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Glenn Hegar
Texas Comptroller of Public Accounts
Glenn Hegar
Texas Comptroller of Public Accounts
Glenn Hegar
Texas Comptroller of Public Accounts

economy

Supply Chains Semiconductor Supply Chain

Semiconductor Snapshot | Print Snapshot (PDF)

Introduction

As the economic fallout from the COVID-19 pandemic continues, consumers and manufacturers still are enduring a global shortage of semiconductors, the high-tech components that power the information, communication and digital economies. These extremely sophisticated products are the brains behind high-tech devices like mobile phones, personal computers and other consumer electronics, as well as data centers and communication networks and automobiles.[1] In May 2021, the average wait time for semiconductor orders was 18 weeks, exceeding the previous high by four weeks.[2] These shortages affect 169 industries, according to a Goldman Sachs report, creating widespread ripple effects throughout the economy.[3]

The cause of the current shortage is straightforward: Demand for products requiring semiconductors – or microchips – has greatly exceeded the available supply. A major contributor to the shortage was the transition to remote work and school environments, spiking demand for electronics and other high-tech equipment. Unanticipated demand for automobiles in late 2020 compounded the chip shortage. (Automakers reduced chip orders at the onset of the pandemic, expecting slow growth in 2020.)

The mismatch between demand and supply was not unique to semiconductors as economies reopened in the wake of COVID-19. The supply chain for semiconductors received extra scrutiny, however, given the industry’s widespread presence in everyday products and its importance to systems and networks critical to national security and competitiveness.

Given the complexity and cost of chip production, filling this supply shortfall will take time. Basic chips can take three to four months to produce and more advanced units, up to six months. According to Intel and Taiwan Semiconductor Manufacturing Company (TSMC), current chip shortages are expected to last into 2022.

Supply Chain Features – Semiconductors

Global semiconductors trade equaled nearly $2.0 trillion in 2020, the fourth-most highly traded product in the world behind crude oil, motor vehicles and parts and refined oil. This integrated and interdependent trade system allows each producing country to specialize in its area of strength. The U.S. is dominant in high-value design activities that require substantial research and development (R&D) expenditures. East Asian countries – Taiwan, South Korea and Japan – lead in manufacturing activities (wafer fabrication) that require enormous capital expenditure (CapEx) investments. China is the current leader in assembly and testing activities (Exhibit 1).

Exhibit 1: Value Added by Type of Activity and Region, 2019
Exhibit 1: Value Added by Type of Activity and Region, 2019
Type of Activity U.S. China Taiwan South
Korea
Japan Europe Other
EDA and core IP*
(R&D Intensive)
74% 3% 1% 1% 1% 20% 0%
Logic
(R&D Intensive)
67% 5% 7% 3% 5% 8% 4%
Discrete, analog and other
(R&D Intensive)
37% 7% 3% 6% 24% 19% 5%
Memory
(R&D Intensive)
29% 0% 4% 59% 8% 0% 1%
Manufacturing equipment
(R&D Intensive)
41% 1% 0% 4% 32% 18% 3%
Raw materials
(CapEx Intensive)
11% 16% 22% 16% 19% 12% 3%
Wafer fabrication
(CapEx Intensive)
12% 16% 20% 19% 17% 9% 6%
Assembly and testing
(R&D and CapEx Intensive)
2% 38% 27% 11% 5% 4% 13%
Total value added 38% 9% 9% 16% 14% 10% 4%
Consumption 25% 24% 1% 2% 6% 20% 22%

Source: Semiconductor Industry Association

* EDA is “electronic design automation”; core IP is “core intellectual property.”


These trade networks create huge value and save money in the production process. The Semiconductor Industry Association (SIA) estimates that the supply chain saves about $1 trillion in upfront investment, generates between $45 billion and $125 billion in annual cost efficiencies and reduces semiconductor prices by 35 to 65 percent.

Over time, however, U.S. semiconductor manufacturing capacity has declined due to trade and offshoring. In the past 30 years, the U.S. share of global chip production has fallen from 37 percent to just 12 percent. For the most advanced technology chips, U.S. reliance is even more striking: The U.S. produces just 6 to 9 percent of mature logic chips – those found in nearly all electronic devices. Moreover, advanced chip production is often concentrated in just one country: Taiwan produces 92 percent of leading-edge logic chips.[4]

Supply Chain Risks – Semiconductors

Supply chain disruptions and chip shortages preceded the pandemic. The complex and integrated nature of chip production makes it susceptible to a variety of supply chain risks and vulnerabilities — most notably, trade disputes and geopolitical tensions, geophysical events (like earthquakes and droughts) and cyberattacks.

In 2018, for example, semiconductors were used as a weapon in the U.S.-China trade war. Citing national security concerns, U.S. officials imposed export controls of U.S. semiconductors on Huawei, a Chinese telecommunications company. The move shook the global supply chain and threatened up to a third of revenues to the U.S. semiconductor industry, requiring U.S. companies to search for new sources of funding for R&D expenditures.

Geophysical events also can disrupt semiconductor production. In February 2021, for example, Texas’ winter storm shut down NXP Semiconductors in Austin, costing the factory a month’s worth of production. In early spring 2021, an earthquake in Japan and a drought in Taiwan temporarily shut down production, further exacerbating chip shortages and delays in automotive manufacturing. And cyberattacks are an increasing threat to industries with high levels of R&D, capital intensity, digitization and digital data flows – all characteristics of the semiconductor industry.

Efforts to Mitigate Risks

Long-term vulnerabilities have renewed interest in enhancing the resilience of the semiconductor supply chain, diversifying sourcing and increasing U.S. domestic capacity. In March 2021, Intel announced a $20 billion investment to build two fabrication centers in Arizona, and Texas Instruments is investing more than $3 billion in construction of a chip plant in Richardson, Texas.

The federal government also is making investments to improve resilience and domestic capacity. In June 2021, the U.S. Senate passed the bipartisan U.S. Innovation and Competition Act, which provides $250 billion in funding for scientific research, subsidies to chipmakers and an overhaul of the National Science Foundation. It allocates $52 billion to fund semiconductor research, design and manufacturing.

Industry in Texas

As the federal government offers incentives to increase domestic production, Texas currently has the infrastructure to capitalize on these investments. Texas is among the national leaders in semiconductor and other electronic component manufacturing. In 2020, the industry contributed $15.3 billion to Texas’ gross domestic product (GDP), accounting for 15 percent of the industry’s total U.S. GDP. The state led the nation, producing more than one-quarter of U.S. semiconductor exports valued at $63 billion. And even in the pandemic year, Texas’ semiconductor manufacturing jobs rose by 1.1 percent, in contrast to U.S. industry losses of 1.9 percent (Exhibit 2).

Exhibit 2: Industry Data, Semiconductor and Other Electronic Component Manufacturing, Texas and U.S., 2020
Exhibit 2: Industry Data, Semiconductor and Other Electronic Component Manufacturing, Texas and U.S., 2020
Metric Texas U.S.
Employment 41,569 366,707
Employment change, 2019-2020 1.1% -1.9%
Average wages $141,685 $123,917
Total wages (billions) $5.9 $45.4
Establishments 469 6,006
Gross domestic product (billions) $15.3 $101.6
Exports (billions) $17.3 $63.0
Imports (billions) $12.8 $77.0

Sources: JobsEQ; U.S. Census Bureau, USA Trade Online

Note: Data are for North American Industry Classification System (NAICS) Code 3344.

Of the state’s nearly 41,600 semiconductor manufacturing jobs, about 87 percent were in counties in the Dallas-Fort Worth-Arlington and Austin-Round Rock-Georgetown metro areas. Exhibit 3 highlights counties with the greatest shares of semiconductor manufacturing, as measured by location quotient (LQ) [see note, Exhibit 3]. In 2020, LQ values in Travis and Grayson counties exceeded 6.0, meaning the share of industry jobs in those counties was more than six times the national average.

Exhibit 3: Semiconductor and Other Electronic Component Manufacturing Employment and Location Quotient by Texas County, 2020
Exhibit 3: Semiconductor and Other Electronic Component Manufacturing Employment and Industry Concentration by Texas County, 2020
County Employment Industry Concentration
Travis 12,958 6.63
Grayson 830 6.50
Collin 5,981 5.26
Dallas 14,196 3.29
Williamson 819 1.68

Sources: JobsEQ, Texas Comptroller of Public Accounts.

Note: *Industry concentration is measured by location quotient (LQ). LQ represents an industry’s proportionate concentration in the region; an LQ greater than 1.0 means that industry employment is more concentrated in the region than nationally.


Endnotes

Links are correct at the time of publication. The Comptroller's office is not responsible for external websites.

  1. “Strengthening the Global Semiconductor Supply Chain in an Uncertain Era,” (PDF) Boston Consulting Group and the Semiconductor Industry Association, April 2021, p. 10.
  2. “The Missing Chips: How to Protect the Semiconductor Supply Chain,” (PDF) Chad P. Bown, Foreign Affairs, July 6, 2021.
  3. “What the chip shortage means for the U.S. economy,” (PDF) Daniel Howley, yahoo!finance.
  4. “Fact Sheet: Biden-⁠Harris Administration Announces Supply Chain Disruptions Task Force to Address Short-Term Supply Chain Discontinuities,” The White House, June 8, 2021.

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