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Tesla to Pay Microchip Manufacturers in Advance Due to Shortages

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Tesla will pay microchip manufacturers in advance to guarantee the supply of this precious technology, which is experiencing severe shortages that are affecting multiple industries in the United States and around the world, according to an investigation by the Financial Times.

The shortage of semiconductors in the world is due to several factors: production delays due to the pandemic, the increase in demand for home appliances due to quarantines, the implementation of 5G internet, the increase in demand for internet services in the world, the release of the PS5 and Xbox X Series video game consoles.

At the moment the shortage of microchips has forced several automakers to decrease their production for this year, which will cost the industry up to 5% of its sales in 2021. Several automakers such as Ford, Volkswagen, Audi, Nissan, Toyota and GM have already announced production cuts for this year due to the semiconductor shortage.

Microchip manufacturers - El American
The semiconductor industry has had problems to scale production due to increasing demand. (EFE)

¿Por qué Tesla pagará por adelantado a los fabricantes de semiconductores?

For its part, Tesla was forced to temporarily halt production of its Model 3 due to semiconductor shortages in February. In its 2020 annual earnings report to the U.S. Securities and Exchange Commission, Tesla acknowledged that:

“A global shortage of microchips has been reported since early 2021, and the impact to us is yet unknown. The unavailability of any component or supplier could result in production delays, idle manufacturing facilities, product design changes and loss of access to important technology and tools for producing and supporting our products.”

Tesla’s Model 3 requires up to 3,500 microchips to operate, in the face of semiconductor shortages the company had to limit its production of the electric car. (EFE)

The semiconductor shortage could be more detrimental to the electric car maker than to traditional gasoline-powered car makers. While a modern gasoline-powered car may require 1,300 chips to operate, a Tesla electric car, specifically the Model 3, requires up to 3,500 microchips to operate.

Tesla originally sought to compare a semiconductor production plant to avoid shortages of the precious chips, however, the costs are prohibitive even for the car-electric giant, so it has opted to secure microchip supply agreements with suppliers with an upfront payment.

No solution in sight

Due to the complexity of semiconductor manufacturing and the limited number of manufacturers, microchip production is unlikely to scale soon. Semiconductor manufactures have opted to offer preferential supply agreements to those companies that urgently need the precious microchips and, of course, are willing to pay more money up front.

President Joe Biden has pledged to give a boost to U.S. semiconductor production as part of his infrastructure plan. (EFE)

President Joe Biden has advocated a bipartisan effort to counter the microchip shortage and within his infrastructure plan has proposed a $50 billion semiconductor production boost.

Unfortunately, the Biden administration’s proposed boost does not even come close to the investment required to make the United States self-sustaining in semiconductor manufacturing. According to data from the Semiconductor Industry Association, an investment of about $1.4 billion is required, plus tax policies aimed at encouraging semiconductor production on U.S. soil.

Economist, writer and liberal. With a focus on finance, the war on drugs, history, and geopolitics // Economista, escritor y liberal. Con enfoque en finanzas, guerra contra las drogas, historia y geopolítica

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