Let’s decode the future of semiconductors

Hello from Crater Lake. That’s the Grand Tetons that you can’t see in the background. I promised you that I was going to talk about something that concerns me and that is the semiconductor supply chain. 

Now, as you all are well aware, we are facing a severe shortage of semiconductors for pretty much every industry right now, with the exception of personal electronics. 

And if you’re looking to something to blame for that, blame COVID because last year when we were all under protracted lockdown, none of us went out and bought cars.

None of us went out and bought fridges. 

We all bought new phones and new iPods and new computers. 

So all of the semiconductor fabs around the world, retooled to maximize their output for those particular product classes. And now we need to retool back for everything else that we use semiconductors for, which is pretty much everything.

The industry that is hit the most by this is automotive. There’s on average, over a thousand dollars worth of microchips in every car.  And the more advanced the car, the more you got. Tesla’s are practically built out of things. So how do we switch back? 

Well, we are switching back. We started switching back six months ago, but here’s the problem.

Semiconductors are not like any other manufacturing.  In any other place, you’re going to have all kinds of small and medium-sized businesses who are building all kinds of components. 

And then those are put together into larger components and ultimately assembled into the end product. It doesn’t work  that way with semiconductors. 

With the standard system, if one small company retools and goes out of business, someone else can step in and pick up the slack, or a new firm will form.

But with semiconductors, it’s all clean room work. And so it all has to be done in the same physical location. 

So they take the Silicon powder, they melt it into a liquid. 

They draw that liquid into a crystal. 

They slice that crystal into wafer discs. 

They then etch the disks, dope the disks, bake the disks, break them apart, and ultimately assemble them into whatever the intermediate product is all under one roof. 

That process from start to finish takes six to nine months based on the degree of complexity of the semiconductor. 

So when the semiconductor fab started switching back six months ago, we’re only now getting the first runs from that hitting the market. 

And it’s going to be another two to four months before those first ones ultimately make them into final products that you can purchase. 

So you’re really talking ultimately about a nine to 12 month lag. 

Okay. We will get through this. The retooling has already been done. The supply chain is up and running again.

My concern is for the future now with rare earth metals, there’s so many places you can get the ore, and the processing is based on technologies from the 1920s. It’s really easy to do. There’s just a little bit of a lag to set it up, but with semiconductors not all fab facilities are created equally. 

The Chinese do the low end stuff like a smart spatula.

The Koreans, the Taiwanese, and the Americans do the really high end stuff. 

The stuff that goes into like your phone, it’s that middle ground. That’s the problem.

The middle ground that goes into say automotive comes from Thailand and Malaysia.

Now the Biden administration is putting tens of billions of dollars behind a program to bring semiconductor manufacturing back to the United States. 

But he’s not going after the stuff that’s in Thailand, and he’s not going after the stuff that’s in Malaysia. 

He’s going after the stuff that Americans have the quality advantage.

That’s the high end that’s competing with Taiwan, Korea, and Japan. That’s not where the shortage is. 

Also when people say, you know, bring semiconductor manufacturing back from China. No, that’s not the stuff we want. That’s the low-end stuff. That’s the stuff you would subcontract out anyway. And besides most of it’s not designed in China, it’s designed here.

Most of the stuff that’s designed or that goes into automotive in Thailand, Malaysia is designed here. 

And a good portion of the stuff that goes into the Taiwanese semiconductors, which are some of the best in the world are designed here, bringing this all under a new manufacturing umbrella is not something you do in six months or nine months or 12 months or 24 months or 36 months. 

So if I’m right about the future of the global trading system, and it really does break down, the United States is going to have to do one of two things. Number one, it’ll have to go down market with semiconductors. And that means building a lot of $10 billion fabs as quickly as possible, and as quickly as possible is probably two years, that’s a long time to go without automation in automotive. 

Option number two — United States might not care about the world anymore, but we’re probably going to care very much about Southeast Asia. And it will be critical for the United States to maintain a security and economic and diplomatic presence in that part of the world in order for this portion of modernity to continue. 

That’s a hard call for a country that is turning sharply isolationist more by the day. All right, that’s it for me until another mountain bye.