The Fuse

Chipaggedon Continues To Hurt The Auto Industry

by Theo Malhotra | August 24, 2021

As the global semiconductor shortage continues, automakers are becoming increasingly impacted, with chip delays longer than ever. According to research firm Susquehanna Financial Group, the gap between ordering a chip and delivery has grown from 13.2 weeks in December 2020 to 20.2 weeks in July 2021.

Automakers across Europe, Asia, and North America have been forced to scale back production significantly due to the chip shortage. Volkswagen’s Wolfsburg plant, which employs over 60,000 people, will decrease scale to just one shift next week, while Audi, a VW subsidiary, will extend a summer break at its German factories. Toyota, which had previously managed the chip crisis better than competitors due to its chip stockpiles, has suspended output at 14 plants across Japan throughout September, when it will slash production by 40 percent. And earlier this month, General Motors was forced to close its three main North American truck-making factories, while Ford temporarily shut a truck-assembly plant earlier this week.

The auto industry’s recent closures—and losses—are the result of a decades-long trend of semiconductor production shifting away from the U.S. and Europe. Analysis from Boston Consulting Group finds that U.S. control over global chip manufacturing has fallen from 37 percent in 1990 to 12 percent today. Countries with the most powerful semiconductor industries today—Taiwan, South Korea, China, and Japan—are those in which the government has incentivized the build-up of domestic industries by funding a large proportion of semiconductor fabricator construction.

A free market for chips does not exist.

Countries suffering from the chip crisis, especially the United States, must recognize that this industry is dependent upon heavy government input: A free market for chips does not exist. The United States remains dependent on Taiwan for chip foundries, which leaves American industry vulnerable. Taiwan Semiconductor Manufacturing Co. (TSMC) makes 92 percent of the world’s most sophisticated chips, while the United States produces none. Experts have also found that TSMC controls 60 percent of the market share for microcontrollers, the chip necessary for vehicle production.

This reliance has hampered the U.S. auto industry financially and presents dangerous problems for the country’s national security. Early this year, cyber security firm TeamT5 began observing a steady increase in attacks on the Taiwan’s chip industry, which experts believe is detecting Chinese state actors stealing chip intellectual property.

There are, however, positive indications that the U.S. government has been actively addressing the country’s dependence on Taiwan. The Biden administration’s defense budget for the 2022 fiscal year includes $2.3 billion for microelectronics efforts that are deemed critical to long-term national security. Congress also recently passed the CHIPS Act, which includes a $10 billion provision to incentivize domestic semiconductor manufacturing and investments in research.

Additionally, Intel announced yesterday that it would provide commercial foundry services to the Defense Department, which is aiming to ramp up domestic investments in the design, technology, and production of chips. Intel’s foundry unit will partner with other companies to form the Rapid Assured Microelectronics Prototypes – Commercial program, which will provide a domestic chip-building ecosystem to the DoD, helping the U.S. secure its long-term needs for the vehicles, devices, and military equipment that require semiconductors.

The Hon. Ellen Lord and SAFE’s Jeffrey Nadaner recently presented A 21st Century Defense Industrial Strategy for America, a report which outlines how the U.S. can reshore its defense supply chains, beginning with microelectronics. The authors suggest that the U.S. follow Taiwan’s model, where the federal government would finance the building of semiconductor fabrication plants (“fabs”), while private industry pays for running the fab.

Noting how the chip shortage over the last year called attention to the U.S.’s foreign reliance for microelectronics, Randhir Thakur, president of Intel Foundry Services, argued “One of the most profound lessons of the past year is the strategic importance of…having a strong domestic semiconductor industry.”