By Zdravka Todorova Post # 2 Horatio C. Forjohn (1911-1943) Idle Governor (airbrush on paperboard) Smithsonian American Art Museum, Transfer from General Services Administration ca. 1940, object number 1971.447.28 Capacity expansion in the production of semiconductors goes together with strategic restructuring of demand. There is a greater dependency on capital-intensive reproducible inputs and products and more non-discretionary consumption. This creates a potential for structural inflationary pressures. Expanding innovations in AI, autonomous vehicles, cloud computing, and connectivity networks, require more memory and processing power. This grows the need for more capacity expansion, larger investments, and demand for microchips. This new “machine process” creates the potential for structural inflation and greater vulnerability of people to upward price level pressures.
From Shortages to New Prices and Restructuring Demand The economy of 2020-2022 was affected by semiconductor shortages and showed the effect of disturbances across complex global supply chains and crises like the pandemic. During 2020-2021 shortages in the automaker industry showed that repurposing capacity to respond to changing demand for different types of microchips is difficult (Listen to Beyond the Valley, Oct. 7, 2021.). This was reflected in the inventory of cars on lots and in final prices, as consumers did not get discounts, and there were fewer choices. This affected also the higher prices of used cars, putting a burden on car-dependent and lower-income households. The microchip shortage was followed by an overall increase in car prices that is now structural to the consumer market. Even with expanding supply and more discounts, car prices have increased to a higher level. Consumers will pay higher prices for cars and their maintenance. There are multiple factors for that higher price level, but we should not ignore strategic investment and expanded implementation of semiconductors. There is an expansion in demand for microchips in the auto industry, which designs vehicles with more electronic features. Cars are now more expensive to repair due to several factors, but the presence of electronics throughout the vehicle is an important one. This puts additional budgetary pressures, especially on small businesses and car-dependent working and lower-income households. Higher repair costs are now structural to these units’ budgets. Auto-industry strategic investment in increased connectivity, entertainment, and electric vehicles (Hoecker et al. 2024), as well as in autonomous vehicles and “software-defined vehicles” (Autology 2024), contribute to the sector’s growing share in demand for semiconductors. These investments would further restructure future demand, including greater implementation of consumer subscriptions. The ever-higher cost of individual vehicle ownership eventually would help validate investments in new future business models based on rent and share, rather than ownership of vehicles. As high-tech developments in automobiles create profitable opportunities and rents, they also enable the absentee ownership of mobility, and subject users to new prices in the form of subscription costs and rent. Automobiles and mobility are only one area of expansion. Industry, consumer electronics, communication, computers, government, housing, and healthcare, are other areas of restructuring demand. Because building capacity in semiconductor production is costly, there must be viable expectations for expanding demand and vast opportunities for value from continuous high-tech upgrades. Continuous expansion of high-tech capacity requires functional effectiveness, which needs more standardized management. This could lead to more concentration and market power. That is one potential area for structural inflationary pressures, especially since an increasing array of rents would be incorporated into wider demand. Expanding Capacity - Growing Wider Demand After the overall shortage of chips, the decline in demand for consumer electronics made space for microchip producers to add capacity, building up semiconductor inventories along the chains in 2022-2023. Now there is a strategic building of capacity in the semiconductor industry, estimated at $ 1 trillion (Crawford et al. 2023). In addition, governments like the USA, EU, South Korea, Japan, China, Taiwan, and India have provided subsidies, tax credits, and investments to expand capacity and secure a skilled labor force (Semiconductor Industry Association 2023). Building capacity in semiconductor production is expensive and it takes a longer time (2-5 years). New facilities, especially for chips supporting technology that relies on high computational power, require larger and more sophisticated building shells, improved power delivery, access to ultra-pure water, and environmental compliance. The production also requires a greater number of manufacturing steps, more complex tools, and greater environmental compliance (Gaurav et al. 2023). Investment in capacity building is validated by expectations for expanding demand for semiconductors. That means wider demand and transformation within many social processes – mobility, education, consumption, labor, recreation, care, surveillance, war, and resource direction. As Corry Doctrow (2023) puts it, modern car producers “… redesigned our cars to be mobile surveillance platforms stuffed full of anti-repair digital locks, which means that cars need dozens of chips just to function.” The multiplication of this trend and the creation of profit value in other areas would justify expanding capacity, and more demand to absorb that capacity. This could lead to more obsolescence and associated waste. In addition, it could mean higher costs for users in multiple areas where it could be more and more difficult to opt out. Restructuring future demand by widening the end-use markets is a long-term strategy. Building and maintaining costly overcapacity could become part of that process because it would be expected that overcapacity would be absorbed. Expanded Non-discretionary Consumption Restructuring demand means changing consumption patterns and what constitutes needs - including more devices and subscriptions for usage. The array of goods that represent consumption expenditures that have to occur would increase. This means that consumption expenditures independent of changes in income would probably increase. Consequently, even if incomes do not grow, those expenditures need to happen to get by and succeed. This might mean an expansion of borrowing. Households might be subjected also to continuously increasing prices for the usage of those products even under a business cycle decline in employment and wages. Further, during a business cycle downturn, consumers might have less discretion to drop those goods and services. The result could be increased financial obligations and borrowing for consumers, especially during business cycle downturns. While expanded newly structured demand for microchips is an automatic stabilizer for capital-intensive production, it puts more pressure on households. On the other hand, from the industry’s point of view, growing the areas of demand means diversification. If there is a decline in demand due to business cycle fluctuation there is availability of less affected markets. Expanded and less discretionary demand validates planning for overcapacity which is expected to be absorbed and is safer for business than lack of capacity. Disruptions and More Capacity Capacity building is planned globally to diversify locations. Still, the supply chains are complex with different chips and geopolitical uncertainty (Hoecker et al. 2024). Several factors could lead to inflationary pressures during crises like pandemics, ongoing wars, and natural disasters. First, plans for building capacity can be disrupted, which opens vulnerability to shortages, and potential price effects. Second, the operation requires gases and water, and depends on commodity extraction, transportation, and is affected by commodity prices. Third, the complexities of the production processes and uncertainties might necessitate building overcapacity. In addition, growing ecological instability and climate change bring inflationary pressures globally, especially in combination with business pricing powers and geopolitical instability (Semenova 2023). We can add to that structural factor of inflation, expansion in microchip production. First, we have the issue of disruption in capacity building and possible shortages amidst an expansion of demand. Second, these ecological uncertainties and disasters might result in an incentive to maintain overcapacity as part of business. Third, there is pressure on ecosystems, including sourcing, extraction, transportation, and waste of commodities, which might worsen inflationary pressures. Due to land and water utilization, increasing capacity can be disruptive locally and push up price levels, especially in the regions where mega-sites are built. Disruptions in price level can occur in food production, water consumption, infrastructure, public infrastructure, social services, and real estate. Democratic Public Powers There can be several public policies to counter the negative effects of the above scenarios. I will mention three main directions that pertain to inflationary concerns. There are many other issues regarding people, education, and democracy. One set of policies would have to do with ensuring the public direction of resources for public access, for example in mobility. Public goods like public transportation are an important part of the economy and need clear public commitment and expansion. Another set of policies would have to address market power, especially in the pricing of consumer goods and services and in stifling human autonomy. Finally, it is very important to create a floor of living wage with social benefits through a centrally funded job guarantee policy that employs people at the local level in democratically designed public service jobs. There are often worries that the job guarantee policy would be inflationary since anybody who seeks a job at local employment offices would be employed at a living wage providing needed community work. The worry is that this lifts the wage floor and contributes to local well-being and social reproduction, rather than producing widgets for sale. Now is a good time to point to the inflationary pressures of current technological implementations, and to argue that lifting the wage floor with public service and expanded public social sector are good ideas. How to cite this blog: Todorova, Zdravka. March 25, 2024. “Chips and the Potential for Structural Inflationary Pressures,” Econ Notes & Knots, blog # 2, www.ztodorova.net References: Autology podcast with Manuel Tagliavini. February 29, 2024. “Head in the Clouds - Connected and Software-defined Vehicles.” S&P Global Mobility, https://stage.www.spglobal.com/mobility/en/podcasts/automotive/autology-head-in-the-clouds.html Beyond the Valley CNBC International Podcast. “The Global Chip Shortage Will Hit your Everyday Life” Oct. 7, 2021. https://www.youtube.com/watch?v=eCHv6g_XT68 Crawford, David, Peter Hanbury, Anne Hoecker, and Michael Schallehn. Sept 18, 2023. “After the Chip Shortage, Fears of a Capacity Glut Are Overblown.” Bain & Company, https://www.bain.com/insights/after-the-chip-storage-fears-of-a-capacity-gut-are-overblown-tech-report-2023/ Doctrow, Cory. 2023. “Excuseflation: Monopolists Will Never Let a Good Emergency Go to Waste.” Pluralistic, March 11, 2023. https://pluralistic.net/2023/03/11/price-over-volume/#pepsi-pricing-power. Gaurav Tembey, Adriana Dahik, Christopher Richard, and Vaishali Rastogi. 2023. “Navigating the Costly Economics of Chip Making.” September 28, 2023, Boston Consulting Group. https://www.bcg.com/publications/2023/navigating-the-semiconductor-manufacturing-costs Hoecker, Anne, Michael Schallehn, and Peter Hanbury. March 06, 2024. “What’s Ahead for the Semiconductor Industry in 2024.” Bain & Company, Webinar. https://www.bain.com/insights/whats-ahead-for-the-semiconductor-industry-in-2024-webinar/ Paul, Mark, William Darity, Darrick Hamilton. 2018. “The Federal Job Guarantee - A Policy to Achieve Permanent Full Employment.” Center on Budget and Policy Priorities. https://www.cbpp.org/research/the-federal-job-guarantee-a-policy-to-achieve-permanent-full-employment Semenova, Alla. 2023. “Rising Temperatures and Rising Prices: The Inflationary Impacts of Climate Change and the Need for Degrowth-Based Solutions to the Ecological Crisis.” Globalizations, 12: 1–18. https://doi.org/10.1080/14747731.2023.2222482 Semiconductor Industry Association. 2023. “State of the US Semiconductor Industry 2023.” https://www.semiconductors.org/wp-content/uploads/2023/07/SIA_State-of-Industry-Report_2023_Final_072723.pdf Todorova, Zdravka. March 2024. “Managing Inflation in the High-Tech Economy: Vital Differences between Large Business and Working Households.” Econ Notes & Knots, Blog # 1, www.ztodorova.net Veblen, Thorstein. 1904. "The Machine Process." Chapter 2 in The Theory of Business Enterprise. New York: Charles Scribner's Sons. ________________. 1923. The Absentee Ownership and Business Enterprise in Recent Times: The Case of America. New York: Huebsch. Comments are closed.
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Zdravka Todorova
I research, teach, and write about systems, processes, and relations of economic lives. Archives
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