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Shortly after a meeting with members of Congress on Wednesday, President Joe Biden signed an executive order that launches a review of supply chain vulnerabilities in the United States. COVID-19 made evident gaps in the U.S. supply chain in medical equipment like face masks and ventilators, but in a ceremony carried live by TV news networks, Biden held up a chip, calling it the “21st century horseshoe nail.”
AI research has received military funding from the outset, and government organizations like DARPA continue to fund AI startups, but a global chip supply shortage caused by COVID-19 has hindered the progress of numerous industries. During his remarks, Biden acknowledged that semiconductor chip shortages led Ford to reduce production by up to 20% in Q1 2021.
Smartphone production is also expected to decline as a result of the chip shortage, and earlier this month, business executives from AMD, Intel, Nvidia, and Qualcomm sent a letter to Biden urging support for the CHIPS for America Act and stating that a chip shortage could interrupt progress for emerging technology areas like AI, 5G, and quantum computing. CHIPS stands for Creating Helpful Incentives to Produce Semiconductors. That bill was introduced in Congress in summer 2020 and called for $22 billion in tax credits and research and development funding. The American Foundries Act, also introduced in Congress last summer, called for $25 billion. As part of the executive order signing ceremony Wednesday, Biden pledged support for $37 billion over an unspecified period described as “short term” and pledged to work with ally nations to address the chip bottleneck. The executive order will also review key minerals and materials, pharmaceuticals, and the kinds of batteries used in electric vehicles.
“We need to prevent the supply chain crisis from hitting in the first place. And in some cases, building resilience will mean increasing our production of certain types of elements here at home. In others, it’ll mean working more closely with our trusted friends and partners, nations that share our values, so that our supply chains can’t be used against us as leverage,” Biden said.
A 2019 U.S. Air Force report put the urgency of the matter in context. That report finds that “90% of all high-volume, leading-edge [semiconductor] production will soon be based in Taiwan, China, and South Korea.” The Semiconductor Industry Association (SIA) finds that 12% of global semiconductor production takes place in the U.S. today.
Analysts who spoke to VentureBeat found a number of factors contributing to the current chip shortage.
Kevin Krewell is a principal analyst at Tirias Research. He attributes the chip shortage to an initial slump followed by unexpected demand increase, not enough advanced semiconductor manufacturers, the fact that more complex semiconductor processes are hard to scale, and that there’s a long lead time on building new semiconductor manufacturing facilities, or “fabs.” Intel and Samsung being slow to get advanced process nodes out in a timely fashion has put more pressure on TSMC to make more chips, but he expects shortages will get addressed as more capacity comes on line and demand returns to more predictable levels.
“The $37 billion figure is a small start, but it is a start,” he said. Building a single semiconductor manufacturing facility can cost tens of billions of dollars.
Linley Group senior analyst Mike Demler said a fourth quarter growth in car sales caught auto manufacturers off guard, that high demand for consumer electronics during the pandemic rippled through other industries. He also said that the U.S. semiconductor industry wants to use the shortage to increase domestic semiconductor-manufacturing capacity.
“The semiconductor industry has thrived because of the global supply chain. Greater investment in R&D could help restore US technological leadership in manufacturing technology, but it would take many years to shift the ecosystem,” Demler said.
IDC analyst Mario Morales said the chip shortage is a real thing but that some businesses may be blaming that shortage to distract from deeper underlying business problems or poor planning. For example, Ford may be reducing inventory due to a lack of chips, but Toyota has a stockpile.
“I think some of this is just not very good business continuity planning, and that some of this is a reaction to that. And others I think they’re using this as an excuse, because there is some underperformance from some of these vendors,” he said.
When discussing what caused the chip shortage, analysts VentureBeat interviewed talked primarily about COVID-19 and made virtually no mention of China, but you could potentially say the opposite about national security interests in the U.S., the other driver of interest in domestic chip production. The final report from the National Security Commission on AI is due out next week. That group was formed by Congress a few years ago and is made up of some of the most influential AI and business leaders in the United States today, like soon-to-be Amazon CEO Andy Jassy, Google Cloud AI chief Andrew Moore, and former Google CEO Eric Schmidt.
The report calls for the United States to remain “two generations ahead of China,” with $12 billion over the next five years for research, development, and infrastructure. It also supports creation of a national microelectronics research strategy like the kind espoused in the American Foundries Act. The 2021 National Defense Authorization Act created a committee to develop a national microelectronic research strategy.
The report calls for 40% refundable tax credit as well. The CHIPS for America Act also calls for hefty tax credits for semiconductor manufacturers through 2027.
“The dependency of the United States on semiconductor imports, particularly from Taiwan, creates a strategic vulnerability for both its economy and military to adverse foreign government action, natural disaster, and other events that can disrupt the supply chains for electronics,” the draft final report reads. “If a potential adversary bests the United States in semiconductors, it could gain the upper hand in every domain of warfare.”
The draft final report echoes calls from the National Security Commission on Artificial Intelligence (NSCAI) for more public-private partnerships around semiconductors. In testimony before the House Budget committee about how AI will change the economy, NSCAI commissioner and Intelligence Advanced Research Projects Activity (IARPA) director Dr. Jason Matheny said, “It will be very difficult for China to match us if we play our cards right.”
“We shouldn’t rest on our laurels, but if we pursue policies that strengthen our semiconductor industry while also placing the appropriate controls on the manufacturing equipment that China doesn’t have and that China currently doesn’t have the ability to produce itself and is probably a decade away from being able to produce itself, we’ll be in a very strong position,” he said.
A Bloomberg analysis found that Chinese spending on computer chip production equipment jumped 20% in 2020 compared to 2019. Reuters has recorded Chinese chip imports above $300 billion for the past three years.
Advanced semiconductor manufacturing facilities can be more expensive than modern day aircraft carriers, and fabs are only part of the equation. IDC’s Morales agreed with Krewell that $37 billion is a start, but that becoming a leader in manufacturing could take a decade of investment not just in semiconductor manufacturing plants, but also design, IP, and infrastructure.
“The goal should be to collaborate a lot more with other regions that I would say are more neutral,” Morales said. He added that, based on conversations with manufacturers, he expects an end to chip supply chain shortage issues by Q2 or Q3 2021.
We’ll have to wait a few months to see what the review ordered by the Biden administration prescribes to improve resilience when it comes to chip production, but it seems clear that $37 billion may only be the start.
For AI coverage, send news tips to Khari Johnson, Kyle Wiggers, and AI editor Seth Colaner — and be sure to subscribe to the AI Weekly newsletter and bookmark our AI Channel.
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