This April, 19 million new cars were sold
in America — the 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 semiconductors — the chips that power virtually every electronic device, from rice
cookers to Xboxes. Earlier this year, auto manufacturers found
themselves in an awkward position — the average car is made up of about 30,000 individual
parts, yet they were missing one — worth 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? Sponsored by Hover. Get 10% off the domain you need to turn your
side project, personal brand, or startup into a reality. Early last year, demand for cars around the
world plummeted. At the same time, sales of home electronics
skyrocketed — routers, 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 expected — almost 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 finish — longer 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 cushion — ordering, 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 cushion — maybe ordering 21 million. It, likewise, may order from another intermediary,
who, again, will extrapolate and add slack. By the time an actual manufacturer, or “fab”,
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 shortage — with 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, the “shortage” may 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
market — which 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. What you and I need, on the other hand, is
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So, you're saying I should hold on to my old 1996 Compaq LTE 5380?
Is it just me or does this video talk more about the ramifications of the shortage vs the cause? They touch it briefly but don't really cover it.
What a bad fucking title.
Taiwan Number 1