Corrected, April 13 | President Joe Biden stood in the White House’s State Dining Room on Feb. 24 and recalled the centuries-old “for want of a nail” proverb — the one about the outsize significance of small things.
For want of that nail, Biden reminded his audience, the horseshoe was lost, followed by the horse, the rider, his message, the battle and ultimately, the kingdom.
The president then held up a tiny semiconductor, a component that is smaller than a postage stamp and that he said contains 8 billion transistors, each of which is 10,000 times thinner than a single human hair.
That chip, he said, is a “21st-century horseshoe nail.”
Biden was talking about semiconductors because a recent shortage of them, due partly to a pandemic-driven surge in computer usage, has triggered an economic crisis in some sectors. Automakers, in particular, have been unable to build thousands of digitized vehicles, have temporarily laid off workers and lost billions of dollars in earnings.
The chip shortage comes on the heels of another supply chain disaster: the struggle in recent months to get protective gear and medical supplies — not to mention products such as toilet paper — from overseas markets, including China. The bitter memory is still fresh of U.S. medical workers reusing masks or covering themselves in trash bags in emergency rooms.
These events have cast in bold relief two facts: the indispensable role semiconductors play in modern life; and the risks of over-reliance on overseas supplies of the most critical products for economic security and defense.
The risk is especially acute, experts say, when the dependence is on companies either based in China or close enough to China for Beijing to imperil or coerce them.
"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," the National Security Commission on Artificial Intelligence concluded in a recent report that described China as the country's "principal strategic competitor."
As bad as the coronavirus-induced disruptions to semiconductor supply lines have been, the future could hold even bigger problems if reliance on overseas chip fabrication plants is not changed, many observers worry. The next disruption could be caused by another pandemic, a natural disaster, a trade dispute or a shooting war, they say.
“In some ways, the auto chip shortage is the canary in the coal mine,” Tarun Chhabra, the National Security Council’s senior director for technology and national security, said in an interview.
Economic, security lifeblood
Besides energy, semiconductors are arguably the most important category of products in the world, and their significance will only grow. They are the red blood cells of the global economy’s circulatory system — tiny carriers of its lifeblood.
They are vital, too, for America’s national security. The military’s most advanced weapons and computers, as well as more pedestrian products like Army trucks, are increasingly digital. And cyberspace is a domain of ongoing and future strife.
The struggle for domination of the chip market, pitting America and its allies against China (and to some extent, America against its own allies) is a key subplot in the burgeoning battle for global supremacy between Beijing and Washington. It is a contest with huge implications, playing out on the smallest of scales, on objects with features not much larger than a single molecule.
While American companies still lead the world in designing chips, they are now just minor players in producing them, and so the United States is at the mercy of vulnerable choke points in Asia.
U.S. reliance on foreign-made computer chips “is a national security problem writ large,” said Frank Kendall, a former Pentagon acquisitions chief.
Washington is poised to spend a lot of money, perhaps $37 billion just for starters, to address the problem. But some say America may be too far behind to catch up. And the federal money will only help if it is accompanied by an implementation strategy that is so far incomplete, experts said.
Lastly, semiconductor security is only partly about access to the chips. It is also about ensuring they are trustworthy, and a system for monitoring that is still embryonic.
The near-term issue, though, is the upcoming congressional debate over whether and how to find the $37 billion that some say is a necessary down payment to reinvigorate U.S. chip manufacturing. It would be a massive bonanza, with scores of thousands of jobs in play, and one virtually every member of Congress will want some piece of.
“I think a substantial amount of money will be appropriated in one bill or another this year,” said Michael Fritze, director of microelectronics policy at the Potomac Institute for Policy Studies, a research center. “There are a few issues that both parties agree on, and this is one of them.”
Peter Harrell, the director for international economics and competitiveness on Biden’s NSC, told CQ Roll Call the issue is front and center for the White House.
“This is a high-priority item for us,” Harrell said.
The U.S. share of the global chip production market has plummeted from 37 percent in 1990 to 12 percent today, and the free fall is not over, according to industry estimates. Companies in Taiwan and South Korea are the world leaders in volume and sophistication of what they produce in fabrication facilities, or fabs. China is already ahead of the United States in production market share (15 percent to 12 percent) and is looking to widen its lead on America and close in on South Korea and Taiwan.
China has announced a goal of dominating the world chip manufacturing market by 2030. It will not get there, but it is making headway and will spend the equivalent of about $150 billion in the process, according to a recent Center for Strategic and International Studies report.
The United States will soon buy roughly 90 percent of its high-volume, advanced chips from countries in East Asia. Almost half the world’s advanced semiconductors, and all the world’s iPhone chips, are made by the Taiwan Semiconductor Manufacturing Co. TSMC’s chips are largely fabricated in its home country, which U.S. military commanders said this month is increasingly at risk of Chinese attack within the decade.
The world’s second biggest maker of high-end chips is South Korea-based Samsung, whose primary facilities are not far from the border with unpredictable and heavily armed North Korea.
Arkansas Republican Tom Cotton said at a Senate Armed Services Committee hearing in February that chip makers in Taiwan and South Korea are both “within striking range of mainland China."
“This is not a vulnerability that the American people can continue to permit,” he added.
At the same hearing, former Google CEO Eric Schmidt, who chaired the artificial intelligence commission, said TSMC’s chips are popular for a simple reason. “They’re just faster, better, et cetera,” he said.
They are also heavily subsidized, with tax incentives in those countries of up to 30 percent, more than double the United States', domestic semiconductor industry executives say. A growing consensus in Congress favors increasing the U.S. refundable tax credits to up to 40 percent, which could mean billions of dollars in write-offs.
China is also accessing the most cutting-edge chips off the commercial market in ways that the Pentagon, which still relies on dedicated foundries for specialized defense chips, is not, experts said.
“China is buying chips that are state-of-the-art,” said Mark Lewis, a former top Pentagon civilian who now runs the Emerging Technologies Institute at the National Defense Industrial Association. “They're buying chips that are one or two generations more advanced than the stuff that we're buying for our most protected defense applications.”
$37 billion plan
The growing worries about chip supply disruptions seem to have lit a fire under efforts in Congress to reverse America’s shrinking share of the chip manufacturing market.
On the same day Biden held aloft the semiconductor at the White House, he announced his administration would launch a 100-day review of America’s supply chain challenges in four areas, including computer chips.
And he said he supports spending the $37 billion, which would fund the so-called CHIPS Act for America, a blueprint that was authorized in the fiscal 2021 defense authorization law but has not yet been appropriated. The law authorizes grants for chip companies and creates a Pentagon-led public-private investment group.
Just prior to Biden's remarks last month, he met with nearly a dozen lawmakers from both parties who back such a proposal.
Decisions about which companies in which states will get tax breaks and grants will almost certainly be made by the executive branch, once the money is appropriated. But many of Congress’s most outspoken advocates of federal help for the industry have something to gain from it politically.
An infusion of $20 billion to $50 billion of federal money, which is in the range being discussed, could create 70,000 high-paying jobs in multiple states, according to the Semiconductor Industry Association.
The states that have the most fabs today — and so are leading contenders for more — are Arizona, Texas, New Mexico, New York, California, Massachusetts and Oregon, experts said.
Senate Majority Leader Charles E. Schumer, D-N.Y., is arguably the semiconductor industry’s most influential backer on Capitol Hill.
One potential New York winner in the fab sweepstakes is GlobalFoundries, which builds semiconductors mostly for commercial customers but also is the primary company that builds highly specialized chips for the Defense Department. GlobalFoundries has locations in both New York and Vermont, home of Patrick J. Leahy, the Democrat who chairs the Senate Appropriations Committee.
Over in the House, Minnesota Democrat Betty McCollum is not known as a vocal champion of semiconductors. But she chairs the House Appropriations defense subcommittee, and her St. Paul district is near fabs owned by Honeywell and a company called SkyWater Technology, which, like GlobalFoundries, makes military-unique chips for the Pentagon.
New York could also benefit if South Korea’s Samsung opens a fab in the state, something the company is said to be considering, according to Fritze of the Potomac Institute for Policy Studies.
Michele Glaze, a spokeswoman for Samsung, did not confirm that talks are underway to build a New York fab and said no decision has been made.
“While we do not have specific plans to build a new fab at this time, we are constantly exploring various opportunities for business development so that we are ready when such opportunities arise,” Glaze said via email.
Samsung is also reportedly considering expanding its existing fab in Austin, and two Texas Republicans, Sen. John Cornyn and Rep. Michael McCaul, are among the leading proponents of semiconductor subsidies.
TSMC, for its part, intends to build a major new fab in Phoenix.
As of now, none of the foreign-owned chip production plants coming to America will rival the size or sophistication of these companies’ native plants, experts said.
Intel, meanwhile, is America’s national champion in semiconductors. Intel is a rarity in that it both designs and fabricates cutting-edge chips. Its top manufacturing facilities are in Arizona, Oregon and New Mexico.
Once the industry leader, Intel now has work to do catching TSMC and Samsung. But the Santa Clara, Calif.-based company signaled that it is determined to have a go at it, announcing on March 23 it would spend $20 billion to build two new fabs in Arizona. Patrick Gelsinger, Intel’s new CEO, told reporters his company’s plan “does not depend on a penny of government support, or state support, or any other investments to make it successful.”
Jeff Rittener, chief government affairs officer at Intel, echoed Gelsinger's position but said government funding would be helpful. It would speed up Intel’s efforts to grow its fab business and compete against heavily subsidized foreign companies and, he adds, help the larger U.S. semiconductor industry.
"The funding is really important because it is an accelerant," Rittener said.
But officials in the nation’s capital largely are reading the Intel plan as being influenced, at least, by growing signs of federal support for subsidizing fab construction.
In fact, Sen. Kyrsten Sinema, D-Ariz., tweeted: “Now that our bill to restore America’s leadership in semiconductor manufacturing is law, Intel is investing $20 billion in Arizona bringing thousands of jobs to our state.”
Sinema was referring to the fiscal 2021 NDAA's CHIPS for America Act provisions.
Going on offense
The CHIPS for America Act, which stands for Creating Helpful Incentives to Produce Semiconductors, is a bipartisan and bicameral bill. One of its several provisions would enable the Commerce Department to dole out grants of $3 billion per project for not just fabrication of chips but a variety of support activities such as testing and research.
The new law could help semiconductor giants such as Intel — and even TSMC and Samsung — grow their fab business, not to mention potentially a host of smaller companies.
Another bipartisan 2020 measure that could be a vehicle for semiconductor subsidies this year, the so-called Endless Frontiers Act, would dramatically expand the National Science Foundation to develop new technologies. The Senate did not consider that bill in the last Congress but Schumer has said he will try to secure passage of aid for building new fabs this year.
It is not clear yet if Biden will suggest his own legislation or if it will be part of a forthcoming package of infrastructure modernization proposals.
Two recent blue-ribbon panels created by Congress, the National Security Commission on Artificial Intelligence and the Cyberspace Solarium Commission, both endorsed and, in some ways, expanded on congressional plans like the CHIPS Act.
Moreover, the issue of supply chain vulnerability for defense programs, including semiconductors, is such a hot topic that the House Armed Services Committee has created a Defense Critical Supply Chain Task Force, which will recommend new provisions for the forthcoming fiscal 2022 NDAA.
Paying a potentially $37 billion tab to add domestic capacity to build chips is a heavy lift politically. But the termination of budget caps as of fiscal 2022 may make the job easier. And the appropriations would probably be divided fairly evenly between defense and nondefense departments.
While some conservatives malign using government “industrial policy” to affect markets, those critics appear to be in the minority on this issue. The prospect of thousands of jobs for constituents appears to be overcoming those qualms in the GOP.
“The next three or four months will be critical, because we’ve got to get the money identified in the budget process," Intel's Rittener said.
Whatever course is taken, settling for the status quo is not acceptable, a growing chorus in Washington says.
Rep. Mike Gallagher, the Wisconsin Republican, has also been a leader on the issue. He co-chairs the House Armed Services supply chain panel. He co-chaired the Cyberspace Solarium Commission. And he co-sponsored the House version of the Endless Frontiers Act.
“Playing defense isn’t enough,” he said in a statement. “In order to ensure America remains as the world’s preeminent leader in science and technology, we have to go on offense and make historic investments in the critical fields of tomorrow.”
This report has been corrected to include SkyWater Technology, another company that supplies the Pentagon with specialized microchips for the military.
Editor's note: This is the first in a three-part series looking at the federal government's race to reinvigorate U.S. chip manufacturing, which would be a boon for the semiconductor industry. Part 1 is the scramble for dollars. Part 2 will look at legislative proposals in Congress. And Part 3 will explore the Pentagon's struggle with chip security.