Part of the Allied strategy to cripple the German war machine in World War II was to destroy ball-bearing plants. Why? Because they were used in virtually anything that moved, such as tanks, submarines, ships, airplanes, machine guns and trucks. Massive bombing raids, with heavy losses, were aimed at German ball-bearing factories, which seriously disrupted their production and may have shortened the war.
Today, the ball bearing equivalent is the computer chip, and a tight supply is causing major market disruptions. This cycle, known as a “chip famine” in chip-tech, regularly occurs about every four years from normal supply-and-demand fluctuations. Add in regional conflicts and COVID-19, and we have a recipe for a major worldwide economic disruption, as is happening now.
Consumer demand is way up
Thanks to increased demand for home-based tech products and too many of us shifting work from offices to homes demand quickly outstripped supply. For example, Peloton’s sales increased more than 172% last year. Demand for everything for desktops, laptops, tablets, webcams, microphones, gym-tech, kitchen appliances and entertainment devices has led to the shortage.
For example, a webcam’s smarts have come a long way in the last five years. Webcams can process HD and, in some cases 4k, video. Some include enhancement tools and filters. A few, such as Ring doorbells, also have facial recognition. All these advancements require more sophisticated video processing, memory and power management chips. The number of available chip factories have not kept up with demand and many have maxed out production capability.
Auto industry may lose $61 billion in sales
In the last month, auto manufacturers are revising their vehicle production projections due to a lack of computer chips. Ford, Mercedes-Benz, Toyota, Volkswagen, Subaru, Honda, Audi and Nissan have all had to slow production or idle plants. A recent report by Bloomberg estimates the auto industry could lose over $61 billion in sales if the COVID-19 pandemic continues.
Computer chips now control virtually all features and functions in a car, including fuel injection, transmission, engine, audio/video, steering and brakes.
Mobile phones feel the biteNow cell phone companies may be cutting back production due to critical chip shortages. Samsung anticipates production disruption as the demand for memory chips needed for mobile phones, laptops and tablets exceeds the current chip foundries’ capacities.
As the shortage continues, some companies are adding their own chip fabrication foundries. Apple has felt the impact, especially with chips that manage power in their iPhones. Apple is making moves to secure its chip demands. It will start selling Mac Pros in 2021 using their own chips manufactured in Taiwan and announced last December that it’s replacing Qualcomm chips in its iPhones with new Apple-designed chips.
The largest chip manufacturer in the world is Taiwan Semiconductor Manufacturing Company, Limited (TSMC) with most of its production in Taiwan and several factories in China. If you’ve been following the latest news (outside of COVID-19 and US politics), China’s threats to invade Taiwan have escalated over the last few weeks due to its perception that Taiwan may proclaim independence, even though it’s already a recognized country in its own right. The United States responded to the threats by increasing fleet operations around the island of Taiwan, moving a U.S. carrier battle group into the disputed South China Sea.
This potential conflict threatens the worldwide supply of chips and could destroy major sectors of the US economy. With Intel’s recent struggles, the US is vulnerable to any disruption to our “ball bearing” supply of chips.
Computer chips are a strategic resource
Similar to Iran’s threat to the flow of oil from the Middle East through the Persian Gulf, China’s bullying threatens chip deliveries from China, South Korea, Japan and Taiwan. The United States needs to secure chip production on our soil and provide incentives and tax breaks to build more Northern American chip foundries, including in Canada and Mexico. These should be considered National Strategic supplies, just like natural gas, freshwater, oil and energy production.
First step: buy only U.S.-made chips
The government can take the first step, to insist all chips and other digital discrete components in any federally purchased device be completely manufactured, assembled and tested in the U.S. within five years.
Secondly, create a “chip infrastructure” funding initiative to create public/private chip manufacturing facilities and U.S.-only subcontracting.
Third, to fund Canadian and Mexican chip fabrication facilities near our borders and re-initiate free-trade agreements.
Bottom-line: achieve chip foundry independence
With these initiatives, the threat to the free-flow of computer chips by hostile nations will be neutralized. Our economic security and the security of our armed forces depends on it.