The Semiconductor Supply Chain: From Silicon to CPU

Semiconductors, the foundational devices in computers, have become key geopolitical tools as the world progresses into the digital age. Also known as integrated circuits, microchips, or simply chips, these devices are essential to the production of modern electronics such as televisions, computers, and even automobiles. Therefore, they are widely recognized as vital to national and economic security. Demonstrating this importance, the ongoing shortage of chips decreased U.S. growth in 2021 by a full percentage point according to estimates and is causing economic slowdowns. Further, the United States increasingly deploys economic sanctions targeted at chip imports to deter and coerce opponents.

Recognizing the precariousness of producing just 12% of global chip production despite consuming 34%, the United States is seeking to invest heavily in the domestic industry. Proposed bills such as the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act and the Facilitating American-Built Semiconductors (FABS) Act would provide upwards of $50 billion in funding through both investment tax credits and grants. New chip fabrication plants, called fabs, are planned in Arizona, Texas, and Ohio. However, to develop a secure and resilient chip supply chain, the United States must focus on more than just constructing new fabs. The full process of creating a chip — from raw materials to a usable product — is a long and complex operation requiring highly advanced technology at every step. The United States must take the complete semiconductor manufacturing process into consideration when making these investments.

From Earth to Wafer

Most chips are manufactured with silicon due to the element’s ability to conduct electrical currents. Fortunately, silicon is among the most common elements on the planet, constituting more than 25% of the Earth’s crust. While legitimate environmental concerns regarding silicon mining exist, such as water contamination, there is no shortage of the resource available to the United States. The challenge begins once silicon has been extracted.

To be utilized in chip production, raw silicon must undergo a high-tech refining process which transforms it into a silicon wafer — a disc of purified silicon. Silicon wafers are critical in the supply chain as the chip’s circuitry is ultimately etched into them. However, the wafer manufacturing industry is dominated by East Asian companies, which control over 75% of production. Further, the top non-Asian producers all reside in Europe, giving the United States little control over this node of the supply chain. Since silicon wafers are fundamental to the production of chips, this presents a security risk: before chips can be built in the United States, the needed raw materials must pass through other nations. 

Supply Chains Within Supply Chains

Silicon wafers are then shipped to fabs where the circuitry is added. The majority of U.S. government and international media attention is focused on this node in the supply chain, which is dominated by Asian companies such as Taiwanese Semiconductor Manufacturing Company (TSMC) and Samsung in Korea. While constructing additional domestic fabs is necessary to develop a resilient supply chain, this is insufficient by itself. The actual chip fabrication process performed at these fabs requires billions of dollars of highly specialized equipment from suppliers all over the world. There are over 50 classes of precision equipment used in chip production, each with complex global supply chains of their own.

A key example of the intricate supply chain behind chip manufacturing equipment are lithography machines, the devices which print the circuitry onto silicon wafers. The most advanced lithography machines produce the most powerful chips, which are utilized in cutting-edge consumer products, such as smartphones, and defense technologies, such as radar and satellites. This makes their possession particularly vital, as demonstrated by the United States successfully blocking their sale to Chinese companies due to national security concerns.

Unsurprisingly, developing these cutting-edge lithography machines is an extremely complex process and there is no U.S. company that can do it. They are produced exclusively by ASML Technologies based in the Netherlands. Further, these machines are assembled through a global value chain with parts from Germany, Japan, and the United States. Even if the United States constructed sufficient fabs to completely supply their domestic industry, it would still be reliant on foreign countries for lithography machines and dozens of other types of equipment.

From Wafer to Products

Once the chips have been printed onto the silicon wafer, the final step in the process is to send the wafer to an Outsourced Semiconductor Assembly and Test (OSAT) facility where it is tested and packaged. Though the circuitry is in place, the chips are not usable until this step is completed. However, only 15% of the global OSAT market resides in the United States, and Asia dominates this segment of the industry as well. Even the U.S. companies involved in this industry typically construct their packaging plants in Asia due to cheaper production costs. As a result, manufacturing chips in U.S.-based fabs will not necessarily decrease foreign dependence since those same chips are often shipped to Asia before being used.

Fostering True Resiliency

The development of a more resilient supply chain is a worthwhile goal. As the United States now views China as both its primary geopolitical rival and largest national security threat, Asia producing 80% of chips is a significant risk. This risk is particularly pronounced given the critical role of Taiwan, the top chip-manufacturer in the world, a country which China views as a breakaway province which must be reunified.

However, current investments into domestic chip fabrication plants alone, while not necessarily counter-productive, do little to alleviate this risk. The CHIPS for America Act and the FABS Act primarily incentivize the construction of new fabrication plants and fund research into new semiconductor technologies. The rest of the supply chain must be developed domestically as well through government investment, particularly silicon wafer manufacturing and OSAT facilities. As these steps are less profitable, U.S. businesses will likely not invest in them without subsidies. Lower value-added businesses such as these may be unattractive for government investment, but if the United States is committed to fostering resiliency and security in its semiconductor supply chain, it must nonetheless develop these capabilities.