President Biden signed a wide-ranging Executive Order on Feb. 24 geared toward ensuring the resilience of America’s supply chains. One of the mandates of the order is to perform a 100-day review of the semiconductor supply chain triggered by the recent chip shortage causing significant impact to auto production in the United States. The stakes are high, with a potential for escalating prices for automobiles, insufficient dealer inventories and economic impact. Auto industry revenue of $61 billion is expected to be wiped out in 2021. While the Executive Order is a much-needed step, there is no short-term fix for the chip shortage.
Semiconductor shortage reasons and Biden Administration recommendations
As the Coronavirus disease (COVID-19) shutdowns accelerated in early 2020, the demand for automobiles significantly declined. Accordingly, auto companies halted production and significantly cut down order volumes. Now as the lockdowns ease, demand for vehicles is picking up.
However, the capacity for chip production has been taken up by a volume spike in gaming, at-home tech for the remote workforce and a rise in crypto currencies (increased crypto mining requires greater computational power). Chips used in these tech devices are newer generation and offer higher margins, which incentivize chip makers to allocate capacity to producing these versus the kind used in automobiles. Hence, a confluence of factors has led to the shortage of semiconductor chips.
Advances in artificial intelligence (AI), 5G, Internet of Things (IoT) and the rise of cyber threats have made semiconductors a matter of national security. It is therefore critical that this Executive Order be carried out successfully.
Here are some recommendations to help major corporations redesign their supply chains:
1. Offer significant incentives to meaningfully drive nearshoring.
The U.S. semiconductor manufacturing capacity declined from 37% in 1990 to 12% today, owing to competing foreign governments providing significant incentives. By comparison, South Korea and Taiwan, the two semiconductor manufacturing powerhouses, carry 43% of the manufacturing capacity. Given the global market size of semiconductors of over $500 billion, government incentives of tens of billions of dollars will be required over the coming decade to encourage nearshoring.
2. Establish programs to close significant skill gaps in chip manufacturing.
About 70% of the world’s most advanced chips pass through Taiwan during the manufacturing, testing and packaging process. This is indicative of the United States’ deep dependence on Taiwan and also the single-source risk within the semiconductor supply chain. When combined with the shift to offshore manufacturing, there is the issue of manufacturing skills atrophy. The United States needs a two-pronged approach to address this skill gap. First, with over 40% of U.S. high-skilled workforce in the semiconductor industry being born abroad, the U.S. immigration policy will need to be conducive to attracting global talent. Second, ramping up a domestic skills program is in order in collaboration with semiconductor industry stalwarts, Massively Open Online Curriculum (MOOC) platforms and vocational training options as an alternative to the 4-year college curriculum. Given the labor cost disadvantage the United States may have, organizations will opt-in for increased automation to make any nearshoring sustainable. This will also require the skill sets needed to cater to the higher end of the skills spectrum and the training programs will need to be tailored accordingly.
3. Stand up cross-industry think tanks with collaborative arrangements.
The United States will need to bring together companies within the semiconductor industry and major customers across the value chain to help launch joint ventures, collaborative R&D efforts and incentivize such arrangements. Collective power across industries is stronger than any one company or any one industry fighting it alone. Besides tapping into the tremendous supply chain talent offered by the various big-named consultants, the United States should also engage technology partnerships with leading supply chain companies. It takes collective intelligence to make a meaningful impact.
4. Accelerate sustainability and diversity efforts.
The Executive Order does make references to encouraging diversity efforts by making employment accessible to underrepresented groups and communities, as well as accelerating sustainability efforts. The current chip shortage will require a massive restructuring of the semiconductor supply chain and its flows within. This will be a multi-year effort. Meaningful nearshoring can take a decade or longer. The government and private sector alike should take the opportunity to tackle multiple objectives at once, beyond just focusing on resilience. Burning issues such as climate change and income inequality can be brought to fore as supply chain resiliency gets addressed. Nearshoring can raise objections from the environmental advocacy groups about the potential environmental impact from setting up fabrication facilities in the United States. However, carbon footprint studies will need to be done, capturing the end-to-end supply chain flows. This will ensure that convincing arguments are made in the net reduction of environmental costs on a global basis by using facilities built with state-of-the-art technology and reducing the transportation impact of shuffling chips around the world.
5. Borrow a page from the private sector’s playbook.
Faced with the challenge of making supply chains more resilient, leading corporations are stress testing their supply chains and testing out designs of the future powered by algorithms. The U.S. government should borrow from this playbook. It should think of all the semiconductor producing and consuming companies of the world as one company and model a range of what-if scenarios. Even a model with a higher level of abstraction can reveal some great insights.
While the Executive Order is a good first step, much work remains. The role of the U.S. government is to create the ambience needed by providing the necessary incentives to the private sectors to stimulate growth in semiconductor manufacturing. A positive environment that incents nearshoring is much better than the threat of tariffs in supply chains with limited source risks. A very close collaboration will be needed between the private sector and the government to make this effort a worthwhile and successful endeavor.