U.S. Warns Chip Shortage to Last Into Late 2022 as Inventories Dip

This article is part of TechXchange: Chip Shortages and Counterfeits

U.S. manufacturers are not out of the woods when it comes to a global chip shortage that has snagged the production of everything from cars to medical devices, the Commerce Department said in a report.

A summary of the report released Tuesday said there is still "a major supply and demand mismatch" for semiconductors. The report, based on survey results compiled from about 150 companies in the supply chain, said demand remains very high, running up to 20% above pre-pandemic levels, and chip suppliers are struggling to keep up.

U.S. manufacturers are now down to less than a week of inventory for key chips, which are defined as 160 components that companies identified as being the most challenging to buy, the report cautioned.

In 2019, companies typically had 40 days of inventory on hand for key chips, the Commerce Department said. Now, inventory levels for the same chips have dipped to a median of fewer than five days, the report warned. Inventories are even more depleted in critical sectors such as automotive and medical devices.

The agency said it is also looking into allegations of price gouging, specifically “the unusually high prices” for chips sold by electronics distributors that act as intermediaries between chipmakers and consumers.

"Fragile" Supply Chain

U.S. companies don't see the shortage being solved in the next six months—at least.

Commerce Secretary Gina Raimondo said the report highlighted the need for the U.S. to pass federal subsidies to help rebuild its manufacturing base for semiconductors and address the country's over-dependence on chip imports.

“It is both an economic and national security imperative to solve this crisis,” she said in a summary of the survey results. “It is essential that Congress move swiftly to pass the President’s proposed $52 billion in chips funding as soon as possible."

The chip drought has gripped the electronics segment for more than a year now, brought on by booming demand for electronic goods such as personal computers and game consoles. Snags in the supply chain are adding to delays. Automakers are unable to procure parts for otherwise idle factories, while the scarcity of components has also tangled production of medical devices and consumer goods.

The dearth of chips has forced companies to fight over the production capacity at chip foundries, largely located outside the U.S., which are overloaded with orders, and in some cases sold out for the foreseeable future.

The chip industry depends on a sprawling global supply chain that can be upended by even short delays or disruptions in one region, leaving holes in the supply chain other regions are generally not equipped to fill. Most U.S. chip firms are completely, or for the most part, fabless, outsourcing production overseas. The U.S. only accounts for approximately 10% of global chip output, a drop from more than 35% in 1990.

Most industry executives have warned that the shortage will not ease until the second half of this year. Some products may continue to be delayed by a scarcity of components into 2023 and 2024.

Procurement challenges with a single part—even one that costs less than a dollar—can leave consumer goods such as cars and game consoles sitting unfinished until it becomes available. Any disturbance in overseas production, such as a coronavirus outbreak, a natural disaster, a fire at a fab, or even political instability, could lead to shutdowns in key U.S. industries, putting American jobs at risk, according to the report. 

"The semiconductor supply chain remains fragile," the report said.

Supply Bottlenecks

The report is the result of a request for information (RFI) put out by the Commerce Department last year. The agency asked chip companies to share details on their products and customers to help get a better handle on how the pandemic has affected the chip supply chain and identify bottlenecks.

Raimondo said the Commerce Department heard back from almost every major semiconductor vendor and from buyers in a wide range of sectors, both inside and outside the U.S., including major car makers. 

The primary bottleneck is wafer production capacity, which she said has no obvious short-term solution.

The vast majority of fabs are running at a rate between 90% and 95% of their maximum production capacity, up from levels of between 85% and 90% before the pandemic. Such a rapid rate of production is unusual because modern chipmaking tools need regular upkeep that takes them out of commission. Chipmakers also periodically shut down part of their factories to upgrade equipment.

A summary of the report highlighted the chips experiencing the most acute supply shortages. The worst deficiencies are in microcontrollers widely used in cars and other areas such as medical devices. These chips depend on mature nodes, e.g., 40 nm, that are generations behind the state-of-the-art in chips.

A diverse range of analog chips, including power-management ICs, radio-frequency ICs, display-driver ICs, and image sensors are also scarce due to a dearth of production capacity at 90 nm and 130 nm, among other nodes. Optoelectronics are another weak spot in the supply chain, the Commerce Department said.

Even though these special-purpose chips are key components in cars and other goods, companies are reluctant to invest in production capacity at mature nodes because they are closer to obsolescence. 

The Commerce Department said substrates that connect a die to a circuit board have also become a key chokepoint in the supply chain. Electronics companies trying to procure capacitors, diodes, and other tiny components used to assemble their devices, are still hitting obstacles, too.

Raw materials ranging from blank silicon wafers that serve as the fundamental building blocks of chips to plastic resins used in packages that house finished chips are also suffering supply woes.

Moreover, there are widespread delays in testing and packaging chips before they are ready to ship out.

Private And/Or Public

The Biden administration hoped to take a more active role in addressing the chip shortage, including better transparency in the supply chain. But the new report released by the Commerce Department highlighted a lack of short-term solutions to the crisis. The broader goal is to boost domestic production.

The report concluded that private companies are "best positioned" to resolve the chip supply crisis in the short term by increasing production and redesigning products in a way that favors readily available ICs.

Ford, GM, and other automakers are taking steps to untangle their globe-spanning supply chains and are forging more direct relationships with foundries to secure component supplies for the long term.

Unprecedented demand for chips has pushed companies to invest aggressively in fabs, both in the U.S. and other locations around the world. While some companies plan to ramp up new production later this year, many other fabs are years out, offering no short-term relief to electronics companies lacking chips.

Intel announced a new $20 billion manufacturing site outside Columbus, Ohio, that it hopes to build into the world’s largest chip manufacturing site. The first two factories are expected to come online in 2025.

TSMC and Samsung also announced U.S. expansion plans that are years from making a difference in the supply chain. Plus, most of these capital investments are in state-of-the-art microprocessors that are not in short supply. 

While Intel and other chip-making giants focus on building fabs, Raimondo said she wants to encourage chip producers and buyers to share more information to reduce the risk of supply-demand mismatches.

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