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Our chip problem is not a supply chain crisis

Hmmm:

U.S. manufacturers and other companies that use semiconductors are down to less than five days of inventory for key chips, the Commerce Department said Tuesday, citing the results of a new survey.

So we're OK until Sunday? Or will we then have another five days of inventory?

Commerce Secretary Gina Raimondo said the survey results show the urgency for Congress to approve the U.S. Innovation and Competition Act, which includes $52 billion to boost domestic chip production.

Right. That might help or it might not, but in any case it won't help for a few years. New fabs don't spring out of the ground like tulips.

There's no compelling reason to point this out except for one: it's yet more evidence that we need to stop talking about shortages as a "supply chain crisis." They're not. They're a growth problem. Demand has skyrocketed beyond all forecasts and chip manufacturers don't have the capacity to meet it. And that has nothing to do with where the chips are made: nobody was investing in enough capacity a couple of years ago, when it would have mattered.

In any case, here's my (probably foolish) prediction: the Fed is going to put the brakes on expansion and demand will then start to cool off. At that point we will magically have enough chips again. It's the free market at work.

26 thoughts on “Our chip problem is not a supply chain crisis

  1. Justin

    It still sounds like a supply chain problem. If users don't accurately forecast demand and operate "just in time" then you have a shortage. And if supply is also constrained a little by the pandemic in either manufacturing or shipping, then you have a shortage.

    Is Mr. Drum saying we would have this chip shortage even without the pandemic?

    All the boosters and advocates for self driving cars and the whole "Internet of things" apparently are piss poor planners.

    https://www.electronicdesign.com/industrial-automation/article/21214146/the-global-chip-shortage-how-did-we-get-here-where-are-we-headed-what-now

    And cryptocurrency?

    "As we deal with this situation over the next years, we must think about all of the different levels of the semiconductor food chain, to ensure the shortage doesn’t create new problems for our most vital industries—and humanity at large. The truth is that some industries may have lower profitability but higher benefit to humanity. As things are playing out thus far, we’re at risk of losing access to products that we count on for our wellbeing—from medical equipment to automobiles—because other market segments are more profitable to the chip producers."

    1. Jasper_in_Boston

      No, it's demand: consumption shifted from services (dangerous because of the required close contact with human respiration) to tangible goods. Even a five point of GDP shift would mean an extra trillion plus in demand for goods. Ten points and we're up to well over two trillion. And globally it would be a lot higher than that. This kind of production ramp up takes time.

      1. Justin

        What did you buy? My consumption is definitely down over the last couple of years. I did buy new shoes… well 4 pair actually. 😂 6 if you count my steel toes for work. I bought a new TV in 2020 but i had to because the other one died. I did buy a really nice one. Sony Bravia. $2200.

        My car is about 5 years old.

  2. Joseph Harbin

    Chip shortages were blamed for the slowdown in car sales, but it looks like the auto biz is beginning to recover.
    https://www.calculatedriskblog.com/2022/01/january-vehicle-sales-forecast-increase.html

    We've had a slow-growth economy for more than a decade that even historically low interest rates could not get kick-started. That means capacity in many sectors is well below what a stronger, healthier economy needs. See: housing, which never recovered from the bubble bursting 15 years ago while the home-building industry shrunk (NIMBYs get the blame for not enough homes, but the bigger cause is economic).

    It will take years to adjust. The mistake would be to slam on the brakes too hard and kill growth while fighting inflation.

  3. kahner

    Well, 1) manufacturing capacity is part of the supply chain and 2) the fact that manufacturing capacity is an issue does not mean other covid related supply chain issues aren't real or that we should stop talking about them.

  4. Austin

    Agreed that the Feds will raise interest rates, but the question for them is “when can we do it to maximize damage for Biden?” After all, never waste a crisis, and Republicans need everything they can get to boost their tarnished brand going into 2022 and 2024 elections.

  5. Ken Rhodes

    Yes, a problem with supply shortages is sudden dramatic demand growth.

    But I reject oversimplification, specifically this one: "we need to stop talking about shortages as a "supply chain crisis." They're not." In a discussion of getting the U.S. manufacturing capability back on its feet, this is a HUGE blind spot.

    Picture this. "Over there" (halfway around the world), the capacity to make certain chips is currently N of them per month. Meanwhile, because of the dramatic growth in demand for goods (rather than services) there are two competing producers of phones--Apple and Huawei--that each try to buy N chips this month. Now take a guess at this. Do they each get 1/2N chips, or is there a likelihood that Huawei gets more than half. I know which way I bet.

    Now, that's simply the way business gets allocated by forces other than bid/asked calculations. But what about when geopolitical problems get much more severe than they are right now. Do we suddenly fine that the suppliers "over there" are suddenly filling ALL of the Huawei orders and NONE of the Apple orders? And suppose there are some other chips that are used in special secure-communications devices. Do we discover that Huawei gets all they need, but there just aren't any left for the Raytheon orders?

    How we let ourselves get into this pickle is a useful question to study. But meanwhile, how to get ourselves out of it is an immediate pressing necessity. If it takes three years, then we shouldn't wait til next year to get started, because that will simply mean it will take four years. Time we can ill afford.

    1. sonofthereturnofaptidude

      American manufacturing isn't "off its feet" just because it can't immediately meet a huge increase in demand.

    2. galanx

      "Over there" is (currently) Taiwan, which is not going out of its way to screw Apple or Raytheon in favour od Huawei, unless by "over there" you just mean to lump all those evil foreigners together.

  6. golack

    One person's supply chain is another's manufacturing capacity....

    FAB fires and the TX freeze are finally clearing up to ease manufacturing backlogs. As for car manufacturers, they had to put their orders in and those are finally being made. The lack of inventory means any hiccups cause major problems. Note: BitCoin collapse might free up video cards....

    Peloton can finally meet demand--which is due to falling demand and much as anything else. Few companies have much, if any surge capacity--and end up overbuilding capacity at peaks and cutting far too much away during down turns. And that's the roller coaster ride...

  7. middleoftheroaddem

    1. Chip fabrication plants are huge. long term, capital investments and represent significant fixed costs for a corporation. Certainty of demand is central for the decision to start this type of new project.

    2. Chip's role in our economy is ever growing: beyond cars, think toys consumer electronics. However, chip technology is also ever changing. A plant set up to build one type of chip ( say system on a chip) can not rapidly, or cheaply, convert to make a different type (such as primary memory).

  8. skeptonomist

    According to at least one story I read, during the early days of the pandemic chip makers switched production of different types of chips, and turned out to be making the wrong things when demand picked up again. Also there was a bad fire at one plant. These are things that may be corrected without the delay of building completely new manufacturing facilities.

    1. golack

      The TX freeze killed production at 3 or 4 FABs in TX--which may have killed off months of production. Unscheduled shutdowns can destroy wafers--even those that are almost done. Those plants were the ones producing the cheap commodity chips that were needed.

  9. skeptonomist

    As Kevin implies, the knee-jerk reaction to inflation of increaseing interest rates has things backward in this case. Higher interest rates are supposed to decrease investment. If the problem is a shortage of goods or parts thereof, how could decreasing investment be a solution? Without investing to increase capacity manufacturer would just fall further behind. worsening the shortage.

    Of course there is no evidence that interest rates have much effect on investment, short of the astronomical rates of the 70's and 80's. The Fed increased federal funds rate by about 2.3% after the end of 2015 through 2018 and this had no evident effect on anything. The Fed failed to prevent inflation in the 70's despite those astronomical rates. But that's another argument.

    1. KenSchulz

      I’m coming to think the MMT crowd are right; that inflation should be controlled through fiscal policy (government spending and taxation), not interest rates. What I would favor is higher and more widely applied luxury taxes, because it is mass markets which foster productivity growth, which is what ultimately fixes supply problems.
      I note that a fixed allowance for purchasing an electric vehicle functions like a negative luxury tax: it reduces the price of an inexpensive car more in percentage terms; more expensive cars are discounted less. It should increase demand for mass-market electrics more than luxury models, inviting the big manufacturers to invest more in production of electrics.

  10. Gilgit

    Many of Kevin's statements are undoubtable true. But some are less clear.

    South Korea's Hyundai Motor Co forecast on Tuesday its vehicle production would rebound in the first half of this year as a global chip shortage is expected to ease gradually from the second quarter.

    https://twitter.com/carlquintanilla/status/1485941116675543041

    There are a lot of people at a lot of companies in a lot of countries trying to meet demand as soon as possible. Oh, and I assume interest rates will rise all year and reach about 1% a year from now. It will signal to people that inflation will not be tolerated and have no real effect on the economy.

    1. Spadesofgrey

      Real final demand was bloated for 2 years at negative rates. Time for capital and residential investment to take the lead. Your not seeing the Forrest from the trees.

  11. akapneogy

    "It's the free market at work."

    I think it is just-in-time inventory at work. The old "just in time" did not anticipate the covid induced switch from services to stuff and came a cropper. Some times there is a price to pay for efficiency.

  12. Spadesofgrey

    Once again, WSJ is lying. There have been no shutdown periods since mid-October. Final production of quite a surge in Chip production is near its end stage. By June, production will be whipping auto workers into frenzy.

  13. illilillili

    Um, yes, but putting on the brakes at the fed doesn't put cash into billionaires pockets. Building a privately owned fab with public money is how you do it!

  14. kenalovell

    Let's hope that this administration's efforts have more substance than the former guy's. Remember this?

    Feb. 8, 2017
    SAN FRANCISCO — Intel, the world’s largest computer chip manufacturer, will invest $7 billion to finish a factory in Arizona, adding 3,000 jobs, the company’s chief executive said on Wednesday after meeting with President Trump at the White House.

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