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ON MULTIPLE BASKETS

IT’S A TIME-HONORED (and economically verified) adage: “Don’t put all your eggs in one basket.” Recent data on the microchip shortage as well as historical data on crude petroleum corroborate this. Here are tidbits gleaned from the DealBook/With Andrew Ross Sorkin and from the U.S. Energy Information Agency.  

Background. The world has only a finite amount of crude petroleum and rare metals. What’s more, these resources are not uniformly distributed among nations, nor readily recovered, nor easily turned economically into useful products.

The U.S. is rich in its resources and has the processing infrastructure to exploit them. For instance, the Energy Information Administration, April 13, 2021, reports that “The United States became a net annual petroleum exporter in 2020.”

What’s more, eia writes, “U.S. petroleum imports were the lowest since 1991…. In 2020, annual petroleum net imports were actually negative (at -0.65 MMb/d), the first time this occurred since at least 1949.”

And Microchips? The DealBook, November 19, 2021, notes, “In 1990, more than a third of all semiconductors were made in the U.S., but that share fell to 12 percent last year, according to the Semiconductor Industry Association.”

“In June,” the DealBook continues, “the Senate overwhelmingly approved a $52 billion package of subsidies aimed at encouraging the construction of more chip factories in the U.S., though that funding has been caught up in partisan battles in the House.”

Automakers have been strapped with a paucity of these semiconductors, complicated by Covid-related worker shortages and shipping bottlenecks. 

DealBook reports, “Ford is taking a do-it-yourself approach to addressing the severe shortage in chips that has slowed its production lines and snarled supply chains around the world. The carmaker announced a partnership yesterday with the semiconductor manufacturer GlobalFoundries to develop its own chips. Initially these will be designed for Ford vehicles, but the companies said a larger goal is to expand U.S. chip production.”

Image from the DealBook, November 19, 2021.

DealBook continues, “Jim Farley, Ford’s C.E.O., said that the auto industry, and the U.S. in general, needs ‘greater independence’ to develop new technologies, and that requires control over chip production.”

The Multiple Basket Approach. This got me thinking about diversity of the supply chain for each of these crucial resources, microchips and crude petroleum. It turns out that something of a multple-basket approach has already prevailed. 

The eia reports that the top five sources of U.S. crude oil imports by share in 2020 were Canada (61 percent), Mexico (11 percent), Saudi Arabia (8 percent), Columbia (4 percent), and Iraq (3 percent). More than 75 countries on the complete list contribute the other 13 percent.

Notice that more than three-fourths of this supply (76 percent) originates in the Western Hemisphere; indeed, 72 percent from our nearest neighbors. Only seven percent comes from OPEC members Saudi Arabia and Iraq in the Middle East. (Venezuela is the only Western Hemisphere country currently a member of OPEC. And U.S. sanctions eliminated Venezuelan imports after March 2019.)

The Microchip Basket. The world’s microchip manufacturing capacity shows more equity in its diversity. 

Image from DealBook, November 19, 2021. Source: VLSI Research, SEMI, BCG, by The New York Times.

I find it interesting that Mainland China holds nothing near a controlling interest in semiconductor production. Indeed, Taiwan’s proportion is greater. 

How Will the Microchip Basket Refill? Not everyone agrees that automaker do-it-yourself is a workable model. DealBook quotes Harvard Business School professor Willy Shih, an expert in the semiconductor industry and supply chain: “I think it’s inevitable we’ll get to a surplus in many chips at some point, and that will be the true test of how strategic these deals actually are.” ds

© Dennis Simanaitis, SimanaitisSays.com, 2021 

One comment on “ON MULTIPLE BASKETS

  1. sabresoftware
    November 21, 2021

    Interesting that oil and chips are compared. For the most part oil source is relatively interchangeable, although heavier oils and synthetic crudes (I.e. oil sands and shales) cannot be handled by all refineries. Chips on the other hand would be far less interchangeable. Memory chips are probably easily sourced from multiple suppliers, but CPU chips have custom and proprietary designs and are often supplied by a limited number of suppliers. Having a significant supply coming from a country like China is similar to the 70s and 80s when some key defense systems still used vacuum tube technology and the main source for those at that time was the Soviet Union.

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