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  • This April, 19 million new cars were sold in Americathe highest level since 2005.

  • But these weren't just any old cars.

  • Today's Chevy Silverados and Ram 1500s are not quite the same as those sold a year or

  • even a few months ago.

  • Something very strange is happening across the industry.

  • Features, packages, even certain parts have suddenly disappeared from recently manufactured

  • vehicles.

  • An exceptionally observant buyer of a '21 Silverado, for example, might notice their

  • truck getting about one less mile per gallon than was advertised earlier this year on the

  • same model.

  • Recent Peugeot 308 hatchback owners, meanwhile, may be surprised to find the digital speedometer

  • shown on TV replaced with an old-fashioned analog version.

  • And the dashboard display on the Renault Arkana mysteriously got a little bit smaller.

  • It's as if they're playing a game: What tiny things can they change without anyone

  • noticing?

  • The actual explanation is a global shortage of semiconductorsthe chips that power

  • virtually every electronic device, from rice cookers to Xboxes.

  • Earlier this year, auto manufacturers found themselves in an awkward positionthe

  • average car is made up of about 30,000 individual parts, yet they were missing oneworth

  • perhaps only 4 or $5, one-hundredth of a percent of the final selling price.

  • It didn't matter.

  • Without one, single component, everything had to wait.

  • At first, factories simply stopped producing and workers went home.

  • Ford, Honda, Volkswagen, Audi, and GM all shut down at least a few of their production

  • lines.

  • Audi furloughed 10,000 workers, and Volkswagen predicts it will sell 100,000 fewer cars as

  • a direct result.

  • The total damage to the industry could be upwards of $60 billion, despite ordinarily

  • spending only about 5% of its GDP on semiconductors.

  • Eventually, though, many brands resigned to cutting back features, realizing the problem

  • is here to stay.

  • It's not just cars.

  • Sony doesn't expect to meet demand for its PS5 until next year, Nintendo can't make

  • enough Switches, and even deep-pocketed Apple, usually immune to such disruptions, has been

  • affected.

  • According to Goldman Sachs, semiconductors touch 169 different industries, and the worst-case

  • scenario would be a 1% reduction in U.S. GDP.

  • Given how strong the incentives are to alleviate the shortage, what on earth could cause such

  • a costly disaster?

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  • a reality.

  • Early last year, demand for cars around the world plummeted.

  • At the same time, sales of home electronics skyrocketedrouters, monitors, webcams,

  • keyboards, iPads, and so on.

  • Car companies canceled their semiconductor orders, consumer electronics brands ordered

  • extra, and to the extent the two overlap, production lines shifted to producing for

  • the latter.

  • Automobile sales, however, jumped back much faster than expectedalmost as fast as

  • they had fallen in March.

  • Already by September of last year, demand for cars was near normal, 2019 levels.

  • Not used to such wild swings in demand, when Americans got back to their usual habit of

  • buying trucks the size of small European countries, car manufacturers rushed to order more parts.

  • The problem is that 'semiconductor' and 'rushed' are practically antonyms.

  • There's nothing fast about producing billions of transistors on a single chip or maintaining

  • conditions 100,000 times more sterile than a hospital operating room.

  • When you hear semiconductors have extraordinarily long lead times, think not days or even weeks

  • but rather months.

  • Many, many months.

  • A single chip takes no fewer than fourteen and as many as 20 weeks just to manufacture.

  • After that, you can expect an additional 6 weeks for assembly, testing, and packaging.

  • This, mind you, assumes the requisite machines are sitting around, ready to start the moment

  • an order is received, and doesn't include delivery time.

  • Ignoring these two giant caveats, each chip will take three to six and a half months from

  • start to finishlonger than the entire dip in car sales last year.

  • But if it were that simple, supply would've caught up with demand months ago.

  • Instead, some analysts don't expect the current shortage to end until later this year, or,

  • even next year.

  • Something else is happening here.

  • The semiconductor supply chain isn't just slow.

  • It also involves many different parties.

  • Steps which would be separated only by conveyor belts or departments in other industries are

  • so complex for semiconductors as to justify entirely different, highly specialized companies.

  • And, while efficient, specialization can also cause problems.

  • Imagine, for instance, last September when Toyota saw its cars start to fly off the lot

  • it would've immediately adjusted its sales forecast accordingly.

  • If sales the previous month were 18 million, it would've extrapolated a trendline and

  • added some cushionordering, let's say, 20 million.

  • But remember, Toyota's order doesn't just go directly to a factory.

  • Instead, it might go to a company like Panasonic, which might be responsible for delivering

  • the car's navigation unit.

  • Panasonic, on the other hand, will see an order of 20 million units, extrapolate, and

  • add some cushionmaybe ordering 21 million.

  • It, likewise, may order from another intermediary, who, again, will extrapolate and add slack.

  • By the time an actual manufacturer, orfab”, receives an order, it may bear little resemblance

  • to the original.

  • Each step of the process involves an independent, profit-maximizing firm, making the most logical

  • decision given its limited information.

  • In aggregate, however, demand gets more and more distorted.

  • Under normal conditions, this effect is known and manageable.

  • But when orders come flooding in all at once, as they did in September, manufacturers are

  • very easily overwhelmed.

  • And because demand shot up everywhere at once, every company was effectively competing for

  • the same, limited supply.

  • Each one, trying both to minimize the risk of under-ordering and maximize its priority

  • in line, inflated its order.

  • For manufacturers, the difficulty is not so much solving the shortagewith lead time

  • so long, there's really nothing that can be done except build more factories, which

  • takes years.

  • Their real task is to project confidence.

  • If they can credibly convince buyers of their capacity, buyers stop inflating orders, and

  • at least some of the shortage will naturally resolve.

  • It's fundamentally no different from toilet paper, masks, or diapers.

  • If even one person fears a shortage, they'll start hoarding supplies, forcing everyone,

  • including the most rational, to play along.

  • Shipping prices are at recent highs, and Chinese companies may be hoarding supplies for fear

  • of U.S. sanctions, but no one truly knows how much is simply panic buying.

  • In reality, theshortagemay not be much of a shortage at all.

  • What if there was a shortage, though?

  • Supply may not be severely constrained now, but if this is what merely believing it to

  • be, looks like, what would it, actually?

  • The very nature of semiconductors all but guaranteed the dominance of a small number

  • of companies.

  • Opening a new factory easily costs upwards of $10 billion, and as much as twice that

  • for the most cutting-edge.

  • But because of how fast the underlying technology changes, it will very likely only remain useful

  • for 5 or so years.

  • That means burning through a million dollars every five hours.

  • There's absolutely no room for mistakes or downtime.

  • Factories run 24/7, 365 days a year, with no exceptions.

  • With capital costs this high, it's simply not possible for new companies to dip their

  • toes in the market.

  • Over time, the number of competitors has dwindled, from 25 in 2002 to just three by 2016.

  • The winner in each major chip technology revolution reinvests its earnings back, ensuring they

  • dominate even harder in the next.

  • With just a handful of competitors, the industry is among the most consolidated in the world

  • more so than airlines, biotechnology, or soft drinks.

  • While not, strictly speaking, a monopoly, Taiwan Semiconductor Manufacturing Company

  • is the clear winner in the contract foundry marketwhich produce on demand for companies

  • like Apple and Toyota.

  • That's a lot of very important eggs in one basket.

  • Especially given that over 90% of TSMC fabs are located in one, politically fraught country:

  • Taiwan.

  • When semiconductors are flowing, no one pays much attention to just how amazing their existence

  • is.

  • But when they stop, when a single ship blocks the Suez Canal, or when an oil pipeline is

  • held for ransom, the fragility of our modern world quickly becomes apparent.

  • And yet, it's in part that very fragility which makes it, in all but the weirdest of

  • times, so dependable.

  • TSMC needs Taiwan, Taiwan needs TSMC, and at least for now, the world needs TSMC.

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This April, 19 million new cars were sold in Americathe highest level since 2005.

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B1 US shortage demand taiwan semiconductor chip toyota

Why the World is Running Out of Computers

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    joey joey posted on 2021/05/30
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