry Association, a trade group, didn’t immediately respond to a question on whether it supports the guardrail provision.

In a statement, SIA President and CEO John Neuffer said the group is “encouraged the legislation is progressing and look forward to swift enactment of investments that strengthen domestic chip manufacturing, design and research.”

The Senate could take a procedural vote on the bill as early as Tuesday, an aide said, which will indicate how much Republican support the legislation has. An early bipartisan vote almost certainly paves the way for clearing hurdles to final passage.

The two parties were divided over the legislation for months, with Republicans saying a House version of the bill had elements related to jobs and climate change that strayed from the original intent of competing with China.

A further hurdle arose when Senate Democrats sought to revive a separate effort to pass a climate and prescription-drug bill along party lines.

That led Senate Minority Leader Mitch McConnell (R., Ky.) to threaten to block the broader competitiveness bill. It has since been narrowed to focus on subsidies for semiconductor manufacturing.

A spokesman for Mr. McConnell declined to comment on whether the Kentucky Republican has officially changed his position. But the climate and prescription-drug bill also has run into problems, easing GOP concerns.

On Sunday, Sen. John Cornyn (R., Texas) tweeted: “This will green light proceeding this week to shore up the dangerous vulnerability of US supply chain for advanced semiconductors.”

But there’s no guarantee that even the sharply narrowed version can pass and become law, as lawmakers push to get it done ahead of the August congressional recess.

The bill would jettison virtually everything else from the far-reaching competitiveness packages approved by the Senate and House over the past year or so, in hopes of ending a long congressional standoff.

Among the high-profile provisions that appeared likely to be cut—for now—were additional federal funding for cutting-edge technology research; proposed national-security reviews of some outbound U.S. foreign investments; waivers of tariffs on Chinese imports; and curbs on the sale of counterfeit goods online, among other provisions.

The new narrow version is expected to clear initial procedural votes in the Senate, according to a person familiar with the matter.

Another question is whether the House can muster the votes to pass the legislation. Although the effort has support from Speaker Nancy Pelosi (D,. Calif.) and other leaders, some House Democrats are expected to oppose the subsidies to the prosperous semiconductor industry.

That means the bill might need support from some Republicans to pass in the often-partisan House.

Numerous companies are waiting for Congress to pass the $52 billion incentive package for chip production and research before committing to significant expansion efforts, according to company executives and funding proposal documents.

The expansion plans anticipated getting part of their funding from the subsidy package, which early on had bipartisan support in Congress and has been backed by the Biden administration.

Those planned facilities would come on top of around $50 billion of plant investments already announced over the past two years as the industry scales up to satisfy increasing demand.

Critics of government funding for the semiconductor makers say the industry is taking advantage of the chip shortage and that companies would have moved ahead with U.S. projects without subsidies.

The government money is aimed at revitalizing U.S. chip production after manufacturing in recent decades shifted to Asia, where financial inducements have been plentiful and costs lower. Some national-security experts worry about concentrating so much capacity in Asia.

Appetite to fund the buildup domestically got a further boost during a two-year chip drought that led to idled car plants and soaring prices for some electronic goods.

American chip-making capacity has fallen to 12% of the world’s total from 37% in 1990.

Updated: 7-19-2022

US Senators Push For Last-Minute Tax Break In Semiconductor Bill

* $2 Billion Tax Break Would Revive Corporate Writeoff
* R&D Deduction Could Also Pass Congress Later This Year

A bipartisan group of lawmakers is making a last-minute attempt to revive a tax break for corporate research and development in the semiconductor funding bill that the Senate is debating this week.

Senator Todd Young, the Indiana Republican who has been leading the negotiations for his party, told reporters Tuesday that lawmakers are discussing a one-year extension to a tax break for R&D costs that expired at the end of 2021.

The addition, which is still being debated, would let companies deduct research expenses in the year they’re incurred, rather than a multi-annual period.

The addition would be a boon to technology, pharmaceutical and manufacturing companies with lots of R&D expenses, including Alphabet Inc.’s Google, Pfizer Inc., and Ford Motor Co. Without the change, companies starting this year will have to spread out the writeoffs for their domestic expenses over five years and the foreign costs over 15 years.

Corporations seeking the change say it’s critical to pass the tax break soon, because they’re currently incurring research costs that aren’t eligible for preferential tax treatment.

The measure has support from a broad swath of senators, including Democrats Mark Warner of Virginia and Jon Tester of Montana, and Republican Shelley Moore Capito of West Virginia. The extension of the tax break passed the House last year as part of President Joe Biden’s Build Back Better plan.

Other Vehicle

“I support it,” Tester said Tuesday. “We just need the votes.”

The attempts to add the R&D tax break — valued at an estimated $2 billion, according to Young — may yet fall short, as lawmakers continue to squabble over last-minute additions. Senate Majority Leader Chuck Schumer is pushing for a vote as soon as this week.

Young is also pushing to add provisions that would establish a directorate for technology and innovation within the National Science Foundation to support basic and applied research and bolster education in science, technology, engineering and mathematics.

Those further measures were included in a draft of the bill that was circulating Tuesday afternoon that didn’t include the tax break.

The overall legislation is a scaled-down version of a more expansive bill intended to make the US more competitive with China in technology and advanced manufacturing.

That legislation has been hung up for months in negotiations between the House and Senate over how to merge their different versions.

If the R&D tax break is left out, it’s still likely to be considered by the Senate this year. Senator Tim Kaine, a Virginia Democrat, said it’s “not impossible” for it to be included in the semiconductor package, but more likely to be in a subsequent vehicle — such as a government funding bill later this year.

“There’s bipartisan support for that. However, I think that gets done in the year-end bill,” John Thune, the No. 2 Republican in the Senate, said. “I think that gets fixed one way or the other.”

Updated: 7-21-2022

The US Has Lost Its Way On Computer Chips

When it comes to a semiconductor strategy, American policymakers don’t know which direction to turn.

In June 2021 the US Senate passed a bill dedicating more than $50 billion to increase the manufacture of semiconductors. At the time pandemic-related shortages in computer chips were highlighting US vulnerability to supply chain shocks, just as rising tension with China heightened national security concerns over technology.

Bolstering domestic capacity to make components with such profound economic and strategic importance seemed like an easy win for officials across the political spectrum.

Over a year later that money—the centerpiece of a bill called the Chips Act—still hasn’t been deployed. Senate Minority Leader Mitch McConnell said his party won’t support a bill to do so unless the Democrats abandon plans for spending on climate and other issues.

The Democrats, whose broader agenda has stalled anyway, are preparing a slimmed-down version for an imminent vote, and GOP leadership seems ready to support it.

The legislative momentum could yet give way to another round of inertia—considering the performance of Congress in recent years, it’s a decent bet that something such as this would happen.

Either way, the delay and uncertainty have shown that Washington is not prepared to act with an urgency that matches its rhetoric.

“The rest of the world is moving on with this,” says Bruce Andrews, chief government affairs officer at Intel Corp. “Other countries are aggressively recruiting. They’re providing incentives. They’re rolling out the red carpet.”

Silicon Valley is literally named after the stuff that semiconductors are made of, but the real action in the chip industry now mostly happens elsewhere. About 12% of chips are manufactured domestically, down from 37% in the 1990s, and the US lacks the ability to produce the most advanced components at scale.

Intel does most of its manufacturing in the US, primarily in Oregon, Arizona, and New Mexico. It’s also planning to build a large facility in Ohio.

But the rising stars are Asian heavyweights like Samsung Electronics Co., which overtook Intel as the biggest chipmaker by revenue last year, and Taiwan Semiconductor Manufacturing Co., which is on track to surpass Intel in 2023.

The governments of China, Japan, South Korea, and Taiwan have all prioritized localizing production, offering incentives that make it at least 30% cheaper to set up plants in their countries than in the US, according to Intel Chief Executive Officer Pat Gelsinger.

Those subsidies have helped shift most advanced manufacturing to Asia. The European Union is also working on a new package of incentives for chipmakers.

US policymakers have never been as enthusiastic about pursuing a full-throated industrial policy as their peers in Asia and Europe. Centrists and conservative officials profess faith in market forces to allocate resources and are loath to act in ways that appear to interfere with them.

The left doesn’t object to government intervention but opposes policies it sees as corporate welfare: Former US Secretary of Labor Robert Reich recently described the Chips Act as “pure extortion.”

At the same time the US is trying to increase manufacturing of its own advanced chips, it’s trying to ensure that China can’t get so good it can develop the most advanced semiconductors on its own. Officials seem to be working at cross-purposes there, too.

A major plank of US strategy has been to cut off Chinese companies from the tools needed to produce advanced tech. The US used this weapon to great effect against Huawei Technologies Co. in 2019 when it banned the export of US components to the company. Since then it’s imposed more such restrictions.

In December 2020 the US Department of Commerce announced it was putting Semiconductor Manufacturing International Corp., China’s largest chipmaker, and over 60 other Chinese companies on the so-called entity list, the department’s roster of institutions that pose potential national security threats.

Being on the list hindered access to machinery needed to make more advanced chips. (A draft of the bill lawmakers are currently voting on includes restrictions on companies that receive federal assistance from investing in China and Russia, a person familiar with the matter told Bloomberg News.)

The chip industry likes manufacturing subsidies but is less enthusiastic about restrictions on whom it does business with. Chinese orders for chip-manufacturing equipment from overseas suppliers rose 58% in 2021, making the country the biggest market for those products for a second year running, according to data from industry group Semi.

Chip-equipment makers and some semiconductor manufacturers have lobbied hard against broad restrictions, arguing that limiting their revenue will weaken their ability to fund future innovation, thus harming US competitiveness.

If China continues to have access to US technology on which it is reliant, their argument goes, it will have little incentive to undertake the long and expensive process of building the capacity to manufacture it on its own.

The Commerce Department has internalized this argument, focusing only on companies that are already on the entity list instead of pursuing broader restrictions against Chinese companies. In doing so, the department is effectively positioning such restrictions as a way to punish bad actors rather than as a policy tool in the greater US-China rivalry.

“I don’t think anyone would want the US government to dip into the private-sector supply chain and try to micromanage it if nothing wrong is happening,” Secretary of Commerce Gina Raimondo told Bloomberg News in June.

Hawks say this approach undermines the goal of preventing China from developing advanced semiconductors. “It’s one of the industries that can’t compete via free-market notions,” says Florida Senator Marco Rubio.

A way to address objections from US companies is to pressure competitors based in allied nations to cut off the supply of chipmaking technology to China, too. The US, for instance, has been pushing the Netherlands to ban ASML Holding NV from providing China with the equipment essential to older semiconductors.

But the approach to chip diplomacy has been inconsistent, with the pursuit of different priorities leading to paralysis. The US has succeeded in the first step toward solving its semiconductor problem, which is to admit that it has one. Several years after doing so, it’s having trouble getting to step two.

Samsung Eyes $200 Billion Expansion Of Chip Plants In Texas

* South Korean Company Is Leading Maker Of Memory Chips
* US Politicians Are Concerned About Supply Vulnerabilities

Samsung Electronics Co. is floating the idea of a broad expansion of semiconductor manufacturing facilities in Texas, a possibly significant step in bolstering domestic capabilities at a time of rising concern over US vulnerabilities.

The South Korean company, the leading maker of memory chips, laid out potential plans to spend almost $200 billion on 11 plants in a series of filings in the state.

Two of the units would be in Austin and nine would be in Taylor, Texas, where Samsung has already unveiled plans to spend $17 billion on an advanced facility.

The company isn’t committed to building the new facilities, and the “hypothetical” proposals could change under various circumstances.

The first new production facility would not start operating until around 2034 even if Samsung does proceed. Samsung revealed the plans in part to vie for Texas financial incentives ahead of a program expiration this year.

“We currently do not have specific plans to build at this time, however, the Chapter 313 applications to the State of Texas are part of a long-term planning process of Samsung to evaluate the viability of potentially building additional fabrication plants in the United States,” Samsung said in a statement.

The concentration of chip manufacturing in North Asia has drawn increasing attention from US politicians concerned about supply chain disruptions and China’s growing power.

Taiwan Semiconductor Manufacturing Co. and Samsung together dominate the business of making the most advanced chips for customers like Apple Inc.

“These new facilities solidify the Lone Star State as the nation’s leader in the semiconductor industry, and I thank Samsung for increasing their investment in the hardworking people of Central Texas,” Governor Greg Abbott said in a statement.

The US is moving toward a $52 billion federal program to provide grants and incentives to boost the American semiconductor industry.

The initiative has gained support after chronic shortages over the past two years left companies like Ford Motor Co. and Apple short of the chips they needed for production.

“This potential investment by Samsung reinforces that America’s industrial strategy is working, and underscores the urgency of Congress passing the CHIPs for America Act now, and getting it to President’s desk,” National Economic Council Director Brian Deese said in a statement.

“Passing the CHIPS Act will unlock hundreds of billions of dollars in additional investment in America, creating tens of thousands of jobs here at home, while strengthening our economic and national security.”


Updated: 7-26-2022

Senate Advances $280 Billion Bill Subsidizing Chip Manufacturing, Technology

Package, seen by proponents as critical to competing with China, draws bipartisan support.

The Senate voted 64 to 32 Tuesday to advance a $280 billion package of subsidies and research funding to boost U.S. competitiveness in semiconductors and advanced technology.

The vote required 60 votes to advance in the evenly divided Senate. Seventeen Republicans joined with all but one member of the Democratic caucus present to move the bill forward. Four senators were absent.

A final Senate vote is expected as early as Wednesday, and then the bill must be approved by the House.

The package is set to give a big boost to domestic chip production, seen by the White House and leaders in both parties as critical to the U.S. supply chain and national security, as most semiconductors are imported from overseas.

Shortages have also helped drive prices sharply higher for cars and other goods in recent years, and proponents say the bill will help cool consumer costs.

“I’m confident that future generations will look back on the passage of this chips and science bill as a turning point for American leadership in the 21st century,” said Senate Majority Leader Chuck Schumer (D., N.Y.) on the floor Tuesday.

“We can’t be so dependent” on faraway countries like Taiwan and South Korea for critical components, said Sen. Todd Young (R., Ind.) on CNBC, citing possible disruptions such as a future pandemic or geopolitical event.

Underscoring the importance of the funds for manufacturers, the chairman of South Korea’s SK Group, Chey Tae-won, held a virtual meeting Tuesday with President Biden.

SK said it is increasing its investment in the U.S. by $22 billion in businesses including semiconductors and green energy.

The bill had been expected to move ahead in the Senate in a procedural vote Monday, setting up a final vote in that chamber later in the week.

But Mr. Schumer delayed the vote until Tuesday, citing East Coast storms that disrupted senators’ travel plans. Several senators have also been out with Covid-19.

The bill restores many but not all of the main provisions of competitiveness legislation passed over the past year by the Senate and House.

The bill combines about $52 billion in subsidy funding to boost semiconductor production in the U.S., along with about $24 billion in advanced manufacturing tax credits that would also support the industry.

The package would authorize about $200 billion in spending, mainly for federally backed scientific research over the next decade. It would fund about $1.5 billion for next-generation wireless research and establish new long-term policies for the nation’s space program.

Much of the science funding represents a compromise between earlier House and Senate science funding bills. There is even a section named for Rep. Eddie Bernice Johnson (D., Texas), the retiring chairwoman of the House Science Committee, underscoring the House’s behind-the-scenes influence on the Senate-written bill.

Supporters, including the Biden administration and the U.S. chip-making industry, say the legislation is needed because of the high cost of building advanced chip manufacturing facilities.

They say the investment is needed for the U.S. to maintain its technological edge and to prevent semiconductor production from becoming too concentrated in Asia, where there are geopolitical risks of supply disruption.

Opponents—who include Sen. Bernie Sanders (I., Vt.) on the left and Sen. Pat Toomey (R., Pa.) on the right—say big semiconductor companies don’t need so much help.

“Should American taxpayers provide the microchip industry with a blank check…when semiconductor companies are making tens of billions of dollars in profits and paying their executives exorbitant compensation packages? I think the answer to that question should be a resounding NO,” Mr. Sanders said on Monday.

The science funding is aimed at boosting the U.S. government’s diminished standing in research spending, by some estimates at its lowest since before the space race of the 1960s. Cutting-edge areas expected to be affected include quantum computing and artificial intelligence.

The package’s revival in recent days came after Senate Republicans abruptly walked away from negotiations this summer. Republicans were unhappy that even as they were negotiating over the sprawling competitiveness bill, Democrats began simultaneously trying to revive a partisan package of climate spending and tax measures.

Updated: 7-27-2022

Senate Approves $280 Billion Bill To Boost U.S. Chip Making, Technology

Bipartisan backers say measure is needed to counter China, while GOP foes say embrace of industrial policy amounts to corporate welfare.

The Senate on Wednesday approved a $280 billion bill aimed at boosting the semiconductor industry crucial to modern technology, in a bipartisan embrace of expanding U.S. industrial policy to counter the competitive threat posed by China.

The vote reflected growing concern in both parties that the U.S. lacks a long-term response to Beijing’s technological and economic rise, a view galvanized when the Covid-19 pandemic disrupted chip supplies from Asia, with fallout across major industries.

The CHIPS and Science Act of 2022 would spend $52.7 billion on direct financial assistance for the construction and expansion of semiconductor manufacturing facilities, as well as other programs. It adds $24 billion in tax incentives and other provisions.

It would also turbocharge federal spending on scientific research, reflecting concerns that without more investment the U.S. might struggle to maintain a technological edge.

“It will mean more resilient American supply chains, so we are never so reliant on foreign countries for the critical technologies that we need,” President Biden, a strong supporter of the bill, said in a statement.

The bill was approved 64-33, with 17 Republicans joining a nearly unanimous Democratic caucus in favor. A deal announced late Wednesday on a Democratic climate, healthcare and tax bill upset Republicans and might undercut GOP House support for the chips bill, which aides from both parties said would be needed to pass.

Opponents of the bill pushed to attach more strings to the funding and questioned the wisdom of a large subsidy to a profitable industry. Sen. Rick Scott (R., Fla.) called the package “one of the grossest gifts to corporate America I’ve ever seen.”

By favoring a particular industry—in this case semiconductor manufacturing—the U.S. is practicing the kind of so-called industrial policy it has long avoided. But supporters say the change is needed for the U.S. to stay competitive.

“In the 1970s and ’80s our companies could do just fine on their own,” Senate Majority Leader Chuck Schumer (D., N.Y.) said in an interview this week. “But in the 21st century, with countries like China and Germany investing heavily, we could sit back on the sidelines and who would lose out? American workers, American economic dominance and our national security.”

The bill has been in the works for more than three years. Mr. Schumer said he first started discussing it in 2019 with Sen. Todd Young (R., Ind.) when the two were exercising in the Senate gym.

Companies that could tap the funding for U.S. expansions include Intel Corp., Taiwan Semiconductor Manufacturing Co., GlobalFoundries Inc., Micron Technology Inc., Applied Materials Inc. and more.

A broad swath of business leaders applauded Wednesday’s vote. The bill allocates $39 billion for semiconductor manufacturing, but also includes $11 billion to advance semiconductor manufacturing research and workforce training, and a $2 billion fund to more quickly translate laboratory advances into military and other applications.

“Companies that make semiconductors and companies that use semiconductors represent almost the entirety of the corporate ecosystem in America,” said Jason Oxman, president of the trade group Information Technology Industry Council, whose members include Intel, as well as manufacturers such as Toyota Motor Corp. and tech giants such as Inc.

International Business Machines Corp. Vice Chairman Gary Cohn had called for the legislation’s approval on a call with reporters earlier in the week. “We need to protect ourselves first as a country and make sure that we’re in the chip manufacturing business,” he said.

The Senate passed a version of its bill last year, but movement stalled until February when the House passed its version. The lower chamber added billions of dollars to combat climate change, as well as provisions on immigration and marijuana.

Talks then stalled again, with lawmakers hung up for months on which provisions to jettison and which to include.

Commerce Secretary Gina Raimondo lobbied both Democrats and Republicans, stressing the national-security worries of reliance on Taiwan or U.S. adversaries for semiconductors. Most of the chips aren’t made in the U.S.

Senior Pentagon officials gave briefings on Capitol Hill about national-security concerns. White House officials coordinated the efforts of dozens of industry associations, holding sometimes weekly meetings.

Pressure on lawmakers ramped up in June when manufacturers like Intel and GlobalWafers, a Taiwan-based semiconductor silicon-wafer firm that had announced plans to build in Sherman, Texas, along with others, began saying their U.S. expansion plans hinged on passage.

At an early June meeting in the White House’s Roosevelt Room, congressional and administration staffers concluded it was time to narrow the bill’s scope, said a White House official who attended.

Lawmakers stripped the bill of components they disagreed on, resulting in the skinnier Chips Act that dropped much of the House portion unrelated to semiconductors, but kept the research elements that lawmakers say will make the U.S. competitive long term.

During this week’s Senate debate, Sen. Bernie Sanders (I., Vt.) accused Intel Chief Executive Patrick Gelsinger of extorting lawmakers, pointing to the executive’s assertion that his and other companies would likely invest in manufacturing facilities in Europe or Asia if the bill doesn’t pass this summer.

“I worry not only about this bill. I worry about the precedent,” said Mr. Sanders, who caucuses with the Democrats. “Any company who is prepared to go abroad, who has ignored the needs of the American people, will then say to the Congress, ‘Hey, if you want us to stay here, you better give us a handout.’”

Intel praised the Senate vote in a statement Wednesday. Mr. Gelsinger, in a recent op-ed he co-wrote with Ford Motor Co. CEO Jim Farley published in The Wall Street Journal, said the legislation is necessary for the U.S. to “help level the playing field with global competitors.”

“Without intervention, shortages of chips—including the legacy chips widely used in the auto, medical-device and defense industries—are expected to persist as investment in the U.S. stalls,” Messrs. Gelsinger and Farley wrote.

Sen. Sherrod Brown (D., Ohio) joined Mr. Sanders in blaming the U.S.’s brittle semiconductor supply chain on the industry’s earlier decisions to move operations offshore. But Mr. Brown said he supports the bill because it promises jobs in his home state, where Intel is planning a chip-manufacturing facility. “We’re on the verge of a big win for Ohio,” he said.

In January, Intel announced plans to build a plant in Ohio, dependent on the legislation passing.

If the bill is approved in the House, as expected, it will give Democrats an accomplishment to talk about in a year when much of Mr. Biden’s agenda is stalled, though it could be years before new chip fabrication plants are built.

Sen. Raphael Warnock (D., Ga.), who is up for re-election, singled out a KIA Corp. auto factory in West Point, Ga., which has been forced to shut down operations multiple times due to the chip shortage.

He said the bill will “help lower costs, create Georgia jobs and ensure Georgia workers are ready to compete in a changing economy.”

Many lawmakers also see hometown benefits in the bill’s second component, which authorizes nearly $170 billion for technology research and development across several federal agencies during the next five years.

Chunks of that funding are expected to flow to rural states under new formulas for distributing research dollars. The legislation also directs the Commerce Department to create 20 “regional technology hubs” designed to create more tech jobs across the country.

The technology R&D investments target fields including artificial intelligence, quantum computing, wireless communications and precision agriculture.

The National Science Foundation would oversee a new $20 billion directorate focused on accelerating the development of technologies critical to U.S. security, in addition to an increase to $61 billion for its core activities funding researchers at universities and elsewhere.

The Energy Department’s Office of Science‘s five-year authorization would increase to about $50 billion to boost a series of programs focused on clean energy, nuclear physics and high-intensity lasers.

The bill also sets new long-term policies for the National Aeronautics and Space Administration, instructing the space agency to prioritize the research required to bring Americans to Mars, as well as programs such as Artemis Moon, which could put the first woman and person of color on the moon.

Updated: 7-28-2022

Rival Chip Makers Brag About Having The Tiniest Products, But Who Can Tell?

Intel, Samsung and TSMC talk big about how many transistors they can cram on a teeny chip, but the advertised sizing makes little sense

The makers of semiconductors running smartphones, TVs and other electronic gizmos like to brag about the power of their components. They also boast that the chips doing all the complex work are shrinking.

The race to miniaturization signals breakthroughs in processing speed or energy consumption and can help win lucrative contracts.

But the battle to be the top small-fry has led to big confusion. Chips carry a number tied to the size of its transistors, and, for years, it was believed that the lower the number, the better the chip. Now, everyone is sort of making up their own standards.

When Samsung Electronics Co. recently started mass production of what it called the industry’s first 3-nanometer chip, company executives celebrated the moment by holding up three fingers.

But ask chief rivals Taiwan Semiconductor Manufacturing Co. and Intel Corp., and they would likely suggest the South Koreans hold up another finger, if not more.

“Please,” said Jui-Lin Yang, a consulting director at a Taiwanese research center with close ties to TSMC, “do not focus on the number three.”

Meanwhile, it isn’t clear if Samsung’s 3-nanometer chip outperforms the 4-nanometer chip from TSMC, based on the numeric claim alone, according to Willy Shih, a professor at Harvard Business School. Such factors as computing performance and power consumption would need to be compared, he said.

“The triumph of marketing hype,” he said of the industry’s nanometer labels. “Three is better than four.”

Samsung declined to comment about comparisons with TSMC products. The company said its latest chip had improved from prior offerings that used the older 5-nanometer process technology.

The semiconductor fibs echo marketing gimmicks in other industries, such as the variation in modern clothing sizes that make room for men with 34-inch waists, for instance, to fit into pants marked as “32.” In women’s clothes, today’s size 8 might be yesterday’s size 16.

The semiconductor industry used to band together to create common measuring definitions. For decades, they marched in step with Moore’s Law, the 1965 prediction that the number of transistors packed onto a chip would double every year (later amended to roughly every two years).

Breakthroughs in miniaturization, known as nodes, helped shrink refrigerator-size computers to laptops, smartphones and wristwatches.

Complicating matters further, the number of companies pursuing cutting-edge chip production has shrunk over the decades from dozens to three: TSMC, Samsung and Intel.

That has added incentives to stand out in the market, even if the companies have, literally, very little to work with. The most advanced semiconductors have shrunk a chip’s circuitry to the size of a few atoms.

Chip makers mark their tech prowess in this Lilliputian world by the nanometer, a billionth of a meter. This marquee number refers to the length of a key component of transistors—called a gate—that regulates the flow of electricity.

Smaller gates translate to smaller transistors, and the smaller the transistor, the more of them that fit onto a single chip.

As the nanometer numbers head closer to toward zero, sizing them up has become increasingly lawless. The nanometer nomenclature is now a better measure of how far companies are willing to stretch the truth.

Intel, having fallen behind TSMC and Samsung in tech advances, rebranded its entire high-end chip library last year. The 10-nanometer chip became an “Intel 7.”

Chief Executive Pat Gelsinger acknowledged at the time that such industry labels, including Intel’s, “no longer refer to any specific measurement.”

The chip world saw a rare nanometer showdown in 2015, which helped deflate the value of the number labels. Apple Inc., for its iPhone 6S series, hired both TSMC and Samsung to make its “system-on-a-chip” component, essentially the brains of its smartphone.

Samsung provided Apple with 14-nanometer chips; TSMC supplied 16-nanometer ones. After the iPhone 6s was released, tech reviewers, testing performance side by side, concluded the TSMC-run iPhones performed slightly better, with less overheating and better battery performance.

Apple currently uses TSMC exclusively for iPhone system-on-a-chip orders.

Such a high-profile chip-to-chip matchup “will unlikely ever happen again,” says David Schor, editor in chief of WikiChip, a semiconductor engineering website.

The duel bared the industry’s barely veiled secret, according to people familiar with the matter. Neither the TSMC nor Samsung chip matched its label. Both were roughly 30-nanometer chips in measurement, the people said.

“If they were in math class, I’d rap all their hands with a ruler,” says David Kanter, a semiconductor and computing expert, who has consulted for such chip makers as Intel and Qualcomm Inc.

Some chip experts have suggested creating a new system, replacing nanometer numbers with other measures, such as performance, power reduction or cost. “The Node is Nonsense,” screamed a 2020 headline in the Institute of Electrical and Electronics Engineers’ trade magazine.

A proposed solution by Philip Wong, a professor of electrical engineering at Stanford University, has drawn some industry attention: the “LCM density metric,” named for its measure of logic, memory and connectivity.

“I admit,” he said, “it doesn’t roll off the tongue.”

In April 2020, the chairman of the IEEE International Roadmap for Devices and Systems urged chip makers to “return to reality.” He proposed replacing nanometers with a three-variable metric that charts chip features. Many others, including Intel’s former top scientist, have called for clearing up the “node naming mess.”

Yet in the chip world, the obsession with size still matters. Intel aims to close the gap with its rivals by releasing the “Intel 3” in 2024. Samsung and TSMC are eyeing the launch of 2-nanometer chips by 2025.

Updated: 7-29-2022

Chips Act Skips US Leaders For Asian Winners

For all its ambition and that extra $52 billion in funding, the US needs to do a lot more to stay ahead of China and close the gap on Taiwan and South Korea.

Long-awaited funding for the CHIPS Act is a win for a cabal of US chipmakers and foreign companies, but largely ignores the nation’s true semiconductor leaders who have been propping up the domestic sector for two decades.

Three-quarters of the $52 billion allocated to the industry by Congress was earmarked “to strengthen semiconductor advanced test, assembly, and packaging capability in the domestic ecosystem.”

The rest of the funds will largely go to a technology center to be set up by the Commerce and Defense departments, and a new Manufacturing USA Institute that will mostly research new ways to make chips, according to the funding schedule outlined in Senate Amendment 5135. It passed the House Thursday.

The act was designed to help close the gap with Taiwan and South Korea in terms of manufacturing capacity and prowess, while ensuring the US stays ahead of China, which is also spending significant sums to boost its own chip sector.

But the move will barely put a dent in American reliance on foreign manufacturing, and won’t boost resilience against supply shocks, either.

Taiwan Semiconductor Manufacturing Co.’s factory in Arizona will end up accounting for a minuscule 1% of its global capacity.

And even then, once those chips are manufactured, they’ll be popped straight onto a plane to be tested and packaged in Asia, before being assembled into a phone or PC in China.

Even after all this government money is spent, Taiwan and South Korea will retain a dominant share of capacity and continue to be technology leaders.

That said, Intel Corp., which designs, manufactures and packages chips at factories in global locations including the US, Israel, China, Vietnam and Ireland, is set to be a big winner. Texas Instruments Inc. can also expect to benefit.

Neither company is capable of making chips using the world’s leading manufacturing nodes. Yet foreign players, including TSMC, Samsung Electronics Co. and materials supplier GlobalWafers Co. have already put their hand up for subsidies and are likely to receive funds, too.

Missing out, though, will be the companies that have come to dominate the most-advanced semiconductor technologies on the planet including Nvidia Corp., Qualcomm Inc. and Broadcom Inc.

That’s because these companies, each of which have a larger market capitalization than Intel and TI, are purely focused on the design and development of chips, without manufacturing them.

Driving the political rhetoric behind the promotion and drafting of the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act is the notion that making physical goods — manufacturing them — is more important and crucial to national security than designing them.

In fact Apple Inc., which also develops advanced chips, is proof that being a technology leader doesn’t mean being a manufacturer since the Cupertino giant doesn’t actually make most of its gadgets.

And it’s the chips from the iPhone designer, as well as Nvidia — a world leader in artificial intelligence — and Qualcomm, the biggest name in wireless communications, that are filling up TSMC’s leading-edge facilities in Taiwan and Samsung’s in Korea.

Intel fell so far behind that it needs TSMC’s factories to churn out some of its best products.

You wouldn’t have the world’s most powerful machine-learning tools, global cellphone communications, or the hottest-selling device on the planet without fabless chip designers.

Still, you won’t hear Nvidia, Apple and Qualcomm complain — at least, not publicly. Although they were passed over for Congressional candy, they’ll end up benefiting from the fact that this largess will help their suppliers of choice (TSMC and Samsung) set up facilities on US soil.

Neither was particularly keen to shift focus away from their manufacturing hubs at home, but a change in the global political environment coupled with promises of tax breaks and other subsidies meant they couldn’t resist.

Yet they’ve also made clear that the money better come through if the US wants such projects to continue.

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

A vast amount of its materials and equipment come from abroad, too. While Lam Research Corp., KLA Corp. and Applied Materials Inc. hail from the US, dozens more, such as ASML Holding NV of the Netherlands, BASF SE from Germany, and Tokyo-based Shin-Etsu Chemical Co., form part of an international network.

Few of the hundreds of global suppliers will have the funds or personnel to shift any operations to the US, even with the incentives on offer.

Reality often doesn’t matter in politics. The long-awaited funding for the Chips Act is being hailed a victory for the White House and proof of bipartisan collegiality, but in reality it’s a victory for America’s semiconductor laggards and the foreign companies that dominate them.


Updated: 7-30-2022

House Passes $280 Billion Package For Chips, Scientific Research And Biden Set To Sign Bill Into Law — Here’s What’s In It

Legislation provides $52.7 billion for semiconductor industry.

In a 243-187 vote on Thursday, the House approved a $280 billion bill focused on domestic semiconductor manufacturing and scientific research.

The legislation is expected to get signed into law quickly by President Joe Biden, who has called for House passage after the Senate gave its OK in a 64-33 vote on Wednesday.

The bill’s final name is the Chips and Science Act of 2022, following a variety of monikers over the months for versions of legislation aimed at tech issues, including the U.S. Innovation and Competition Act and the COMPETES Act.

One key element for the legislation, which totals more than 1,000 pages, is $52.7 billion for domestic manufacturing of chips, including $39 billion for an incentive program and $11 billion for programs aimed at research and development and workforce development.

In addition, a 25% investment tax credit for semiconductor plants has an estimated cost of $24 billion.

There is also roughly $200 billion for scientific research, including $81 billion for the National Science Foundation, $10 billion for regional technology hubs and $68 billion for the Department of Energy.

This Table Shows Some Of The Legislation’s Funding For Scientific Research:

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

Backers of the bill from both parties have described it as meeting critical national-security needs. They’ve emphasized that it aims to prevent companies that receive funding from expanding their microchips manufacturing in China or “other countries of concern,” and the funding also can’t go toward stock buybacks or dividend payments.

“This is the bold action needed to counter investments in innovation made by our foreign competitors, including China, and will help us reclaim America’s global leadership in innovation,” said a statement from TechNet, which lobbies for the technology industry.

But some senators still panned the measure, with Republican Sen. Chuck Grassley of Iowa tweeting that he saw eye to eye with a prominent Vermont colleague who usually votes with the Democrats.

“Bernie Sanders & I almost never agree but he is right about so-called CHIPS bill,” Grassley said on Twitter. “It’s just a huge govt handout to massive/already-profitable companies.”

Earlier this week, the chips measure had been expected to sail through the House with ease, but on Thursday there were concerns that it would face a closer-than-anticipated vote, after Republicans objected to Wednesday’s surprise deal among Senate Democrats on a separate $739 billion healthcare, climate and tax package.

In the end, 24 House Republicans voted for the chip bill on Thursday, and no Democrats voted against the measure, although one did vote “present” rather than “yea” or “nay.”

White House press secretary Karine Jean-Pierre signaled on Friday that Biden may sign the legislation into law after the weekend.

“We’ll probably have more on the signing of the chips act early next week,” she told reporters during a briefing.


Congress’s $76 Billion Plan To Help U.S. Chip Makers Is Bad Tax Policy — And Could Turn Into Subsidies Forever

Instead, fix the tax code’s bias against capital investment.

Both the Senate and the House of Representatives have approved $52 billion in grants and $24 billion in tax credits that advocates say will strengthen the production of semiconductors in the U.S. while increasing national security.

Now U.S. semiconductors could join wool, mohair, helium, soybeans, ethanol, steel and credit unions as industries thought to be so important as to warrant taxpayer subsidies—forever.

True, the CHIPS and Science Act would provide these subsidies only through 2027, but you can count on the Washington apparatus to continuously push for another round of grants and tax credits until it becomes permanent.

A better path, as outlined in a recent Tax Foundation study, is to fix the bias against capital investment in the tax code.

Lawmakers could do that by letting businesses write off the cost of their capital investments, including equipment, structures, and research and development in the year in which the purchases are made. These measures allow all industries to thrive, not just the politically connected.

This is especially true of semiconductors, an industry that changes as fast as Moore’s Law, which basically says that the speed and capacity of computer chips tend to double every two years.

Rather than create a federal “chip” bureaucracy and a special interest group dependent on subsidies, Congress would do better to broadly reduce the tax cost of research and development and of building factories, which can cost tens of billions of dollars.

Unfortunately, Congress’s propensity is to target help to specific industries rather than enact policies that improve the overall investment climate in the U.S.

At the same time as Congress is considering taxpayer subsidies for the semiconductor industry, it allowed a tax provision that lowers the tax cost of R&D for all companies to expire at the start of this year.

Normally, companies can write off the cost of R&D expenses in the year they make the investment. But starting this year, the 2017 Tax Cuts and Jobs Act requires firms to deduct those costs over many years, which effectively raises their taxes and the cost of R&D.

A recent Tax Foundation study reports that no other developed country requires companies to spread R&D deductions over multiple years. Indeed, “China allows R&D expenses to be immediately deducted and provides additional ‘super deductions’ to encourage R&D investment.”

If we are going to compete with China, we need to have a more competitive tax system than theirs. This bill is a step in the wrong direction.

Similarly, the 2017 tax law allowed companies to write off purchases of equipment and machinery, such as the machines that make computer chips. However, in 2023, the benefits of those write-offs will begin to phase out, making those investments more expensive and less attractive in the U.S.

Making these provisions permanent will give all companies, not just a select few, confidence to invest in the future. It is easier for an industry to rely on a sound, pro-growth tax code rather than on continuously expiring tax carveouts.

U.S. tax law is even less kind to major investments, such as factories and buildings. The cost of those investments must be written off over 39 years rather than in the year the investment is made. In an era of 9% inflation, such deductions are worth less every year.

By contrast, China allows factories to be expensed over 20 years, and many firms pay a lower corporate tax rate than do U.S. companies.

Tax Foundation economists estimate that the average tax cost of new investments of factories in China is 4.8%. In the U.S., the tax cost of such an investment is 18.3%. Throwing billions into taxpayer subsidies and U.S. firms won’t change that disparity.

Ironically, the U.S. tax code allows companies to write off the wages they pay their workers, but not the buildings those workers work in every day.

Unfortunately, Congress’s propensity is to target help to specific industries rather than enact policies that improve the overall investment climate in the U.S. Today it’s the chip industry. Past Congresses obsessed over steel.

During the height of the COVID-19 crisis, lawmakers strove to onshore the production of medical supplies and personal protective equipment (PPE).

In times of crisis, the intent behind such policies is laudable. But targeting benefits to one industry not only violates the basic principles of sound tax policy, it’s also short-sighted.

What is good policy for medical manufacturing should also be good policy for semiconductors, automobiles, steel and every other industry that might one day be critical.

The federal budget is comprised of sedimentary layers of programs, often well-intended, that were created to solve a national crisis or emergency.

Sadly for taxpayers, the programs also create special interests who organize to protect these programs and subsidies long after the crisis has passed.

Lawmakers should embrace these historical lessons and not deposit subsidies for semiconductors atop these alluvial layers of budgetary largess. Good tax policy can benefit all industries equally.



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