It shouldn’t be just crisps
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The US Congress and the Biden administration are rushing to invest billions of dollars in the domestic semiconductor manufacturing industry. But there is a flaw in their approach as they ignore the larger manufacturing infrastructure that is required to combine semiconductors with other parts to create reliable electronic systems.
In January 2021, the U.S. Congress passed the CHIPS Act, a $ 53 billion effort to bring back the most advanced semiconductor wafer manufacturing in North America. The momentum continues with the Facilitating American-Built Semiconductors (FABS) bill, which would provide a 25% permanent investment tax credit for investments in semiconductor manufacturing; and the $ 250 billion US Innovation and Competition Act (USICA), which would boost federal R&D investments in 10 high-tech areas, including high-performance computing and semiconductors.
But wafer fab is only one piece of the puzzle. The finished wafers must be placed in some form of package, such as an integrated circuit (IC) or other device, which is then assembled with resistors, capacitors, metal traces and other components on a circuit board. printed. This circuit board is then interconnected with other systems to create a car, computer, cell phone, or airplane.
Indeed, a computer chip is like the engine of a car. Without all the other parts of the car, the engine cannot accomplish much. Likewise, without other electronic components and interconnections between them, a computer chip cannot function. The modern world runs on electronic systems, not just computer chips.
Twenty-five years ago, most original equipment manufacturers (OEMs) such as IBM, Sony, Ford, GM, Motorola and Hewlett Packard were vertically integrated. A network of subcontractors powered their manufacturing operations, but most of the assembly work was done in-house. Then, in the late 1990s, the dual phenomenon of outsourcing and offshoring to cut costs deepened the West’s electronics manufacturing infrastructure. The constant pressure to improve profit margins and quarterly financial results has led OEMs to outsource many functions to lower cost suppliers, with the exception of wafer manufacturing, design and intellectual property factories. .
Today, the world’s most critical factories for high-tech manufacturing are all within 750 miles of China’s coastline. Almost every OEM in the world now relies on an Asia-centric supply chain.
But keep in mind that the problem isn’t just with China and the Asian tigers. The problem is competitiveness, and in many countries competitive advantages are changing. In recent years, labor costs in Asia have increased with the improvement in living standards. The cost of shipping goods from Asia to North America or Europe is now five to ten times higher than at the start of the COVID crisis, and it is expected to remain much higher for years to come. Growing demand exceeds supply.
All of these factors combine to present an opportunity to reestablish a strong electronics supply chain in North America.
Silicon Valley was once the center of the electronics revolution that began in the 1970s. Quite often during this time, the entire supply chain, from design to finished product, was in California. If a room was needed it was only a short drive away. These synergies created more wealth faster than at any time in history.
The Taiwanese government took this lesson to heart by establishing the Silicon Valley-inspired Hsinchu Science Park in 1980. Today, 400 companies in the electronics supply chain are again located within a few miles of each other, but now in Taiwan. The major subcomponent suppliers are all within hours away and the suppliers work hand in hand with their best customers. The governments of China, South Korea and elsewhere have also replicated the model, putting materials, components, services and suppliers at their fingertips. Government-backed capital and land transactions played a supporting role.
With much of the world’s most advanced electronic technologies now located in East Asia, the industry faces an existential crisis in the rest of the world. As we’ve seen over the past year, supply chain disruptions – whether caused by pandemics, political tensions, or other causes – could endanger national economies whole.
The gaps in the electronics manufacturing supply chain in North America are well known. The region lacks high-output manufacturing of the most advanced chips, integrated circuit packages, and printed circuit boards. The circuit assembly and “package” industries are robust but not suited to meet today’s global demand.
State-of-the-art wafer manufacturing plants cost $ 10 billion or more. Semiconductor Manufacturing Investments At Highest Level In 20 Years, Intel, TSMC, Samsung And Others Collectively Pledged More Than $ 50 Billion In New US Wafer Manufacturing Plants -United. Due to the nature of their business, electronic packaging suppliers, also known as Semiconductor and Outsourced Testing Suppliers (OSATs), are closely associated with wafer manufacturing plants from the start. An OSAT plant can cost anywhere from $ 300 million to $ 600 million.
This is where the CHIPS law and the FABS law end. But as we noted, this is not where the industry ends. Allied printed circuit board (PCB) manufacturing and assembly industries also need support if the United States is to be a leader in building the most advanced electronic systems.
A state-of-the-art, high-output, state-of-the-art PCB plant can cost anywhere from $ 400 million to $ 500 million. We don’t have any in North America, and it would take several to become technology independent. The laser drills and direct imaging systems used in PCB manufacturing cost nearly a million dollars each, and hundreds are needed in high production manufacturing.
Materials supply chains in the West have also contracted by 80-90% over the past 20 years. Some essential materials are no longer made in America. This must also change.
The North American supply chain has reorganized to focus primarily on defense and aerospace, medical electronics, and other niche industries. But even in these critical sectors, the US government admits that there are serious technological gaps.
With increasing automation, the Asian advantage of cheap labor is drastically reduced. In addition, the best and most critical technologies are always designed by Western companies. But the flip side is that American companies like IBM, Apple and Microsoft may be the world leaders in intellectual property, but they outsource the manufacturing to contractors they don’t necessarily know very well. .
To see it another way, Apple, Microsoft, Qualcomm and other IP-based companies operate on gross margins of 35-65%. Chipmakers like TSMC and Intel operate on gross margins of 55%. An OSAT or PCB supplier typically operates with margins of 10-15%, and an electronics manufacturing service provider (EMS) operates with margins of 5-10%.
Thus, the issue of competitiveness boils down to long-term planning and public-private collaboration; working capital available; tax and investment compromises with foreign competition; and economies of scale. On all of these measures, the United States has a lot of work to do to be more competitive in the years to come.
Strategically, electronics manufacturing is at the heart of the modern economy. A strong and highly advanced technological sector is vital in an increasingly overcrowded and dangerous world. From an economic standpoint, manufacturing electronics lifts all boats.
But electronics supply chains have been and continue to be disrupted. The old offshoring models no longer guarantee the availability of critical components.
It is impossible to recover from the mistakes of the past 20 years without an integrated and collaborative plan. If America is to reclaim the mantle of global leadership in electronics manufacturing – and reap the benefits – it will need to focus on the entire ecosystem, not just one part of it.
– Matt Holzmann is president of CGI Americas, based in Santa Ana, California.