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How US manufacturers were hobbled by a shortage of tiny silicon chips

By JEANNE WHALEN, REED ALBERGOTTI AND DAVID J. LYNCH | The Washington Post | Published: March 1, 2021

Semiconductor executive Tom Caulfield knew a crisis was brewing when he started getting frantic calls from big automakers just before Christmas.

"Tom, you're killing me, you need to make more," Caulfield, the chief executive of chipmaker GlobalFoundries, recalls the auto executives saying. "Ford, Volkswagen, BMW, Daimler-Benz, Fiat Chrysler, GM — every one of them became my new best friends."

The Santa Clara, Calif.-headquartered company did its best to ramp up production for car manufacturers at its three big factories in the United States, Germany and Singapore, Caulfield said in an interview. But its efforts alone couldn't fix a supply problem that had been building for months as an unprecedented surge of demand far outstripped supplies across the globe, leaving manufacturers of all kinds in the lurch.

The shortages have forced General Motors and Ford to slash production in three states as well as in Canada and Mexico, threatening jobs at the auto companies and their suppliers. The White House has already leaned on big chip producers and their host nations, including Taiwan, to increase output, but on Friday, governors from eight states urged President Biden to "redouble those efforts," warning of a "growing list of automakers, suppliers, and dealers negatively affected by the shortage."

Semiconductors are the brains behind an ever increasing range of products, from vacuum cleaners and refrigerators to computers and space shuttles. The average automobile contains dozens of the integrated circuits, controlling air bags, power windows, catalytic converters and dashboard displays.

Many of the factors contributing to the shortfall are tied to recent events like the pandemic and the cold snap that slapped Texas and sidelined two chip factories in Austin. But the growing presence of chips in devices large and small foreshadows a supply problem not easily resolved by warmer weather or presidential executive orders. New semiconductor factories are among the most complex manufacturing facilities to build, costing billions of dollars and taking years to construct.

That means much of the world's electronics industry will continue to depend heavily on existing factories, many of them in Taiwan — a reliance that critics say looks increasingly risky as the island's tensions with China rise. One Taiwanese company, TSMC, produces 70 percent of the global auto industry's supply of a key type of chip called a microcontroller, according to research firm IHS Markit.

"You have an entire global electronics supply chain that is dependent on Taiwan, and it's 100 miles offshore of China," said Stacy Rasgon, a semiconductor analyst at the financial services firm AllianceBernstein. "Given everything going on with geopolitical tensions, that's becoming a strategically untenable position."

That has helped spark bipartisan calls for government subsidies to encourage construction of more chip factories in the United States, which today hosts 12 percent of global semiconductor manufacturing.

The supply pinch has hit auto manufacturers particularly hard because they use many chips designed years ago that are lower-priority items for semiconductor makers. Those chips yield lower profit margins than the newer, pricier semiconductors that power 5G smartphones and video games, which are also in high demand worldwide and dominate many manufacturing lines.

The global auto industry will produce 1.5 million to 5 million fewer vehicles this year than originally planned because of the supply constraints, according to the consulting firm AlixPartners. Some analysts predict that could raise auto costs for consumers and threaten jobs in a sector that employs hundreds of thousands of Americans.

The roots of the shortage lie in the early weeks of the pandemic, when auto plants worldwide abruptly shut down amid widespread stay-at-home orders. Auto sales fell by almost half between February and April. As a result, car companies and their parts suppliers drastically cut their semiconductor purchases.

At the same time, demand for computers and other electronics soared as consumers tried to make their new work-from-home lifestyles palatable by bingeing on monitors, laptops and entertainment devices. So manufacturers of those items stepped up their chip purchases.

"It comes down to capacity," said Shawn DuBravac, chief economist of IPC, an electronics industry association. "Semiconductor manufacturers weren't getting orders from auto manufacturers. They were getting orders from other industries, so they started to reallocate production."

Auto sales recovered faster than expected, as China's economy bounced back and as consumers everywhere sought to avoid public transportation. By September, annualized sales figures reached 97 percent of the pre-pandemic volume.

As automakers tried to place chip orders again, however, they found their suppliers busy making components for electronics companies. Switching manufacturing lines from one type of chip to another is a lengthy process that companies don't undertake lightly.

Other factors compounded the problem. An Oct. 21 blaze disrupted production at a Japanese chip factory, while the recent cold snap in Texas knocked two semiconductor plants in Austin offline.

The owner of those factories, NXP Semiconductors, says it is working to restore production as soon as possible, but auto industry executives say that supply may not resume till late March. NXP declined to confirm that date.

Even U.S. sanctions limiting chip sales to Chinese telecommunications giants Huawei and ZTE played a role, said Bindiya Vakil, chief executive of Resilinc, a maker of supply chain management software.

The sanctions kicked off a domino effect as the Chinese giants stockpiled chips, prompting others to do the same.

"A lot of companies started to hoard," she said. "When large players like this make large moves, they have a ripple effect on others."

Taiwan and its biggest chip maker, TSMC, are now under pressure from all sides to boost output. In a Feb. 17 letter, Biden's top economic adviser, Brian Deese, thanked Taiwan's economics minister, Wang Mei-Hua, for her efforts to resolve the chip shortage for automakers.

"We see significant potential for broader engagement over the medium-to-longer term to enhance supply chain resilience," Deese wrote in the letter, which was reviewed by The Post and reported earlier by Bloomberg News. "We also look forward to working closely with you on the broader U.S.-Taiwan economic relationship," Deese said.

A TSMC spokeswoman pointed to the company's Jan. 28 statement that called addressing the auto chip shortage "our top priority."

"While our capacity is fully utilized with demand from every sector, TSMC is reallocating our wafer capacity to support the worldwide automotive industry," the statement said.

Car manufacturers began using electronics to control automobiles in the 1970s, replacing older mechanical controls. Gradually, the number of tiny chips known as microcontrollers increased inside cars, powering a wide array of functions, from lights to engine cooling systems.

The 38 microcontrollers in an Audi Q7 come from eight companies, highlighting the complexity of auto supply chains, according to research firm IHS Markit.

Yet because TSMC manufactures nearly three-quarters of all auto microcontrollers, any capacity crunch at the company has ripple effects through the entire auto industry.

The most modern chips feature ever smaller transistors, measured by their width in nanometers, a unit that itself shows just how small these devices are. (It takes 25.4 million nanometers to equal an inch.) In general, the smaller the nanometer number, the smarter and faster the chip is, and the more expensive and difficult it is to make. Auto chips don't tend to contain the latest nanometer technology.

Most semiconductor companies have focused their capital investments in recent years on the latest, high-tech chips, leaving insufficient investment in production capacity for more mature chips, Caulfield said.

Car companies are often slow to update their components because they undergo lengthy internal checks to ensure safety and durability. Switching to more modern chips would improve their access to supply but would cost more money and require lengthy revalidation of parts, said Ambrose Conroy, founder of Seraph Consulting, which is advising two automakers on the chip shortage.

"They don't want to spend the money to revalidate chips and change things within the vehicle, but they know they have to," he said, adding that cars "are increasingly becoming computer electronics devices."

In the short term, companies like Ford and General Motors can try to outbid electronics makers for scarce chips, analysts said.

"Maybe you take a bigger wallet with you," said Koray Kose, a senior supply chain analyst for Gartner.

Caulfield said some auto companies are also trying to establish closer relationships with semiconductor manufacturers to ensure steady supply. Traditionally, car companies haven't dealt directly with chip companies, leaving those relationships more to middleman suppliers.

Jeff Fieldhack, an analyst with the market research firm Counterpoint, said the advent of 5G mobile connectivity has increased competition for chips.

In addition to the sheer amount of demand for new phones, 5G handsets require two to four times more power management chips than 4G phones do because of the complexity of the wireless technology, he said. Those power management chips, which tell batteries when to send power and where, are also used in automobiles.

The addition of more and more cameras to smartphones — the latest Samsung phone has five — also requires more display chips, which are also needed in automobiles for backup cameras, infotainment screens, driver assistance sensors and more.

Some smartphone makers are already facing shortages, Fieldhack said. In parts of the country, prepaid phones and handsets from smaller companies like Alcatel, 1Plus and Motorola are in short supply, he said.

It's unlikely, though, that Apple or Samsung would face similar problems, Fieldhack said.

"The Apples and Samsungs of the world are so big and powerful," he said, that chip suppliers put them at the front of the list. "The weaker and smaller get pushed to the back of the line for sure."