The COVID-19 pandemic revealed how 40 years of increasing dependence on imports and the resulting hollowing out of U.S. manufacturing has created unacceptable national vulnerabilities.
For instance, despite the fact that the United States is a world leader in semiconductor design and R&D, chip manufacturing occurs mostly in Asia. Only 12 percent of the world’s semiconductor chips are made in the United States, down from 37 percent in 1990. The overdependence of the United States on imports creates national and economic security risks.
Trade wars and the pandemic caused widespread supply disruptions of security-sensitive and critical components like computer chips and medical devices. Sticking with our semiconductor example, automakers and their suppliers canceled semiconductor orders at the onset of the pandemic as car sales plummeted but demand quickly rebounded. Concurrently, a demand surge for personal electronics created a chip crunch. “Automakers and suppliers that use chips contacted chipmakers and put back their orders,” said Michelle Krebs, executive analyst for Autotrader. “By then, chip capacity was consumed by other businesses—phones, computers, video games—as people worked and schooled at home.”
When chip fabrication and packaging went offshore, U.S. intellectual property went with it, leaving us vulnerable to national security threats. Total global semiconductor demand share by end use in 2019 was communications (33%), computer (28.5%), consumer (13.3%), automotive (12.2%), industrial (11.9%), and government (1.3%). Chips are used in devices like computers, tablets, and phones but also in medical equipment, military equipment, wireless networks, cars, and manufacturing equipment.
In order to avoid being too dependent, the United States should produce at least 50 percent of what it consumes, for most products. If foreign supply is cut off, a 100 percent increase is feasible in many cases by working 24/7. Another criterion would be to cut our trade deficit to zero, which is the average condition of all countries. The resulting 40 percent increase in production would dramatically reduce dependencies.
Even before the pandemic-driven disruption, some companies were already trying to improve supply chain resiliency. A 2019 MGI survey found that 70 percent of respondents expected to change their global sourcing strategies with 32 percent planning to move in closer proximity to consumers. By May 2020, 93 percent of supply chain leaders were planning to increase resilience, with 44 percent willing to do so even at the expense of short-term earnings. Let’s look at some aerospace and defense companies that decided to shorten supply chains and manufacture in the U.S.
NHanced Semiconductors is expanding the cleanroom of its North Carolina foundry to house a new high-volume line of advanced packaging (AP) equipment. The new line is expected to be capable of constructing up to 10,000 three-dimensional integrated circuit wafer stacks per month. The expansion will also enable greater capacity for 2.5 D interposer fabrication and die-to-wafer assembly. Domestic sourcing of these AP technologies is critical to aerospace and defense agencies and many U.S. manufacturers. Government incentives, lead time, time to market, underutilized capacity and import replacement made U.S. manufacturing attractive.
In September 2020, SkyWater Technology, a U.S.-based and U.S.-owned semiconductor foundry, announced a facility expansion supported by a Department of Defense (DOD) investment of up to $170 million. The DOD’s investment was made under the Trusted and Assured Microelectronics (T&AM) program, which is developing enhanced sources of microelectronics for the department’s unique needs. The T&AM program seeks to collaborate with industry and key laboratory partners to provide sustainable, assured technology solutions for national security and defense. Supply chain interruption risk, natural disaster risk and political instability made manufacturing offshore less attractive.
Aerospace assemblies manufacturer Killdeer Mountain Manufacturing (KMM), invested $8 million to establish a fourth U.S. plant in Texas. KMM is a custom manufacturer of circuit boards, wire harnesses, fiber-optic assemblies and ground support equipment for aerospace, commercial and military applications. A $900,000 state grant made U.S. manufacturing attractive. KMM is a Tier 1 supplier in an aviation niche with customers that include Boeing, Raytheon and Lockheed Martin Corp. The investment is expected to create 200 jobs.
MEMC Electronic Materials, a subsidiary of Taiwanese company GlobalWafers, is investing $210 million in its O’Fallon, Mo., facility, adding 75 jobs. The project will add a production line for 300-mm wafers, which will be used by semiconductor maker GlobalFoundries in the production of computer chips at its advanced manufacturing facility in upstate New York. The investment will help meet a growing demand for advanced radio frequency technologies from the telecommunications, automotive, and aerospace sectors.
Investing billions of dollars in chip foundries is essential. However, there is a risk in letting the chips fall where they may. The U.S. risks going from being dependent on Taiwan and China for chips to being dependent on those countries to buy the chips our new chip foundries will create. We recommend making the U.S. cost competitive for the assembly of servers, cell phones, automotive electronics, machinery and more to overcome this problem. The best means to this end are a much stronger skilled workforce, a lower-valued U.S. dollar, a value-added tax and keeping corporate tax rates competitive.
Now is an especially good time for companies to re-evaluate the choice of domestic vs. offshore production. To help quantify those costs, the Reshoring Initiative website provides tools to help companies decide objectively whether their overhead will come down more than their manufacturing cost goes up when sourcing locally.
The free online Total Cost of Ownership Estimator will more accurately determine the real profit and loss impact of reshoring or offshoring. After doing the math, most companies will decide to bring some work back.
See if reshoring makes economic sense for your company. The Reshoring Initiative’s resources can be found on the website ReshoreNow.org.
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