Global semiconductor supply chain woes have been dragging on for months as demand for these chips continues to exceed what the domestic manufacturing sector can deliver. 

In May of this year, the wait time for semiconductors hit 18 weeks, slowing from 17 weeks the previous month, according to Susquehanna Financial Group and Bloomberg. That marks a record wait time since Susquehanna began tracking the data in 2017. For some chips, like those used for power management, lead times are well in excess of the chip industry average, with wait times lengthening to 25.6 weeks. A recent White House review of the nation’s supply chains found that “the United States has fallen from 37 percent of global semiconductor production to just 12 percent over the last 20 years.”

Lawmakers are now taking action to support the U.S. semiconductor industry and remedy its supply chain shortages. On June 8, the Senate passed a bipartisan bill set to invest $52 billion over five years on incentivizing domestic research and development efforts as well as manufacturing in the chipmaker industry. This bill specifically incentivizes items such as alternatives to Chinese 5G telecommunication gear. Just over a week later, a bipartisan group of senators “proposed a 25 percent tax credit for investments in semiconductor manufacturing as Congress works to increase U.S. chip production,” Reuters reported.

Why the Semiconductor Shortage Matters

Semiconductors are ubiquitous in everything from cars to consumer electronics. The United States is in a particularly vulnerable position right now as a result of the chip shortage.

These new pieces of legislation are expected to increase the incentives associated with R&D and domestic production so that the U.S. does not have to rely as much on a global supply chain in the future. But these proposals will not be an instant fix.

More Analysis From Kurt ShenkWhat President Joe Biden’s Russia Sanctions Mean for U.S. Tech

 

An Issue of Global Scale

In 2020, 47 percent of global semiconductor sales were made by companies domiciled in the United States. For every dollar earned by a U.S.-based chipmaker last year, approximately 19 cents were invested back into research and development. U.S. chip companies see the opportunity within this sector and are willing to invest significantly in this space in order to position themselves for future growth. We expect that this ratio will continue into the future — and hopefully increase as a result of recent bills that have been passed by U.S. lawmakers. For comparison, European chipmakers ranked second among regions investing in R&D, investing approximately 17 cents of every dollar earned back into R&D, according to Bloomberg. Chipmakers based in the United States should take advantage of new opportunities and incentives around R&D investments if they want to remain competitive in the future and build a more sustainable domestic supply chain.

China is another factor in the semiconductor supply crunch in the United States, particularly in the chip equipment market. Approximately 25 percent of all U.S. chip equipment exports last year went to China, the number-one country for such exports. That 25 percent is valued at $5 billion, a figure that has more than tripled since 2014. 

As is the case across many industries, China competes with the United States in semiconductor manufacturing. China continues to try to shift its focus away from low-cost manufacturing and toward higher-value products, such as chips, but this shift has been slow, and China still accounts for less than 10 percent of global semiconductor sales last year, ranking sixth behind the U.S., South Korea, Japan, Europe and Taiwan, according to the Semiconductor Industry Association and Bloomberg. 

Still, China’s semiconductor manufacturing capacity increased by 50 percent from 2015 to 2019, compared to a decline of approximately 15 percent in North American manufacturing capacity during that same time. China aims to be the global leader in the manufacturing of chips by 2030, and there are government subsidies in place to support Chinese technology companies in this space. 

 

What’s Behind the Supply Crunch?

There are numerous reasons why demand for semiconductors is outstripping supply, not least of which is the pandemic, which has spurred both tailwinds and headwinds for the industry. One headwind was that many factories needed to shut down temporarily, and one tailwind was the increased demand for many technology enabled devices — each powered by a microchip — necessary for remote work. 

One obvious reason why demand has outweighed supply over the last year is that economic forecasts simply did not anticipate a pandemic or the various disruptions it has caused. Bloomberg estimates that the automobile industry, for instance, will lose upwards of $110 billion in revenue because companies are not able to purchase enough semiconductors this year and expect to produce approximately 3.9 million fewer vehicles as a result of this. Over the past two decades, the cost of a chip has come to represent 40 percent of the overall cost associated with manufacturing a car, according to Bloomberg, and this percentage has more than doubled from the turn of century. 

The automotive industry has been particularly hard-hit because many manufacturers, out of an abundance of caution, reduced the number of semiconductors purchased once the pandemic took hold. Demand for automobiles started increasing again in the fourth quarter of last year, but the chip industry had shifted its focus toward supplying some of the bright spots in the economy — such as the technology industry — and could not meet the demand of the auto industry. 

Extreme weather conditions this year have also affected the global supply chain of chips. These include the February deep freeze in Texas, which is a hub for semiconductors, and natural disasters in Japan and Taiwan, which have impacted several of the larger chip manufacturing plants. 

 

Potential Solutions for the Semiconductor Shortage

Chipmakers are looking to build larger manufacturing facilities, but doing so is an expensive and time-consuming effort. Pictured below is the rise in expected semiconductor fabrication capacity over the coming year. Given the time needed to get such production facilities up and running, we anticipate the supply chain shortage with chips will likely continue well into 2022 and likely also 2023. 

In June, Intel Corp. CEO Pat Gelsinger told Bloomberg: “I don’t expect the chip industry is back to a health supply-demand situation until ’23. For a variety of industries, I think it’s still getting worse before it gets better.” Gelsinger also said he believes the chip supply issues will bottom out in the second half of 2021.  

While lawmakers’ efforts to incentivize domestic production of semiconductors are expected to bring about investment and change, chipmakers’ abilities to expand their production capacity will take time. The hope behind these bills is to decrease reliance on the Asia-Pacific region for chips and to better prepare the United States for other future crises. 

Expert Contributors

Built In’s expert contributor network publishes thoughtful, solutions-oriented stories written by innovative tech professionals. It is the tech industry’s definitive destination for sharing compelling, first-person accounts of problem-solving on the road to innovation.

Learn More

Great Companies Need Great People. That's Where We Come In.

Recruit With Us