Semiconductor Shortage Shines Light On Weak Supply Chain

By Yasmin Tadjdeh

iStock photo

Semiconductors are the foundation of the advanced technologies that regular citizens and military officials rely on — from cell phones and laptops to fighter jets. But the global shortage amidst soaring demand during the pandemic for electronic devices is illuminating supply chain issues and vulnerabilities for the United States.

While the nation is a leader in the design of semiconductors, in recent decades the manufacturing and production of microelectronics has moved offshore and is now concentrated in places such as Taiwan and China. Officials and experts say that creates a major risk.

“It is not an exaggeration to say at the moment that we have a crisis in our supply chain,” said Commerce Secretary Gina Raimondo during an April hearing before the Senate Committee on Appropriations.

Global semiconductor sales increased by 6.5 percent in 2020, according to a paper by the Semiconductor Industry Association, “Semiconductor Shortage Highlights Need to Strengthen U.S. Chip Manufacturing, Research.”

The global chip shortage is affecting a number of different industries and has clobbered the vehicle market particularly hard, said Falan Yinug, director of industry statistics and economic policy at SIA.

“The shortage is largely the result of substantial swings in demand due to the pandemic and the increased use of semiconductors in advanced vehicles,” he said. “The semiconductor industry is working diligently to ramp up production to meet renewed demand. … [However], this supply-demand imbalance cannot be remedied with the ‘flip of a switch.’”

Restoring market balance will take time because semiconductor manufacturing is not suited to rapid and large shifts in demand, he noted.

“Making a semiconductor is one of the most complex manufacturing processes,” he said. “Lead times of up to 26 weeks are the norm in the industry to produce a finished chip.”

The Defense Department is not immune from the chip shortage, said Sarah Leeper, principal director of defense systems at Draper, a not-for-profit research and development organization based in Cambridge, Massachusetts.

“There’s definitely a supply chain shortage in general with defense programs,” she said. “The overall access to electronics from a Defense Department [perspective] is very challenging right now.”

Industry consolidation between three major companies — Samsung, Intel and the Taiwan Semiconductor Manufacturing Co. — is raising considerable concern about both supply chain access and security given that those companies, with the exception of Intel, are based offshore, she noted.

In March, the Pentagon announced it would be working with Draper — which is known for its packaging technology — on an effort to create a sustainable supply of defense-grade microchips for its weapon systems.

Draper received two contracts — one from the Defense Production Act Title III office for $10 million and another from the Pentagon’s Industrial Base Analysis and Sustainment office for $4 million — in support of the second phase of funding under the program. The firm i3 Microsystems is the major subcontractor for the effort.

The first phase — which was awarded in 2018 — focused on recapitalizing a trusted foundry manufacturing center owned by i3 Microsystems in St. Petersburg, Florida, she said.

The second phase is focused on increasing the capacity of the facility and looking for bottlenecks, Leeper said. That way “you can increase capacity and cut down the cycle time for the components, making it more available to the industry and providing more packaging capabilities.”

Phase 2 of the contract runs for three years, she said.

“It’s really been about keeping the communication with the government [open and] getting the processes online and ready for production assets to go through them,” she said. “We’ve done a significant ... [amount of] qualification of the equipment in the first six months to get ready for those production programs.”

The Defense Advanced Research Projects Agency also recently announced a three-year partnership with Intel to expand access to domestic manufacturing capabilities under a program known as the Structured Array Hardware for Automatically Realized Applications, or SAHARA.

Meanwhile, Commerce Secretary Raimondo noted that semiconductors are the building blocks of the United States’ future economy, yet the country finds itself in the middle of a global chip shortage that is hurting businesses in every sector.

“Our nation is falling behind its biggest competitors with regard to investments in R&D, manufacturing and training,” she said. “It’s time to catch up.”

To do so, the Biden administration, in its far-reaching American Jobs Plan, is calling for Congress to invest $50 billion in the National Science Foundation to create a technology directorate that will focus on fields such as semiconductors and advanced computing.

However, officials know more money will be needed, Raimondo said. “There’s no way $50 billion is enough. We hope to turn the $50 billion into three or four times that leveraging public-private partnerships and public and private investment.”

That will ensure the United States can protect itself, Raimondo said. “We are totally reliant on Taiwan and China for critical supply,” she noted.

In his Executive Order on America’s Supply Chains — which was released in February — President Joe Biden tasked Raimondo with creating a report that identifies risks in the semiconductor manufacturing and advanced packaging supply chains and offers recommendations to address them.

Bob Work, former deputy secretary of defense and the current co-chair of the National Security Commission on Artificial Intelligence, said the United States currently has a two-generation lead on China in advanced hardware such as semiconductors.

However, “we’re 110 miles away from going two generations ahead to maybe two generations behind,” he said during the unveiling of the commission’s final report in March. “If China absorbed Taiwan — which is the source of many of the world’s hardware — that would really be a competitive problem for us.”

The United States must build a resilient domestic base for designing and fabricating microelectronics, the commission’s report said.

“Put simply: the U.S. supply chain for advanced chips is at risk without concerted government action,” the study said. “Rebuilding domestic chip manufacturing will be expensive, but the time to act is now.”

Rep. Michael McCaul, R-Texas, the lead House sponsor of the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act of 2020, said the pandemic and its shortage of personal protective equipment illustrates the need for more domestic production of microelectronics.

“We saw what the [Chinese Communist Party] did when the U.S. needed critical PPE during the height of the COVID-19 pandemic — they hoarded the global supply and restricted exports,” he said during an event hosted by the Intelligence and National Security Alliance in April.

“The reason they were able to do this is because of their stranglehold on that supply chain.”

The Chinese government’s actions should be a “wake-up call” for the United States, he said. The nation must build up its supply chain so it is not held hostage by its adversary’s behavior, he said.

Beijing is advancing aggressive policies using non-market subsidies of more than $100 billion in intellectual property theft to surpass the United States and other leading democracies, McCaul said.

That behavior is why he introduced the CHIPS for America Act to incentivize companies to increase manufacturing of advanced semiconductor chips in the United States, he said. The initiative was authorized as part of the 2021 National Defense Authorization Act, but now it must be funded, he noted.

However, securing supply chains cannot be done with incentives alone, McCaul said. The nation and its allies must also moderate the flow of critical technologies to China that could threaten U.S. national security and foreign policy interests.

“The U.S. government must continue to restrict technology exports to companies … that partner with the CCP’s military and their production of semiconductors,” he said. This includes firms such as the Semiconductor Manufacturing International Corp., or SMIC, China’s top chipmaker.

Beijing is projected to dominate global semiconductor production by 2030, according to the Pentagon’s Fiscal Year 2020 Industrial Capabilities Report, which was released in January.

Additionally, “current suppliers in Taiwan, South Korea, Malaysia and elsewhere are in easy range of Chinese missiles, subversion, or air or maritime interference,” the report said. “Thus, in addition to its growing dominance in the area of production, Beijing is already in a position — through its geographic and political position — to threaten virtually our entire supply chain through theft, corruption of microelectronic products, disruption of supply, coercion and other measures even short of military action.”

In a report released last year by the Semiconductor Industry Association and Boston Consulting Group, the organizations said the 10-year total cost of ownership of a new front-end fabrication facility, or fab, in the United States is 30 percent higher than in Taiwan, South Korea and Singapore, and 37 percent to 50 percent higher than in China.

That is “an enormous gap” when considering that the 10-year cost of a state-of-the-art fab — including both initial investment and annual operating costs — ranges between $10 billion and $40 billion, according to the report, “Government Incentives and U.S. Competitiveness in Semiconductor Manufacturing.”

For about $50 billion in federal investment, the United States could build up to 19 new semiconductor manufacturing facilities in the country over the next decade, the study said. That could create more than 70,000 high-paying jobs.

“These potential incentives would mark a real inflection point and would reverse the sustained erosion in U.S. share that has been a historical trend over the last 30 years,” it said. “The U.S. would be reestablished as a competitive location for semiconductor manufacturing, well positioned to continue increasing its participation in the global expansion of capacity over the decades beyond 2030.”

The Pentagon’s industrial capabilities report noted that foreign governments, not companies, pay the lion’s share of the cost of building fabs.

“They take on the other massive set of costs: running the fab,” it said. “The hard truth is that if the United States does not start doing the same, our nation will continue to see its historically low share of chip production continue to decline to irrelevance. We will have few new fabs. We will have fewer semiconductor production jobs. We will have frightening vulnerability to foreign cutoffs whose impact would make our COVID-related shortages look miniscule.”

The report noted that one recent success story is the new Skywater Technology Foundry in Bloomington, Minnesota, which is the first new semiconductor fab to open in the United States in a generation.

Through a combination of Defense Department investment and private equity capital, the facility is producing integrated circuits for the automotive, computing and cloud, consumer, industrial and medical sectors, the study said. Additionally, it is making radiation-hardened microelectronics that are critical for military space operations.

The report applauded the recent passage of the CHIPS for America Act, calling it a landmark piece of legislation that will open vistas for future creative pooling of federal and private capital to fund fabs in the United States.

Topics: Cyber, Infotech, Manufacturing

Comments (2)

Re: Semiconductor Shortage Shines Light On Weak Supply Chain

Great article. Another question to consider is how can we avoid a similar shortage in materials and other components for EVs, AVs and other emerging tech in all types of vehicles. What lessons can be learned from this chip shortage?

Angela at 3:11 PM
Re: Semiconductor Shortage Shines Light On Weak Supply Chain

Assured supply requires rebuilding an entire product ecosystem. "Back-end" wafer-fabs are the highest profile, highest cost link and a great start but they are only one link in the long and geographically dispersed supply chain for semiconductors. After wafers leave the fab they must go through dicing, packaging, final test ("front-end" manufacturing) before they ship to customers. Each of those stages relies on hundreds of inputs (blank wafers, gasses, chemicals, subassemblies) any of which can bottleneck production, all of which come from separate vendors, all of which have varying lead-times and availability constraints.

I spent decades in the semiconductor industry. It took 20 years to go from US autarky to a near-complete atrophy of US-based production. Building it back will not be a trivial task or a quick fix or a cheap one.

An band-aid would be to buy and hold inventory. We can't do that amid a shortage. It would require prior planning and a willingness to accept that inventoried chips go obsolete quickly.

Ergo at 1:31 PM
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