Semiconductors, the building blocks of the digital economy, are in short supply. These shortages are a product of poor planning during the COVID-19 pandemic, as well as a production model that relies on global supply chains, which are subject to interruption.
This situation has spurred governments across the world to action. Several, Japan among them, are providing support to chipmakers to increase production. While governments should work to ensure a steady supply of chips, it is vitally important that any solution not create more problems. A cooperative, multilateral approach is required.
In January, global semiconductor industry sales rose 13.2% from a year ago, reaching $40 billion. Nevertheless, companies in almost every industrial sector continue to complain of shortages that prevent them from meeting production schedules.
Consumer electronics makers, such as computer, video game and phone makers, have warned that they cannot keep pace with demand. Sony, for example, anticipates chip shortages will slow production of its PS5 device for another year. More ordinary appliance manufacturers are also impacted, cutting production of refrigerators, washing machines and even smart toilets.
The proliferation of technology throughout the economy means that the pinch will be felt in unexpected areas. Agriculture has gone high-tech, and many of the most modern and productive producers rely on semiconductors to get their goods to market. Steel makers, like other suppliers of the raw materials of the modern economy, need chips to operate their production facilities.
The loudest complaints have come from automobile makers, who have responded to shortages in a variety of ways. Several manufacturers shut down entire plants. Others have removed options that require particular chips, like navigation systems or various screens within the vehicle.
Shortages are the result of several factors. Semiconductor manufacturers first cut production during the pandemic, worried about falling demand as they and their customers sent workers home. Demand soared as homebound employees turned to electronic devices to stay connected or entertained.
Many companies that are complaining now had canceled orders because they misread the trajectory of the pandemic and resulting recovery in demand. Chip manufacturers shifted spare capacity to that needed for home electronics, anticipating that surge in demand, although they still fell short. Most experts forecast shortages for the remainder of the year, with imbalances continuing in some areas for another two years.
Cognizant of the importance of chip production, several national governments are providing funds to increase domestic production, either to national manufacturers or to entice foreign manufacturers to set up shop in their country. Japan already has a ¥200 billion ($1.8 billion) fund to support domestic chipmakers and the Cabinet is weighing plans to supplement those funds with monies it will spend on “strategic goods,” those that it deems essential to the evolution and security of the nation. Those intentions rest on aggressive attempts to decarbonize the economy, and semiconductors will be critical to that transition.
Japan once dominated semiconductor production. Today, however, about half of global chip manufacturing is done by Taiwanese and South Korean companies, with the majority of production taking place in China. The United States’ share of manufacturing capacity has fallen from 37% in 1990 to 12% today. However, Japan continues to play an outsize role in production networks by making the machines, parts and chemicals needed to make the chips themselves.
The Japanese government hopes to entice leading chipmakers to set up operations in the country. Since chips are designed for specific purposes, marrying Japanese R&D with those manufacturers will give this country a lead in the green tech revolution that will be critical to engineering the transition to a more sustainable economy.
U.S. companies are a priority target, as cooperation between the two countries’ businesses will facilitate the creation of secure supply chains, an item that dominates the agenda whenever officials from the two countries meet, including last month’s summit between Prime Minister Yoshihide Suga and U.S. President Joe Biden. Biden already signed an executive order that requires certain U.S. government agencies to identify immediate steps they can take to address vulnerabilities in the semiconductor supply chain.
There is danger that national security will be narrowly defined, however, and rather than pursuing the cooperative, alliance-based approaches that make economic and political sense, more narrowly defined national projects will prevail.
The U.S. is ready to spend some $40 billion on semiconductor research and development and manufacturing. South Korea has announced that it will spend $450 billion to boost the competitiveness of its chipmakers. Europe, which seeks to double its share of global chip production to 20% has said that it is considering investing €20 to €30 billion ($24 to $36 billion) to that end. There is a risk that those plans will result in a competition among governments to secure partners or create overcapacity that will weaken the industry.
Enhanced cooperation between Tokyo and Washington is a must. Success would be another sign of the vitality of our bilateral security alliance and ways that our two countries can work together to protect national security broadly defined.
And since it takes at least two years for a semiconductor manufacturing facility to go online, big national plans will not yield immediate results. Only multilateral cooperative solutions can provide that. Japan and the U.S. can and should be leading the way.
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