Will Passage of the CHIPS Act Resolve Supply Chain Issues?

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Supply Chain Brain
Scott Schara, SCB Contributor
August 30, 2022

Congress has been under intense pressure to release $52 billion in subsidies to U.S. semiconductor manufacturers, to strengthen the nation’s competitive stance and self-reliance in an industry that’s essential to our economic and national security.

The U.S. and other countries have been heavily reliant on one main source for microchips, found in everything from washing machines to smartphones to credit cards. The impact of the chip shortage has been felt across all industries.

After being in limbo for the past year, the CHIPS Act was finally passed on July 28, 2022 as a concrete way to invest in the domestic semiconductor industry. It came at an opportune time, as chip manufacturers had suspended plans to build new chip fabrication plants, called fabs, in the U.S., saying they wouldn’t proceed without U.S. government subsidies.

Chipmakers had argued that government support was necessary to level the playing field for the U.S. because other countries were already subsidizing the industry. Now that the bill has passed, these companies can resume planning and proceed with building construction.

Chip manufacturers such Intel, Micron, Samsung, and TSMC are planning to build fabs in the U.S. Plant locations already in the works include Ohio, Arizona, New Mexico and Texas.

Since plants can take three to five years to build, this is not a short-term solution to the chip shortage and supply chain issues. The CHIPS Act funding is more of a long-term effort to incentivize semiconductor manufacturers to invest in America and prevent chip-related supply chain issues subject to future disruptions.

With more than 75% of semiconductor chips imported from overseas, according to recent reports by the Semiconductor Industry Association, logistics plays a significant role in the chip shortage. Further aggravating the situation, there have been lengthy transit delays, a worldwide container shortage and a personnel shortage at ports and warehouses. What’s more, U.S. ports are backlogged, taking weeks for vessels to dock and offload freight. Alternative transportation options haven’t helped, as restrictions on air travel continue to limit freight capacity on passenger airlines.

So what’s the solution? Chip manufacturers have initiated a multidimensional effort to alleviate the chip shortage. They have increased staffing in production facilities to boost output, and requested long-term contracts from customers to facilitate production planning. As a result, chip supply is starting to come back on line, and should continue to improve over time. For the current chip shortage to end, however, production must match demand, and shipping issues need to be addressed. With growing global demand for chips, Intel chief executive officer Pat Gelsinger expects semiconductor shortages to continue into 2024.

Increasing the number of countries where chips are manufactured will strengthen the supply chain and prevent disruptions caused by disruptions at distant factories. Near-shoring, controlling manufacturing domestically, will alleviate supply chain interruptions for a number of products and allow manufacturers to control their own destiny.

In the meanwhile, businesses need to plan carefully to minimize negative impacts of the chip shortage on production flow, until domestically fabricated chips are available. Keep in mind that lead times for some chips, from order submission to fulfillment, can be up to 52 weeks. And it’s common for the front-end production cycle for chips to run 12 to 24 weeks, plus another four to eight weeks for packaging and testing prior to shipment.

The best way for businesses to diminish the chip shortage’s impact on their ability to meet the demand for chip-requiring products is by practicing effective production planning and forecasting. This might even mean ordering more chips or technological products than actually needed, to compensate for unpredictable shortfalls until the chip supply chain fully recovers.

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