Why The Chip Shortage Isn’t Going Away Anytime Soon

Domestic plants may be long-term answer for hard-hit industries, but CEOs need to do a better job of strategizing for the immediate future.

In the U.S. auto industry the well-documented shortage of microchips is accomplishing something in a matter of months that no recession or safety recall has ever done: It is forcing The Ford Motor Company to slash output of the F-150 pickup truck, its highest-profit model and America’s best-selling vehicle and to halve the company’s overall U.S. output.

They’re hardly alone. While some carmakers like GM and Toyota have mitigated the problem somewhat, the chip shortage has cost the car business alone a staggering $110 billion in revenue this year, according to a new forecast by AlixPartners, nearly double the $61-billion hit forecast by the consultancy just four months ago.

Which begs the question: Rather than losing hundreds of billions of dollars, imperiling jobs and companies, frustrating flush consumers, stoking inflation and reinforcing the disappointing reality that one crucial lever of control of the U.S. economy really resides in Asia, not here – can’t America just build a microchip plant or two?

The answer is yes, but also that even constructing new chip plants in this country at the cost of tens of billions of dollars each would take too long to alleviate the current shortages wracking many manufacturing industries. So CEOs of American companies are stuck with a very difficult status quo.

While building new U.S. chip capacity might be an obvious solution, just as obvious is that many manufacturers are in a bind for actions they took before the chip shortage manifested itself, and for how they’re handling it now. Company chiefs are learning the hard way about the importance of risk management, long-term forecasting and strategic-inventory buffers.

Some Strategies

Auto companies and others have shipped and designed around the shortages to try to ensure their highest-profit vehicles get hit the least and to repurpose chips. “You can make up for hardware with good software,” Mike Juran, CEO of Altia, a Colorado Springs, Colo.-based supplier of graphical user interfaces for autos, appliances and medical equipment, told Chief Executive.

“So with a couple of OEMs, we’re enabling them to use available chips that are sitting in a warehouse somewhere rather than the latest chip.” And some customers, he said, “are designing out chips that are in short supply and designing in chips that are in supply and looking to us to make sure that code runs on all of these available chips.”

But CEOs have a lot to learn, fast, about what they and their predecessors did wrong that helped lead to the current mess. “A big part of the problem was that they were too myopic in their views,” Douglas Kent, executive vice president of strategy and alliances at the Association for Supply Chain Management, told Chief Executive. “There were wild demand swings in chip utilization in non-competing industry sectors during Covid, and they didn’t have a good perspective on that.”

Auto companies have made moves that others can learn from. General Motors, for instance, built some pickup trucks without software that helps manage fuel consumption, reducing miles per gallon – but presumably leaving room for mileage improvements to be programed in later. Toyota once pioneered just-in-time inventory, but the company’s nudging away from that strategy in the wake of the 2011 earthquake in Japan has helped it weather the U.S. microchip shortage better than many rivals. The company also funneled chips to highest-profit vehicles.

Still, Kent says, auto manufacturers cut back on orders for chips but with the “naïve consideration that when their sales picked back up, chip manufacturers could respond accordingly. Unfortunately, chip utilization by consumer products has increased at the same time.”

Kent says that CEOs in all manufacturing industries now must take a broader view of chip planning items beyond what we know today. “Understand the potential for supply constraints. Narrowing your view to your sector isn’t going to help you. You need an outside-in view of potential supply constraints and to take risk-mitigation efforts to protect yourself. You need to understand that consumption of a shared raw material is going to be impacting your business.”

The Long Haul Ahead

For the longer term, manufacturing chiefs should consider new risk-management measures, Dan Hearsch, a managing director of AlixPartners’ auto and industrial practice, told Automotive News. They include “getting a better view into what happens beyond the three-month window, spending a lot more time getting a better forecast and having a bit more of a risk-management forecast and especially doing it in a more sophisticated way,” he said. Ultimately, Hearsch added, “Supply-chain management, purchasing activity, engineering activity [have] real changes and real lessons that can be learned.”

One way to address industries’ competition for chips with consumer-electrics outfits, which peaked during Covid, would be to no longer rely on chips that meet certain product specifications but rather to source generic chips that companies could enhance themselves through software measures to meet their required specs, suggested AlixPartners’ Mark Wakefield. That approach, said the company’s co-leader of the automotive and industrial practice, would simplify how the chips are sourced – and thereby make them easier to source.

Wakefield also called on CEOs to intensify their attention to cost management for better visibility of their supply chain, noting that an improved understanding of a supply chain will allow better insight into a company’s costs and exposure in the semiconductor space.

A more robust and longer-term solution for U.S. manufacturers and the federal government would be more chip plants in this country. Intel already announced in March that it would construct two chip factories in Arizona, at what is already its largest chip-manufacturing site. Another global giant, Taiwan Semiconductor Manufacturing, has started to build its own $12-billion chip factory north of Phoenix.

Several years ago, Intel abandoned an uncompleted chip plant in Colorado Springs, Colo., which then became a site for bitcoin mining but possibly could still lend itself to repurposing as a chip plant again.

“We have underinvested in [semiconductor] production and hurt our innovative edge, while other countries have learned from our example and increased their investments in the industry,” Gina Raimondo, U.S. Commerce Secretary, said during a webcast for Intel’s announcement in March. Congress passed a CHIPS for America Act recently, which provides assistance in grants for advanced semiconductor manufacturing and research.

What Happens Next?

But any real relief for U.S. manufacturers still will be long in coming. The Intel plant, for instance, won’t start production until 2024, the company said. Getting new chip-making capacity up and running requires “a multi-faceted production process that is measured in weeks and months, not in days,” Kent said. “Even in accelerated fashion, an increase in capacity just from the manufacturing-plant and equipment perspective is a multi-year process.”

And there’s the rest of the ecosystem to consider. “To achieve self-reliance, investments need to be made across the entire ecosystem, from wafer manufacturing, assembly and testing all the way down to the manufacturing of raw materials such as substrate, which has been in high demand,” Syed Alam, semiconductor global lead and managing director of Accenture, told Chief Executive.

And manufacturing chiefs must focus not only on the chip-making ecosystem but also on broader logistical vulnerabilities that have greatly compounded the shortages of 2021.

“Companies could alternatively source from other suppliers, [but] they tend to still be based in Asia and are dependent on shipping and air lanes, which are still subject to bottlenecks,” Frank Kenney, director of market strategy at Cleo, a supply-chain software platform, told Chief Executive. “Given their impact, companies that depend on semiconductor chips, and likewise their end customers, need to reset expectations.”