Avoidable Contact #94: Crunching automakers, hidden wafers … and terrified dealers

What is good news for Malaysia, bad news for quarantine enthusiasts, and a nightmare for automakers? Why, it’s the 200-millimeter wafer! Which isn’t something you eat, but rather part of the way that computer chips are “grown.” If you’re even a little bit curious on this topic, you should encourage said curiosity, the satisfaction of which will provide you with a lifetime of casual reading, plus it will manifestly improve your understanding of the modern world.

Let’s say you’re not curious, however, and you just want to know why the heck all the automakers are shutting down the factories. Alright. Here’s the deal. Every so often, a new process for the creation of semiconductors is introduced. When this happens, chipmakers stop investing in the old process and start investing in the new one. Otherwise, their factories will be stuck turning out Model Ts when everyone else is building the Model A. Which is all well and good, unless all of America decides they’d really rather have a Model T after all!

In a nutshell, that’s what has happened. The “300 millimeter” standard for wafers overtook the “200 millimeter” standard a while back, so everybody stopped working on 200mm fabrication. Unfortunately, the pandemic has drastically increased the demand for mid-range consumer tech—think everything from new home internet routers to those goofy rich-people stationary bikes that can’t even clear a 10-foot box jump, let alone “Candyland” at the Angel Fire resort—and almost all of that junk uses chips made on the 200mm wafer.

This wouldn’t be so important, except, and please pay attention, because this is more relevant to your life than anything I normally write: automobiles are low-profit items. Compare a modern automobile to, say, whatever electronic face hugger you spend all your time staring at. The profit margin in stuff like the iPhone is often 50–150 percent. So if your 200mm wafer in a consumer electronic product costs a little more, it doesn’t really matter. You have the overhead to cover it. An F-150 pickup, which usually hovers between “making a few percent profit” and “losing money when all is said and done”? You can’t just absorb the costs. Nor can you easily pass them along to dealers.

Therefore, it’s super-easy for the makers of home-security cameras and pre-paid cellphones and who knows what else to outbid Ford or GM or Honda or whoever. “Jack, you idiot—we saw this movie when the exchange rates changed, and everybody just charged more for the cars. They could do that now, and outbid the Furby makers. It’s a rising tide that lifts all Monroneys.” Yeah, except that nobody knows how this situation is going to go from here on out. There are low-cost production countries with outdated 200mm equipment, like Malaysia, that could come up to speed on production before you know it. The automakers and dealers don’t want to create a situation where everybody makes, then has to sell, a few month’s worth of high-priced cars against the normal-priced cars they’ll build once the semiconductor supply increases again.

Imagine you’re in the dealership. “Well, Mr. Jones, you can buy a January-build Accord for $29,950, or a March-build Accord for $29,350.”

“And they’re the same car?”

“Identical!”

“Uh, is there a hidden camera somewhere?” Of course, it wouldn’t work like that. The cars would be re-priced after the fact, and someone, mostly likely the automaker, would eat the extra cost. It doesn’t help that this past year, while it has often been staggeringly profitable for dealers, hasn’t filled the automakers with confidence about the market’s ability to absorb serious sales volume. So everyone is going to do the easy thing, which is to reduce production, or cancel it entirely, until the semiconductor suppliers come back to the table.

Just so you know, I’ve been trying to figure out a way to write a song about this, to the theme of “Video Killed The Radio Star”:

I sit at home all day and you know what I’d like
Someone to yell at me while I sit on a bike
How could I know that this was like a union strike
oh-a oh-a
They took the chips that we all knew were second rate
But for the cars and trucks they would have still worked great
And so consumer products sealed the Civic’s fate
oh-a oh-a

I want a Honda
I’m not so fond-a

Pelotons killed the mass produced car
Pelotons killed the mass produced car

For the record, I have no idea if Pelotons use a 200mm chip, but given that they rely on some commodity-grade hardware to work their magic, it’s not that unlikely. They’re also made in China, like most popular-priced consumer products, so they have closer access to four of the five primary chip fabricators in the world. There’s been a tidal wave of extra consumer-electronic stuff rolling into most of our homes this year. Did you get an extra monitor so you could work from home? A better wireless router? A new mouse? All of those items can, and did, successfully outcompete the automakers for access to 200mm semiconductors.

China has eight new 200mm fab plants under construction, and other companies are scrambling to rebuild their 200mm capacity. The demand for electronic Model Ts is now projected to continue for almost another decade. So this problem will be short-lived. In the short term, however, the automakers are frightened—and so are their real customers, the auto dealers. Without a steady supply of new vehicles, the dealers can’t maintain the warranty service work that helps them keep the lights on.

What does all this mean to you? Unless you’re going to be swapping vehicles in the next six months, probably not much. But it’s worth noting that this is yet another hazard of that all-praised golden calf known as Globalism. In a world where cars ran on semiconductors in the 1960s, the automakers would have had iron-clad contracts with all the chipmakers, said chipmakers being located in the same countries where the cars were built. Sure, there would have been a smidgen of potential profit lost here and there, and nobody would be able to make their name around an executive board by J. Ignacio Lopez-ing 10 bucks out of every new car, but the supply would have been assured.

Our feverish desire to squeeze every potential penny out of every supplier, not to mention the thrill people seem to get nowadays when they catapult jobs out of their hometowns into distant and obscure dictatorships, is the true root of this semiconductor crunch. It’s plainly insane that some of the most powerful corporations in the world couldn’t be bothered to guarantee their supply lines for something this essential. And it’s going to happen again, just you wait and see. It probably won’t be semiconductors. Instead, it will be a certain kind of plastic, or an unusual metal, or …

… oh, wait …

… a rare earth! Rare earths, of course, are those unusual materials that are absolutely essential for so many modern technological marvels. Regular cars like ’em for all sorts of stuff, but if a 2021 Silverado is a weekend social drinker in that regard, an electric car is Keith Richards. Think of rare earths as the crude oil of electric cars. And just like with crude oil, there’s one place in the world that has more rare earths than anywhere else.

It’s China.

Don’t worry. I’m sure it’s all going to be fine. In the meantime, if you really need a new Accord … expect to pay retail.