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The long-term costs of shortcuts in the semiconductor crisis

The chip shortfall is persisting and spreading. Makers of cars, phones and computers still can’t get their hands on the semiconductors they need. Their suppliers don’t have the components to produce chips either. And it doesn’t look like solutions will emerge anytime soon. Such makeshift fixes only stand to make the problem worse. Meanwhile, few companies are using the crisis to prepare for future shortages.

Take General Motors Co. It said it would go ahead and make its 2021 light-duty full-size pickup without a fuel management chip — part of a complicated system that controls and helps manage the vehicle’s engine cylinders. Its absence would result in a reduction in the pickup’s fuel economy.

Rather than roll out potentially sub-par products, wouldn’t it have been better to rein in production altogether and get sustainable chip plans in place to make the right kind of cars in the future? Isn’t that something customers would prefer?

While the automaker shut down some facilities because of a chip deficit, it plans to keep making all truck models because they are its most profitable vehicles. Indeed, U.S. annualized car sales are at their highest since 2017. The lack of a fuel-management chip, GM says, won’t have a major impact on its greenhouse gas compliance numbers. But it’s telling what the company is willing to give up to keep its profits.

Why aren’t more corporations using this opportunity to plan for the next chapter in this shortage saga, to get ahead of it now?

Consider the growing shortage of yet another part necessary for chipmaking — substrates, which act as insulation in semiconductors. They aren’t sophisticated but lead times are now at 52 weeks for the highest-end variety, and those delays stand to affect behemoths like Nvidia Corp. and Advanced Micro Devices Inc.

Six months ago, there were signs substrate production was going to come up short. But the relatively low-margin business was almost a managed market, set up around long-term demand and contracts. Few companies invested in new production. It takes approximately $500 million to build a new substrate facility. Now the shortage is expected to get worse.

The only way this gets better is if the deepening shortage upends the lazy, laissez-faire approach of supply chains and planning. Firms need to go beyond the reactive responses and consider how they got to a shortage in the first place. Was it really just demand spurred by the pandemic that threw everything into a tizzy?

Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co. are investing billions into cutting edge semiconductors. But the production of relatively moderate technology — like substrates and fuel management chips — would have helped in this crisis. And this period should be used to learn how to avoid shortages.

Sustainable solutions are needed. If companies don’t start making decisions for the future now, and short-sightedness persists, supplies are bound to get worse. Reform doesn’t require massive overhauls. For starters, being conservative with production forecasts and promises of beating profit goals is one way, even if investors won’t be happy. Companies can also bake in longer lead times, diversify suppliers and build larger inventories.

The world has been in this long enough. It’s worth investing time to figure out solutions now so we can get out of the shortages and avoid them in the future.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Bloomberg

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