Semiconductor Supply Chain Control is Critical, But Export Restrictions May Hurt U.S. Companies, Event Hears

WASHINGTON, January 12, 2023 — Gaps in the domestic microelectronics supply chain both expose potential U.S. vulnerabilities and highlight the importance of a multilateral approach with international allies, according to speakers at a Hudson Institute panel on Wednesday.

Semiconductors and microelectronics play a key role in computing, healthcare, military systems and countless other critical applications. But their manufacturing process is extremely complex and relies on a tenuous supply chain with several potential points of failure.

For example, 70 percent of the world’s capacity for photoresist — a light-sensitive polymer that plays an important role in the electronics industry — is concentrated in just four companies, all of which have operations in the same part of Japan, said Neal Anderson, strategy lead for the semiconductor market at chemicals company Chemours.

This is “not necessarily a single point of failure, but when you look at it from a geographic perspective, it presents the same amount of risk,” Anderson explained.

Chemours is the only U.S.-based manufacturer of PFA, a fluoropolymer that is “used pretty ubiquitously across the semiconductor infrastructure and semiconductor fabrication facilities,” Anderson said.

“Earlier this year we became aware of a $35 gasket that was holding up an $80 million tool that was holding up the opening of a semiconductor fab[rication plant]… It just really illustrated the challenges and how one simple piece like that can create fragility across that supply chain.”

In addressing this problem, the U.S. government should refine its priorities for domestic manufacturing and focus on developing “end segments” for critical industries, said Travis Kelly, president and CEO of Isola Group. “Once we define ‘Hey, these are the critical end segments that we want to have a resilient and secure supply chain for,’ we need to figure out what that demand signal is.”

Kelly, who also serves as chairman for the Printed Circuit Board Association of America, noted that recent legislative activity — including last summer’s passing into law of the CHIPS and Science Act, which subsidizes domestic semiconductor manufacturing — is a good step forward.

However, it could be a mistake to prioritize domestic manufacturing at the expense of developing a secure supply chain between countries with distinct resources and technological advantages, he added. “You can’t bring everything back to the U.S. because that’s too much of a myopic view — it’s a global economy.”

New export restrictions may do more harm than good

An argument often raised in debates about the microelectronics supply chain is that the U.S. has lost its lead, but this applies only in very limited circumstances, said Rich Ashooh, vice president for global government affairs at Lam Research. While the volume manufacturing of chips has largely moved overseas, the U.S. maintains a lead in the tool industry, building the machines for chip fabrication facilities.

“It’s a very small number of companies that integrate these very complex technologies, and that does make for a fragile system, but the system has worked and the US is in the lead,” Ashooh said. “Now… U.S. policymakers have decided to change the system under which that lead was achieved.”

Ashooh was referring to export restrictions announced by the U.S. Commerce Department in October, prohibiting U.S. companies from exporting chip production technology and equipment to China. Industry leaders have warned that these restrictions risk making American companies less competitive in global markets.

“Everyone agrees that semiconductor leadership is a national security concern,” Ashooh said. “But if that’s the case, we need to ask ourselves seriously about whether or not the government is aware that they changed the system overnight and there is no clear replacement for it.”

If the U.S. puts excessive bilateral sanctions on China, this could have the “unintended consequence” of driving innovation in China and causing future problems for the U.S. market, Anderson said. A better approach would be multilateral, with the U.S. working alongside a “regional like-minded coalition.”

The importance of a multilateral approach was echoed by other panelists, including Bryan Clark, senior fellow at the Hudson Institute and director of the Center for Defense Concepts and Technology.

If the supply chain is examined “from just the U.S. lens, it gets really complicated… but if you look at this instead as the lens of the U.S. and its allied countries, that seems like a coalition of both customers and providers that may be relatively self-contained,” Clark said.