Opinion: Governors Begging Congress for Semiconductor Cash Won't Fix Anything

Matt Posky
by Matt Posky

There’s an initiative to convince Congress to pass legislation that would pour billions of dollars onto chip manufacturers at play that’s being led by Michigan Governor Gretchen Whitmer. A letter, signed by nine other governors, was issued asking like-minded lawmakers to send $52 billion in economic aid so that the chip shortage so that the supply issues that have been plaguing various industries (including the automotive sector) can finally be resolved.

Backed by the U.S. Semiconductor Industry Association (SIA), the “CHIPS for America Act” is just one of several programs designed to use the National Defense Authorization Act to create federal funding for chip suppliers. The governors (all of which are from states manufacturing automobiles) say they want a cash injection by the end of 2021 so that domestic chip manufacturing can build new factories right away. But SIA lobbyists are pressing for numerous plans that would result in extensive tax breaks and annual investments from the government that is all focused around the proposed CHIPS legislation and piggybacks on the recently passed U.S. Innovation and Competition Act (USICA).

Alright, let’s break this down.

On Wednesday, a letter was sent to House Majority Leader Nancy Pelosi, Minority Leader Kevin McCarthy, and their Senate counterparts — Chuck Schumer and Mitch McConnell — requesting that Capitol Hill swiftly push through the CHIPS Act. The presiding logic is that domestic manufacturers (particularly automakers) have been struggling due to semiconductor shortages and are now endangering the employment status of hundreds of thousands of Americans.

“There is no question that our nation’s automotive manufacturing industry — more than any other sector — has been hit hardest by the global semiconductor shortage,” Whitmer wrote in the letter. “Production at auto plants across the country has been idled, impacting more than 575,000 auto-related American jobs.”

Whitmer was joined by Governor Gavin Newsom of California, Laura Kelly from Kansas, Andy Beshear of Kentucky, J.B. Pritzker of Illinois, Pennsylvania’s Tom Wolf, Roy Cooper of North Carolina, Tony Evers of Wisconsin, and Kay Ivey of Alabama — the latter being the only Republican.

Giving the semiconductor industry has been popular with the Biden administration and the Senate has already voted in the affirmative to provide businesses with government money. But Reuters has reported that there’s been pushback in the House due to the open-ended nature of the proposed legislation.

From Reuters:

The semiconductor funding passed the U.S. Senate earlier this year by 68-32 as part of the broader U.S. Innovation and Competition Act, or USICA. But it has not passed the House of Representatives.

Elements of the broader bill have drawn opposition from some House members who worry that it does not have safeguards to prevent research funds from benefiting China, the United States’ primary global competitor.

“We understand that the House of Representatives has its own priorities with respect to the policies and programs included in USICA, we hope the two chambers will now come together quickly to find common ground with respect to this legislation, including full funding for the CHIPS Act re-shoring provisions, as soon as possible,” reads the governors’ letter.

Your author would like to echo those concerns while adding a few of his own. Rather than focusing exclusively on bolstering chip output, much of the proposed funding is reserved for research and development. Tax breaks likewise seem more focused on helping an industry that has one of the most in-demand goods imaginable right now, instead of building up new players that could help maximize domestic production.

But perhaps the dumbest aspect imaginable is how little goes toward the chips automakers actually use. Of the proposed $52 billion, only $2 billion will be used to prioritize the older chips that go into cars. This has actually been a massive contributor to the semiconductor shortage since we became aware of it. When COVID restrictions began, people weren’t buying cars. They were buying laptops, tablets, and other small devices relying on the latest technologies because there was nowhere to go. Confronting problems of their own, suppliers shifted production accordingly and realized newer chips would net them more money in the long term. This left the automotive sector ( which has continued to outsource the production of necessary hardware) in a sticky spot.

While the industry has figured out how to remain more-or-less profitable by launching rolling production stoppages, the industry at large is estimated to have lost $200 billion this year due to massive massive production shortfalls. The latest math has 2021 yielding roughly 4 million fewer cars than planned. But it’s not entirely the fault of absent semiconductors. Electronic components (resistors, capacitors, connectors, etc.) have become difficult to source in general and their predominantly Asian suppliers have opted to prioritize the home markets first. This has increased prices and lowered availability across the planet, however, it’s hitting Western nations particularly hard.

It’s not just electronics either. Raw materials are also going up in price as global supply chains continue to struggle. One of the more recent examples of this is the magnesium shortages taking place in Asia. Quadrants of the automotive industry have begun ringing alarm bells that economic troubles have resulted in factory closures that are about to create extra demand for the element. China, which is responsible for 85 percent of global magnesium supply, is assumed to have cut its total output by half. While some automotive manufacturers have stated they are not concerned due to the limited amount of magnesium they use, others have said they’re worried they’re just a few weeks out from another crisis. Europe’s automobile manufacturer association, the ACEA, has also stated that its also expecting problems between now and the start of 2022.

One wonders how the CHIPS Act is supposed to do anything other than keep the United States as the preeminent chip designer and why that’s supposed to be important when it’s supplying the older chips that will ultimately help boost automotive production. The U.S. still has the market cornered when it comes to cutting-edge tech but it has ceded a significant amount of capacity to China by going from building 37 percent of the world’s semiconductors (in 1990) to just 12 percent (in 2020). That lacking capacity seems to be what’s hurting the broader industry most and it’s not evident that the CHIPS Act addresses this in a serious manner. Extend that premise to as many other legislative actions that similarly seem to prioritize the wishes of lobbyists — at the expense of creating helpful, financially prudent, and manageable solutions for the American people — as you want.

[Image: sitthiphong/Shutterstock]

Matt Posky
Matt Posky

A staunch consumer advocate tracking industry trends and regulation. Before joining TTAC, Matt spent a decade working for marketing and research firms based in NYC. Clients included several of the world’s largest automakers, global tire brands, and aftermarket part suppliers. Dissatisfied with the corporate world and resentful of having to wear suits everyday, he pivoted to writing about cars. Since then, that man has become an ardent supporter of the right-to-repair movement, been interviewed on the auto industry by national radio broadcasts, driven more rental cars than anyone ever should, participated in amateur rallying events, and received the requisite minimum training as sanctioned by the SCCA. Handy with a wrench, Matt grew up surrounded by Detroit auto workers and managed to get a pizza delivery job before he was legally eligible. He later found himself driving box trucks through Manhattan, guaranteeing future sympathy for actual truckers. He continues to conduct research pertaining to the automotive sector as an independent contractor and has since moved back to his native Michigan, closer to where the cars are born. A contrarian, Matt claims to prefer understeer — stating that front and all-wheel drive vehicles cater best to his driving style.

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  • Jeff S Jeff S on Nov 11, 2021

    After visiting the book depository in Dallas Oswald could have been the lone assassin since he was a trained sniper and won awards for his marksmanship but that is besides the point and I agree that the Government cannot improve the chip shortage. As for the oil shortage there are no shortages of oil itself but there is a lack of capacity to refine all the oil available. The same thing is true of the lumber industry in that trees to produce lumber and paper from are not scarce but when 4 major players in the lumber industry that mill the lumber have limited capacity and have an incentive to limit the supply of processed lumber with higher prices. Restrict supply and the price goes up. There is a lot more to these shortages than we are told and the question is how much of the shortages are due to actual shortages and how much are actually due to limiting the supply to create shortages.

    • Lou_BC Lou_BC on Nov 12, 2021

      @Jeff S - lumber prices went up because companies could not keep up with demand. People weren't able to collectively spend billions on vacations/travel so they put money into renovations. Add to that some big natural disasters. There are various reasons why lumber producers could not keep up with demand. Antiquated/outdated mills can't increase all that much. In BC our mills can easily crank out more lumber. That's typically what happened in the past. We cranked up production and prices stabilized. This time around, we are running out of easily accessible timber. We've cut too much and haven't kept up with reforestation. Wild fires and tinder dry forests kept loggers out of the forest.

  • Jeff S Jeff S on Nov 12, 2021

    I thought there was an abundance of Canadian lumber from some of the videos I saw that showed lumber coming from Canada piling up in the US as prices continued to rise. Yes I realize that demand for lumber shot up and that lumber mills were operating at their peak but I also wonder how much incentive the mills have to increase supply if the prices are high. They can make more money by selling less lumber at a higher price.

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