Global electronics shortage puts Northwest manufacturers on the spot

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Silicon Forest Electronics has built a thriving business making special-order electronic parts, whether for a new gadget prototype or a fighter jet, and turning them around quickly.

Orders have been pouring in all year as big manufacturers seek to capitalize on the robust post-pandemic economy and booming consumer demand. But the Vancouver company and its 88 employees find themselves scrambling.

Some parts the company uses, typically available within several weeks, are now backordered by up to a year. Other components that typically run $1 apiece cost as much as $10. And like every employer, Silicon Forest Electronics is coping with a labor shortage — exacerbated by the fact that new hires take weeks or months to learn the necessary skills.

“It’s a crazy game. And it isn’t going to get any better for another year or two,” said founder Frank Nichols.

The shortages roiling the electronics industry have constrained supplies of cars, PCs, video game consoles and home appliances. Prices are soaring, but Americans flush with cash from a year of federal stimulus payments are finding they can’t get some of what they want at any price.

Factories in the Portland area make the ingredients for all these products — or, in some cases, the ingredients for the ingredients. They manufacture microprocessors for PCs, communications chips for smartphones, circuits for cars and the equipment the manufacturers themselves need to make these components.

Little-known outfits like Silicon Forest Electronics and big-name companies like Intel all find themselves in a similar bind as they struggle to meet demand.

While orders are soaring, every one of these companies is coping with backlogs and delays caused by shortages of labor, materials and manufacturing equipment. That’s why it’s expensive to buy a new truck, expensive to replace your dryer, or nearly impossible to find certain video game systems.

This is more than just a headache and lost opportunity for these businesses. It takes months to train new workers and years to build new factories. So if they increase capacity now, they’re gambling that the economy will hold up and new orders will still be flooding in when they’ve finished their expansion.

That’s the kind of thing that keeps you up at night, Nichols said. But Silicon Forest Electronics, founded in 1998, has seen this kind of thing before. And the company has chosen to focus on the potential upside, staffing up in hopes of capitalizing on the boom rather than worrying about a prospective bust.

“You place your bets and hope for the best,” Nichols said. “You can’t live in fear.”

$15 BILLION IN EXPORTS

Electronics production is, by some measures, the Portland area’s biggest industry. Chips made in this region end up in millions of PCs, laptops, iPhones, digital cameras and home appliances every year.

Technology manufacturing accounts for nearly 60% of all Oregon exports, totaling nearly $15 billion last year. The value of those exports surged in the first half of 2021, climbing by 26%.

Intel is the state’s largest corporate employer, with 21,000 people working at its Washington County campuses. The chipmaker is betting on growth in Oregon, and everywhere else, for years to come.

But first it has to work through the enormous disruption facing the industry. Demand for electronics soared during the pandemic, with sales of computers and other gadgets soaring as people adapted to changes wrought by COVID-19. At the same time, the pandemic made it more complicated for manufacturers to build and ship their products.

“Industry after industry is becoming more dependent on semiconductors. So this has created great disruptions, and you just can’t increase output rapidly enough to catch up with it without building new factories,” CEO Pat Gelsinger told Time magazine in a new interview. And it takes years to build up that new capacity.

“I think we have about two years,” Gelsinger said. “It’s not until ‘23 we start to see supply and demand come into balance.”

Next winter Intel will wrap up work on a three-year, $3 billion expansion of its D1X research factory in Hillsboro, where Intel engineers and manufactures each new generation of microprocessor.

The company is planning to spend $20 billion on new factories in Arizona, and says it will announce sites later this year for additional factories in the U.S. and Europe.

None of that spending, though, is helping Intel today. Despite unprecedented demand for laptops and PCs — a market Intel still dominates — the chipmaker is forecasting its 2021 sales will be flat.

That’s partly because Intel has been ceding market share to its rivals after a string of manufacturing failures, and partly because Intel can’t get enough of one essential ingredient it needs to build more chips.

Intel has been suffering all year from a shortage of “substrates,” the silicon wafers that form the foundation of all computer chips.

“We expect supply shortages to continue for several quarters, but (they) appear to be particularly acute” for PC chips in the summer months, chief financial officer George Davis told Wall Street analysts on the company’s quarterly earnings call in July.

Intel has begun using its own packaging facilities to finish the wafers, taking some of the pressure off its suppliers. But Davis indicated that while those efforts may have alleviated the shortage, it remains severe. He did suggest there might be some easing of the supply crunch late in the year.

‘LONG-TERM DISRUPTIONS’

It’s not just Intel. Every chip manufacturer is facing the same problem.

“They depend on the silicon wafer, and they can’t do anything without it,” said Neil Weaver, a vice president with SEH America, which makes wafers in Vancouver for customers throughout the region.

SEH, which employs several hundred Vancouver, is trying to boost production but is constrained by the labor shortage and the time it takes to train new workers, according to Weaver. And he said pandemic-related disruptions to international shipping and domestic trucking are making it difficult for SEH to find its own supplies.

“We’re planning for, I’ll say, long-term disruptions into next year,” Weaver said. “The disruptions are multiple and they are challenging but we are managing them.”

In Portland, wafer manufacturer Siltronic says sales are up 15% and employment is up to 360 from 334 at the end of last year, with 10 more positions open. But the company said its factory is essentially full, with little room to expand to meet demand.

“There is hardly any space in our cleanrooms left to add additional manufacturing equipment which allows for higher output,” Siltronic said in a statement. “But, of course, our engineers are always working on debottlenecking solutions, trying to find ways to accommodate customers’ needs for more wafers.”

Inability to meet demand is certainly a problem, but for most of the region’s electronics manufacturers it seems to be a good problem to have.

“We like it better than the problem we had last year,” said Dan Malinaric, vice president of operations at Microchip Technology’s Gresham factory. He said production is up about 50% at the site in the past 12 months.

Microchip’s products perform specific control and power management functions in cars, industrial tools, wireless devices and computers. Early in the pandemic, automakers and other manufacturers were canceling their contracts with Microchip, anticipating a recession would sap consumer demand as economic downturns usually do. Instead, demand boomed — fueled by federal stimulus payments and the money households saved during a period when they couldn’t travel or go out much.

Microchip’s stock is up nearly 50% since the end of 2019. The company has added about 125 Gresham employees in the past year and is now adding about 25 production workers each month to a staff that currently numbers more than 680.

Even so, Malinaric said the Arizona-based company would love to hire more. Microchip has now-hiring billboards on roads and highways around Gresham and is signing up recent high-school grads and students with technical degrees from Portland and Mt. Hood community colleges. But he said the competition is fierce even for workers without professional experience.

The semiconductor industry is notoriously cyclical, but Malinaric said Microchip believes it has a cushion against a sudden downturn because it’s requiring customers…

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