Biden’s order calls for a 100-day review of supply chains across four key industries: semiconductors, critical minerals, pharmaceuticals, and large capacity-batteries for electric vehicles, according to CNET.
The shortages are not confined to the United States, though. It has become a worldwide problem, exacerbated by the ongoing coronavirus pandemic. Besides the current pandemic, the increased use of laptop computers by the public during the crisis has added to the semiconductor chip shortage.
Shortages have gotten so bad that several automotive companies — including Volkswagen, Fiat Chrysler, and Toyota — have been forced to temporarily suspend vehicle production over the past several months due to the global chip shortage.
In an article in Digital Journal on February 7, Supplyframe’s CMO Richard Barnett, who is a veteran semiconductor supply chain expert, pointed out that semiconductors used in automobiles are also used in consumer electronics and enterprise computing.
Barnett said the situation is precarious because, “Businesses seldom have a buffer supply of semiconductors to address demand spikes, and it takes a long time to replenish the semiconductor supply.”
The major suppliers of semiconductor chips used in cars are overseas, namely Taiwan-based Taiwan Semiconductor Manufacturing Company (TSMC) and United Microelectronics Corporation (UMC). This outsourcing of chip production is also adding to the shortages because the chips are not being made in-house.
Then there are the lingering impacts of Trump’s trade war with China that make it harder for American companies to get chips from overseas.
Outsourcing of chip production
According to the Detroit Free Press, the data company IHS Markit has been tracking the chip shortage since April 2020. Based on the company’s data, they estimate that the chip shortage will result in 672,000 fewer light-duty vehicles built globally in this first quarter. As part of that total estimate, North America will see about 100,000 fewer vehicles made.
But some in the automotive industry are saying that there is probably little that President Biden can do in the short-term to alleviate the chip problem.
“It is a reasonable goal to want to secure and protect the supply chain for U.S. manufacturing and parts, given the issues the auto industry is currently facing, but this will do little to address the near-term shortage of semiconductors,” said Jeff Schuster, LMC Automotive’s president of Americas Operations and Global Vehicle Forecasts.
“It will be challenging to make changes to a global supply chain in the medium term without significant investment and incentives.”
However, this argument is one of Biden’s concerns. Biden says the nation’s manufacturers have become increasingly reliant on imports of the chips, creating a possible risk to national security and the economy. A fact sheet supplied by the White House explains:
“The United States is the birthplace of this technology and has always been a leader in semiconductor development. However, over the years we have underinvested in production — hurting our innovative edge — while other countries have learned from our example and increased their investments in the industry.”
Pandemic changes demand patterns
And as CBC Canada points out, it seems the coronavirus pandemic created a vicious cycle of supply and demand problems that have escalated as the months have dragged on into the new year.
The pandemic has created global supply problems. People confined to staying home and indoors used their vehicles less, and buying a new car or truck was the last thing on anyone’s mind, so automakers scaled back production, said Will Mitchell, a professor of strategic management at the Rotman School of Management in Toronto.
“They don’t order as many chips, [so] the people who make the chips cut back on staffing, shut down some facilities, and have less of a base to make more chips,” he said. “Now we’re in 2021, demand is coming back, orders for chips are coming back and the companies that make the chips have to scale up production.”
Nikola Dimitrov, a vice-president with AIS Technologies Group in Windsor, Ontario, says the supply chain is broken – “from the beginning all the way to assembling the goods and delivering it to the customer.”
Dimitrov says that the automotive industry is a relatively small sector for chipmakers. The auto industry spends around $40 billion US a year on chips — about a tenth of the global market. “The business model of the chip manufacturers, I think, is playing a big role in this,” he said. “I think the automotive sector is finally realizing they are not as important as they think they are.”
