Biden administration sounds the alarm on the semiconductor crisis

Semiconductors, or computer chips, act as the brains that power our technological devices. These chips, now smaller than a stamp and thinner than a piece of hair, have revolutionized the modern world. Innovation in the field has led to smarter, faster, and smaller technology (think pacemakers, smartphones, solar energy, self-driving cars, laptops, airplanes, just about everything you use). They’re also the second largest export in the U.S. and are responsible for 2 million American jobs. 

A recent shortage of semiconductors sent companies, who usually rely on a lean inventory of the chips, around the world into crisis as the pandemic drummed up demand for laptops, cellphones, and other technological devices. The blockage of the Suez Canal in March only worsened deliveries. Industry leaders like Intel CEO Pat Gelsinger expect things to get worse before they get better. They don’t expect any real hope for recovery until 2022. Now, auto companies like GM and Ford have announced that they’re temporarily shutting down plants because of a semiconductor shortage.

And that’s exactly why Secretary Raimondo is worried. “We have fallen very far behind from where we need to be with respect to semiconductors,” she explained this week at Fortune’s CEOI Collaborative discussion. “Semiconductors are the building blocks of our entire digital economy and unfortunately, we’re vulnerable now because we don’t make enough leading edge semiconductors in America.”

China is a net importer of semiconductors, largely from the U.S. The country imported $350 billion in chips in 2020, an increase of 14.6% from 2019. But recent trade tension under President Trump has damaged the long standing relationship and spurred China to begin accelerating and prioritizing its own chip-making programs. 

In 2020, the former president cut off Huawei Technologies, the number two smartphone maker in the world, from access to U.S. chips in a fight over Beijing’s industrial practices. The Trump administration also publicly considered imposing export restrictions on Semiconductor Manufacturing International Corporation, the largest manufacturer of semiconductors in China. 

The hostilities came as China promoted its Made in China 2025 initiative and Guidelines to Promote National Integrated Circuit Industry Development, which create financial incentives, intellectual property and antitrust standards to develop the Chinese semiconductor industry and end reliance on the U.S. 

“What I most often get asked about is China,” said Raimondo. “The fact of the matter is we have to run faster in America, and that means investing in our innovation and tech and unleashing all the opportunity that we have here.”

U.S. semiconductors accounted for half of all global sales, or about $193 billion, in 2020, but only 12% of those chips are actually manufactured in the U.S. So while the U.S. still leads in design, supply-chain issues have become a problem and gives China a lot of leverage over the U.S. 

In February, President Joe Biden issued an executive order to review America’s industrial supply chain, partially to review why there was a shortage of production in the United States. “It’s about making sure there’s a level playing field, so that we show every company can compete,” said Raimondo. But, more needs to be done to aid in research and development. “We have consistently fallen behind in terms of R&D as a percent of GDP,” she said. 

While Taiwan, South Korea, Singapore and China invest billions annually in their semiconductor industries, the federal government has been slow to provide R&D funding and funding for domestic production. 

R&D now accounts for less than 1% of the U.S. GDP but that would change under President Biden’s infrastructure bill, which proposes $52 billion invested in domestic manufacturing and another $50 billion in R&D funding to focus on semiconductors and advanced computing. 

Still, Raimondo is weary. Even if the infrastructure bill were to pass as-is, $52 billion is not enough, she says. The money is just “a piece of the puzzle,” she told Fortune. But while it’s “not nearly enough to do what we need to do,” she hopes it will be able to unlock and stimulate private sector investment to the tune of $100 billion in the production of semiconductors and job training. 

Stimulating that innovation and enhancing innovative competition, she said, “is the bedrock of our capitalistic system, the bedrock of what has made America great.”