April 29, 2021

Semiconductors: Key to Economic and National Security


KEY TAKEAWAYS

  • U.S. manufacturing of semiconductors, which are critical to our economic and national security, has fallen from 37% of global output in 1990 to 12% in 2020.
  • China aims to be the global leader in chip manufacturing by 2030 and is massively subsidizing its semiconductor industry in an attempt to get there.
  • The Defense Department has tried to buy computer chips from secure, domestic producers. But the companies that participate in DOD’s Trusted Foundry Program are at risk of falling behind technologically and do not come close to meeting the demand.  

Semiconductors enable nearly every modern industrial, commercial, and military system, including smartphones, aircraft, weapons systems, the internet, and the electric grid. They are critical to the economic and national security of the United States.

China’s efforts to develop a semiconductor industry that covers all parts of the supply chain are unprecedented in scope and scale. There is bipartisan support for legislation to revitalize U.S. manufacturing and research of semiconductors and to decrease supply chain risks associated with dependency on China.

the global semiconductor industry

The U.S. first developed silicon-based microchip technology in the 1950s, with industry, academia, and the federal government playing significant roles.

Semiconductors are key to economic growth and prosperity in the digital age. They are one of the top five exports for the United States, with total sales of $193 billion in 2019. The industry directly employs nearly a quarter of a million people in the U.S. and supports more than one million additional U.S. jobs.

Today, the U.S. dominates many parts of the complex semiconductor supply chain, such as chip design, but manufacturing has progressively moved to other countries, mostly Taiwan, South Korea, Japan, and China. The concentration of fabrication facilities in East Asia creates supply chain risks – a trade dispute, military conflict, or other disruption in the region could significantly affect U.S. access to semiconductors.

The recent chip shortages in the automobile industry and others illustrate the economic consequences of losing access to cutting-edge semiconductors. Factories have been shuttered and workers have been furloughed or laid off as pandemic-influenced demand has far outstripped supply across the globe.

The National Security Commission on Artificial Intelligence highlighted the risk in stark terms in a recent report: “If a potential adversary bests the United States in semiconductors over the long term or suddenly cuts off U.S. access to cutting-edge chips entirely, it could gain the upper hand in every domain of warfare.”

Global Semiconductor Fabrication Capacity 2019

Semiconductors

china makes its move

The U.S. and our allies are engaged in a global geopolitical and economic competition with China that will define the 21st century. Semiconductors underlie the technologies that will be the engines of economic growth and prosperity, including AI, autonomous systems, advanced robotics, and quantum computing. All of those technologies rely on semiconductors. The country that leads the world in advanced chip research, development, design, and manufacturing, will have a significant advantage in this competition.

Recognizing this, China has named semiconductors as one of seven “frontier” technologies for which it plans to boost research, subsidies, and other forms of state support as part of its long-term goal of overtaking the U.S. as the world’s superpower. China has spent about $150 billion since 2014 propping up its industry and plans to spend billions more in the future. The Chinese Communist Party distorts the market through subsidies, tax preferences, pressure to engage in joint ventures, forced technology transfers, and discriminatory antitrust and security practices.

Japan, Taiwan, and South Korea, with their large semiconductor manufacturing capabilities, are potential allies to help push back against Chinese aggression in this area. Other countries, such as the Netherlands, Germany, and the United Kingdom, have influence and expertise in additional parts of the supply chain and could help blunt the CCP’s goal.

In 1990, the U.S. accounted for 37% of global semiconductor fabrication capacity. By 2020 our share had fallen to 12%. In contrast, China had no capacity to produce semiconductors in 1990, but by 2020 it had nearly 13% of production. The Chinese share of global manufacturing is projected to reach 24% by 2030, which would make it the world leader.

U.S. vs. China: Share of Global Semiconductor Manufacturing

Semiconductors

To mitigate supply chain risks and ensure that semiconductors used in sensitive military systems do not have malware embedded in them, in 2004 the Department of Defense established the “Trusted Foundry Program.” Under this program the government identifies companies deemed secure and trustworthy enough to produce chips exclusively for the military. Two facilities currently operate under this program, one in Vermont and one in New York.

The program only produces a small percentage of the nearly 2 billion semiconductors DOD acquires each year. Some observers have expressed concern that the trusted foundries are falling behind technologically compared to commercial fabrication facilities in East Asia. This could leave the U.S. military at a technological disadvantage to China and other countries that buy superior chips.

In 2017, the Defense Advanced Research Projects Agency launched the Electronics Resurgence Initiative, which seeks to address market and technological trends and challenges in the microelectronics sector.

congress takes action

Senators from both parties have supported legislation to revitalize U.S. manufacturing of semiconductors, decrease supply chain risks, and ensure the U.S. leads the world in research and development.

The CHIPS for America Act, introduced by Senators John Cornyn and Mark Warner, increases federal incentives for advanced domestic chip manufacturing; promotes efforts to create consistency, transparency, and trust in global supply chains; and creates new research and development streams.

The American Foundries Act, introduced by Senators Tom Cotton and Chuck Schumer, authorizes the Commerce Department to make grants to states to help finance, construct, or modernize advanced semiconductor manufacturing and research facilities.

Provisions from both of these bills were included in the fiscal year 2021 National Defense Authorization Act.

Committees have held hearings early in the 117th Congress focused on this issue, including a February Armed Services Committee hearing where senators heard testimony on the imperative of leading the world in this technology and reducing reliance on Chinese supply chains. An April hearing of the Commerce, Science, and Transportation Committee examined ways to counter China and strengthen America’s innovation economy.