The Changing Role of the US in Chip Manufacturing
The U.S. has historically dominated the semiconductor design process. According to the Center for Security and Emerging Technology, 47% of semiconductor design is done in the U.S., along with 52% of intellectual property patents and a whopping 96% of software designs.
This, however, has not translated to chip production. For various reasons such as lower cost of labor, fabrication happens overseas, particularly in Asia. Taiwan has taken a strong foothold in this market, producing an incredible 90% of the world’s most advanced chips. Additionally, 56% of chip materials come from within its borders.
This presents a litany of potential problems. Although Taiwan has long been an ally and trade partner with the U.S., Taiwan historically has had a tenuous relationship with neighboring China, which has never referred to Taiwan as an independent nation. In 2022, rhetoric has escalated to the point where a full China invasion of Taiwan is if not probable, at least more likely than it has been in the last 50 years. If such an event occurs, the U.S. would be almost entirely cut off from the critical components and semiconductors necessary to keep virtually every major manufacturing sector functioning.
Recently, the U.S. Pentagon labeled China as the top threat to U.S. security. This is a major reason why, and these concerns have materialized into actions; in October, the Commerce Department banned the export of leading-edge chips used in military applications as well as advanced chipmaking tools. The export controls also forbid “U.S. persons” from servicing advanced chipmaking facilities in China. The goal, ultimately, is to significantly hinder China’s ability to manufacture chips in their own territory.
This is also why the U.S. has strived to dramatically increase domestic semiconductor production. Although the U.S. chip market will likely never rival the scale of Taiwan, an increase at any level has been deemed a national security issue that must be resolved in a bipartisan fashion. This summer, for example, Congress passed the Chips and Science Act that will funnel more than $50 billion in subsidies to companies who pursue onshore chip manufacturing.
The question for manufacturers who are forced to navigate these geopolitical tensions are many, and as the market continued to change, it is going to have dramatic consequences for their supply chains. The key goal is simple: especially given the state of the geopolitical world at this time, the overall risk appetite must remain nearly zero. This means securing inventory whenever possible, maintaining a free-flow of capital, maintaining strict budget control, and shoring up in-house infrastructure where possible.