Re-Building the U.S. Semiconductor Industry: Impacts on Economic Development
A global shortage of semiconductors, and lack of domestic manufacturing capacity threatens to hamper US economic recovery.
The perfect storm of stay-at-home orders, lack of domestic production, and supply-chain disruptions have created a global shortage of semiconductors. This leads to American companies competing on a global stage for access to a dwindling supply of chips, driving up costs and decreasing the productivity of US manufacturers.
To restore American semiconductor manufacturing capabilities, President Biden has signed an executive order that seeks to increase resilience in US supply chains and has asked Congress to appropriate funds to make that happen. But before we get into that, let’s briefly talk about what semiconductors are, why they are vital to the US economy, and why there is a global shortage.
Semiconductors are a silent pillar of the modern world. From your phone to your fridge, virtually everything with electronics uses semiconductors—but it goes even further than that. The telecommunications infrastructure that you need to use your phone requires semiconductors. The trucks and logistics networks that enable you to put food in your fridge also need semiconductors.
The far-reaching consequences of a global shortage of these essential electrical components threaten to derail the post-pandemic economic recovery and raise the cost of consumer goods. So how did we get here? Like most things, it’s complicated.
The Semiconductor Shortage
The immediate shortage of semiconductors is largely due to changing consumer habits related to the pandemic. People are buying more electronics like gaming consoles, computers, and smartphones while also buying fewer cars and trucks because no one is going anywhere. This has caused fluctuating demand for silicon chips and is wreaking havoc on the manufacturers who make them.
For example, early in the pandemic the automotive manufacturing industry greatly reduced the number of new vehicles they produced. This had a downstream effect on chip makers causing them to shutter factories and lay off workers. As the automotive industry began ramping up production, demand for consumer electronics was skyrocketing, snatching up the remaining semiconductors on the market and forcing some automotive assembly plants to temporarily halt the production of new vehicles.
Makers of semiconductor are trying to increase production but after closing factories and laying off workers due to disruptions in demand, it will take months to recover. This will create a supply and demand problem that could raise the cost of consumer electronics and put the US economy in a particularly hard spot, given the erosion of domestic semiconductor manufacturing capacity.
Made in America Chips?
Half of all microchip designs are American but made in America chips only account for 12% of global production. The reason for the discrepancy between American semiconductor intellectual property versus manufacturing capability is corporate outsourcing and under-investment. For decades American companies have moved to outsource chip production, which has generated short-term profits at the expense of domestic manufacturing capabilities. But that wasn’t always the case.
In the early 1970s the U.S. held 60% of the world market in semiconductors. By 1990, this number declined to 37%. Today, it’s only 12%. To come close to restoring the industry in America, it will require significant government intervention.
After receiving pressure from industry groups and members of congress, President Biden has signaled a willingness to address the semiconductor shortage through executive order and congressional action.
Biden’s Executive Order
After meeting with a bipartisan group of senators on February 24, President Biden has signed an executive order, that among other things, seeks to improve domestic supply chains for semiconductors.
“The United States is the birthplace of this technology, and has always been a leader in semiconductor development. However, over the years we have underinvested in production—hurting our innovative edge—while other countries have learned from our example and increased their investments in the industry.”
The order will allow members of Cabinet to conduct a 100-day review of relevant products and supply chains to assess vulnerabilities and to evaluate ways of protecting the country from shortages of critical products. President Biden also urged Congress to allocate $37 billion in short term funding to increase domestic semiconductor manufacturing. Senate Majority Leader Chuck Schumer has been supportive of efforts to boost US tech manufacturing capabilities and has directed lawmakers to craft a package of measures to counter China’s rise.
How to Boost Domestic Chip Production
Building semiconductors is expensive work. According to Fortune Magazine, there are 70 semiconductor production facilities in the USA. The cost for each facility is enormous, upwards of $20 billion. Without government grants to subsidize this industry, it’s unlikely the situation will improve drastically on its own.
While the taxpayers will be picking up the tab for these new facilities, the benefits of reshoring operations to the US are many. First, these facilities create stable and well-paying jobs. Second, they support countless other American industries. Finally, a robust domestic semiconductor manufacturing sector gives American companies an edge on deploying game-changing technologies like 5G, AI, and quantum computing.
Will Biden’s executive order and congressional funding get the job done? Time will tell. But in the meantime, if you’re looking to buy a PlayStation 5, you might be waiting a while.
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