Strengthening the Global Semiconductor Supply Chain in An

1 About Boston Consulting Group (BCG) Boston Consulting Group (BCG) is a leading global management consulting firm, with offices in over 50 countries. BCG partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we help clients with total transformation—inspiring complex change, enabling organizations to grow, building competitive advantage, and driving bottom-line impact. About the Semiconductor Industry Association (SIA) The Semiconductor Industry Association (SIA) is the voice of the semiconductor industry in the US, one of America’s top export industries and a key driver of America’s economic strength, national security, and global competitiveness. The semiconductor industry directly employs nearly a quarter of a million workers in the United States, and US semiconductor company sales totaled $208 billion in 2020. SIA represents 98 percent of the US semiconductor industry by revenue and nearly two-thirds of non-US chip firms. Through this coalition, SIA seeks to strengthen leadership of semiconductor manufacturing, design, and research by working with Congress, the Administration, and key industry stakeholders around the world to encourage policies that fuel innovation, propel business, and drive international competition. About the Authors Antonio Varas is a Senior Partner and Managing Director in the Silicon Valley office of Boston Consulting Group and is a core member of its Technology, Media & Telecommunications practice. You may contact him by email at [email protected]. Raj Varadarajan is a Senior Partner and Managing Director in the Dallas office of Boston Consulting Group and leads its Global Advantage practice in North America. You may contact him by email at [email protected]. Jimmy Goodrich is the Vice President, Global Policy at the Semiconductor Industry Association. You may contact him at [email protected]. Falan Yinug is the Director, Industry Statistics and Economic Policy at the Semiconductor Industry Association. You may contact him at fyinug@ semiconductors.org. Acknowledgments This report would not have been possible without the contributions of our BCG colleagues Ramiro Palma, Anoop Shah, Zhenyu Bo, Kaitlyn Alsup, Sohini Kar, Yeonsoo Lee, Ian Kleinman, and our SIA colleague Devi Keller. 2 Contents 4 Executive Summary 7 Introduction Overview of the 9 Semiconductor Supply Chain A Global Integrated Structure based 27 on Geographic Specialization 39 Emerging Risks in the New Context Strengthening the Supply Chain 51 for the Next Decade of Innovation 3 Executive Summary he widespread shortage of semiconductors An Integrated Global Supply Chain that began in late 2020 highlighted how indispensable these specialized components Semiconductors are highly complex products to T are in today’s economy. Semiconductors design and manufacture. No other industry has the are used to power a vast array of electronic same high level of investment in both R&D (22% devices—everything from smartphones and cloud of annual semiconductor sales to electronic device servers to modern cars, industrial automation, makers) and capital expenditure (26%). and critical infrastructure and defense systems. The need for deep technical know-how and scale The global structure of the semiconductor supply has resulted in a highly specialized global supply chain, developed over the past three decades, chain, in which regions perform different roles has enabled the industry to deliver continual leaps according to their comparative advantages. (See in cost savings and performance enhancements Exhibit 1.) The US leads in the most R&D-intensive that ultimately made possible the explosion in activities—electronic design automation (EDA), information technology and digital services. In the core intellectual property (IP), chip design, and past few years, however, several new factors have advanced manufacturing equipment—owing to its emerged that could put the successful continuation world-class universities, vast pool of engineering of this global model at risk. Addressing these talent and market-driven innovation ecosystem. vulnerabilities requires a combination of carefully East Asia is at the forefront in wafer fabrication, designed actions from policymakers, including which requires massive capital investments targeted incentives to encourage domestic supported by government incentives as well as production in order to address strategic gaps. access to robust infrastructure and skilled workforce. China is a leader in assembly, packaging and testing, which is relatively less skill- and capital-intensive, and is investing aggressively to expand throughout the value chain. All countries are interdependent in this integrated global supply chain, relying on free trade to move materials, equipment, IP, and products around the world to the optimal location for performing each activity. In fact, semiconductors are the world’s fourth-most-traded product after only crude oil, refined oil, and cars. This global structure delivers enormous value. A hypothetical alternative with parallel, fully “self- sufficient” local supply chains in each region to meet its current levels of semiconductor consumption would have required at least $1 trillion in incremental upfront investment, resulting in a 35% to 65% overall increase in semiconductor prices and ultimately higher costs of electronic devices for end users. 4 EXHIBIT 1 The global semiconductor supply chain based on geographic specialization has delivered enormous value for the industry Semiconductor Supply Chain Precompetitive Research Share by region (% of worldwide total, 2019) Cost savings vs. fully localized US China1 East Asia2 Europe Other “self-sufficient” supply chains: EDA and Core IP 74% 20% EDA Design Logic 67% 15% 8% • Logic $0.9-1.2T • DAO avoided upfront Core IP • Memory DAO 37% 7% 33% 19% investment Memory 29% 70% $45-125B annual cost efficiencies Equipment Manufacturing Equipment 41% 36% 18% • Wafer fabrication • Assembly, Materials 11% 13% 57% 12% 35-65% Materials packaging enabled reduction and testing Wafer fabrication 12% 16% 56% 9% in semiconductor prices Assembly, packaging 38% 43% 12% and testing Source: BCG analysis Note: DAO = discrete, analog, and other (including optoelectronics and sensors); EDA = electronic design automation; OSAT = outsourced assembly and test 1. Mainland China 2. East Asia includes South Korea, Japan, and Taiwan Risks and Vulnerabilities market share, although the level of risk associated with each of these varies. Manufacturing emerges as Over the next ten years, the industry will need a major focal point when it comes to the resilience of to invest about $3 trillion in R&D and capital the global semiconductor supply chain. About 75% expenditure globally across the value chain in order of semiconductor manufacturing capacity, as well to meet the increasing demand for semiconductors. as many suppliers of key materials—such as silicon Industry participants and governments must wafers, photoresist, and other specialty chemicals— collaborate to continue facilitating worldwide access are concentrated in China and East Asia, a region to markets, technologies, capital, and talent, and significantly exposed to high seismic activity and make the supply chain more resilient. geopolitical tensions. Furthermore, all of the world’s most advanced semiconductor manufacturing While geographic specialization has served the capacity—in nodes below 10 nanometers—is industry well, it also creates vulnerabilities that each currently located in South Korea (8%) and Taiwan region needs to assess in a manner specific to its (92%). These are single points of failure that could own economic and security considerations. There be disrupted by natural disasters, infrastructure are more than 50 points across the supply chain shutdowns, or international conflicts, and may cause where one region holds more than 65% of the global severe interruptions in the supply of chips. 5 Besides the risks associated with concentration with onshore capacity—would require over in certain geographic locations, geopolitical $400 billion in government incentives and cost tensions may result in export controls that more than one trillion dollars over ten years. impair access to critical providers of essential technology, tools, and products that are clustered In setting policies to promote supply chain resilience, in certain countries. Such controls could also governments must guarantee a level global playing restrict access to important end markets, field for domestic and foreign firms alike, as well potentially resulting in a significant loss of scale as strong protection of IP rights. They must also and compromising the industry’s ability to sustain take steps to further promote global trade and the current levels of R&D and capital intensity. international collaboration on R&D and technology standards. In parallel, policymakers need to step The solution to these challenges is not the up efforts to stimulate basic research and address pursuit of complete self-sufficiency through the shortage of talent threatening to constrain the large-scale national industrial policies with a industry’s ability to maintain its innovation pace. staggering cost and questionable execution To that end, further public investment in science feasibility. Instead, the semiconductor industry and engineering education is needed, as well as needs nuanced targeted

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