The COVID-19 pandemic from mid-March 2020 caused massive lockdown of chip producing companies for months. And now, two and a half years later, as the pandemic is subsiding and consumption is picking up, the shortage of the chips for semiconductors is felt severely by both consumers and producers of regularly used items as summarized by the “Chip Demand by Revenue” pie chart. Notably, the chip demand by revenue for the auto industry is less than nine percent, but it employs more than ten million people globally!
On the supply side, Taiwan, South Korea and more recent entry of mainland China have been dominating the semiconductor manufacturing, when the initial leaders were Japan, Europe and U.S. in the 1990s. The Semiconductor Industry Association reported that the share of modern semiconductor manufacturing capacity within the U.S. reduced by 25% from 37% in 1990 to 12% in 2022 with the lead cause being lack of U.S. government investments relative to significant incentives provided by the governments of leading competitors in the last few decades. This is aptly summarized in “The Hidden Suppliers of the Chip Industry” chart.
With national demand outstripping supply, and rising global competitors, the federal government has stepped in to address this acute microchip shortage. On September 9th, 2022, President Biden alongside the CEO of Intel attended the groundbreaking ceremony of Intel’s newest semiconductor manufacturing plant in Columbus, Ohio. Exactly a month earlier, President Biden signed into law the “CHIPS & Science Act” that includes the following key government provisions to spur domestic semiconductor manufacturing including the much needed microchips:
- $52B competitive grants
- 25% investment tax credit worth an estimated $24B
This is refreshing news for easing the supply of microchip production within the country since inflation rate for the month of August 2022 was 8.3% with unadjusted 12-month inflation rate ending August 2022 for new vehicles is 10.1%; used cars and trucks, 7.8%, and transportation services, 11.3% as reported by the Bureau of Labor Statistics.
Discussion Questions:
- Based on the Demand-Supply concepts,
- show the shortage of microchips with a graph where x-axis is the quantity of microchips and y-axis is the price of the microchips, and
- use the determinants of demand and factors of supply to explain the microchip shortage
- Tax credit provided by the CHIPS & Science Act is a type of government subsidy to ease the production of microchips,
- show this subsidy with another demand-supply graph where x-axis is the quantity of microchips and y-axis is the price of the microchips,
- show the change in consumer surplus and producer surplus before the subsidy and after the subsidy on the graph, and
- explain how this subsidy will change the microchip industry on the global stage?
- do you think the subsidy is sufficient for U.S. semiconductor manufacturers to become a global leader again like in the 1990s? how?
- Self-reflection: If you are in the market to purchase a new car or a used car, how will the government subsidy to microchip producers and the current inflation rate affect your decision? Do explain.
Sources| CNET: Global Chip Shortage and $53B Subsidy Boosts US Manufacturing; Spectrum Ieee: How and When the Chip Shortage Will End, in 4 Charts; Statista: Chip Production Shifts Away From Traditional Stronghold, The Hidden Suppliers of the Chip Industry; Semiconductor Industry Association: SIA Applauds Enactment of CHIPS Act; Commerce Senate: $20 Billion Intel Semiconductor Plant to Break Ground After Passage of Cantwell-led Bill; BLS: Economic News Release/Consumer Price Index Summary; Economics Help: Demand-Supply Concepts (Shortages); Investopedia: How Do Government Subsidies Help an Industry?; YouTube: Subsidies: Consumer and Producer Benefit; Pixabay: Processor Micro Technology