Supply Chain Security Challenges
The complicated nature of semiconductor supply chains poses multiple challenges to ensuring sufficient semiconductor supplies and to U.S. national security. Given that semiconductors are essential components of everyday consumer products as well as critical national security systems, any supply chain vulnerability poses a threat to U.S. economic and national security.
Geographic Concentration
With much of the semiconductor supply chain (including fabrication, ATP, and many raw material inputs) highly concentrated in Taiwan, South Korea, Japan, and China, there is a risk that a single geopolitical crisis or natural disaster in this region could completely disrupt global semiconductor supplies. For example, a 1999 earthquake in Taiwan shut down the Hsinchu Science Park for 6-days. As a result, memory chip prices tripled and major electronics companies such as IBM, Hewlett Packard, Intel, and Xerox all lost 18-40% of their value in a month as their share prices fell. The supply chain crisis, initiated by the COVID-19 pandemic and exacerbated by worker shortages and other issues, has led to a severe shortage of semiconductors in the United States as factories that cut and package semiconductors pause operations across Southeast Asia. Apple alone announced in October 2021 that it lost an equivalent of $6 billion in sales due to the semiconductor chip shortage, demonstrating the scale of economic loss caused by the vulnerability of semiconductor supply chains. Conceivably, a devastating typhoon in the region worsened by climate change, a massive Chinese cyberattack on Taiwan, or a North Korean missile launch at South Korea could similarly cause enormous disruptions to semiconductor supplies.
Geopolitical Tensions
Even without an armed conflict in East Asia or a hypothetical naval blockade of Taiwan, geopolitical tensions in the region could similarly
disrupt supply chains. With rising tensions between the U.S. and China, both sides have the capabilities to enact ‘economic warfare’ measures that could seriously disrupt global semiconductor supplies. During the Trump Administration, the U.S. used export controls, sanctions, tariffs, and blacklists to hammer the Chinese semiconductor industry to try to prevent it from acquiring advanced equipment or a larger market share. However, the loss of potential sales to the Chinese market could blowback on U.S. semiconductor firms, particularly those that produce manufacturing equipment and rely on sales to China. Additionally, China possesses its own economic retaliation capabilities, such as cutting off exports of REEs (which it did to Japan in 2010 after a geopolitical dispute) or polysilicon. Escalating tariffs and embargoes would seriously disrupt these already fragile and complex supply chains.
Declining U.S. Manufacturing Base
The minimal capacity for fabrication and ATP/advanced packaging in the U.S. also poses a national security risk, as it forces the U.S. to heavily rely on imports from East Asia. The U.S. share of chip manufacturing fell from 37% in 1990 to just 12% today and is predicted to continue dropping. During the next decade without any policy changes, it is estimated that only 6% of new semiconductor capacity will be built in the U.S. whereas 40% of new capacity will be built in China. Given that new fabrication facilities can cost $5-$20 billion and take years to build, reinvigorating U.S. manufacturing capabilities will be a challenge.
Furthermore, it is also not cost competitive to build fabrication facilities in the U.S. Generous subsidies and government incentives in other countries are used to support semiconductor fabrication firms. As a result, the total cost of a new fabrication facility in the U.S. is 25-50% higher than the cost in Asia, with approximately 40-70% of that difference due to differences in government incentives. Examples of government incentives in other countries include:
- South Korea: Various subsidies and government incentives for fabrication facilities is estimated to lower the cost of operating a facility by 25-30%. A government announcement in May 2021 outlined a plan to invest $450 billion USD in domestic semiconductor production by 2030.
- China: China is estimated have provided $200 billion in subsidies for semiconductor fabrication between 2015 and 2025, while simultaneously co-financing facilities and ‘stealing’ talent from abroad with significantly above-market wages.
- Taiwan: With government-organized science parks that facilitate access to land, electricity, and water, tax incentives, R&D subsidies, and other incentives, the government of Taiwan covers 25-30% of the cost of operating a fabrication facility.
By contrast, current U.S. incentives for fabrication facilities are only 10-15% of total ownership costs. Therefore, if global semiconductor firms are looking to build a new fabrication facility, the U.S. is presently not the most financially attractive option.
U.S. Firms’ Reliance on Sales to China
U.S. semiconductor firms are also heavily reliant on sales to China to make profits and generate the enough revenue needed to reinvest in highly expensive semiconductor R&D and design. China also dominates the electronics assembly space, meaning that U.S. semiconductor firms often sell chips to Chinese companies to be assembled into electronic devices that are then resold to U.S. consumers. In 2018, U.S. semiconductor firm Qualcomm generated 66% of its revenue from China and memory chip maker Micron generated 57% of its revenue from China. In 2018, Intel reported that China accounted for 26% of its revenue.
U.S. semiconductor equipment manufacturers are also nearly entirely dependent on foreign sales, with sales to China growing in significance as China develops more fabrication and ATP facilities. For example, U.S.-based semiconductor equipment manufacturers Applied Materials and Lam Research reported that 90% of their total revenue in 2020 came from foreign sales. For Lam Research, sales to China accounted for just 16% of its revenues in 2018 but rose to 31% in 2020. The high reliance of U.S. firms on sales to China indicates that any attempt at fully decoupling or cutting off China would in-turn bankrupt most U.S. semiconductor firms. At the same time, if China develops its own endogenous supply of chip designs or manufacturing equipment, U.S. firms could similarly stand to lose significant global revenues. The issue is further complicated by the current severe chip shortage, as U.S. firms struggle to obtain licenses to sell chipmaking equipment to Chinese companies that manufacture semiconductors, limiting one avenue for boosting supply.
Skilled Workforce Shortage
The semiconductor supply chain requires a highly skilled workforce. Researchers and engineers in the R&D and design phases require highly advanced degrees and workers in fabrication facilities operate complex manufacturing equipment and require significant training. A 2017 Deloitte and Semiconductor Equipment and Materials International (SEMI) survey found that 77% of surveyed semiconductor executives thought the industry was facing a severe talent shortage and a 2017 U.S. Commerce Department survey found that 71% of fabrication facilities cited “finding qualified workers” as one of their top concerns.
With these skilled labor demands, the U.S. semiconductor industry is highly dependent on immigration, with 40% of high-skilled workers in the industry presently born abroad and 60% of students in U.S. semiconductor-related graduate programs coming from abroad. With existing talent shortages and China aggressively attempting to poach talent from abroad, building and maintaining a skilled semiconductor workforce is necessary to ensure the U.S. technical edge.