Easing the chip shortage means moving manufacturing to the U.S., commerce secretary says

One of the biggest supply chain stories of the pandemic is the shortage of all kinds of semiconductors. The vast majority of chips are made outside the U.S.

Some lawmakers want the White House to invoke the Defense Production Act, which could force companies to prioritize what the government says it needs to ease the shortage.

In the meantime, the White House is pushing for more funding to boost domestic chip production. Leading that charge is Secretary of Commerce Gina Raimondo, who is encouraging Congress to fund the CHIPS for America Act, which provides incentives for chip manufacturing and research in the United States.

The secretary says the funding would address some of the infrastructure issues behind the shortage. The following is an edited transcript of our conversation.

Gina Raimondo: First of all, I would say, there’s an immediate short-term crisis. There’s not enough chips today, supply chain disruption, prices are high. Then there’s the longer term — we need to make more chips in America, which is what the CHIPS Act is for. You know, incentivizing the creation of factories in America. We are already seeing improvement. Recently, you saw GlobalFoundries, which is a big semiconductor company, having a partnership with automakers. That’s a direct result of the administration’s work, which is to say, since I’ve been in this seat, we’ve been constantly bringing together consumers of chips and producers of chips, encouraging them to share data, asking them to share information, identify the bottlenecks. We’re also seeing chipmakers increasing supply. In other words, running their operations more and continuously. So, you’re going to see incremental change. For the CHIPS Act, though, which is the big change, that’s at least a couple of years away, minimum.

Kimberly Adams: Most of the predictions are that these COVID-related shortages are going to last for at least into next year. There seems to be quite a bit of demand, especially as we’re bringing more [electric vehicles] on the road. You have Samsung building a $17 billion factory. Why does the federal government need to be spending money on this when there’s clearly demand? And these companies are sitting on record profits and could spend this money on their own if they wanted?

Raimondo: And they will. They will. First of all, I agree with you. But when you’re in the position of a company having to make a multibillion-dollar investment, it’s one thing for you and I to sit here and say, “Of course, there’ll be demand,” you know? They want to know, is there long-term demand for each particular kind of chip? I mean, there are hundreds, probably thousands, so it’s complicated. Secondly, you know, our $50 billion, which is the amount coming out of the CHIPS Act, is a drop in the bucket relative to what the private sector will have to invest. And the reason we have to do it is because we want them doing this in America. It is less expensive to do this in Taiwan. It is less expensive to do this in Vietnam, Malaysia, etc. We need this stuff produced on American shores, particularly the most sophisticated chips, which are used in the most sophisticated military operations. So listen, I think you make a good point. This is absolutely not a free lunch for these companies. They are large, they are profitable. And we’re gonna hold them accountable to put skin in the game. But because this is a national security issue and economic security issue, and we’re in such a bad situation. We make zero percent of the world’s most sophisticated chips in America. It’s appropriate to do some kind of industrial planning to incentivize domestic production.

Adams: So you said we’re in such a bad situation. Under what circumstance do you think it would be necessary to use the Defense Production Act to address this?

Raimondo: So it’s on the table, and it’s something we’re looking at. And when I did the voluntary request for information, I called all the CEOs and said, “We would like you to send your data. But if you don’t, we will use the Defense Production Act and require you to.” I would say at this point, we don’t think it’s necessary. That is a pretty big stick to use, and we only want to use it when appropriate. At the moment, we’re seeing things get better. You go to Detroit, the auto companies report improvement. If we start to see things take a turn for the worse significantly, then I would recommend that we use the Defense Production Act.

Adams: Do you have any metrics for what that “worse” would look like?

Raimondo: Not especially. It would have to be noncompliance from industry, so if industry weren’t giving us the data that we’re requesting, and we felt we needed it and we had to require them. It would be a dip in production. There’s plenty of demand, they ought to be increasing production. So if we start to see some funky things happening in the supply chain — evidence of hoarding, evidence of price gouging, evidence of dipped supply, not complying with our requests, then we would think about doing it.

Adams: In the CHIPS Act, and some of this other legislation, there is money sort of targeted at the auto industry and the chips that they need. But there have been some complaints that it’s not a good idea for [the Department of] Commerce to be picking winners and losers when there’s a vital supply shortage across so many industries. How do you think about that?

Raimondo: Yeah, I agree with that, which is to say, no industry should really get a preference. Now, there is an additive $2 billion that the Senate put on top of the original $50 [billion] for what’s sometimes called legacy chips, bigger chips, feature-rich chips. It isn’t just the auto industry that uses those chips. It is covered that way, but the truth is, they’re in so many electronics and such. So I think we shouldn’t be in the business of prioritizing particular industries. We should be in the business of making sure that there’s enough domestic production of all kinds of chips. And I think that’s why they added the $2 billion on top of what already existed.

Adams: Back to that point about sort of picking and choosing winners and losers, though. We have chips in health care and defense, and EVs, but also chips in electric toothbrushes. How do you think about sort of prioritizing when the need is so great?

Raimondo: Such a good question, and something that most people don’t recognize. So this is exactly why I don’t think we should be in the business of prioritizing automakers. Because when I talk to medical device makers who make pacemakers, ventilators, every piece of medical equipment in the hospital, they argue that’s just as important. So I think the only thing everyone seems to agree to is that video games are less important [laughing]. That is the one thing that people agree with.

Adams: [Laughing] just don’t tell that to the gamers.

Raimondo: I know that, I know that. And I’m saying that, like, a little tongue-in-cheek. So I don’t want — the federal government should not be in that business. The federal government needs to have a map of all the chips that are necessary to secure our economic and national defense security. By the way, we should create that map with our allies. Japan’s putting a lot of money into this, Europe’s putting a lot of money into this. We need to coordinate with them. It would be — shame on us if all of our allies and us incentivize the same kind of chips. So that’s why I was just in Japan. That’s why I’m talking to Europe. How do we, together with our allies, map out the supply, monitor the supply, and then coordinate our investments so that we have enough of everything? And then industry can kind of fight it out around who gets what and who pays for what.

Adams: If this CHIPS [Act] funding comes through, that’s a lot more money coming into Commerce than —

Raimondo: We’ve ever had —

Adams: Ever. How do you think about disbursing them? You used to run a state, and you come from a [venture capital] background. But how do you think about dealing with that much money coming into a department that hasn’t been used to it?

Raimondo: So I will say we are ready. We have implementation plans that are very detailed. We have organizational charts that are very detailed. I’ve already started recruiting people, so we have the top-notch talent. We are putting in place mechanisms for transparency. This all has to be very transparent, competitive. But it is what keeps me up at night. I’m being honest with you. I know how to do this. I ran a state. I was in business. We will succeed. But it’s going to be hard. The Commerce Department is poised to get over $100 billion, you know, almost $50 billion for broadband, $50 billion for chips. Billions for a supply chain office. And so I feel the heat, but we’re going to get it done. However, I will tell you it’s a challenge.

Adams: What happens if we don’t get CHIPS funded by the end of the year?

Raimondo: I wake up Jan. 1 and keep pounding away. I mean, I feel that that would be so deeply unfortunate, and there’s no reason for it. This is bipartisan to get out of the Senate with a big bipartisan vote. It is a top priority of the president’s. It’s one of the few things that all economists, all generals, Democrats and Republicans can agree with. It is core to our American competitiveness. So, I am not entertaining that possibility right now. I’m going to work as hard as I can to make it happen. If it doesn’t, you do what you always do in politics. You get back up the next day and you keep trying.

Related links: More insight from Kimberly Adams

Secretary Raimondo was in Detroit last week talking to automakers about the chip shortage. And she says many of the companies that were initially hesitant to turn over details of their supply chain bottlenecks told her it actually helped them spot areas for improvement. We have a link to the Detroit News’ writeup of that visit.

Speaking of automakers, management consulting firm AlixPartners put out a report in September estimating that the global chip shortage cost the industry $210 billion in 2021. According to AlixPartners, that translates into about 7.7 billion “units of vehicle production.”

Another cost of the chip shortage is literally lives.

Bloomberg has a piece about how the scarcity led to tragedy for one Malaysian town. The relentless push to get semiconductors out the door led to a COVID-19 outbreak that killed at least 20 people. At that manufacturing facility, the death toll from the pandemic was 1 in 210 compared to 1 in 1,100 in Malaysia overall.