The country has a major microchip problem -- and the Senate has a $52 billion solution

The commerce secretary said the U.S. must spur development of the crucial chips.

July 25, 2022, 5:41 PM

The Senate is aiming this week to bolster the public's ability to buy an affordable car, microwave or a smartphone as lawmakers push forward legislation to incentivize production of the tiny semiconductor chips that all kinds of technological devices rely upon.

A nationwide shortage of these chips has caused production delays, stalling out industries from automotive to medical and spurring already-punishing inflation rates.

The Biden administration warns there's no time left to lose: Commerce Secretary Gina Raimondo, briefing lawmakers earlier this month, called passing a bill to incentivize U.S. developments of the semiconductors a "matter of urgency" and said the country was "out of time" to act.

"It's a matter of national defense. It's a matter of economic vitality. And it's time for all of us just do our job and get this over the finish line," she said.

The Senate agrees. After more than a year of congressional back-and-forth, lawmakers are poised to take action on the so-called CHIPS+ legislation this week. The proposal would provide billions to spur research and development of semiconductors.

Here are answers to a few key questions on the issue that impacts almost every piece of technology you touch.

Secretary of Commerce Gina Raimondo in the South Court Auditorium of the Eisenhower Executive Office Building in Washington, D.C, on July 25, 2022.
Brendan Smialowski/AFP via Getty Images

What is a semiconductor anyway?

A semiconductor, sometimes referred to as a chip or microchip, is only about the size of a dime. But as experts describe it, this tiny piece of tech is a "building block" for a range of everyday devices, from cell phones to cars to air conditioners to smart appliances in kitchens.

The chips, made out of silicon and other mined elements, serve as a kind of brain for machines both handheld and massive. They can be found in trains, planes, iPads and microwaves.

"Semiconductors, or 'chips' as we call them, are sort of the building blocks of any computer system," Morris Cohen, an emeritus professor of manufacturing and logistics in the Operations, Information and Decisions Department at the University of Pennsylvania's Wharton School, told ABC News in January.

That means the chips are also the bedrock of dozens of industries, including auto, health care, agriculture, robotics, travel, national security and dozens of others.

But as the chips have become essential in the manufacturing of more and more products, there's been a shortage of them.

Why is there a shortage? What does it mean for the economy?

A "perfect storm" is how the Department of Commerce described the factors that contributed to the shortage of microchips.

Even before the onset of COVID-19 in 2020, the supply-demand imbalances in the semiconductor industry were fragile, the department noted in a recent report. But the pandemic spurred challenges as more and more people rushed to acquire new technologies for communication that rely heavily on semiconductors. Supply-chain issues and COVID-era factory shutdowns made manufacturing of the chips even more difficult.

In short: Demand for the chips far outpaces the supply.

This comes at a time when the U.S. is producing a smaller percentage of the world's microchips than ever before. According to the Semiconductor Industry Association, a lobbying group focused on semiconductor manufacturing, the U.S. now produces 12% of the world's chips, down from 37% in 1990.

The result of that disparity has been the strained manufacturing of all sorts of products that require these chips. The auto industry has been kneecapped by the shortage, at times temporarily shutting down American plants until more chips could be acquired. The spike in the cost of cars caused one-third of all inflation Americans saw in 2021, according to the Bureau of Labor Statistics.

What does Congress plan to do about it?

The bill that Senate lawmakers are hoping to advance this week allocates $52 billion to spur domestic research and development of these microchips and grants tax incentives for manufacturing. The aim is to bring more semiconductor production to the U.S., something legislators see as a critical national security component of the bill.

Many other countries, with already cheaper labor costs, have taken strides in recent years to incentivize major chip manufacturers to build plants abroad. Congress hopes with this new funding to make the U.S. a more attractive place for such operations.

Employees work at a chip manufacturing company on April 19, 2022 in Suqian, Jiangsu Province of China.
Xu Changliang/VCG via Getty Images, FILE

But the bill does more than address the chip shortage -- and a test vote in the Senate last week proved there was enough support to do even more.

The proposal also includes funding for a few other innovation-based priorities; there are billions for tech startups and the National Science Foundation in the legislation as well. The Senate is scheduled to take another key vote on the bill on Tuesday morning and, if it clears, the package could be on a path for final approval as soon as Tuesday or Wednesday.

But wait, hasn't this been in the news for more than a year?

Yes: Addressing the shortage of microchips has been a priority of the Biden administration and Senate Majority Leader Chuck Schumer for some time. That's why the Senate voted to approve funding for microchips over a year ago.

The Senate first passed a massive innovation and competitiveness bill on June 8, 2021. Tucked inside that legislation, along with provisions to bolster the national science apparatus, spur competition with China and address supply chains shortages, was $52 billion for semiconductor research and development.

The House also passed a bill that included this funding but had differences from the Senate bill on some of the other competitiveness factors. Both chambers voted to hold meetings to try to reconcile the House and Senate versions of the bill, but those negotiations slugged along and later got tied up in political gamesmanship from Minority Leader Mitch McConnell, who threatened to withdraw GOP support for the process as Democrats soldiered on with a partisan spending bill.

The legislation Senate lawmakers are now considering is a compromise: a less comprehensive version of last year's competitiveness bill.

Sen. Majority Leader Chuck Schumer during a news conference, June 22, 2022, in Washington, D.C.
Brandon Bell/Getty Images, FILE

When will it pass?

The Senate is expected to pass the CHIPS+ bill sometime this week with relatively broad bipartisan support. Despite some Republican opposition -- and objections of "corporate welfare" from Sen. Bernie Sanders, I-Vt. -- in its first test vote the bill earned substantial backing from both parties.

Once the Senate passes their legislation, it will head to the House where Majority Leader Steny Hoyer said they will "will act on this bill as soon as it is ready."

"Addressing the global semiconductor shortage is crucial to tackling inflation and ensuring that America can compete with the rest of the world," he said in a statement.

The administration is supportive of the legislation and President Joe Biden is expected to sign it if it clears Congress.

ABC News' Catherine Thorbecke contributed to this report.

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