Tuesday, October 25, 2022

Supply Shortage

John Phipps: Is the Chip Shortage Far From Over? Why a Global Frenzy is Underway

Although U.S. agriculture is trying hard to look the other way, tensions between the U.S. and China are escalating. John Phipps has talked about facets of this situation, but he looks into it even more.

The biggest development in our simmering feud has been our resentment (along with the rest of the world) of our dependence on China’s manufacturing dominance. Now that they’ve begun to move toward producing not just consumer goods but cutting-edge technology, we have noticed we really aren’t in a strong bargaining position. Our government, along with other China competitors notably allies South Korea and Taiwan are matching our steps to lower our dependence on all things Chinese. It will be a challenge.

The headline-grabber in this competition is semiconductors or chips. If you remember my commentary on the topic from April 21, this is an illustration of where chips come from. The first step, which is not clearly shown, is to design the semiconductor.

The U.S. is the overwhelming dominant global player is this architectural step. But then we hit a block in our pipeline. Outside of semiconductor giant Intel, we have very little fabrication capacity. Like the rest of the world, we have relied with good reason upon partners TSMC and Samsung, who produce about 90 percent of basic chips. However, pressure from industry and political sources has prompted plans to build domestic fabrication plants.

New plants have been announced in Texas, New Mexico, New York, Arizona, and an enormous fab in Ohio. Meanwhile, China has responded by rapid expansion of their foundry capacity. The Inflation Reduction Act provided around $200B to make this happen. Personally, I am a little skeptical of completion dates – remember Foxconn in Wisconsin, for example.

Regardless of what gets built or not, this global frenzy to build chip fabs has some big challenges to overcome. Before the pandemic and supply chain meltdown, there was strong demand for semiconductors, but few outright shortages of any size. Supply and demand were roughly balanced. The planned facilities may reduce our dependence on foreign suppliers, but they could also flood the market just as the global economies edge toward recession, crimping consumption.

I’ll detail some of the possible problems next week, along with possible outcomes.

Source: AgWeb