The United States wants to tighten control over the semiconductor supply chain

The semiconductor summit held by the US government on September 23rd turned into a "Hongmen Banquet". The theme of this meeting was to deal with the impact of the new coronavirus variant on the supply chain and how to narrow the supply and demand gap between chip manufacturers and customers. However, the US government proposed at the meeting to ask TSMC, Samsung and other semiconductor manufacturers for business data such as inventory, orders, and sales records, on the grounds of "improving crisis management capabilities and identifying the root causes of chip shortages."

This move caused an uproar in the industry, because these data are core business secrets of semiconductor companies. Whether TSMC and other companies hand them over or not will lead to a series of unpredictable consequences in the future.

Pressure

At a recent event, TSMC General Counsel Sylvia Fang said bluntly: "We will never disclose sensitive company information, especially information related to customers."

Sylvia Fang said TSMC is still in the stage of conducting some preliminary research and evaluating the content of the U.S. government questionnaire, and is seeking ways to handle the questionnaire without compromising confidential customer information.

This questionnaire is the Notice of Request for Public Comments on Risks in the Semiconductor Supply Chain issued by the U.S. Department of Commerce. The notice proposes to collect relevant data and information from interested companies in the semiconductor supply chain in order to promote the flow of information in all links of the supply chain. The information collection ends on November 8.

According to relevant media reports, the questionnaire is divided into two parts, each with 13 questions. The first part is for IC design, front-end and back-end wafer manufacturing, packaging and testing companies, and semiconductor distributors, and the second part is for semiconductor product intermediaries and end users. The questions in the questionnaire are also very detailed. For example, manufacturers are required to list "the top three current customers of each product and the estimated sales percentage of each customer for that product", and to list the products with the "largest order backlog" and the sales volume of these products. Major semiconductor companies such as TSMC, Samsung, SK Hynix, Intel, and Micron are among the respondents of the questionnaire.

Unlike ordinary business inquiries, the US government has a tough attitude towards this matter. US Commerce Secretary Gina Raimondo said on September 23 that the Biden administration is considering using the Cold War-era Defense Production Act to force companies in the chip supply chain to provide key data if they do not respond to requests to voluntarily fill out questionnaires within 45 days. It is reported that the Defense Production Act was mainly used for civilian defense and war mobilization during the Cold War. It was cited by former President Trump in the past to require General Motors to assist the government in manufacturing medical respirators.

Why is the US government taking such a tough stance? According to Bloomberg, the two previous semiconductor summits held by the US government failed to solve the problem of the semiconductor supply chain, and many companies refused to provide sensitive business data, which led to the current move.

Since it involves core business secrets, the companies involved are naturally very resistant. TSMC's ability to become the No. 1 in the foundry industry depends largely on a strict customer confidentiality system. This neutrality gives TSMC a very special position in today's semiconductor industry. TSMC not only expressed opposition, but its minority shareholders even applied for a temporary injunction from the Hsinchu Court in Taiwan, demanding that chip manufacturers not be allowed to send key business secrets to the United States.

Similarly, South Korean companies Samsung and Hynix also expressed opposition. South Korean Minister of Trade, Industry and Energy Yeo Han-koo mentioned on the 29th that South Korea and the US government are in dialogue on the issue of supply chain in Taiwan, implying that the South Korean government can help the industry deal with this issue.

Most importantly, TSMC, Samsung and other companies have customers throughout the entire industry chain, including many American chip and system companies. This will be a huge game, and the outcome remains to be seen.

Presidential Order and 100-Day Supply Chain Report

The Boston Consulting Group of the United States announced in August that automobile production in 2021 will be 7 million to 9 million units less than originally planned. This is equivalent to nearly 10% of global production before the COVID-19 pandemic in 2019. After September, the production cuts are expanding due to the spread of the epidemic in Southeast Asia.

As the pillar of the U.S. manufacturing industry, the crisis in the automotive industry threatens the country's economic development. Coupled with the impact of the epidemic and geopolitical factors, controlling the supply chain has become a major priority for the U.S. government.

On June 18, the White House released an assessment report titled "Building Resilient Supply Chains, Revitalizing U.S. Manufacturing, and Promoting Broad-Based Growth." The report sorted out the supply chains of four key products, including semiconductors, high-capacity batteries used in pure electric vehicles, pharmaceuticals, and important minerals including rare earths.

The report pointed out that the COVID-19 pandemic and the economic disorder it caused exposed long-standing vulnerabilities in the US supply chain. The increase in demand for working from home has also exacerbated the global shortage of semiconductor chips, affecting multiple industrial fields such as automobiles and communications products. The recent strong rebound in the US economy and the shift in demand patterns have also strained the supply chains of other key products such as lumber and increased pressure on the US transportation and shipping network.

Significantly, the report also attributes the supply chain risks of four key products to five major economic reasons, namely, insufficient U.S. manufacturing capabilities; short-termism in the private market; industrial policies of allies, partners and competitors; uneven geographical distribution of global resources and limited international coordination.

Regarding the shortage of semiconductor products, the report gives seven suggestions for improvement, which can be summarized as: taking defensive actions to protect the current technological advantages, providing more sufficient funds for US chip manufacturing, strengthening the domestic semiconductor manufacturing system, cultivating professional talents, and supporting technological innovation of small and medium-sized enterprises, etc., to ensure the United States' technological advantages and long-term leadership in the industry.

Access to information is placed at the top of the list, with the first recommendation stating: “While the private sector must take the lead in addressing shortages in the short term, the U.S. government can help alleviate the current shortage by strengthening partnerships with industry to facilitate the flow of information between semiconductor producers, suppliers, and end users; strengthening engagement with allies and partners to promote fair semiconductor chip distribution, increased investment, and increased production; and promoting companies to adopt effective semiconductor supply chain management and security practices.”

Before the release of this report, Biden signed a presidential order on February 24 to adjust the supply chain of semiconductors and other products, which will establish a stable procurement system for major key categories such as semiconductors and batteries.

Before signing, Biden said: "(The supply of important components) cannot rely on foreign countries that are not in line with our national interests and values," emphasizing the need to adjust the supply chain.

After the report was released, the US government took action one after another. On the one hand, it began to increase investment to support the reconstruction of domestic supply chains in key industries. For example, the US Export-Import Bank is developing a financing plan to provide funds for the reshoring of US manufacturing. In the field of large-capacity batteries, the Department of Energy will inject $17 billion in loan authorization into the Advanced Technology Vehicle Manufacturing Loan Program (ATVM) to support the domestic battery supply chain.

On the other hand, the White House announced the establishment of a supply chain disruption task force, led by U.S. Commerce Secretary Gina Raimondo, Transportation Secretary Pete Buttigieg, and Agriculture Secretary Tom Vilsack, to address short-term supply shortages in the semiconductor, construction, transportation, agriculture, and food industries.

The U.S. Department of Commerce will be responsible for compiling data from across the federal government to improve the federal government's ability to track supply and demand disruptions and promote information sharing between federal agencies and the private sector to more effectively identify recent risks and vulnerabilities. Perhaps it is because of the important task that the U.S. Department of Commerce asked for data.

Some industry insiders believe that this behavior shows that the United States wants to dominate and restructure the industrial cooperation model between regions, which will inevitably destroy the existing regional division of labor. Moreover, if the United States eventually obtains these data, more countries and regions may follow suit in the future, which will inevitably cause the entire semiconductor industry chain to split. For the entire industry, this is obviously not a result that everyone wants to see.