For more than two years, global supply chain disruptions have delayed orders of the ubiquitous semiconductor chips found in products as diverse as home appliances, video game consoles and high-grade weapons. The small but integral components manage the flow of electric currents of devices in an exponentially electrified world.
The automotive industry, while just one player in the global demand for chips, has proven to be particularly vulnerable. The vehicle market swayed rapidly in either direction early in the pandemic, while demand for other devices continued to soar. The chip shortage has caused automotive OEMs to idle plants in some cases, which inevitably trickled down the supply chain.
Although auto suppliers and the industry at large still aren’t out of the woods, a glimmer of hope has emerged, even if its effects remain perhaps a few years away.
After two years of legislating, congressional lawmakers recently coalesced around the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act. Signed into law by President Joe Biden on Aug. 9, the $53 billion plan aims to bring semiconductor chip research and manufacturing to the U.S., hoping to future-proof against similar supply chain disruptions caused by a heavy reliance on producers based overseas, particularly in Southeast Asia.
“I see it as a very positive step. I see it as something that will make us less reliant on other countries for something that’s critical to our supply chain,” said Pat Greene, president of Tier 2 supplier Cascade Die Casting Group Inc. “I think it’s important we control our own destiny, and I think that’s a step in the right direction.”
The CHIPS Act allocates $53 billion for semiconductor chip research and manufacturing. The funding provides subsidies for manufacturers to invest in U.S. plants, including $24 billion for a 25-percent investment tax credit for building plants. The bill also creates a $500 million fund to help bolster the security around semiconductor supply chains.
“The fact that we’re just making a focus on chip capacity in general is certainly a positive,” said Mike Wall, executive director of automotive analysis with S&P Global in Grand Rapids.
While Wall noted a “natural lag” in the time it takes to invest in and ramp up capacity, the CHIPS Act “will certainly help incentivize those investments. The fruits of that labor might be more 2024 to 2025, but it’s certainly much needed, nonetheless.”
How we got here
Multiple factors contributed to the global automotive chip shortage over the past couple of years, including the significant growth in the number of chips used per vehicle. From 2017 to 2021, the number of chips per vehicle nearly doubled with the proliferation of electrical components, digital displays and driver safety measures. That’s on top of growing demand in other sectors, such as consumer electronics.
“Then combine the lockdowns in the spring of 2020 and the ripple effect sent out through the system, it really did profoundly impact the chip industry,” Wall said. “We’ve been trying to catch up ever since.”
Wall also noted the “disconnect” between more advanced chips and simpler analog chips meant to withstand more durable conditions and situations.
“The analog chips are clearly the constraint right now. A vehicle uses so many analog chips already,” Wall said. “They’re complex in the sense that there could be different uses for those analog chips. You could have an analog chip for a power supply be plentiful, but an analog chip for a transceiver be in tight supply. You only need to be shy on one and you’re not building that car.”
The CHIPS Act allocates $2 billion to incentivize the production of “mature node,” or analog, chips.
Indeed, the global chip shortage ripples throughout the entire automotive supply chain, from OEMs to suppliers who may not even use chips but their customers do.
That’s where Cascade Die Casting Group fits. The company’s book of business is about 75-percent automotive.
“It’s been significant because the demand is there in the marketplace for automobiles, but the supply isn’t there,” Greene said. “In our world, we get our capacity in place to make the parts then the customer doesn’t need them. We sell to Tier 1 (suppliers) and they’re not able to make vehicles because they can’t get the chips.”
That’s on top of struggling to hire enough employees and “keeping them busy” when there is a delay, Greene said.
“The chip crisis continues to cause interruptions for our business and makes it hard to plan,” he said. “There’s no reliable outlook for what the future holds. In our business, you need to be ready for the customer, but if the customer doesn’t buy the product, it’s pretty expensive to wait.”
CHIPS and economic development
Meanwhile, the Whitmer administration has touted several victories in the ongoing competition to lure chip suppliers and manufacturers to Michigan, including an SK Siltron R&D facility announced last year near Bay City. The semiconductor industry contributes $4.6 billion in gross regional product in Michigan, according to state officials.
Glenn Stevens, executive director of automotive cluster MICHauto, sees three significant components to the CHIPS Act: Controlling the intellectual property of high-tech components, onshoring to protect against supply chain disruptions, and building a highly talented workforce in the U.S.
“There’s a really interesting workforce need and opportunity for where these (manufacturing facilities) are located,” Stevens said. “These plants are what they call labs to fab. There’s a lot of R&D and technical work that’s done in these factories. It’s not simply an assembly process.”
Stevens singled out Intel’s $20 billion plan for a semiconductor manufacturing facility in Ohio. The company expects to employ 3,000 people at an average annual salary of $135,000.
“That’s incredible,” Stevens said. “Talk about an economic impact to a city, community, region, state or — in this case — a country, where you’re going to have those types of operations.”
And those are the proverbial big fish. A much wider manufacturing supply chain expects to follow if large semiconductor plants are built soon in the U.S., since semiconductors rely on various components, materials, substrates and wafers.
“I think Michigan is very well positioned to be an important part of that supply chain,” Stevens said, noting the presence of Hemlock Semiconductor, a global leader in polycrystalline silicon used in semiconductors.
“There’s a really concerted effort on the part of the state, Michigan Economic Development Corp., regional economic development agencies and the administration to make sure Michigan is a leader of the supply chain,” Stevens added. “The big mothership, labs-to-fab facilities — I think Michigan has as good of a shot as anybody to land one of those projects.”
In landing the large projects, Stevens pointed to the “economics of site selection,” which include several factors — overall business climate, competitive energy rates and highly skilled labor availability, to name a few.
Another new factor also appears to be emerging, Stevens added. Last week, executives at Indianapolis-based Eli Lilly & Co. — one of the largest and oldest employers in Indiana — released a statement saying the state’s new abortion ban bill may limit the company’s ability to attract workers and therefore may have to look elsewhere.
“When you look at where a company’s going to move their headquarters, R&D or manufacturing facility, I think more and more companies will go to places with inclusive cultures and communities with the right to express themselves and the rights to do and choose things,” Stevens said. “You’re going to hear more about that. It’s business climate, energy, land, talent and that inclusive community. I hope Michigan stacks up really well in those categories.”
— MiBiz Editor Joe Boomgaard contributed reporting to this story.