[Senate Hearing 117-789]
[From the U.S. Government Publishing Office]
S. Hrg. 117-789
IMPLEMENTING SUPPLY CHAIN RESILIENCY
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HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
JULY 15, 2021
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available online: http://www.govinfo.gov
_________
U.S. GOVERNMENT PUBLISHING OFFICE
54-258 PDF WASHINGTON : 2023
SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
MARIA CANTWELL, Washington, Chair
AMY KLOBUCHAR, Minnesota ROGER WICKER, Mississippi, Ranking
RICHARD BLUMENTHAL, Connecticut JOHN THUNE, South Dakota
BRIAN SCHATZ, Hawaii ROY BLUNT, Missouri
EDWARD MARKEY, Massachusetts TED CRUZ, Texas
GARY PETERS, Michigan DEB FISCHER, Nebraska
TAMMY BALDWIN, Wisconsin JERRY MORAN, Kansas
TAMMY DUCKWORTH, Illinois DAN SULLIVAN, Alaska
JON TESTER, Montana MARSHA BLACKBURN, Tennessee
KYRSTEN SINEMA, Arizona TODD YOUNG, Indiana
JACKY ROSEN, Nevada MIKE LEE, Utah
BEN RAY LUJAN, New Mexico RON JOHNSON, Wisconsin
JOHN HICKENLOOPER, Colorado SHELLEY MOORE CAPITO, West
RAPHAEL WARNOCK, Georgia Virginia
RICK SCOTT, Florida
CYNTHIA LUMMIS, Wyoming
David Strickland, Staff Director
Melissa Porter, Deputy Staff Director
George Greenwell, Policy Coordinator and Security Manager
John Keast, Republican Staff Director
Crystal Tully, Republican Deputy Staff Director
Steven Wall, General Counsel
C O N T E N T S
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Page
Hearing held on July 15, 2021.................................... 1
Statement of Senator Cantwell.................................... 1
Statement of Senator Wicker...................................... 2
Article dated July 14, 2021 from the Washington Post
entitled, ``Biden targets high shipping costs as pandemic
ravages global supply chains'' by David J. Lynch........... 52
Statement of Senator Blumenthal.................................. 55
Statement of Senator Fischer..................................... 57
Statement of Senator Klobuchar................................... 59
Statement of Senator Peters...................................... 60
Statement of Senator Scott....................................... 65
Statement of Senator Sullivan.................................... 67
Statement of Senator Thune....................................... 69
Witnesses
Gary Gereffi, Ph.D., Emeritus Professor and Founding Director,
Global Value Chains Center, Duke University.................... 3
Prepared statement........................................... 5
James A. Lewis, Senior Vice President and Director, Strategic
Technologies Program, Center for Strategic and International
Studies........................................................ 15
Prepared statement........................................... 16
Richard Aboulafia, Vice President, Analysis, Teal Group Corp..... 21
Prepared statement........................................... 23
William A. (Lex) Taylor III, Chairman of the Board and Chief
Executive Officer, The Taylor Group Inc........................ 30
Prepared statement........................................... 31
Dr. Dario Gil, Senior Vice President and Director, IBM Research.. 33
Prepared statement........................................... 35
John S. Miller, Senior Vice President of Policy and General
Counsel, Information Technology Industry Council (ITI)......... 39
Prepared statement........................................... 41
Appendix
Response to written questions submitted to Dr. Gary Gereffi by:
Hon. Maria Cantwell.......................................... 75
Hon. Jacky Rosen............................................. 77
Hon. Kyrsten Sinema.......................................... 79
Hon. John Hickenlooper....................................... 80
Response to written questions submitted to Dr. James A. Lewis by:
Hon. Maria Cantwell.......................................... 81
Hon. Jacky Rosen............................................. 82
Hon. Kyrsten Sinema.......................................... 83
Hon. Raphael Warnock......................................... 84
Hon. Shelley Moore Capito.................................... 84
Response to written question submitted to Richard Aboulafia by:
Hon. Maria Cantwell.......................................... 85
Response to written questions submitted to William ``Lex'' Taylor
III by:
Hon. Maria Cantwell.......................................... 86
Hon. Shelley Moore Capito.................................... 86
Response to written question submitted to Dr. Dario Gil by:
Hon. Jacky Rosen............................................. 87
Hon. Kyrsten Sinema.......................................... 88
Hon. John Hickenlooper....................................... 89
Response to written questions submitted to John S. Miller by:
Hon. Kyrsten Sinema.......................................... 90
Hon. Raphael Warnock......................................... 90
Hon. Shelley Moore Capito.................................... 91
IMPLEMENTING SUPPLY CHAIN RESILIENCY
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THURSDAY, JULY 15, 2021
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 10:32 a.m., in
room SR-253, Russell Senate Office Building, Hon. Maria
Cantwell, Chair of the Committee, presiding.
Present: Senators Cantwell [presiding], Klobuchar,
Blumenthal, Peters, Tester, Sinema, Rosen, Hickenlooper,
Wicker, Thune, Fischer, Sullivan, Blackburn, Young, and Scott.
OPENING STATEMENT OF HON. MARIA CANTWELL,
U.S. SENATOR FROM WASHINGTON
The Chair. The U.S. Committee on Commerce, Science, and
Transportation will come to order. Thank you all for being
here. We have a distinguished group of witnesses today to talk
about a very important issue to us in the United States of
America, that is the state of competitiveness of our supply
chain and its resiliency for the future.
Each one of our witnesses, the distinguished Dr. Gary
Gereffi, Dr. James Lewis, Mr. Rich Aboulafia, Dr. Dario Gil,
Mr. William Lex, I am sorry, Taylor, thank you, and Mr. John
Miller all offer a variety of perspectives on the importance of
this issue. I can say for me, in the state of Washington, the
aviation supply chain is something we are very proud of. More
than 150,000 people work in that supply chain that continue to
innovate and create new products that, as Mr. Aboulafia says in
his testimony, that is where the innovation is happening in the
supply chain.
That is why we just recently passed the now called U.S.
Innovation and Competition Act, USICA, that we are trying to
negotiate with our House colleagues because we believe in
making an increased investment in the supply chain. So I am
sure we are going to hear today also about the challenges we
face in the semiconductor sector, an aspect of our supply chain
in which we saw great shifts over the last several decades and
the consequence is obviously less jobs in the United States of
America.
So needless to say, I think Congress has caught on that the
supply chain is key to our economic strategy and that a robust
supply chain in the United States of America means we are going
to continue to have robust employment in the United States of
America. Without the resiliency of the supply chain, it could
be complicated as to, given the experience of the COVID-19
pandemic, whether products can be delivered in a timely
fashion, whether our services and security could be impacted,
and just how important it is that we have a strategy for a
global economy in which a variety of products and services can
be delivered in a much more competitive fashion than in the
past.
That means the investments that the Department of Commerce
should make are important. USICA took several steps to
contribute to the resiliency of the supply chain, and
incentivize domestic semiconductor manufacturing, establish a
supply chain resiliency and response office within the
Department of Commerce. It makes tremendous investment in the
Department of Commerce National Science Foundation, and
Department of Energy to support R&D in translating inventions
into products, creating regional technology hubs, and expanding
the workforce and our innovation economy.
And these important facilities like our Pacific Northwest
National Laboratory, can help with spinoffs of new technology
that become critical parts of our R&D and domestic supply
chain. Also, our NIST funded manufacturing extension programs
can help in working with developing resiliency and supply chain
strategies so that we continue to have not just potential
customers and supply chain connectors, but understand, again,
how we can best innovate and stay competitive. So I look
forward to hearing the testimony from our witnesses today.
I feel very excited to have this distinguished group in
front of us, and I hope our colleagues will all learn from the
information here Senator Wicker, I am not sure 20 years ago
that we would have had the same hearing. I see our colleague,
Senator Young here, the key sponsor behind what was then the
Endless Frontier Act.
I am not sure we would have been having the same
conversation. But the world has changed. Supply chains have
changed and are changing and I look forward to how the United
States stays very competitive here. Thank you.
STATEMENT OF HON. ROGER WICKER,
U.S. SENATOR FROM MISSISSIPPI
Senator Wicker. Thank you, Madam Chair, and good to be here
with you today and to be with this distinguished panel. What do
we mean when we say supply chain? It is the process that starts
with raw materials and ends with sale or consumption. Along the
way, there are various steps, materials, refinement,
manufacturing and distribution.
Resilient supply chains can withstand and quickly recover
from disruptions, and we have had disruptions, but they also
include, in addition to infectious disease outbreaks, severe
weather, international conflict, things like that. In recent
decades, our manufacturing capacity has declined significantly.
Between 2000 and 2010, manufacturing jobs were cut by one-
third, with small businesses heavily impacted. And as we all
know, that is where we create the jobs in the United States of
America, small business.
As global competition has increased, control over our
supply chains has fallen into the hands of fewer and fewer
countries, most notably China. Such geographic concentration of
supply chains has left many U.S. companies vulnerable to
disruption, something we are now acutely experiencing. Helping
U.S. companies identify, and address areas of vulnerability
will require strong partnerships and international partners.
The Federal Government can also help by investing in R&D
and workforce development to make sure new innovations are
conceived and developed here in the United States. Taylor
Machine Works in Mississippi is one great example of a U.S.
company conducting R&D in the materials handling industry and
whose innovations are today being replicated around the world.
This committee took important steps, as the distinguished
chair mentioned, in passing the Endless Frontier Act, now known
as the United States Innovation and Competition Act, or USICA.
I don't like that as well. This bill, authored by Senator
Young, passed the Senate by a vote of 68 to 32. The legislation
would create a new supply chain resiliency program within the
Department of Commerce to monitor key industry supply chains
and develop ways to address vulnerabilities.
The bill also includes emergency appropriations to support
semiconductor manufacturing and R&D. This is a much needed
response to the semiconductor shortages that have disrupted
manufacturing across the nation, including my home State of
Mississippi. And undoubtedly we will hear about that from our
distinguished panel. The legislation also includes important
contribution from the Finance committee to combat China's
manufacturing imbalances and threats to free and fair trade.
Today's hearing is an opportunity for witnesses to discuss
how the United States Innovation and Competition Act can make
our supply chains more resilient. Our witnesses may want to
share their thoughts on how the Department of Commerce might
implement the various provisions of this bill. The House passed
its reauthorization of the National Science Foundation, but it
still needs to take action on the broad range of topics covered
by our legislation. The president recently issued a 100 day
supply chain review that identifies some important supply chain
vulnerabilities. We perhaps will hear about that today.
I am honored that among our panel is my good friend and
fellow Mississippian Lex Taylor, the Chairman and CEO of the
Taylor Group. It is a leading manufacturer in Mississippi.
Taylor builds forklifts and a wide variety of material handling
machines for both industry and defense purposes.
Mr. Taylor has firsthand experience with the topics we will
cover. And I know he and other members of the panel will make a
valuable contribution to this discussion. Thank you, ma'am.
The Chairman. Thank you, Senator Wicker. We are leading off
with you, Dr. Gereffi. Thank you so much for being here. We are
honored to have you before the Committee and hear your
expertise in this area. So please proceed.
STATEMENT OF GARY GEREFFI, Ph.D.,
EMERITUS PROFESSOR AND FOUNDING DIRECTOR,
GLOBAL VALUE CHAINS CENTER, DUKE UNIVERSITY
Mr. Gereffi. Thank you very much. Madam Chair Cantwell,
Ranking Member Wicker, members of the Senate Commerce
committee, it is a pleasure and an honor to be invited to
testify before you today. My name is Gary Gereffi. I have been
a Professor at Duke University for many years, and I direct the
Global Value Chains Center there.
And I have spent a number of decades studying global supply
chains. And this is the first time that I think my neighbors
and friends want to talk about that topic, not necessarily for
good reasons the last couple of years. As we know, COVID-19,
the pandemic has introduced many disruptions and shortages of
products so supply chains have come to the public
consciousness, oftentimes through these shortages. But I think
as the White House report that was released last month on
building resilient supply chains has emphasized, supply chains
have been a critical part of globalization and the U.S. economy
for the last five decades.
And it is really important that we be aware of disruptions
not just for products like personal protective equipment or the
other issues that have come up with COVID-19, but as a matter
of long term competitiveness. So what I wanted to do is just
highlight a couple of points that I make in my written
testimony, one about the nature of supply chain research, two,
about the concept of resilience, and then I want to give a kind
of a bottom up perspective of supply chains and conclude with a
couple recommendations. Supply chain research is surprisingly
recent in the university context. Businesses deal with supply
chains all the time. It is a matter of logistics. But from a
researcher point of view, it is a challenging field for two
reasons.
One reason is the boundary problem. We are aware of
industry studies, but supply chains are bigger and different
than industries. Supply chains have multiple tiers of companies
that stretch up and down that supply chain. So we might be
aware of the end product makers. We are not aware so much of
the first tier, second tier, third tier suppliers. That is
critical. But supply chains also have an important breadth.
They have backward linkages and forward linkages. So in many
ways, supply chains are much bigger and more complicated than
our traditional sense of industries.
So it has been hard to create those boundaries and that
raises a measurement problem. The data that we have on other
kinds of economic analysis like trade and investment data are
easier to find if we are dealing with traditional industries.
But when we are dealing with supply chains, many of those
supply chain linkages are confidential. They are not the kind
of things that you can just go and find easily. So the
researchers working in different industries have had to try to
recreate what those supply chains are. Resilience, I agree, as
a critical concept, but I think we need to look at it at
several levels.
There is resilience from the level of the firm, but from a
firm perspective, they are thinking of resilience in terms of
operational efficiency and how do they risk--how do they deal
with risk management if supply chains are disrupted? There is a
second level of supply chains, resilience viewed at the level
of supply chains themselves, which are bigger than firms. They
are the industry systems that have organizational and
geographic characteristics.
And finally, there are supply chains, resilience in terms
of countries and what we care about. Part of that is National
Security. And that was a key emphasis in the White House report
last month. But also from a country point of view, supply
chains relate to jobs. They relate to infrastructure. They
relate to different kinds of economic, social, and
environmental concerns. So I think when we are talking about
resilience, it will be helpful to link resilience for whom? For
firms, for the industries themselves, or for countries? In my
written comment, I talk about supply chains from top down or
bottom up.
In these short remarks, we just mentioned the bottom up
perspective. How do we look at supply chains from a U.S.
vantage point? And one of the projects we had done at Duke too
was something called the North Carolina and the Global Economy
Project, where we looked at seven key industries in North
Carolina, natural resource industries like tobacco and hog
farming, traditional manufacturing like furniture or textiles,
but also high tech industries like biotechnology or information
technology or banks and finance.
Every state in the country has critical industries that
they care about. So I think if we start looking at supply
chains from the bottom up, and each state says, here is the
industries we care about, there are things we can learn from
supply chain research about how to do that kind of mapping, and
I gave some examples in the written testimony. Final point on
some of the recommendations I noticed. What is important to me
is how universities get tied in to the initiatives that this
committee and this legislation is talking about.
I think in the USICA, the Information and Competitiveness
Act, there is a critical emphasis on an NSF technology
directorate as a way to perhaps focus some of these efforts. I
would applaud that. I think that is going to add applied
research to the kind of basic research that NSF does. But NSF
also tries to get universities involved in this research. And
so one thing I would just recommend is that if we think about a
technology directorate, we think about it as more than just
engineering. Engineering is embedded in a lot of these other
social areas that we care about, jobs and the like.
So I think that that part of what we can do with the
technology directorate is figure out how do you link
universities in different parts of the country that are dealing
with common industry issues. So I think the kind of initiatives
that have been proposed are really going to be important. But
some of the advice you might be getting from private sector,
university folks, and others could help us knit together these
proposals in a really strong, robust way. Thank you very much.
[The prepared statement of Mr. Gereffi follows:]
Prepared Statement of Gary Gereffi, Ph.D., Emeritus Professor and
Founding Director, Global Value Chains Center, Duke University
I. Introduction
Madam Chair Cantwell, Ranking Member Wicker, and Members of the
Committee, I am honored to appear before you today to offer testimony
on the hearing topic, ``Implementing Supply Chain Resiliency.'' My name
is Gary Gereffi, and I am the Founding Director of the Global Value
Chains Center at Duke University. I have spent much of my academic
career looking at the structure and dynamics of global industries, and
how and why U.S. companies decided to set up international production
and sourcing networks. This research has involved extensive fieldwork
in a wide variety of industries and countries around the world,
including in-depth interviews with the companies, business and labor
groups, policymakers, and other industry stakeholders in each setting.
In light of this experience, I am very gratified to see the
excellent White House report on ``Building Resilient Supply Chains,
Revitalizing American Manufacturing, and Fostering Broad-Based Growth''
released in June 2021 that outlines steps to strengthen critical U.S.
supply chains. In my remarks today, I draw upon my background as both a
researcher and a policy adviser. I will organize my remarks around
three main themes: (1) a brief review of the rise of global supply
chains as a research field; (2) a short list of building blocks of
resilient supply chains that derive from this research; and (3) a few
recommendations for actions that the U.S. Federal government can take
to implement supply chain resiliency.
Recent disruptions associated with the COVID-19 pandemic have
brought both the significance and risks of supply chains to the
American consciousness as never before. COVID-19 has been a unique and
terrifying event because of its swift global spread and its devastating
and lingering impact on the health and security of the American people
and the global community. It has resulted in unprecedented supply
shortages and demand fluctuations that have affected virtually all U.S.
industries, from medical supplies to food products and toilet paper,
and from the transportation and service sectors to critical
intermediate goods like semiconductors, active pharmaceutical
ingredients, and rare-earth minerals. These dislocations can provide
important lessons for the future.
Supply-chain disruptions are a recurrent risk for many businesses.
They can be caused by natural events, such as tropical storms,
earthquakes, or extended droughts, as well as cyclical fluctuations
like business cycles or financial crises (e.g., the 2008-09 global
recession). Government policies can also disrupt supply chains, such as
trade restrictions that impede the cross-border flows of imports and
exports or local-content requirements that mandate the domestic
procurement of goods and services. While COVID-19 disruptions were a
different order of magnitude because of their speed and global impact,
a supply-chain perspective that links firm strategies, industry
dynamics and government policies can help address short-term supply-
chain discontinuities in the U.S. economy, and inform plans for long-
term resilience as a basis for dynamic, inclusive and sustainable
economic growth.
II. Supply Chain Research: A Recent Field
Although supply chains may sound like a rather arcane or technical
topic, supply-chain research has flourished in recent decades,
especially as supply chains have gone global. In contrast to the more
familiar field of industry studies or intriguing case histories of
well-known products (such as Barbie dolls or iPhones), supply-chain
research encompasses the full structure of an industry, including its
pre-production (R&D and design) phases, the often complex production
process (raw and processed materials, manufactured components and other
inputs, and the assembly, testing and packaging of final products), and
post-production stages (e.g., distribution and logistics, marketing,
and in some cases recycling).
During the origins of American big business (19th and early 20th
centuries), most supply-chain activities were carried out inside large
vertically integrated corporations where the ``visible hand'' of
management replaced Adam Smith's famous invisible hand of the
market.\1\ However, in the post-World War II era, as businesses became
more specialized and global through the twin processes of
``outsourcing'' (obtaining goods or services from outside suppliers)
and ``offshoring'' (moving portions of the production process to
overseas locations), the global factory model became more common where
the assembly of goods and later the full range of production activities
were spread across multiple countries for a combination of cost,
capability and market reasons.\2\ Thus, a growing proportion of
international trade was made up of intermediate goods rather than
finished products. As this globalization process gained momentum from
the mid-1960s through the 1990s, American manufacturing especially of
relatively labor-intensive consumer goods moved offshore, imports
accounted for a growing portion of consumer items sold in the United
States, and the number of companies and employees in the U.S.
manufacturing sector fell precipitously.
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\1\ Alfred D. Chandler, Jr., The Visible Hand: The Managerial
Revolution in American Business (Belknap Press, 1977).
\2\ Joseph Grunwald and Kenneth Flamm, The Global Factory: Foreign
Assembly in International Trade (Washington, DC: Brookings Institution,
1985).
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Supply chain studies to analyze this globalization process and its
impact on the U.S. economy were promoted by various U.S. foundations.
The Alfred P. Sloan Foundation in New York launched an Industry Studies
program (1990-2010) to foster a closer interaction between academia and
industry, which grew to include around two dozen centers at U.S.
universities. The Rockefeller Foundation supported a Global Value
Chains Initiative (2000-2008) that funded an international network of
scholars with the goal of creating a paradigm linking global, national,
and local levels of analysis to address both the knowledge gaps and
policy gaps created by globalization. What the global value chain (GVC)
framework added to earlier supply chain studies was an explicit effort
to understand and measure how and where value is created and captured
along global supply chains, as well as the main trajectories of
economic, social and environmental upgrading (or downgrading)
associated with these changes at the global, national, regional and
community levels.\3\
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\3\ Gary Gereffi, Global Value Chains and Development: Redefining
the Contours of 21st Century Capitalism (Cambridge University Press,
2018); Stefano Ponte, Gary Gereffi and Gal Raj-Reichert (eds.),
Handbook on Global Value Chains (Edward Elgar Publishing, 2019); World
Bank, Trading for Development in the Age of Global Value Chains, World
Development Report 2020 (World Bank Group, 2020).
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Supply-chain researchers are very interdisciplinary and their work
is featured at a variety of annual conferences, such as Industry
Studies Association (ISA), Regional Studies Association (RSA), Society
for the Advancement of Socio-Economics (SASE), and Academy of
International Business (AIB). Traditionally, the supply-chain
literature has relied heavily on industry case studies and cross-
industry comparisons, but the Organisation for Economic Co-operation
and Development (OECD) in conjunction with the World Trade Organization
has created a Trade in Value Added database that permits a detailed
trade mapping of how countries participate in GVCs by calculating the
value-added of exports (domestic content minus imported inputs), which
permits modeling of how domestic manufacturing contributes to economic
growth. The World Bank, in collaboration with other multilateral
development agencies, created the World Integrated Trade Solution
software package that allows users to download detailed trade
information on commodities and over 170 partner countries to assist
policymakers and practitioners involved in the international trading
system.
Academic researchers also build their own unique databases to
measure supply-chain relationships. For example, a study of the
aerospace industry collected data on buyer-supplier and partnership
linkages among more than 2,800 firms across 52 aerospace clusters in
North America and Europe during 2002-2014,\4\ and another study
utilized a dataset of over 57,000 sourcing transactions of automotive
parts manufacturers in Europe and North America between 1993 and 2012
to test propositions derived from GVC governance theories.\5\ Thus,
mixed methodologies continue to characterize the field.
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\4\ Ekaterina Turkina, Ari Van Assche and Raja Koli, ``Structure
and evolution of global cluster networks: Evidence from the aerospace
industry,'' Journal of Economic Geography 16 (2016): 1211-1234.
\5\ Johannes Van Biesebroeck and Alexander Schmitt, ``Testing
predictions on supplier governance from the global value chains
literature,'' Industrial and Corporate Change (2021), https://doi.org/
10.1093/icc/dtab034.
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International organizations have increasingly adopted the GVC
framework as a way to understand how countries at different levels of
development participate in the global economy, and what kinds of policy
advice could promote dynamic, inclusive and sustainable economic
growth.\6\ This was the focus of a Duke GVC Summit in October, 2014
that invited representatives from 30 international organizations,
national development agencies, non-governmental organizations (NGOs)
and universities as well as leading supply-chain researchers to discuss
how and why they use the GVC approach, and to provide suggestions on
how it can be improved. This type of policy impact is very unusual for
most academic research paradigms, and it is a significant catalyst for
ongoing work in the field.\7\
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\6\ Olivier Cattaneo, Gary Gereffi and Cornelia Staritz (eds.),
Global Value Chains in a Postcrisis World: A Development Perspective
(World Bank, 2010); UNCTAD, World Investment Report 2013--Global Value
Chains: Investment and Trade for Development (United Nations Conference
on Trade and Development, 2013); UNIDO, Global Value Chains and
Development: UNIDO's Support towards Inclusive and Sustainable
Industrial Development (United Nations Industrial Development
Organization, 2015).
\7\ Gary Gereffi, ``Global value chains and international
development policy: Bringing firms, networks and policy-engaged
scholarship back in,'' Journal of International Business Policy 2(3)
(2019): 195-210.
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III. Building Blocks of Resilient Supply Chains
Drawing from recent research on global supply chains, I will
outline six broad themes that intersect with the goals and
recommendations of the White House's ``Building Resilient Supply
Chains'' report,\8\ and also address the Department of Commerce's
concerns to identify concrete steps it can adopt to ensure the
resiliency of the Nation's critical supply chains. These central
concepts, findings and trends reflect work on supply chains that cuts
across the global, national, regional and local levels, and they inform
my recommendations for U.S. supply chain initiatives such as those
carried out by the Department of Commerce to advance a broad-based,
inclusive and sustainable economic agenda.
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\8\ The White House, ``Building Resilient Supply Chains,
Revitalizing American Manufacturing, and Fostering Broad-Based Economic
Growth,'' 100-Day Reviews Under Executive Order 14017, June 2021.
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1) Resilience for Whom? Firms, Supply Chains and Countries
In the aftermath of the disruptions caused by COVID-19, there has
been an intense debate on whether U.S. supply chains are too rigid and
dependent on a small number of offshore locations in pursuit of cost-
based global efficiency.\9\ The notion of ``resilience'' is often
proposed as an alternative principle to guide recovery from recurrent
disruptions. However, resilience has different meanings for companies,
supply chains, and countries:
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\9\ Lizzy O'Leary, ``The modern supply chain is snapping,'' The
Atlantic, March 19, 2020; Willy C. Shih, ``Bringing manufacturing back
to the U.S. is easier said than done,'' Harvard Business Review, April
15, 2020; Aaron Friedberg, ``The United States needs to reshape global
supply chains,'' Foreign Policy, May 8, 2020; Robert E. Lighthizer,
``The era of offshoring U.S. jobs is over,'' New York Times, May 11,
2020.
For companies, resilience refers to the ability to adjust
and respond to disruptions in their supply chains through
strategies and capabilities that balance operational efficiency
and flexibility via appropriate forms of risk management and
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redundancy.
For supply chains that extend beyond individual firms,
resilience entails adaptation via modes of governance
established by lead firms that maximize system-level
efficiencies and cushion against vulnerabilities, taking into
account the organizational and geographic configurations of
each supply chain.
At the country level, building resilience in the face of
supply-chain disruptions involves proposals for reshoring,
country and supplier diversification, near-shoring, and
reliance on trusted partners, as well as the buildup and
maintenance of national stockpiles and strategic reserves that
will be driven by national security considerations as well as
broader economic and social goals related to jobs, investment,
trade, sustainability, and innovation.
Understanding resilience as a multidimensional concept means that
coordination and tradeoffs are inevitable to develop robust and
comprehensive supply chain policies. Resilience strategies may not
easily align across these different levels, but awareness of the
interdependencies is a necessary step to ameliorate disruptions in a
more effective way.
2) Supply Chains Have Multiple Governance Structures
A core finding and premise of the GVC framework is that global
supply chains have governance structures that are established by the
lead firms that set up and orchestrate the activities of the multi-
tiered suppliers in the chain. An initial seminal distinction was
between producer-driven and buyer-driven supply chains: (a) the lead
firms in producer-driven chains were integrated manufacturers that
typically controlled the capital and technology used to establish new
industries (e.g., automobiles, aircraft, computers, pharmaceuticals);
and (b) conversely, in buyer-driven chains the lead firms were large
retailers (e.g., Walmart, JC Penney, Costco, Tesco) and brand-name
firms (e.g., Nike, Adidas, Liz Claiborne, Disney) that orchestrated but
did not own vast networks of global suppliers in consumer-goods
industries, such as apparel, footwear, sporting goods, toys, and food
products. Whether led from the supply side or the demand side, lead
firms tend to set the rules of the game in terms of price, quality,
product standards and delivery schedules for other firms in the
chain.\10\ Subsequent governance typologies were introduced that cover
a wider range of structures, such as hierarchical, captive, relational,
modular, and market forms of governance.\11\
---------------------------------------------------------------------------
\10\ Gary Gereffi, ``The organization of buyer-driven global
commodity chains: How U.S. retailers shape overseas production
networks,'' in Gary Gereffi and Miguel Korzeniewicz (eds.), Commodity
Chains and Global Capitalism (Praeger, 1994), pp. 95-122.
\11\ Gary Gereffi, John Humphrey and Timothy Sturgeon, ``The
governance of global value chains,'' Review of International Political
Economy 12(1) (2005): 78-104
---------------------------------------------------------------------------
Within key industries like semiconductors, multiple governance
structures may be set up by lead firms that adopt distinct production
models. For example, the integrated device manufacturers (IDMs), such
as U.S.-based Intel and Texas Instruments and South Korea-based
Samsung, do the entire production process for finished chips
themselves, whereas in the alternative ``fabless'' or foundry model,
the three broad steps for making finished semiconductors--design,
manufacturing, and assembly, testing and packaging (ATP)--are carried
out by specialized companies. While U.S. firms are dominant IDM
players, accounting for over half of global IDM revenues in 2020, the
fabless/foundry model relies very heavily on chip output from
Taiwanese-based TSMC (Taiwan Semiconductor Manufacturing Company),
which accounts for 53 percent of the contract foundry market, including
the most technologically advanced chips.\12\
---------------------------------------------------------------------------
\12\ White House (2021), op. cit., pp. 34-35.
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3) Supply Chains Have Shifting Geographies
The geographic footprint of most supply chains evolves quite
significantly over time. The apparel industry, which epitomized the
fragmented and globally dispersed production networks associated with
buyer-driven GVCs, became much more consolidated when quotas allowed by
the Multi-Fiber Arrangement were eliminated by the World Trade
Organization (WTO) in 1995. Today, just three countries--China,
Bangladesh and Vietnam--account for nearly half of world apparel
exports. In other industries, supply chains are more regionally based,
such as the North American automotive industry, the European aerospace
sector, and East Asia's ecosystem of consumer electronics suppliers.
Regional chains are often a by-product of regional trade pacts, such as
the North American Free Trade Agreement (NAFTA) and the European Union
(EU).\13\
---------------------------------------------------------------------------
\13\ Gary Gereffi, Hyun-Chin Lim and Joonkoo Lee, ``Trade policies,
firm strategies, and adaptive reconfigurations of global value
chains,'' Journal of International Business Policy (2021), https://
link.springer.com/article/10.1057%2Fs42214-021-00102-z.
---------------------------------------------------------------------------
Supply chains can also be examined at the national level, but
measurement and boundaries raise difficult challenges. National
statistics typically use standard industry classifications. If we take
the U.S. semiconductor industry, for example, which is analyzed in the
recent White House supply-chain report, we can define the size of the
industry using various metrics: annual sales ($208 billion in 2020,
which is nearly half of the world market); value added ($35 billion in
2019, 1.4 percent of U.S. manufacturing value added); employment
(207,400 workers in 2019, 1.6 percent of U.S. manufacturing
employment); number of firms (733 companies in semiconductor device
manufacturing and 140 semiconductor equipment manufacturers); and the
breadth of activities across the country (18 U.S. states have major
semiconductor manufacturing operations).\14\
---------------------------------------------------------------------------
\14\ White House (2021), op. cit., p. 24.
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However, these industry figures fall far short of indicating the
true size and scope of the semiconductor supply chain in the United
States, which would include the multitude of suppliers (domestic and
international) to U.S. semiconductor firms. In addition, since
semiconductors are a critical intermediate component used in many
industries, the semiconductor supply chain would also extend to the
main sectors that use these chips, which include (based on worldwide
demand in 2019): mobile phones (26 percent), information and
communication infrastructure (24 percent); computers (19 percent);
industrial (12 percent); automotive (10 percent); and consumer
electronics (10 percent).\15\
---------------------------------------------------------------------------
\15\ Ibid., pp. 24-25.
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4) Asia Is a Pre-eminent Global Production Hub, and China Is Its
Epicenter
In the last couple of decades, Asia has emerged as a dominant
production hub for many global supply chains. Asia offers a unique
combination of low-cost production, economies of scale, and a broad
array of technologically sophisticated and specialized suppliers that
serve both global and increasingly Asian consumer markets. The cost
advantages associated with Asia-based sourcing are attractive not only
to the lead firms in global supply chains, but also to cost-conscious
institutional clients like U.S. hospital systems and medical agencies
that wish to couple just-in-time (JIT) purchasing of medical supplies
with the JIT low-inventory model favored by industry leaders.
China has become the world's top exporter ($2.6 trillion in 2020),
well ahead of the United States and Germany (each around $1.4
trillion).\16\ However, given rising wages in China and growing
shortages of factory workers in many parts of the country, other
relatively low-wage economies within Asia, such as Vietnam, Bangladesh,
India, Indonesia and the Philippines, are becoming prominent exporters
from the region. The most technologically advanced Asian economies,
such as Japan, South Korea, Singapore and Taiwan, provide specialized
components and equipment, which combine to make Asia a formidable
global production and export hub.
---------------------------------------------------------------------------
\16\ World's Top Export Countries, https://
www.worldstopexports.com/worlds-top-export-countries/, accessed on July
6, 2021.
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As an economic power, China is a significant adversary. It has
supplemented its export-oriented development strategy from the 1990s
and 2000s with a technology-driven and domestic-economy-oriented
approach since the early 2010s, as typified by its Made in China 2025
and indigenous innovation programs. China is also poised to expand its
regional influence through its massive Belt and Road Initiative that
will increase its external investments and trade in Central and
Southern Asia, sub-Saharan Africa, and South America. Although still
lagging in key technologies like semiconductors, China has placed an
emphasis on forward-looking industries like electric cars, high-speed
rail, artificial intelligence, automation, and e-commerce services like
mobile banking and digital platform-based factory networks.
There are many valid concerns about China's troubling policies and
practices involving state control of the economy, intellectual property
theft, human rights abuses, and political repression at home and
abroad, among other issues. New U.S. supply chain initiatives are
needed to meet the technological and economic challenges posed by
China. However, in pursuing its agenda, the United States would do well
to align its efforts to address the threats posed by China with U.S.
strategic partners and allies who share many of our concerns and
objectives. A rapid decoupling from China poses many practical
difficulties and it could reduce U.S. leverage in terms of broader
geopolitical and economic interests.
5) Building Resilient Supply Chains in the United States
While much work on supply chains tends to highlight the
international dimension and looks at global industries from the ``top
down,'' it is equally important to view supply chains from the ``bottom
up'' by emphasizing their potential contributions to national and local
growth. A good illustration of this bottom-up approach is the project
on ``North Carolina in the Global Economy,'' which was launched at Duke
University to understand how globalization affected seven of the
state's principal industries: tobacco, textiles and apparel, furniture,
hog farming, information technology, biotechnology, and banks and
finance.\17\ Like many U.S. states, North Carolina's key industries
reflect a mix of resource-based, manufacturing and service sectors, and
it faces a range of investment, employment, skills training, small
business development, and innovation challenges. The NC-Global Economy
website was built using publicly available state-level and national
economic statistics for a 20-year period (1992-2012), supplemented by
online data searches at the company and industry levels, to provide a
longitudinal portrait of how North Carolina's industries and companies
have fared in an era of globalization, and what policies and strategies
at the state and local levels might foster resilient growth.
---------------------------------------------------------------------------
\17\ See the North Carolina in the Global Economy website at http:/
/ncglobaleconomy.com.
---------------------------------------------------------------------------
Among the insights gleaned from the NC-Global Economy project is
that traditional industries like textiles and furniture have adapted in
striking ways to recent political, economic and technological shifts.
While North Carolina's textile firms accommodated NAFTA by continuing
to supply apparel customers that moved to Mexico and Central America,
the industry also embraced technological change via the growth of
nonwoven and ``technical'' textiles in the state's output and exports.
These new products shifted the industry's end markets from its
traditional apparel, home furnishing and automotive customers to
sectors like aerospace, medical, marine, military and geotextiles.\18\
North Carolina's furniture industry also showed resilience in adapting
to change, as local manufacturers were hit by export slowdowns and
rapidly rising furniture imports from Asia and Mexico. However, the
annual High Point, NC furniture market served as a lifeline to keep
wholesale buyers coming to the state as local manufacturers slowly
recovered.\19\
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\18\ http://www.ncglobaleconomy.com/textiles/overview.shtml
\19\ Bill Lester and Lukas Brun, ``The economic impact of the High
Point market,'' Duke Center on Globalization, Governance &
Competitiveness (CGGC), Durham, N.C., October 2013, available at
https://gvcc.duke.edu/wp-content/uploads/2013-09-30High PointMarket-
economic-impact-analysis-1.pdf.
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A supply-chain methodology can also prove very useful in tracking
opportunities created by new high-tech sectors in the United States.
For example, following a study on the U.S. smart grid (the ``energy
internet'') that assessed the potential of 125 leading smart grid firms
to create clean energy-related jobs, the Research Triangle Region of
North Carolina emerged as one of the U.S. ``hot spots'' for future
growth.\20\ A separate study was commissioned by a local development
agency to assess how this North Carolina cluster of smart grid firms
could build on its competencies and expand its opportunities to invent,
make and sell their products in the U.S. as well as abroad.\21\ A main
objective of both studies was to ``map'' the smart grid value chain to
show more clearly the technological synergies linking the national and
state-level economies.
---------------------------------------------------------------------------
\20\ Marcy Lowe, Hua Fan and Gary Gereffi, ``U.S. smart grid:
Finding new ways to cut carbon and create jobs,'' Duke CGGC, Durham,
N.C., April 19, 2011, available at https://gvcc.duke.edu/wp-content/
uploads/ Lowe_US_Smart_Grid_CGGC_04-19-2011.pdf.
\21\ Marcy Lowe, Hua Fan and Gary Gereffi, ``Smart grid: Core firms
in the Research Triangle Region, NC,'' Duke CGGC, Durham, N.C., May 11,
2011, available at https://gvcc.duke.edu/wp-content/uploads/
Lowe_Research-Triangle-Smart-Grid_CGGC_05-24-2011.pdf.
---------------------------------------------------------------------------
Value-chain studies have proven particularly useful to show the
connections between so-called ``clean technologies'' and U.S. jobs. One
of the initial clients of the Duke GVC Center was the Environmental
Defense Fund (EDF), which commissioned a series of product-level
studies to show how the transition to a low-carbon economy positively
impacted the U.S. manufacturing sector. The initial report focused on
five carbon-reducing products--LED lighting, high-performance windows,
auxiliary power units for trucks, concentrated solar power, and a
``super soil'' system for hog-waste management--and value chain maps
for each product helped to show how and where manufacturing jobs were
being produced in the United States.\22\ Subsequently, EDF commissioned
over a dozen additional product and company case studies to illustrate
the tangible connections between the green economy and U.S. blue-collar
jobs.\23\ A similar supply-chain methodology was employed in a new
study focusing on expanding utility-scale, lithium-ion battery-storage
capacity in North Carolina as a foundation for all forms of clean
energy, thus enhancing North Carolina's potential to be a national
leader in clean energy.\24\
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\22\ Gary Gereffi, Kristen Dubay and Marcy Lowe, ``Manufacturing
climate solutions: Carbon-reducing technologies and U.S. jobs,'' Duke
CGGC, Durham, N.C., November 2008, available at https://gvcc.duke.edu/
wp-content/uploads/greeneconomy_Full_report.pdf.
\23\ https://gvcc.duke.edu/search-our-work/
?fwp_cggc_search=environmental%20defense%20fund.
\24\ Lukas Brun and Gary Gereffi, ``Battery storage: North
Carolina's footprint in the global value chain,'' report commissioned
by Audubon North Carolina, February 1, 2021, available at https://
mercury.postlight.com/amp?url=https://nc.audubon.org/press-release/
report-finds-north-carolina-well-positioned-battery-storage-growth.
---------------------------------------------------------------------------
This ``bottom up'' approach to building supply-chain resiliency
focusing on particular states and products is broadly applicable across
the entire U.S. economy. Virtually all U.S. states rely on a handful of
key industries linked to national and global markets that account for
the bulk of their investment, output and employment. The tools of
value-chain analysis, as exemplified in the NC-Global Economy and EDF
projects highlighted above, are suitable for various monitoring,
planning and innovation objectives that could be spearheaded by the
Department of Commerce, including:
tracking how both large and smaller companies in a state's
key industries are performing over time, and how the state
compares to its main U.S. competitors in relevant industries
attracting investors to supplement or fill critical supply-
chain needs, especially as multiple U.S. states seek to lure
top firms and talent in similar industries
supporting university, community college and corporate
research and training capabilities
assisting local workforce development efforts to identify
and add critical skills needed by priority sectors
Similar dynamics are unfolding in major U.S. cities. A number of
American cities stand out as hubs or centers of excellence in key U.S.
industries, such as Seattle (aerospace, software and digital economy,
with Boeing, Microsoft and Amazon), Houston (oil and gas; medical),
Phoenix (semiconductors), Pittsburgh (steel and biomedical), and Boston
(high-tech; defense), to name just a few. Cities like these are
production and innovation nodes in critical U.S. and global supply
chains. To enhance their resiliency, U.S. supply-chain initiatives
should strengthen and deepen the supporting activities (infrastructure,
hardware, software and services) these urban hubs rely on, and
facilitate their connections to other regions and smaller cities that
are part of the same value chain.
As U.S. technology giants like Google, Apple and Amazon make major
investments in machine learning, artificial intelligence, software
engineering, and quantum and cloud computing in mid-sized cities like
those in North Carolina \25\ and elsewhere across the country, it is
clear that vibrant U.S. supply chains rely on urban knowledge and
production networks that can create and retain value and spread
benefits to surrounding communities.
---------------------------------------------------------------------------
\25\ David Sebastien, ``Apple to build new campus in North
Carolina: Move would create at least 3,000 jobs in machine learning,
AI, software engineering and other fields, company says,'' Wall Street
Journal, April 26, 2021, available at https://www.wsj.com/articles/
apple-to-build-new-campus-in-north-carolina-11619441000; Rick Smith,
``Google picks Durham for engineering hub, aims to create 1,000 jobs,''
March 18, 2021, available at https://www.researchtriangle.org/news/
google-picks-durham-for-engineering-hub-aims-to-create-1000-jobs/.
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6) The Role of Universities in Supply-Chain Research
Somewhat surprisingly, perhaps, universities play a very uneven
role in supply-chain research. U.S. foundations have been an important
source of financial support, but even in the most positive cases,
assistance has been temporary. The Sloan Foundation's Industry Studies
program set up industry-specific centers in 26 U.S. universities, but
the program was terminated in 2010. A by-product of the Sloan program
was the formation of the Industry Studies Association in 2009, which
has annual conferences but offers no funding for industry research or
university-based industry centers. The Rockefeller Foundation, which
helped to launch the Global Value Chain Initiative with an
international group of scholars,\26\ encouraged the formation of the
Duke GVC Center (previously the Center on Globalization, Governance &
Competitiveness) in 2005 to provide a university base to facilitate the
future networking of GVC scholars, but research support was guaranteed
by neither Rockefeller nor Duke University. Project funding was client
driven and therefore highly uncertain.
---------------------------------------------------------------------------
\26\ The GVC Initiative agenda and members are discussed in Gary
Gereffi and Raphael Kaplinsky (eds.), ``The value of value chains:
Spreading the gains from globalization,'' special issue of IDS Bulletin
32(3), July (2001).
---------------------------------------------------------------------------
This situation reflects the business model of most U.S. research
universities. Their core mission is to foster high-quality independent
research by faculty that secure long-term funding (primarily from large
U.S. government agencies like the National Science Foundation (NSF) or
National Institutes of Health) and publish in prestigious peer-reviewed
academic journals. Supply-chain research is not an ideal fit for U.S.
universities because industry-oriented researchers are both
interdisciplinary and international, and acquiring industry-specific
knowledge does not necessarily lend itself to academic publications,
which tend to privilege theoretical and methodological rigor, and in
the social sciences this often translates into quantitative (rather
than case-based) analysis.
Given the significant real-world impact of good supply-chain
research, a growing number of universities support programs linked to
supply chains and economic development (not including supply-chain
management programs in many business schools). In the United States,
along with the Duke GVC Center, the Massachusetts Institute of
Technology's Industrial Performance Center is a highly regarded and
relatively well-funded unit. Many overseas universities have research
groups in GVC analysis or related fields like global production
networks, including the University of Manchester (UK) and Oxford
Business School (UK), Copenhagen Business School (Denmark), University
of Padova (Italy), the National University of Singapore, and the
University of International Business and Economics (Beijing, China).
IV. Implementing Supply-Chain Resiliency: A Few Recommendations
Based on this overview of various concepts, findings and trends in
recent supply-chain research, I will highlight several final topics
that may be relevant in the Department of Commerce's efforts to design
and implement projects to strengthen supply-chain resiliency.
Supply Chains Are Product-Specific
Although it is tempting to think of supply chains in broad industry
categories, such as automotive, aerospace or semiconductors, in fact
supply chains are often quite product-specific and we overgeneralize at
our peril. For example, during the COVID-19 pandemic, it was common to
analyze disruptions in COVID-19-related medical supplies as though they
fit a standard pattern. Particular concern was given to shortages of
personal protective equipment (PPE) such as sterile rubber gloves and
face masks to limit the spread of the novel coronavirus in the general
population, as well as ventilators used by medical personnel to treat
seriously ill patients. But recent supply-chain research shows that PPE
shortages required different solutions, depending on how the supply
chains were organized:
Rubber gloves: Production was concentrated in Southeast
Asia, and Malaysia is the dominant supplier with two-thirds of
global exports. Although some shortages persist, the U.S.
resolved its main supply shortfalls via increased imports of
sterile gloves from Malaysia and Thailand.\27\
---------------------------------------------------------------------------
\27\ Gary Gereffi, ``Increasing resilience of medical supply chains
during the COVID-19 pandemic,'' Industrial Analytics Platform, June 24,
2021, available at https://iap.unido.org/articles/increasing-
resilience-medical-supply-chains-during-covid-19-pandemic.
Face masks: China accounted for about 60 percent of U.S.
face mask imports prior to the pandemic, but China suspended
its exports of face masks worldwide as it dealt with its own
outbreak of COVID-19 cases in early 2020. In late March 2020,
the U.S. government began to encourage large U.S. face mask
producers like 3M and Honeywell along with smaller domestic
suppliers to ramp up production, but it took several months
before the supply gap was substantially narrowed by late
August.\28\
---------------------------------------------------------------------------
\28\ Gary Gereffi, What does the COVID-19 pandemic teach us about
global value chains? The case of medical supplies,'' Journal of
International Business Policy 3(3) (2020): 287-301, available at
https://link.springer.com/article/10.1057/s42214-020-00062-w.
Ventilators: The United States confronted acute shortages of
ventilators in late March and April, 2020, a life-saving device
for many COVID-19 patients treated in the intensive-care units
(ICU) of hospitals. Ventilators were much more complex than
other PPE items, and the Defense Production Act was invoked to
facilitate production partnerships between U.S. auto companies
like General Motors and Ford with much smaller medical
equipment firms. Although U.S. ventilator output dramatically
increased, domestic supply soon exceeded demand. The number of
ventilators in the U.S. strategic stockpile surged from 10,000
in April to over 95,000 by mid-August 2020, but only a very
small number of these machines were actually used to treat
COVID-19 patients. With improved hospital care, far fewer
patients were sent to ICUs, demand for ventilators plummeted,
and the U.S. ventilator shortage became a glut.\29\
---------------------------------------------------------------------------
\29\ Faiz Siddique, ``The U.S. forced major manufacturers to build
ventilators. Now they're piling up unused in a strategic reserve,''
Washington Post, August 18, 2020.
Lessons the Department of Commerce can take away from these COVID-
---------------------------------------------------------------------------
19 product case studies include:
(1) Related products with different supply-chain structures may
require distinct policy solutions (e.g., reliance on trade ties
for rubber gloves; use of the Defense Production Act in both
face masks and ventilators to increase domestic production;
anticipate the risks in overbuilding strategic stockpiles).
(2) An up-to-date and regularly revised inventory of the main
suppliers (domestic and foreign) in key U.S. supply chains will
facilitate a much quicker policy response.
(3) Public-private collaboration is required for effective
interventions, including cross-industry production
partnerships, and appropriate committees and decision-making
units should be created based on what we learned from previous
experiences.
Beware of Technological Lock-In
The pace of technological change in global supply chains can be
startlingly fast. In the semiconductor industry, this is illustrated by
what is referred to as ``Moore's Law'' the number of
transistors on a semiconductor doubles every two years; this is
supplemented by ``Moore's Second Law'' the cost of
constructing a semiconductor fabrication facility doubles every four
years.\30\ Because of such rapid change, the potential for
technological lock-in is particularly high in R&D and design-intensive
fields, such as aerospace and semiconductors. Since it costs $12-$20
billion to build a new state-of-the-art chip fabrication facility,
caution in planning such investments and spreading the risks across
strategic production partners (both inside the United States and
abroad) are prudent supply-chain practices.
---------------------------------------------------------------------------
\30\ White House (2021), op. cit., pp. 34, 42 & 59.
---------------------------------------------------------------------------
The mobile telecom industry, which is the largest end-market for
semiconductors, illustrates the rapidly evolving landscape in
technology-intensive GVCs. The leading smartphone brands in 2019 were:
Samsung (19.2 percent), Huawei (15.6 percent) and Apple (12.6 percent).
Previous industry leaders like Nokia (Finland), Motorola (U.S.),
Ericsson (Sweden), and Blackberry (Canada) have disappeared from the
market. Current market pacesetters each have a different business
model:
Samsung is a highly integrated global producer, but relies
on open-source software.
Apple is a global innovator that relies almost exclusively
on proprietary technology.
Huawei has emerged as a ``national champion'' within China
using a mix of open-source and own technology, but it is
hindered by the Chinese government's strict controls on
domestic Internet access for foreign firms and by U.S.-led
sanctions that restrict Huawei's access to buying parts and
components from U.S. companies.
Google is now entering the smartphone GVC primarily on the
basis of its software (its Android OS platform) and
capitalizing on its many users from other services it owns
(such as Gmail, Google Maps, and YouTube), demonstrating the
disruptive potential of digital platform pioneers.\31\
---------------------------------------------------------------------------
\31\ Joonkoo Lee and Gary Gereffi, ``Innovation, upgrading, and
governance in cross-sectoral global value chains: The case of
smartphones,'' Industrial and Corporate Change, (2021), available at
https://doi.org/10.1093/icc/dtaa062.
Because the path to innovation in the mobile telecom industry
depends on so many industries--including semiconductors, digital
services, hardware devices, and telecom providers, among others--the
result is a ``massively modular system'' that remains vulnerable to
short-term disruption.\32\ Trying to reshore supply chains in an
industry such as this with an ecosystem of hundreds of globally
distributed and specialized firms and numerous critical inputs poses
significant national security risks and a plethora of practical and
policy difficulties.
---------------------------------------------------------------------------
\32\ Eric Thun, Daria Taglioni, Timothy J. Sturgeon and Mark P.
Dallas, ``Why policy makers should pay attention to the concept of
massive modularity: The example of the mobile telecom industry,'' Let's
Talk Development, World Bank blog, June 18, 2021, available at https://
blogs.worldbank.org/development talk/why-policy-makers-should-pay-
attention-concept-massive-modularity-example-mobile.
---------------------------------------------------------------------------
Be Mindful of Unintended Consequences
Another concern for supply chain resiliency are the unintended
consequences of policy in a hyper-connected world. This is most clearly
evident with trade restrictions, such as the recent U.S.-China ``trade
war'' as well as U.S. tariffs on imported goods from neighboring trade
partners like Mexico and Canada. Such policies are intended to support
U.S. firms and save American jobs, but given the dense inter-firm
networks in global supply chains, restrictions on U.S. imports often
have a deleterious impact on U.S.-based companies.
The North American automotive industry provides a striking example.
U.S. automotive imports from Mexico contain 40 percent U.S. content
(i.e., parts made by U.S.-based firms that are incorporated in Mexico's
exports back to the U.S.) and imports from Canada are 25 percent U.S.
content by value, whereas goods imported from China contain just 4
percent U.S. content.\33\ Thus, tariffs on imports from Mexico and
Canada can hurt U.S. suppliers rather than help them.
---------------------------------------------------------------------------
\33\ Gereffi (2018), op. cit., p. 436.
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Trade policies created a different set of unintended consequences
in the 1980s when the U.S. government imposed voluntary export
restraints (VERs) on Japanese carmakers to limit the quantity of their
exports to the American market. Although the VERs were successful in
limiting Japanese exports, they induced a wave of foreign direct
investment by Japanese carmakers and parts suppliers in the United
States to sidestep the VERs. Subsequently, Korean and European
automakers followed suit, and foreign auto ``transplant'' firms are now
roughly equivalent to their American competitors in automotive output
and employment in the U.S. market.\34\
---------------------------------------------------------------------------
\34\ Gereffi, Lim and Lee (2021), op. cit.; Timothy Sturgeon,
Johannes Van Biesebroeck and Gary Gereffi, ``Value chains, networks and
clusters: Reframing the global automotive industry,'' Journal of
Economic Geography 8(3) (2008: 297-321.
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Long-Term Funding for Supply-Chain Research
Last month, the U.S. Senate passed the U.S. Innovation and
Competition Act by a final vote of 68-32, which strengthened the role
of the NSF and other leading Federal agencies to coordinate in
scientific and technological innovation related to key U.S. supply
chains.\35\ This is a very significant and positive step, especially
the proposed creation of an NSF technology directorate that could help
focus technology research in areas of critical national importance.
However, more specific attention should be devoted to the
aforementioned challenges confronted by universities in supply-chain
research.
---------------------------------------------------------------------------
\35\ ``Chair Cantwell statement on Senate passage of the U.S.
Innovation and Competition Act and NASA authorization,'' June 8, 2021,
https://www.commerce.senate.gov/2021/6/chair-cantwell-statement-on-
senate-passage-of-the-u-s-innovation-and-competition-act-and-nasa-
authorization.
---------------------------------------------------------------------------
One issue is to supplement the previous temporary support provided
by U.S. foundations like Alfred P. Sloan and Rockefeller, which
initiated a process of institution-building involving U.S.
universities, but it was never designed as a long-term solution to
enhancing the resilience of American industries by overcoming short-
term disruptions or promoting broad-based and sustainable economic
growth. For more decentralized U.S. supply-chain projects, like North
Carolina in the Global Economy, a state-level focus did not guarantee
local funding. The North Carolina Department of Commerce provided no
financial support for this Duke GVC Center initiative, despite
utilizing many of the materials from the NC-Global Economy website for
internal and overseas presentations and brochures.
Additional project-based funding by NGOs such as Environmental
Defense Fund and Oxfam America has certainly boosted the knowledge
capacities of university-based research centers and independent
scholars, but several related difficulties remain. These include:
providing incentives for universities to build and sustain
industry-oriented research communities over time;
facilitating the ongoing data-collection efforts needed to
allow supply-chain datasets to meet the criteria of top-level
peer-reviewed scientific journals as well as policy relevance;
and
building inter-university, cross-regional and international
research networks that allow for robust efforts to develop
analytical frameworks, generate testable propositions, and
collaborate with policymakers and practitioners.
In conclusion, given the Department of Commerce's central role in
ensuring the resiliency of critical U.S. supply chains, my testimony
has sought to highlight the connections between firm strategies, GVC
structures, and diverse government policy objectives. The opportunity
to revitalize American industries from the ``bottom up'' seems
particularly timely. Broad-based economic growth is often
decentralized, and thus we need comprehensive frameworks to promote and
evaluate how U.S. companies, states and communities compete across
different places and within global industries. Tools like value-chain
mapping and using new technologies to build resiliency within local
clusters or hubs hopefully can assist this essential mission.
The Chairman. Thank you, Dr. Gereffi. We will now turn to
our next witness, Dr. James Lewis. Thank you so much for being
here.
STATEMENT OF JAMES A. LEWIS, SENIOR VICE PRESIDENT AND
DIRECTOR, STRATEGIC TECHNOLOGIES PROGRAM, CENTER FOR STRATEGIC
AND INTERNATIONAL STUDIES
Mr. Lewis. Chair Cantwell, Ranking Member Wicker, thank you
for the opportunity to testify. The U.S. benefited for decades
from a global supply chain that provided lower cost and greater
efficiency. But that era is over. First, the pandemic created
an understandable demand for greater resilience.
Second, predatory China will use any means to displace
competitors in its quest for global primacy. We are in a
conflict with China, and as in past conflicts, industrial
strategy, industrial policy is essential. We do not need to
abandon a global supply chain, but just shrink China's role in
it. This is why the United States Innovation and Competition
Act is so important. Congress has already strengthened
restrictions on tech transfer to China with the Foreign
Investment Risk Review Modernization Act and the Export Control
Reform Act. Now it must build technological resilience.
Building resilience means taking into account what the global
supply chain will look like in the future, the leading role of
the market and the private sector in innovation, and the need
to build trust into the supply chain for technology.
And of course, the bill touches on that when it discusses
5G and open radio access networks. It must focus on
semiconductors, emerging technologies, and reinforcing our
national innovation system, which is the strongest in the
world. USICA can do this if it is implemented effectively.
Congress can start by fully funding the CHIPS Act and by
authorizing the supply chain resilience programs already found
in the text of the USICA. Fully funding the CHIPS Act will
create jobs and is essential for resilience. Increased funding
for research and STEM education is also essential to provide
the inputs needed for tech leadership. Congress and the White
House will guide policy, but implementation falls on the
agencies.
The Commerce Department plays a key role, but it faces
challenges. Commerce needs to predict, not react. It needs
better analytical capabilities, clarity and roles and
responsibilities, a high tech focus and close engagement with
senior levels of the private sector to better anticipate tech
trends. One advantage we have over China is that we have
allies. A supply chain with allies increases resilience by
diversifying sources. We benefit economically and strategically
from an allied approach. This is in USICA and in other bills,
but it is crucial for moving ahead.
The U.S. must, as it has done in the past, strengthen
strategic industries. USICA identifies 10 advanced technology
areas. This is where implementation should focus, right. The
U.S. has used industrial policy in every major conflict of the
last century. It is one reason for our success in these
conflicts. This is why USICA is so important. I thank the
committee for the opportunity to testify and I look forward to
your questions. Thank you.
[The prepared statement of Mr. Lewis follows:]
Prepared Statement of James A. Lewis, Senior Vice President and
Director, Strategic Technologies Program, Center for Strategic and
International Studies
Chair Cantwell, Ranking Member Wicker, and distinguished Members of
the Committee, thank you for the opportunity to testify.
The United States is creating the policies and tools needed to
defend ourselves against a hostile, authoritarian China. To do this,
the U.S. will need new technological and industrial strategies that
will allow it to maintain its national security and economic strength.
We are in some ways at the start of the undertaking. Congress and the
new Administration, with the United States Innovation and Competition
Act (USICA), and the Administration's Executive Order 14017 and 100 Day
Review, have taken important steps in this direction. Much of the
burden now falls on agencies like the National Science Foundation
(NSF), the National Aeronautics and Space Administration (NASA), and
the Departments of Commerce and Energy.
For more than two decades, the U.S. depended on a global supply
chain that provided lower cost and greater efficiency. Two things broke
that global supply chain. The first is the rise of a predatory China
that will use any means to displace competitors in its quest for global
primacy. The second is the COVID-19 pandemic, which produced an
understandable desire in many nations to reduce their dependence on
foreign suppliers and instead rely on national capabilities. Many
countries became uncomfortable when they realized that critical medical
supplies were only available from sources like China. They want to move
some critical production back onto their territories. Now the U.S. and
the EU are taking a harder look at reshoring. In a way, this mimics
China. Chinese policy has always pursued indigenous capabilities to
reduce reliance on foreign suppliers. This supply chain nationalism is
reinforced by growing and powerful competition for technological
leadership and by events like the semiconductor shortage.
There is a degree of wishful thinking in some Western countries
about this contest, that hope that there can be normal commercial
relations with China despite stark political differences and predatory
behavior. Even if one is willing to put aside any qualms about doing
business with regimes that routinely violate the rights of their
citizens, the governments of China and Russia have decided that the
U.S. goal of building a world made up of market democracies is a threat
to their survival. They have further decided that the U.S. is in
irreversible decline and now is their moment to push for a world that
they can dominate. The end of the Cold War in 1989 and the few decades
of American primacy, now ended, are best seen as an interregnum in a
longer conflict between democracy and authoritarianism. We are in many
ways behind in this contest, but this can be remedied.
This is where the USICA plays a vital role. Past industrial
strategies built munitions or heavy industry, but are now outdated. We
need a new style of industrial policy that takes into account
globalization, the leading role of the market and private sector in
innovation, and the need to ensure resilience in emerging technologies.
A high-tech industrial strategy fundamentally has two complementary
parts. The first is restrictions on technology transfers to opponents.
Congress has strengthened protective measures for competition with
China with the Foreign Investment Risk Review Modernization Act and the
Export Control Reform Act. These are important components of a tech
strategy.
The second part is to build and accelerate technological
resilience. The high-tech industries we have today are built on a
foundation of Federal funding, but in the intervening thirty years,
there have been significant changes in our economy and innovation
system. An industrial strategy today needs to take into account these
changes and be guided by three dominant factors: the global supply
chain for innovation and technology, the importance of Federal funding,
and the central role of markets and the private sector in tech
competition.
Previous Efforts at Strategic Industrial Policy
Historical precedent can be an ambiguous guide for policymaking.
Many people talk of a new Cold War between China and the U.S. But the
globalization of supply, China's dynamic, quasi-market economy, and the
reluctance of some key allies to abandon the Chinese market make for a
very different world than the bipolar landscape of the Cold War. The
1930s and the rise of authoritarian states bent on confronting
democracies is a better precedent than the Cold War, but it too falls
short. This new contest with China will last longer and the emphasis is
on tech leadership and controlling a global narrative of economic
success more than on displaying military power. These past experiences
do not provide a perfect roadmap for action, but we can still draw
important lessons from them.
In the 1950s, the Eisenhower Administration expanded the technology
base created for the World War II with massive Federal funding and the
establishment of an institutional framework with entities like NASA and
the National Science Foundation. In the late 1970s, the Department of
Defense (DoD) focused research on technologies that would offset the
Soviet numerical advantage in munitions weaponry. These investments in
precision munitions, stealth, sensors, and communications created a
``Revolution in Military Affairs.'' The Eisenhower Administration's
support for R&D to expand STEM education and workforce were
foundational for America's tech success in the last sixty years and
provides a useful precedent we should copy. Technology gave America
unquestioned military superiority for decades, but this unquestioned
superiority has ended as other advanced states challenge American
technological leadership. USICA begins the work to restore it.
America has cut defense spending after every war. In the 1990s, we
assumed conflict with peer competitors was a thing of the past. This
ultimately proved to be wrong, but made it seem safe to make
significant cuts in Federal R&D spending after the Cold War. Congress
increased spending on life sciences, but trimmed ``hard'' sciences like
physics, math, and materials. Government funding is essential for basic
research in these areas--research that by itself has no immediate
commercial value but creates the basis for commercially valuable
innovation. Americans did not stop innovating after these cuts--if
anything, innovation increased with the introduction of digital
technologies--but it was private sector innovation aimed at commercial
markets.
USICA, when it is funded, will begin to remedy these mistakes. It
is a good start for repeating earlier successes in using technology to
advance national security and build economic strength. But today's
policy needs to acknowledge that there are crucial differences in how
America creates new technologies nowadays. America's national
innovation base has changed dramatically. Twentieth century American
innovation was national, but today's innovation base is international,
with strong research and commercial links between the United States,
Europe, and Asia. Efforts at ``reshoring'' will not change this. While
these connections can create security risk when it comes to technology
transfer to hostile states, they also provide benefits that outweigh
risk. A country that cuts itself off from this international innovation
system will fall behind. These changes make it necessary to find ways
to take advantage of a multinational commercial innovation base that
leads R&D for new technologies, including 5G, artificial intelligence,
biotechnology, quantum computing and alternative power sources.
The Role for the U.S. Department of Commerce
The deep interconnectedness between the U.S. and the Chinese
economy forged over forty years created both opportunity and risk. We
do not need to abandon a global supply chain but to shrink China's role
in it. Complete bifurcation is unnecessary as there are some
technologies that can be safely transferred to China while others must
be restricted. The Commerce Department could make this distinction as
part of its export control process. It is in the national interests to
allow our companies to take advantage of the Chinese market in ways
that minimize risk for as long as possible. The United States has made
good progress in restricting China's ability to acquire American
technology--a key part of China's modernization plans--with Congress's
passage of the Foreign Investment Risk Review Modernization Act of 2018
and the Export Control Reform Act (although it has had implementation
problems).
These two Acts, however, are defensive. Denying China access to
technology is not enough. We know from the American experience in the
conflicts of the twentieth century that the U.S. must also strengthen
its own technological base in this new and long-term competition with a
hostile and authoritarian China. This is where the USICA is vital to
protecting American security. However, the industrial policy models of
the twentieth century are no longer effective. Nor do we wish to copy
China's state-directed economy. Finding a new model of Federal
intervention to bolster our technological base in the competition with
China will be difficult.
Implementation points to the critical role of the Department of
Commerce. If there is a precedent here it is the difficulties in
implementing the Export Control Reform Act. For years, Commerce defined
itself as an export promotion agency and this still has a powerful
influence over its culture. The export controls Commerce is charged
with administering are still largely based on the Cold War technology
framework enshrined in the Wassenaar Arrangement. Sometimes agencies
can modernize themselves, other times it takes Congressional direction
and leadership. Thinking about what a twenty-first century Commerce
Department should look like may be a good task for the committees of
jurisdiction in their oversight function.
These difficulties may be less of an obstacle than they may appear,
because in fact, the decisions and strategies needed to implement USICA
will be made in the White House, at the NEC and NSC, and by Congress.
Commerce will implement these policies and how it does so will be
crucial in determining their success. In this, we can suggest two
principles to guide Commerce: first to focus on emerging and
foundational technologies, and second to build a symbiotic relationship
with America's fast moving, risk-taking, entrepreneurial business
culture.
Commerce should focus its efforts on key technologies and design
policies that as much as possible reinforce the private sector. The
comparatively smaller size of Federal investment versus private sector
investment alone makes this a good choice. We are in a competition
between economic models, between China's increasingly state-centric
economy and our market driven model. A key task for policy is to
identify where Federal intervention is necessary, and USICA's
identification of ten key technologies categories is where the U.S.
should focus its activities.
USICA gives Commerce the authority to establish a supply chain
resiliency program, to encourage cooperation between the Department and
the private sector to identify supply chain problems and develop
solutions. Supply chain issues that arose from the global COVID-19
pandemic are one reason for these provisions. Hence, the supply chain
program should initially prioritize semiconductor supply chain issues,
and only cover other supply chain issues in the future.
The most immediate of these areas involves semiconductors. Federal
support is necessary to achieve two goals: to move more production
capability back to the United States and, to a lesser extent, to
increase productivity capability (less because private sector
investment will do this). We do not want to duplicate China's error of
investing billions in inefficient or outmoded semiconductor production.
We do want to invest in location subsidies, in research, and in
opposing anti-competitive behavior.
Semiconductors
Semiconductors are the foundational technology of the twenty-first
century. The United States needs to remain strong in this industry, but
in the face of global competitors that make heavy use of subsidies, it
will need government action and funding to maintain its position. The
United States still has the largest share of the global semiconductor
market. It leads in chip design and it has roughly half of the global
market for semiconductor manufacturing equipment, but it lags in chip
fabrication. This lag is the source of supply chain risk.
A 2019 OECD study found that of the dozen or so countries with
significant semiconductor industries, only the United States did not
use subsidies. We may not like it, it may not be fair, but subsidies
are part of the market and the failure to provide location incentives
is one primary reason why the U.S. share of semiconductor fabricating
facilities has fallen by two thirds and chip fabrication moved
offshore.
The semiconductor industry has a globally distributed supply chain.
This is the most economically efficient, but it now creates security
risks. Our goal should not be to abandon the global supply chain but to
reduce China's role in it. This will not be easy, but complete
bifurcation is unnecessary. We want to avoid ending up in a position
where China is the sole supplier for any segment of the chip supply
chain, because they will take advantage of this to harm us. That does
not mean that companies and facilities outside of China that provide
key parts of the chip supply chain--in Israel, Ireland, and others--
should be replaced. We benefit economically and strategically from
maintaining a global supply chain in which China's role has been
decreased. China exploits us. We should in turn exploit the Chinese
market as long as possible and as long as our technology transfer
controls are working. This means selective decoupling and allowing some
economic interactions to continue.
One open question is Taiwan. The Chinese government's ultimate
intent is to absorb Taiwan as it absorbed Hong Kong, but Taiwan will be
more difficult to absorb and China may never succeed. But the intention
creates risk. We depend on Taiwan for advanced fabrication of chips.
This dependency requires that we ensure Taiwan's autonomy from China,
but also that we ensure resilience by getting key Asian firms to locate
some of their facilities in the United States. This can be part of a
larger effort to build resiliency and security by strengthening all
segments of the U.S. chip industry, through investments in R&D,
workforce, and subsidies, including support for other parts of the
semiconductor supply chain, such as advanced packaging.
The Administration's 100 Day Supply Chain Review offered seven
recommendations to strengthen the U.S. chip industry. These include a
call to fully fund the Creating Helpful Incentives to Produce
Semiconductors (CHIPS) for America Act (which has been languishing in
Congress for a year), measures to strengthen the entire chip supply
chain, build the STEM workforce, use export controls to protect
technology, and work with allies to harmonize policies on R&D and
China--key allies like Japan are ready to do this. The recommendations
in the 100 Day Review, particularly if combined with Congressional
guidance and action on funding, will keep the United States strong in
this core technology.
There are reasonable concerns with any effort to strengthen the
chip industry. The first is that our efforts may create overcapacity.
The chief cause of the chip shortage was a miscalculation by companies,
in particular, car companies. They, like many others, failed to plan
for the surge of pent-up demand as the pandemic waned and cancelled
chip orders. In response, chip makers shifted from producing for cars
to producing for items suddenly in demand during the pandemic, those
that supported streaming, gaming, computing and phones. This
miscalculation was reinforced by supply chain disruptions from weather
and fire. Just-in-time supply left car makers with no reserves, and one
question for reliance is whether and how to incentivize companies to
move away from just-in-time supply. The 100 Day Review's recommendation
for better information flows can reduce the risk of future
miscalculation, as more information on the market can guide Federal and
private investment in production capacity. Overproduction in chips is
not a long-term problem, as demand for semiconductors will continue to
grow and absorb increased capacity.
A related concern is ``investment in what.'' The digital economy is
being reshaped by cloud computing, artificial intelligence, and 5G
networks. Digital technologies are being reshaped and USICA recognizes
changes in telecom technology that work in America's favor. 5G and open
access technologies like O-RAN depend on chips and software, both areas
of American strength (especially when compared to China). Telecom and
chips are dynamic industries driven by demand for better performance.
The pace of change is rapid, and this could complicate plans for
Federal intervention. The semiconductor industry itself is broken into
highly specialized segments and is geographically distributed. Deciding
which sectors would benefit from Federal support, and determining what
kind of support, is an immediate task for policy. USICA, and with it
the CHIPS for America Act and the USA Telecom Act, do a good job of
recognizing that there is more to the industry than fabrication
facilities. The issue is how best to intervene in this complex
industry. An earlier success, SEMATECH, a non-profit, public private
research consortium, provides useful precedents, the most important of
which is to not try to have the Federal government direct research or
insist on specific technologies and to ensure that the private sector
has ``skin in the game.''
Role of the Government
The question of the role government is a long-standing debate in
industrial policy, which we can simplify as a debate between those who
argue that governments should supply the foundation for innovation
through R&D funding, increased STEM education, and balanced regulation,
and those who would prefer a more directive approach. The well-known
case of Solyndra became the poster child for why the government should
refrain from selecting a specific technology company to support, and
instead emphasize market competition to identify the most successful
paths forward.
Few government agencies can act like venture capital firms,
something that proves to be very hard to do. Venture capital firms have
a higher tolerance for risk and ring specialized expertise to identify
opportunities, including using geographic proximity to markets to gain
a deeper knowledge of the business. There is a mismatch between
bureaucracy and innovation. There are a few examples of success for the
Federal government, such as In-Q-Tel and the Defense Innovation Unit
(DIU), and it would help build resilience if these and similar efforts
were better funded and, in DIU's case, given increased and more
flexible authorities to invest.
These difficulties should not distract us from the importance of
the Federal government playing an essential role in creating new
technology. That role has changed given the immense expansion of
commercial innovation. The center of gravity for innovation and tech
investment has moved away from government. A dynamic private sector
innovation ecosystem is focused on commercial markets, but with the
right authorities, funding, and mechanisms, the government can take
advantage of this to improve resiliency. This will require some effort
because the cultures are vastly different. Private sector investments
dominate R&D budgets for new technologies, such as 5G, artificial
intelligence, biotechnology, quantum computing and alternative power
sources. The new innovation ecosystem is shaped by market signals on
investment risk and returns more than policy.
Commerce and other agencies need to predict, not react. For
example, media reporting recently highlighted problems with the supply
of lumber. This is perhaps a good example of why media reporting is not
always a useful guide for policy. The shortage was so short lived that
the efforts to remedy it barely begun before it was over. It needs
better analytical capabilities, clarity in roles and responsibilities,
and close engagement with the private sector at senior levels to
anticipate market and tech trends. Its industrial analysis and support
function (a legacy from World War II) atrophied over the past decades
and now needs to be rebuilt to focus on high-tech. A focus on emerging
technologies can help avoid wasteful spending of time and money.
Cost
There are concerns over the cost of these initiatives, but critics
of the price tag should consider two factors. First, China has been
willing to spend for sustained periods of time to gain technological
advantage. In some areas, China is keeping pace with the U.S. and even
outspending it in some cases. In semiconductors, for example, it has
pledged more than $50 billion in five years from national funds and an
equivalent amount from local governments. Given how much larger U.S.
national income is compared to China, this should not be the case. We
should not expect to outcompete China without increased Federal
spending. Second, this spending is an investment, a down payment on
America's technological future. Money appropriated now will create jobs
and income, more than repaying the cost. Both security and economics
call for the full appropriations to support the objectives laid out in
USICA. Putting aside the collateral benefits to wealth creation and
economic growth from USICA (and these could be substantial), it is
better to overspend and stay ahead of China than to under-spend and
fall behind.
A Global Approach
One advantage we have over China is that we have allies. A supply
chain that involves allies increases resilience by diversifying
sources. We benefit economically and strategically from an allied
approach. It may seem counterintuitive, but international cooperation
makes America more competitive.
Artificial intelligence (AI) exemplifies how international today's
innovation base is. The technologies behind AI are not easily
controlled. China has significant strength in this, but AI depends on a
globally distributed R&D and innovation chain, with key nodes not only
in the U.S. and China, but in Canada, the UK, Israel, Germany, and a
few others. These countries share a growing distrust of China's
intentions and policies that the U.S., by working with them, can
capitalize upon to build security and growth. Focused Federal
investments and multinational partnership structures, and revised
authorities can provide the U.S. real advantage in the competition with
China.
The United States has used industrial policy in every major
conflict since 1860. Industrial policy is part of the reason for its
success in these conflicts. The U.S. must, as it has done the past,
strengthen strategic industries. This is why USICA and its
implementation are so important. Industrial policy was the key to
helping the U.S. win those conflicts, and the technology base built in
World War Two--and expanded tremendously for the Cold War--still
provides foundational benefits to our economy from investments made
decades ago.
We and our allies are again confronted by authoritarian states. The
terms of conflict with these hostile powers will be different, relying
less on military force and more on economic and political influence.
One key area for competition will be in the fields of technology and
business. These provide the countries that lead in them with power and
authority in the international environment. A new industrial policy is
necessary again for the United States, but we will need to adjust to
this new form of conflict and to the changes in research and industry
that have taken place over the last thirty years. That means a new,
high-tech industrial policy cannot focus on building weapons and it
cannot be over-managed by Washington.
China has many weaknesses that its propaganda seeks to obscure. It
faces immense problems, but under its current leadership, it intends to
displace the United States. Building globally dominant high-tech
industries is a part of this strategy. The U.S. must respond to China's
hostility, but we can no longer rely on market forces alone to advance
the national interest. Defensive actions alone will not suffice. These
themes all point to the need for a renewed industrial strategy, but it
cannot simply duplicate previous policies because we are now in a world
where the private sector leads. This means the task for USICA
implementation is to find where government intervention can best
support a multinational commercial innovation base. Finding the right
balance of the role of government will be difficult, but USICA,
Executive Order 14017 and the 100 Day Review means that we are off to a
good start.
I thank the Committee for the opportunity to testify.
The Chairman. Thank you, Dr. Lewis. Thank you so much. We
are now going to go virtually to Mr. Richard Aboulafia. Not
sure where--what part of the world you are in, Mr. Aboulafia,
but welcome here into our committee conference hearing room.
STATEMENT OF RICHARD ABOULAFIA, VICE PRESIDENT, ANALYSIS, TEAL
GROUP CORP.
Mr. Aboulafia. Sure, Madam Chair Cantwell, and thanks to
you and to the Ranking Member Wicker, and of course, members of
the committee. I bring you greetings from an island off of
Stockholm. It is rather a long ways away, but deeply honored to
be here speaking with you today about the aerospace supply
chain.
A few things to emphasize about the character of that
supply chain, some recent challenges it has faced in the wake
of the COVID-19 pandemic, and the associated aviation market
downturn, and a few things that the committee might want to
consider as it deliberates the status of our industry and our
supply chain. Basically, there are three things that I would
emphasize about the aviation industry supply chain.
First of all, value. The overwhelming bulk of the value add
in the aviation business happens at the supply chain. It is not
at all a dig at the many great prime contractors out there, but
an aircraft is effectively the sum of its parts, and up to 85
percent or more of the value of the plane comes from the
suppliers. Typically the prime, somewhere between 15, 20, 25
percent at most, with the rest coming from its supply chain
companies. Having said that, it is also vulnerable. This is an
industry--well, we have very high barriers to entry and very
low levels of substitution.
So as a consequence, if there is a relatively small, what
seems like an easily replaceable part that simply isn't
available, the aircraft can't be built pure and simple. We saw
this last year with, of course, the logistical challenges
associated with the COVID-19 pandemic. And Lockheed Martin had
planned on building about 140 F-35 Joint Strike Fighters for a
variety of logistical reasons. Almost all of them in the supply
chain, they were only able to deliver 123. So in terms of
vulnerability, well, that is where you faced problems, I am
afraid.
And then finally, innovation. And thank you, Madam Chair
Cantwell, for highlighting this, really the overwhelming bulk
of technological progress of fuel savings, of emissions
reduction, of passenger comfort, really anything you associate
with aviation. On the other side of the house, a lot of the
combat effectiveness that we associate with the country's
fantastic combat aircraft come from the supply chain, not the
prime. So it is very important that the companies in the supply
chain have a steady stream of research and development
resources in order to bring these new technologies to market.
Now, the unfortunate reality, of course, is that we faced
the most devastating pandemic in industry history last year
because of COVID-19. You know, looking back over the many
decades of the aviation industry, typically in a really bad
year, you would lose maybe 3 percent of traffic year over year
after for example, 9/11 or the 2008 recession or Gulf War I or
any of those, maybe 2 or 3 percent. Last year we lost 66
percent of traffic globally. That is cataclysmic, especially
for companies that are heavily dependent upon the aftermarket
on equipment utilization.
So the financial challenges associated with this
unprecedented falloff in business were very challenging for the
supply chain. Now, I am very happy to say that for a variety of
reasons, almost all companies have come through it. But I am
very concerned about their ability to access capital in order
to hire people and of course facilitate for the upturn that
inevitably follows a downturn. It may sound counterintuitive,
but in a lot of ways some of the greatest challenges supplier
companies will face is in the recovery having come through the
downturn.
And especially this is true for the labor side of things.
And that is why I would commend the Government especially for
its several rounds of Paycheck Protection Program legislation,
because I think this has absolutely been vital in retaining
skilled workers and keeping them from going elsewhere or simply
just being offline for whatever reason.
It has been absolutely fantastic for the industry, and I
deeply hope it continues. Other things that the committee may
want to discuss, I believe the time might be right to consider
basically the sustainable aviation industry R&D program. The
Government has historically been very good at basic R&D, but
when it comes to applied R&D, less so. And I think there are a
number of promising technologies, particularly in sustainable
aviation fuels and other sustainable initiatives that I think
could be accelerated, and with perhaps a bit of Government
assistance, play a meaningful role in companies' ability to
maintain their competitiveness.
And then finally, I think another thing to discuss might be
the issue with China, because China is the biggest single
export market for commercial aviation companies and there is a
great deal of uncertainty, both about our trade relations with
China and with the rules on shipments of technology and
componentry due to the creation of the military end user list
by the U.S. Government.
There are so many complications involved here, but there is
a great deal at stake for the future growth of the industry.
Thank you so much for your time.
[The prepared statement of Mr. Aboulafia follows:]
Prepared Statement of Richard Aboulafia, Vice President, Analysis,
Teal Group Corp.
Madam Chair Cantwell, Ranking Member Wicker, and Members of the
Committee, thank you for asking for me to testify before your committee
today. I am privileged to provide you with an overview of the aviation
industry supplier base.
I am Vice President of Analysis at Teal Group, a leading aerospace
market analysis consultancy based in Fairfax, VA. I manage consulting
projects in the commercial and military aircraft field and analyze
broader defense and aerospace trends. I have advised numerous aerospace
companies, including most prime and many second-and third-tier
contractors in the U.S., Europe, and Asia. I also advise numerous
financial institutions on aerospace market conditions and industry
dynamics. I have been in the industry since 1988. All my public
writings and comments on the industry can be found at
www.richardaboulafia.com.
Today, I would like to discuss three things with the Committee: (1)
the structure and characteristics of the aviation industry supply
chain; (2) the market, and other challenges to suppliers; (3) questions
that should be asked by the Committee, along with my recommendations
for future action. I am also happy to answer any questions you might
have.
1. Industry Structure And Characteristics
The Supply Chain's Importance
The supply chain is the heart of the aviation industry, because of
three factors: Value, Innovation, and Vulnerability.
First, the components, structures, systems, and technologies
provided by the aviation supply chain represent the strong majority of
the Value of any given aircraft. When Boeing sells a jetliner, or
Lockheed Martin sells a fighter jet, suppliers, collectively, realize
more revenue than the primes (Boeing and Lockheed Martin) do. There are
almost no exceptions to this pattern, whether it is a transport,
helicopter, business jet, or any other type of aircraft.
For a typical Boeing jetliner, 80 percent of the value gets added
at the supplier level. Of course, employment, tax revenue, and other
key metrics mirror this reality: the supply chain is of greater
importance to the economy compared with the primes for many reasons.
Second, it is important to note that much (and often most) of the
Innovation that takes place in aviation happens at the supplier level,
and not at the prime level. Boeing's 737 jetliner, its F-15 fighter,
Lockheed Martin's F-16 fighter, and many other platforms have been in
production for around half a century. But the current models have very
little in common, aside from exterior shapes, with the original
production versions. The rejuvenated jetliners use much less fuel and
produce much fewer emissions. The rejuvenated combat aircraft are
vastly more effective.
The successful transformation of these aircraft is because of the
tremendous innovation that has taken place at the supplier level.
Suppliers have created new and improved engines, avionics, systems,
electronic warfare suites, materials, and more, which have been applied
to these aircraft. Therefore, a steady flow of research and development
(R&D) funding, for and by suppliers, is essential for the industry's
future growth, industry competitiveness, and for the overall good of
the aviation transportation system.
Third, as with most complex manufactured products, an aircraft
production system is only as strong as its weakest link. That is, if a
supplier company fails, somebody needs to step in to buy it, or to give
it the capital or other resources needed to stay in business.
Otherwise, the aircraft in question is not built.
The health of the supply chain, therefore, is critical to the
aircraft industry. Given the enormous stresses experienced by the
supply chain over the past two years, company failure, or inadequate
resources for supplier capacity expansion and technology development,
are some of the biggest risks faced by the industry. The supply chain,
crucial to industry success, is also its greatest Vulnerability.
High Barriers to Entry and High Levels of Concentration
The aviation industry has very high entry barriers. Since World War
2, only one country (Brazil), and one company (Embraer) has
successfully entered the jetliner industry. Very few companies--around
five--have successfully entered the smaller jet industry. Worldwide,
more companies have exited the jet industry than have entered it.
Entry barriers at the supplier level are also quite high. Most
suppliers have been in business for 50 or 60 years, and while small,
niche companies have been created, they are the exception. Very often,
they are simply purchased by the larger, established suppliers.
There has also been a great degree of concentration in the
industry. The aviation supply chain saw a series of mega-mergers over
the past few decades. As a result, some supplier companies, such as
Raytheon Technologies, General Electric, or Safran, are about as large,
or larger, than some of the biggest aircraft primes.
Having said that, there are still a large number of suppliers at
the Tier 2 or Tier 3 level that are small, and relatively fragile.
While there's little risk from emerging competition (due to the high
entry barriers), these smaller companies still face serious challenges
in accessing capital and improving their products and processes.
Impact of Globalization
The supply chain, like the rest of aviation and aerospace, is a
highly globalized industry. Components built by U.S. suppliers find
applications on platforms throughout the world. In fact, one key U.S.
supplier component, Pratt & Whitney's Geared TurboFan engine, has
become quite successful purely on the basis of powering jets built by
foreign aircraft companies.\1\
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\1\ https://www.forbes.com/sites/richardaboulafia/2017/07/30/a-
stunning-u-s-industrial-success-shows-problems-with-trumps-made-in-
america-push/?sh=3c9149997c0c
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However, it isn't always an equal playing field in the world.
Suppliers from allied countries, such as the U.K., France, or Italy can
readily find applications on U.S. aircraft, even military ones. But
U.S. suppliers have a much harder time being sourced on European
military aircraft.
Some of this problem results from U.S. International Traffic in
Arms Regulations (ITAR) regulations. Aircraft designed with U.S.
components are perceived to be problematic in international
competitions, where U.S. Government decisions can prevent the sale of
any aircraft that has U.S. components on board. Similarly, technology
transfer restrictions have also resulted in U.S. suppliers being
disadvantaged on combat aircraft built in countries without their own
supplier companies.
South Korea's KF-21 is a good example of that. U.S. Government
reluctance to transfer data pertaining to U.S. technologies and
systems, and to provide export licenses for these systems has resulted
in significant competition losses. European companies, for example,
have been tapped to provide this new fighter's radar, and other
systems, largely because the U.S. did not want to provide the necessary
data and licenses.
Also, government-funded R&D programs seldom cross borders (although
companies do successfully cross borders with their own privately-funded
R&D). When governments support their industry with commercial or
military R&D development programs, the beneficiaries are almost always
exclusively domestic firms. That is true in the U.S., and in other
major aviation producer countries.
Some countries that only have an aviation supplier industry (as
opposed to an in-country prime contractor) are more willing to make
these programs accessible, since their own industry depends on global
trade. The Netherlands is a good example of that. But most large
aviation powers, such as France or Japan, have their own prime
contractors, and do not make their much larger government R&D programs
accessible to companies domiciled in other countries.
One unique characteristic of the aviation supplier industry is that
globalization has not seen the rush to low-cost sourcing seen in many
other industries. Rather, the overwhelming majority of foreign
suppliers providing components for U.S. aircraft are from high skill,
high wage countries. Japan, France, Canada, the U.K., and Mexico are
the top sources for these components, but almost all of the components
and structures shipped from Mexico are actually sourced from transplant
factories owned by U.S., Canadian, or French supplier companies.
China, notably, is not a significant source of aircraft components,
even from transplant factories. In fact, at the peak level of U.S.-
China aerospace trade, the trade balance between the two countries was
17-1 in the U.S.'s favor.\2\
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\2\ https://dataweb.usitc.gov/
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2. The Market and other Challenges
An Unprecedented Downturn
The entire aviation manufacturing industry has been impacted by the
worst air transport downturn in history. The Covid-19 pandemic, and the
associated lockdowns and travel restrictions, have resulted in numbers
heretofore unseen in the aviation industry. Historically, in a bad year
for the market, air travel typically falls by 2-3 percent year-over-
year; in 2020 it fell by 66 percent. Only massive government
intervention, in the U.S. and other countries, has staved off mass
airline bankruptcies.
As of this writing, however, the situation is improving. The over-
all economic picture is far better than feared. Domestic travel
markets, particularly in the U.S. and China, have come back strongly.
The most recent traffic numbers show U.S. domestic flights up 3 percent
relative to the same period in 2019, the first time these numbers have
turned positive since the pandemic began. Even European flights, which
were down 62 percent in May (relative also to 2019) have started to
make a strong recovery, with the most recent numbers down just 34
percent.\3\
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\3\ Bank of America equities report, ``Commercial Aerospace
Tracker,'' July 13, 2021
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In fact, we now expect a return to the 2019 revenue passenger
kilometer (RPK) travel peak in late 2022. And meanwhile, jetliner
financing is inexpensive and readily available, and fuel is getting
expensive again--the perfect formula for renewed jetliner orders
(particularly single aisles).
The only area of serious concern, outside of Covid-19 itself, is
China, the biggest single export market (and tied with the U.S. for
biggest single market). At the peak level of deliveries to China, 2018,
the country took 23 percent of all jetliner deliveries worldwide. This
has fallen precipitously, for both market reasons and due to
geopolitical factors. This trade is under threat, due to slowing in-
country growth rates, China's reluctance to recertify Boeing's 737MAX,
and the U.S. Government's decision to put Western components for
China's ambitious national aircraft programs on a possibly restrictive
export list.
However, for the supplier base, the Covid-19 downturn came after
another traumatic event: the grounding and production halt of Boeing's
737MAX. This is the second largest volume program in the world, and
easily the largest in the U.S. Some supplier companies have a very high
level of exposure. For fuselage provider Spirit AeroSystems, and many
of its suppliers, this level of 737MAX dependence is in the 50 percent
range.
The impact of the Covid-19 downturn on the civil aviation market
can be seen in the chart below. The 2020 line (red) illustrates the
market outlook as of right before the pandemic (with a MAX-related
downturn in 2019-2020). The green line shows current projections, but
also what happened to the market in 2020. Deliveries of commercial
jetliners fell by 50 percent relative to 2019, and again, 2019 was
already a weak year due to the 737MAX shutdown.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The above chart also illustrates the relative sizes of the civil
and military segments of the aviation industry. The civil side is
simply much larger, if not always as profitable, compared with the
military side of the business. Thus, while military revenue has helped
stabilize the supply chain, it simply cannot compare to the volumes
seen in the commercial sector.
For aviation suppliers with a heavy exposure to the aftermarket, or
maintenance, repair, and overhaul (MRO) part of the industry, the
unprecedented falloff in utilization has resulted in a revenue decline
even worse than that seen with new-build aircraft. Even for supplier
companies that don't rely on the aftermarket for the majority of their
business, this decline has been painful, since aftermarket work tends
to be more profitable than new-build production.
Boeing's market position
Another challenge faced by the supply chain concerns Boeing's
market position. Despite the industry's globalization, U.S. supplier
companies, in aggregate, are more exposed to Boeing relative to its
rival, Airbus. Right now, however, Boeing seems prepared to cede market
share to Airbus. This may change as the market recovers, and Boeing is
clearly under a great deal of financial pressure as a consequence of
both the 737MAX shutdown and the industry downturn, but right now the
outlook for the company's future product development efforts is a
serious concern for the industry.\4\
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\4\ See, for example, https://aviationweek.com/aerospace/program-
management/opinion-will-boeing-become-next-mcdonnell-douglas
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The European company's A321neo is a very strong performer in the
mid-market segment. Boeing, by contrast, has cancelled plans for its
own new mid-market jetliner. It hasn't launched a completely new jet in
17 years. It continues to cut its engineering team. As the chart below
indicates, it has slashed R&D, with a further 27 percent cut last year
alone.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Assuming Boeing does nothing new, and the duopoly goes from a 50
percent-50 percent market share balance to a 60 percent-40 percent one
in Airbus's favor (this is our projection), then on balance, U.S.
aviation supplier companies will face a similar decline. The companies
with substantial Airbus exposure will be immune from this, but again,
many U.S. suppliers are heavily reliant on Boeing.
Boeing has also been quite aggressive with its supply chain in
terms of contract terms. Boeing programs such as Partnering For Success
(PFS) were designed to pressure suppliers on prices, intellectual
property, aftermarket access, and other terms. It isn't clear whether
Boeing will begin to take a softer approach, now that much of its
supply chain faces very different circumstances (relative to the good
years before the MAX shutdown, when the supply chain was healthy enough
to withstand these contractual changes and pressures).
The extent to which U.S. industry relies on Boeing can be seen in
the following chart, which shows U.S. aviation industry output in both
absolute and relative (to the rest of the world) terms. As a percentage
of world deliveries, U.S. output has been fairly stable at just over 50
percent for several decades. However, in 2019 and 2020, this shifted
below 50 percent. Obviously, the serious decline in 2020 (in absolute
terms) was due to the pandemic. But the decline as a percentage in 2019
and 2020 was purely due to the 737MAX production halt.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Consequences
Despite the severity of the aviation market downturn, the aviation
supply chain has generally weathered the storm rather well. Several
smaller companies have gone bankrupt, but these represent well under 1
percent of supplier capacity. For almost all companies, relative health
has depended upon portfolio: those with the most defense work have done
best. Those with the most exposure to twin aisle jets (the single most
impacted part of the aviation business) or to the 737MAX, have
generally been hit hardest. But again, there have been very few
outright bankruptcies.
However, there are many concerns for the future of the aviation
supply chain, for two reasons:
First, it is important to consider the reasons that almost all
aviation suppliers have come through the crisis intact. Government
support is one of the biggest reasons, particularly with paycheck
protection programs. Similarly, defense spending, while not as large as
commercial market numbers, is relatively strong, particularly compared
with the last commercial jetliner market downturn (in 2002-2003). The
Department of Defense's accelerated payments program, aimed at
stabilizing the aerospace industrial base, has been very helpful.
Supplier companies have also taken almost every possible defensive
action. They have sold assets, fired or furloughed workers, burned down
work-in-progress, and conserved cash any way they can. These were tough
calls, particularly with headcount reduction; but, when topline revenue
falls drastically, the only way to avert financial disaster is to cut
variable costs, which, for the most part, means cutting payroll.
Also, financing, so far, has been available to suppliers. Banks and
other lenders have been patient, and have provided new financing.
Interest rates are low, which helps with debt servicing.
Yet all of these measures have run their course. Debt has been
increased, capacity and workforce cuts have been made, non-core
businesses have been shed, and the Pentagon has done all it can.
Defense budget growth has halted in real terms, and accelerated
payments, inevitable, have run their course.
Second, it is important to consider the challenges ahead. When
jetliner production rates rise again, many supplier companies may have
a difficult time raising the capital needed to make capacity
investments. Labor costs increases and other inflationary pressures
could exacerbate these capacity expansion challenges.
In short, these survival tactics have resulted in a rather brittle
supplier base. These companies have shed assets and taken on a great
deal of debt. Inevitably, R&D funding for new technologies has been
slashed too, endangering future competitiveness.
Finally, given the concerning development of Covid-19 variants,
such as the Delta variant, there are valid reasons for concern
regarding the recovery's trajectory. If anything were to disrupt the
market recovery, such as another round of pandemic-induced lockdowns,
the resulting production cuts would endanger the health of a very
fragile supply chain. Concerns about its health would range from short-
term financial viability worries, to long-term R&D funding questions.
3. Questions and Recommendations
Questions
In my opinion, the Committee might want to ask the following ten
questions about the health of U.S. aviation supplier industry:
1. Is the market crisis over? Or, will another round of paycheck
protection aid be required by the industry as a consequence of
either a resurgent pandemic or an economic downturn, possibly
one induced by the end of government aid programs?
2. Will financial weakness in the supply chain impact the
production ramp-up that will hopefully be associated with a
market recovery?
3. Human capital is a major possible bottleneck; can suppliers
bring back skilled employees after deep cutbacks?
4. In addition to labor, what other inflationary pressures (energy,
materials) do suppliers face? Do their contracts allow for
pass-throughs of these inflated costs? How badly did prices
fall for jetliners, and are suppliers further subject to
declining revenue here as well?
5. Will private equity and other financing sources be available to
help suppliers with capital (or to buy them) in the next few
years?
6. Are U.S. suppliers at risk of acquisition by non-allied
countries?
7. Are current ITAR reforms sufficient to enhance the
competitiveness of U.S. suppliers on the military export
market?
8. What is the status of U.S. components on the Military End User
(MEU) list? The Trump Administration put many of the
constituent companies of China's COMAC (their aspiring state-
owned jetliner company) on a list that may, or may not,
prohibit component exports. Since China's jetliners will be
much more difficult (and perhaps impossible) to develop without
these inputs,\5\ this was a very aggressive move, and the Biden
Administration has continued this ambiguous policy. Is this
part of an effort to negotiate a grand trade bargain (perhaps
one including Boeing jet sales) to China?
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\5\ https://foreignpolicy.com/2021/02/16/china-aviation-industry-
washington-trump-biden/
9. Will U.S. allies stay on the same page regarding China? The
Biden Administration has made working with allies on China a
priority. Calling a ceasefire on the WTO complaint against
Airbus is part of that, with the objective of working with the
Airbus countries on a united front against China's efforts to
distort the jetliner market. Will those European countries say
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with the U.S. in this united front?
10. Will Boeing launch a new aircraft to effectively compete with
Airbus in the mid-sized jetliner market?
Recommendations
I would offer the following seven recommendations to the Committee
for actions that would be useful in securing the future of the U.S.
aviation industry supplier base:
1. Initiate a government R&D ``Sustainable Aviation'' or ``U.S.
Clean Skies'' program for aviation suppliers. Europe has moved
aggressively to establish Zero Emissions targets for aviation,
and is funding a wide variety of technologies under ``Clean
Skies'' and other programs. The U.S. should consider the same
for its supplier companies, particularly since the majority of
EU country-funded research is not accessible to them.
The emphasis might be on sustainable aviation fuel (SAF) and other
related technologies. This initiative would echo similar work
begun in France, Germany, and the European Union, the latter
with its ReFuelEU legislation to boost SAF. SAF and other
research programs might be coupled with airline usage mandates
designed to increase the guaranteed market for the new
technologies.
This clean skies initiative would also serve to employ engineers
and technical workers at suppliers, who might otherwise be at
risk of headcount reductions due to company-funded R&D cuts.
2. Move a greater share of government R&D dollars from basic to
applied research. The composition of R&D is a serious issue
because the U.S. Government is good at funding basic research
but not as good at applied research. It would be good to
consider a migration of Federal R&D dollars toward applied
level projects to help out with U.S. competitiveness. This
would also help to get technologies to market faster, and of
course with supplier workforce issues. This migration would
involve working with supplier companies to identify what is in
the pipeline now, what the prospects are for acceleration, and
how government money can help.
3. Clarify the China MEU list. For many suppliers, there is
considerable uncertainty about this list: are component
shipments for China's indigenous jetliner programs prohibited
or not? If this uncertainty isn't a deliberate effort aimed at
crafting a trade agreement with China, the terms and conditions
of the MEU list should be clarified, so U.S. suppliers can
again sell into this important export market without fear of
legal ramifications at home.
4. Work to enhance coordination with Europe on China aviation
policy. China is able to demand technology transfer from U.S.
supplier companies, in large part, because it plays Europe and
the U.S. off against each other for jetliner orders from Airbus
and Boeing. If both sides agreed that jetliner orders would not
come with pre-conditions like these (that is, if China adhered
to the terms outlined in the WTO's Agreement on Trade in Civil
Aircraft \6\), this would not be a problem. Eliminating
technology transfer risk would help supplier companies sell
into the crucial China market without fear of creating long-
term competitors.
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\6\ https://www.wto.org/english/tratop_e/civair_e/civair_e.htm
5. Continue to work on labor-centric assistance packages. Paycheck
protection programs have been remarkably successful in helping
the supply chain maintain its workforce during the downturn,
and this will be crucial in maintaining the increased pace of
output we will hopefully see as the market recovers. But if
another round of PPP is needed, it would be better to have the
terms and conditions lined up in advance. Also, U.S. companies
continue to face a demographic ``bathtub'': there is a gap
between many older, more experienced workers, and the younger
next-generation, due to low levels of employee intake during
the 1990s and early 2000s. There may be ways for the government
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to help with mentoring and training programs.
6. Direct the Department of Defense to provide greater clarity on
its spare parts order patterns and inventory levels. Several
suppliers report that they benefitted from a significant run-up
in components orders at several times over the last year, but
then, suddenly, orders fell to nothing. It's possible that DoD
was increasing its orders as a way of helping supply chain
companies during the crisis, but, inevitably, this resulted in
filled warehouses, so orders have fallen off. Either way,
guidance for industry on these patterns would be very helpful.
7. Accelerate and improve ITAR reform. It might be best to go back
to the commitment made in the Export Control Reform (ECR)
during the Obama Administration to review the Munitions List on
the ITAR to see what might be added or removed. This would
involve looking carefully at what technologies are now more
widely available from competitors, in which case our controls
were simply closing the market to U.S. industry, not keeping
them from potential adversaries. Also, this means looking at
what new and emerging technologies might have significant
military applications and should be controlled, preferably in
concert with our allies.
Again, thank you very much for asking me to provide testimony to
the Committee. I will now be happy to answer any questions.
The Chairman. Thank you, Mr. Aboulafia. I just want to
point out that Senator Wicker and I worked very hard on those
COVID-19 packages as it related to aviation. And then most
recently, Senator Moran and I worked on a package that was just
focused on aviation supply chain manufacturers. And that
program just became, I think, operational or available for the
actual applications last month.
So I hope that many of the supply chain maintenance will
take advantage of that. We definitely are hearing the impacts
of both COVID-19 and now shortages of a workforce just at the
time we need to pick back up. We will now turn to Mr. Lex
Taylor. Thank you so much. Senator Wicker gave you a robust
introduction. Thank you so much for being here. We look forward
to your comments.
STATEMENT OF WILLIAM A. (LEX) TAYLOR III, CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER, THE TAYLOR GROUP INC.
Mr. Taylor. Thank you, Chair Cantwell and Ranking Member
Wicker for, as well as the rest of the Committee here, and
virtually thank you for allowing me to be here. I appreciate
the opportunity to tell you a little bit about our company. I
feel like I am preaching to the choir a little bit. We all have
the same goals in mind. But I hope I can tell you a little bit
about our company, how it is affecting us at this point in
time. And I think you can translate it to many, many companies
across this Nation.
The Taylor Group is a manufacturer of heavy industrial lift
trucks, primarily for material handling industry. And we also
build power generator sets for residential and commercial
applications. And we are a remanufacturer of material handling
equipment for the U.S. military. The business began as Taylor
Machine Works in 1927 and still operates as a family privately
owned business. We are proud to wave that flag in Lewisville,
Mississippi.
Our products are manufactured in America and exported
around the world. In total, we have 1,200 employees with an
average annual sales of a little over $550 million. Our
products operate every day, in every prime industry, steel or
metals, wood, concrete, intermodal transportation, just to name
a few. Approximately 430 vendors support our thousands of parts
and components that go into building our products. These
businesses are based all over the world and are critical to our
ability to produce products and support our customers.
Some of these suppliers are also our customers. The supply
chain is very interwoven and the companies within it depend on
each other to keep the industry and thus the wider economy
going. I appreciate the committee holding this hearing to
discuss the challenges facing our supply chain, why this
interruption happened, and solutions to right the ship. America
was clearly headed for further economic growth at the beginning
of 2020, but then the unthinkable happened.
The virus, the COVID-19 virus, was the primary culprit to
shut this industry down, shut this supply chain down, and it is
where we are today. So where are we? Yes, the supply chain is a
disaster. It is in disarray. That is why we are here. Delays in
deliveries have forced manufacturers like Taylor to resort to
unorthodox and expedited methods of getting critical supplies.
This situation is causing inflation to run rampant throughout
the supply chain. So far, we have kept our lines running, but
are facing 30 to 75 percent price increases from our vendors
and transportation companies.
Three examples of this are microchips, of course, steel,
and container costs, just to name a few. Our products operate
via some form of computer interface. So the chip shortage is
extremely concerning. In addition to the availability of the
right inventory items such as chips keeping our product lines
running, it depends on receiving inventory on time. Steel is a
major component of our products, both in its structure and the
components that are made of steel that go into our products.
We are facing price increases weekly, and in some cases,
every 24 hours. These average--and then the average cost of
containers have gone from $4,000 a container to $18,000 as I
speak today due to this low supply and high demand. Major
shortages of key workers are also contributing to the supply
chain crisis. Too large national trucking companies that
support us have reported to us that they are trying to fill
over 2,000 driver applications today. They claim that the
Government employment subsidy is particularly detrimental to
getting prospects to come back to work.
And then therefore, with all this said, our company has, in
order to protect its financial liquidity and viability, we have
had to institute price increases. And this is happening all
over the country. As I said, inflation is rampant. The worst
part is we have orders, but we don't have confidence in our
supply chains to meet the demand.
We still have 40 employees now on layoff still from the
COVID year. This means 40 families in need with no pay or
benefits. We want to hire those workers back and hire even
more. But we don't dare make such a large investment when we
cannot commit to fulfilling customer orders on time now. The
same story is playing out in thousands of manufacturers across
America. For Taylor, our purchasing, engineering, and
manufacturing teams are doing a Herculean job to keep our lines
rolling, satisfy our customers, and keep our people employed,
with a goal to get those on layoff back. This cannot be
sustained, however, much longer.
Our vendors tell us they do not see an end to this supply
problem until the end of 2022 at the earliest. I suspect there
are thousands, hundreds of thousands of other family businesses
facing similar issues as us. We wake up every day, working all
day to maintain our production lines, maintain our employment,
and keeping our customers happy.
My request to this committee is not to overreact with
solutions that may cause unintended consequences. Rather, I
encourage you to support a free market system and allow it to
do what it does best and find solutions that are practical and
driven by the private sector. Chair Cantwell, thank you again,
Ranking Member Wicker, and the committee for allowing me to
speak to you today and I look forward to any questions.
[The prepared statement of Mr. Taylor follows:]
Prepared Statement of William A. (Lex) Taylor III, Chairman/CEO,
The Taylor Group Inc.
Chair Cantwell, Ranking Member Wicker, and Members of the
Committee: Thank you for the opportunity to appear before the committee
today. And let me thank you all for your commitment of service to this
great nation. My name is Lex Taylor and I serve as Chairman of the
Board and Chief Executive Officer of The Taylor Group. My hope is to
share about the challenges facing my company and, to some extent, all
of our fellow manufacturers, due to the supply chain interruptions. My
comments are my own and will focus primarily on my company.
By way of brief introduction, The Taylor Group is a holding company
with ownership of several entities--three of which are Taylor Machine
Works (a manufacturer of heavy industrial lift trucks), Taylor Power
Systems (a manufacturer of stand-by and prime power generator sets for
residential and commercial applications), and Taylor Defense (a
remanufacturer of material handling equipment for the U.S. military).
The business began as Taylor Machine Works in 1927 and today still
operates as a privately owned family business based in Louisville,
Mississippi. Our products are manufactured in America and are exported
around the world. In total, we have 1,200 employees in our entire
system, which also includes service, financial, and retail businesses.
We are considered a small mid-cap firm with average annual sales of
over $550 million. Our products operate in every prime industry,
including metals, concrete, intermodal, and wood to name a few. Our
machines are operating all over the world moving goods and services
daily.
With thousands of parts and components that go into building our
products, we are supported by approximately 430 vendors. Of these we
consider 121 to be Tier 1 suppliers. These supply chain businesses are
based all over the world and are critical for our ability to produce
products and support our customers. In fact, some of these suppliers
are also our customers. The supply chain is very interwoven and the
companies within it depend on each other to keep industry and thus the
wider economy going.
A key part of this chain is transportation. Transportation in all
facets--including road, rail, water, and air--is an integral part of
the supply chain formula. And the transportation companies in our
supply chain are also customers of Taylor. As an example, we have
transmissions, counterweights, axles, and diesel engines coming to us
from offshore sources. These major components come containerized to
both East and West Coast ports of entry. Our units are the predominant
mode of container handling in those ports once they are off-loaded. Not
to belabor a point, but our small business is just one of thousands of
businesses in this story, and the slightest interruption in supply is a
detriment to the continuous flow of goods and services across this
Nation and the world.
I appreciate the committee holding this hearing to discuss the
challenges facing our supply chains, why this interruption happened,
and solutions to right the ship. There is no question that this Nation
was on track and heading for further economic growth at the beginning
of 2020. But then, the unthinkable happened--a pandemic that brought
tragedy to the world and caused a dramatic economic slowdown. If we can
all agree on one thing, it is that the COVID-19 virus was the single
culprit that triggered the supply chain debacle we are experiencing
today.
There has been, and will be, much testimony as to how uncertainty
and government intervention to control the spread of the virus led to
exponential drops in consumer demand and the cascade of events that led
to the almost complete shutdown of the economy for the better half of
2020. With the help of the Association of Equipment Manufacturers and,
to a lesser extent, the National Association of Manufacturers, an
effort was pushed forward by our company and other manufacturers to
urge the Treasury and the Federal Reserve to underwrite a national
manufacturing ``floorplan'' program. Our proposed program would have
allowed manufacturers to continue to build their products and stock the
equipment for future sale during the dark and uncertain days of 2020.
Much like the successful Payroll Protection Program the Congress
instituted at the Small Business Administration, the goal of our
initiative was to keep people employed and secure the supply chain to
be ready when the pandemic ended. A notable difference was that our
proposal would have required companies receiving Federal support to pay
the money back. This effort was unsuccessful because of the political
wrangling and failure of the government to understand the big-picture
consequences of letting supply chains falter.
So here we are. The supply chain is a disaster. Some of that is due
to the shortage of generic, programmable, or hard-coded microchips. Our
products, like so many others, operate via some form of computer
interface, so the chip shortage is extremely concerning. In addition to
the availability of the right inventory items such as chips, keeping
our production lines running depends on receiving inventory on time.
Delays in deliveries have forced manufacturers like Taylor to resort to
unorthodox and expedited methods of getting critical supplies. This
situation is causing inflation to run rampant throughout the supply
chain. So far, we have kept our lines running but are facing 30 percent
to 75 percent price increases either from our vendors or the
transportation companies, or a combination of both.
Steel is a major component of our products, both in the structure
of our machines and the components within our machines. We are facing
price increases weekly and, in some cases, every 24 hours due to lack
of availability. So much of our supply, such as engines, transmissions,
and sub-assemblies, come from overseas and container shortages have
become a detriment to supply--particularly with the average cost per
container currently at $18,000, up from $4,000 only 6 to 12 months ago.
In order to protect financial liquidity, we have had to institute price
increases, and this is happening all over our country. As I said,
inflation is rampant.
Major shortages in key workers are also contributing to the supply
chain crisis. Two large national trucking companies we use are trying
to fill over 2,000 driver positions to meet demand, but can't find
them. Their claim is that the government unemployment subsidy is
particularly detrimental to getting prospects to come to work.
We have over 40 employees still laid-off from COVID that we want to
bring back but cannot because, while we have received customer orders
that would justify their employment, a lack of confidence in supply is
preventing it. This is 40 families that are in need with no pay or
benefits. We want to hire those workers back, and hire even more, but
we do not dare make such a large investment at a time in which we
cannot commit to fulfilling current customer orders on time. Keep in
mind, this same story is playing out in tens of thousands of
manufacturers across America.
Let me conclude by saying that, as for Taylor, our purchasing,
engineering, and manufacturing teams are doing a herculean job to keep
our lines rolling, satisfying our customers, and keeping our people
employed with a goal to get those on lay-off back on board. Engineers
are finding alternative component solutions to replace the components
that are in short supply. Purchasing is finding alternative delivery
solutions to ensure the lines are supplied--utilizing hot shot delivery
services, air transport instead of ships, and even sending a vehicle to
pick up a part in a distributor or retail store. Manufacturing is
alternating personnel and reorganizing the process flow--trying to hang
on to employees instead of laying them off. This cannot be sustained
for much longer.
Our long-term investments in research and development and workforce
training have allowed us to remain as nimble as possible during these
challenging times. Working with partner organizations, such as our
community colleges, has helped bring expertise and resources to address
some of these problems. But state and local programs alone are unlikely
to deliver a solution to such a complex problem. Our vendors tell us
they do not see an end to this supply problem until the end of 2022 at
the earliest. Like all manufacturing employers, we will do our best to
maintain steady employment until that time. My request is that this
committee not act to overcorrect with solutions that may cause
unintended consequences. Rather, I encourage you to support the free-
market system and allow it to do what it does best and find solutions
that are practical and driven by the private sector.
Again, thank you for allowing me to introduce my company and
provide insight about the challenging issues. The good news is that
demand is strong, which translates into jobs and economic growth. The
bad news is that nothing was done during the pandemic year to avoid the
destruction of the supply chain, and thus this economic engine is
faltering.
Chair Cantwell, Ranking Member Wicker, and Members of the
Committee, thank you again for the opportunity today, and I look
forward to your questions.
The Chairman. Thank you, Mr. Taylor. We will look forward
to getting some more specifics on that business and
opportunities during the Q&A. Thank you for being here. Dr.
Gil, thank you so much. Look forward to your testimony.
STATEMENT OF DR. DARIO GIL, SENIOR VICE PRESIDENT AND DIRECTOR,
IBM RESEARCH
Mr. Gil. Chair Cantwell, Ranking Member Wicker, members of
the Committee, thank you for the opportunity to testify on the
critical need to bolster our semiconductor supply chain. I am
Dario Gil, the Senior Vice President of IBM and Director of IBM
Research. I am responsible for billions of dollars of R&D
annually to develop cutting edge technologies, from advanced
semiconductors to artificial intelligence to quantum computing.
I am also a member of the National Science Board.
Semiconductors are the beating heart of modern electronics and
really power every sector of our economy and facet of our
lives.
The Chairman. Mr. Gil, I think people want you to pull that
microphone a little closer to you or turn it on.
Mr. Gil. The mic is not working, unfortunately. OK.
The Chairman. That is better.
Mr. Gil. Let me see if I can do this. Is this--hopefully it
is better.
The Chairman. Yes, thank you so much.
Mr. Gil. OK. Semiconductors are really the beating heart of
modern electronics and power every sector of our economy and
facet of our lives. For example, our smartphones use
semiconductors under 10 nanometers. In May, IBM unveiled the
world's first two nanometer chip, which actually I have brought
with me today. And what it could do is it could quadruple
battery life for our smartphones and really slash their carbon
footprint and consumption or use of our data centers, and
really shows the power of R&D. But for over a year, we have
experienced the consequences of semiconductor supply chain
disruptions. Failing to produce chips in the U.S. hinders our
ability to develop future emerging technologies. And the facts
are simple. We only manufacture 12 percent of the world's
capacity.
Global leaders churn out advanced semiconductors at 7
nanometers and 5 nanometers, yet we manufacture nothing under
10 nanometers. For the U.S. Government to bolster the
semiconductor supply chain, it needs to do three things:
invest, create effective partnerships, and focus on results
that benefit all Americans. We need sustained investments in
domestic manufacturing and R&D for advanced chips. The winning
recipe is clear, to have products to manufacture, you need to
innovate new technologies, then manufacture, innovate then
manufacture.
While foreign Governments invest in advanced semiconductor
R&D and manufacturing capabilities, we are lagging. Federal
research and development represents a smaller percentage of GDP
today than in 1964. The president's 100 day supply chain review
and bipartisan consensus in Congress demonstrate a will to
invest in addressing supply chain challenges, including
boosting leadership in advanced R&D. The Senate has provided a
strong catalyst for investment by overwhelmingly voting in
support of USICA and the CHIPS Act. Now, let's talk about
partnerships.
Semiconductor innovation is fueled by partnerships. IBM's
two nanometer chip breakthrough was built on decades of
collaborative R&D with partners in New York. Bolstering
American semiconductor capacity requires a scalable partnership
model. The National Semiconductor Technology Center, or NSTC,
is a major first step, and IBM encourages the Senate to fully
fund and empower it. We cannot afford to waste time building
semiconductor innovation capabilities from scratch. The NSTC
could deliver results in months if we leverage existing
expertise and billions of dollars in semiconductor
infrastructure.
The Albany Research Center, home to many companies and
university partners, is already working on advanced logic
pathfinding a new semiconductor materials. It offers an ideal
environment from which to build and scale NSTC. As a proud
member of this ecosystem, IBM is prepared to take a leadership
role to make the NSTC success. The NSTC should be an industry
led public private consortium that bridges gaps between
industry, academia, and Government in advanced semiconductor
R&D, prototyping, packaging, and manufacturing.
It should enable American innovators, big and small, to
quickly move semiconductor designs to any U.S. foundry. But we
need more than physical assets and manufacturing plants. We
need to invest in the American worker through education and
training programs to create good paying jobs and opportunities
for decades. This moment demands great urgency and results that
generate dividends for all Americans.
As I have outlined, the U.S. needs to address semiconductor
supply chain disruptions by investing, creating effective
partnerships, and ensuring outcomes that benefit Americans
today for generations to come. Thank you. I look forward to
your questions.
[The prepared statement of Mr. Gil follows:]
Prepared Statement of Dr. Dario Gil, Senior Vice President and
Director, IBM Research
Introduction
Good morning Chair Cantwell, Ranking Member Wicker, and
distinguished Committee members. I thank you for this opportunity to
address the Committee on the critical need to bolster the semiconductor
supply chain in the United States today and for generations to come. My
name is Dario Gil, and I am a Senior Vice President of IBM and Director
of IBM Research, the research and innovation engine of IBM. In addition
to my leadership role at IBM, I am a member of the National Science
Board of the National Science Foundation and the Board of Governors of
the New York Academy of Sciences, and serve as co-chair of the MIT-IBM
Watson Artificial Intelligence (AI) Lab.
IBM pioneers cutting-edge computing technologies. In May, we
unveiled the world's first 2 nanometer chip, which could quadruple cell
phone battery life, cut the carbon footprint of data centers, and
drastically speed up a laptop's functions. We are also a leader in
quantum computing and were the first company in the world to build a
programmable quantum computer and make its computing power available
through the cloud.
IBM Research is a leading-edge corporate research lab with 3,000
scientists and engineers working to build next-generation technologies
that will underpin United States leadership in hybrid cloud, AI,
cybersecurity, quantum computing, and accelerate the process of
scientific discovery. We are committed to pushing the boundaries of
technological and scientific discovery to positively shape our world.
Today, I would like to talk about three key actions the United
States government should make to address the supply chain manufacturing
challenge in the semiconductor industry and to avert a crisis--invest,
create effective partnerships, and ensure outcomes that benefit
Americans today and in the future.
Invest in the Semiconductor Supply Chain
First, let me speak about the need to invest in restoring the
semiconductor supply chain. At the heart of the current supply chain
challenges we face, which every American can now see and feel, is a
tiny and often invisible ingredient that is crucial to safeguarding
economic growth, national security, and our continued ability to
achieve technological and scientific advances. Semiconductors.
Semiconductors are the beating heart of modern electronics--they power
every sector of our economy and every facet of our lives. This phone,
every American's phone, could not function without them.
Semiconductor advances will be essential to unlocking fresh
advances in technologies such as AI, 5G, and hybrid cloud. The set of
manufacturing processes used in different generations of chips are
referred to as technology nodes. A smaller technology node results in a
faster and more efficient chip.
At IBM, we define advanced semiconductors as those below 10
nanometers. While the global leaders churn out advanced nodes at 5 and
7 nanometers, the United States does not manufacture any advanced nodes
under 10 nanometers.\1\ Some say we should not care about manufacturing
advanced nodes. But we had better. This phone runs on them, and iPhones
have used 5 and 7 nanometer chips since 2019.\2\ And that's just
phones--picture a world where laptops and other advanced machines did
not work--or do not work that quickly or well. This could be our
reality if the United States does not take action to address the
current semiconductor shortage and ensure it does not happen again.
---------------------------------------------------------------------------
\1\ ``2021 Factbook,'' Semiconductor Industry Association. https://
www.semiconductors.org/wp-content/uploads/2021/05/2021-SIA-Factbook-
FINAL1.pdf.
\2\ ``Apple iPhone 12 Will Be Powered by The A14 Bionic 5nm Chip,
Already Seen In The New iPad Air?'' News 18, October 13, 2020. https://
www.news18.com/news/tech/ahead-of-iphone-12-launch-apple-execs-shed-
light-on-a14-bionic-design-performance-2958803.html.
---------------------------------------------------------------------------
The facts are simple: although the United States maintains 47
percent of the global market for semiconductors and electronics, we
only manufacture 12 percent of the world's capacity.\3\ When it comes
to the production of ultra-advanced nodes at 7 nanometers and below,
just two countries--Taiwan and South Korea--dominate 100 percent of
global production.
---------------------------------------------------------------------------
\3\ ``Global Wafer Capacity, 2021-2025,'' IC Insights. https://
www.icinsights.com/data/reports/5/9/brochure.pdf?parm=1625240565.
---------------------------------------------------------------------------
While the governments of other countries have invested in research
and development and manufacturing incentives to boost advanced
semiconductor nodes and manufacturing capabilities, the United States
has not kept pace. In the last 30 years, total Federal investment in
research and development has never represented more than 1.2 percent of
our GDP, and Federal research and development constitutes a smaller
percentage of GDP today than it did in 1964.\4\ A 2019 report from the
Organization for Economic Cooperation and Development (OECD) found that
all countries with significant chip industries except the United States
employ government incentives.\5\ Analysts have concluded that our
failure to incentivize the semiconductor industry has helped push chip
manufacturing abroad.
---------------------------------------------------------------------------
\4\ ``How Much is Enough?,'' Center for Strategic and International
Studies, April 21, 2021. https://www.csis.org/analysis/how-much-enough.
\5\ ``Let the chips fall where they may: A story of subsidies and
semiconductors,'' The Organization for Economic Cooperation &
Development, December 4, 2019. https://www.oecd.org/trade/let-the-
chips-fall-where-they-may/.
---------------------------------------------------------------------------
These stark facts raise three key issues, which collectively inject
an unacceptable degree of uncertainty and risk into our economy,
national security, and innovation ecosystem.
First, a dearth of domestic semiconductor manufacturing capacity at
all nodes crimps our access to basic ingredients that power even the
most elementary devices, such as garage door openers. As a result,
nearly all industries in the United States are vulnerable to global
semiconductor supply chain disruptions. In 2021, semiconductor
shortages idled auto production in multiple states.\6\ And a lack of
point-of-sale machines means that restaurants are struggling to make up
business lost to the pandemic.\7\ Projections show that by year's end,
the shortage will impact 169 industries, and shrink 2021 GDP growth by
half a percentage point.\8\ This threatens both our post-pandemic
recovery, and our long-term uninterrupted access to the building blocks
of critical technologies.
---------------------------------------------------------------------------
\6\ ``Ford to Idle or Curb Output at More Plants Because of Chip
Shortage,'' The Wall Street Journal, June 30, 2021. https://
www.wsj.com/articles/ford-to-close-or-curb-output-at-some-plants-
because-of-chip-shortage-11625068975.
\7\ ``No Chips, No Tips: How the computer Chip Shortage threatens
Thousands of Restaurant Service Jobs,'' The Washington Post, June 11,
2021. https://www.washingtonpost.com/business/2021/06/11/restaurant-
workers-computer-chip-shortage/.
\8\ ``The Semiconductor Shortage of 2021,'' Goldman Sachs, March
17, 2021. https://www
.goldmansachs.com/insights/pages/the-semiconductor-shortage-of-
2021.html.
---------------------------------------------------------------------------
Second, the lack of domestic semiconductor manufacturing capacity,
especially for advanced nodes under 10 nanometers, also saps our
ability to work with allies to promote United States-designed and
manufactured chips in global markets. America could be exporting
advanced semiconductors under 10 nanometers to supercharge our
technological and scientific leadership abroad. But, in lacking
production capacity for advanced chips, we are foreclosing on the
prospect that emerging technologies will be pioneered and manufactured
in the United States. We must reverse this trend.
Third, the lack of investment in research, development and
prototyping undermines our efforts to retain strong American leadership
in this strategic gateway technology. Using history as a guide, the
United States should recall that we have not always lacked domestic
manufacturing capacity: as recently as 1990, we manufactured 37 percent
of global semiconductor capacity.\9\ We can produce a significant
percentage of chips in the United States again. The United States
government has played a significant role in supporting manufacturing
and research in key areas, and it needs to step up once again to secure
onshore semiconductor production and secure supply chains.
---------------------------------------------------------------------------
\9\ ``Turning the Tide for Semiconductor Manufacturing in the US,''
Semiconductor Industry Association. https://www.semiconductors.org/
turning-the-tide-for-semiconductor-manufacturing-in-the-u-s/.
---------------------------------------------------------------------------
Thankfully, the President's 100-Day Supply Chain Review, and a
bipartisan consensus in Congress, demonstrate a will to address both
short and long-term supply chain manufacturing challenges through
investment. And, they recognize that while new manufacturing in the
United States is important to improving the resilience of our supply
chains, we must also invest to maintain leadership in advanced research
and development. Crucially, the United States Senate has provided a
strong catalyst for investment by overwhelmingly voting to support
USICA and the CHIPS Act.
Forge Partnerships
I have spoken about the need for investment, and now let me turn to
the need for partnerships. At IBM, we have a strong track record of
semiconductor innovation. These innovations are the product of decades
of research and development carried out by IBM in New York State. These
innovations stem from partnerships--where IBM scientists work in close
collaboration with public and private sector partners to push the
boundaries of logic scaling and advanced semiconductor capabilities.
As a nation, we must build on this collaboration and take full
advantage of existing semiconductor ecosystems. IBM strongly supports
the recommendation contained within the President's 100-Day Supply
Chain review aimed at strengthening our semiconductor manufacturing
ecosystem by promoting collaboration.\10\ At IBM we understand the
power of collaboration and have expertise in creating successful
partnerships that cut across domains. In addition to our semiconductor
innovation ecosystem--which led to the 2 nanometer chip--during the
pandemic we worked with the Federal Government, industry, and academia
to create the COVID-19 High Performance Computing Consortium--which
provides access to the world's most powerful supercomputing resources
to support COVID-19 research. The consortium was launched and scaled
with unprecedented speed when competitors all came to the table to
mobilize for a greater purpose.
---------------------------------------------------------------------------
\10\ ``Building Resilient Supply Chains, Revitalizing American
Manufacturing, and Fostering Broad-Based Growth,'' The White House,
June 2021. https://www.whitehouse.gov/wp-content/uploads/2021/06/100-
day-supply-chain-review-report.pdf.
---------------------------------------------------------------------------
Today, we find ourselves at another inflection point. And again,
IBM is committed to working across industry, government, and academia,
this time to leverage the initial down payment provided by the CHIPS
Act to boost short and long-term semiconductor supply chain resiliency.
A major first step to building American capacity would be to
establish the National Semiconductor Technology Center (NSTC), as
included in the 2021 NDAA and the CHIPS Act within USICA. IBM believes
the NSTC could be a lynchpin for addressing supply-chain disruptions if
it leverages proven ecosystems in the following ways:
First, the NSTC should be established immediately and then move
fast.\11\ The short-term semiconductor shortage, paired with
the specter of long-term global competition for supply, means
there is no time to waste building out United States
semiconductor innovation capability. The shortest and most
efficient path to deliver results is to leverage our strengths,
building on billions of dollars in previous and existing
semiconductor infrastructure investments, while at the same
time working to forge new industry-led innovation pipelines.
---------------------------------------------------------------------------
\11\ Ibid.
Second, the NSTC should leverage existing, proven ecosystems
for semiconductor research and development with strong track
records of leading-edge innovation. For example, the NSTC could
be built around the existing multi-company semiconductor
ecosystem infrastructure in Albany, NY, which is already home
to advanced photo-lithography capability including EUV (Extreme
Ultra-Violet Lithography), advanced logic pathfinding, AI
hardware research, and the development of new semiconductor
materials. By leveraging proven ecosystems such as the Albany
Research Center, the NSTC could be operational in as little as
6-12 months as opposed to years. While IBM is prepared to lead
such a consortium, we recognize that success requires
maximizing participation of all partners.
Deliver Sustained Outcomes
Investment and partnerships are critical to supply chain
resiliency, and now I would like to turn my attention to how we
leverage them to deliver outcomes. The President's 100-Day Supply chain
review makes note of the extremely complex nature of semiconductor
supply chains, and the need for public and private interests to work
together to bolster multiple segments of this supply chain. While the
United States leads the world in semiconductor research, design and
tooling, there is no integrated, collaborative mechanism between
industry, academia, and government in advanced development, prototyping
and packaging, and advanced manufacturing capabilities. This creates
substantial supply chain vulnerabilities.
A well-structured and governed public-private NSTC could address
this shortfall. It could also serve as an important link between
academic research, government R&D labs and programs, company specific
R&D, and product manufacturing. This is what is needed to get this
right and to ensure we reap the benefits and protections of our
investments long into the future.
The NSTC should be built as an industry-led, agile public-private
consortium with widespread industry participation, including small,
medium, and large companies, entrepreneurs, and VC's. Having access to
NSTC capabilities and expertise can help lower the barriers to entry to
the capital-intensive semiconductor industry. Rather than creating
another government program office to operate the NSTC, it should use an
industry-led consortium model proven in the semiconductor industry and
other industry sectors. An agile model would allow the NSTC to have an
operating team up and running in months, not years.
Also, leadership, accountability and a strong technical agenda are
critical for consortium success. Oversight of funding from Federal and
state governments as well as the member contributions is critical. A
Board of Directors with an Executive Committee consisting of key
industry and government stakeholders would provide this function and
determine technical directions and program management with input from a
technical advisory committee and consortium members.
The NSTC should take a manufacturing-agnostic approach to be an
accelerator in moving designs to multiple fabrication plants in the
United States. Such an approach would help spur new capacity and job
creation in America, enabling American innovators, big and small, to
move semiconductor designs to any manufacturing plant. And it would
provide needed flexibility in the United States manufacturing supply
chain to support both government and commercial needs.
Finally, I would like to explain why STEM education and developing
a semiconductor workforce is critical to ensuring that Americans of all
backgrounds can participate and benefit from the investments and
partnerships we forge. A robust semiconductor ecosystem requires far
more than just the physical assets of research and development labs and
manufacturing plants. Ultimately, semiconductor ecosystems are driven
by the diverse and constantly evolving talents of American workers.
Investments to bolster semiconductor supply chains by supporting
ecosystems requires a skilled workforce fluent in semiconductor
research and development, manufacturing, and advanced packaging. As a
result, workforce development, education, and tight integration with
universities, community colleges and other training programs are
critical components of the NSTC. Investments in a semiconductor
workforce will alleviate supply constraints and enable the creation of
semiconductor know-how necessary for future technology developments in
hybrid cloud, and AI.
A May 2021 study commissioned by the Semiconductor Industry
Association found that, from 2021-2026, $50 billion in CHIPS Act
funding would result in the creation of 185,000 temporary jobs annually
and add $24.6 billion annually to the United States economy as new
semiconductor manufacturing facilities come online. Beyond 2026, the
study found that CHIPS Act investment would add 280,000 permanent jobs
to the United States economy.\12\
---------------------------------------------------------------------------
\12\ ``Robust Federal Incentives for Domestic Chip Manufacturing
Would Create an Average of Nearly 200,000 American Jobs Annually as
Fabs are Built, Add Nearly $25 Billion Annually to U.S. Economy''
Semiconductor Industry Association, May 19, 2021. https://
www.semiconductors.org/robust-federal-incentives-for-domestic-chip-
manufacturing-would-create-an-average-of-nearly-200000-american-jobs-
annually-as-fabs-are-built-add-nearly-25-billion-annually-to-u-s-
economy/.
---------------------------------------------------------------------------
We should meet this demand for talent by harnessing CHIPS Act
funding as a force for inclusive job creation that spurs long-term
innovation. The NSTC should lead workforce programs to help train
workers for jobs in the industry across the United States.
In addition, to maintain our global competitiveness, we must also
dramatically increase the number of individuals from underrepresented
communities in STEM fields, as noted in the National Science Board's
Vision 2030 report.\13\ IBM has committed to investing $100 million in
technology, assets, resources, and skills development through
partnerships with historically black colleges and universities through
the IBM Skills Academy Academic Initiative. But, while the private
sector devotes significant funding to STEM education, we need to do
more to collaboratively addresses urgent areas of need, share
resources, and bring the combined weight of the government and industry
together to ensure increased diversity in STEM fields.
---------------------------------------------------------------------------
\13\ ``National Science Board Vision 2030,'' National Science
Board, May 2020. https://www.nsf.gov/nsb/publications/2020/
nsb202015.pdf.
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For a start, we should reform the Higher Education Act (HEA). For
example, Congress could loosen Federal work study restrictions to
accommodate off-campus work experience in the private sector; expand
Pell Grants to cover skills education for part-time students and mid-
career professionals; and make career-oriented education beyond
bachelor's and other traditional education degrees eligible for Federal
student loans.
Also, IBM supports an Executive Order that expands the Department
of Labor's Employment and Training Administration apprenticeship
efforts to provide good paying sector-based pathways to jobs in the
semiconductor industry. This expansion can be built on the successful
work started in 2019 to update the traditional apprenticeship model
with paid, hands-on learning for the digital era in careers in coding,
design, and cybersecurity. This program was particularly attractive to
mid-career workers who want to build new skills or break into new
industries without incurring student debt or taking time off from work.
The program grew twice as fast as expected, and as a founding member of
the GTA apprenticeship coalition, we are proud to share our
apprenticeship framework with some of America's top employers.
Meanwhile, in 2020, IBM joined with other employers, education
institutions--including community colleges--and education service
organizations to demonstrate an education and employment record
exchange. Improving the technical infrastructure to better support the
exchange of education and skills-based credentials would significantly
ease the management and exchange of these certifications, empower
learners with trusted skills-based information, and align their skills
to in-demand jobs. The Department of Commerce played a critical role in
the 2020 demonstration and should convene stakeholders to resolve
governance issues in the electronic exchange of credentials between
educators, and employers.\14\
---------------------------------------------------------------------------
\14\ ``American Workforce Policy Board (9/23): IBM Pilot Video,''
United States Department of Commerce, September 23, 2020. https://
www.youtube.com/watch?v=w9y0J0DmPvE.
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Lastly, and importantly, in addition to workforce training, IBM
also understands that strong semiconductor ecosystems must also include
support for medium and small sized enterprises that contribute to
supply chain resiliency. The Albany Research Center is a model for how
a multitude of partners can drive semiconductor research and
innovation--and jobs.
Conclusion
My testimony today focused on the risks posed to the United States
by current supply chain disruptions, and the urgent steps we must take
to develop a semiconductor ecosystem that supports economic and job
growth, and our national security. We have an unprecedented opportunity
before us--to unlock fresh advances in technologies and ensure United
States leadership. Semiconductor supply chain shortages present a
danger with potentially dire consequences for our economy, jobs, and
national security. But through investment, partnerships, and
maintaining a focus on long-term outcomes, we can succeed in meeting
these challenges. Thank you.
The Chairman. Thank you, Dr. Gil. Thank you so much for
that testimony. Thank you for covering a broad view of the
various sectors that we are going to talk about here. Mr.
Miller, thank you so much for joining us. We look forward to
your testimony.
STATEMENT OF JOHN S. MILLER, SENIOR VICE PRESIDENT
OF POLICY AND GENERAL COUNSEL,
INFORMATION TECHNOLOGY INDUSTRY COUNCIL (ITI)
Mr. Miller. Chair Cantwell, Ranking Member Wicker, and
distinguished members of the Committee, on behalf of the
Information Technology Industry Council, or ITI, thank you for
the opportunity to testify today on implementing supply chain
resiliency.
As the current co-chair of the Information and
Communications Technology Supply Chain Risk Management, or ICT
SCRM Task Force, the United States preeminent supply chain
public-private partnership, I welcome the committee's interest
on this important topic. ITI represents 80 of the world's
leading ICT companies. The global ICT industry respects the
U.S. Government's obligation to address the resiliency of
global supply chains, including the semiconductor and broader
ICT supply chains.
We believe that Government and industry must work together,
along with international partners and allies, to achieve the
trusted, secure, and resilient global supply chains needed to
protect National Security and which are an indispensable
building block for competitiveness, innovation, and economic
growth. ITI welcomes the broad, holistic, and strategic
approach reflected in the America's supply chains Executive
Order and related 100 day report, which is also echoed in the
Senate's United States Innovation and Competition Act or USICA.
While my written testimony commends numerous promising
supply chain programs and initiatives contained in that bill, I
would like to take this opportunity to especially thank the
committee for authorizing emergency appropriations for the
CHIPS Act and ORAN funding for establishing a supply chain
resiliency program housed in the Department of Commerce and for
providing increased investments in the Manufacturing USA and
Manufacturing Extension Partnership programs. We look forward
to working with Congress to get these important strategic
programs fully funded and over the finish line.
ITI has consistently urged the U.S. Government to pursue
this type of broad strategic approach to supply chain
policymaking, which includes promoting a thoughtful,
harmonized, risk based, evidence driven approach to facilitate
transparency and predictability, designing measures to advance
and protect U.S. National Security objectives without putting
American competitiveness at risk, and prioritizing close
Government industry collaboration to most effectively leverage
resources and expertise.
Of course, crafting sound policy measures to address the
global supply chain resiliency challenges that were laid bare
by the COVID-19 pandemic does not guarantee the successful
execution of those policies by the Commerce Department or other
Federal agencies. So this hearing poses a key question, how can
we most effectively implement recent Congressional and
Administration policies to improve supply chain resiliency? I
offer four recommendations in this regard.
First, Commerce should develop and execute a strategic,
coordinated plan for implementing its numerous supply chain
obligations. Given the sheer volume of supply chain taskings
laid at Commerce's doorstep by successive Administrations, as
well as the new responsibilities contemplated by USICA, a
coordinated and strategic approach within Commerce is necessary
to effectively implement supply chain resiliency. One key
feature of such an approach is to identify and empower one
entity within Commerce to lead and coordinate this work.
Another is to prioritize close coordination with industry,
including by leveraging existing partnerships, information
sharing programs, and innovation ecosystems.
The ICT SCRM Task Force, which is currently working with
the Commerce Department and our sponsor, the Cybersecurity and
Infrastructure Security Agency, on implementation of the
Americas Supply Chains Executive Order, provides an excellent
model of public-private collaboration that Commerce can draw
inspiration from and coordinate with as it launches the new
supply chain disruptions task force.
Second, Congress should ensure that Commerce has adequate
resources to effectively implement supply chain resiliency
policy, not only by fully funding the CHIPS Act, but by making
sure the Department is adequately resourced in terms of both
funding and staff. Commerce can also help itself in this regard
by focusing the scope of the prior Administration's Executive
Order on securing the ICTS supply chain and related rulemaking
to ensure that covered transactions are too prioritized and
targeted to discrete National Security risks.
Doing so would allow U.S. companies to conduct global
business with certainty, improve U.S. competitiveness, and help
Commerce more effectively deploy its resources. Third, Congress
should ensure robust liability protections to promote and
incentivize the sharing of supply chain risk information. We
appreciate this committee's extended protected critical
infrastructure information program liability protections as
part of the USICA Supply Chain Resiliency Program to spur much
needed sharing of supply chain risk information.
However, after months of careful study, the ICT SCRM Task
Force developed a legislative proposal to amend the
Cybersecurity Information Sharing Act of 2015 that would
provide stronger liability protections for such sharing, a
preferred approach for the reasons stated in my written
testimony. Finally, Commerce and other U.S. Government
stakeholders should deepen engagement with international
partners on supply chain resiliency.
ITI welcomed the recent establishment of the U.S., EU Trade
and Technology Council as providing just this sort of
opportunity to strengthen cooperation between allies on this
and other critical issues. Thank you for the opportunity to
testify today. I look forward to your questions.
[The prepared statement of Mr. Miller follows:]
Prepared Statement of John S. Miller, Senior Vice President of Policy
and General Counsel, Information Technology Industry Council (ITI)
Chair Cantwell, Ranking Member Wicker, and Distinguished Members of
the Committee on Commerce, Science and Transportation, thank you for
the opportunity to testify today. I am John Miller, Senior Vice
President of Policy and General Counsel at the Information Technology
Industry Council (ITI).\1\ I have deep experience working on public-
private supply chain policy initiatives in the United States, including
serving as the current Co-chair of the Cyber and Infrastructure
Security Agency (CISA)-sponsored Information and Communications
Technology Supply Chain Risk Management Task Force (ICT SCRM Task
Force)\2\ as well as Vice Chair of the of the Information Technology
Sector Coordinating Council (ITSCC).\3\ I am honored to testify before
your Committee today on the important topic of Implementing Supply
Chain Resiliency. The global information and communications technology
(ICT) industry respects and takes seriously the U.S. government's (USG)
obligation to address the resiliency of global supply chains, including
the ICT supply chain. We believe the USG and industry must work
together, along with partners and allies, to achieve the trusted,
secure, reliable, and resilient global supply chains that are a
necessary priority for protecting national security and are also an
indispensable building block for supporting competitiveness,
innovation, and economic growth. We welcome the Committee's interest
and engagement on this subject.
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\1\ The Information Technology Industry Council (ITI) is the
premier global advocate for technology, representing the world's most
innovative companies. Founded in 1916, ITI is an international trade
association with a team of professionals on four continents. We promote
public policies and industry standards that advance competition and
innovation worldwide. Our diverse membership and expert staff provide
policymakers the broadest perspective and thought leadership from
technology, hardware, software, services, manufacturing, and related
industries. Visit https://www.itic.org/ to learn more.
\2\ The ICT Supply Chain Risk Management (SCRM) Task Force--
sponsored by CISA's National Risk Management Center (NRMC)--is the
United States' preeminent public-private supply chain risk management
partnership, established in response to these realities and entrusted
with the critical mission of identifying and developing consensus
strategies that enhance ICT supply chain security. The Information
Technology Sector Coordinating Council and Communications Sector
Coordinating Council are co-chartering entities of the Task Force along
with NRMC. Visit https://www.cisa.gov/ict-scrm-task-force to learn
more.
\3\ The Information Technology Sector Coordinating Council (IT SCC)
serves as the principal entity for coordinating with the government on
a wide range of critical infrastructure protection, cybersecurity and
supply chain risk management activities and issues. The IT SCC brings
together companies, associations, and other key IT sector participants,
to work collaboratively with the Department of Homeland Security,
government agencies, and other industry partners. Through this
collaboration, the IT SCC works to facilitate a secure, resilient, and
protected global information infrastructure. Visit https://www.it-
scc.org to learn more.
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ITI represents 80 of the world's leading ICT companies.\4\ Most of
ITI's members service the global market via complex supply chains in
which technology is developed, made, and assembled in multiple
countries, and service customers across all levels of government and
the full range of global industry sectors, such as financial services,
healthcare, and energy. Thus we acutely understand the importance of
ensuring the resiliency of global ICT supply chains as not only a
global business imperative for companies and customers alike, but as
critical to our collective national and economic security. As a result,
our members have devoted significant resources, including expertise,
initiative, and investment in cybersecurity and supply chain risk
management efforts to create a more secure and resilient Internet
ecosystem, inclusive of ICT supply chains.
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\4\ See ITI membership list at: https://www.itic.org/about/
membership/iti-members
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Last month, ITI welcomed the Senate's passage of the U.S.
Innovation and Competition Act (USICA) as critical to helping the
United States remain competitive on the international stage by
prioritizing and expanding essential investments in research,
development, and technological advancement. USICA takes important steps
to expand U.S. innovation leadership, including key measures to help
build a strong ecosystem for developing advanced technologies and
creating new jobs in communities across the country. ITI was
particularly pleased that the bill provides robust funding for the
CHIPS for America Act (CHIPS) to boost U.S. investments in the
semiconductor ecosystem--including promoting a strong, skilled
workforce for advanced manufacturing, strengthening the semiconductor
supply chain, and increasing U.S. manufacturing capacity--all of which
are essential for U.S. economic and national security.
We were similarly pleased to commend the White House's publication
of the final report stemming from the 100-Day Reviews under Executive
Order 14017 on America's Supply Chains (ASC EO) just a couple of days
after USICA's passage, which signaled the Biden Administration's
commitment to building trusted, secure, and resilient supply chains and
echoed some of USICA's key proposals. Importantly, the administration
outlined a clear vision to strengthen U.S. semiconductor leadership,
including efforts to address research and development, increase
manufacturing, and build a skilled workforce, a forward-looking and
complementary approach to enhance economic competitiveness and bolster
national security. Together, these mutually reinforcing steps taken by
the administration and Congress hold the promise of making the U.S.--
and ultimately global--supply chains stronger and more resilient,
advancing U.S. competitiveness, and harnessing U.S. innovation.
Of course, acknowledging the pressing global supply chain
resiliency challenges laid bare by the COVID-19 pandemic and crafting
sound policies to address them does not necessarily guarantee the
successful execution of those policies. So the key question--as the
subject of this hearing foreshadows--is how can we most effectively
implement recent Congressional and administration policies to improve
supply chain resiliency?
I will focus my written testimony on four areas bearing on this
question: (1) the importance of a strategic, holistic and coordinated
approach to addressing supply chain resiliency including the need to
prioritize public-private collaboration; (2) a discussion of the Biden
Administration's emerging approach to supply chain resiliency and the
relevant provisions of USICA; (3) the U.S. Department of Commerce's
(Commerce) increasingly important role in supply chain resiliency and
security, and its recent track record of implementing supply chain
policy initiatives, including various taskings from the prior
administration; and (4) recommendations for how Commerce and the USG
more broadly can most effectively implement supply chain resiliency
going forward.
1. A Strategic, Holistic and Coordinated Approach is Foundational to
Implementing Supply Chain Resiliency
While supply chain resiliency is not a new topic, particularly for
large technology companies managing sophisticated global supply chains,
the heightened U.S. policymaker focus on supply chain resiliency and
security over the past few years is unprecedented, as evidenced by the
more than 30 active Federal supply chain security and resiliency
measures inventoried by the ICT SCRM Task Force since late 2018. The
palpable impacts of the COVID-19 pandemic on global supply chain
resiliency further intensified the focus on this issue. The increased
policy attention on supply chain issues prompted ITI earlier this year
to prominently feature recommendations regarding supply chain security
and resiliency in our Policy Memo for the Biden-Harris Administration
and 117th Congress \5\ and issue a set of Supply Chain Security
Principles \6\ intended to lay out strategic considerations to guide
U.S. policymakers tackling these issues in 2021 and beyond.
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\5\ See ITI's Policy Memo for the Biden-Harris Administration and
117th Congress: Advancing Innovation to Make the U.S. More Globally
Competitive at https://www.itic.org/documents/general/
ITI_CompetitivenessMemo_Final.pdf.
\6\ See ITI's Supply Chain Security: Principles for Strategic
Review at https://www.itic.org/policy/
ITI_SupplyChain_Principles2021.pdf.
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Although supply chain security and resiliency are not one and the
same, they are closely related insofar as national security (including
cybersecurity), trustworthiness, availability and competitiveness are
all facets of the broader term resiliency, and ITI's recommendations
are applicable across both concepts.
Our recommendations noted the change in administrations and a new
Congress offered the opportunity for a strategic review of U.S. supply
chain security and resiliency policy to develop a more coherent,
streamlined, and effective long-term approach, consistent with the
holistic assessment of the ICT and other industrial base supply chains
called for by the ASC EO.
Key pillars of ITI's recommendations in this regard have
consistently included the following:
Pursuing a holistic, streamlined, coherent, and strategic approach
to supply chain resiliency and security policy. The Federal
government's ability to provide consistent regulatory approaches and
supply chain security guidelines is critical to securing the U.S.
innovation economy and ensuring supply chain resiliency. ITI shares the
concerns of members of this Committee regarding threats to global ICT
supply chains, which implicate cybersecurity, national security,
economic security, and U.S. competitiveness. However, these legitimate
concerns have too often manifested in uncoordinated, inconsistent
approaches across various departments and agencies. We have encouraged
the establishment of a lead agency on supply chain risk management to
manage a coordinated and effective approach to varied and disparate
activities occurring at all levels of government.
Promoting a thoughtful, harmonized, risk-based, evidence-driven
approach to supply chain resiliency policy to facilitate transparency
and predictability. The approach to supply chain security over the last
several years has primarily focused on country-of-origin, particularly
China, which has led to an over-reliance on this attribute and short-
circuited more fulsome risk analysis. While country-of-origin is one
risk factor bearing on supply chain security as well as resiliency, it
should not be the sole and dispositive factor animating U.S. supply
chain policy, or in determining trustworthiness. It is noteworthy that
the ICT SCRM Task Force working group on Threat Assessment catalogued a
total of 188 supplier-related threats, with country of origin being
just one. A successful supply chain resiliency strategy must widen the
aperture to consider a full array of relevant threats and
considerations, not only to address identifiable, material, concrete
national security risks directly tied to actionable threats articulated
in USG intelligence or vulnerability assessments, but also to consider
other facets of resiliency including supply chain resiliency
investments, U.S. competitiveness, availability and domestic
manufacturing capacity, and workforce development.
Designing measures to advance and protect U.S. national security
objectives without putting American competitiveness at risk. Lack of
clarity in scope and process in any rulemaking, legislation, or other
policy mechanism makes for an uncertain business environment and
threatens the ability of companies to compete with foreign companies
not subject to U.S. or similar foreign requirements. Overbroad policy
approaches or approaches that duplicate or conflict with existing
mechanisms, such as those embodied in the prior administration's
Executive Order on Securing the Information and Communications
Technology Supply Chain (ICTS EO), stifle U.S. innovation,
technological leadership, and competitiveness. Members of this
Committee should seize the opportunity to advance supply chain security
policy approaches that are not only compatible with but drive global
policymaking norms.
Collaborating closely with industry including leveraging industry
resources and expertise. ITI's members understand we cannot tackle
current and future supply chain challenges on our own, and that
industry and government share responsibility to facilitate the global
competitiveness of the U.S. technology sector and other critical
sectors. Public-private partnerships and other multi-stakeholder
approaches are essential to addressing supply chain resiliency and
security. Government and industry often have access to unique
information sets--only when this information is shared can all relevant
stakeholders see the complete picture. These partnerships are essential
to (1) identify potential threats; (2) understand how and whether the
risk can be managed; and (3) determine what actions should be taken to
address risks without yielding unintended consequences.
ITI has consistently encouraged U.S. policymakers to leverage the
existing ICT SCRM Task Force as a focal point for public-private
collaboration on supply chain security. The Task Force has brought
together subject matter experts from the private sector and from across
the USG, including multiple Commerce stakeholders, and has produced
several actionable tools and other work products that can be used by
industry and government to address supply chain security challenges,
including related to information-sharing, threat modeling, procurement,
vendor attestation and small and medium-sized businesses' unique needs.
The administration should look to this established public-private
mechanism for creative, actionable solutions, and should prioritize
implementing and operationalizing Task Force products across the USG
and incentivizing their promotion and uptake across the critical
infrastructure community. I have been honored to serve as a co-chair of
the Task Force on behalf of the IT sector since its inception, so I
speak from personal experience in pointing out that the Task Force has
focused on many of the same issues prioritized in USICA, and in
recommending the Task Force as a good model for Commerce to emulate as
it seeks to implement new programs such as the nascent Supply Chain
Disruptions Task Force.
ITI has also advocated for inclusion of other key tenets in any
strategic approach to supply chain resiliency, including viewing supply
chain risk management through the lens of trustworthiness and
prioritizing bi-directional sharing of supply chain risk information.
2. The Emerging U.S. Policy Approach to Supply Chain Resiliency as
Reflected in USICA/EFA and the 100-Day Report
ITI is pleased that both the Biden Administration and Congress have
taken on board many of our policy recommendations in charting a
broader, more holistic, and strategic approach to improving supply
chain security and resiliency, as illustrated by both the Building
Resilient Supply Chains, Revitalizing American Manufacturing, and
Fostering Broad-Based Growth: 100-Day Reviews Under Executive Order
14017 (100-day Report) under the ASC EO and the supply chain provisions
in USICA.
ASC EO and the 100-Day Report. The ASC EO embraces the type of
broader, holistic approach we have been advocating for the past few
years, which balances important national security considerations with
other considerations such as U.S. competitiveness. ITI particularly
welcomed the 100-Day Report's conclusions and recommendations on
semiconductors, which tracked closely with several of ITI's
recommendations offered in response to Commerce's RFI on the 100-day
semiconductor review. We welcome the Biden Administration's commitment
to building trusted, secure, and resilient supply chains, and we
support its plan to realize that goal. Importantly, the administration
outlined a clear vision to strengthen U.S. semiconductor leadership,
including efforts to address research and development, increase
manufacturing, and build a skilled workforce.
Support for CHIPS Funding. The 100-Day Review calls for $50 billion
to fund the CHIPS and outlines additional steps to increase the
domestic semiconductor manufacturing capacity and strengthen the U.S.
technology workforce through STEM and training for semiconductor
manufacturing. It also encourages enhanced cooperation with global
partners and allies to ensure the stability of the global semiconductor
supply chain. This forward-looking incentive will enhance economic
competitiveness and bolster national security.
Request for a Supply Chain Resiliency Fund. We support the
recommendation stemming from the 100-day Report which calls on Congress
to fund the Supply Chain Resiliency Program proposed under the Endless
Frontiers Act (EFA), a part of USICA. This program, which requires
close collaboration with the private sector, would help to formalize
the ongoing activities taking place under the ASC EO, which are
imperative to strengthening supply chain resiliency. While we
appreciate the effort to provide needed liability protections to spur
the sharing of supply chain risk information (SCRI) as part of the
program, we also believe these protections could be further
strengthened, as further articulated below.
Supply Chain Disruptions Task Force. We welcome the
administration's plan to work with industry to develop a coordinated,
streamlined, and holistic long-term approach to address semiconductor
supply chain issues in a coordinated and holistic manner. The ICT SCRM
Task Force provides a preeminent model in this regard, and we recommend
synchronizing the efforts of this newly proposed Task Force with it to
avoid duplication and leverage potential synergies that may result.
Collaboration on the Year-Long ICT Assessment. As the
administration undertakes the longer-term assessment of the ICT
industrial base, we continue to encourage close collaboration with the
private sector to understand how it views the ICT supply chain, what it
views as critical, where it sees gaps, and how government can best
provide support. The ICT SCRM Task Force has been pleased to assist in
the early stages of this assessment, as further explained below.
USICA/EFA Supply Chain Provisions. As stated previously, ITI
commended the Senate's passage of USICA as providing a much-needed
prioritization and expansion of critical investments in research,
development, and technological advancement, including in the critical
areas of semiconductor manufacturing, and addressing supply chain
resiliency more broadly. A few key provisions include:
Emergency Appropriations for CHIPS and ORAN Funding. The emergency
appropriations to fund provisions within CHIPS and the Utilizing
Strategic Allied Telecommunications Act are imperative to maintaining a
competitive edge in two technology areas key to U.S. leadership. As
such, we are very supportive of the emergency appropriations, which
provide an additional $52 billion to fund the semiconductor programs
outlined in the FY2021 NDAA, and $1.5 billion to fund the Public
Wireless Supply Chain Innovation Fund, which will help to support R&D
for open architecture, software-based networks--technologies which the
United States could leverage to address challenges related to vendor
diversity that have emerged in recent years.
Commerce Supply Chain Resiliency Program. We welcome the proposal
to develop a Supply Chain Resiliency Program housed in the Department
of Commerce. As has been reiterated throughout the testimony thus far,
there is a need for a more streamlined, coordinated approach to supply
chain activities and this program would ideally help to achieve that
objective. That being said, some of the activities listed under the
purview of the Supply Chain Resiliency Program are already being
undertaken pursuant to the ASC EO, though we appreciate that this
program would formalize the review process called for there on a
perpetual basis. We are further supportive that the program explicitly
includes participation of the private sector in identifying and
mitigating supply chain gaps. We also appreciate of the inclusion of
liability protections to spur voluntary sharing of SCRI similar to
those provided through DHS' Protected Critical Infrastructure Program
(PCII), though as explicated below we believe those protections could
be further strengthened. To effectively implement this program
alongside all the other programs the Commerce Department is currently
tasked with implementing, it needs to be appropriately resourced.
Investments in Manufacturing USA and Manufacturing Extension
Partnership. We appreciate that the EFA would seek to quadruple the
Manufacturing Extension Partnership program, including adding a
specific track for cybersecurity and workforce development. This
program has been helpful to manufacturers seeking to grow and we
believe sustained funding will continue to help improve supply chain
resiliency and U.S. competitiveness. Similarly, we appreciate that
additional funding is provided for the Manufacturing USA program, aimed
at supporting U.S. leadership in advanced manufacturing through this
robust public-private partnership mechanism, another area that will be
key to supporting supply chain resiliency.
Regional Technology Hubs. Although not strictly a supply chain
provision, we welcome funding for the regional technology hubs, which
will help increase the geographic diversity of supply chains across the
U.S. Such hubs will support innovation, especially among smaller
players across the United States, and spur additional workforce
development and commercialization activities.
3. Commerce's Increasingly Important Supply Chain Policy Role and
Implementation Track Record to Date
Commerce, as the Federal steward of U.S. economic growth,
competitiveness, job creation, and opportunity, is a key USG partner to
ITI, the tech sector, and industry writ large. Commerce thus must play
a central role in helping to make the ICT and other critical supply
chains more resilient and secure. However, it cannot and should not be
expected to do so alone or in an uncoordinated or ad hoc manner; rather
it should continue to leverage its historical role as a convener and
partner to industry and should also work closely with interagency
partners to solidify the emerging U.S. policy approach to supply chain
resiliency, as explained in the previous section.
However, it is important to view the new responsibilities the White
House and Senate have proposed adding to Commerce's plate in the
context of what has already been a significantly expanded role for
Commerce in supply chain security and resiliency during the previous
administration.
Commerce's Implementation Track Record for Supply Chain Policies
and Programs Launched During the Prior Administration. Commerce is
currently implementing several supply chain policy activities, rules,
programs, and initiatives, including many launched during the last
administration. The most significant of these include the following:
ICTS EO Interim Final Rule (IFR) and Licensing Process. Commerce
bears primary responsibility for implementing the previous
administration's ICTS EO, including taskings to finalize an IFR
impacting a wide array of commercial ICTS transactions and to establish
a new licensing or pre-clearance process applicable to a similarly
large number of transactions. At present, the IFR provides the U.S.
Secretary of Commerce (Secretary) with broad authority to review
practically every single ICTS transaction with any nexus to an
identified ``foreign adversary,'' and casts a cloud of uncertainty over
all other ICTS transactions given the list of named foreign adversaries
could change at any time. When combined with the Secretary's additional
power to block and unwind deals and the absence of an established,
effective voluntary pre-clearance/licensing process (which Commerce has
been delayed in developing or implementing), the fact that the broad
IFR is ``live'' creates immense uncertainty in the business community
that will result in an unnecessary, chilling effect on innovation and
commerce. Commerce's responsibility for implementing these broad
authorities under the ICTS EO alone raises significant questions
regarding whether it has the resources or capacity to implement several
new contemplated supply chain resiliency programs on top of this broad
multilayered rule. The implementation status of the IFR and the
licensing program are uncertain at this time.
Establishing a Process to Review Transactions Including Those
Involving Chinese Apps. Although technically part and parcel of the
ICTS IFR, as we understand it Commerce had separately been working on
developing a meaningful transaction review process that would have also
subsumed multiple other prior administration EOs directed at Chinese
apps. While some of those EOs have been withdrawn by the Biden
administration (see below), there remains a need for Commerce to
develop a meaningful process for reviewing ICTS transactions. The
implementation status of Commerce's transaction review process is
uncertain at this time.
IAAS EO. The Commerce Department is currently tasked with
implementing portions of the previous administration's Executive Order
on Taking Additional Steps to Address the National Emergency with
Respect to Significant Malicious Cyber-Enabled Activities (IaaS EO),
including promulgating regulations for identity verification of foreign
account holders and regulations that enables the Secretary, in
conjunction with other agencies, to require IaaS providers to take
``special measures'' blocking them from doing business in certain
foreign jurisdictions or with foreign persons identified to be engaged
in patterns of conduct allowing for the use of IaaS products in
malicious cyber-enabled activities. The two sets of regulations
required to be promulgated by Commerce pursuant to the IaaS EO, whose
authorities overlap in some respects with the ICTS EO, are not due
until next week, while implementation of a third section of the EO is
delayed.
NDAA 2021 Provisions. Commerce is responsible for establishing the
CHIPS grant program pursuant to section 9902 of the 2021 NDAA and the
National Semiconductor Technology Center (NSTC) pursuant to section
9906, as well as for conducting a ``Study on Status of Microelectronics
Technologies in the United States'' pursuant to section 9904. As stated
elsewhere in my testimony, ITI encourages full funding of the CHIPS
grant program and additionally suggests that efficient implementation
of the NSTC by Commerce can leverage existing, proven industry
ecosystems for semiconductor R&D where there are strong track records
of innovation. The implementation status of the CHIPS grant program is
pending funding via the emergency appropriations in USICA.
Additionally, although not directly related to supply chain
resiliency, it is notable that, over the past few years, Commerce
(specifically BIS) has been tasked with significantly expanding the
export controls system to emerging and foundational technologies via
implementation of ECRA, and BIS has also been called upon to make
numerous additions to the Entity List. All this increased activity,
while certainly justifiable for national security reasons, has also had
an undeniable impact on the ability of Commerce/BIS to devote resources
to the implementation of supply chain resiliency initiatives.
The unclear, and in many instances delayed, implementation status
of numerous of the above-listed items helps to underscore the volume of
supply chain resiliency and security responsibilities Commerce has
accumulated and the resulting resource challenges it faces.
Commerce's Implementation Track Record for Supply Chain Policies
and Programs Launched During the Current Administration. Commerce has
more recently been charged with implementing several supply chain
policy activities, rules, programs, and initiatives by the current
White House, layered on top of all the activities stemming from the
previous Administration. The most significant of these include the
following:
ASC EO. The ASC EO gave Commerce two significant taskings: first,
to conduct a 100-day review of the critical semiconductor supply chain
and submit a report to the White House; and second, to lead a year-long
comprehensive review (with DHS) and submit a report on supply chains
for critical sectors and subsectors of the ICT industrial base,
including the industrial base for the development of ICT software,
data, and associated services.'' Because the ICT SCRM Task Force was
asked by DHS and Commerce to help in the initial scoping of this
review, I am confident in stating based on the work thus far that
Commerce and DHS/CISA will both be required to expend significant
additional resources to complete the ASC EO tasking over the next
several months. I commend Commerce for its work in completing the 100-
day review and for its initial outreach and partnership with the ICT
SCRM Task Force on scoping the initial work for the year-long
assessment and report.
EO on Protecting Americans Sensitive Data from Foreign Adversaries.
This EO withdrew multiple EOs issued under the prior Administration
banning transactions with certain Chinese apps in favor of a more
process driven approach aligned with the regulatory regime required by
the ICTS EO. It calls on Commerce to issue reports and evaluate on a
continuing basis transactions involving connected software applications
that may pose an undue risk of sabotage or subversion of the design,
integrity, manufacturing, production, distribution, installation,
operation, or maintenance of ICT or services in the United States
(amongst other things). The implementation status of this EO and how it
practically relates to the implementation of several of the above
articulated taskings is unclear.
Executive Order on Improving the Nation's Cybersecurity (Cyber EO).
Commerce, particularly through the National Institute of Standards and
Technology (NIST) and NTIA, also has a primary role in implementing
section 4 of the new Cyber EO pertaining to strengthening the software
supply chain. NIST has been tasked with identifying standards and best
practices for the software supply chain, defining critical software,
recommending minimum standards for source code testing, and initiating
pilot programs related to IoT devices and software development
practices. NTIA has been tasked with publishing minimum elements for a
software bill of materials (SBOM), and it is noteworthy that NTIA has
previously devoted a significant amount of resources over the past two
years to running a multistakeholder process to conduct foundational
work on SBOM.
It bears emphasizing that Commerce was responsible for all the
above taskings even before the implementation of any potential USICA/
EFA mandates or funding programs, should the bill pass the House and be
signed into law. There are significant, legitimate questions that
should be asked including: How do the above Commerce taskings relating
to supply chain resiliency and security fit together? Does Commerce
have sufficient resources and expertise to implement all these tasking
simultaneously? And which bureau, office or other entity within
Commerce is best equipped to lead and drive a coherent and coordinated
approach to implementing supply chain resiliency across Commerce's many
taskings?
4. Recommendations for Effective Implementation of Supply Chain
Resiliency Policy
My testimony thus far helps to illustrate the substantial amount of
progress that has been made by the Biden Administration and Congress to
identify problems regarding the resiliency of key supply chains and
craft sound policies to address these issues. However, such progress
will not necessarily translate into effective implementation of those
policies by Commerce and other Federal stakeholders, particularly given
the existing array of taskings Commerce is already implementing. Below
I offer recommendations intended to help position Commerce and other
relevant Federal stakeholders for success in implementing the various
emerging planks of U.S. supply chain resiliency policy, along with
Commerce's many ongoing holdover responsibilities in this area.
Commerce should develop and articulate a strategic, coordinated
plan for implementing its numerous supply chain taskings. As mentioned
earlier in my testimony, ITI has consistently advocated for a centrally
coordinated and holistic USG-wide approach to supply chain resiliency
and security policymaking. Given the volume of supply chain taskings
that have been layered upon Commerce by successive administrations as
well as the new responsibilities contemplated by USICA, a coordinated,
holistic, and strategic approach within Commerce is also clearly
necessary to effectively implement its numerous supply chain taskings.
Commerce is the preeminent Federal stakeholder equipped to balance
important U.S. competitiveness and economic interests with national
security. Two key features of a strategic approach to achieve this
balance should include identifying and empowering a specific entity
within Commerce to lead and coordinate this work and ensuring that
Commerce does not attempt to do all this work itself. Rather, Commerce
should prioritize working with industry and other Federal partners to
create synergies and stretch scarce resources.
Congress should ensure that Commerce has adequate resources to
effectively implement supply chain resiliency policy, including fully
funding CHIPS and providing Incentives to enhance the domestic
semiconductor ecosystem. ITI encourages the USG to provide meaningful
incentives to increase domestic semiconductor manufacturing capacity of
both leading edge and mature node semiconductors and to increase
semiconductor R&D funding and prototyping. We encourage the U.S. House
of Representatives to follow the Senate's lead and provide robust
funding for CHIPS at the $50 billion level included in the 100-Day
Report and Senate passed USICA, without distorting the incentives or
the semiconductor market by favoring some sectors or applications over
others, as a fundamental first step to boost the domestic semiconductor
supply chain. These efforts should remain open to all multi-national
chip manufacturers that meet the standards and guidelines set forth in
CHIPS. Beyond that, it is imperative that Commerce is adequately
resourced--in terms of both funding and staff--to carry out the full
slate of supply chain resiliency policy activities identified above.
Commerce should prioritize close coordination with industry,
including by leveraging existing partnerships, information sharing
programs and innovation ecosystems. Policymakers and companies each
have important and distinct roles to play in implementing supply chain
resiliency. The USG has information that companies do not have about
national security threats, whereas companies have information that
governments do not have about their network operations and how they
detect, manage, and defend against risks to data, systems, networks,
and supply chains. Both policymakers and industry should communicate
regularly and robustly about relevant risks (consistent with
limitations relating to classified information and business
confidentiality), including through opportunities for industry input in
regulatory rulemaking processes, public-private task forces and other
collaborative mechanisms, and informal relationships between
policymakers and companies. As I stated earlier, the ICT SCRM Task
Force provides an excellent model of public-private collaboration on
supply chain matters that Commerce can draw inspiration from as it
helps to launch the new Supply Chain Disruptions Task Force, which we
urge Commerce to synchronize with the ICT SCRM Task Force.
Congress should ensure adequate liability protections to promote
and incentivize the sharing of supply chain risk information. We
appreciate the attention of the Senate Commerce Committee to include
liability protections as part of USICA's supply chain resiliency fund
to spur much needed voluntary sharing of SCRI. Increased information-
sharing regarding risks related to suppliers and other aspects of the
ICT supply chain can help both the government and industry to identify
and mitigate supply chain risks. Currently, companies face challenges
in sharing supplier risk information. This includes the legal risk of
sharing potentially derogatory information about a supplier, the
administrative barriers for Federal personnel to share detailed,
actionable information with individuals who do not hold clearances, and
instances where the Federal Government withholds vulnerability
disclosures for offensive purposes. The ICT SCRM Task Force has
developed a legislative proposal that would amend CISA 2015 to provide
liability protections for companies that share SCRI information in good
faith. This is a superior approach to the proposed extension of certain
PCII protections in the Senate-passed USICA for several reasons. Most
notably the PCII liability protections may not extend to industry-
industry sharing of SCRI (which is much needed for companies to share
information across their supply chains) and PCII may not preclude all
regulatory uses of shared SCRI. Further, the PCII sections of USICA
would not preclude potentially expensive lawsuits (because the
provisions do not result in an automatic dismissal of lawsuits as does
CISA 2015). Finally, PCII comes with heavy administrative burdens
(including that companies need to apply to be part of the PCII program,
be approved by DHS, and mark all covered materials), whereas CISA 2015
protections are automatically conferred to all shared information.
Commerce should focus the scope of the ICTS EO to ensure that
covered transactions are prioritized and targeted according to discrete
national security risks. In its current form, the ICTS EO and
associated rulemakings will not only have potentially devastating
effects on U.S. competitiveness and innovation, casting a cloud of
uncertainty over almost all ICTS transactions with foreign entities,
with limited benefit to ICTS security, but because the current scope of
the ICTS EO and IFR remain so broad, implementation ``as-is'' will also
sap a disproportionate amount of Commerce resources. We agree that
supply chain security is imperative to facilitating trust, but the ICTS
EO in its current state does not achieve those objectives, in large
part because it focuses on risks associated with foreign adversaries to
the exclusion of other risk-based considerations. Therefore, revising
the EO and the scope of its rulemaking to ensure it is targeted at
identifying and managing the greatest risks would allow U.S. companies
to conduct global business with certainty, thus improving
competitiveness and allowing for continued innovation across borders,
while also freeing up otherwise limited Commerce resources.
Commerce and other USG Stakeholders should deepen engagement with
international partners and pursue a coordinated approach to supply
chain resiliency. Global ICT SCRM challenges ultimately call for
globally scalable solutions, and we encourage the USG to collaborate
with international partners and allies on supply chain resiliency
issues to further common approaches to technology-related national and
economic security risks--including through promotion of global,
consensus-based, industry-led standards. For example, ITI welcomes the
recent establishment of the U.S.-EU Trade and Technology Council as
providing an opportunity to strengthen engagement and cooperation
between the U.S. and EU on semiconductor and other strategic supply
chains by conducting joint supply chain reviews to identify
collaborative actions to improve resilience across semiconductor and
other strategic supply chains.
Conclusion
Members of the Committee, ITI and our member companies are pleased
you are examining how best to implement supply chain resiliency.
The USG has an unprecedented opportunity to lead on supply chain
resiliency policy, and to do so it must work collectively, via public-
private collaboration and across the Federal government, both
domestically and on the global stage. Commerce is appropriately at the
center of this effort, but to succeed in implementing the many critical
programs, rules and other taskings addressed in my testimony it must
adopt a holistic, coordinated approach, exhibit strong leadership,
embrace partnerships across industry and government, and be well-
resourced and committed to the task.
ITI stands ready to provide you with any additional input and
assistance in our collaborative efforts to develop policy approaches to
supply chain resiliency that continue to leverage risk management-based
solutions and public-private partnerships as the most promising way
forward for addressing complex and evolving global ICT supply chain
threats.
I thank the Chair, Ranking Member, and Members of the Committee for
inviting me to testify today and for your interest in and examination
of this important issue. I look forward to your questions.
Thank you.
The Chairman. Thank you, Mr. Miller. And again, thank you
to all the panelists. I feel like discussing this subject is,
while you all have been studying, a new day for supply chain
analysis and impact as far as what we should be doing. And you
all gave us some good ideas on that. Some differences. Dr.
Lewis, you were unabashed, industrial policy, let's go.
Definitely more analysis, Dr. Gereffi. And very direct things
in the last two witnesses about what Commerce should be doing
specifically.
So I want to pose my question, I think, Mr. Aboulafia, to
you and Mr. Taylor and then just see whoever else wants to jump
in, about this notion that we try to get at with USICA,
somewhat about the supply chain, but really just about
innovation. So if you are right, Mr. Aboulafia, which I think
you are right--if there are 2 million people working in the
United States in aerospace or the sector of semiconductors, and
yet the innovation is happening at Mr. Taylor's level or Mr.
Taylor is seeing the world and knowing what needs to happen,
how do we really get that input and that strategic involvement?
How do they get their views on the table, I guess is my point?
So we now have two proposals, strengthening tech sectors
and strengthening tech hubs. Say, you have big parent companies
who are just chasing the market, whether it is Intel chasing
semiconductor markets or Boeing chasing international aviation
markets, but yet the supply chain is the nose, the next level
of innovation has to happen. How is it that we are going to
drive the resources and innovation down to that level so that
they can access that? So, Mr. Aboulafia?
Mr. Aboulafia. Yes, thank you for your question, Madam
Chair. And it is true, I am afraid the bigger companies at the
top tend to drive the conversations and tend to have a bit more
of a direct pipeline to the R&D centers within the Federal
Government.
Now, the good news is that thanks to some of the
megamergers we saw back over the past 15 or 20 years, a lot of
the supply chain is concentrated in companies such as Raytheon
Technologies, General Electric, Honeywell, and many others that
had sort of become their own effective economic and business
powerhouses. I would like to see greater coordination between
these first tier contractors. But how do you get the smaller
companies involved, the ones that are also quite critical to
both innovation and production?
And whether that happens through the auspices of trade
groups such as the Aerospace Industries Association or perhaps
maybe just standing up other committees and organizations
within, say, NASA's Commercial Aerospace Directorate, I think
it is absolutely essential. And I think there is greater
recognition in the Government of the importance of these
supplier companies. You know, one of the great saving aspects
of this crisis has been the accelerated payment program by DOD,
which is basically called for faster transfer of dollars from
the primes to the suppliers.
So I think that kind of greater awareness of the importance
of the supply chain. But it is a very good question under what
auspices that happened and how that happens. But I think it is
essential.
The Chairman. Dr. Lewis, you called for a greater role for
Commerce to play, as you said, a more predictive role. What do
you think we should do here if the supply chain is identifying
the innovation, but they are like Mr. Taylor, they are running
their business every day? They know what needs to happen, but
they are not in control of the supply chain.
Mr. Lewis. Thank you, Chair Cantwell. I focus on the high
tech sector and on some of the innovation startups we have now
spreading around the country. That is a really good sign. It
used to be Silicon Valley. It is still Silicon Valley, New
York, and Boston, but you are seeing research hubs spring up
around the country and that is where the bill could make a
useful contribution. We have a strong innovation system. It is
based on research universities, venture capital, and then
entrepreneurs. So those three elements are what produces
innovation. They are really good at it. There is one dilemma,
and this is a hard one. They follow the market.
So if they think--they all want to be unicorns, the next
billion dollar company or the next Amazon. In talking to
friends at the Defense Innovation Unit, which is DOD's effort
to connect to the startup community, we are doing great on
software. We are maybe lagging a little behind on hardware. And
that is I think what one of the bill points out, the bill
focuses on. So how do we get greater connectivity between the
national innovation system and the industry? With my colleague
here, Mr. Taylor, I would agree.
Let the market do it and then look for the places where the
market isn't working. The market isn't working in a few places
and the bill does a good job of fixing that. But we can use
both Federal and private sector to make this work.
The Chairman. Mr. Taylor.
Mr. Taylor. Chair Cantwell, what I can relate it to, we are
small business and therefore the overhead structure that it
takes for innovative work, it gets limited. You are focusing
what you have to do in materials and labor and the supply chain
to produce the product and get it to the market. So we use the
research university system, and many small businesses use that
resource. I am thinking my distinguished panelists from Duke
University, I am not sure what they have there. Mississippi
State, which is just 30 minutes from us.
There are some rules and regulations that that are governed
by the State of Mississippi, the Institute of Higher Learning,
IHL, has a mandate that if an entity, say Taylor, wants to
invest some capital in a research of something for product
innovation, engaging the university, if faculty are involved,
immediately, if there is patentability coming from that
research, because faculty is involved, it stays at the
university level. You know, I am not sure about that.
If an industry is willing to make the financial investment
and lose the patent downside of that. So there are some--there
are some play in the hand in hand of partnering with the
university system, but that is something that could be improved
in Mississippi.
The Chairman. Thank you. That is why I have held up this
Rose Holleman model, because they do not--they don't claim
anything on the patent. And researchers, companies like you
just go right to them and say, help us solve this problem. And
if that was more regional in various parts of the country, it
would just be a ready-made asset. Senator Wicker.
Senator Wicker. Very good point, Madam Chair and Mr.
Taylor. I meant at the end of my opening statement, Madam
Chair, to ask unanimous consent to enter into the record a
Washington Post story from yesterday entitled, ``Biden Targets
Shipping Costs As Pandemic Ravages Global Supply Chains.'' I
ask unanimous consent.
The Chairman. Without objection.
[The information referred to follows:]
Biden targets high shipping costs as pandemic ravages global supply
chains
Regulator warns of potential shortages amid ongoing disruption
By David J. Lynch
July 14, 2021 at 6:00 a.m. EDT
Shipping a container of hazardous chemicals from Shanghai to
Chicago used to cost John Logue about $6,600. Now, the Royale Group
chief executive pays as much as $29,000--and that's if he is lucky
enough to find space on one of the much-sought-after cargo vessels
plying the Pacific trade routes.
Logue's oceangoing headaches are mirrored on land, where Royale
Group shipping containers routinely get stuck in rail yard logjams that
lead to costly and unpredictable storage charges.
Earlier this month, BNSF, one of the Nation's largest railroads,
increased its fees in Los Angeles and Chicago, adding to Logue's woes.
The Royale Group's double-barreled freight troubles, which hamper
both existing operations and Logue's efforts to return manufacturing to
the United States, illustrate the market power of the handful of
shipping companies and railroads that bring goods from distant
factories to American homes.
``We're at their mercy,'' Logue said. ``Sometimes, we just throw up
our hands. . . . It's lunacy.'' On Friday, President Biden called on
regulators to crack down on consolidation in the shipping and rail
industries, as part of a broad executive order promoting competition
throughout the U.S. economy. Freight may seem a prosaic topic for
presidential attention. But the smooth movement of goods has perhaps
never been more essential, amid the explosion of e-commerce that
accompanied the pandemic. Transport bottlenecks in June helped fuel the
highest inflation in 13 years, rattling Americans with sticker shock on
goods such as used cars, airfare and bacon. Indeed, some regulators and
executives warn that abnormally high shipping costs and related supply
chain disruptions could lead to scattered shortages this year as the
U.S. economy heals. Imports of products including tires, food and water
purification chemicals could be affected, according to Carl Bentzel, a
commissioner of the Federal Maritime Commission.
``I am extremely concerned now about the economic impact caused by
the current situation. This could be the first time the public sees the
impact of maritime shipping disruption since World War II,'' he said.
Trump is long gone, but trade frictions between the U.S. and Canada
remain
But global cargo carriers and U.S. railroads insist that the
administration has misdiagnosed the supply ills. The nation's ports,
terminals, trucking fleets and rail lines are being overwhelmed by a
pandemic-related import surge, not strangled by monopolies, they said.
Either way, with industry groups opposing new regulations, an early
untangling of snarled U.S. supply chains is unlikely.
The White House officials who drafted Biden's order say high
freight costs, resulting from a lack of competition, are an economywide
drag. Nine cargo carriers, organized in three shipping alliances,
control more than 80 percent of the global market for oceangoing
vessels. Likewise, there are just seven major railroads, down from 33
four decades ago, according to the White House.
``It's like interest rates or oil,'' said Tim Wu, special assistant
to the president for technology and competition policy. ``It gets less
attention, but for consumers and American exporters, the price of
moving goods is very important.''
Distinguishing between the effects of industry consolidation and
the pandemic, however, is difficult. Importers and exporters have
complained for more than a year about soaring freight charges, amid a
shortage of shipping containers, truck chassis, drivers and
dockworkers. Biden's aides acknowledge that the pandemic is responsible
for much of the disruption. But they say the lack of competition
enabled cargo carriers and railroads to exploit the pandemic by driving
prices to historic highs.
Industry officials and some independent analysts disagree. Drafting
regulations to address the current situation risks unintended
consequences once the economy regains its footing, according to Lars
Jensen, CEO of Vespucci Maritime, in Copenhagen.
``The current state of affairs is extreme and is entirely driven by
the ripple effects of the pandemic. It tells us absolutely nothing
about the general structure of the industry at all,'' he said.
Over the past four years, eight of the top 20 shipping lines
disappeared; nine survivors sought to escape a history of meager
profits by organizing themselves into three rival alliances. The
shipping consortia operate akin to airline industry pacts, with
carriers alternately cooperating and competing. Members of an alliance
share space among their vessels, even while operating from some of the
same ports.
The arrangement has paid off for the major carriers. Maersk
reported a record $2.7 billion profit for the first three months of
this year, up from $185 million in the same period last year. As demand
cratered in the pandemic's early months, the alliances quickly canceled
more than 400 sailings, according to S&P Global. That avoided ruinous
losses from a price collapse but led to exporters' complaints of price
gouging.
Then demand for cargo space unexpectedly surged, as Americans
bought laptops, furniture and electronics for the work-from-home era.
Over the past year, the cost of shipping a container from China to
a U.S. West Coast port has risen by more than 156 percent, reaching
historic highs, according to the Freightos index.
Yet over the long term, there is little sign of soaring prices.
During the first three years of the alliance era, that cost increased
by just 14 percent. Prices from China to Europe over the same period
actually declined slightly, according to Freightos.
``Freight costs didn't matter,'' Jensen said. They do now.
A rate rise in the U.S. might trigger big problems in the developing
world
At Royale Group, based in Bear, Del., Logue said he spends twice as
much time managing his supply chain as he did only a few years ago. On
Monday, a carrier abruptly canceled a shipment, leaving him scrambling.
Many of Royale's cargoes involve hazardous chemicals for the
pharmaceutical, automotive and electronics industries, which require
special handling. So carriers often opt to avoid the hassle if they can
transport a routine product instead, Logue said.
``The three major alliances have a lot more bargaining power and
control than they ever have before,'' said Matt Godden, CEO of Seattle-
based Centerline Logistics, which provides refueling services.
After years of moving production offshore, Logue has been trying to
bring work back to the United States. Congested ports, crowded rail
yards and a shortage of truck drivers have him improvising.
But he blames a host of factors for the current freight
difficulties, including outdated port infrastructure and technology,
tariffs, tensions between the United States and China, and the
pandemic. Lack of competition ``is maybe part of the problem,'' Logue
said.
American consumers could feel the impact of stressed supply lines.
La-Z-Boy this month blamed ``shipping container issues'' for delivery
delays and shortages of electrical components for some of its more
expensive and profitable power recliners. Likewise, KushCo Holdings,
which produces packaging for cannabis products, told investors that
rising freight costs were a ``drag on'' profits, and Constellation
Brands said it was having trouble keeping retailers stocked with its
Ruffino and Kim Crawford wines.
Clothing manufacturer Levi Strauss is circumventing the worst
backlogs, including at the ports of Los Angeles and Long Beach, by
shipping more goods by air and rerouting ocean cargoes to the East
Coast, Harmit Singh, Levi Strauss's chief financial officer, told
analysts on a recent earnings call.
``A lot of people are talking about not being able to get
containers, not being able to get onto a ship,'' Singh said. ``[Our]
team has done an extraordinary job, on getting us guaranteed space--
guaranteed pricing, as well, which is helping us to control our costs.
So this is a big challenge for the industry.''
In calling for independent regulators to act, the president may be
pushing on an open door. Martin Oberman, chairman of the Surface
Transportation Board, which governs the rail industry, said the
president's call for pro-competition regulation dovetailed with his
long-standing concerns.
``While consolidation may be beneficial under certain
circumstances, it has also created the potential for monopolistic
pricing and reductions in service to captive rail customers,'' Oberman
said.
Freight rail rates have risen by about one-third since 2003, though
the industry notes that they are down by 44 percent since deregulation
in 1981.
At the Federal Maritime Commission, which oversees ocean shipping,
officials have the authority to challenge carrier actions that
``unreasonably'' raise prices or reduce service. Even before the
president's order, the agency had begun investigating industry
practices regarding extra charges for shipping containers that are not
promptly removed from their facilities, known as detention and
demurrage fees.
The White House last week labeled those charges ``exorbitant'' and
invited regulators to respond. The charges are controversial because
customers like Logue often are billed thousands of dollars by shipping
companies or railroads for not claiming their shipments quickly enough,
even when they are unable to do so because of congestion or a lack of
trucking services.
``You've got to be a real Houdini to get stuff out of one of these
rail yards,'' he said. The charges can add up. Norfolk Southern Corp.
billed customers for more than $93 million in demurrage fees in the
first quarter, up from $61 million in the same period last year,
according to the STB, which has required railroads to report such data
since 2018. At Royale Group, Logue said he hopes Biden's initiative
will help. But the ongoing import tsunami coupled with constricted
freight channels has him pessimistic.
``When you've limited the supply of something, the natural tendency
is that the price is going to go up,'' he said. ``I don't think it's
going to come back down.''
Senator Wicker. And let me just mention, it starts off
``shipping a container of hazardous chemicals from China to
Chicago used to cost John Locke about $6,600. Now, the Royal
Group Chief Executive pays as much as $29,000, and that is if
he is lucky enough to find space on one of the much sought
after cargo vessels plying the Pacific trade routes. His
ongoing headaches are mirrored on land where Royal Group
shipping containers routinely get stuck in rail yards, logjams,
and lead to costly and unpredictable storage fees.''
So thank you for letting me do that. Mr. Taylor, you
mentioned that you are 30 miles away from Mississippi State
University, a land grant institution and a leader in research.
But you are not in a major technology hub. So what unique
challenges do folks in your position--you have got 1,200
employees. You would like to hire another 40 back. And you are
the big employer and economic engine in that area. What
suggestions do you have to make it easier for small and medium
sized businesses who are not in these large hubs?
Mr. Taylor. Yes, those that are not in those corridors like
we are--we are distanced from the distribution hubs, so that
distance plays a factor in timing of deliveries. One thing that
comes to my mind is that from that distance, usually interstate
highway systems are used, of course, and then State service
highway systems are used. At least in Mississippi, and I think
in many rural parts of the nation, this infrastructure bill is
being discussed and negotiated here in the capital now is
vitally important. But I would say that if there is anything
that can be done in that regard is not only refurbish our
highways, refurbish our bridges to get them to standard, to use
as many alternatives to source components to us and then ship
our products out, but also improve.
We build lifting equipment, and we see the customer base
wanting bigger equipment because their machine tools, their
processors are putting out bigger packages for efficiency.
Well, those bigger packages usually take weight and impact the
load limits that we currently have in our Nation.
If the infrastructure system could be passed and it could
cause an improvement in capacity, not just the service, but the
capacity of transporting goods and services, rural facilities
like us could have a better application for delivering high end
product or getting more component per delivery or truck or per
rail.
Senator Wicker. So strengthen our roads as we as we build
them.
Mr. Taylor. Strengthen, yes.
Senator Wicker. Mr. Miller, you mentioned a liability
concern. We are going to want people to participate in this
monitoring program. That will be voluntary, won't it? The
Government is not going to make people do that. What will the
absence of a liability protection provision have on the
willingness of companies to participate?
Mr. Miller. Thank you, Senator Wicker. There are some very
significant considerations that companies have to consider when
sharing the type of information we are talking about, supply
chain risk information. You know, oftentimes that type of
information is, quite candidly, derogatory information about
suppliers, you know, somewhere in their supply chain. And there
are just a whole number of State and other causes of action
that, you know, expose them to very significant legal risk if
they were to, you know, say something, you know, about a
supplier, for instance, that, you know, hey, we--you know, this
is a bad company, right.
We don't even have to get into details. Things like
tortious interference with contract, breach of contract,
defamation. I mean, these are all very serious, you know,
business disparagement. There is a number of different really
significant legal risks and companies want to share this
information, but there is not a clear pathway to doing it
without those type of liability protections.
Senator Wicker. Well, thank you very much and I am going to
take a little liberty up. Does anybody want to tell us we
didn't quite get the CHIPS Act right and we need to make an
amendment or two? If anybody would like to make a suggestion in
that regard, either now or on the record, that would be helpful
to us. Anyone? We will take that for the record. And is it--
raise your hands, is it perfect? I think we are on to
something. I assume, I am supposed to--yes, Dr. Gil?
Mr. Gil. Yes. Thank you, Senator Wicker. I think it is--.
Senator Wicker. Reach in for that microphone.
Mr. Gil. That is right. I am reaching. I do think is an
excellent piece of legislation. I think the consideration that
we should have is how do we have a sustained effort throughout
the decade. Right, the consideration, of course, and the
priorities to get it passed and implemented and executed
properly in the next 5 years.
But the semiconductor industry is notorious for having to
engage in long term planning and long term execution of
roadmaps. So I think that, you know, hopefully these bipartisan
Acts and consensus of getting these done will also be the basis
and the success that we enable with that to sustain it over
time.
Senator Wicker. Thank you. I yield.
STATEMENT OF HON. RICHARD BLUMENTHAL,
U.S. SENATOR FROM CONNECTICUT
Senator Blumenthal. Thanks. Thanks, Senator Wicker. I am
next in the order and then I am going to call on someone. I
will have to leave, as did Chairman Cantwell. Just by way of
explanation, we are in the middle of a vote right now and there
are two votes so we will be shuttling back and forth. I want to
focus on drones which may not seem to be a kind of supply chain
at first blush, but the presence of drones grows literally
every day, every year in this country. They have commercial
applications, recreational uses, and present grave National
Security threats. And more to the point, for purposes of
today's hearing, the overwhelming number of drones in the
United States are made in China.
Anybody disagree with that proposition? I am going by
public reports, but you may have better information. Last week
I had the opportunity to visit Aquiline Drones, which is based
in Hartford, Connecticut, to tour their Made-in the-USA
facility. We talked about the need for growth in the domestic
drone market and in the components and parts that go into
drones. Aquiline is at the forefront of some of the most
advanced applications of drone technology. It is not a huge
company. But to go to your point, Dr. Gil it is one that is
doing research and investment.
Senator Scott and I introduced the American Security Drone
Act, which was incorporated as part of the competition package
passed by the Senate this past June. And the Act helps protect
Federal agencies from insecure drones and it spurs domestic
alternatives, but it is only the beginning in my view of what
we need to do.
Let me ask the witnesses here whether you agree with me
that the prevalence of Chinese drones represents a security
threat from the standpoint of surveillance potentially within
the United States, certainly lost opportunity because the
market is only growing for them here and around the world, and
what can be done about it? Anyone who would like to take a
crack at that question?
Mr. Lewis. I will go first. Thank you, Senator. So I
actually had DJI come in and, when we could still have
meetings, and demonstrate their products to me. They are really
good. I tried to get them to give me one, but they wouldn't do
it. We are in a situation where DJI, the Chinese company and a
couple other Chinese companies, dominate the global market. And
it is a good question to ask how we got there.
A rule of thumb I use is that if it connects to China in
any way, it could be a source for intelligence gathering. And
that is why I think that the legislation to restrict Federal
agency use of Chinese drones is essential. And we do not want
to underestimate our opponents' ingenuity in seeking
intelligence collection. So what do we do about it? And some of
it is we don't always want to copy the Chinese what we want to
look at some of the things they have done, which include
subsidies for research, subsidies for STEM education, and
really closing their own market, not openly, but closing their
own market to foreign suppliers.
China wants to bifurcate. I mean, they are the ones who
came up with the idea of indigenous economy. So we will need to
think how we rebuild our drone industry and that will not
happen automatically. We still do quite well in UAVs, the big
drones for military purposes. Can we use some of that to
encourage those companies to go down market? Can we find ways
to support these innovative startups like you were talking
about?
And we will need to do that. I don't think that is part of
the legislation that I have seen, but it is the model that you
have used in USICA probably needs to be applied to drones
because it is a security risk. Thank you.
Senator Blumenthal. Thank you. Anyone else? My time
actually has expired. I am going to turn to Senator Fischer,
but before I do, I just want to second what you just said, Dr.
Lewis. I think that the prevalence of Chinese drones, because
they are essentially, even if used by companies here for
commercial purposes or whatever, they are essentially eyes in
the sky. And the UAVs, ironically, may be used by the military
for surveillance but used abroad, whether it is Afghanistan or
any other countries where we are conducting military
operations.
So we may have a bit of a recess before Senator Fischer
takes over. I understand she may be running a little bit late,
but I want to thank all of you for being here today, and it has
been very useful. Thank you. So we are turning now to Senator
Fischer.
STATEMENT OF HON. DEB FISCHER,
U.S. SENATOR FROM NEBRASKA
Senator Fischer. Senator Blumenthal, I am here.
Senator Blumenthal. The floor is yours.
Senator Fischer. Thank you, Senator Blumenthal. And thank
you to our panel today. A harmonized and complementary
Government role is essential when we look at sound policy that
strengthens our Nation's supply chain resiliency. And it is
important that policymakers avoid a top down bureaucratic
approach on this issue, which may be too heavy handed or slow
to respond.
Mr. Miller, you noted in your testimony that the Commerce
Department should prioritize working with industry and other
Federal partners to create synergies and stretch scarce
resources. In what major ways can lawmakers ensure that the
Government is agile and efficient in this approach?
Mr. Miller. Thank you, Senator Fischer. You know, there are
a variety of different ways that lawmakers can do that. And I
do sincerely believe that, you know, you have laid out several
ways in the USICA bill. You know, the Manufacturing USA and
extension partnership programs are certainly one example. You
know, the formation of the new supply chain disruptions task
force is another. You know, I will say that the Commerce
Department, for instance, has been participating in the ICT
supply chain risk management task force as well.
And, you know, I think Commerce Department in particular
does have a long history of successful partnerships with the
private sector. You know, I am thinking in particular of
various programs that that NTIA and NIST have run. You know, as
I did state in my testimony, you know, I do think that the
Commerce Department should develop a coordinated strategy to
really, you know, create synergies and maximize these efforts,
but I do think that there is an opportunity to do that.
And, you know, Congress, by authorizing these programs, is
going to be very helpful in that regard. Thanks.
Senator Fischer. Where would you suggest that Congress look
for some good examples of programs that might be valuable for
us to drill down into and see if they would work at a
Governmental level?
Mr. Miller. Well, I mean, I you know, I do think that, you
know, in terms of existing programs, you know, some of what we
have--some of the suggestions in the 100 day report is one
place. You know, I do think that, you know, having, you know,
the White House involved in in really setting the tone there is
important. And, you know, certainly there is a lot that is
going to need to be done, I think, in terms of drilling down
when we look at the supply chain resiliency program and you
seek--you know, I think some of the other my fellow witnesses
have said really making sure that we have a sustained effort in
implementing the CHIPS Act.
You know, it is a long game, right. I mean, it is not just
drafting a bill and giving Congress or anyone else a pile of
money. It is really having a sustained strategy to follow
through on these programs that hold so much promise that I
think is important.
Senator Fischer. Thank you very much. Dr. Gil, in your
testimony you also touched on the importance of an agile
approach to address the ongoing semiconductor shortage. Right
now, timing is the key for the next steps necessary to build
American semiconductor capabilities and domestic production.
You highlighted that the National Semiconductor Technology
Center could be the foundation for addressing supply chain
disruptions.
But you also stated that rather than creating another
Government program office to operate NSTC, it should use an
industry led consortium model. I appreciate the suggestion on
this front. Could you please expand on what key elements of the
model may make it more responsive or agile?
Mr. Gil. Thank you, Senator. I think a characteristic of
the model is to build on our strengths that we have as a Nation
in the entire supply chain of semiconductors. Actually, we have
wonderful strengths on equipment manufacturers, in the
electronic design industry and electronic design automation, on
fabulous companies, as well as fabrication and R&D, and R&D
strengths, not only in industrial sector, but also with
universities.
So I think the most important thing that we have got to get
right is to bring a broad coalition where we bring the
strengths in an environment that lifts all those boats. And we
have precedent for being able to do this successfully in the
past. There have been moments, in fact, in the very
semiconductor industry in the 80s when we were confronting
great challenges and the context of then was in competition
with Japan at a time, where the creation of Semitech and other
environments where industry and universities and the Federal
Government came together resulted in great success.
So there is precedent for us coming together. And I would
say that will be the number one priority that we got to do, a
broad coalition of leaders to make this happen and to build on
the strengths of previous investments and infrastructure that
we have had. I think the biggest risk that we would have is to
sort of ignore those trends and start something brand new. That
sounds exciting and perhaps sometimes a little bit more
academic but doesn't lead to the results that we are going to
want because in the end, we want the manufacturing capacity in
the United States, and we want the innovation capacity to
deliver results.
Senator Fischer. OK. Thank you. I see my time is up and
Senator Klobuchar is here, so thank you very much. Senator
Klobuchar.
STATEMENT OF HON. AMY KLOBUCHAR,
U.S. SENATOR FROM MINNESOTA
Senator Klobuchar. Oh, thank you very much, Senator
Fischer. And thank you to the panel. We are proud of the work
that has been done on this bill, the U.S. Innovation and
Competition Act. And I guess I will start with you, Mr. Miller.
Part of this bill, the--something I worked on with Senators
Wicker, Coons, and Portman creates an Office of Manufacturing
Industrial Innovation Policy, and it prioritizes across agency
coordination because we know we have a lot of agencies working
on manufacturing. Can you speak to the importance of
interagency coordination when it comes to the supply chain?
Mr. Miller. Absolutely, Senator Klobuchar, and thank you
for the question. The importance of industry--of interagency
coordination really can't be overemphasized in this case. You
know, there is a couple of different reasons for that. You
know, number one, there really are quite a number of ongoing
supply chain related activities across the Federal Government.
You know, I think it is--you know, even though I focus on
the ICT supply chain, it is clear, and it has become even more
clear from the global pandemic that global supply chains and
the importance of supply chains are really important to all
U.S. industries. So it is really a situation where if we are
going to have a coordinated strategy, you know, we need to be
in sync across agencies and across sectors to really make sure
that, you know, we have everyone pointed in the right
direction.
And that is why the program you referenced is important to
really prioritize that sort of coordination.
Senator Klobuchar. Very good. I hear Dr. Gil, you have a
nanochip with you and I actually recently visited SkyWater in
Bloomington, Minnesota, a very successful chip producer that
produces 65 and 90 nanometer chips. In your testimony, you note
the importance of this. And can you speak about investing in
U.S. based companies in the production of semiconductors?
Mr. Gil. Yes, thank you for the question, Senator. You
know, semiconductors, in the end, is the lifeblood of the
electronics industry, I know of almost every product that we
can imagine, right. In fact, I think there has been an
awakening for all of our fellow citizens to discover just how
ubiquitous they are and how it can affect the production of
almost every item that they rely on.
So I think it is absolutely imperative that we maintain the
dual mission of innovating to imagine new products of what we
are going to do with semiconductors, and we are not only
talking about the traditional electronics, it is going to be
the world of AI, the world of quantum computing, the world of
next generation wireless.
New capabilities in cyber security are going to rely on
this. And it is a combination of that creativity and
breakthrough with our ability to manufacture in the United
States. And that is a dual equation that we absolutely have to
get right, and it will lift many, many boats across all the
industries.
Senator Klobuchar. Very good. Thank you very much. Mr.
Miller, in your testimony, you note your support for funding
for Supply Chain Resiliency Program, which would include the
Commerce Department working with the private sector. Do you
want to elaborate on that public-private partnership and how
important that is as we look to the future in doing this right?
Mr. Miller. Yes, absolutely. You know, I think it has been
a theme that has already emerged during this hearing about how
important it is for the Government and the private sector to
work together on supply chain challenges in particular. You
know, there are a variety of reasons for that. You know, not
the least of which is that, you know, we are talking about
massive, in many cases extended global supply chains where, you
know, it would be impossible for the Government to have
visibility into what is happening in those supply chains
without, you know, constant and continuous coordination and
communication with industry.
You know, there is also, you know, limited resources, I
think, on both sides of the ledger. So to the extent that
people can combine together forces, that is really great. And
again, leveraging existing partnerships and innovation
ecosystems is great.
Senator Klobuchar. Thank you. And I will get it the rest in
writing. I just want to ask one last question in my time to Mr.
Aboulafia. And in your testimony, you talk about the role of
research and technologies like sustainable aviation fuel can
play in reaching zero emissions. Can you touch on that for me?
I am very interested in that.
Mr. Aboulafia. Yes. Thank you, Senator. I am afraid there
is not a lot of clarity in terms of the path toward reducing
emissions beyond traditional development of equipment. But
sustainable aviation fuels appears to be one of the most likely
ways. Hydrogen, for example, not so promising despite all the
talk, but sustainable aviation fuel seems to offer a way
forward. You know, there is an awful lot of different
initiatives setting up around the world, and I wouldn't want to
see U.S. industry hamstrung because of the lack of parallel
initiatives.
And it also seems that it is important to get industry on
the same page because it is absolutely essential to make these
developments, if you will, technology ecumenical. Basically, we
should be able to put sustainable aviation fuel in existing
equipment so make sure we are working with, well, the 25,000
jets we have out there, rather than trying to invent bespoke
technologies to work with it.
And then finally, it might behoove the Committee and others
in Government to consider mandates as a way of creating a
guaranteed market for when these products come online, as we
saw in the car industry. That might be a productive use of
Government resources.
Senator Klobuchar. OK, very good. Thank you, everybody.
The Chairman. Thank you, Senator Klobuchar. Senator Peters.
STATEMENT OF HON. GARY PETERS,
U.S. SENATOR FROM MICHIGAN
Senator Peters. Well, thank you, Madam Chair. Dr. Gil, I
certainly applaud IBM's work to achieve incredible
breakthroughs with respect to advanced semiconductors. As you
are well aware of, these are tiny devices just the size of a
fingernail, basically, that will literally shape the course of
the 21st century by powering our cutting edge technologies like
artificial intelligence and supercomputing. However, I think it
is important for us to remember that the advanced chips are
just one part of the story.
There is an entire ecosystem of semiconductor technologies
that our economy depends on, including what are called so-
called legacy chips. And so I bring this up in relation to the
auto industry, where the chips shortage right now of these
legacy chips is forcing production shutdowns. And this has had
a devastating impact on auto workers in Michigan as well as
across the country. And I am afraid it could even become worse
in the coming months. But I also want to be clear, as you know,
this is not just about automobiles.
A wide range of industries and devices depend on these
legacy chips, from farming equipment to medical devices as well
as military vehicles. Even the CEO of Apple, Tim Cook, said in
April that a shortage of legacy chips was causing the most
problems for his company. And that is why I worked with Senator
Stabenow to include legacy chips in a $52 billion package to
reshore domestic production of semiconductors, which passed the
Senate last month through the U.S. Innovation and Competitive
Competition Act.
So my question to you, Dr. Gil is, can you elaborate on the
role that legacy chips play in the broader economy and
employment in the United States? And could you comment further
on why swiftly passing this U.S. Innovation and Competition Act
is absolutely essential to keeping our Nation at the forefront
of semiconductor manufacturing globally?
Mr. Gil. You are absolutely right, Senator, on the reliance
on the importance of many, many generations of what is referred
to as semiconductor nodes, different technologies that are a
part of our automobiles and industrial equipment, aerospace and
defense, et cetera. One observation I will make is undoubtedly
the case that we have to have a great urgency on being able to
address the current supply chain shortages, including the
legacy chips. But I will make the obvious point that those
legacy chips where the future chips of a decade ago.
And this industry that this element of planning for solving
issues of today but planning for tomorrow is vital. And what
looks like advanced notes right now, 5 years from now, 7 years
from now, will become what we are referring to today as the
legacy chips that we are confronting now. The legislation of
the CHIPS Act does a number of things are really, really
important of that today and tomorrow. So in the context of the
National Semiconductor Technology Center, there is a great
emphasis as well on the assisting with the design and the
portability of these designs to multiple foundries on
packaging, and test, et cetera.
So I think this legislation is actually going to be very,
very consequential in helping the broader ecosystem be more
productive in the design and production of chips, including
their indispensable legacy ones. But I will continue to make
the point that we need to do both, the today and tomorrow.
Senator Peters. Well, thank you. And Mr. Miller, I serve as
Chair of Homeland Security and Governmental Affairs Committee,
where yesterday we passed the Supply Chain Security Training
Act. This legislation directs GSA to develop a coordinated
Federal Government wide training program to prepare personnel
to identify and mitigate supply chain threats to enhance
Federal supply chain cybersecurity long term. This bill
addresses Federal supply security.
And Mr. Miller, in your testimony, you mentioned,
``uncoordinated inconsistence'' approaches to supply chain
resiliency and security policy, including cybersecurity. So my
question for you, Mr. Miller, how should CISA's mandate be
improved to ensure that it is indeed the lead agency to
coordinate efforts on supply chain risk management? And if so,
how can its resources and authorities be improved to fulfill
that mandate?
Mr. Miller. Thank you for the question, Senator Peters. You
know, I do think that CISA has clearly prioritized supply chain
security and resiliency I think already over the past couple of
years. You know, it was a few years ago that the Secretary
really prioritized supply chain security in particular in, you
know, kind of, you know, spearheading the formation of the ICTs
supply chain risk management task force.
You know, I have been pleased to serve as the co-chair of
that. I do think the National Risk Management Center also has a
very clear mandate to focus on supply chain as well. You know,
in terms of anointing or making sure that that CISA is really
named, as I think your question implied, as the as the lead
agency there, I think we would be very supportive of that.
There are many different dimensions of supply chain, and
the Commerce Department and others have to have a role in it,
particularly when we look at through the broader lens of
resiliency. But when we are looking at security in particular,
you know, CISA is well positioned to lead there. So any support
that the Congress is able to provide, I think is well received
by us.
Senator Peters. Thank you for that answer. Thank you, Madam
Chair.
The Chairman. Thank you. Thank you, Senator Peters. So I
have a couple of questions. I am not sure we are going to see
other members here, but I wanted to cover a couple of things.
Dr. Gereffi, you talked about the research of this particular
issue, too. And from our witnesses and the questions from our
colleagues, you can definitely see, everybody is advocating for
more expertise and definitely a larger role for Commerce. So
how do we get that expertise given any one of these things? As
Mr. Aboulafia said, maybe you should have a dedicated supply
chain focused just on aviation and obviously we are heading
that way on semiconductors.
I could make the case we should have had a better analysis
on aluminum, given where we are with the aluminum sector and
the shift that is happening. How do we--what do we need to do
if we are going to say we want a larger Federal role? What is
it we need to do to have the research about these sectors,
again, if a lot of the innovation or the awareness about the
next phase of innovation is at the very base level of the
supply chain? You have got to turn your mic on. Yes.
Mr. Gereffi. Senator, thank you, Senator Cantwell. I think
in the past when we wanted to focus on specific industries, we
had programs like national industry centers at things like the
Sloan Foundation supporters I mentioned in my testimony. But I
think to get the universities involved, we end up having to
take a more interdisciplinary approach. And so I think one of
the critical issues is trying to find some of the key industry
areas that are cutting edge where the universities can
supplement.
And that is where I think your National Science Foundation
Technology Initiative, the Technology Directorate, could be a
key because NSF does tie into universities in a very direct
way. And but I think it has to connect also to those industrial
clusters where the industries are located, in particular parts
of the country. So a combination of NSF, which is going to tie
into applied funding, the multidisciplinary that comes from
industry clusters, and then linking that across different
industries that are specialized, I think is probably one of the
key ways to go for universities.
The Chairman. I see you nodding, Dr. Gil. You agree with
that?
Mr. Gil. I very much agree with that. I mean, in the
context of serving in the National Science Board and the
evolution that we see and the potential of the technology and
innovation translation new directorate, by bringing the best of
the university, what historically would have done in centers,
by imagining a new catalyst where we can bring universities and
industry at all scales together through these NSF sponsored
centers, I think would be a unique model that would allow us to
address some of these concerns.
The Chairman. Well, it certainly could be more
translational, and it certainly could be more informational
back up the chain. I don't mean to use that word
intermittently.
So when you are talking about getting somebody over at
Commerce to understand what is happening in Mr. Taylor's
business or what is happening in aviation or what is happening
in semiconductors, it is not that there aren't people at NIST.
But when you want to call a shot and say, oh, well, we need a
specific R&D supply chain effort for aviation or
semiconductors, you should have somebody farther up at the
Department of Commerce making that decision.
Mr. Gereffi. Just one further comment. I think that when we
look at the existing technology areas in the U.S. that are well
developed, Seattle with Aerospace or Silicon Valley or Austin
with IT or Boston 128, in all of those cases, we have well-
established universities that are connected with private
companies. But one thing that is happening now is we have a
whole new set of technologies that is transforming the cutting
edge of research. So artificial intelligence, quantum
computing, all of the different areas that are coming out of
the digital revolution.
So I think that is where we need to bring universities back
into the equation, because what worked 5, 10, 15 years ago is
changing very fast now. And so that to me is the real
challenge. How do we have that discussion between industry and
universities and Government taking these next generation
technologies and bringing them into the picture?
The Chairman. Well, that is where the hub and the center
come together. And that is--you know, it may be a new fashion,
but Dr. Lewis, did you have a comment on that?
Mr. Lewis. Thank you, Chair Cantwell. Commerce used to have
a technology Administration. Technology used to be one of their
central missions, and they got rid of it some time ago. So one
of the things to think about is you were talking about NIST
isn't a policy agency. They do great work, but they don't do
policy. So if you are going to rebuild that capability at
Commerce at the senior level, further up the chain, we might
want to look at what Commerce has in place. A lot of talent
there, a lot of strengths, but not focused on the technology
mission in a way it might have been 10 years ago.
The Chairman. And thank you, I like that suggestion because
I do think you have to have--as it is changing so fast you have
to develop expertise. Mr. Aboulafia, there is, you know, this
effort on thermoplastic that I have heard about. I have heard
about it because, you know, obviously in the aviation supply
chain, getting material for airplanes that have material flaws
in them requiring you to start over, you know, is a big deal.
So thermoplastics give you that ability. But the most I
have heard about this research is that it is over in Europe and
there are companies like Boeing that are participating. I have
also heard of it from companies in Spokane who are saying, I am
doing this, and we need to do more of this. But how do we get
the focus on the core technologies that need to happen in
aerospace if these are just voices in the supply chain or for
example, Europe has had associations just because they are
Europe or Max Planck Institutes, where everybody always works
together.
What is it that we need to do to identify the next
generation technology that seems to be already there in the
supply chain, but the supply chain is made up of just small
individuals trying to compete? What do we need to do?
Mr. Aboulafia. Well, I suppose that it is encouraging the
very fact that, Madam Chair, you are hearing about this
technology indicates that there is some equipment and
technologies that are coming to public view, to your view. You
know, when it comes to materials, that is actually a very good
example of the kind of thing that I think should be accelerated
because they can be brought to market a bit quicker.
But that despite the emphasis on creating these materials
in the supply chain, and it is up to the primes to specify them
at the end of the day. So bigger companies like Hexcel or
something like that could create these advanced materials and
some of the smaller companies. But ultimately it comes down to
the primes. And this is one point where I guess I will slightly
reverse myself.
I think it is up to the primes to identify what
technologies they are able to bring into next generation
platforms, be it materials, be at various advanced control
systems, be it avionics or whatever else. They might be the
best source to say, well, this is something we would like to
see on our next generation jetliner or next generation business
jet or combat aircraft.
In the case of thermoplastics, you know, there is a lot of
work going on in the interiors field, so that might be the sort
of intermediate end user people who create interiors and want
to bring some new capabilities to market. But in general, these
are exactly the sort of technologies that I think could migrate
from basic to a more advanced supply level of R&D. And yes, it
is sort of noteworthy that a lot of other companies or a lot of
other countries are engaging in this research. One thing about
this is that being in the Netherlands and Belgium or other
places, these are effectively neutral aviation powers.
It is not--if it is taking place in France or Britain or
Germany, it is probably not addressable as much to U.S.
contractors. And I think that's important to remember. And the
reason, I think for the U.S. to have that greater capability in
identifying these technologies and well, working with U.S. R&D
programs and getting them to market.
The Chairman. Thank you. Senator Scott.
STATEMENT OF HON. RICK SCOTT,
U.S. SENATOR FROM FLORIDA
Senator Scott. Thank you, Chair Cantwell. I want to thank
everybody for being here today. I have been up here for about
two and a half years, and I am a business guy, and a lot of
times what people come up here to do is they always ask, what
can the Government do to solve a problem?
Can you all talk about what your industries are doing and
what you think we could be doing without Government and without
increasing our debt? And we have almost $30 trillion worth of
debt now. Could each of you talk about what the private sector
should be doing and what you are doing?
Mr. Gil. I will be happy to start. Thank you for the
question, Senator Scott. So one element, and I will speak for
IBM, is we have had an unwavering commitment to invest in R&D.
I am proud to lead the research division, IBM. We have had a
research division for 76 years. We continue to employ over
3,000 scientists, work full time to continually to invest and
create the future of information technology and artificial
intelligence and quantum computing, semiconductors, et cetera.
So I think that, you know, the private sector needs to
continue to have a very, very strong commitment to R&D and
invest in our workforce so that we can continue to create
differentiated products. That is one thing I would advocate
strongly.
Mr. Taylor. Senator, I would say that one of the things we
are doing as a small manufacturer is we are building more and
more relationships with partners. There is just a lot of
technology that as a small company you can't do yourself. Build
that relationship. And I am talking about a relationship, not
finding a vendor, but building a relationship with that vendor
that seeks a long strategic approach to the innovation or the
product you want to present to the consumer. And these
partnerships are very, very important, particularly to small
manufacturers. But I think any size manufacturer that is where
the expansion will be.
Senator Scott. Anybody else?
Mr. Lewis. Just quickly, Senator, and thank you for the
question. You know, one thing that the private sector can do,
and associations like we have here today are helpful on that,
it needs to send clear messages to Government on what would be
helpful to do, where there are areas that go outside of the
purview of the USICA that we need to address, like monetary
policy, like tax policy. We need to get those signals from the
private sector on the guidance for Federal policy. And that
would be an area where I think there's room for improvement.
Mr. Gereffi. Can I just add one thing, also Senator Scott,
you know, I think beyond the R&D investments as well, you know,
one of the things that that the private sector is doing is
lending, expertise and resources to the Government. You know,
as I stated earlier, particularly in the supply chain context,
Government entities don't always have, you know, a lot of
visibility into what is going on in across these supply chains.
So partnering with the Government, working, you know, on public
private-partnerships and task forces and really, you know,
devoting industry resources to help, you know, advance the
shared Government industry mission is something that I know
that the ITIs companies are doing.
And another is also partnering on, you know, some of the
workforce development programs and things like that to really
try to, you know, help rebuild the talent pipeline. That that's
another thing that our companies are doing.
Senator Scott. Thank you. Is there anything that any of you
think we, the Government, should stop doing that would help the
supply chain? A lot of people come up and say what we should do
more. I was in business. I got tired of Government. I mean,
they are always just a pain in the rear. I mean you get fed up
with it. OK.
The Chairman. Go ahead, Mr. Aboulafia.
Mr. Aboulafia. Oh, thank you very much, Madam Chair.
Senator, if I may know, there is one aspect I think, of the
Government's approach to the supply chain that could probably
change a bit. The Pentagon has a rather patchy procurement
policy when it comes to aftermarket componentry. And given the
reliance of the supply chain on aftermarket components for a
lot of their profits, ultimately the kind of lumpy buying
habits and frankly absence of guidance at times is a bit of an
issue for the supply chain.
So perhaps greater guidance from the Pentagon and other
Government purchasers of componentry about what they are doing
to fill their warehouses or when they are destocking or what
their purchasing patterns are going to be in the coming couple
of years would be extremely helpful, I think, to a lot of the
supplier companies I would--I speak to. But if I may just
quickly address your previous question, it is a really
interesting one about what private the private sector should be
doing.
One change I would like to see them make is have less of an
adversarial approach to their supply chain. Many companies at
the prime level kind of regard them as something to be,
frankly, fresh for profit, basically. Got to harmonize margins
and whatever else.
I would like to see more of a partnership between the
primes and the subs. And perhaps this crisis will illustrate
the rather vulnerable nature of the supply chain and the
importance of having that partnership and working together in
tandem to be more resilient.
Senator Scott. Thanks, everybody. Thank you, Chair
Cantwell. Thank you. Senator Sullivan.
STATEMENT OF HON. DAN SULLIVAN,
U.S. SENATOR FROM ALASKA
Senator Sullivan. Thank you, Madam Chair, and thanks for
this really important hearing. I want to start with a kind of a
couple questions I am going to toss out there. Somewhat related
to Dr. Lewis and Dr. Gil. I was recently in South Korea and
Taiwan on a bipartisan Senate delegation with Senator Coons and
Senator Duckworth.
And I would like to get both of your views on this issue of
selective decoupling. And I was very surprised and actually
pleased both in Taiwan and in South Korea meeting with their
senior Government leaders, but also senior private sector
executives, how they do see this selective decoupling coming
and they seem very forward leaning on making the choice about
being in the United States both foreign direct investment in
our country, which they are starting to do, and being more
interested in, you know, if there is a choice, the choice is
the United States.
I was very pleased by that.
And then, Dr. Gil, this obviously relates to semiconductors
too. In terms of Taiwan and South Korea, both of their big
semiconductor manufacturing companies are looking at major,
major investments in our country as well. So maybe, Dr. Lewis,
if I can start with you and this issue on Taiwan, where it is
very clear the ultimate goal is for the Chinese Communist Party
to absorb Taiwan. I don't think that is a good idea, forcefully
or not, but how do we think about that when we think about
selective decoupling as well?
Mr. Lewis. Thank you, Senator. I am very grateful to the
Chinese Communist Party because they make our task so much
easier. Every time they open their mouths, countries move in
our direction.
Senator Sullivan. That is really happening. I think you are
right.
Mr. Lewis. Yes, and so we need to think then how do we
build a unified approach with our allies and partners like
Taiwan and South Korea? How do we streamline the path for them
to work here? You know, it would be great to have TSMC in the
U.S. Sure, they are a competitor, but I feel confident our
companies can compete with them.
Senator Sullivan. Well, they are obviously strongly
contemplating that, as you know.
Mr. Lewis. Contemplating and location are not the same. And
so how can we make it easier for them to get here? Same for
Samsung. Very strong presence in Texas, but we depend on
Samsung and TSMC.
An issue for the Congress and for the Administration is, do
we feel comfortable with that dependency? Mixed answers there.
We may not have a choice in some cases. So how do we smooth the
path to work with them? Also, you were in Asia, but we need to
think about our European allies. They are a little more
ambivalent when it comes to cutting off trade with China.
Senator Sullivan. But that is changing, I get the sense.
Mr. Lewis. No, I was going to say--.
Senator Sullivan. The more the Chinese Communist Party
opens its mouth, the more I think our European allies are
recognizing what the reality is.
Mr. Lewis. Let's look at the results of the elections in
France and Germany, because I think when those are over, it
might be easier to see new directions in European policy.
Senator Sullivan. Dr. Gil?
Mr. Gil. To borrow the microphone. You are absolutely
right, Senator Sullivan, about the strength of South Korea and
of Taiwan in terms of production. I refer in my testimony that
they represent 100 percent of the manufacturing capacity below
the 10 nanometer node. So I think is our dual policy that would
be very beneficial to the United States.
One is absolutely encourage their investments here onshore,
which, you know, they do have plans to do. But seeing it
through and the signaling that the CHIPS Act does, it is
absolutely sending a very clear message about the importance
and the resurgence of semiconductor industry in the United
States and the need to invest. And on top of that, also be able
to foster through the creation of NSTC and manufacturing
capacity with U.S. manufacturers to complement that. I think
there will be a wonderful outcome, actually, that this decade
we have the sum of all of those in the United States.
Senator Sullivan. Thank you. And Madam Chair. I mentioned
this to Senator Wicker. It was very interesting. Those
companies and countries were very closely tracking what was
going on with our legislation and the CHIPS Act. If I can ask
just one final question, if that is OK?
The Chairman. Senator Thune is waiting but go ahead.
Senator Sullivan. Dr. Lewis, I will just very quickly, and
it is a long question, so I will try and keep it very short.
One, asymmetric advantage the Chinese have over us is that we
have an entire finance class, Wall Street, a lot of our big
private equity groups that seem very comfortable investing in
not just China, but Chinese AI, Chinese military, Chinese
Communist Party related companies, and of course, any Chinese
financiers who want to relate, who want to invest in something
related to the Pentagon or something would help us, the Chinese
Communist Party will crush them.
How do we think about our own Americans, I get disturbed by
this to be perfectly honest, who seem very happy, free, open,
willing to invest in our biggest competitor, sometimes in
military applications that could someday be used to kill
Americans? I find this very, very troubling and yet some of our
biggest finance executives seem to be completely fine with it.
I am sure they make a lot of money doing it, but it
certainly isn't a patriotic undertaking, in my view. Any
thoughts on that?
Mr. Lewis. Thank you, Senator, and you will be happy to
know that the Chinese are also closely tracking the progress of
the bill. I got to be on Chinese television trying to explain
that when I was called the Endless Frontiers Act. So they were
very upset by it, which is good, right?
Senator Sullivan. That is a good sign.
Mr. Lewis. Yes, this is going to be a hard problem. We are
at the start of a long process of, if China continues on its
current path, they will become more and more of an opponent,
more and more of a place that we will not want to do business
with and we will not want our allies to do business with as
well.
But right now, there are still transactions that are safe
to make. And so the question for policy is, how do we get
them--how do we exploit China the way they exploit us? How do
we find places where it is safe to do business and the places
where we will need to close off? That space is shrinking--that
safe space is shrinking. But that is what I would look at is,
let's see where the Chinese come out in a few years.
They are probably not so happy either. So but we will have
to find ways to balance making money in China, which is good,
versus the National Security risk.
The Chairman. Thank you. Thank you.
Senator Sullivan. Thank you, Madam Chair. Senator Thune.
STATEMENT OF HON. JOHN THUNE,
U.S. SENATOR FROM SOUTH DAKOTA
Senator Thune. Thank you, Madam Chair. Mr. Lewis, earlier
this year, I reintroduced the bipartisan Network Security Trade
Act to ensure that the security of our communications
infrastructure is a clear trading objective of the United
States.
And let me just say that I believe it is critical that our
global communications infrastructure is not compromised by
manufacturers like Huawei Technologies, which is supported by
the Chinese Communist Party. Can you talk about the importance
of this legislation so that we can address the barriers to the
security of our communications networks and supply chains?
Mr. Lewis. Thank you, Senator. I think the bill is very
valuable because one thing I hope we have all learned is that
the use of Chinese technology creates real risk of espionage.
So the bill makes a valuable contribution. It is not just an
American problem.
We have done well in this country and starting to remove,
from all the big companies, Huawei technology. But now we need
to think of the other places we connect to as well. So an
important step is to continue to push on the need for secure
communications technology. That is why I think the bill is
invaluable. And I am glad you reintroduced it. Thank you.
Senator Thune. Thank you. And this is a follow up and this
is related to the pandemic. But that is obviously has
accelerated the rise of the digital economy. And with more
individuals and businesses online, our country has got to make
smart investments in the technologies that are reshaping the
way we live.
What steps do we need to take to ensure our communications
supply chain can meet the needs of the future when we think
about new technologies like 5G and A.I.? And is there a role
for Government to play? And if so, you know, what is it to make
sure that we lead to technological advancements and stay ahead
of countries like China?
Mr. Lewis. Thanks again, Senator. Sure, there is a number
of areas where we could use a good collective approach with the
private sector and Government. The first is in standards
bodies. We all know that. The U.S. is doing better in standards
than you might think, but the Chinese are not giving up.
Second, R&D and STEM. The companies tell me they have workforce
shortages and so we can help with that.
Spectrum allocation, the U.S. has made good progress in
moving spectrum to commercially--we are in a new kind of
National Security contest and the old spectrum allocations
might need to be reconsidered, but we have done OK at that.
Finally, a larger business question. Building the
infrastructure is good.
Making sure the infrastructure is secure is important. But
how you use that infrastructure is also crucial. So we need to
find ways to accelerate innovation in the use of 5G, and dare I
say it 6G. Thank you.
Senator Thune. Yes, let's hope so. Mr. Miller, in your
testimony, you talk about the need for a strategic plan for
implementing the numerous supply chain initiatives that are
underway. What risks do we face if we don't have a coordinated
approach to supply chain resiliency? And are there existing
public-private initiatives reviewing supply chain risk that
could serve as a model?
Mr. Lewis. Thank you, Senator Thune. Yes, I mean, again, I
think it has been a big theme of the hearing today about the
need for a coordinated approach. You know, as I as I mentioned
in my testimony, I think an excellent model is the Cyber
Security and Infrastructure Security Agency led ICT Supply
Chain Risk Management Task Force. You know, it is a--one of the
best features of that task force is that although it is
sponsored by CISA, it involves about a dozen Federal agencies
and partners, including the Commerce Department. It includes
experts and participation from across both the IT and
communications sectors.
And it has really involved Government and industry rolling
up their sleeves and, you know, working on developing real
proactive solutions that could actually help address some of
these--the variety of supply chain challenges. You know, and I
would also say that one of the things that we have been working
on most recently is, you know, trying to figure out how to make
sure that the products are getting out into the supply chains
themselves, into the bloodstream, if you will, and also
specifically addressing the small and medium sized businesses
who, you know, quite candidly comprise 90 percent or so of the
supply chains.
And really trying to figure out how do we help those
companies in particular.
Senator Thune. Thank you. Madam Chair, my time has expired.
I have a question which I can submit for the record for Mr.
Aboulafia.
The Chairman. Go ahead, Senator Thune.
Senator Thune. OK, well, let me just--you mentioned in your
testimony, the aviation industry experiencing several recent
disruptions stemming from the pandemic and geopolitical
concerns and aircraft groundings. As the pandemic recedes
across the world, what materials or components do you believe
represent the biggest constraint on domestic aircraft
manufacturing in coming years?
Mr. Aboulafia. Thanks for your question, Senator. I think
there is a number of areas of concern. Frankly, labor wage
inflation might be one of the biggest. One of the quirks of the
commercial industry is that we are effectively deflationary.
That is to say, pricing for our finished systems have been
declining in real terms for quite some time now, I am afraid.
And that actually accelerated. The deflationary trend
accelerated during the pandemic in an effort to stimulate
demand.
So unless contracts for the supply chain allow for the
appropriate path through mechanisms, I think we are going to be
stuck between higher materials prices, higher energy prices,
and most of all, I think higher labor prices.
But historically, just to get to the heart of your
question, it is really the castings and forgings that have
typically produced bottlenecks mostly made from more exotic
metals and things like that. Some sort of turbine componentry
and things along those lines.
Senator Thune. OK, thank you. Well, it seems like--argue
for our investment in more of those exotic metals in our own
supply chain? Yes, alright. Thank you, Madam Chair. Thank you
all.
The Chairman. Thank you, Senator Thune. I just have one
last question. You know, we talked about, you know, some of the
aspects on the adversarial side. What about on the allies side?
Dr. Gereffi, you have written about this as a way from your
research to prioritize things. What should we be doing to think
about building alliances on supply chains? How should we be
looking at that as a Government? And who in the Government
should be doing that?
Mr. Gereffi. A lot of people on the panel have already
mentioned, for example, in semiconductors, how important the
alliances are between the U.S. companies, Samsung, TSMC. I
think getting the international companies investing in the
U.S., as we now hope to see, is going to be very important. I
think from the Government's point of view, I think the industry
associations that are working with Government agencies are
probably a good place to begin to encourage more of that
collaboration.
But so I think there is collaboration among the big
companies, and then there is also that collaboration between
lead firms and their first tier smaller suppliers. And perhaps
that is an area that has been less well developed, that we
don't really see very far down those supply chains beyond the
big companies. And that is maybe where these industries can get
better routed in the U.S. and we could start to have that small
business or medium-sized business development.
And that collaboration is probably very important. I think
it is probably private sector led. Oftentimes there is going to
be those top companies that are encouraging the small
companies. But the U.S. Government as well, with its policies,
can be encouraging the kind of investment at local levels that
would help that
The Chairman. Anybody else on the ally front? Yes, Dr.
Lewis or Mr. Miller.
Mr. Lewis. Sure. Thank you. I see others want to speak too.
The Tech and Trade Council was an important step. The Europeans
really wanted it. It was their idea. And so they are looking
for ways to partner with us. That is good. They are worried
about, what they are afraid might be trade nationalism in the
U.S. So Buy America is something that they react to.
We should be worried about some of tech governance
initiatives. I think they say it is not aimed at American
companies, but some days it sure looks that way. But the I just
was at a meeting with one of the European Commissioners on this
and there is a real desire to build partnership. There is not
as much appreciation in Europe of the risk of China, but it is
growing, as we heard. And so we are entering a long period of
dialog that moves us in the right direction. Thank you.
The Chairman. Mr. Miller.
Mr. Miller. Thank you. I was--I will echo both the point
about investment and actually attracting investment from
partners and allies to the U.S. as one thing for sure, as well
as the U.S. Trade and Technology Council. You know, one of the
promising features of that, as Mr. Lewis indicated, is that,
and I think it has already been announced that one of the
things they are specifically forming a working group on is
semiconductor and other strategic supply chains.
And then just a final note on the international front on
this topic. You know, for the past two or 3 years now that
there has been kind of the Prague principles and focus on 5G
security, which has a significant number of supply chain
components, and again, brings together several different U.S.
partners and allies to focus on the security aspects of the
supply chain issue.
The Chairman. Thank you. Mr. Taylor.
Mr. Taylor. Sure. And I think one other item, it sort of
goes back to what Senator Scott said and even Senator Thune,
but this investment in international business is coming here
and establishing a footprint in our own American industries
also.
I would ask the Commerce Department to take a strong look
at revitalizing or re-supporting, whatever the word might be,
the permitting processes. It is long. It is laborious. It is
debilitating, and it really hinders greenfield production--a
greenfield building growth or expansions or just additional
lines for the processes and antiquated ways that we all have to
go through for a permit to get that innovation started, get
that factory started or additions to a factory started. So I
would ask that that be looked at.
The Chairman. Thank you. Thank you very much. Well, this
has been--did you have one last thing you want to say on this
point, Mr. Gil?
Mr. Gil. Just 30 seconds that when we grow our investments
like is being done with this piece of legislation, it really
serves as a beacon for our allies to desire to partner with us
much more strongly.
The Chairman. Thank you. I think that is a good summation
to USICA and one of the reasons why we did it. This has been a
great deep dive on the supply chain. Thank you all very much.
Thank you for your expertise and for your knowledge about this.
A lot of great information has come out of it. I definitely
believe, as Mr. Aboulafia says, that we have to look at the
supply chain in a more collaborative way. When I reflect back
about what our discussion has been here, I keep thinking, what
if we would have had a better partnership on that years ago?
Would we be in the same situation we are in now with the
semiconductor industry?
So we are trying to have more illumination about these
sectors and how important they are not just from their
technology perspective, but also what they mean for jobs and
for our economy and certainly for National Security issues.
So thank you all very much. This hearing record will remain
open for two weeks until July 29, and any Senator can submit
questions for the record, if they do so by July 22. And we ask
you to respond so that we can fill that record by the 29th of
July. And with that, this concludes our hearing. Thanks. Thanks
very much again.
[Whereupon, at 12:30 p.m., the hearing was adjourned.]
A P P E N D I X
Response to Written Questions Submitted by Hon. Maria Cantwell to
Dr. Gary Gereffi
Supply Chain Research and Mapping. In your testimony, you
emphasized the need for tools such as value chain mapping and of
efforts to build regional clusters or hubs, connected to other portions
of the value chain.
Question 1. What role should value chain mapping at the Department
of Commerce play in helping the United States predict and prepare not
only for supply chain disruptions but also for emerging economic
opportunities?
Answer. Value-chain mapping is a practical tool that requires us to
link several kinds of economic and commercial statistics, including:
data on international trade (imports and exports); national production
statistics (output by firms producing goods and services in the U.S.
market); industry statistics (using standardized and detailed industry
classification schemes to indicate the economic activities of firms);
and occupational and employment data (linked to companies and
industries, located in particular U.S. states and zip codes). Each
variable (trade, production, industry, occupation, location, etc.) has
different classification systems used by the U.S. government, and
harmonized codes used by multilateral agencies, like the United Nations
Statistics Office or the World Trade Organization (WTO).
A significant, but manageable, challenge in value-chain mapping is
technical--i.e., to develop ``correspondence'' indexes (or crosswalks)
that link industry, occupation and trade classification systems at
similar levels of detail.\1\ Different parts of the U.S. government,
such as the Department of Commerce (and the U.S. Census Bureau it
houses) and the U.S. International Trade Commission (USITC), have data
collection and analytical units that manage complex national economic
databases on trade, production and employment, and much of this is
publicly available (although not easy to manage without the statistical
skills used in handling large databases).
---------------------------------------------------------------------------
\1\ See U.S. Census Bureau, ``Guidance for Industry and Occupation
Data Users,'' available at https://www.census.gov/topics/employment/
industry-occupation/guidance.html.
---------------------------------------------------------------------------
Another problem for the Department of Commerce (or any other large
U.S. government agency) is institutional--i.e., which unit in Commerce
or elsewhere in the government would be best suited to incorporate
value-chain mapping as part of its core mission? Answering this
question would require conversations with various government units,
possibly the International Trade Administration (ITA) and its related
Bureaus of Industry and Analysis within the Department of Commerce, to
find an appropriate fit for value-chain research.
In studies such as the Duke GVC Center project on ``Manufacturing
Climate Solutions'' that focused on clean technologies and U.S. jobs,
for each product analyzed (e.g., LED lighting, high-performance energy-
efficient windows, and U.S. concentrating solar power technology), a
value-chain diagram was created to illustrate the core technology and
its constituent parts, a geographic map identified the main factories
in the United States that supplied manufactured inputs for these
products, and a table estimated the number of U.S. jobs associated with
current and projected demand for each of these technologies.\2\ The
value-chain approach thus combines a variety of sources, including
company websites and annual reports, interviews with company managers
and industry experts, and other business sources.\3\
---------------------------------------------------------------------------
\2\ Gary Gereffi, Kristen Dubay, and Marcy Lowe, ``Manufacturing
climate solutions: Carbon-reducing technologies and U.S. jobs,'' Duke
CGGC, Durham, N.C., November 2008, available at https://gvcc.duke.edu/
wp-content/uploads/greeneconomy_Full_report.pdf.
\3\ For discussions and illustrations of the methodology involved
in value-chain mapping, see Stacey Frederick, ``Global value chain
mapping,'' in Stefano Ponte, Gary Gereffi, and Gale Raj-Reichert
(eds.), Handbook on Global Value Chains (Edward Elgar Publishing,
2019), pp. 29-53; and Gary Gereffi and Karina Fernandez-Stark, ``Global
value chain analysis: A primer,'' 2nd edition (Duke GVC Center, 2016),
available at https://gvcc.duke.edu/wp-content/uploads/
Duke_CGGC_Global_Value_Chain_GVC_Analysis_Primer_2nd_Ed_2016.pdf.
---------------------------------------------------------------------------
There are two related issues in high-quality value-chain studies:
(1) the need for supply-chain transparency in analyzing the structure
of U.S. and global industries; and (2) assessing lead-firm strategies
to identify multiple pathways to innovation and commercial success
among close competitors in the same industry. In terms of supply-chain
transparency, many U.S. and other multinational corporations (MNCs) are
becoming far more open about identifying the names and locations of the
firms that make up their manufacturing supply chains. For example, Nike
now publishes an interactive ``manufacturing map'' of where Nike
products are made (http://manufacturingmap.nikeinc.com/) that includes
the number of factories, countries and workers involved in making
finished goods as well as material inputs. Patagonia is also a leader
in mapping its supply chain footprint,\4\ and most large companies such
as VF, H&M, Apple, and adidas publish lists of global suppliers. In
addition, U.S. multinationals are collaborating more explicitly with
academic researchers by sharing supply-chain data on overseas plants to
assess whether factory monitoring improves labor conditions and
economic performance.\5\
---------------------------------------------------------------------------
\4\ Patagonia, ``Working with Factories,'' https://
www.patagonia.com/our-footprint/working-with-factories.html; Patagonia,
``Supply Chain Environmental Responsibility Program,'' https://
www.patagonia.com/our-footprint/supply-chain-environmental-
responsibility-program.html.
\5\ Richard M. Locke, Fei Qin, and Alberto Brause, ``Does
monitoring improve labor standards? Lessons from Nike,'' Industrial and
Labor Relations Review (61, 1) (2007): 3-31; Greg Distelhorst, Jens
Hainmueller, and Richard M. Locke, ``Does lean improve labor standards?
Management and social performance in the Nike supply chain,''
Management Science (63, 3) (2016), https://doi.org/10.1287/
mnsc.2015.2369.
---------------------------------------------------------------------------
Just as the structure of supply-chains offers insights into the
overseas performance of U.S. companies, comparisons of the global
strategies of U.S., Asian and European MNCs competing head-to-head in
the same industry tell us how and why top companies pursue distinct
international production and sourcing strategies, and how current
disruptions are likely to shape their future approaches to investment
and innovation.\6\
---------------------------------------------------------------------------
\6\ Pavida Pananond, Gary Gereffi, and Torben Pedersen, ``An
integrative typology of global strategy and global value chains: The
management and organization of cross-border activities,'' Global
Strategy Journal (10, 3) (2020): 421-443; Gary Gereffi, Hyun-Chin Lim,
and Joonkoo Lee, ``Trade policies, firm strategies, and adaptive
configurations of global value chains,'' Journal of International
Business Policy (2021), https://link.springer.com/article/10.1057/
s42214-021-00102-z.
---------------------------------------------------------------------------
Since good supply-chain research goes beyond a simple integration
of publicly available statistics, it might be easier to launch a U.S.
value-chain resiliency initiative as a targeted pilot project with a
handful of priority U.S. industries or states willing to collaborate
with the U.S. Department of Commerce or other research entities.
Initially, a major objective of value-chain analysis at the government
level would be to prove its usefulness in looking at specific
industries that are vulnerable to supply-chain disruptions, such as the
recent White House 100-day supply chain review report on four critical
U.S. industries. Alternatively, value-chain studies on specific U.S.
states can benchmark how they are doing in their priority industries
and spot emerging opportunities, such as the North Carolina in the
Global Economy project carried out at Duke University. Although many
value-chain mapping studies can serve as guides, there is a pressing
need for comprehensive new research given the manifold disruptions of
the current era.
Question 2. How can investing in regional technology hubs support
robust and resilient domestic chains?
Answer. Regional technology hubs bring together the entire local
ecosystem needed for successful industrial development: technology and
innovation opportunities provided by large firms; smaller providers of
goods and services that occupy lower tiers in the supply chain; the
educational and training inputs of faculty and graduates of research
universities as well as community colleges; a local workforce trained
to meet existing needs and that can expand as investments increase; and
the regional political and business leadership required to address
critical gaps or shortages and align stakeholders around a shared
vision of the future.
The United States has many highly successful regional technology
hubs that are specialized in established and emerging industries, such
as Silicon Valley (information technology (IT)), Seattle (aerospace;
software), Austin, TX (IT), Boston's Route 128 (IT; defense),
Pittsburgh (steel; biomedical), and others. However, significant signs
of robust and resilient domestic supply chains are visible in a new
generation of cities and regions that are modernizing traditional
industries or promoting new sectors tied to the emerging digital
economy. The Research Triangle region of North Carolina enjoys this
kind of growth pattern, where a traditional industry like textiles for
apparel or home furnishings has shifted to ``technical textiles'' used
in the medical, defense and aerospace industries, and new digital-
economy engineering hubs are being created with major investments from
big companies like Apple, Google, IBM/Red Hat and Amazon to develop
cloud and quantum computing, driverless vehicles, and big data
analytics.
While numerous U.S. states can point to selected examples of
regional technology hubs, a key goal of value-chain mapping is to
permit a more rigorous identification of such opportunities by
analyzing both existing industries and new investment opportunities for
current firms in the region. The industry profiles of ``bottom up''
value chain analysis at the state level can inform prospective
investors about the firms and economic activities already present in
the region, as well as ``value chain gaps'' that new investors could
fill to significantly increase the competitiveness of the region.
State-level value chain analysis should do global benchmarking to
identify production stages where global overcapacity or environmental
constraints exist (e.g., mineral processing) as well as identify
emerging opportunities and threats (e.g., artificial intelligence, the
industrial Internet of things, and cyber-security).
______
Response to Written Questions Submitted by Hon. Jacky Rosen to
Dr. Gary Gereffi
Critical mineral supply chain. Nevada is home to dozens of critical
mineral resources, including lithium, which is integral for battery
technology in electric vehicles. In fact, Nevada has the only operating
lithium mine in North America, as well as several proposed lithium
projects and battery recycling companies. Despite our state's
leadership in this space, the United States relies on imports for a
majority of the critical minerals necessary to our economic advancement
and national security. In addition, our country has virtually no
domestic processing capacity, so the lithium and other materials that
we produce are shipped overseas for processing.
Question 1. As someone with a background in clean energy supply
chains, can you discuss the economic benefits and potential job
opportunities if we were to invest in critical mineral manufacturing
and processing here in the U.S.? And how can we increase U.S.
processing capacity for lithium and other critical minerals necessary
for clean energy, both to bolster the supply chain and enhance our
national security?
Answer. Thank you for this excellent question, Senator Rosen. It
illustrates very well how the supply-chain approach is useful in
looking at U.S. competitiveness from the bottom up--i.e., by analyzing
U.S. industries from the perspective of the individual states where
they are economically most significant.
Critical minerals supply chains, like other natural resource
industries, have three main stages: (1) raw-material extraction; (2)
the processing of natural resources; and (3) the downstream component
and end-product user industries for these raw materials. The question
you are posing is where Nevada (and the United States, more generally)
fit within these three stages of the lithium industry value chain.
1. Raw-material extraction--A variety of countries are major global
suppliers of critical mineral resources used in the production
of advanced-battery technologies:
Lithium--Australia produces more than half the global
total; Chile is second
Copper--Chile is the world's largest producer; Peru is
second
Nickel--Indonesia, Australia and Canada are among the
top producers
Rare earth elements--China has about 60 percent of
world output, followed by the United States (16 percent)\7\
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\7\ https://www.statista.com/statistics/270277/mining-of-rare-
earths-by-country/.
2. Lithium processing--However, China dominates in the processing of
all these raw materials, and in rare earth minerals, China
accounted for 80 percent of global imports in 2019.\8\
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\8\ https://www.cnbc.com/2021/04/17/the-new-us-plan-to-rival-
chinas-dominance-in-rare-earth-metals.html
3. Main U.S. user industries for lithium--Advanced batteries used
for electric vehicles are among the most important product
markets for processed lithium, but utility-scale lithium-ion
batteries are also significant for the clean energy grid in the
---------------------------------------------------------------------------
United States.
In terms of the critical minerals supply chain, a central question
for the United States is where in the chain it can get the greatest
payoff from additional investments and new technologies. Currently,
there is global excess processing capacity for critical minerals in
general, with both China and India expanding their processing capacity
significantly since the 2000s. Because the prices for processed
minerals are quite low and the negative environmental impact of
refining and smelting activities tends to be very high, most raw
material exporting countries use China for their processing.
What does this mean for Nevada, which has a significant share of
U.S. lithium deposits and mining but no lithium-processing capacity?
Given U.S. environmental regulations, probably it would only make sense
to invest in major lithium-processing facilities in Nevada if companies
could use advanced processing technologies that would sharply reduce
the environmental impact of lithium processing; this is likely to be
very costly unless the processing could be carried out on a large-scale
basis within the U.S. market and beyond. The innovation opportunities
for U.S. battery production and storage are probably much greater and
more immediate, but this will also require further investments in
advanced-battery technologies, as outlined in the White House 100-day
supply chain review report.
Domestic solar manufacturing. The solar industry employs 7,000
workers in Nevada, the most solar jobs per capita in the entire
country. If we are to address the climate crisis and continue creating
good-paying jobs in the renewable energy sector, we must have Federal
policy that promotes the affordable deployment of solar projects.
Unfortunately, the previous administration imposed costly Section 201
tariffs on imported solar panels and cells. These misguided tariffs
have cost us an estimated 62,000 solar jobs across the U.S. and have
not led to an increase in domestic solar manufacturing, which
represents less than 10 percent of all solar jobs in the U.S. In fact,
the United States currently has no meaningful production capacity for
wafers, cells, solar glass, machine tools, and other system components.
We need to be investing in domestic solar manufacturing and
reducing our reliance on imports, especially from countries and regions
that rely on forced labor.
Question 2. Dr. Gereffi, how our country can increase our domestic
renewable energy manufacturing capacity? And how can Congress support
the solar industry to create manufacturing jobs here at home and bring
down costs for end-users?
Answer. Senator Rosen, this is another very important supply-chain
question focusing on one of Nevada's critical industries, the
manufacturing of solar panels. There are several supply-chain themes
that are relevant to your question.
(1) The unintended (negative) consequences of U.S. trade
restrictions--I provided a few illustrations in my written
testimony, but you offer a great example for solar panels where
Section 201 import tariffs on solar panels and cells did not
increase U.S. domestic manufacturing, and arguably led to U.S.
solar job losses of 62,000 jobs.
(2) Residential solar versus utility-scale solar--I would
distinguish between these two segments of the U.S. renewable
energy solar value chain, just as in lithium-ion batteries,
there are distinct industry segments for electric vehicles
versus utility-scale storage batteries. States like Nevada,
Arizona and California are very important for the U.S.
``concentrating solar power'' supply chain, but their value for
the U.S. economy is linked to the creation of national power
distribution networks that reach the distant populations
centers in the United States.\9\ Different technologies are
involved in the manufacturing versus the distribution parts of
the solar value chain.
---------------------------------------------------------------------------
\9\ See Chapter 4 in Gereffi, Dubay and Lowe, ``Manufacturing
climate solutions: Carbon-reducing technologies and U.S. jobs,'' Duke
CGGC, Durham, N.C., November 2008, available at https://gvcc.duke.edu/
wp-content/uploads/greeneconomy_Full_report.pdf.
(3) Where the jobs are: manufacturing versus installation--It sounds
like the 7,000 solar workers in Nevada are largely in solar
panel manufacturing. However, in most solar markets, the
largest number of jobs occur in installation. According to the
U.S. National Solar Jobs Census 2020, there were just over
30,000 manufacturing jobs in solar but this was dwarfed by the
155,000 installation and development jobs in solar.\10\ Thus,
domestic solar manufacturing and solar installation both have
significant and complementary U.S. job creation potential, but
the quantity, benefits and location of jobs will vary according
to their position in the solar value chain. Each state should
develop its strategy and industry development plan accordingly.
---------------------------------------------------------------------------
\10\ National Solar Jobs Census 2020, May 2021, p. 8; available at
https://www.seia.org/sites/default/files/2021-05/National-Solar-Jobs-
Census-2020-FINAL.pdf.
---------------------------------------------------------------------------
______
Response to Written Questions Submitted by Hon. Kyrsten Sinema to
Dr. Gary Gereffi
Role of Critical Minerals. To produce semiconductors and transmit
electricity, the United States relies on critical minerals, many of
which are mined outside of our Nation's borders. This poses a risk
should our supply of critical minerals be disrupted by natural
disasters or the actions of hostile actors in other nations.
Question 1. Please describe the importance of secure and reliable
supply chains to our Nation's mineral and energy security. Can you
describe how supply chain vulnerabilities have the potential to impact
access to affordable energy and economic recovery goals?
Answer. For many decades, the United States has built its central
approach to energy and mineral security around securing access to
petroleum and fossil fuels that were heavily concentrated in regions
characterized by intense geopolitical conflict (such as the Middle
East) or political volatility and high inequality (Venezuela, Bolivia,
Central Africa). The development of shale gas and extensive energy
reserves within North America has greatly lessened the energy
dependence of the United States on foreign oil, and the rapid expansion
and lower costs of clean energy technologies (solar, wind,
hydroelectric, etc.) has allowed the United States to make a strong
transition to a clean energy future.
Supply chain vulnerabilities remain, especially as critical
minerals and rare earth elements needed for essential intermediates
like semiconductors and advanced batteries are concentrated in
geopolitical adversaries like China or Russia. Two ways the United
States can address these vulnerabilities are to diversify its sources
of mineral and energy supply to trusted allies and strategic partners,
and also to support sustainable sources of affordable energy in its
domestic production as well as its purchasing contracts with
international energy suppliers and collaborators in sustainable energy
projects.
Question 2. How, if at all, do climate considerations factor into
your analysis of developing a critical materials supply chain?
Answer. By all indications, climate change is occurring even more
rapidly than most climate scientists expected. In North America, record
heat waves, forest fires, and tropical storms are reaching
unprecedented extremes, and the melting of polar ice and the breakup of
enormous ice shelves in Greenland portend an even higher than expected
sea level rise that could flood major coastal cities and agricultural
deltas in the United States and many low-lying regions around the world
(from northern Europe to South Asia).
As analyzed in the White House report on Building Resilient Supply
Chains (June 2021), climate change underscores the centrality of
strategic and critical minerals supply chains in two fundamental (and
potentially cross-cutting) ways: (1) the performance of many
environmentally friendly ``green'' technologies, such as electric
vehicles, wind turbines, and advanced batteries to store and distribute
energy from clean technologies, is more vital than ever to combat
climate change; and (2) these same technologies are heavy users of
critical mineral inputs (such as lithium, rare earth elements, and
others) that are needed to make and operate the clean technologies that
could help to attenuate the impact of climate change. Thus, making
critical mineral supply chains more ``resilient'' is imperative in
addressing this double challenge.
Pharmaceutical Supply Chain. In your testimony, you discussed how
COVID-19 illustrated the supply chain vulnerabilities the United States
faces in regards to medical supplies and pharmaceutical ingredients.
Question 3. How many pharmaceutical manufacturers do you estimate
had their international operations curtailed as a result of the COVID-
19 pandemic? What options were then available to American patients to
obtain their prescriptions? Did prescription drug costs to patients
increase as a result?
Answer. I have not seen any information that would allow me to
estimate how many U.S. pharmaceutical companies had their international
production operations curtailed due to COVID-19 or how much
prescription drug prices to patients increased as a result. However, in
the pharmaceutical industry chapter in the White House report of June
2021 on Building Resilient Supply Chains, there are concrete
recommendations to lessen U.S. dependence on foreign nations for the
supply of key essential medicines--both finished dosage forms (FDFs)
and active pharmaceutical ingredients (APIs)--by creating investment
and financial incentives to boost domestic production of selected
products, and to promote international cooperation with allies and
strategic partners to diversify U.S. sources of supply for these
medicines.
Question 4. What steps could Congress take to encourage
pharmaceutical companies to return their manufacturing operations to
America and reduce their international supply chain vulnerabilities?
Answer. The White House's 100-day supply chain review report listed
a variety of specific near-term and medium-term incentives to promote
greater U.S. production and to develop new technologies to reduce costs
and increase the resilience of U.S. and allied production (pp. 242-
243). However, the report also stressed that intense cost pressures,
especially on the mature U.S. generic drug market that accounts for 90
percent of all prescription medications filled but only 20 percent of
total prescription drug spending in the United States, have not only
driven pharmaceutical manufacturing overseas in pursuit of lower
production costs, but also led to an intense concentration of the
manufacturing and distribution of prescription drugs in the United
States (pp 213, 226-228). This makes the survival of relatively small
U.S. drug companies more difficult.
Question 5. Drug manufacturers were able to adjust to COVID-19 by
implementing masking and social distancing procedures. What are the
risks if a manufacturer's operations were halted for several months
because of a natural disaster or security concerns? How quickly can
manufacturers obtain additional capacity for their operations?
Answer. Factory closures or slowdowns because of COVID-19 have been
happening across a large portion of U.S. industries in the
manufacturing sector, even when safety measures have been introduced.
The best way to mitigate this risk or more severe problems due to
natural disasters is to diversify production by identifying actual or
potential sources of supply in the event of significant supply-chain
disruptions.
______
Response to Written Questions Submitted by Hon. John Hickenlooper to
Dr. Gary Gereffi
Supply Chains & Technology Advancement. Your testimony highlights
the rapid pace technology advances increases the risk of
``technological lock-in'' for R&D-intensive sectors of the economy. As
Chairman of the Subcommittee on Space & Science, I am monitoring how
semiconductor shortages may impact mission timelines for Federal space
programs or the commercial space sector.
Question 1. Could you discuss how technology-intensive sectors,
such as space, can reduce their supply chain vulnerabilities once
semiconductor production stabilizes?
Answer. Unfortunately, I do not have any information about the role
of semiconductor shortages in relation to Federal space programs or the
commercial space sector. However, in my written testimony, I note that
recent research on ``massive modularity'' highlights significant
vulnerabilities in the distributed international technology systems for
an ubiquitous high-tech product like smartphones,\11\ and thus
potential cybersecurity risks and the nationality of lead firms and
their suppliers can matter a great deal.
---------------------------------------------------------------------------
\11\ Eric Thun, Daria Taglioni, Timothy J. Sturgeon and Mark P.
Dallas, ``Why policy makers should pay attention to the concept of
massive modularity: The example of the mobile telecom industry,'' Let's
Talk Development, World Bank blog, June 18, 2021, available at https://
blogs.worldbank.org/developmenttalk/why-policy-makers-should-pay-
attention-concept-massive-modularity-example-mobile; and Joonkoo Lee
and Gary Gereffi, ``Innovation, upgrading, and governance in cross-
sectoral value chains: The case of smartphones,'' Industrial and
Corporate Change (2021), available at https://academic.oup.com/icc/
article/30/1/215/6215046?guest
AccessKey=e382e42f-4a31-46f7-b144-636c78979d69.
Supply Chains & Telecommunications Networks. Your testimony
highlights the telecommunications sector as the largest end-market for
semiconductors. Mobile networks require many components such as
semiconductors, antennas, routers, hardware and software components.
Within USICA, legislation I wrote with Ranking Member Wicker, the
Telecommunications Supply Chain Diversity Promotion Act, was included
to establish a testbed at NTIA to evaluate various interoperable
network architectures and increase vendor diversity within our
---------------------------------------------------------------------------
telecommunications supply chains.
Question 2. Could you discuss the importance of vendor diversity as
a component of supply chain resiliency?
Answer. Senator Hickenlooper, vendor diversity indeed is a key
component of supply chain resiliency for several reasons. First, we
need more detailed and accurate supply-chain maps to indicate which
companies are supplying components and other inputs at different tiers
of complex supply chains in advanced-technology industries such as
semiconductors, aerospace, and pharmaceuticals. We need to know not
only how many suppliers there are at crucial nodes in U.S. and global
supply chains, but also their nationalities, their intellectual
property rights status, and asset ownership, which is not currently
possible with official economic statistics. For example, on May 7,
2021, the CEO of Pfizer, Albert Bourla, stated that the company's
Covid-19 vaccine ``requires 280 different materials and components that
are sourced from 19 countries around the world.'' \12\ This illustrates
the magnitude of the problem. Without greater supply-chain
transparency, the risks of future supply-chain disruptions increase.
---------------------------------------------------------------------------
\12\ Kevin Breuninger, ``Pfizer CEO opposes U.S. call to wave Covid
vaccine patents, cites manufacturing and safety issues,'' CNBC News,
May 7, 2021, available at https://www.cnbc.com/2021/05/07/pfizer-ceo-
biden-backed-covid-vaccine-patent-waiver-will-cause-problems.html.
---------------------------------------------------------------------------
Second, firms have developed several types of ``switching
strategies'' to mitigate the risks of policy-related or other
disruptions to their activities in in global supply chains: (1)
production switching--moving production to other countries not affected
by policy restrictions or supply-side disruptions like natural
disasters; (2) supplier switching--changing sourcing partners to
circumvent restrictions (such as the U.S. ban against Huawei and its
suppliers); and (3) market switching--the strategy of selling products
in alternative countries not affected by restrictions.\13\ While these
firm-level options are predictable, the ability to carry them out
depends on the current organizational and geographic configuration of
global supply chains, and frequently our information about these
features of contemporary industries is inadequate or out of date.
---------------------------------------------------------------------------
\13\ Gary Gereffi, Hyun-Chin Lim, and Joonkoo Lee, ``Trade
policies, firm strategies, and adaptive configurations of global value
chains,'' Journal of International Business Policy (2021), https://
link.springer.com/article/10.1057/s42214-021-00102-z.
---------------------------------------------------------------------------
Third, policy tools are in place to evaluate the impact of certain
foreign direct investment (FDI) transactions on U.S. national security,
such as the Committee on Foreign Investment in the United States
(CFIUS), an interagency committee chaired by the Secretary of the
Treasury authorized to review FDI transactions that produce or deal
with inputs critical to U.S. supply chains. However, a former U.S.
Under Secretary for Industry and Security who has been involved as a
decision-maker in CFIUS deliberations cautions that not all FDI
transactions or prospective foreign buyers involve the same risks, and
thus advises to use this tool judiciously and ``resist a reflexive,
sweeping approach that could undermine long-term U.S. security
interests.'' \14\
---------------------------------------------------------------------------
\14\ Mario Mancuso, ``CFIUS and China in the post-COVID
environment,'' Columbia FDI Perspective, No. 310, July 26, 2021,
available at https://ccsi.columbia.edu/content/columbia-fdi-
perspectives.
---------------------------------------------------------------------------
______
Response to Written Questions Submitted by Hon. Maria Cantwell to
Dr. James A. Lewis
Preparing for Supply Chain Disruptions. In your testimony, you
emphasized the need to strengthen the industrial analysis and support
functions at the Department of Commerce. Impact Washington, the
Manufacturing Extension Partnership (MEP) center in my state, helps
small-and medium-sized manufacturers to better understand their supply
chain vulnerabilities, to improve their cybersecurity posture, and to
identify new opportunities, among other responsibilities.
Question 1. What role should supply chain mapping at the Department
of Commerce play in helping the United States predict and prepare for
supply chain disruptions, and what historical Commerce functions can be
leveraged?
Answer. Commerce needs to start by identifying key technologies
whose supply are vital for national security and economic health. Every
shortage is not a strategic problem. It then needs to identify
potential chokepoints in the supply of those technologies, which often
turn out to be surprisingly fragile and dependent on only two or three
producers. As part of this, it needs to consider how reliant these
supply chains are to just-in-time production and how much has been
stockpiled. The answers will point to potential vulnerabilities, since
just-in-time and small stockpiles reduce resilience in supply.
Commerce used to have a ``Technology Administration,'' headed by an
Undersecretary. It needs to bring this back. Right now, the Commerce
offices that have some insight into supply chain are scattered around
the building and there are significant lacunae in their coverage, since
the focus is often on export controls or trade promotion. The tech
policy function will have to be rebuilt almost form scratch.
Question 2. In your view, how can additional resources at the
Department of Commerce, including for cybersecurity support at the
Manufacturing Extension Partnership program, help to prepare small-and
medium-sized businesses for disruptions and bolster the Nation's supply
chain resiliency?
Answer. Commerce can help small-and medium-sized businesses (SME)
by reinforcing market mechanism for supply chain resilience. To use
chips as an example, there are brokers in that market who know their
segments and the state of supply better than anyone else. Commerce
needs to find ways to take advantage of these deep pools of knowledge
and identify if there are areas where this deep knowledge is lacking.
Written surveys under the Defense Production Act are not adequate.
Commerce can act as an intermediary to connect small-and medium-sized
businesses to these pools of knowledge, and that means commerce must
know the market and the players the same way an analyst on Wall Street
knows them (and that means a lot of time on the phone, plant visits,
etc.).
On cybersecurity, while it is not in the Committee's jurisdiction,
the best way to help small-and medium-sized businesses is to connect
them to DHS's Cybersecurity and Infrastructure Administration (CISA).
Commerce does not have the expertise for this area and it would be
redundant for it to develop it. The best support function might be to
advise companies on foreign cybersecurity and privacy requirements that
affect exports, particular the requirement of the European Union, where
Commerce's ITA probably has expertise.
______
Response to Written Questions Submitted by Hon. Jacky Rosen to
Dr. James A. Lewis
Impact of semiconductor shortage on the tourism economy. The COVID-
19 pandemic, which has created shifts in global demand, including a
severe downturn in the travel and tourism industry, which in turn
dramatically decreased demand for rental cars. Rental car companies
sold off close to half of their fleets last year when travel halted,
and are now struggling to restock fleets as auto manufacturers are
idled by the global semiconductor shortage.
Now, as travel and tourism rebounds for places like Las Vegas,
visitors are unable to find available rental cars or face extremely
high prices. This directly impacts whether or not individuals and
families choose to travel at all--particularly for outdoor recreation
destinations in states like Nevada that can only be reached by car,
even after arriving in the state by air.
The White House's 100-day Supply Chain Review recommends addressing
such issues by building a diverse and accessible talent pipeline for
jobs in the semiconductor industry through significant investments in
the STEM talent pipeline.
Question 1. Dr. Lewis, could you please elaborate on the benefits
of investments in the STEM talent pipeline to improve our domestic
semiconductor capacity and discuss some ways in which Congress might
support that effort?
Answer. Semiconductor manufacturing requires a high tech workforce.
The American STEM workforce is strong, but there are persistent
shortages in some areas. The U.S. has an advantage in that its
universities remain the most attractive for STEM graduate education,
but in many cases, the majority of students are fairing (often Chinese)
because of the cost to American students. Increasing the number of
American STEM students would benefit innovation and economic growth
across the board.
The best way to build a STEM workforce in the U.S. is to provide
students with financial incentives to get STEM degrees. The motto for
this is ``pay them and they will come.'' The need to create financial
incentives to build the STEM workforce has been a consistent theme for
more than a decade. The intent is to duplicate success that began in
the Eisenhower administration with the 1958 National Defense Education
Act, which created and sustained America's high -tech workforce for
decades. Funding university research will also help, as graduate
students from these programs will populate the high tech industry.
Supply chain risk management. Recent, unprecedented breaches have
revealed the cyber risks to our information and communications supply
chain. If a product could be compromised and go unnoticed for months,
as in the case of the SolarWinds attack, how many more software supply
chain compromises are out there at this very moment?
To address cyber risks to our supply chains, President Biden
directed the Secretaries of Commerce and Homeland Security--through
CISA--to submit a report on supply chains for critical sectors and
subsectors of the information and communications technology industrial
base within 100 days.
Question 2. How can the Department of Commerce better collaborate
with CISA to track and resolve known cyber vulnerabilities in our
information and communications technology supply chain before an attack
takes place?
Answer. Collaboration between NIST and CISA is essential for better
cybersecurity. NIST maintains the National Vulnerability Data Base.
Legislation passed in November 2020 (the Internet of Things
Cybersecurity Improvement Act) also requires it to work with the
Department of Homeland Security to develop and publish guidelines on
vulnerability disclosure and remediation for Federal IT systems. CISA
has the authority to issue binding operational directives that require
agencies to address vulnerabilities. . In combination, this can be
effective. While this system works well, areas of improvement include
timeliness, ensure broad dissemination, and improve the ability to
integrate input on vulnerabilities from private sector researchers.
Question 3. And in your view, would supply chain risk management
standards, like the one published by the Department of Commerce via
NIST, have prevented the SolarWinds breach?
Answer. SolarWinds was the result of 1) hostile Russian action and
2) poor coding practices. A more assertive diplomatic policy is the
best response to the first. Sanctions or petulant letters to the
Kremlin are insufficient. The May 2021 Executive Order, which tasked
NIST to develop standards for secure coding which would then become
mandatory for software products and service sold to the Federal
government, is the best answer to the second. Companies, often
unwittingly, sell vulnerable IT products and mandatory standards can
begin to change this.
______
Response to Written Question Submitted by Hon. Kyrsten Sinema to
Dr. James A. Lewis
Federal Investment in Semiconductors. In your written testimony,
you describe how other nations have subsidized their own domestic
industries for decades, while the United States has not.
Question. Why is it important that Congress support domestic
semiconductor manufacturing in the U.S. Innovation and Competition Act?
Answer. Companies make business decisions on where to locate or
expand facilities, based on the cost of different locations and access
to resources (like a skilled workforce or a good educational system).
Semiconductor production provides real economic benefits to
jurisdictions where it is located and semiconductors are a growth
market that justify investment. Countries compete for a facility by
offering tax breaks, educational support, infrastructure and land
guarantees and other subsidies. They have assumed, correctly, that the
net gain justifies the cost of these subsidies.
The United States still has a dominant position in the
semiconductor industry when measured by overall market share, but not
in all segments of it. It leads in design and in the production of
semiconductor manufacturing equipment, but not in fabrication (fabs).
This was not a concern until China became a hostile competitor. In his
celebratory speech for the 100th anniversary of the founding of the
Chinese Communist Party, Xi Jinping said China is ``good at destroying
the old world'' and those who oppose it ``will find their head broken
and blood flowing against a great wall of steel built with the flesh
and blood of more than 1.4 billion Chinese people!'' Rhetorical
flourishes to be sure, but a good indicator of China's intent and the
need to offset any potential vulnerability in the supply of this key
technology. Additionally, many commentators have pointed to the
strategic risk of depending on Taiwan as the primary source for
advanced chip fabrication, given its proximity to China and China's
intent to do to Taiwan what it did to Hong Kong. All of this points to
the need to incentivize an increased chip-making capacity in the United
States.
Chip production in the U.S. has decline from 35 percent to 10
percent over two decades. The goal is to rebuild this share by having
fabs locate in the United States. To do this, the U.S. will need to
provide incentives if it is to compete against other countries who also
want fabs on their territory. Arguments against subsidies are that they
distort the market or that the semiconductor industry does not need
funding. This does not recognize competition with China and the use of
subsidies by many nations. There is fierce competition. These subsidies
by other governments make it more expensive to build a fab in the U.S.
than in other countries. A decision by Congress not to fully fund the
semiconductor industry will keep the United States at a disadvantage
and harm national security. Semiconductors are the foundational
technology of the 21st century. They drive economic and military
digitalization. The United States needs reliable and assured access to
semiconductor and it can no longer safely rely on a supply chain
connect to China.
______
Response to Written Questions Submitted by Hon. Raphael Warnock to
Dr. James A. Lewis
Supply chain threats are not only a result of specific national
security components built overseas, but also a result of the failure or
inability for domestic industries here at home to grow. Just last year,
Congress directed the Department of Defense to assess cybersecurity
threats to the defense industrial base and the ability of the
Department's industrial base and private sector partners to meet
software development needs for our national security. I recently
visited Project Synergy in Warner Robins, Georgia, a cutting-edge
software laboratory built on a partnership between Robins Air Force
Base's software depot maintenance and the regional Mercer College's
engineering and computer science schools. One of their top requests was
increased investment in STEM education and a strong workforce pipeline
to ensure they can grow to meet their current needs and the threats of
the future.
Question 1. What is the role of investments in domestic human
capital, education, and workforce development as a component of supply
chain resiliency--particularly as we invest in critical growth
industries like cybersecurity and computing?
Answer. In 1983, Deng Xiaoping looked around China and found it
lagging far behind in technology. To remedy this, he created programs
to build the STEM workforce by subsiding education and research. He
knew that technological strength and innovation capabilities require a
strong workforce. Deng was inspired in part by the US's National
Defense Education Act (NDEA). This is ironic because in recent decades,
the U.S. has seen the number of STEM student decline while China's
continues to grow. WE all know anecdotally of STEM programs at U.S.
universities where foreign students make up the majority of a class.
The ration of U.S. to foreign is moving in the wrong direction and
support for STEM can change this. Regional and two-year colleges play
an important part in this effort, since they are often best suited to
building the technology workforce.
The easy fix to this is to spend on STEM education by subsidizing
student tuition. A good motto is ``if you pay them, they will come.'' A
program focused on STEM and offering full or partial tuition coverage
for students to obtain degrees in math, physics, material sciences,
computing, and other related disciplines would increase the workforce.
NDEA also supported the study of foreign languages, but a new effort
should focus first on STEM.
Question 2. How can Congress support these efforts?
Answer. Congress can usefully support these efforts in two ways.
The first, as noted above, involves subsiding students to allow them to
choose the school and the program. The second is more difficult, but
the rate of increase in tuition far outpaces inflation. A badly
designed tuition subsidy program could contribute to this, and it may
be necessary to impose tuition caps or limitation on what courses will
be supported, Congress can mandate attention to how to increase the
productivity and rein in costs in higher education, but this is a long-
term problem, and the immediate need is to increase the size of the
STEM workforce
______
Response to Written Question Submitted by Hon. Shelley Moore Capito to
Dr. James A. Lewis
Question. On June 16th, I wrote a letter to Federal Maritime
Commission (FMC) Chairman Maffei regarding the ongoing shipping crisis.
I appreciate Chairman Maffei's expeditious and thorough response to my
letter and the FMC's commitment to doing whatever it can--within their
jurisdiction--to address the issue.
In Chairman Maffei's response, he noted that most ocean containers
and chassis are manufactured in China. It is only recently that other
nations--like India, Vietnam, and Korea--are considering policies to
develop or expand their manufacturing capabilities of intermodal
equipment. You mention in your testimony that one of the U.S.'s
advantages in securing a resilient supply chain are our allies.
In your opinion, what strategies should we take to support a
multinational commercial innovation base?
Answer. Not all products made in China create security risks. To
assess this, we might want to ask how easy it would be to duplicate the
item if China blocked supply, whether there are movements in pricing
that indicated intentional interference with a supply chain or
predatory trade practices, and whether China's share of the market
provides it with an opportunity such interference.
In many instances, manufacturing moved to China because of its low
cost labor, government subsidies, and in some cases, the weak
regulatory structure (as in environmental protections). Labor costs
have risen in China, but as we discovered during the pandemic with
personal protective equipment, a supply chain dominated by China
creates security risks and raises issues with quality and reliability.
Supply chain security requires that we ask in what industries do we
need to reduce dependence on China and what can we continue to safely
export or import from China (recognizing that this is a shrinking
space).
We are not alone in having these concerns and a first step is to
work with similarly inclined nations to respond to China's predatory
trade practices. Low labor costs alone do not explain why industries
moved to China, which has displayed a general disregard for its WTO
commitments since it was admitted. Second, we need to invest
domestically and find new ways to cooperate with security partners to
accelerate the ability of private entrepreneurship to create new
technologies.
In many ways, reducing reliance on supply chains that originate in
China is inevitable. China is not interests in global supply chains,
unless it can dominate them. To do this, it will use any means
regardless of its WTO obligations. Distrust of China continues to grow
in the U.S. and elsewhere. While price may dictate continued purchases
form China, both trade and security policy may requires limiting
purchased from China. This will probably be incremental, first
affecting with the most sensitive (from a security perspective)
acquisitions. The issue for the U.S. is to identify where the security
risk are low and continued reliance on China is appropriate. The best
approach for contained would be to encourage other suppliers to enter
the market and penalize China for predatory trade practices.
______
Response to Written Question Submitted by Hon. Maria Cantwell to
Richard Aboulafia
Aviation Workforce. Workforce shortages are known causes of supply
chain disruptions. Maintaining a highly-skilled workforce in the multi-
tiered aviation supply chain helps ensure that firms can meet future
demand for valuable U.S. exports and compete with international firms.
In your testimony, you indicated that market factors such as fuel,
financing, and availability are creating the ``perfect formula'' for
renewed large aircraft orders.
Question. After the COVID-19 pandemic caused smaller tier suppliers
to close manufacturing facilities and consolidate their employees, do
you think the aerospace manufacturing supply chain is prepared to meet
demand? Would you recommend investing further in any existing Federal
programs, such as the Department of Transportation's Aviation Workforce
Development Grants, to strengthen the ability of the aviation sector to
deter long-term risks of workforce shortages?
Answer. First, while I am still optimistic that the market for
single-aisle jetliners is coming back, the arrival of the Covid Delta
variant is clearly putting pressure on aviation recovery indicators. We
could easily see a longer-than-expected slump in air travel demand,
leading to a significantly delayed recovery in new aircraft demand, and
in demand for maintenance, repair, and overhaul services for the
existing fleet. This, in turn, puts pressure on suppliers, who were
just starting to recover from the worst aviation market downturn in
history.
But also importantly, many smaller U.S. aviation industry suppliers
came through, and are still coming through, the crisis by reducing
costs to the greatest extent possible. They did everything they could
to raise money--selling assets, taking on debt, furloughing workers,
cutting headcount, and of course reducing hiring to a bare minimum.
Since this process is unfolding over at least two or three years, that
represents a significant reduction in the number of new employees
entering the industry.
In short, whether or not the market recovers, securing the next
generation of aviation workers remains a key concern.
To me, workforce development and training grants represent the best
use of government dollars to help the aviation industry compete in the
long run. The Department of Transportation's Aviation Workforce
Development Grants is a very strong program. Since funding for
vocational training has fallen markedly over the past few decades, it
would be good to see additional funding enacted to support vocational
training institutions for a broad variety of aerospace functions (CNC
operations, machining, Airframe & Powerplant mechanics, etc.). One
option would be Federal matching grants to the states, educational
institutions, community colleges, and other entities providing this
training. These programs and initiatives will play a key role in the
aviation industry supply base's future competitiveness and health.
______
Response to Written Questions Submitted by Hon. Maria Cantwell to
William ``Lex'' Taylor III
Supply Chain Resiliency. Other hearing witnesses noted the
importance of promoting supply chain resiliency from the bottom up,
with a focus on companies or groups of companies, universities, and
government united by a common goal. By example, Washington state has
cultivated technology and innovation clusters around the maritime,
timber, and aerospace sectors.
Question 1. How can the Department of Commerce integrate smaller,
innovative companies into its supply chain planning activities?
Answer. A suggestion for the Commerce Dept. is to direct NIST to
give more focus toward supporting each State's industry association
partnerships to more directly assist the small and medium companies to
advance and increase their output to the supply chain. An example of
this in Mississippi is the Manufacturing Extension Partnership (MEP)
program administered by the Mississippi Manufacturers Association. The
MEP is giving focused support to small manufacturers for services that
they could ill afford from consulting firms.
The Dept. of Commerce should also work in conjunction with the EPA
to streamline the permitting process for green field and additional
floorspace expansion projects. For instance, develop a secure web
portal to upload required documentation rather than letters, e-mails
and faxes. This would allow for faster permit approvals from that one
portal.
Question 2. What lessons can the Nation take from the private
sector on building resilient supply chain infrastructure in a way that
supports sustainable growth for small-to large-size suppliers?
Answer. The private sector generally will promote discounts or
warranty extensions to entice their customers or prospective customers
to increase business with them. Likewise, the government can do the
same with tax incentives programs and liability protections to entice
manufacturers to invest in America for job growth and facility
expansion to improve the supply chain.
The private sector makes strategic plans for alternative supply in
anticipating interruptions of their main supply sources. The government
should do the same by not limiting strategic reserve contracts to union
only shops or lowest price only contracts.
______
Response to Written Question Submitted by Hon. Shelley Moore Capito to
William ``Lex'' Taylor III
Question. Dr. Gereffi and Mr. Taylor, you both mentioned the need
to be wary of unintended consequences before implementing policy. I
agree and believe that our current market system has been relatively
dynamic when addressing supply disruptions and pulling us out of the
pandemic, especially when given additional flexibility from Federal
regulations. Are there any consequences you believe Congress should be
mindful of? What have been some examples of unintended consequences
your companies has dealt with during the pandemic?
Answer. One of the biggest unintended consequences of government
implementing policy on the current market system is on the procurement
of steel. Within the last year, the average price of hot-rolled coil
(HRC) has tripled from $464/short ton to $1,491/short ton. Spot hot-
rolled coil prices has continued to rise as limited sales and offers
pushed prices above $1,800/short ton earlier this month. The Section
232 tariffs originally put in place to counter Chinese overcapacity of
steel production but were implemented in a way that created numerous
problems for U.S. manufacturers and disrupted North America's critical
supply chains that are critical to our Nation's economic recovery from
the COVID-19 pandemic. The Section 232 tariffs on steel have resulted
in increased production costs, extended lead times, product scarcity,
decreased exports, and workforce shortages that have become detrimental
to domestic manufacturers and a boon to our foreign competitors.
Even with near record steel prices and diminished foreign
competition, U.S. steel mills refuse to operate at full capacity, and
recent consolidation within the industry has resulted in fewer domestic
producers. Our national economic recovery depends on U.S. companies
creating more family-sustaining jobs, not price gouging domestic steel
consuming manufactures. Congress and the Administration need to remove
the Section 232 tariffs on our trading partners and allies, and compel
U.S. steel mills to bring more capacity online and hire more American
workers.
One final example of unintended consequences is the government
stipend to unemployment benefits. While giving much needed help to
those individuals placed on layoff during the early uncertain days of
the COVID pandemic; the lack of forethought for what to do as the
economy recovers has caused a lingering problem for employers to bring
back on that labor force as their respective business recovers. This
has greatly exacerbated the ability to bring the supply chain back on
line.
______
Response to Written Question Submitted by Hon. Jacky Rosen to
Dr. Dario Gil
Impact of semiconductor shortage on the tourism economy. The COVID-
19 pandemic has created shifts in global demand. This includes a severe
downturn in the travel and tourism industry and a dramatic decrease in
demand for rental cars. Rental car companies sold off close to half of
their fleets last year when travel halted, and are now struggling to
restock as auto manufacturers are idled by the global semiconductor
shortage.
As a consequence, despite travel and tourism rebounding in places
like Las Vegas, visitors are unable to find available rental cars or
face extremely high prices. This directly impacts whether or not
individuals and families choose to travel at all--particularly for
outdoor recreation destinations in states like Nevada that can only be
reached by car, even after arriving in the state by air.
The White House's 100-day Supply Chain Review recommends addressing
such issues by building a diverse and accessible talent pipeline for
jobs in the semiconductor industry through significant investments in
the STEM talent pipeline.
Question. The White House's report also suggests that to rebuild
our industrial base and hopefully prevent supply chain disruptions,
like the semiconductor shortage, the Federal government should work
with industry and labor to create and support registered apprenticeship
programs and skilled workers. Dr. Gil, can you discuss ways in which
Congress can help companies like IBM support workforce development?
Answer. Thank you for the question, Senator Rosen. Semiconductor
supply chain disruptions will impact nearly 169 industries in the
United States by year-end, including tourism and hospitality.\1\ A lack
of semiconductors has caused a shortage of point-of-sale machines in
restaurants and bars, hobbling our post-pandemic jobs recovery.\2\
Ultimately, semiconductor ecosystems are driven by the diverse and
constantly evolving talents of American workers. We propose four ways
for Congress to help IBM support workforce development:
---------------------------------------------------------------------------
\1\ ``The Semiconductor Shortage of 2021,'' Goldman Sachs, March
17, 2021. https://www.goldmansachs.com/insights/pages/the-
semiconductor-shortage-of-2021.html.
\2\ ``No Chips, No Tips: How the computer Chip Shortage threatens
Thousands of Restaurant Service Jobs,'' The Washington Post, June 11,
2021. https://www.washingtonpost.com/business/2021/06/11/restaurant-
workers-computer-chip-shortage/.
1. Support the CHIPS Act and the creation of the National
Semiconductor Technology Center (NSTC). The NSTC should be a
force for inclusive, good-paying jobs across the United States.
To this end, the NSTC should collaborate with universities,
community colleges, workforce agencies, and the private sector
to build skills pathways to jobs in the semiconductor industry
---------------------------------------------------------------------------
that result in long-term outcomes for all Americans.
2. Increase funding for registered apprenticeships and reduce
obstacles to the use of apprentices in Federal contracts. In
order to proactively address skills gaps and support continued
skills development among workers, IBM launched the New Collar
Jobs program, which uses registered apprenticeship programs to
create skills pathways for workers without advanced degrees.\3\
IBM has 25 registered apprenticeship roles in 16 states and 24
cities, and we have hired 500 apprenticeship graduates as full-
time IBMers. IBM has partnered with the American Association of
Community Colleges and the Department of Labor to launch the
Expanding Community College Apprenticeships initiative, which
aims to train an additional 16,000 apprentices over three
years.
---------------------------------------------------------------------------
\3\ ``IBM New Collar Programs,'' IBM, https://www.ibm.com/us-en/
employment/newcollar/.
3. As it builds the NSTC, encourage the Department of Commerce to
again convene stakeholders to resolve governance issues in the
electronic exchange of credentials between educators and
employers. Improving the technical infrastructure to better
support the electronic exchange of education and skills-based
credentials would significantly ease the management and
exchange of these certifications, empower learners with trusted
skills-based information, and align their skills to in-demand
jobs. In 2020, IBM joined with other employers, education
institutions--including community colleges--and education
service organizations to demonstrate an education and
employment record exchange. The Department of Commerce played a
---------------------------------------------------------------------------
critical convening role in that demonstration.
4. Modernize pathways to STEM fields. To maintain our global
competitiveness, we must dramatically increase the number of
individuals from underrepresented communities in STEM fields,
as noted in the National Science Board's Vision 2030 report.\4\
IBM has committed to investing $100 million in technology,
assets, resources, and skills development through partnerships
with historically black colleges and universities (HBCUs)
through the IBM Skills Academy Academic Initiative. In
addition, the IBM-HBCU Quantum Center includes twenty-three of
the Nation's HBCUs.\5\ And IBM supports National Science
Foundation (NSF) scholarships in baccalaureate education at
Minority Serving Institutions (MSI) focused upon quantum
science and applied quantum technologies.
---------------------------------------------------------------------------
\4\ National Science Board Vision 2030,'' National Science Board,
May 2020. https://www.nsf.gov/nsb/publications/2020/nsb202015.pdf.
\5\ ``The IBM-HBCU Quantum Center grows rapidly in scope,'' IBM,
February 22, 2021. https://www.ibm.com/blogs/research/2021/02/ibm-hbcu-
quantum-center-expands.
But, while the private sector devotes significant funding to STEM
education, we need to do more to collaboratively addresses urgent areas
of need, share resources, and bring the combined weight of the
government and industry together to ensure increased diversity in STEM
fields. As a start, Congress could reform the Higher Education Act
(HEA) including loosening Federal work study restrictions to
accommodate off-campus work experience in the private sector; expanding
Pell Grants to cover skills education for part-time students and mid-
career professionals; and making career-oriented education beyond
bachelor's and other traditional education degrees eligible for Federal
student loans.
______
Response to Written Question Submitted by Hon. Kyrsten Sinema to
Dr. Dario Gil
Federal Investment in Semiconductors. The Senate passed the U.S.
Innovation and Competition Act in June, which builds on the CHIPS for
America Act by providing $50 billion for American semiconductor
manufacturing.
Question. How will this Federal funding for CHIPS Act grants
support American semiconductor manufacturing and enable domestic
manufacturers to develop state-of-the-art semiconductor technology?
Answer. Thank you for the question, Senator Sinema. To build
semiconductor supply chain resilience and ensure that next-generation
semiconductor breakthroughs occur in the United States, we must
manufacture and invest in research and development. One cannot happen
without the other. This requires a robust investment in the United
States, and therefore we strongly support CHIPS Act funding for
semiconductor manufacturing grants, as well as the creation of the
National Semiconductor Technology Center (NSTC). Together, they address
short-term supply chain challenges, and long-term research and
development needs by leveraging existing semiconductor ecosystems.
As outlined in my written testimony, a well-structured and governed
public-private NSTC could address immediate shortfalls by building on
billions of dollars in previous and existing semiconductor
infrastructure investments. In addition, the NSTC would promote
collaboration between industry, academia, and government in advanced
development, prototyping and packaging, and advanced manufacturing
capabilities, serving as an important link between academic research,
government R&D labs and programs, company specific R&D, and product
manufacturing. Such an approach would help spur new capacity and job
creation in America, enabling American innovators, big and small, to
move semiconductor designs to any manufacturing plant. And it would
provide needed flexibility in the United States manufacturing supply
chain to support both government and commercial needs.
Furthermore, to deliver outcomes long into the future, the NSTC
should leverage existing, proven ecosystems for semiconductor research
and development with strong track records of leading-edge innovation.
IBM has a track record of semiconductor breakthroughs: in May, we
unveiled the world's first 2 nanometer chip, which could quadruple cell
phone battery life, cut the carbon footprint of data centers, and
drastically speed up a laptop's functions. This was achieved by IBM at
the Albany Research Center, an existing multi-company semiconductor
ecosystem with over 20 industry and university partners. Work on
advanced photo-lithography capability including EUV (Extreme Ultra-
Violet Lithography), advanced logic pathfinding, AI hardware research,
and the development of new semiconductor materials is already underway
at the Center, in New York. It offers an ideal environment from which
to build and scale the NSTC. Fully funding the CHIPS Act, including the
NSTC, will create a rising tide that will lift all boats.
______
Response to Written Question Submitted by Hon. John Hickenlooper to
Dr. Dario Gil
Tech Apprenticeships & Credentials. In your testimony you advocated
for technical apprenticeships and credential systems in order to grow
our high-tech workforce and support the semiconductor industry. As
Governor of Colorado, we started the National Cybersecurity Center in
Colorado Springs to provide students and local governments with hands-
on cyber training and skills.
Question. What role should these programs play in supporting mid-
career transitions and creating new professional pathways?
Answer. IBM supports the creation of multiple education and
training pathways that lead to good jobs. The National Cybersecurity
Center (NCC) in Colorado Springs provides in-demand cybersecurity
skills and training. Graduates often enter local government, where they
deploy their skills to protect highly sensitive information and
systems. Educational pathways, such as those offered by the NCC,
improve equity, jobs, and pay. Making them more widely available is an
economic imperative that our country cannot afford to ignore. IBM urges
three additional steps to support mid-career transitions and the
creation of new professional pathways:
1) Better connect pathways to existing education and training
systems: Nationally, only 13 percent of students who enrolled
in community college in 2010 earned a bachelor's degree by
2016. In most states, reducing obstacles to transferring
credits would significantly improve those outcomes while
reducing taxpayer and student costs. An example of good
practices in Colorado is Pikes Peak Community College (PPCC),
which offers AAS and Certificates in Cyber Security.
Transferring credits to the University of Colorado at Colorado
Springs (UCCS) is possible and the courses that transfer from
PPCC to UCCS are clearly defined.\1\ PPCC and UCCS are to be
commended on the clarity of their transfer pathway. Reducing
obstacles to educational pathways could also bolster the value
of NCC training.
---------------------------------------------------------------------------
\1\ https://transfer.uccs.edu/sites/g/files/kjihxj1551/files/
inline-files/BC%20CSBA-Cyber%
2021-22.pdf
2) Use industry recognized certifications: For example, NCC awards
certifications to completers but may not award the most
valuable industry recognized certifications in the Colorado
employment marketplace. CIO Magazine lists 10 top IT
certificates, including cybersecurity.\2\ NCC should ensure
that its training (and the certificates awarded) best align
with the needs of the Colorado job market. IBM is working with
employers on a Learning Credential Network to ease the
management and exchange of these kinds of credentials--
providing a secure and trusted source for all skills-based
credentials.
---------------------------------------------------------------------------
\2\ https://www.cio.com/article/3562331/top-15-it-certifications-
in-demand-for-2021.html
3) Increase apprenticeship funding: Apprenticeships can be a
valuable pathway to jobs for Colorado and NCC students and help
create a more diverse workforce. In October 2017, IBM launched
its first of a kind technology focused Department of Labor
Registered Apprenticeship Program. The program grew nearly
twice as fast as expected in its first year. IBM
apprenticeships focus on building skills in rapidly growing
fields, such as cybersecurity and cloud network management.
This 12-24 month earn while you learn program pairs apprentices
with an IBM mentor to work through real-world projects and
provides traditional classroom learning in technology's
fastest-growing fields. IBM is partnering with the American
Council on Education (ACE) to increase transfer of credit from
apprenticeship programs. To achieve this goal, ACE will
evaluate selected apprenticeship programs for college credit
and workplace competencies based on input from schools and
employers. Higher education partner institutions will receive
support to articulate the apprenticeship credits into degree
programs.
______
Response to Written Question Submitted by Hon. Kyrsten Sinema to
John S. Miller
Federal Investment in Semiconductors. In your written testimony,
you describe the importance of the $50 billion authorized by the Senate
in the CHIPS Act and funded in the U.S. Innovation and Competition Act
for the semiconductor industry.
Question. In addition to direct investment, what other options
would you recommend either the Commerce Department or Congress pursue
to further increase the capacity of American semiconductor
manufacturing?
Answer. Thank you for the question, it is an important one given
the importance of U.S. semiconductor leadership to both economic
competitiveness and national security, and also due to the reality that
increasing domestic manufacturing capacity will take time. There are
several options we recommend the Commerce Department and Congress
pursue to address this issue.
First, it will be important to utilize tax policy to encourage and
enable greater investment in the U.S. semiconductor ecosystem, such as
through maintaining a competitive corporate tax environment, offering
investment tax credits (ITCs) to further incentivize building new and
modernizing existing semiconductor manufacturing facilities in the
United States, and ensuring companies may continue to deduct research
and development (R&D) expenses in the year incurred.
Second, the U.S. should enhance cooperation with global partners
and allies to ensure stability of the global semiconductor supply chain
by convening formal supply chain reviews and other efforts to minimize
damaging interruptions. The U.S. should also deepen trade and
investment relationships and address unintended trade barriers that
restrict supply chain resilience by organizing tech-sector specific
dialogues, increasing digital trade partnerships, enhancing regulatory
compatibility, and reducing barriers to trade through increased
bilateral, regional, and multilateral engagement with partner
economies. The newly launched EU-U.S. Trade and Technology Council
provides an excellent venue for pursuing international cooperation on
semiconductor supply chain issues.
Third, the U.S. needs to strengthen public-private partnerships by
convening industry and government experts to enable a holistic view of
the semiconductor supply chain and risks, and utilize such partnerships
to develop a coherent, streamlined, holistic, coordinated long-term
approach to address ICT supply chain security.
Fourth, the U.S. should support semiconductor R&D through
innovation-forward economic policies, such as those that open markets
and minimize burdens on U.S. overseas sales to ensure continued robust
R&D funding and market leadership.
Fifth, the U.S. should advance policies to ensure that America has
the highly-skilled technology workforce necessary to support increased
semiconductor manufacturing capacity, including providing funding for
science, technology, engineering, and mathematics (STEM) and computer
science education and advancing legislative proposals for immigration
reforms.
______
Response to Written Questions Submitted by Hon. Raphael Warnock to
John S. Miller
Supply chain threats are not only a result of specific national
security components built overseas, but also a result of the failure or
inability for domestic industries here at home to grow. Just last year,
Congress directed the Department of Defense to assess cybersecurity
threats to the defense industrial base and the ability of the
Department's industrial base and private sector partners to meet
software development needs for our national security. I recently
visited Project Synergy in Warner Robins, Georgia, a cutting-edge
software laboratory built on a partnership between Robins Air Force
Base's software depot maintenance and the regional Mercer College's
engineering and computer science schools. One of their top requests was
increased investment in STEM education and a strong workforce pipeline
to ensure they can grow to meet their current needs and the threats of
the future.
Question 1. What is the role of investments in domestic human
capital, education, and workforce development as a component of supply
chain resiliency--particularly as we invest in critical growth
industries like cybersecurity and computing?
Answer. Addressing America's workforce shortage must be at the top
of the list when tackling the cybersecurity and technology challenges
this Nation faces. The global cybersecurity workforce shortage is
particularly acute, and impacts companies and governments alike.
Projections as of a few years ago estimated there would be
approximately 3.5 million open cybersecurity jobs globally in 2021,
with the United States accounting for roughly a half-million of those
open positions. My guess is that the actual numbers today may well be
higher.
Investment in education and training of the U.S. workforce is a
part of the solution, and many ITI member companies partner with
universities in support of science, technology, engineering, and
mathematics (STEM) education indicatives. Additionally, the workforce
shortage provides a good reminder of one of the reasons ITI has long
advocated for a collaborative, public-private approach to resolving
cybersecurity and supply chain challenges; the partnership model
enables both government and industry to leverage shared cybersecurity
resources they would otherwise not have access to.
Question 2. How can Congress support these efforts?
Answer. ITI and our member companies appreciate the U.S. Innovation
and Competition Act's (USICA) sponsors for their attention to the
workforce issue, by addressing STEM education which is foundational to
training workers needed to enable the technologies of the future as
well as the diversity pipeline. The United States operates at maximum
global competitiveness when our workforce is both well-equipped in
terms of both knowledge and skills and diverse. ITI is supportive of
numerous pieces of legislation which, if passed, would promote
cultivating a proficient workforce, including the Advanced
Technological Manufacturing Act sponsored by Senators Cantwell and
Wicker. Other legislation that ITI has been supportive of that address
the workforce challenge include the Rural STEM Education Act sponsored
by Senators Wicker, Rosen, Cornyn, and Hassan; and the and the
Institutional Grants for New Infrastructure, Technology, and Education
for (IGNITE) HBCU Excellence Act sponsored by Senators Coons and Scott.
______
Response to Written Questions Submitted by Hon. Shelley Moore Capito to
John S. Miller
Question 1. I believe the significant investments and priorities
that were included in the United States Innovation and Competition Act
(USICA) will keep the United States competitive now and into the
future. A critical component was the funding needed to implement
provisions of the CHIPS Act. However, a number of these provisions may
take years to implement and even longer to bear fruit. What are some
short-term measures that should be taken to address the current
semiconductor shortage? Can those measures be handled by the private
sector or are there recommendations for the Department of Commerce in
order to address the shortage?
Answer. Thank you for the question, it is an important one given
both the significance of the semiconductor challenge facing the U.S.,
but also due to the reality that increasing domestic manufacturing
capacity will take time.
First, it is important to identify opportunities to utilize tax
policy in the near-term to encourage and enable greater investment in
the U.S. semiconductor ecosystem, such as through maintaining a
competitive corporate tax environment, offering investment tax credits
(ITCs), and ensuring companies may continue to deduct research and
development (R&D) expenses in the year incurred.
Second, the U.S. has the opportunity now to enhance cooperation
with global partners and allies to ensure stability of the global
semiconductor supply chain by convening formal supply chain reviews and
other efforts to minimize damaging interruptions. Deepen trade and
investment relationships and address unintended trade barriers that
restrict supply chain resilience by organizing tech-sector specific
dialogues, increasing digital trade partnerships, enhancing regulatory
compatibility, and reducing barriers to trade through increased
bilateral, regional, and multilateral engagement with partner
economies.
Third, the private sector has significant expertise on supply chain
management that can benefit U.S. government stakeholders including the
Department of Commerce. The U.S. needs to strengthen public-private
partnerships by convening industry and government experts to enable a
holistic view of the semiconductor supply chain and risks, and utilize
such partnership to develop a coherent, streamlined, holistic,
coordinated long-term approach to address ICT supply chain security.
Question 2. I agree with the sentiments in your testimony about the
inclusion of Regional Technology Hubs in the USICA. I believe that
geographic diversity of supply chains are not only beneficial to
producers, but especially important to the economic development of more
rural communities. Could you elaborate on how supporting such hubs will
support innovation, especially among smaller players?
Answer. ITI welcomes funding for the regional technology hubs to
help increase the geographic diversity of supply chains across the
U.S., and I appreciate your point that such hubs will also support
innovation among smaller players, particularly as the presence of such
hubs should help spur workforce development and attract the highly
skilled workforce of the future to rural and underserved communities
that smaller players will need to support innovation. Maintaining a
trained domestic workforce is key to ensuring a resilient semiconductor
supply chain in the United States, and is a necessary precursor to
ensure the talent is available to support the Regional Technology Hubs.
Policymakers should support significant funding for science,
technology, engineering, and mathematics (STEM) and computer science
education through these technology hubs, which should consist of
technical training opportunities and new advanced hardware for
teachers; expanded access to high-quality instructional materials and
rigorous STEM and computer science coursework; hands-on practical
experience for students; and effective regional partnerships. Moreover,
policymakers must ensure that all students have access to high-caliber
STEM and computer science education, including underrepresented
minorities and girls.
Developing Regional Technology Hubs will also provide an additional
strategic benefit for the United States: improving the resiliency of
U.S. semiconductor and other supply chains. The ICT SCRM Task Force's
study of the impacts from COVID-19 on ICT supply chains underscored the
need for an approach to improving supply chain resiliency that was
already underway over the last six years: diversifying supply chains to
a broader array of locations and away from single source/single region
suppliers. While the study was focused on the impacts of single source/
single region suppliers outside the U.S., there are a variety of
reasons why increasing the geographic diversity of supply chains within
the U.S. can also improve resiliency, for example, by broadening
supplier networks and lessening the overall potential impacts of
natural disasters such as hurricanes, floods, and wildfires on
manufacturing, logistics, transportation and other elements of supply
chains.
Question 3. You mention in your testimony that the Department of
Commerce should be asked which bureau, office, or entity is best
equipped to coordinate supply chain resiliency strategies. In your
opinion, which bureau, office, or entity should Commerce consider to be
the lead?
Answer. What is more important than identifying which bureau,
office or entity is designated as the lead is ensuring that whichever
entity is so designated is fully resourced, equipped with a sound
Commerce-wide strategy, and empowered to lead and coordinate on behalf
of all Commerce Department entities to execute on that strategy. The
Bureau of Industry and Security could potentially serve as the
convening force to coordinate supply chain resiliency strategies and
activities at Commerce, based on its recent track record of working
closely with industry and demonstrated expertise in delivering the 100-
day review report. However, it is important to point out that BIS did
not execute that report alone, and worked with ITA and other entities
within the Department of Commerce, and also that BIS has a substantial
number of other priorities including in the expansive area of export
controls.
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