Chip industry executives have a huge collective challenge: deciding how to prioritize the $50 billion in support promised by President Joseph R. Biden in an executive order.
Semiconductor industry executives met virtually with President Biden to discuss the issues around chip capacity and supply chain. Neither the Semiconductor Industry Association (SIA) nor the White House readouts of the meeting told us anything new. The President did acknowledge however that the $50 billion support package is not likely to be enough, stating, “We are seeking a significant investment in this piece of legislation. It’s important, but we know it’s not sufficient.”
At the meeting, President Biden held up a silicon wafer and said, “Chips, like the one I have here — these chips, these wafers, are batteries, broadband; it’s all infrastructure. This is infrastructure. We need to build the infrastructure of today, not repair the one of yesterday. And the plan I propose is going to create millions of jobs, rebuild America, protect our supply chains, and revitalize American manufacturing. And it’s going to make America research and development a great engine again.” He said 23 senators and 43 House members had sent him a letter supporting the CHIPS for America program.
Quoting from the letter, he said, “It says, the Chinese Communist Party aggressively plans to reorient and dominate the semiconductor supply chain. And it goes into how much money they’re pouring in to being able to be able to do that. But I’ve been saying for some time now: China and the rest of the world is not waiting, and there’s no reason why Americans should wait.”
Meeting participants included SIA board members Tom Caulfield, CEO of GlobalFoundries, Pat Gelsinger, CEO of Intel, and Sanjay Mehrotra, CEO of Micron Technology, along with senior executives from SIA member companies NXP, Samsung, and TSMC. The White House said in a statement following the meeting that it heard directly from CEOs and senior leaders from industries affected by the semiconductor shortage — including representatives from American semiconductor producers, tech companies, automotive manufacturers, and other companies that use semiconductors.
A key topic of emphasis was the importance of improving transparency in the semiconductor supply chain to help mitigate current shortages and improving demand forecasting across the supply chain to help mitigate future challenges. The statement added, “They also discussed the importance of encouraging additional semiconductor manufacturing capacity in the United States to make sure we never again face shortages. Finally, they discussed how the President’s infrastructure investments in the American Jobs Plan strengthen America’s competitiveness and national security by building the infrastructure of tomorrow and strengthening supply chain resilience — ensuring that the United States remains a global leader in critical technologies and the transition to a clean energy future.”
The SIA’s brief post-meeting statement said it commended President Biden’s support for $50 billion in semiconductor manufacturing and research investments. It noted, “Semiconductors are at the heart of America’s job creation, pandemic response, national security, education system, and growth and innovation across a range of sectors, including aerospace, automotive, cloud computing, medical devices, telecommunications, and many others.”
“Funding the chip manufacturing incentives and research investments called for in the CHIPS for America Act, as President Biden’s infrastructure plan would do, will strengthen U.S. semiconductor production and innovation across the board so all sectors of our economy have the chips they need. Today’s meeting marks the continuation of a strong partnership between the Biden Administration and industry to strengthen America’s semiconductor supply chain by enacting federal investments in domestic chip manufacturing and research.”
Global supply chain dependencies
The biggest challenge will be how to overcome the current globalized semiconductor supply chain structure which has itself evolved based on geographic specialization that has enabled tremendous innovation, productivity, and cost savings over the last 30 years. This is highlighted in a report the SIA jointly released in partnership with the Boston Consulting Group (BCG) earlier this month.
The report said that hypothetical alternatives with fully self-sufficient local supply chains in each region would require at least $1 trillion in incremental upfront investment and result in a 35% to 65% overall increase in semiconductor prices, “ultimately resulting in higher costs of electronic devices for consumers.”
This was emphasized by several industry executives after the meeting. For example, David Somo, senior vice president at ON Semiconductor told Reuters, “Trying to reconstruct an entire supply chain from upstream to downstream in a single given location just isn’t a possibility. It would be prohibitively expensive.”
In addition, it’s not all about building capacity for leading edge technologies, as Tyson Tuttle, CEO of Silicon Labs, told Reuters that the U.S. needs to support not only new cutting-edge fabs, but older technology too. It’s the more mature chips that are in severe shortage. “We have a mismatch of capital in the semiconductor industry, with too much of the money going to the most advanced technologies,” he said.
One of the key findings of the 53-page SIA and BCG report, Strengthening the Global Semiconductor Supply Chain in an Uncertain Era, is that geographic specialization has created vulnerabilities in the global semiconductor supply chain.
For example, there are more than 50 points across the value chain where one region holds more than 65% of the global market share. These are potential single points of failure that could be disrupted by natural disasters, infrastructure shutdowns, or international conflicts, and may cause severe interruptions in the supply of essential chips. About 75% of global semiconductor manufacturing capacity, for example, is concentrated in China and East Asia, a region significantly exposed to high seismic activity and geopolitical tensions.
In addition, 100% of the world’s most advanced (below 10 nm) semiconductor manufacturing capacity is currently located in Taiwan (92%) and South Korea (8%). These advanced chips are essential to America’s economy, national security, and critical infrastructure. An extreme hypothetical scenario of complete disruption of Taiwanese foundries for one year could cause the global electronics supply chain to come to a halt, creating significant global economic disruptions. If such hypothetical complete disruption were to be become permanent, it could take a minimum of three years and a $350 billion investment to build enough capacity in the rest of the world to replace the Taiwanese foundries.
To address these vulnerabilities in the global semiconductor supply chain and ensure its long-term strength and resilience, the SIA and BCG indicate government action is needed. To reduce the risk of major global supply disruptions, the U.S. government should enact market-driven incentive programs to achieve a more diversified geographic footprint. These incentives should aim to expand semiconductor manufacturing capacity in the U.S. and broaden the supply of some critical materials. For example, the additional capacity from such incentives would enable the U.S. to meet domestic demand for advanced logic chips used in defense, aerospace, and critical infrastructure.
The report also calls for the following government actions to promote long-term supply chain resilience:
- Guarantee a level global playing field for domestic and foreign firms alike, as well as strong protection of intellectual property rights;
- Promote global trade and international collaboration on R&D and technology standards;
- Invest in basic research, STEM education, and workforce development;
- Advance immigration policies that enable leading global semiconductor clusters to attract world-class talent; and
- Establish a clear and stable framework for targeted controls on semiconductor trade that avoid broad unilateral restrictions on technologies and vendors.