The national security implications of the semiconductor supply chain
Effective and efficient supply chains are essential not just for the economic health of private companies but for the well-being of society. As a result, supply chains need to be thought of as a national security concern—especially for essential products and commodities like semiconductors.
Bradley Martin is the director at the RAND Corporation's National Security Supply Chain Instituteand a senior policy researcher at the RAND Corporation, where he has worked since November 2012. His work has emphasized issues of vulnerability resulting from economic interdependence, strategic readiness impacts from logistics and infrastructure shortfalls, and the overlap between geopolitics and supply chain exposure. His most recent work has focused on the challenges associated with China’s position in multiple different supply chains critical to the U.S. and its allies.
“National security” broadly describes what a nation does to protect its essential interests. This is often viewed in solely military terms, but the reality is that many things besides the military balance affect national security.
Viewed from that perspective on national security, we can see that supply chains are an integral part of national security, and not just with reference to items specific to the defense industrial base. Aspects of infrastructure and services are so fundamental to the functioning of society that they, too, should be considered national security issues. Secure food and energy supplies, for example. Or public safety. Or protection against environmental threats. In some cases, shortages resulting from supply chain disruptions can develop in commodities that a nation must have. These could include pharmaceuticals and personal protective equipment, energy, food, and raw materials used in manufacturing.
These highly interconnected supply chains are a fact of life, and in many ways beneficial. Efficient production leads to company profits, distribution of capital across markets, improved productivity, lower prices, wider availability of goods and a host of other benefits.
But, with benefit comes vulnerability. Dispersed supply chains develop because actors find it economically advantageous to seek the least expensive and most productive sources of supply. While this may be individually beneficial for the actors, actions taken by a company or even a government organization to protect its supply chains do not necessarily promote collective protection of national supply chains. A company might find that its most efficient supplier resides in a company with serious policy or diplomatic disagreements with the United States.
The fact that the U.S. and the supplying country now have an economic tie in common does not guarantee that the policy differences will disappear or even be mitigated. Indeed, such interdependence may greatly complicate responses to geopolitical challenges, creating costs and risks where none were evidentbefore. One profound example of this potential for complication lies in the semiconductor supply chain.
The case of Taiwan and semiconductors
Semiconductors are present in effectively every sector of the U.S. economy, as well as in every other advanced economy. The People’s Republic of China (PRC) is not a major player in advanced chip manufacturing. Its “rogue province” Taiwan, however, is not just a major player but, in some parts of chip manufacturing, a dominant one. Taiwan does not possess anything like the overall economic power of China, but it has built up a near monopoly in the production of high-end (less than 10 nanometers) logic chip semiconductors, largely through the Taiwan Semiconductor Manufacturing Corporation (TSMC).
TSMC’s dominance over the advanced semiconductor market—producing 94% of the most advanced logic chips—results both from some unique market conditions and from its diligence and careful management. TSMC is a technically proficient company operating in a portion of the microelectronics supply chain that is very capital intensive—and thus unattractive to companies seeking an immediately high rate of return. It has also received direct support from the government of Taiwan, which has served to put this company in the center of a supply chain vital to the world. Finally, it pursued a “global foundry model” with multiple customers, as opposed to the vertically integrated model pursued by Intel. Its dominance is in many ways the natural culmination of market impulses.
Taiwan’s position as the home of a company with a near monopoly on key parts of the semiconductor supply chain would seem likely to strengthen Taiwan’s importance to the United States (and the rest of the world). But the most important national security implication might go from protecting Taiwan’s autonomy to protecting access to a key material resource. While it might seem like the need to protect the United States’ access to semiconductors would strengthen the country’s historical commitment to protecting Taiwan, that may not necessarily prove to be the case.
No good option
In June 2022, to explore the geopolitical implications of Taiwan’s semiconductor dominance, the RAND National Security Supply Chain Institute conducted a tabletop exercise (TTX) with representatives from the executive and legislative branches of the U.S. government and from a variety of industries that rely on semiconductors. No single TTX can give a complete answer as to policy outcomes. This TTX did, however, demonstrate that there are generally only bad options for responding to the PRC attempting to coerce Taiwan in current circumstances.
Scenarios are ways of presenting reality and illuminating choices. They do not represent reality but explore a reality that could plausibly occur. In this TTX, RAND presented the players with two different ones, both intended to illuminate the impact of semiconductor supply chain vulnerability. Both began with a common set of conditions in which the PRC, for geopolitical reasons, imposed a coercive quarantine on Taiwan, as outlined in a recent RAND report. The scenarios diverged in Taiwan’s response to the coercive quarantine.
In the first case, rather than continuing to resist, Taiwan capitulates to Chinese demands, and the United States is forced to deal with a PRC now in possession of a near monopoly on high-end semiconductor manufacturing and a healthy portion of other semiconductor manufacturing. In the second, Taiwan attempts to resist, resulting in the PRC taking actions that increasingly disrupt Taiwanese semiconductor production, and thus supply of high-end semiconductors to the U.S. and the world.
In the first scenario, U.S. industry players sought to continue business as usual, while legislative and executive participants sought paths to alternative supply. However, the actors generally did not view this as a catastrophic outcome. The attitude of many industry players was that U.S. industries routinely do business with Chinese suppliers and that while the dominance of the PRC over high-end semiconductors might result in complications, they would not necessarily imply any major change in existing trade or contractual relationships. Government players were more focused on intellectual property and security implications, but no group necessarily saw a change in the national ownership of TSMC’s semiconductor “fabs” as catastrophic.
In the second scenario, Taiwan resists the initial demand, and the PRC steadily increases pressure on Taiwan, beginning with a demand for a curtailment of exports from Taiwan to the U.S. and moving steadily upward toward increasing disruptions of semiconductor production. In making these demands, the PRC understood that it would be hurt economically to the same degree or greater than Taiwan’s partners, but it opted to continue with pressure to achieve a long-standing political end. Throughout the process, the PRC offered an immediate lessening of pressure in exchange for Taiwan accepting the political condition of unification. At no time did the PRC offer an armed intervention beyond the imposition of the blockade/quarantine that it had already initiated.
The U.S. teams found that they had few desirable choices as the pressure continued. The U.S. always had the option of trying to impel Taiwan toward a settlement that would preserve access to semiconductor chips even if at the expense of its autonomy. Without U.S. support and security guarantees, Taiwan would rapidly find itself isolated. Although no U.S. team advocated this, all understood that this could become a very real possibility.
A second option would be to attempt a radical decoupling from both Taiwan and the PRC and develop “friendshored” sources of supply. Such changes likely could not occur in the short term. They would take time, capital, an available workforce, and possibly changes in technology, on a timeline that would likely exceed the time Taiwan could reasonably be expected to withstand pressure. For example, we know that it would take the United States and allies two to five years to build and outfit sufficient fabrication capacity to offset the loss of Taiwan’s production. This timeline includes optimistic assumptions regarding tooling, permitting, and the labor market. Developing sources for other commodities more directly controlled by the PRC—such as processed minerals—would also take time, cooperation, resources, and possibly significant policy changes.
Friendshoring could also be coupled with imposing counter sanctions against the PRC—in hopes of creating costs the PRC would find difficult to bear—and providing incentives for manufacturing in friendly countries. As an autocratic society, however, the PRC might be better able to harness the whole of government and private economy to pursue objectives. It would certainly be hurt by efforts to exclude it from markets, possibly more than the U.S. and its allies, but the question then turns to how long the different societies could withstand the disruption. The TTX did not specifically examine this. However, we know from the response to COVID-19 that the PRC has considerable capability to lock down its population and accept diminished levels of economic production. Worth bearing in mind is that the timelines for Taiwan’s collapse in the face of pressure are considerably shorter than the timeline for creating greater levels of supply chain resilience in the rest of the world.
The TTX specifically took military actions out of play, but the game pointed to the challenge of having few options between acceptance of the PRC’s demand or responding with military force. “Tit for tat” responses proportional to the provocations generally were not available, largely because the consequences of supply chain disruptions were immediately dire for the global economy.
Next potential steps
The TTX was, as mentioned already, one representation with a set of assumptions about behavior that might not prove accurate in the real world. The fact that it highlighted difficult options does not imply that no effective action could ever be taken. But this TTX and other efforts strongly suggest that the U.S. and allies must form partnerships, partnerships that must include industry, to increase supply chain resiliency and offer leaders something other than poor choices. The following are a few preliminary steps:
Both the public sector and the private sector should improve their analysis and understanding of the semiconductor supply chain specifically and the overall level of supply chain interdependence in general. From a geopolitical perspective, many of the planning scenarios that address how to handle a potential conflict over Taiwan’s autonomous status do not include the loss of Taiwanese semiconductor capacity as a likely consequence. This consequence deserves significant consideration.
An immediate and concerted effort must be made to reduce the concentration of semiconductor production in Taiwan. This condition not only is dangerous to the world’s economic well-being, but it also actually increases Taiwan’s vulnerability. Reducing this concentration will take several years. The management of vulnerability is thus to a very large degree a matter of timing. There are several steps that should be taken:
TSMC must be incentivized to relocate production out of Taiwan. This does not imply moving all production, nor does it necessarily imply transfer of ownership. It means geographic relocation of production to places without as much geopolitical significance as Taiwan. Reducing the risk of semiconductor disruption because of Chinese aggression would increase the willingness of the United States and allies to support Taiwan should aggression occur. This should be a powerful incentive for Taiwan.
Irrespective of TSMC actions, governments should take action to strengthen domestic and/or allied semiconductor production. Action does not imply top-down direction for investment, at least not in every case. It does involve creating incentives for investment and creating opportunities for workforce training and/or liberalized immigration. It probably also involves management of intellectual property sharing with a clearer eye toward the security impacts of sharing designs, even those without an obvious defense tie. There may be designs that should only be accessible to producers inside the United States or preferred allies.
Movement of facilities and equipment to the PRC should be specifically discouraged and heavily regulated. If markets are incentivized to invest in the PRC and/or sell Chinese companies advanced equipment, both are likely to occur. Eliminating such incentives is likely to require coordination with allies and does go against the normal imperatives of a market economy. Incentives need to be structured in ways that industry will see as effective.
Collaborative relationships with allies, industries, and governments are essential, even if these appear counter to the normal impulse to separate sectors. The interdependencies created by supply chains are complicated and extensive, with individual and collective interests intertwining to a degree that neither market nor normal government decision-making will be sufficient. This complexity requires extensive consultation, to the point that the relationships may of necessity be “cozier” than most democratic governments or private industries would prefer. The relationship between public and private will require careful management, as will the relationship with allies who have their own private-public challenges. But the TTX reinforced that neat separations between private and public interest are not possible in this context.
The U.S., U.K., and Australia will strengthen supply chain resiliency by sharing data and taking joint actions under the terms of a pact signed last week, the three nations said.
The agreement creates a “Supply Chain Resilience Cooperation Group” designed to build resilience in priority supply chains and to enhance the members’ mutual ability to identify and address risks, threats, and disruptions, according to the U.K.’s Department for Business and Trade.
One of the top priorities for the new group is developing an early warning pilot focused on the telecommunications supply chain, which is essential for the three countries’ global, digitized economies, they said. By identifying and monitoring disruption risks to the telecommunications supply chain, this pilot will enhance all three countries’ knowledge of relevant vulnerabilities, criticality, and residual risks. It will also develop procedures for sharing this information and responding cooperatively to disruptions.
According to the U.S. Department of Homeland Security (DHS), the group chose that sector because telecommunications infrastructure is vital to the distribution of public safety information, emergency services, and the day to day lives of many citizens. For example, undersea fiberoptic cables carry over 95% of transoceanic data traffic without which smartphones, financial networks, and communications systems would cease to function reliably.
“The resilience of our critical supply chains is a homeland security and economic security imperative,” Secretary of Homeland Security Alejandro N. Mayorkas said in a release. “Collaboration with international partners allows us to anticipate and mitigate disruptions before they occur. Our new U.S.-U.K.-Australia Supply Chain Resilience Cooperation Group will help ensure that our communities continue to have the essential goods and services they need, when they need them.”
Artificial intelligence (AI) tools can help users build “smart and responsive supply chains” by increasing workforce productivity, expanding visibility, accelerating processes, and prioritizing the next best action to drive results, according to business software vendor Oracle.
To help reach that goal, the Texas company last week released software upgrades including user experience (UX) enhancements to its Oracle Fusion Cloud Supply Chain & Manufacturing (SCM) suite.
“Organizations are under pressure to create efficient and resilient supply chains that can quickly adapt to economic conditions, control costs, and protect margins,” Chris Leone, executive vice president, Applications Development, Oracle, said in a release. “The latest enhancements to Oracle Cloud SCM help customers create a smarter, more responsive supply chain by enabling them to optimize planning and execution and improve the speed and accuracy of processes.”
According to Oracle, specific upgrades feature changes to its:
Production Supervisor Workbench, which helps organizations improve manufacturing performance by providing real-time insight into work orders and generative AI-powered shift reporting.
Maintenance Supervisor Workbench, which helps organizations increase productivity and reduce asset downtime by resolving maintenance issues faster.
Order Management Enhancements, which help organizations increase operational performance by enabling users to quickly create and find orders, take actions, and engage customers.
Product Lifecycle Management (PLM) Enhancements, which help organizations accelerate product development and go-to-market by enabling users to quickly find items and configure critical objects and navigation paths to meet business-critical priorities.
Nearly one-third of American consumers have increased their secondhand purchases in the past year, revealing a jump in “recommerce” according to a buyer survey from ShipStation, a provider of web-based shipping and order fulfillment solutions.
The number comes from a survey of 500 U.S. consumers showing that nearly one in four (23%) Americans lack confidence in making purchases over $200 in the next six months. Due to economic uncertainty, savvy shoppers are looking for ways to save money without sacrificing quality or style, the research found.
Younger shoppers are leading the charge in that trend, with 59% of Gen Z and 48% of Millennials buying pre-owned items weekly or monthly. That rate makes Gen Z nearly twice as likely to buy second hand compared to older generations.
The primary reason that shoppers say they have increased their recommerce habits is lower prices (74%), followed by the thrill of finding unique or rare items (38%) and getting higher quality for a lower price (28%). Only 14% of Americans cite environmental concerns as a primary reason they shop second-hand.
Despite the challenge of adjusting to the new pattern, recommerce represents a strategic opportunity for businesses to capture today’s budget-minded shoppers and foster long-term loyalty, Austin, Texas-based ShipStation said.
For example, retailers don’t have to sell used goods to capitalize on the secondhand boom. Instead, they can offer trade-in programs swapping discounts or store credit for shoppers’ old items. And they can improve product discoverability to help customers—particularly older generations—find what they’re looking for.
Other ways for retailers to connect with recommerce shoppers are to improve shipping practices. According to ShipStation:
70% of shoppers won’t return to a brand if shipping is too expensive.
51% of consumers are turned off by late deliveries
40% of shoppers won’t return to a retailer again if the packaging is bad.
The “CMA CGM Startup Awards”—created in collaboration with BFM Business and La Tribune—will identify the best innovations to accelerate its transformation, the French company said.
Specifically, the company will select the best startup among the applicants, with clear industry transformation objectives focused on environmental performance, competitiveness, and quality of life at work in each of the three areas:
Shipping: Enabling safer, more efficient, and sustainable navigation through innovative technological solutions.
Logistics: Reinventing the global supply chain with smart and sustainable logistics solutions.
Media: Transform content creation, and customer engagement with innovative media technologies and strategies.
Three winners will be selected during a final event organized on November 15 at the Orange Vélodrome Stadium in Marseille, during the 2nd Artificial Intelligence Marseille (AIM) forum organized by La Tribune and BFM Business. The selection will be made by a jury chaired by Rodolphe Saadé, Chairman and CEO of the Group, and including members of the executive committee representing the various sectors of CMA CGM.
Businesses were preparing to deal with the effects of the latest major storm of the 2024 hurricane season as Francine barreled toward the Gulf Coast Wednesday.
Louisiana was experiencing heavy rain and wind gusts at midday as the storm moved northeast through the Gulf and was expected to pick up speed. The state will bear the brunt of Francine’s wind, rain, and storm damage, according to forecasters at weather service provider AccuWeather.
“AccuWeather meteorologists are projecting a storm surge of 6-10 feet along much of the Louisiana coast with a pocket of 10-15 feet on some of the inland bays in south-central Louisiana,” the company reported in an afternoon update Wednesday.
Businesses and supply chains were prepping for delays and disruptions from the storm earlier this week. Supply chain mapping and monitoring firm Resilinc said the storm will have a “significant impact” on a wide range of industries along the Gulf Coast, including aerospace, life sciences, manufacturing, oil and gas, and high-tech, among others. In a statement, Resilinc said energy companies had evacuated personnel and suspended operations on oil platforms as of Tuesday. In addition, the firm said its proprietary data showed the storm could affect nearly 11,000 manufacturing, warehousing, distribution, fabrication, and testing sites across the region, putting at risk more than 57,000 parts used in everyday items and the manufacture of more than 4,000 products.
Francine, which was expected to make landfall as a category 2 hurricane, according to AccuWeather, follows the devastating effects of two storms earlier this summer: Hurricane Beryl, which hit the Texas coast in July, and Hurricane Debby, which caused $28 billion in damage and economic loss after hitting the Southeast on August 5.