Microelectronics - A Critical National Resource
One fallout from the pandemic has been a growing realization of the impact of a fragile manufacturing and supply chain on the economy and potential impact on national security.
This is true in several sectors, but arguably, none more important than microelectronics. The issues are great, but there is a recommended solution that has been identified as a way forward to “build back better” a strong microelectronics industry in the United States: there needs to be a public-private partnership that will take the nation from foreign dependency to self-sustaining domestic production.
Microelectronics is a sector where the United States still has the largest market share in sales of finished product, at about 47 percent of the global total, according to the Semiconductor Industry Association.
Unfortunately, America only accounts for approximately 12 percent of the global manufacturing production. The nation relies on parts made offshore which are in many cases single sourced. This is true for both commercial and military systems. Disruption of the worldwide microelectronics supply chain would seriously impact the U.S. economy, as well as the readiness posture of the armed forces, and operability of critical national infrastructure such as electric grids, banking and the medical industries.
By 2030, left unchecked, U.S. production will fall to 10 percent of global production. Roughly 50 percent of production will come from China and Taiwan; 80 percent when adding Japan and Singapore. The United States imports about 80 percent of the microelectronics used here. This situation leaves the nation totally vulnerable and reliant on several countries, one of which — China — has shown no hesitancy to wield economic tools to further their national security objectives.
The United States has already seen the “canary in the coal mine” of microelectronics supply chain fragility in the automotive industry.
Modern automobiles rely on a specialized microelectronic called “microcontrollers.” The Taiwan Semiconductor Manufacturing Co. produces roughly 70 percent of the global supply of microcontrollers. At the start of the pandemic, TSMC projected a need to shift production to chips required to meet the demand of teleworking, reducing production of microcontrollers. The demand for automotive microcontrollers did not wane, resulting in Western automakers having to reduce 2021 vehicle production.
There is very little the West can do about this in the short term.
U.S.-based firms are shifting their production processes, but this takes time — measured in years, not months.
The canary in the coal mine event occurred largely through a series of circumstances. But it is very illustrative of the national security challenges facing America. Disruption of a supply chain of standard microelectronics could slow or cripple production of new U.S. defense systems or completely undermine sustainment of existing systems.
This is not just a state-of-the-art problem for microelectronics. It is a problem for legacy systems as well. In the commercial semiconductor market, most products are expendable. If the cell phone or computer gets old — replace it. The life span is around five years or less. Defense platforms are very complex, and fighter jets, aircraft carriers, etc., are not expendable. To be sure, the Defense Department could mitigate some of the challenges by more aggressively adopting digital engineering and open architectures to allow more plug-and-play modules. The department is not there yet — they are heading in that direction — but a completely open system is likely years away.
So, what happens when the Defense Department loses access to legacy parts? Currently, two options — both bad — are available: reengineer with available microelectronics, which costs a lot of money and takes time, or program for end-of-life purchases.
In the fiscal year 2021 budget request, the department asked to make a roughly $900 million purchase of legacy microelectronics to support the fielding of military GPS user equipment through 2028. Such a change is not free — the money has to come from something else the department needs to do. More end-of-life purchases are expected in the coming years.
Defense can’t drive the market. Its market share is under 2 percent of U.S. demand.
However, when we start to think about all national security systems — inclusive of critical infrastructure — the demand can approach 20 to 25 percent. This opens options. Currently, several Asian nations subsidize production, giving these countries as much as a 30 to 50 percent advantage in the market. U.S. producers really can’t compete at this disadvantage. By taking policy and financial actions in a coherent strategy, the nation can develop a sustainable microelectronics ecosystem that would reduce the dependency on offshore manufacturers.
But the time to act is now. President Joe Biden has opened the discussion with his “Build Back Better” initiative. We believe the nation needs to strengthen the Buy America Act or an expanded Berry Amendment to provide preferential purchasing from domestic microelectronics producers and enhanced emphasis on digital engineering and open systems architecture to begin a change in incentives. However, this will not be enough. The United States needs to couple these policy options with a coordinated and strategic government funding plan for 2021. We advocate a public-private partnership to coordinate this investment as a business, with a sustainable cash flow to keep the U.S. microelectronics ecosystem healthy and critical infrastructure secure.
Alan R. Shaffer is an advisor, Chris Toffales is chairman and Monique D. Attar is communications manager at CTC Aero LLC, an aerospace and defense consultancy firm.