Semiconductors make the world go round. They are in everything, including medical and military equipment, phones, refrigerators, alarm clocks, cars and planes, to name a few. Along with transistors and diodes, semiconductors are vital to productivity, a healthy economy, and our own national security.
With semiconductor companies expected to have a compound annual growth rate of at least 4-7% by year 2027, a predicted increase total of $315 billion, personal investment in semiconductor companies like Intel and TSMC (Taiwan Semiconductor Manufacturing Company), as well as others, are something to consider.
Various semiconductors have been around for many decades, and although they have grown increasingly smaller and cheaper to produce, they still require hundreds of complex components from many different countries. There isn’t yet a centralized or concentrated area of global production. One computer chip has 1000+ steps, and will travel over dozens of borders before it reaches its ultimate destination. Even one change in a single nation's policies, or a problem with even one necessary product or company, can have a negative trade effect on hundreds of different products down the line. This becomes a problem, when faced with supply interruptions from things like COVID, global disasters, civil unrest and war.
The Brookings Institution states that, “There are at least 20 major semiconductor product categories (from optical sensors to battery management modules to CPUs) and each category usually contains hundreds of different stock keeping units—distinct items for sale—for specialized applications. This complexity leads to a large market filled with myriad niches, in which specialized world-class companies have built defensible market positions through decades of targeted research and development.“
It’s common knowledge that a large number of U.S. factories have moved overseas for the sake of profit margins, aided by disastrous foreign trade policies and corporate deregulation. What many don’t know is that much of our important semiconductor production went overseas as well. The U.S. used to make +40% of the global supply in the 1990’s, and although we still own almost 50% of the designs, we now only produce 12% of global supply. While Intel can boast being the #1 chip designer with the highest revenue, it is TSMC in Taiwan that is the largest chip manufacturer.
Unfortunately the U.S. government did little to stop the trend of moving production abroad, while at the same time, countries like China, Japan and the UK were making important national investments. We’ve slashed overall federal investment since the end of the cold war, while China is outspending us 20-1, according to James A. Lewis of the Center for Strategic and International Studies.
Our current shortage (mostly COVID related) will affect many U.S. based industries. It has already begun with GM Motors shutting down plants in March 2021, not for lack of demand, but for a lack of semiconductors. GM suffered an estimated $2 billion loss from that one shutdown alone which also contributed to rising unemployment. New rental car shortages are forcing Hawaiians to rent Uhauls. Even Sony Playstation is having supply issues and keeping up with consumer demand for their consoles. This is expected to continue well into the third quarter of 2021.
Trump had the opportunity to urge then Director of the Office of Trade and Manufacturing Policy Peter Navarro to expand our national capacity, under the Defense Production Act (DPA) but failed to do so. Congress also failed to pass “Creating Helpful Incentives to Produce Semiconductors for America Act or the CHIPS for America Act”, The Biden administration has issued an executive order to look at the vulnerabilities in our supply chain, but direct action and deficit spending are required to catch up globally. Essential resources shouldn’t be left to the whims of the free market, which exacerbated the problem in the first place, although some advocates would have you believe differently.
Jessica Anderson, executive director of Heritage Action (sister to conservative think tank The Heritage Foundation), says “The American semiconductor industry is currently strong and Congress shouldn’t be sending tens of billions of dollars to a profitable tech industry.”
The U.S. isn’t revenue constrained, so we can’t use a lack of money as an excuse for ignoring our national interests, or getting ahead of supply issues. The latest COVID stimulus packages have proven that inflation isn’t the boogeyman it’s been made out to be. This is an issue of ensuring our productive capacity, protecting consumer prices while staying competitive in a growing industry. It’s a very complex and nuanced problem, the free market alone cannot solve.
Many other countries subsidize semiconductor fabrication & design with grants, equity investments, infrastructure support, and tax credits for FAB’s(fabrication plant or foundry), lowering the cost, while the USA remains the most expensive country to build a FAB. This cost difference also encourages the trend of moving production overseas.
A “FAB'' is a plant in which raw silicon wafers are turned into integrated circuits, through the culmination of hundreds of different types of equipment and skill sets. It pulls resources and materials from many countries. No one country or company has everything it needs to create a FAB from scratch. The manufacturing process for any given semiconductor relies on as many as 300+ different materials, including raw wafers, commodity chemicals, specialty chemicals, and bulk gases, with a completed semiconductor taking up to 26 weeks to complete. Not all companies make their own chips, and are designated as “fabless”, like Qualcomm, Broadcom, AMD, and Nvidia.
According to the Center for Security and Emerging Technology, “Semiconductor production includes three segments: (1) design, (2) manufacturing, and (3) assembly, testing, and packaging (ATP). Production relies on associated elements of the supply chain: semiconductor manufacturing equipment (SME), materials (including “wafers” formed into chips), design software (called electronic design automation, or EDA, software), and intellectual property related to chip designs (called core IP). The highest value and most technologically complex parts of this process are the design and fabrication segments of production, and the SME element of the supply chain.”
Semiconductor production requires a highly skilled workforce, and the U.S. doesn’t even make the top ten list. You can find U.S. owned FAB’s in China, Taiwan, Singapore, Israel and Europe, because some of those countries have invested in education and infrastructure, and have the workforce available (some countries offer incentives and lower costs as well). Americans need to demand more public purpose spending for investments in free college tuition and a job guarantee, if we want to be competitive in the future, and eliminate possible supply issues.
Cesar Ybarra, senior director of legislative affairs of FreedomWorks (founded by the Koch Brothers) says U.S. leadership in semiconductors “is a laudable goal that should be funded by private enterprise and not the American taxpayer.”
Mr. Ybarra’s statement is based on a neoliberal money myth, pushing a specific narrative to convince the public that the government is broke. If we have resources available for sale, such as workers in need of training or jobs, Congress can authorize the spending to buy those resources with no need for revenue. Someone should send Mr. Ybarra a copy of “The Deficit Myth” by Dr. Stephanie Kelton, so he too can learn that federal taxes have nothing to do with how the federal government spends.
According to the NSF (National Science Foundation), headed by Dr. Sethuraman Panchanathan, the U.S. government spent $83.4 billion on basic/applied science & tech research in 2019, or 1.9% of all federal spending (0.4% of GDP). James A. Lewis says U.S. companies spent $28 billion on basic research, and $314 billion for development. China spent $554 billion on R&D, more than Japan, Germany, South Korea, France, and the UK, combined.
The Biden administration has presented a national infrastructure plan, including $50 billion for semiconductor manufacturing and research, as well as the creation of a National Semiconductor Technology Center, with an additional $50 billion in proposed funding, all of which is to be spent out over eight years. It could pass this Summer, but there are no guarantees.
Senate Majority Leader Chuck Schumer and Republican Todd Young of Indiana plan to introduce legislation, called the Endless Frontier Act, that would supposedly provide $100 billion over five years to boost research and development in the U.S. This isn’t the first time various bills have been presented, most of which never make it to a vote, like S.4324 - Restoring Critical Supply Chains and Intellectual Property Act and S.5049 - National Critical Capabilities Defense Act of 2020 to name just a few. It’s a big risk waiting on a possible legislation instead of just funding what is necessary by executive order under the Defense Production Act, or a stand alone bill.
Semiconductor Equipment and Materials International (SEMI) states that China plans to double capacity of semiconductor production in the next five years, and is the largest buyer of manufacturing equipment. (The U.S. is currently the largest manufacturer of (SME) semiconductor manufacturing equipment).
China’s goals include closing a talent gap of roughly 300,000 engineers, producing 70% of its own demand, expanding R&D and incentivizing foreign relocation, putting a dent in the 36% of U.S. semiconductor sales to China. ($70.5 billion in 2019), according to the Semiconductor Industry Association (SIA). This would be supported by a $58 billion government investment, with another $60 billion raised by various local governments, including a 10 year corporate tax exemption for advanced chip makers.
The U.S. government has responded by blocking some exports of semiconductor manufacturing equipment, restricting sales of chips made with U.S. equipment, and blocking Chinese acquisition of U.S. designs. One could argue that steps taken under the Trump administration have actually contributed to the current shortage. It seems like our government is more preoccupied with ways to punish China, than expanding our ability to supply our own demand.
In 2018, Trump's 25% tariffs on the Chinese semiconductor industry went into effect, costing $3.6 billion, mostly passed off to consumers. In his misguided attempt to lower the trade deficit, Trump’s administration failed to see that the U.S. is too interdependent on other countries for materials and equipment to take a hard stance via tariffs. The U.S. Treasury doesn’t need that revenue for spending, so not only is the tariff on semiconductors detrimental to the industry, it is completely unnecessary for the government to collect. Tariffs aren’t the way to make the U.S. more competitive, instead we need continued investment in infrastructure, education and job creation, working with the private sector.
The Brookings Institution (with Bill Gates as its primary donor) states that, “since 2016, in response to concerns about Chinese tech firms’ involvement in human rights abuses and Chinese semiconductor companies’ links to Chinese military institutes, the U.S. government has added major Chinese consumers and producers of semiconductors to the entity list. These firms include semiconductor consumers such as DJI, ZTE, and Hikvision; targeted semiconductor producers include Huawei and SMIC. The companies on the list are generally ineligible to receive any item subject to Export Administration Regulations without a license provided by the Bureau of Industry and Security.”
U.S. aggression towards China has only ramped up since COVID. A new report published by the Newlines Institute for Strategy and Policy, highlights Chinese human rights abuses of Uyghurs. However there are extensive reports from Ajit Singh and Max Blumenthal of The Grayzone, that show the authors of the report and evidence cited are suspect.
Ajit Singh writes, “A majority of the report’s “expert” signatories are members of the Newlines Institute and the Wallenberg Centre. Others are members of the hawkish Inter-Parliamentary Alliance on China, former US State Department officials, and ardent supporters of US military interventionism. The report relies most substantially on the “expertise” of Adrian Zenz, the far-right evangelical ideologue, whose “scholarship” on China has been demonstrated to be deeply flawed, riddled with falsehoods and dishonest statistical manipulation.”
He goes on to say, “As The Grayzone has reported, Zenz is a far-right Christian fundamentalist who has said he is “led by God” against China’s government, deplores homosexuality and gender equality, and has taught exclusively in evangelical theological institutions. A careful review of Zenz’s research shows that his assertion of genocide is concocted through fraudulent statistical manipulation, cherry-picking of source material, and propagandistic misrepresentations. His widely-cited reports were not published in peer-reviewed journals overseen by academic institutions, but rather, by a DC-based CIA cut-out called the Jamestown Foundation and “The Journal of Political Risk,” a publication headed by former NATO and US national security state operatives.”
We have to take into account that bad actors inside and outside government work to manufacture consent with propaganda, and it can be used against any country, not just China, Iran, Venezuela or Russia. It is the height of hypocrisy for the U.S. government to condemn human rights abuses, when we are guilty of much worse, at home, and abroad.
Why is this aspect of foreign relations important to semiconductors? Interventionist warmongering can be horrifically bad for production, especially since we continue to rely so heavily on global imports to satisfy our demand. The U.S. government is spending more money on acts of aggression, based on false pretenses, than protecting such a vital component in our daily lives.
Only political will is stopping us from ensuring our semiconductor supply. This problem is decades in the making, and it will take several more years to put necessary manufacturing in place. The longer we fail to act with public purpose spending, when we fail to reign in corporate control, is another year we fall farther behind. These are the types of deficits we should fear, not government spending.
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