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America’s Semiconductor Industry Crisis

Largely outsourced to China, the U.S. semiconductor industry faces a dangerous supply problem.

For the past four years, the Department of Defense has been warning of a problem with the supply chain providing semiconductors and microelectronics. The demand would outstrip the supply.  Much of the concern centers on the U.S. dependency on China and other Asian suppliers for semiconductors and other electronic components. How did this dependency happen, you ask? Joe Schaeffer, political columnist for Liberty Nation, gave us some insight into one cause: greed.

Schaeffer explained that state governors were falling all over themselves to do business with China. For example, Arizona Governor Doug Ducey (R) was effusive about a meeting he had with the Chinese Chamber of Commerce, the Chinese Communist Party’s propaganda machine.

The Dangerous Lure of China

DO NOT USE!!To get more business for his state, Ducey was excited about putting China into the U.S. aerospace and defense industry supply chain. He wasn’t the only one. Georgia Governor Brian Kemp (R) was also eager to get in on the China gravy train. Then came the COVID-19 pandemic impacting U.S. manufacturing throughout the country, including the auto industry and the aerospace and defense industry.

In a commentary written for the Wall Street Journal, T. J. Rodgers outlines the auto industry’s problem. As Rogers points out, “Mid-price automobiles today are controlled by 100 or more silicon chips.” He expanded:

“Cars couldn’t meet legal standards for mileage or pollution—or even start—without chips, let alone connect to the internet or display a fancy digital dashboard. A supply shortage on only one or two chips can shut down an assembly plant that occupies 100 acres and employs 10,000 people.”

In his article, Rogers suggests that the “semiconductor and the auto industry will resolve the issue before politicians finish assigning blame.” His premise is that the semiconductor industry supplying integrated circuits and microelectronics to the auto industry does not require taxpayer subsidies to survive and compete. Rogers says: “There is no need to give taxpayers’ money to some of the smartest and richest corporations in the world.”

What about defense weapon systems?

Challenges For the Defense Department

Defense has a different and, in many ways, a more complex problem. The Defense Department faces a two-pronged challenge. First, the Defense Department must acquire new capability in its weapon systems, and new capability means more state-of-the-art semiconductors and microelectronics to control weapon operations and performance.

Second, the Defense Department must support legacy weapon systems, many of which have electronics and microsystems that are decades old. There are cases where the Original Equipment Manufacturer no longer builds the weapon system, yet those legacy systems are still operational. The issue is stated clearly in the Fiscal Year 2020 Industrial Capabilities Report to Congress, published by the Under Secretary of Defense for Acquisition and Sustainment.  The report says:

“Microelectronics are critical to producing and maintaining existing military systems, for advancing emerging technologies like AI, 5G, and quantum computing, and for sustaining the critical infrastructure and, indeed, our entire modern economy. Microelectronics are in nearly everything, including the most complex weapons the Department of Defense buys, such as Aegis warships, the F-35 joint strike fighter, soldier systems, and our nuclear weapons and their command-and-control – which together form the backbone of our national defense.”

Weapon systems and other military equipment dependent on integrated circuits and other microelectronics often use unique specialty electronic chips with no commercial value and not purchased in quantities that would reduce the cost or provide manufacturers with appealing profit margins. This situation is true for both legacy systems and future systems.  It’s not just a matter of having sources for critical microelectronics.

Those sources must be secure. The Industrial Capabilities Report quoted then-Under Secretary of Defense for Acquisition and Sustainment, Ellen Lord, who said: “While we still design components and printed circuit cards in the U.S., the majority of fabrication, packaging, testing, etc., is done offshore.” The U.S. has a “45-50 percent combined market share in electronic design,” but its market share of “semiconductor manufacturing has declined from 37 percent in 1990, to 12 percent in 2020.”

This means that much of the touch labor for critical defense microelectronics is outsourced overseas to China and other Asian countries, where labor is cheaper. At the same time, the overseas manufacturing process provides the opportunity for intellectual property theft, sabotage, pilferage, and counterfeiting. For the Defense Department microelectronics market, Secretary Lord said: “the government can provide capital and a demand signal to encourage manufacturers to bring microelectronics production back to the U.S.”  In other words, if companies currently outsourcing overseas had confidence there would be continuous demand for defense-related microelectronics, those companies would come back to the U.S.

To that end, Congress is becoming more proactive. Sen. Josh Hawley (R-MO) introduced legislation that would address the security of the microelectronics supply chain and strengthen U.S. manufacturing of microelectronics. In Defense News, Hawley is quoted saying: “It is imperative that we give the Department of Defense the tools it needs to secure its printed circuit board supply chains so that our warfighters can have full confidence in the weapons they rely on to protect our nation.”

Additionally, as the Industrial Capabilities Report notes, Congress has included language that addresses microelectronics security and availability in its Fiscal Year 2021 National Defense Authorization Act, “including on-shoring microelectronics manufacturing capability, increasing funding for research and development of new microelectronics technologies, and requiring the use of domestic PCBs [printed circuit boards] in DoD systems.” Congress’s help to secure U.S. access to legacy and state-of-the-art microelectronics, including semiconductors and printed circuit boards, is a step in the right direction.

The views expressed are those of the author and not of any other affiliation.

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Read more from Dave Patterson.

Read More From Dave Patterson

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