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With the growing role of semiconductor chips in our society, the shortages that piled up during the pandemic created a lot of headaches. Although the shift to home was a boon for the PC and smartphone industries, orders ramped up so quickly that chip demand quickly outpaced supply. And since new cars rely on a growing array of chips, the automotive industry was one of the most severely affected.

Like many other products that rely on multiple suppliers and manufacturers in the global supply chain, the ability to meet semiconductor requirements has been greatly impacted by various iterations of supply chain disruption. As a result, there’s been a big push to ramp up domestic production.

Here, we’ll take a look at the current status of semiconductor supply, what experts predict for the months ahead, and how the CHIPS Act may have an impact.

Chip Type Impacts Shortage Trends

Although small—even tiny in some cases—semiconductor chips carry a lot of power. This is especially true for the most advanced types of chips that require specialized facilities staffed with experts who possess the unique skill sets required to make them.

A key player in this context is Taiwanese chipmaker TSMC, which reported record profits this year—as well as a warning that reduced consumer demand and “chip hoarding” would negatively impact financials in the future.

In a July Wired post, writer Will Knight reflected on what such news meant for the chip industry.

“It’s just the latest sign that the recent chipmaking boom is finally over—for some at least,” Knight wrote. “But that doesn’t mean the shortage of chips that has bedeviled the global economy is about to disappear, or that the US need no longer worry about shoring up its advanced chipmaking capacity.”

Cited in the article, Julie Gerdeman, CEO of Everstream Analytics, said shortages were easing in certain industries, but “the complexity of the chip supply chain, the diversity of components used in different sectors, and evolving risks affecting product availability, require a more nuanced picture,” according to Knight.

She also underscored the importance of considering chip type and industry, since all chips aren’t the same. In that light, some sectors are still expected to experience shortages and a “growing uncertainty around future supply.”

Knight cited Everstream’s data which “shows that lead times for some advanced chips needed for medical devices, telecommunications, and cybersecurity systems is around 52 weeks, compared to a prior average of 27 weeks.”

Automotive Industry Still Struggling

Citing additional experts, Knight noted that although some industries are experiencing shortage relief, the automotive industry isn’t one of them. The move by carmakers to cancel orders during the pandemic meant they weren’t prepared for the unexpected demand that occurred. Since then, they’ve had difficulty securing some of the thousands of chips needed to build today’s cars.

This trend was also underscored by writer Ryosuke Eguchi in an August Nikkei article.

“The semiconductor shortage that has plagued manufacturers is showing signs of turning around in some areas as inventories build up, but this production bottleneck looks likely to drag on for months longer for automakers,” Eguchi wrote.

Although other industries are leveling out, he said “…the dearth of chips for autos, industrial equipment and data centers looks likely to drag on until late in the year.”

A Familiar Cycle

Eguchi also noted that the chip trends we’ve seen aren’t necessarily new.

“After a long stretch of tight supply, there is a growing view among market watchers that the chip market has passed its peak in the current round of the boom-bust cycle that the industry goes through every three to four years,” he wrote.

The slowdown reported for some semiconductor sectors concurs with Gartner’s forecast issued in late July.

According to a press release, the global consulting firm expects a slowing of worldwide semiconductor growth and a drop in semiconductor revenue from PCs in 2022.

“Global semiconductor revenue is projected to grow 7.4% in 2022, down from 2021 growth of 26.3%, according to the latest forecast from Gartner, Inc.,” the release said. “This is down from the previous quarter’s forecast of 13.6% growth in 2022.”

“Although chip shortages are abating, the global semiconductor market is entering a period of weakness, which will persist through 2023 when semiconductor revenue is projected to decline 2.5%,” said Richard Gordon, Practice VP at Gartner. “We are already seeing weakness in semiconductor end markets, especially those exposed to consumer spending. Rising inflation, taxes and interest rates, together with higher energy and fuel costs, are putting pressure on consumer disposable income. This is affecting spending on electronic products such as PCs and smartphones.”

The release also noted that in an enterprise context, “inventories are recovering rapidly, lead times are beginning to shorten, and prices are starting to weaken.”

“The semiconductor market is entering an industry down cycle, which is not new, and has happened many times before,” said Gordon. “While the consumer space will slow down, semiconductor revenue from the data center market will remain resilient for longer (20% growth in 2022) due to continued cloud infrastructure investment. In addition, the automotive electronics segment will continue to record double-digit growth over the next three years as semiconductor content per vehicle will increase due to the transition to electric and autonomous vehicles. The semiconductor content per vehicle is projected to increase from $712 in 2022 to $931 in 2025.”

Impact of the CHIPS Act

For months, the semiconductor industry and tech companies have been eagerly awaiting passage of the CHIPS and Science Act. On August 9th, President Biden signed it into law.

According to a White House Fact Sheet, “The CHIPS and Science Act will boost American semiconductor research, development, and production, ensuring U.S. leadership in the technology that forms the foundation of everything from automobiles to household appliances to defense systems. America invented the semiconductor, but today produces about 10 percent of the world’s supply—and none of the most advanced chips. Instead, we rely on East Asia for 75 percent of global production. The CHIPS and Science Act will unlock hundreds of billions more in private sector semiconductor investment across the country, including production essential to national defense and critical sectors.”

Here are a few of the specifics:

  • The CHIPS ACT “Provides $52.7 billion for American semiconductor research, development, manufacturing, and workforce development.”

  • “This includes $39 billion in manufacturing incentives, including $2 billion for the legacy chips used in automobiles and defense systems, $13.2 billion in R&D and workforce development, and $500 million to provide for international information communications technology security and semiconductor supply chain activities.”

  • “It also provides a 25 percent investment tax credit for capital expenses for manufacturing of semiconductors and related equipment. These incentives will secure domestic supply, create tens of thousands of good-paying, union construction jobs and thousands more high-skilled manufacturing jobs, and catalyze hundreds of billions more in private investment.”

For more details, please see the Fact Sheet.

As noted, one major intent for the CHIPS Act is to boost domestic production of semiconductors—and the Semiconductor Industry Association (SIA) couldn’t be happier.

In a press release, the SIA applauded the enactment of the new law.

“The Semiconductor Industry Association (SIA) released the following statement today from President and CEO John Neuffer commending President Biden for signing the CHIPS Act of 2022 (H.R. 4346) into law,” the release said.

“Today marks a giant leap forward for American innovation and competitiveness and the launching point for re-asserting U.S. leadership in semiconductors. By enacting the CHIPS Act, President Biden and leaders in Congress have fortified domestic semiconductor manufacturing, design, and research, thereby strengthening America’s economy, national security, and supply chains for decades to come.

“We thank President Biden and Secretary Raimondo for their unwavering support and leadership and applaud the bill’s champions in Congress – led by Sens. Schumer, Cornyn, and Warner, as well as Reps. Matsui and McCaul – for their tireless efforts to get this critical legislation across the finish line. The CHIPS Act will help usher in a better, stronger American future built on semiconductors.”

“The CHIPS Act of 2022 includes $79.344 billion in government spending over 10 years, according to the official scorekeeper for Congress, the non-partisan Congressional Budget Office (CBO),” the release noted. “These investments will create hundreds of thousands of American jobs, spur hundreds of billions of dollars in chip company investments in the U.S., and ensure more resilient chip supply chains for key manufacturing industries in the U.S. and for the national security community.”

There are various opinions from industry experts about the potential impact of the CHIPS Act. In the following video, Bernstein Research’s Stacy Rasgon joins Yahoo Finance Live anchors Akiko Fujita and Brian Cheung to “discuss the implications of the CHIPS Act on the chip industry and competition between the U.S. and China.”

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