Today is the second class in our current four class set. We will start class with a casual conversation. Our reading this week is about streams and cooling off during the hot summer. Our listening is an about semiconductors. We will continue with our mini grammar lesson. Writing the sentences on a separate piece of paper by hand is a wonderful way to practice. For today’s mini grammar we will practice the present perfect. Have/has + PP. For example, “I have taught many classes today.” Teach, taught, taught. We are using the third verb form- also know as the present perfect.
Click HERE for the reading
SYLVIE DOUGLIS, BYLINE: NPR.
(SOUNDBITE OF DROP ELECTRIC’S "WAKING UP TO THE FIRE")
PADDY HIRSCH, HOST:
This is THE INDICATOR FROM PLANET MONEY. I'm Paddy Hirsch.
DARIAN WOODS, HOST:
And I'm Darian Woods. We've been talking a lot about chip shortages on THE INDICATOR. And today, we're going to take a very deep dive into the world of semiconductors.
HIRSCH: Semiconductors, computer chips - they're in almost everything that we use that uses a power supply, from toasters and toothbrushes to smartphones and cars. And the ubiquity of these tiny devices means that we produce a lot of them. In fact, globally, every year we produce more transistors, which are the individual components of a semiconductor, than we do grains of wheat and rice combined.
WOODS: So we wanted to know - why is there this shortage of such an important component at the moment? That's coming up after the break.
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HIRSCH: We are experiencing a global semiconductor shortage. It's gotten so bad that it's beginning to threaten entire companies. General Motors' income dropped 40% last quarter because it couldn't source the chips it needed to finish making tens of thousands of vehicles.
WOODS: Ambrish Srivastava is a managing director at BMO Capital, where he covers the semiconductor industry. He says that there can be dozens of individual chips in every car and even more in a high-tech car like a Prius.
AMBRISH SRIVASTAVA: Could be at least hundreds of parts that go into it, ranging from chips that cost, you know, 5 cents to all the way to 100 - you know, somewhere in the close to $100 - 70, 80, $100 range.
HIRSCH: Now, it's important to note that not all of those chips are in short supply, right? It might be easy to get the cheap low-tech chips for your electronic mirrors, for example, but hard to find the expensive, high-performance ones that operate the backup camera or the battery. Or it could be the other way round. You could be able to find the advanced chips, but not the cheap 25-cent ones. Either way, it's a problem.
SRIVASTAVA: The 25-cent chip, if it's not present, it could stop that $20,000 car from being manufactured.
WOODS: And that's what's happening all around the world right now. There just aren't enough of certain kinds of chips being made or at least being made available, which is why car production plants are full of these half-built vehicles.
HIRSCH: And this isn't just a problem affecting the auto industry. The same factors are playing out in every business that uses semiconductors. Ambrish says some of the building blocks of this crisis were actually laid in 2018, when our trade war with China really screwed with the tech sector.
SRIVASTAVA: Companies became very cautious about spending, so people weren't sure, you know, is this the end of the business cycle? Are we going to spend or not? And so capacity was not being added heading into the pandemic, right? And then as soon as the pandemic hit, everything shut down, right? Companies were, oh, I was not going to spend before; I'm definitely not going to spend now.
HIRSCH: Yeah, and the pandemic didn't just hit high tech. It also hit low tech. Everyone in the economy forecast lower sales in their areas of business, and as a result, they ordered less inventory. That meant fewer orders for all sorts of computer chips, which meant, of course, that chipmakers made less and, in some cases, idled some of their capacity.
WOODS: Now, of course, we know that it didn't turn out the way everyone predicted. People didn't buy fewer electronics. In many cases, they bought more, and not just computers and computer games that use advanced chips. People also ordered more household electronics like fridges and ovens, which used cheaper, old-technology semiconductors.
HIRSCH: Yeah, and demand for all of these chips surged. Some companies actually began buying and hoarding semiconductors, which constricted supply. And even though the chipmakers ramped up production, it just wasn't enough. Ambrish says the resulting disruption shows up most clearly today in lead times. That's the time it takes to deliver a chip once it's been ordered. Normally...
SRIVASTAVA: Depending on the complexity of the chip, could be a couple of months to three months to four months.
HIRSCH: And today...
SRIVASTAVA: Eighty percent of the lead times are still at 52 weeks. It's unprecedented.
HIRSCH: In other words, it's not that chips aren't being made; it's just that not enough are being made fast enough and being shipped fast enough to meet the needs of manufacturers. It means that where companies used to be able to get the chips that they needed when they needed them, now in many cases, there is a queue.
WOODS: But the production and supply disruptions caused by the pandemic are only part of our chip problem. A bigger issue is the way the entire chip business is configured. So it's time for a little explainer, Paddy.
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WOODS: In the old days, all semiconductor companies used to design, make and sell their own chips.
HIRSCH: But the process of making chips is incredibly expensive. First, you have to dig tons of quartz rock out of the ground. Then you have to heat it to the point where the raw silicon can be extracted.
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WOODS: The silicon is purified and then melted in a special process that produces long, cylindrical bars of the stuff called ingots. Those ingots are sliced into wafers, and they're treated with chemicals. And only then are they etched with the individual chips.
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HIRSCH: Each of these steps is fiendishly complicated and brutally expensive. The silicon smelting process alone takes up enough energy to supply more than 80,000 average homes per year. Ambrish says chip fabrication plants, whether they be for low-tech or high-tech chips, can take as many as five years to build and cost billions of dollars.
SRIVASTAVA: Older technology, older lagging edge - still several billions of dollars, start from 5 plus billions of dollars - right? - as an example. You go all the way to Intel, which is the cutting edge of cutting edge - $15 plus billion.
WOODS: Fifteen billion dollars per plant.
HIRSCH: Yikes.
WOODS: Not small change, and that's not even including the operating costs, the specialized engineers and scientists. And it's in a business that changes so rapidly that it only takes a few years for a plant to become almost obsolete if no updates are done. It's those kind of numbers that made semiconductor companies reconsider their whole business model in the 1990s.
SRIVASTAVA: The more nimble companies said, we're going to focus on design, and we're going to outsource manufacturing. What has also happened is there's been tremendous consolidation in the industry. So the reason we are here is because of cost. Companies don't want to invest because of the outlay, so it's much easier to outsource. Let somebody else do it. I'll just do my design. I'll capture all that. And they have profitability.
HIRSCH: It happens at the high end of the market because the cost of building a plant for the tiniest, most powerful chips is prohibitively expensive. It happens at the low end of the market because '90s and early-2000s style chips just simply don't make that much money, and they become increasingly obsolete as time goes on.
WOODS: And so the result is that the production of chips has become really concentrated in just a few plants around the world. So take the really high-end chips. Ninety percent of the really high-end chips, the super powerful ones that go in your gaming PCs, these are made in one place - Taiwan.
SRIVASTAVA: The compute power of these chips at the high end, it's tremendous. And they could go for thousands of dollars.
WOODS: That concentration of the industry and the value of those advanced chips has made one company super rich - the Taiwanese company TSMC. And we devoted an episode to this company in December.
HIRSCH: That concentration in the industry has also begun to concern some global strategists who worry about Taiwan's vulnerability. If the supply of chips from Taiwan is disrupted or cut off, perhaps by China, then that could leave the West and, particularly, the United States at a disadvantage.
WOODS: It's OK, though. President Biden has a plan for that.
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PRESIDENT JOE BIDEN: OK, here I go.
HIRSCH: Yeah, I guess.
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BIDEN: We're here today to talk about the importance of passing the CHIPS for America Act to strengthen our national and economic security.
HIRSCH: The CHIPS Act - or CHIPS Plus I think it's called now, right?
WOODS: OK. Yeah, the director's cut.
HIRSCH: Anyway, it's a $52 billion plan that's supposed to get us to a place where we make our own chips right here in the United States.
WOODS: And in fact, that is already happening independent of the government. Ambrish says a number of American companies - like Global Foundry, Texas Instruments and Intel - these companies are investing heavily in building fabrication plants in the U.S.
SRIVASTAVA: All these are massive capital outlays - massive.
HIRSCH: Massive outlays in the anticipation, of course, of massive profits, right? I mean, the semiconductor industry is hugely profitable. Last year, global chip sales totaled more than $550 billion, up 26% from the year before. And analysts are predicting another 13% growth in the sector for this year.
WOODS: But even if we do see an increase of U.S. production capacity, it doesn't necessarily mean that we'll avoid the kind of supply chain disruptions that we're seeing today. After all, even if the U.S. has the plants and the staff to make enough chips to meet the needs of American electronics companies, these new plants will still need equipment and supplies to actually make the chips in the first place. And that equipment and those supplies are also sourced from all over the world.
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WOODS: This episode was produced by Nicky Ouellet with engineering from Maggie Luthar. Kathryn Yang checked the facts. Viet Le is our senior producer. Kate Concannon edits the show. And THE INDICATOR is a production of NPR.
HIRSCH: My question about chips is - salt or vinegar or both?
WOODS: Salt, vinegar, chicken salt.
HIRSCH: Chicken salt?
WOODS: Chicken salt - that is Australia's gift to the world.