It all seemed like such a great idea. One of the most vexing aspects of operating a manufacturing operation is inventory. Obviously, a company needs to have all the needed parts, materials and commodities to produce efficiently but having too much is as deadly to the bottom line as having too little. The inventory is a dead weight – a liability that has to be stored and protected and it has to be hoped that what is in inventory is what is actually needed. To solve that problem there was a system created – Just-In-Time. The transportation networks became so reliable that a manufacturer was able to get what was needed at precisely the moment it was required. The key was that network reliability and over time it was possible to extend that network to include global operations. Then came the pandemic and the shattering of that supply chain reliability.
At one point almost 40% of global cargo had been stalled or halted altogether. Ports were on lockdown, ships were in quarantine, manufacturers all over the world were shuttered or could no longer move their output. There have always been supply chain challenges from storms or breakdowns or geopolitical issues. Recently there was the accident that shut down the Suez Canal for nearly two weeks. The problem now is that these interruptions have become more frequent and the delays more critical.
The semiconductor shortage is a case in point as there are several factors that have combined to create a crisis that has forced the shutdown of auto plants all over the US as well as other nations. Not only has there been interruptions in shipping there have been political concerns. One of the major producers of these chips is a Chinese company and the US has sanctions imposed on China that make these chips unavailable to US buyers. The majority of the world’s chips are produced in Asia – some of these nations are friendly to the US and some are not. This has led the Biden administration to explore what the government can do to ensure chip production takes place in the US.
The details of this plan are still pretty vague. It is likely part of a larger effort to introduce some kind of industrial policy for the US. Many nations support key parts of their manufacturing infrastructure in a variety of ways but the US has been slow to engage. Almost 50% of microchip design is from the US but less than 12% of production. China is set to complete $100 billion in investment to build new chip production facilities and new start-up operations are aggressively recruiting engineers and designers from all over the world.
The recommendation to the Biden administration includes three strategies. The first and most obvious is to invest upwards of $50 billion to construct additional chip making capacity. The second strategy would involve ensuring that US made chips are purchased as opposed to imported products and the third aspect is to incentivize universities and other institutions to concentrate on developing cutting edge technology and applications. The challenge to all this? Money. Attempting to get yet another major government investment plan in place on top of $6 trillion in stimulus/rescue and $2 trillion in infrastructure spending is a daunting task.
The reality is that the US will remain dependent on imported semiconductor chips for the foreseeable future and that puts emphasis on working with the other nations that produce chips – South Korea, Taiwan, Japan and some others.