Report shows how severe shortage of chips can harm manufacturers

Manufacturers and other buyers of computer chips had less than five days’ supply of some chips on hand late last year, leaving them vulnerable to any disruptions in deliveries, the Commerce Department reported Tuesday as it pushed Congress to endorse federal aid for chipmakers.

The report highlighted the severity of a global shortage that has hobbled manufacturing and fueled inflation for more than a year. It’s a shortage that defies easy solutions.

Manufacturers’ median chip inventory levels have plummeted from about 40 days’ supply in 2019 to less than five days, according to a survey of 150 companies worldwide that the Commerce Department conducted in September.

“This means a disruption overseas, which might shut down a semiconductor plant for 2-3 weeks, has the potential to disable a manufacturing facility and furlough workers in the United States if that facility only has 3-5 days of inventory,” the Commerce Department concluded in a six-page summary of its findings.

The lack of chip inventory leaves auto manufacturers and other chip users with “no room for error,” Commerce Secretary Gina Raimondo said Tuesday as she presented the findings.

“A COVID outbreak, a storm, a natural disaster, political instability, problem with equipment — really anything that disrupts a (chipmaking) facility anywhere in the world, we will feel the ramifications here in the United States of America,” she said. “A COVID outbreak in Malaysia has the potential to shut down a manufacturing facility in America.”

“The reality is Congress must act,” Raimondo added, urging lawmakers to pass a proposal for $52 billion in federal subsidies to incentivize construction of chip factories. “Every day we wait, we fall further behind.”

The Senate passed the proposal last year. The legislation has been tied up for months in the House, though House Democrats are expected to introduce their version of the legislation as soon as this week.

Industry executives say federal funding is likely to create a more long-term supply of chips but not to alleviate the shortterm shortages because chip factories take years to build.

Survey respondents said they didn’t see the shortages going away in the next six months. Some industry executives say they could last into 2023.

Median demand for chips among buyers that responded to the survey was as much as 17 percent higher in 2021 than 2019, as consumer purchases of electronics surged during the pandemic and as more products required computer chips to function.

The report found that computer chips based on older technology are in particularly short supply, creating special problems for manufacturers, including automakers, that need them.

A lack of chips forced auto manufacturers worldwide to idle factories and slash output by as much as 7.7 million cars last year, causing shortages of new and used vehicles. The collapse in auto sales to consumers because of the chip shortage shaved more than 2 percentage points from U.S. gross domestic product growth in the third quarter.

Raimondo said soaring car prices accounted for a third of overall inflation last year, which rose to 7 percent, a 40-year high.

“This new data underscores that it’s time to stop dragging our feet on this. The House has been sitting for months on a good bill to build more semiconductors here in the U.S., and there’s urgency to act now,” Sen. Mark Warner, D-VA., a vocal supporter of the legislation, said Tuesday.

U.S. chipmaker Intel last week announced it will spend $20 billion to build two new chip factories in Ohio, aiming to complete the work in 2025. Intel’s CEO said that work would proceed faster if the company receives some of the proposed federal subsidies.

In the early 1990s, the U.S. was home to about 37 percent of global chip manufacturing, but that has dropped to about 12 percent in recent years as more production shifted to Asia.

About 75 percent of chip production today takes place in East Asia, and over 90 percent of the most advanced chips are manufactured in Taiwan, a particular vulnerability for the U.S., federal officials have said, given China’s aggression toward the democratic island.