Will the Chip Industry Be Nationalized?
Posted November 03, 2021
The semiconductor chip shortage has been an obvious problem for a year. It became apparent when the car lots reopened with nothing to sell. The price of used cars began to soar. Weeks turned to months and months to a year with no relief. Now car retailers have adapted a new model of dealing with inventory: it’s not just in time; it’s wait six months and we’ll see.
The chip shortage then hit all electronics.
Some people in the crypto-mining sector are getting concerned that it will eventually hit mining rigs.
Apple reports that it left $6 billion on the table due to the chip shortage. They are borrowing chips from some products to give them over to others.
Nintendo has failed to meet its production targets for its Switch console.
It’s wonderful that Taiwan Semiconductor Manufacturing Company is building a plant in Arizona, but it cannot come anywhere near meeting demand.
There is little hope it will be fully resolved for at least another year or two. Or three or four.
That’s because there is no solution except for market supply gradually finding its way toward meeting global demand. Meanwhile, the bottlenecks will continue. Products will sit in manufacturing plants awaiting completion. Consumers and producers will go without or pay higher and higher prices.
Waiting and letting markets work is not a specialization of government. Back in May, and with very little public debate or attention, the Senate passed the United States Innovation and Competition Act of 2021, with 60 yay votes. It creates a new department within the National Science Foundation and, alongside a sister bill called Chips for American Act, a new division at the Commerce Department to oversee new investment in chips. It allocates fully $52 billion for the task.
As the bill says:
The share of semiconductors and microelectronics manufactured in the United States has fallen in recent decades. While the U.S. represented 37% of global semiconductor manufacturing capacity in 1990, today just 12% of semiconductors are manufactured in the U.S., and many foreign competitors, including China, are investing heavily to dominate the industry.
In order to preserve our competitive edge, the Fiscal Year 2021 (FY21) National Defense Authorization Act (NDAA) included bipartisan provisions based on the bipartisan CHIPS for America Act and the bipartisan American Foundries Act to encourage the development of domestic semiconductor manufacturing capabilities and ensure the U.S. stay on the cutting-edge of the industry with R&D.
But here’s the trouble: the chip shortage is not really about money. It is about talent, priorities, and institutions. Before the US set out to “decouple” trade with China, then stupidly closed the economy for virus control, there was no chip shortage. No one really imagined that there would be. Then government got involved and created what has become a nightmare for manufacturers and consumers all over the world.
Government is not going to solve the problem that it created.
In the old days of fascist chic, the chosen resources to nationalize were mostly related to energy. The US somehow avoided that void, but barely. Most countries did not. As a result, the US thrived in drilling and coal and all energy-related production. It is frequently said today that computer chips are the oil of the digital age. The US is veering closer to the point of nationalizing this industry in order to bolster production and compete with China.
Case in point was the Commerce Department order issued September, 24, 2021 by its “Bureau of Industry and Security, Office of Technology Evaluation. The agency’s bureaucrats sought to understand and map all the global supply chains for chips in a futile effort to understand who was making what and delivering them to whom.
The US sent official letters to chip makers and shippers the world over, deeply annoying (or amusing) specialists all over the world. This has only ended in straining relations with trading partners.
The entire edict reads like comedy:
The ongoing shortages in the semiconductor product supply chain are having an adverse impact on a wide range of industry sectors. With the goal of accelerating information flow across the various segments of the supply chain, identifying data gaps and bottlenecks in the supply chain, and potential inconsistent demand signals, the Department is seeking responses from interested parties (including domestic and foreign semiconductor design firms, semiconductor manufacturers, materials and equipment suppliers, as well as semiconductor intermediate and end-users) to the questions set forth in this notice.
Leonard Read famously wrote that no man can make a pencil. There are too many parts, too many complications, a deeply complex set of production structures each with its own supply chains, skills and techniques diffused all over the world. It’s even more significant than that no man can make a pencil; no single person can fully conceptualize or really know how to do so. Markets are about information flows, often built by inchoate habits and radically decentralized patterns of coordination through signalling systems.
There is simply no way for government to understand them, much less reproduce them on their own. And if that is true for pencils, how much more so for computer chips? In this case, as with a tiny virus, government has truly met its match. Prediction: the effort will eventually squander trillions, but get the US no closer to global leadership in chip production. In the end, in this case, there is a test: do they work? The answer is that government cannot come anywhere near reproducing what the markets only two years ago achieved seemingly effortlessly.
Crucial to understanding the problem is to realize that this is not just about chips. It’s about broken supply chains and trade relations the world over. It’s about all the component parts that go into making everything we associate with the modern world. “Semiconductors are not the only components in short supply,” writes the New York Times in a correct piece of reporting. “Carmakers are also scrounging for the type of plastic used to hold windshield wiper fluid and mold the dashboard as well as the foam used to construct seats.”
It’s right to blame lockdowns for supply dislocations, but in the future we will have an even more profound realization that the “decoupling” that began in 2018 was even more devastating.
The US will experiment with techno-fascism, even perhaps de facto nationalizing the entire industry, but it will come no closer to satisfying demand. The only possible course is the complete re-opening of world trade and the domestic economy. How likely is that? Hardly at all. That means technological stagnation at home, at least on the margin, while China and its best trading allies move the world to the next frontier of economic development.