Semiconductor Chip Shortage --- Or Just Bad Risk Management?

Curtis BartellOn February 25, 2021, the U.S. Taiwan Business Council (USTBC) released a statement "Taiwan Is an Important U.S. Partner in the Chip Supply Chain." The USTBC was reacting to Senator Debbie Stabenow's statement during the Senate Finance Committee hearing on Katherine Tai's nomination to become United States Trade Representative. She stated, "Right now, for example, our manufacturers of automobiles, home appliances, other products, are being forced to shut down a line or a plant temporarily because of a single company in Taiwan, which has reduced its shipments of semiconductor chips to our manufacturers. It's only a slight change, but we've seen profound losses, billions of dollars in losses in key U.S. manufacturers, because of that decision."

The USTBC summarizes her statement as "Senator Stabenow suggests that the chip supply challenges currently confronting American manufacturers are a function of a "decision" made by a Taiwan company to "reduce shipments" of semiconductor chips to U.S. companies. This statement is both incorrect and misleading." Well, alrighty then…game on!

The principal issue at hand is that U.S. manufactures seem to be confronting a lack of chip supply. The allegation is that Taiwan (or a company therein) made this decision and is punishing the U.S. market. On the contrary, the USTBC notes the shortage "is primarily a function of the industry itself miscalculating its production needs.

At the onset of the pandemic, the U.S. auto industry significantly reduced its orders for chips, expecting a significant reduction in demand for vehicles. That drop in vehicle demand did not materialize fully, and the industry is therefore left with existing chip orders that do not match their manufacturing needs." Ah, now we are getting somewhere.

This has nothing to do with the Senate Finance Committee (on either side of the aisle), Taiwan, Taiwanese company, or the USTBC. It's about supply and demand. I read about this notion a couple times in college only because I was required. I was so interested in Econ I took it again the next semester. I recollect that when demand goes down, prices decrease and so does supply. To recap: U.S. manufacturers made a risk calculation that was based on assumption production/sales would go down during the pandemic. This did not turn out be a good assumption…and we all know what happens when we assume. Sooooo, now the Senate sees fit to weigh into basic supply and demand ebb and flow by casting blame on someone other than industry.

Now for the inevitable resilience bomb: if any of these industries had a resilience program of any significance this would all be a nothing burger and, while taking a calculated hit, wouldn't be having this issue even raised before the Senate…or even have associations and councils do their bidding and/or blame foreign interference.

Having a single supplier dependence on a major supply chain item constitutes a basic failure of risk management in today's operating reality. And this lack of foresight can't even be attributed to the "unforeseeable" fallout from the pandemic. The semiconductor industry has always whipsawed between oversupply and undersupply and riding out these curves is a standard part of everyday planning for anyone with significant dependence.

Do your job…be resilient. Or learn to accept the consequences of not being prepared and putting investors, reputation, shareholders, and consumers at risk.

AUTHOR: Curtis Bartell is the founder and CEO of Covenant Park Integrated Initiatives, Inc. and Managing Partner of Covenant Park Preparedness Systems Integration, LLC which focuses on commercial consulting.