POLICY ANALYSIS EXERCISE Made in the USA Revitalizing the Domestic Semiconductor Industry Bo Julie Crowley Raina Davis PAPER JULY 2020 Belfer Center for Science and International A!airs Harvard Kennedy School 79 JFK Street Cambridge, MA 02138 www.belfercenter.org This paper was completed as a Harvard Kennedy School Policy Analysis Exercise, a yearlong project for second-year Master in Public Policy candidates to work with real-world clients in crafting and presenting timely policy recommendations. Statements and views expressed in this report are solely those of the authors and do not imply endorsement by Harvard University, Harvard Kennedy School, or the Belfer Center for Science and International A!airs. Cover photo: Production and cleanroom facilities at work in Intel’s D1D/D1X plant in Hillsboro, Oregon, in April 2017. (Walden Kirsch/Intel Corporation) Copyright 2020, President and Fellows of Harvard College Made in the USA: Revitalizing the Domestic Semiconductor Industry Bo Julie Crowley and Raina Davis | MPP Candidates 2020 Harvard Kennedy School Policy Analysis Exercise Advisor: Nick Sinai 1 This PAE reflects the views of the authors and should not be viewed as representing the views of the PAE's external client, nor those of Harvard University or any of its faculty Acknowledgements We would like to thank the many individuals and organizations instrumental in the development of this report. We are grateful to have the opportunity to work on such an important topic and are indebted to everyone at the National Security Commission on Artificial Intelligence (NSCAI) for encouraging us to pursue it. In particular, we would like to thank Yll Bajraktari, Olivia Zetter, Chris McGuire, and Kevin McGinnis for helping us scope the project, providing regular feedback on our progress, and connecting us with key individuals and valuable resources to strengthen our findings. We are indebted to our fellowship director, Eric Rosenbach, for connecting us with the commission and providing informal feedback and support throughout the process. We would like to thank our PAE advisor Nick Sinai for challenging us to push past our assumptions and argue authoritatively on behalf of our findings. We are also grateful for the advice of Professor Dara Cohen, who guided us along the process and introduced a valuable framework to evaluate qualitative research. Our fieldwork would not have been possible without funding from the Belfer Center for Science and International Affairs and the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School. Their financial support enabled us to conduct primary research in Taiwan, Japan, and California. The in-person interviews proved invaluable in shaping our understanding of the global semiconductor industry. Finally, we would like to thank the experts in Taiwan, Japan, and across the United States whom we interviewed for this project. We mention only a few by name in this report, but many more were instrumental in shaping our thesis. This report would not have been possible without their insights on the global semiconductor industry, the resiliency of the US supply chain, China’s semiconductor ambitions, and beyond. Many people contributed directly or indirectly to the development of this report, but any errors or omissions found in the document are ours alone. Cover page image source: Production and cleanroom facilities at work in Intel’s D1D/D1X plant in Hillsboro, Oregon, in April 2017. (Walden Kirsch/Intel Corporation). 2 Table of Contents Executive Summary 4 Methodology 8 Introduction to Semiconductors in the US: Ubiquity and Obscurity 10 What is a Semiconductor? 10 Powering the US Economy 10 Impact on Artificial Intelligence 11 Overview of the Global Supply Chain 13 Production Phases 13 Mapping Supply Chain Leaders 14 China’s Rising Role 17 Semiconductors Are the New Oil 17 Strategic Goals and Motivation 17 Tactics 18 Impact: Will China achieve semiconductor independence? 23 Risks to US Semiconductor Resiliency 24 Recommendations: How Government Can Enable Technology Leadership 28 Invest in Leading Edge Domestic Manufacturing 28 Double Down On US Strengths in Research, Design, and Innovation 30 Communicate a Vision for International Collaboration 32 Rejected Hypotheses 33 Implementation and Next Steps 34 Conclusion 37 Ethics 38 Bibliography 39 Appendix 1: Interviews 43 3 Executive Summary Problem Statement: In light of China’s pursuit of semiconductor independence, how can the US maintain industry leadership and supply chain resilience? Background: Why is semiconductor manufacturing an economic and national security imperative? Most Americans will encounter a dozen semiconductors within an hour of waking up in phones, coffeemakers, cars, dishwashers, traffic lights, and other devices that underlie modern life. In 2018, the US semiconductor industry employed 250,000+ people and generated over $200B in annual revenue. Semiconductors rank as the fourth-largest American export and provide the foundation for the global $2T electronics industry. Semiconductors enable our daily routines, power the US economy, and project American influence across the globe. The semiconductor production lifecycle is incredibly complex, capital intensive, and geographically concentrated. While the US remains a global leader in the industry, American chip companies are increasingly dependent on foreign chokepoints in the supply chain. The US maintains an advantage in semiconductor design and end-stage mass production but has ceded almost all leading edge manufacturing competitiveness to suppliers abroad. Today, US chip design companies like Qualcomm, Nvidia, and Apple send the majority of their chip designs overseas for manufacturing. The US technology industry relies on one company, Taiwan Semiconductor Manufacturing Company (TSMC), for 90% of its advanced semiconductor manufacturing. The US is increasingly reliant on leading-edge chips to power emerging technologies like Artificial Intelligence (AI). The most advanced manufacturers are now producing semiconductors at the 5nm node. For perspective, a human hair is around 75,000nm. As AI is integrated into business operations and national security technology, the US must maintain a steady supply of advanced chips. Risks: Will China achieve semiconductor independence? “The [Huawei] ban was Semiconductor independence is a cornerstone of “Made in China China’s Sputnik moment 2025,” China’s 10-year industrial plan to transform its economy for semiconductors” from the ‘world's factory’ for cheap, low-quality products into a leader in high-tech manufacturing and services.1 China has used a - Haomiao Huang, combination of state subsidies, industry consolidation, and zero-sum Kleiner Perkins 2 tactics to promote the development of its semiconductor industry. China’s investment is unparalleled: state, provincial, and municipal leaders have allocated $118B in planned investment in semiconductor technology over five years.2 China will likely remain partially dependent on foreign suppliers for high-end chips after 2030. As Moore’s Law slows down, however, experts across the semiconductor industry, finance, academia, and government agree that it is only a matter of time before China catches up to Western leaders.3 1 Made in China 2025. U.S. Chamber of Commerce, 2017, www.uschamber.com/sites/default/files/final_made_in_china_2025_report_full.pdf. 2 Haomiao Huang (Investor, Kleiner Perkins) in discussion with authors, January 2020, Palo Alto, CA. 3 Zen Soo, et al., “China Sees a Chance to Close US Core Tech Gap with AI Chips in 5G Era,” South China Morning Post, 18 Sept. 2019, www.scmp.com/tech/enterprises/article/3027775/lagging-semiconductors-china-sees-chance-overtake-us-ai-chips-5g. 4 The industry also faces near-term risks from China’s strategy. China’s zero-sum tactics like talent poaching and IP theft overwhelmingly target Taiwan, the most important country for US semiconductor manufacturing. An estimated one-third of the island’s engineers have been recruited through China’s “Thousand Talents Program” alone, and TSMC faces increasing pressure to support either US or Chinese national interests. As China pursues semiconductor independence, the US cannot afford to maintain the status quo. In the short term, “Whether our relationship with China the US may become increasingly dependent on Chinese as a country gets better or not, it’s… a companies for low-end hardware components. In the long fait accompli that China wants to be term, China could leverage market leadership to restrict US independent of US technology and will companies’ access to critical components in the event of a do everything they can to make that military or political conflict. Additionally, as automation and happen… it will only be a matter of artificial intelligence are integrated into defense systems, the time for at least some of the products US must maintain a reliable source of verified trusted chips. they purchase today” China’s AI accelerators pose a cybersecurity and supply 4 chain risk if the national security community cannot secure - Mark Edelstone, Morgan Stanley domestic alternatives.4 Recommendations: What untapped opportunities should the US prioritize? Without decisive action, the US risks moving from a position of leadership to one of dependence. We recommend three core areas of investment, policy support, and partnership to guide the National Security Commission on AI’s recommendations to Congress: 1. Invest in Leading Edge Domestic Manufacturing: We suggest revitalizing