5 Ways to Bolster Success of Executive Order for Semiconductor Supply Chains

Madhav Durbha
Madhav Durbha
VP of Supply Chain Strategy, Coupa Software

Dr. Madhav Durbha is the Vice President of Supply Chain Strategy Coupa Software, where his team helps customers and prospects solve various supply chain challenges. Prior to Coupa, Dr. Durbha held positions at LLamasoft, Kinaxis, JDA Software and i2 Technologies, Inc. With more than 20 years in the supply chain industry, Dr. Durbha has broad experience in strategy & process consulting, supply chain software, program management, software application development & deployment, machine learning and data science. He received his Ph.D. in chemical engineering from the University of Florida and his bachelor’s degree in chemical engineering from the Indian Institute of Technology at Madras.

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5 Ways to Bolster Success of Executive Order for Semiconductor Supply Chains

President Biden signed a wide-ranging Executive Order on February 24th geared towards ensuring the resilience of America’s supply chains. One of the mandates of the order is to perform a 100-day review of the semiconductor supply chain triggered by the recent chip shortage that is causing significant impact to auto production in the United States. The stakes are high, with a potential for escalating prices for automobiles, insufficient dealer inventories, and economic impact. Auto industry revenue of US $61 billion is expected to be wiped out in 2021. While the Executive Order is a much needed step, there is no short term fix for the chip shortage. 

Semiconductor Shortage Reasons and Biden Administration Recommendations

As COVID-19 shutdowns accelerated in early 2020, the demand for automobiles significantly declined. Accordingly, auto companies halted production and significantly cut down order volumes. Now as the lockdowns ease, demand for vehicles is picking up. 

However, the precious capacity for chip production has been taken up by a volume spike in gaming, at-home tech for the remote workforce, and a rise in crypto currencies (increased crypto mining requires greater computational power). Chips used in these tech devices are newer generation and offer higher margins, which incentivize chip makers to allocate capacity to producing these versus the kind used in automobiles. Hence, a confluence of factors has led to the shortage of semiconductor chips. 

Advances in AI, 5G, IoT, and the rise of cyber threats have made semiconductors a matter of national security. It is therefore critical that this Executive Order be carried out successfully. Here are some recommendations to the Biden administration, based on our experience of helping hundreds of major corporations redesign their supply chains:

1.  Offer significant incentives to meaningfully drive nearshoring

The U.S.’s semiconductor manufacturing capacity declined from 37% in 1990 to 12% today, owing to competing foreign governments providing significant incentives. By comparison, South Korea and Taiwan, the two semiconductor manufacturing powerhouses, carry 43% of the manufacturing capacity. Given the global market size of semiconductors of over $500 billion, government incentives of tens of billions of dollars will be required over the coming decade to encourage nearshoring.

2.  Establish programs to close significant skill gaps in chip manufacturing

About 70% of the world’s most advanced chips pass through Taiwan during the manufacturing, testing, and packaging process. This is indicative of the U.S.’s deep dependence on Taiwan and also the single source risk within the semiconductor supply chain. When combined with the shift to offshore manufacturing, there is the issue of manufacturing skills atrophy. The U.S. needs a two-pronged approach to address this skill gap. First, with over 40% of U.S. high-skilled workforce in the semiconductor industry being born abroad, the U.S. immigration policy will need to be conducive to attracting global talent. Second, ramping up a domestic skills program is in order in collaboration with semiconductor industry stalwarts, MOOC (Massively Open Online Curriculum) platforms, and vocational training options as an alternative to the 4-year college curriculum. Given the labor cost disadvantage the U.S. may have, organizations will opt-in for increased automation to make any nearshoring sustainable. This will also require the skill sets needed to cater to the higher end of the skills spectrum and the training programs will need to be tailored accordingly.

3.  Stand up cross-industry think tanks with collaborative arrangements

The U.S. will need to bring together companies within the semiconductor industry and major customers across the value chain to help launch joint ventures, collaborative R&D efforts, and incentivize such arrangements. Collective power across industries is much stronger than any one company or any one industry fighting it alone. Besides tapping into the tremendous supply chain talent offered by the various big-named consultants, the U.S. should also engage technology partnerships with leading supply chain companies. It takes collective intelligence to make a meaningful impact.

4.  Accelerate sustainability and diversity efforts

The Executive Order does make references to encouraging diversity efforts by making employment accessible to underrepresented groups and communities, as well as accelerating sustainability efforts. The current chip shortage will require a massive restructuring of the semiconductor supply chain and its flows within. This will be a multi-year effort. Meaningful nearshoring can take a decade or longer. The government and private sector alike should take the opportunity to tackle multiple objectives at once, beyond just focusing on resilience. Burning issues such as climate change and income inequality can be brought to fore as supply chain resiliency gets addressed. Nearshoring can raise objections from the environmental advocacy groups about the potential environmental impact from setting up fabrication facilities in the U.S. However carbon footprint studies will need to be done, capturing the end-to-end supply chain flows. This will ensure that convincing arguments are made in the net reduction of environmental costs on a global basis by using facilities built with state of the art technology and reducing the transportation impact of shuffling chips around the world.

5.  Borrow a page from the private sector’s playbook

Faced with the challenge of making supply chains more resilient, leading corporations are stress testing their supply chains and testing out designs of the future powered by algorithms. The U.S. government should borrow from this playbook. It should think of all the semiconductor producing and consuming companies of the world as one company and model a range of what-if scenarios. Even a model with a higher level of abstraction can reveal some great insights.

While the Executive Order is a good first step, much work remains. The role of the U.S. government is to create the ambience needed by providing the necessary incentives to the private sectors to stimulate growth in semiconductor manufacturing. A positive environment that incents nearshoring is much better than the threat of tariffs in supply chains with limited source risks. A very close collaboration will be needed between the private sector and the government to make this effort a worthwhile and successful endeavor.

To learn more about how organizations can improve their supply chain resiliency in the wake of COVID-19, watch this Harvard Business Review webinar “Global Supply Chains in a Post-Pandemic World.”