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How To Fix The Semiconductor Chip Shortage In Canada

Dylan S. Adams

Texas Christian University

Intro Comp: Writing Inquiry 007

Dr. Stacey Said

October 19, 2021

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Introduction

One of the major industries affected by the lack of semiconductor chips in Canada

is the auto industry. A semiconductor chip is designed to manage and control the flow of

current in electronic devices and equipment. An important aspect of the semiconductor

chip manufacturing process is that it is intensive in water usage in order to cool

equipment. The lack of semiconductor chips started before COVID-19, when Taiwan, the

location of a leading chip manufacturer, had a severe drought. The drought created conditions

that required the plant to reduce production, as there was not enough water to cool down the

equipment used when manufacturing semiconductor chips. When COVID-19 started there was

already a shortage in chips, so when all of the semiconductor chip manufacturers around the

world shut down due to the pandemic, the global chip shortage became more severe. Canada is

on track to produce 1.2 million vehicles this year, which is down from the 1.4 million autos

manufactured last year, and the 2.2 million the country averaged the decade leading up to 2019

(The Canadian Press, 2021). To solve the lack of semiconductor chips causing supply chain

issues in Canada, the Canadian government needs to focus a significant part of its budget on

building new chip plants domestically because it will lead to preventing future shutdowns due to

water shortages, Canada becoming a global provider of semiconductor chips, and catching up

with the demands for new vehicles in Canada.

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Water Is Canada’s Ally In Chip Manufacturing

Prior to the pandemic semiconductor chips were primarily manufactured in regions of the

world heavily affected by global warming. These extreme weather events caused manufacturing

levels of chips to decrease. Decreased demand for goods at the beginning of the pandemic drove

chip manufacturers to further lower production, and when the demand for the chips increased the

supply chain couldn’t keep pace to fulfill demand. How could Canada take advantage of these

global problems that affect production of semiconductor chips? Unlike Taiwan, Canada has 20%

of the world’s freshwater reserves, so a shortage of water to run the semiconductor

manufacturing plants would be far less likely in Canada (Lillo, Champagne, Touchant, Fortin,

and Burelli, 2021). Taiwan Semiconductor Manufacturing Co. uses more than 150,000 tons of

water per day, and the Taiwanese government had to restrict the amount of water given to

industrial factories during the 2019 drought (Barbiriglio, 2021). If Canada could focus a large

portion of the federal budget on creating new semiconductor chip plants, the country's access to

water supply would be much less impacted by water shortages due to global warming.

The Perfect Place For Business In The Chip Industry

Canada is the ideal place for business in the semiconductor industry. Nuvia Inc. (a

company founded by some of the creators of the chips found in Apple devices) creating its first

international office in the heart of Toronto led to many companies wanting to do business in

Canada. According to Barbara Schecter of the Financial Post, “Canada is predicted to have their

revenue from semiconductor chips and other electronic components manufacturing increased by

$3.8 billion by 2024” (Financial Post, 2021). According to the California-based Semiconductor

Industry Association (2021), each semiconductor job creates almost five indirect jobs in the

industry that generates US$7 trillion. It is clear to see that if Canada were to build new plants,
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jobs would grow and companies in the technology industry could be looking at Canada to engage

in business. Canada has the skilled labor to run the manufacturing plants, the water source and

climate conditions to assure safe and undisrupted manufacturing of the chips. New chip

manufacturing plants in Canada would lead to the country becoming a global leader in chip

manufacturing. It is up to the Canadian government to determine whether or not it wants to

invest in new plants, but there is real upside to this investment, both in terms of job creation and

other economic benefits.

Catching Up

When COVID-19 hit, the problem was that chip manufacturers shut down and couldn’t

manufacture semiconductor chips, and then, unexpectedly, the demand for the chips during the

pandemic increased. The semiconductor chip shortage led to many problems during the

pandemic, including increased prices, and a lack of technology devices, including cars. One of

the advantages that countries like the United States and Taiwan had over Canada during the

pandemic was the fact that they had plants in their countries. Even though there were closures

going on around the world, it was easier for the US and Taiwan to have access to the

semiconductor chips because they didn’t need to import chips. Canada had no access to

domestically produced semiconductor chips, so they had to rely on older chips for most of their

technology and really struggled producing newer technology.

With technology becoming more advanced and expensive it is harder for Canada to catch

up in the demands in technology without access to new chips. Auto factories in Canada have

seen a delay in chips of up to 22 weeks this year (Evans, P, 2021). If there was a domestic supply

chain for chips available to Canadian industries, it would be easier and faster for Canadian

companies to get these chips. The shortage of cars and higher demand for these cars means that a
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large portion of the chips are going to need to be allotted to the auto industry. With a 22 week

delay in chips in the auto industry, people may be forced to delay purchasing vehicles, both those

that are necessary for replacement as well as for people purchasing cars as upgrades. The

Canadian auto industry is worth $12.5 billion annually, and directly employs more than 117,200

people, with an additional 371,400 people in aftermarket services across the country

(Government of Canada, 2021). If supply shortages continue, the auto industry may decline in a

way that impacts other parts of the economy.

Barriers to Building New Plants

There are several barriers to building new semiconductor plants. One of the main

limitations to building new plants is the time it takes to fund and construct them, combined with

how quickly technology changes. It takes two to three years to build a chip manufacturing plant

that is capable of mass producing semiconductor chips. The process of building a new plant that

can mass produce chips is highly complicated and requires incredible precision. Technology is

changing so rapidly that plants become obsolete after 5 years in production (King, I,. Leung, A.,

Pogkas, D., 2021). The risks are so great that there are less than a handful of chip manufacturers

that can afford to invest in new construction (King, I,. Leung, A., Pogkas, D., 2021). The time

required to build a new plant means that this isn’t an immediate fix to the supply shortage, but

can reduce the risk of supply shortages occurring in the Canadian auto industry in the future. In

the near term, Canada, along with other countries around the globe, must be patient and allow the

supply chain issues in chips to normalize over time.

The next barrier is the amount of money needed to construct these new plants. It would

cost the government or private industry roughly $15 billion (King, I,. Leung, A., Pogkas, D.,

2021) to build each individual plant because of 1) the necessary equipment that is required for
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chip manufacturing and 2) the special infrastructure for the advanced manufacturing of the chips.

A potential solution to address both the time and financial investment required to build new

plants would be for the Canadian government to pursue public/private partnerships with one or

more of the top chip manufacturing companies to draw investment in Canada. As a geographic

area not historically known for chip manufacturing, Canada needs to show chip manufacturers

why it’s the perfect place to invest and build. If the Canadian government shares the risk and

lowers the economic investment required by chip manufacturers to build in the country, these

private companies will be more likely to build in Canada.

Another major barrier is that if an economic downturn, like another pandemic or a

recession, were to happen, these new plants might lose money. The economics of constructing

new chip plants is risky, considering the significant financial investment and the time it takes to

build a plant compared to the speed of technology change making plants obsolete. Again, the

public/private partnership strategy could make Canada a more desirable location in which chip

manufacturers want to invest.

Even though the cost of building new plants is $15 billion the companies who invest in

the plants have the opportunity to create profit in Canada. In 2013 the chips in cars cost roughly

$312, and is expected to rise to $600 per car in 2022 (Ramsey, J., 2020). In 2020, 1.5 million

cars were sold in Canada, which was a 19% decrease from sales levels in 2019 (The Canadian

Press, 2021). This decrease in car sales was due to the chip shortages driving supply of autos to

fall. If the Canadian government invests in building semiconductor chip plants in the country, the

chip industry would be able to capitalize on the opportunity to profit roughly $1.3 billion from

making chips for the auto industry, based on 2022 estimated cost of chips per vehicle and

average number of autos produced in Canada between 2009-2019.

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Why New Plants?

Investing in new semiconductor chip plants in Canada is the best long-term solution to

chip shortages in the Canadian auto industry, and potentially supplying chips to other countries

as well. New plants will allow for more reliable and more profitable means of chip

manufacturing. Why should we care? Companies and consumers all over the world have been

affected by the semiconductor chip shortage that began with the terrible drought in Taiwan in

2019 and got worse with COVID-19. The shortage of the semiconductor chips has caused prices

for products to rise as the demand for products has increased and supply hasn’t kept pace.

Canada’s natural supply of fresh water makes it the ideal geographic location for building new

plants, and the Canadian government should build new partnerships with chip manufacturers by

sharing in the investment and highlighting natural resources. It’s Canada’s turn to be a global

producer of semiconductor chips, so it is necessary for the Canadian government to sell the idea

of Canada as the place to produce chips and share in the financial investment to bring chip

manufacturing companies to Canada.

References

Lillo, Champagne, Touchant, Fortin, and Thomas Burelli. “Canada Has 20% of the World’s

Freshwater Preserves-This Is How We Protect It.” April 29, 2021, para. 4,

https://theconversation.com/canada-has-20-per-cent-of-the-worlds-freshwater-reserves-this-is-ho

w-to-protect-it-159677

Emanuela Barbiroglio. “No Water No Microchips: What Is Happening In Taiwan?” May 31,

2021, para. 10,

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https://www.forbes.com/sites/emanuelabarbiroglio/2021/05/31/no-water-no-microchips-what-is-

happening-in-taiwan/?sh=1a5b674e22af

Schecter, B. (2021). Fishing For Chips: Making the case for a homegrown Canadian

Semiconductor Industry. The Financial Post

https://financialpost.com/technology/fishing-for-chips-making-the-case-for-a-homegrown-canadi

an-semiconductor-industry

Evans, P. 2021. How the Covid-19 semiconductor shortage has brought Canada’s car industry to

a halt-again. CBC News

https://www.cbc.ca/news/business/covid-car-industry-analysis-1.6216265

Ramsey, J. 2020. Semiconductor-based systems continue to increase in cost. Auto Blog

https://www.autoblog.com/2020/05/11/car-electronics-cost-semiconductor-chips/

Government of Canada, 2021. Canadian Automotive Industry

https://www.ic.gc.ca/eic/site/auto-auto.nsf/eng/home

King, I,. Leung, A., Pogkas, D., 2021. The Chip Shortage Just Keeps Getting Worse. Why Can’t

We Just Make More?

https://www.bloomberg.com/graphics/2021-chip-production-why-hard-to-make-semiconductors/

The Canadian Press, 2021. Canadian auto sales fell 19.7% in 2020 from a year earlier; lowest

level in a decade. Bloomberg Canada

https://www.bnnbloomberg.ca/canadian-auto-sales-fell-19-7-in-2020-from-a-year-earlier-lowest-

level-in-a-decade-1.1544778