Building global supply chains: U.S. strategy to mitigate risks with China

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If the Biden administration succeeds, many more electronic chips would be produced in factories located in, say, Texas or Arizona. Then, these chips would be shipped to partner countries like Costa Rica, Vietnam, or Kenya for final assembly and global distribution, powering everything from refrigerators to supercomputers.

These places are not the first that come to mind when thinking about semiconductors. However, administration officials are trying to transform the global chip supply chain, and they are negotiating hard to make it happen.

Key elements of the plan include convincing foreign companies to invest in chip manufacturing in the U.S. and finding other countries to set up factories to do the work. Officials and researchers in Washington call it part of the new “chip diplomacy.”

The Biden administration argues that producing more of these tiny electronic brains in the United States will help make the country more prosperous and secure. President Biden boasted about his efforts in an interview with ABC News, where he mentioned persuading South Korea to invest billions of dollars in chip manufacturing in the United States.

But a crucial part of the strategy is unfolding outside America’s borders, where the administration seeks to work with partners to ensure that U.S. investments are more durable.

If this emerging effort advances, it could help the administration achieve some of its broader strategic goals. Among them are alleviating security concerns about China, which is ramping up its chip production while threatening Taiwan, a global tech hub. Additionally, it aims to reduce the risks of disruptions in the chip supply chain, risks that became evident during the coronavirus pandemic and the war in Ukraine, which have disorganized global shipping and production.

“The goal has been to do everything we can to expand capacity across a diverse set of countries to make those global supply chains more resilient,” said Ramin Toloui, a Stanford professor and former assistant secretary of the Bureau of Economic and Business Affairs at the State Department, who is at the forefront of diplomatic efforts to establish new supply chains.

The administration aims to achieve this not just for chips, but also for green energy technologies like batteries for electric vehicles, solar panels, and wind turbines. China is by far the biggest player in those sectors.

Biden and his advisers say the dominance of Chinese companies is a national security and human rights problem, given that some manufacturing takes place in Xinjiang, a region of China where officials force members of some Muslim ethnic groups to work in factories.

During the three years of the Biden administration, the U.S. has attracted $395 billion in foreign investment in semiconductor manufacturing and $405 billion in green technology and clean energy manufacturing, according to Toloui.

Many of the companies investing in this type of manufacturing in the U.S. are from Asian countries known for their tech industries, like Japan, South Korea, and Taiwan, and from Europe. One of them is SK Hynix, a South Korean chip manufacturer building a $3.8 billion factory in Indiana. The State Department says the project is the largest investment in the state’s history and has the potential to create over 1,000 jobs in the region.

Secretary of State Antony J. Blinken mentioned this plan in a speech last month at a conference in Maryland aimed at fostering foreign investment in the U.S. He said he hoped legislation signed by Mr. Biden would attract foreign investment in high-tech manufacturing in the U.S. by “modernizing our roads, railways, broadband, and grid.”

Policy efforts, he added, seek to “strengthen and diversify supply chains, boost domestic manufacturing, and stimulate key industries of the future, from semiconductors to clean energy.”

The Commerce Department has also played a significant role in efforts to strengthen the chip supply chain, providing $50 billion to American companies and organizations for chip research, development, and manufacturing.

Commerce Secretary Gina Raimondo has conducted an exhaustive study of global chip supply chains to identify vulnerabilities and has worked with foreign governments to discuss additional investment opportunities abroad.

This topic was a focus of Ms. Raimondo’s trip to Costa Rica last spring when she met with local officials and Intel executives, who operate a factory there. (Mr. Toloui spoke at a semiconductor manufacturing conference in Costa Rica in January.) She also discussed diversifying the semiconductor supply chain during trips to Panama and Thailand.

But restructuring global supply chains to be less dependent on East Asia will be challenging. East Asian chip factories offer more advanced technology, a larger pool of talented engineers, and lower costs than U.S. factories.

Taiwan produces more than 60% of the world’s chips and almost all the advanced chips used in computers, smartphones, and other devices.

In comparison, according to various estimates, the U.S. semiconductor industry could face a shortage of about 90,000 workers in the coming years.

Governments in China, Taiwan, South Korea, and other countries are also aggressively subsidizing their own chip manufacturing industries.

Still, billions of dollars in new U.S. investment are expected to shift global supply chains somewhat. The U.S. share of global chip production is expected to rise to 14% by 2032, from 10% currently, according to a May report by the Semiconductor Industry Association and Boston Consulting Group.

Some administration officials have adopted a more coercive form of chip diplomacy to prevent China from developing versions of U.S. technology. That approach has focused on convincing a handful of countries, particularly Japan and the Netherlands, to prevent companies from selling certain chip manufacturing tools to China.

Alan Estevez, head of the Commerce Department’s export control office, visited Japan and the Netherlands last month to try to persuade those countries to block the sale of certain advanced technologies to China.

By contrast, Mr. Toloui and his collaborators have been traveling the world to identify countries and companies that might want to invest in the U.S. industry and set up factories that would be the endpoint of the supply chain. Mr. Toloui said his office’s work was part of Mr. Biden’s recent passage of legislation to create more manufacturing jobs in the U.S., including the Infrastructure Act and the CHIPS and Science Act.

The CHIPS Act includes $500 million in annual funding for the administration to create secure supply chains and protect semiconductor technology. The State Department uses that money to identify countries for supply chain development. Officials are conducting studies in several countries to see how infrastructure and the workforce can be elevated to standards that ensure smooth chip assembly, packaging, and shipping.

Countries now part of the program include Costa Rica, Indonesia, Mexico, Panama, the Philippines, and Vietnam. The U.S. government is bringing Kenya into the fold.

Vocational training is a priority in building this supply chain, Mr. Toloui said. He has spoken with Arizona State University about partnering with foreign institutions to develop training programs. One such institution is the National University of Vietnam in Ho Chi Minh City, which he visited in May.

Martijn Rasser, executive director of Datenna Inc., a research firm on China, said this network of alliances represents a strategic advantage for the United States over China.

For the U.S., trying to do everything on its own would be too costly, he said. And going it alone would not recognize the reality that technology is now much more globally distributed than a few decades ago, with multiple countries playing important roles in the chip supply chain.

Associated media – Associated media

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