The Little Chip Driving the High Prices

If you’ve been in the market for a dishwasher or fridge, you might have found it nearly impossible to find a new model in stock. If you’ve been looking to purchase a used car, you’ve probably cringed at the soaring prices.

The culprit for empty shelves and rising prices are the little chips that enable almost all our electronic devices- semiconductors. So how did we end up with a massive shortage of this delicate electronic?

Like a lot of problems in the last three years, Covid-19 can be blamed – at least partially.

With worldwide lockdowns at the beginning of the COVID-19 pandemic, the lack of transportation halted automotive assembly lines, leading manufacturers to cancel their semiconductor orders.

At the same time, the demand for personal devices, such as computers, game stations, and other gadgets to kill pandemic boredom rapidly grew. The semiconductor industry welcomed this consumer shift but was unprepared for the automotive industry to bounce back. Semiconductor suppliers didn’t have enough product to support the demand from the automotive industry,  and many factories began waiting on their shipment of chips.

Car manufacturers such as General Motors went so far as to continue manufacturing without semiconductors and parking assembled cars in lots, resulting in close to 100,000 GM vehicles sitting and waiting for chips.

The lack of new cars in the market carried over to the used car market, hiking pre-owned vehicle prices to new heights. Canadian Black book notes that the average used car is now working 34% more than they were in 2021.

Multiple industries have been facing supply-chain issues because of these tiny chips, and that issue has trickled down, blocking many consumers from everyday goods.

A report from the US Department of Commerce released analytics detailing that there was as much as a 17% higher demand for semiconductors chips in 2021 than in 2019, an increase the industry could not handle.

The Government’s Solution to the Semiconductor Crisis

In late July, the United States Senate voted on a bipartisan bill, the CHIPS+ Act, that would funnel $52 billion into the country’s semiconductor industry in an attempt to lessen the worldwide semiconductor shortage. Thirty-nine billion dollars of the total amount is allotted to subsidize new or expanded manufacturing facilities located in the US.

Interesting to note is this Act aims to produce chips that are only utilized in specialized equipment, far too expensive for the average American to use. Basic chips used in common electrical devices, frequently called legacy chips, are not a major priority for large semiconductor manufacturers as they don’t result in a high-profit margin.

The CHIPS+ Act focuses on developing advanced chips – chips with transistors that are less than 10 nanometers wide, specifically those used in advanced military weapons. For reference, the cars parked in GM’s lot are missing chips with transistors 45-65 nanometers apart, and most home electronics are similar in makeup.

If the chips developed in those factories aren’t solving the worldwide shortage anytime soon, what is the point of the CHIPS+ bill?

The Real Motivation

The large sum of money aims at restoring former semiconductor glory. America was once a powerhouse when it came to semiconductors, producing 37% of the world’s chips, but as a favor from federal funding waned, the industry was outsourced to other countries. The United States now only domestically produces 12% of the world’s chips, making way for the current largest chip manufacturer, Taiwan Semiconductor Manufacturing Company. Security may be closer to the focus of the act than care for the average consumer as the US military remains uneasy with the heavy reliance on Taiwan for a vital component of their weaponry.

Tensions between China and Taiwan have the world worried about a potential invasion, which would put America’s supply of advanced chips at risk. The pentagon has prominently assured the nation that China will not invade Taiwan in the next two years, but 52 billion dollars worth of taxpayer money seems to undermine their confidence in this claim.

Kickstarting domestic fabrication of these advanced semiconductors places the US military in a safer position with a constant “made in America” supply of advanced chips. CHIPS+ is a multi-billion-dollar shot of adrenaline into the heart of the American semiconductor industry.

While the advanced chips industry grows, all hope is not lost on the average consumer. Deloitte Consulting predicts that the semiconductor shortage could end before 2023. Pandemic buying behaviors are slowly leveling out, and inflation is making individuals wary of purchasing new electronic devices. Some semiconductor producers even claim that the sales are dipping back to normal.

However, money isn’t the only thing holding the US back from being a big player in the semiconductor world. Semiconductor factories are massive industrial undertakings that take years to develop and construct – chip manufacturing is a formidable challenge, a process that needs 90% accurate yield to remain profitable. As the senate congratulates themselves for a boost to the American economy, it will be interesting to watch the development, design, and construction of these new advanced semiconductors facilities. How far can $52 billion go?