Taking Stock of Semiconductors
It does America little good to win the innovation battle for the state-of-the-art if our military, ground transportation, and infrastructure grind to a halt for lack of the common essentials, including a reliable supply of semiconductors.
A recent Commerce Department survey found that U.S. manufacturers had only five days’ worth of the semiconductors needed to sustain production lines (compared to a roughly forty days-supply just three years ago). In 2021, many U.S. auto assembly lines nearly shut down from a global supply crunch on the semiconductors now ubiquitous in modern cars and much else in American life. All this following nearly two years of Covid-19-exacerbated shortages—first, medical equipment, then computer chips, and, more recently, consumer goods of all types.
Towards the end of last year, the Biden administration tapped the Strategic Petroleum Reserve in response to rising gas prices. Whatever the merits of that decision, the existence of the stockpile provides a measure of both market and geopolitical stability. The federal government also maintains, with decidedly mixed success, stockpiles for personal protective equipment (created after 9/11 and nearly empty when Covid-19 began), critical minerals, and even helium. Nonetheless, given the dependencies revealed and accentuated by the pandemic, it is past time to consider expanding the scope of products and materials kept under strategic reserve—starting with semiconductors.
Until recently, the merits of stockpiling any manufactured product were a largely academic discussion. Global supply chains generally delivered on time and at an agreeable cost. Commercial businesses were geared to avoid excess at all costs. Popular management techniques called for ruthless efficiency, or “just in time” delivery, leaving the private sector—and the country—vulnerable to even short interruptions.
But times are changing rapidly, both geopolitically and economically. Should escalating tensions with China lead to a rapid decrease in semiconductor imports, America’s critical infrastructure, advanced manufacturing, and even the basic capacity of the U.S. military to operate effectively would be dangerously degraded.
Recognizing these vulnerabilities, the U.S. Congress has recently considered legislation—including the CHIPS Act passing the Senate and the America Competes Act just introduced in the House—that will invest tens of billions of dollars to support U.S. semiconductor research, development, and production. These are important steps but will take multiple years and yet more investment to establish new production and supply systems (a new chip foundry is a multi-billion-dollar capital investment, in addition to the maze of regulations and other costs associated with any new industrial project in the United States.)
In the meantime, a dangerously high percentage of microelectronics products consumed in the United States are produced either in China (packaging and lower-end chips) or Taiwan and South Korea (more advanced semiconductors), which are potentially subject to Chinese coercion and blockade. The vulnerabilities apply not just to the advanced semiconductors found in nearly every new commercial and military system, but lower-value components like the surrounding packaging (98 percent of which is produced in Asia).
There is a basic supply and demand disconnect that cannot be addressed through the usual market forces and government incentives. We are confronted with a significant microelectronics problem in the present day. This cannot wait to be solved in the indefinite future.
To ensure an adequate supply of semiconductors of all types—from obsolete to legacy to leading edge—in the near term requires a strategic stockpile for microelectronics. It would, among other purposes, add an element of uncertainty and even deterrence to Chinese strategic calculations. The Chinese government can exert significant leverage over the United States by forcing a slow-down or outright halt to semiconductors imported from Asia. The known presence of significant domestic reserves would complicate those plans.
A concerted U.S. government effort would—via bulk purchases, tax incentives, or other policies—acquire and set aside up to a month’s worth of the most commonly used microelectronics items from existing sources. The priority would go towards products not being generated in large quantities already by commercial markets. Unlike the Defense Department’s other reserves, the semiconductor stockpile should be available to alleviate supply shocks impacting civil and commercial sectors. Additionally, microelectronics supply levels should be maintained irrespective of market or budget considerations—meaning it cannot be a profit center for the government.
While there is understandable hesitation to “militarize” such tasks, the Defense Department is a natural home for such a stockpile. The Pentagon’s stewardship of the National Defense Stockpile of critical minerals and metals has left much to be desired, as documented by the Biden administration’s supply chain report last year. Still, there is no denying the U.S. military’s proficiency at large-scale logistics, especially compared to the rest of the federal government. For example, it was the Pentagon that stepped in to ensure sufficient supplies of ventilators and other life-saving equipment at the onset of Covid-19 and led the effort to develop a vaccine for the virus.
Ultimately, it does America little good to win the innovation battle for the state-of-the-art if our military, ground transportation, and infrastructure grind to a halt for lack of the common essentials, including a reliable supply of semiconductors. Congress and the administration have a viable model upon which to base the solution.
Jeffrey Jeb Nadaner is Executive Director of SAFE Commanding Heights a bipartisan initiative to secure critical industrial supply chains, and a former Deputy Assistant Secretary of Defense for Industrial Policy.
Alexander B. Gray is a former Chief of Staff of the National Security Council and a Senior Fellow with SAFE Commanding Heights.