Semiconductor Industrial Policy Muddled, US China Commission Told
A German think tank specialist in semiconductors' value chain vulnerabilities told the U.S.-China Economic and Security Review Commission he's concerned that the policy focus on bringing more production back to either the EU or the U.S. won't achieve its aims because policymakers aren't sure what those aims are.
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"We have to be very clear about the objective," Jan-Peter Kleinhans testified June 9 at a commission hearing on supply chains and China. "Is it national security, is it technological competitiveness or is it global supply chain resilience?"
If it's security, the most important thing is to develop packaging and printed circuit board capabilities, not fabs, he said, but the problem is that those functions are labor intensive, and cannot be done economically in Germany or the U.S. It's easier to compromise a chip in the packaging phase than when you make it, he said.
He said that while governments do influence the industry through export restrictions and investment screening, their power to influence it through procurement is extremely limited, given that even including the military, government purchases only account for 1% of all sales.
If resilience is the top priority, Kleinhans said, policymakers need to understand that the biggest factors in the chip shortages of recent years "were not the result of our dependence on China or East Asia," but was instead because companies wrongly forecasted their demand, and that some companies had sole sources for chips that were then cut off because of a fire at a specific fab, or other natural disaster.
He said that while the 100-day supply chain review was a good step to understand how to have better resiliency, those sorts of efforts have to be ongoing.
He said that whether resilience is the goal, or better industrial competitiveness is, policy makers need to be talking to consumer electronics companies, mobile phone makers and cloud infrastructure companies, since they are the biggest users of chips. He said the automotive industry also is an important customer. "So far in this debate, I would say their voices have been rather silent," he said.
Automotive firms did make sure that the China packages dedicated funds to making chips other than the latest and greatest, since the chips in their cars are not the most technologically advanced.
"We need the end users at the table," he said. He said the Commerce Department should be asking big purchasers what cost differential they're willing to pay for a TMSC chip made in Arizona rather than in Taiwan. "If you cannot get a very specific answer to that rather simple question, you will have a hard time to come up with sustainable business cases for these newly established fabs," Kleinhans said. "The worst case that would happen is that we now subsidize the hell out of an industry, and then, in ten years’ time, we find these fabs are not utilized as well as possible because ultimately from a cost perspective …" it was not attractive to buyers.
Commissioner Aaron Friedberg asked Kleinhans if, even if the prescriptions are different, could the policies needed to address industrial competitiveness, national security and resilience build upon each other?
Kleinhans said no. "You end up with conflicting objectives, you end up with a reality that you cannot optimize all three of them," he said. If you're worried about industrial competitiveness, chip design is the most crucial, since it's 50% of the value-add in the chip. If you are worried about national security, you'd spend money on the very low-value add final assembly and packaging stages.
"That is one example out of countless in the semiconductor industry," he said.