US builds high-tech global supply chains to mitigate China risks

If the Biden administration had its way, many more microchips would be made in factories in, say, Texas or Arizona.

They would then be shipped to partner countries, such as Costa Rica, Vietnam or Kenya, to be finally assembled and sent around the world to power everything from refrigerators to supercomputers.

These countries may not be the first ones people think of when they think of semiconductors. Yet administration officials are trying to transform the global chip supply chain and are negotiating hard to do so.

Key elements of the plan are to entice foreign companies to invest in chip manufacturing in the United States and to find other countries to set up factories to finish the job. Washington officials and researchers call it part of the new chip diplomacy.

The Biden administration argues that producing more of the tiny brains of electronic devices in the United States will help make the country more prosperous and secure. President Biden boasted of his efforts in his Friday interview with ABC News, during which he said he convinced South Korea to invest billions of dollars in manufacturing microchips in the United States.

But a key part of the strategy is taking place outside the United States' borders, where the administration is trying to work with partners to ensure that investments in the United States are more sustainable.

If the nascent initiative moves forward, it could help the administration achieve some of its broader policy goals. It wants to ease security concerns about China, which is expanding its chip production while threatening Taiwan, a global center of chip technology. It also wants to reduce the risks of chip supply chain disruptions that have become evident during the coronavirus pandemic and the war in Ukraine, both of which have wreaked havoc on global shipping and manufacturing.

“The goal has been to do our best to increase the capacity of a diverse set of countries to make these global supply chains more resilient,” said Ramin Toloui, a Stanford professor who most recently served as assistant secretary of the State Department’s Bureau of Economic and Business Affairs, which is at the forefront of diplomatic efforts to build new supply chains.

The administration wants to do the same not just for microchips, but also for green energy technologies such as batteries for electric vehicles, solar panels and wind turbines. China is by far the largest player in these sectors.

Mr. Biden and his aides say the dominance of Chinese companies is a national security issue as well as a human rights concern, given that some manufacturing takes place in Xinjiang, a region of China where authorities force members of some Muslim ethnic groups to work in factories.

During the three years of the Biden administration, the United States has attracted $395 billion in investment in semiconductor manufacturing and $405 billion in green technology manufacturing and clean energy production, Toloui said.

Many companies investing in such manufacturing in the United States are based in Asian countries known for their tech industries, such as Japan, South Korea and Taiwan, for example, and in Europe. SK Hynix, a South Korean chipmaker, is building a $3.8 billion plant in Indiana. The State Department says the project is the largest investment ever made in the state and could create more than 1,000 jobs in the region.

U.S. Secretary of State Antony J. Blinken mentioned the plan in a speech last month at a conference in Maryland aimed at encouraging foreign investment in the United States. He said he hoped the legislation Mr. Biden passed would attract foreign investment to America’s high-tech manufacturing industry by modernizing our roads, railroads, broadband and electric grid.

Policy efforts, he added, aim to strengthen and diversify supply chains, boost domestic manufacturing and boost key industries of the future, from semiconductors to clean energy.

The Commerce Department has also played a major role in efforts to strengthen the chip supply chain, providing $50 billion to companies and organizations to research, develop and manufacture chips.

Commerce Secretary Gina Raimondo conducted an extensive study of global chip supply chains to identify vulnerabilities and worked with foreign governments to discuss opportunities for additional overseas investment.

That topic was at the heart of Raimondo’s trip to Costa Rica last spring, where she met with local officials and executives from Intel, which operates a fab there. (Toloui spoke at a semiconductor manufacturing conference in Costa Rica in January.) She also discussed diversifying the semiconductor supply chain during trips to Panama and Thailand.

But redesigning global supply chains to be less dependent on East Asia will be difficult. East Asian chip factories offer cutting-edge technology, a larger pool of engineering talent and lower costs than U.S. factories could afford.

Taiwan produces more than 60% of the world's microchips and nearly all of the most advanced chips used in computers, smartphones and other devices.

By comparison, the U.S. semiconductor industry could face a shortage of up to 90,000 workers over the next few years, according to several estimates.

Governments in China, Taiwan, South Korea and elsewhere also heavily subsidize their own chip industries.

Still, billions of dollars in new U.S. investment are expected to shift global supply chains somewhat. The U.S. share of global chip production is expected to rise from 10% today to 14% by 2032, according to a report released in May by the Semiconductor Industry Association and the Boston Consulting Group.

Some administration officials have adopted a more coercive form of chip diplomacy to prevent China from developing versions of American technology. That approach has focused on persuading a handful of countries, including Japan and the Netherlands, to block companies from selling certain chip-making tools to China.

Alan Estevez, who heads the Commerce Department's export control office, traveled to Japan and the Netherlands last month to try to persuade those countries to block companies there from selling certain cutting-edge technologies to China.

Instead, Mr. Toloui and his staff have traveled the world to scout out countries and companies that could invest in American manufacturing and set up factories that would serve as the endpoint of the supply chain. Mr. Toloui said his office’s work is part of Mr. Biden’s recent legislative efforts to create more manufacturing jobs in the United States, including the Infrastructure Act and the CHIPS and Science Act.

The CHIPS Act provides $500 million in annual funding for the administration to build secure supply chains and protect semiconductor technology. The State Department is using the money to find countries to develop supply chains. Officials are conducting studies in several countries to see how infrastructure and labor can be upgraded to ensure that chips can be assembled, packaged, and shipped smoothly.

Countries currently participating in the program are Costa Rica, Indonesia, Mexico, Panama, the Philippines and Vietnam. The U.S. government is including Kenya.

Vocational training is a priority in building that supply chain, Toloui said. He has been talking to Arizona State University about partnering with foreign institutions to develop training programs. One such institution is the Vietnam National University in Ho Chi Minh City, which he visited in May.

Martijn Rasser, chief executive of Datenna Inc., a China research firm, said the network of alliances is a strategic advantage the United States has over China.

It would be too costly for the United States to do it all itself, he added. And to do it alone would ignore the reality that the technology is much more diffuse globally today than it was a few decades ago, with several countries playing important roles in the chip supply chain.

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