[Congressional Record (Bound Edition), Volume 149 (2003), Part 10]
[Senate]
[Pages 13968-13971]
[From the U.S. Government Publishing Office, www.gpo.gov]




   THE NATIONAL SECURITY ASPECTS OF THE GLOBAL MIGRATION OF THE U.S. 
                         SEMICONDUCTOR INDUSTRY

  Mr. LIEBERMAN. Mr. President, I rise today to express my concern 
about the loss to the U.S. economy of most of our high-end 
semiconductor chip manufacturing sector, the threat of the subsequent 
loss of the semiconductor research and design sectors, and the 
resulting serious national security implications.
  The composition of the global semiconductor industry has changed 
dramatically in recent years. East Asian countries are leveraging these 
changing market forces through their national trade and industrial 
policies to drive a migration of semiconductor manufacturing to that 
region, particularly China, through a large array of direct and 
indirect subsidies to their domestic semiconductor industry. If this 
accelerating shift in manufacturing overseas continues, the U.S. will 
lose the ability over time to reliably obtain high-end semiconductor 
integrated circuits from trusted sources, at a time when these advanced 
processing components are becoming a crucial defense technology 
advantage to the U.S. Experts in the military and intelligence sectors 
have made clear that relying on semiconductor integrated circuits 
fabricated outside the U.S., e.g. in China, Taiwan and Singapore, is 
not an acceptable national security option. The economic impact in the 
U.S. of the loss of manufacturing, research and design has equally 
serious implications.
  I would like to direct my colleagues' attention to a White Paper, 
that I am asking to be included in the Congressional Record, which 
outlines the fact that this off-shore migration of high-end 
semiconductor chip manufacturing is a result of concerted foreign 
government action, through an effective combination of government trade 
and industrial policies which have taken advantage of opportunities 
resulting from market forces and changes in the semiconductor industry. 
This White Paper lists a number of possible actions the defense and 
intelligence communities should consider to prevent this serious loss 
of U.S. semiconductor manufacturing and design capability. I have also 
requested that the Department of Defense, the National Security Agency, 
and the National Reconnaissance Office submit reports and plans of 
action to respond to this impending national security threat. I have 
asked that these reports provide an analysis of the semiconductor 
manufacturing issues that relate to defense and national security, as 
well as an analysis of the potential solutions that are discussed in 
the White Paper. I hope these reports will detail the steps that will 
be taken to counteract this loss of critical components for U.S. 
defense needs, as well as a timetable for the implementation of such 
steps. I note that the Armed Services Committee report on the bill we 
passed yesterday requests similar information.
  I hope we can act promptly to avoid a potential national security 
crisis in terms of reliable access to cutting-edge technology necessary 
to the critical defense needs of our country. The loss goes beyond 
economics and security. What is at stake here is our ability to be 
preeminent in the world of ideas on which the semiconductor industry is 
based. A prompt, concerted effort by the defense and intelligence 
community in cooperation with industry can reverse this trend of off-
shore migration of manufacturing, research and design that is now under 
way and that will become essentially irreversible if no action is taken 
in the next few months.
  I ask consent that my ``White Paper on National Security Aspects of 
the Global Migration of the U.S. Semiconductor Industry'' be printed in 
the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

 White Paper: National Security Aspects of the Global Migration of the 
                      U.S. Semiconductor Industry

       The U.S. is facing an imminent threat to national security 
     as a result of foreign government actions that have 
     capitalized on the changing composition of the semiconductor 
     industry. Our concern is the loss to the U.S. economy of the 
     high-end semiconductor manufacturing sector, the potential 
     subsequent loss of the semiconductor research and design 
     sectors, and the grave national security implications that 
     this would entail. East Asian countries are leveraging market 
     forces through their national trade and industrial policies 
     to drive a migration of semiconductor manufacturing to that 
     region, particularly China. If this accelerating shift in 
     manufacturing overseas continues, the U.S. will lose the 
     ability to reliably obtain high-end semiconductor integrated 
     circuits from trusted sources. This will pose serious 
     national security concerns to our defense and intelligence 
     communities. Historically, shifts in manufacturing result 
     over time in the migration of research and design 
     capabilities. This is especially true of leading-edge 
     industries such as advanced semiconductor manufacturing, 
     which requires a tight linkage and geographic proximity for 
     research, development, engineering and manufacturing 
     activities. The economic impact in the U.S. of the loss of 
     manufacturing, research and design has equally serious 
     implications.
       The Pentagon's Advisory Group on Electron Devices (AGED) 
     has warned that the Department of Defense (DoD) faces 
     shrinking advantages across all technology areas due to the 
     rapid decline of the U.S. semiconductor industry, and that 
     the off-shore movement of intellectual capital and industrial 
     capability, particularly in microelectronics, has impacted 
     the ability of the U.S. to research and produce the best 
     technologies and products for the nation and the war-fighter. 
     This global migration has also been discussed in a recently 
     released National Research Council/National Academy of 
     Sciences report on the U.S. semiconductor industry, which 
     details the significant growth in foreign programs that 
     support national and regional semiconductor industries. This 
     support is fueling the structural changes in the global 
     industry, and encouraging a shift of U.S. industry abroad.


                critical national security applications

       Studies have shown that numerous advanced defense 
     applications now under consideration will require high-end 
     components with performance levels beyond that which is 
     currently available. These cutting-edge devices will be 
     required for critical defense capabilities in areas such as 
     synthetic aperture radar, electronic warfare, and image 
     compression and processing. Defense needs in the near future 
     will also be focused on very high performance for missile 
     guidance (``fire and forget''), signal processing, and 
     radiation-hardened chips to withstand the extreme 
     environments of space-based communications and tactical 
     environments. There are profound needs for much more advanced 
     onboard processing capabilities for unmanned aerial vehicles 
     undertaking both reconnaissance and attack missions, for 
     cruise missiles and ballistic missile defense, and for the 
     infrastructure that connects these systems. As the military 
     transforms to a ``network-centric'' force in the future, the 
     DoD's Global Information Grid will demand extremely high-
     performance computation to overcome the technical barriers to 
     a seamless communication network between terrestrial 24 and 
     48 color optical fiber and satellite platforms transmitting 
     in 100+Mbps wireless. Such performance will also be necessary 
     for ``last-mile'' extremely high-speed connectivity to 
     platforms and to the soldier in the field, as well as for the 
     high-speed encryption requirements for a secure communication 
     system. Intelligence agencies will increasingly need the most 
     advanced chips for very high-speed signal processing and data 
     analysis, for real-time data evaluation, for sensor input and 
     analysis, and for encryption and decryption.
       As studies for DARPA have indicated, the next several 
     generations of integrated circuits, which emerge at roughly 
     eighteen-month intervals as predicted by Moore's Law, offer 
     the potential for exponential gains in defense war-fighting 
     capability. It is erroneous to believe that future U.S. war-
     fighting capability will be derived from chips one or two 
     generations behind current state-of-the-art technology. Many 
     of the integrated circuits and processing platforms that

[[Page 13969]]

     are coming in to use, and which are at the heart of DoD 
     defense strategies, are clearly at the cutting edge in their 
     capabilities.
       With the dramatic new capabilities enabled by rapidly 
     evolving chip technologies, DoD and the intelligence agencies 
     will need to be first adopters of the most advanced 
     integrated circuits, and will be increasingly dependent on 
     such chips for a defense and intelligence edge. If the 
     ongoing migration of the chip manufacturing sector continues 
     to East Asia, DoD and our intelligence services will lose 
     both first access and assured access to secure advanced chip-
     making capability, at the same time that these components are 
     becoming a crucial defense technology advantage. Informed 
     elements of the intelligence community therefore have made 
     clear that relying on integrated circuits fabricated outside 
     the U.S. (e.g. in China, Taiwan and Singapore) is not an 
     acceptable national security option.


     economic importance and changes in the semiconductor industry

       The influence of the semiconductor industry to the U.S. 
     economy in the last decade is difficult to overstate. The 
     U.S. semiconductor sector currently employs 240,000 people in 
     high-wage manufacturing jobs, and had sales totaling $102 
     billion in the global market in 2000 (50 percent of total 
     worldwide sales). In 1999, this sector was the largest value-
     added industry in manufacturing in the U.S.--larger than the 
     iron, steel and motor vehicle industries combined. The 
     productivity growth in the U.S. in the 1990s was due in 
     significant part to the computer production and advances in 
     information technology that depended on the semiconductor 
     industry. The economic implications of the potential 
     migration of high-end semiconductor chip research, design and 
     manufacturing to off-shore facilities has the potential to 
     cause (and, it could be argued, is already causing) long-term 
     damage to the economic growth of this country, with 
     corresponding national security ramifications.
       A fundamental change in the semiconductor industry has 
     been, in very simplified form, that the price to performance 
     curve has reduced revenue in the industry dramatically over 
     the last decade. During the early 1960's, and continuing 
     until about 1994, the compound annual growth rate in revenue 
     of the industry was 16 percent. From 1994 to the present, the 
     growth rate has been approximately 8 percent. This situation 
     is combined with the very large costs associated with the 
     development of new 300 mm fabrication facilities (``fabs''), 
     as well as the increasing complexity and cost of research and 
     design as the industry must develop methods other than the 
     traditional scaling methods (making all aspects of the chips 
     smaller and smaller) in order to increase performance. These 
     factors, and the current recession, are driving the industry 
     to consolidations. As those consolidations take place, new 
     business models, such as fabless companies and consortia, 
     come into play.


   a process driven by government policy in reaction to market forces

       The principal reason that China is becoming a center of 
     semiconductor manufacturing is the effective combination of 
     government trade and industrial policies which have taken 
     advantage of opportunities resulting from market forces and 
     changes in the semiconductor industry. In a sector 
     characterized by rapidly increasing capital costs and the 
     need to have access to large, rapidly growing markets, such 
     as China's, Chinese government policies and subsidies can 
     decisively change the terms of international competition. The 
     impact of these incentives is accentuated as a result of the 
     multi-year recession, which has sharply reduced revenue and 
     increased the competition for markets to absorb the 
     industry's characteristic high fixed costs. Government 
     policies in Taiwan were already drawing new manufacturing 
     capability, as well as tool and equipment makers, to its 
     science and technology park complex. However, in the last two 
     years, Chinese policy has resulted in a sharp upsurge in 
     construction of fabrication facilities in that country, with 
     plans for a great many more.
       The U.S. high-tech industry has been in a recession the 
     last two years, with sharply reduced sales and severe losses. 
     The number of state-of-the-art U.S. chip manufacturing 
     facilities is expected to sharply decrease in the next 3-5 
     years to as few as 1-2 firms that now have the revenue base 
     to own a 300 mm wafer production fab, and likely less than a 
     handful of firms. Although the U.S. currently leads the world 
     semiconductor industry with a 50 percent world market share, 
     the Semiconductor Industry Association estimates that the 
     U.S. share of 300 mm wafer production capacity will be only 
     approximately 20 percent in 2005, while Asian share will 
     reach 65 percent (only 10 percent of this from Japan). The 
     remaining state-of-the-art U.S. chip-making firms face great 
     difficulty in attaining the huge amounts of capital required 
     to construct next-generation fabs. This situation stands in 
     contrast to that in China. To ensure that they develop the 
     ability to build the next-generation fabrication facilities, 
     the Chinese central government, in cooperation with regional 
     and local authorities, has undertaken a large array of direct 
     and indirect subsidies to support their domestic 
     semiconductor industry. They have also developed a number of 
     partnerships with U.S. and European companies that are cost-
     advantageous to the companies in the short-term. The Chinese 
     government is successfully using tax subsidies (see below) to 
     attract foreign capital from semiconductor firms seeking 
     access to what is expected to be one of the world's largest 
     markets. This strategy, which is similar to that employed by 
     the European Union in early 1990s, is a means of inducing 
     substantial inflows of direct investment by private firms. 
     Indeed, much of the funding is Taiwanese, driven by the tax 
     incentives and their need for market access, especially for 
     commodity products such as DRAMs. The strategy does not rely 
     on cheaper labor, as that is a small element in semiconductor 
     production.
       The Chinese are, however, able to increasingly draw on 
     substantially larger pools of technically trained labor as 
     compared to the U.S., from the large cohorts of domestic 
     engineering graduates. Importantly, the output of Chinese 
     universities is supplemented by large numbers of engineers 
     trained at U.S. universities and mid-career professionals who 
     are offered substantial incentives to return to work in 
     China. These incentives for scientists and engineers, which 
     include substantial tax benefits, world-class living 
     facilities, extensive stock options taxed at par value, and 
     other amenities, are proving effective in attracting 
     expatriate labor. They also represent an important new 
     dimension in an accelerating global competition for highly 
     skilled IT labor.
       The immediate and most powerful incentives for a highly 
     leveraged industry are the direct and indirect subsidies, 
     including infrastructure needed for state-of-the-art fabs, 
     offered by the government. For example, the Chinese central 
     government has undertaken indirect subsidies in the form of a 
     substantial rebate on the value-added tax (VAT) charged on 
     Chinese-made chips. While many believe this is an illegal 
     subsidy under GATT trade rules, the impact of the subsidy on 
     the growth of the industry may well be irreversible before--
     and if--any trade action is taken. There are a variety of 
     other documented measures adopted by the Chinese government. 
     The development of special government funded industrial 
     parks, the low costs of building construction in China as 
     compared to the U.S., and their apparent disinterest in the 
     expensive pollution controls required of fabrication 
     facilities in the U.S. all represent further hidden 
     subsidies. The aggregate effect of these individual 
     ``subsidies'' may be only a few tens of percentage points of 
     decrease (literally, only 20-30 percent in the manufacturing 
     costs of the chips, but in such a cost-driven industry, this 
     difference appears to play an important role in driving the 
     entire offshore migration process for these critical 
     components. Essentially, these actions reflect a strategic 
     decision and represent a concerted effort by the Chinese 
     government to capture the benefits of this enabling, high-
     tech industry, and thereby threatening to be a monopoly 
     supplier and thus in control of pricing and supply.
       It is therefore important to understand that the current 
     shift in manufacturing capacity to China is not entirely the 
     result of market forces. It is equally important to recognize 
     that even if some residual U.S. manufacturing capacity 
     remains after this large-scale migration takes place, the 
     shift of the bulk of semiconductor manufacturing will 
     severely constrain the ability of the U.S. to maintain high-
     end research and development capabilities. Such directed 
     government support has proven itself to be a severe threat to 
     U.S. industry. For a variety of reasons, the U.S. government 
     has never been able to provide such coordinated support. The 
     results of this deficit have been devastating. The idea that 
     national governments cannot contribute to the health and 
     direction of such a ``consumer based'' industry is unfounded, 
     particularly given the national security implications.


                            A Plan of Action

       The stakes are real. The time for the country to react 
     effectively is limited. There are things that can be done. If 
     these steps are taken in a timely fashion, the collective 
     impact of the measures will be more powerful in maintaining 
     reliable first access to high-end semiconductor chip design 
     and manufacturing in the U.S. These could include:
       Active Enforcement of GATT trade rules. Currently the 
     Chinese government is providing a 14 percent rebate on VAT to 
     customers who buy Chinese-made semiconductor chips, 
     essentially providing a large subsidy of their domestic 
     industry in clear violation of GATT rules. Thus, U.S.-made 
     chips would pay a 17 percent VAT, and Chinese-made chips 
     would pay a 3 percent VAT. Given the tight price competition 
     of chips and the growing importance of the Chinese chip 
     market, this is a very significant step towards ending U.S. 
     production. It is important to ensure that GATT rules are 
     properly enforced in this instance, and not allow government 
     imposed advantages for foreign competitors to damage U.S. 
     manufacturers. DoD should insist that the U.S. Trade 
     Representative undertake prompt bilateral negotiations to 
     remove these measures.
       Joint production agreements. With the current downturn in 
     the high-tech sector, it is probable that many chip 
     manufacturing companies will be unable to acquire the 
     necessary capital to invest in the $3+ billion required for 
     new 12-inch water advanced chip

[[Page 13970]]

     fabrication facilities, which are radically increasing in 
     cost. Title 15 of the U.S. code (sections 4301 through 4305) 
     gives private technology companies facing global competition 
     the ability to enter into joint production ventures with a 
     waiver of certain anti-trust laws. Under this provision, a 
     group of companies could consolidate assets into a small 
     number of chip fabrication plants, which could be jointly run 
     by a cooperative of two to five companies. This cooperative 
     investment in a fab could sharply reduce the risk and cost to 
     each participating firm, and their agreements to purchase 
     chips from the new fab could be the basis to obtain 
     financing. The Department could encourage this kind of 
     venture and offer contracting opportunities to meet DoD's own 
     chip-making needs, thus being an additional guarantor of 
     demand.
       Business models. A variety of creative business models 
     exist which can help the Department and intelligence agencies 
     obtain improved access to advanced manufacturing lines. The 
     Department and intelligence agencies can enter into 
     agreements with a number of U.S.-based chip manufacturers 
     within the context of one of these models to the mutual 
     benefit of all parties. DoD should contract with selected 
     U.S. fabs for long-term access, using any one or more types 
     of contractual vehicles (such as ``take or pay''). DoD should 
     also direct its aerospace end-users to employ the services of 
     these domestic fabs. While DoD, NSA and NRO are only a very 
     small piece of the semiconductor market, they can still use 
     their residual contracting power to encourage retention of 
     U.S. advanced chip manufacturing in a coordinated way. DoD 
     and the intelligence agencies must pursue this avenue of 
     creative government-industry cooperation, and must do so 
     soon, as time is not on the side of the U.S. industrial base 
     or the U.S. Government. It is important to note, however, 
     that even a much stronger and better coordinated effort in 
     this area alone will not resolve DoD's problems because over 
     time without a strong domestic commercial semiconductor 
     industrial base it will become very difficult for DoD to 
     retain access to state of the art chips. DoD requires an 
     industry with technology leadership, not just its own short 
     term supply fix.
       Encourage tax incentives for U.S. investment. As the next 
     generation of chip fabrication facilities can cost at least 
     $3 billion per plant, the manufacturing sector will require 
     assistance in acquiring the investment capital necessary to 
     develop the manufacturing capabilities for cutting edge 
     semiconductor chips. DoD and the intelligence agencies should 
     work with industry and propose targeted tax incentives, 
     possibly in coordination with state and local government 
     financing, to assist in meeting these investment costs. As 
     noted above, these efforts cannot be delayed into the out-
     years, as time is of the essence.
       Increase Science and Engineering Graduates. The 
     unprecedented technical challenges faced by the industry will 
     require technically trained talent to provide solutions to 
     these problems. In order to effectively compete against the 
     concerted effort by the Chinese to capture the semiconductor 
     industry, it will be necessary to counter the growing 
     disparity of trained talent in both physical sciences and 
     engineering between East Asia and the U.S. Incentives need to 
     be created for increasing university student training in 
     these fields, in particular, of students who are U.S. 
     citizens. The training over the past two decades of East 
     Asian students in American universities, who increasingly 
     return to their country of origin, is a partial cause of the 
     present situation. Additionally, efforts need to be 
     undertaken to encourage their retention in the U.S. Overall, 
     DoD should focus on programs that increase the number of 
     science and engineering graduates at the B.S. and M.S. level 
     needed to provide the technical capabilities for the 
     semiconductor industry.
       Increases in Federal Funds for Research and Development 
     (R&D). Levels of federal funding in the U.S. for research on 
     microelectronics have been steadily decreasing, while at the 
     same time, competitors in Asia and Europe have dramatically 
     expanded public support for semiconductor R&D. This decline 
     in U.S. research support is of particular concern because the 
     industry is increasingly addressing extremely complex 
     technical challenges for which no solution is readily 
     apparent. The following points highlight this need for 
     restoration of funding and describe possible steps that could 
     be taken:
       a. DARPA's annual funding of microelectronics research and 
     development--the principle channel of direct federal 
     financial support in this area--has declined since 1999, and 
     is projected to decline further. DoD should consider 
     restoring this funding.
       b. SEMATECH, the private industry partnership with 
     government which was created to help revive the weakened U.S. 
     industry in 1987 through collaborative research and pooled 
     manufacturing knowledge, was provided with government funds 
     of $100 million per year, fully matched by industry funds. 
     Since 1996, SEMATECH has no longer received any government 
     fundings. Originally an entirely U.S. endeavor, SEMATECH has 
     now had to become ``international'' to remain in operation, 
     thereby destroying its original U.S.-centric focus. DoD 
     should consider alternative mechanisms for cooperative R&D 
     efforts with industry in critical research areas.
       c. In the current harsh financial climate of the U.S. high-
     tech industry, the private sector will not be able to 
     continue an adequate investment in research and development--
     there have in fact been widespread anecdotal report of major 
     decreases in R&D efforts in the U.S. commercial electronics 
     industry. The need is developing for processors based on the 
     next generation of silicon chip technology (referred to as 
     the ``90 nanometer'' generation), and the U.S. could find 
     itself without a domestic manufacturing base, as the research 
     for that technology generation should be under way now. The 
     area of non-silicon semiconductors, which offer a level of 
     speed performance exceeding that of silicon components, is 
     clearly under-funded. For example, research is needed on 
     nano-electronics, such as alternatives to silicon CMOS 
     through nanotubes and nanowires. This technology will be 
     important for next-generation military communications and 
     radar systems (operating in consort with advanced silicon 
     processor chips). Here too, the DoD must find ways to assist 
     the U.S. non-silicon semiconductor manufacturing based by 
     further encouraging R&D appropriate to DoD requirements.
       d. I urge the Department and intelligence agencies to 
     support increased government funding for R&D of advanced chip 
     technologies and also to support the development of new DoD-
     specfic chip designs within the aerospace industry, which, 
     like the fabs, are losing their capabilities as the chip 
     designs themselves are increasingly conducted overseas. DoD's 
     decades-long role in the support of such research has 
     diminished in recent years. Rejuvenation of this long-
     standing DoD role in advanced R&D would help to assure that 
     U.S. industry, to the extent that it can be retained, will 
     lead the future shifts to the most advanced chip technology 
     which DoD will need.
       Cooperative Research Programs. Programs such as the Focus 
     Research Center Program (FRCP) under the Microelectronics 
     Advanced Research Corporation (MARCO) seek to overcome the 
     growing challenges companies face in advancing 
     microelectronics technologies through government-industry 
     partnerships that focus on cutting-edge research deemed 
     critical to the continued growth of the industry. The 
     government's share of funding (25 percent) of this 
     cooperative program has been supported through the 
     Government-Industry Co-sponsoring of University Research 
     (GICUR) program within the Office of Secretary of Defense. 
     The funding targets for this program as outlined in the 
     original ramp-up plan have not been met. In fact, this 
     program has been zeroed out of the administration's FY 2004 
     budget. DoD should ensure that funding levels for this vital 
     area of government-industry collaborative research be 
     properly supported, and that when U.S. universities are the 
     recipients of such funding, the training of U.S. citizens (in 
     contrast to foreign students) is strongly emphasized.
       Survey of Trade Practices. DoD should survey all possible 
     technologies that the Chinese government may be targeting for 
     subsidies that would assist in the transfer of U.S. chip-
     making and related fields to China, and then develop a list 
     of those subsidies that are in violation of GATT trade rules 
     and seek USTR action For those that are not in violation but 
     nonetheless create a competitive ``edge'' for China, the 
     Department and the intelligence agencies will need to develop 
     counter strategies. The focus should aid to strengthen the 
     entire electronics and IT ``food chain''--from semiconductor 
     manufacturing equipment to semiconductors to computers and 
     systems. This will require broad interagency coordination and 
     cooperation. It would probably be necessary to form such a 
     ``tiger team'' immediately, and to provide that team with the 
     authority and resources to act to stem the deterioration of 
     our defense-critical on-shore infrastructure.
       The Semiconductor Equipment and Materials Industry. Over 
     the last decade a fair fraction of U.S. semiconductor tooling 
     and equipments capability has migrated off shore. This has 
     been particularly true of the ``high technology'' end of the 
     business--advanced lithography. The migration has had a 
     significant impact on our ability to guide and direct 
     development in the chip economy as a whole. For example, when 
     ASML (a Dutch firm) tool over SVG-L (our last cutting edge 
     lithography stepper supplier) the personnel base at the 
     former SVG-L site, in part because of the recession, was 
     reduced, and some advanced product development shifted to 
     Europe. Along with the sale of SVG-L, Tinsley, an SVG-L 
     subsidiary, which is the world's premier supplier of aspheric 
     optical components widely used in defense surveillance 
     systems, was also conveyed to ASML. Lithography patent 
     battles that could affect sales and services to U.S. chip 
     makers using equipment from either of these companies are 
     continuing. As another example, it is generally accepted 
     throughout the industry that the photomask is a key gating 
     element in semiconductor development today, and that mask 
     development is one of the largest challenges currently facing 
     the industry. The cost of photomask infrastructure 
     development is currently outstripping

[[Page 13971]]

     available R&D resources by a factor of 4 to 5. A recent 
     SEMATECH study indicated the shortfall at approximately $750 
     million. Outside the U.S., this shortfall is being met with 
     Government sponsored development activities in hopes of 
     taking over the market. A small number of U.S. merchant mask 
     companies are currently spearheading an effort to establish a 
     pre-competitive R&D activity focused on U.S. mask 
     infrastructure development. The need, supported by SEMATECH, 
     includes advanced tool evaluation and development, along with 
     materials, metrology, and standards activities to improve 
     future photomask manufacturing capability. The goal is to 
     accelerate leading edge photomask infrastructure capability 
     on-shore by building on prior and current mask industry 
     investments. DoD should give full consideration to supporting 
     this effort for a U.S. mask consortium. Overall, the ``tiger 
     team'' should survey and make recommendations on what can be 
     done to stimulate and grow what is left of the on-shore 
     semiconductor equipment industry, including masks and 
     lithography.


                   necessity of comprehensive action

       If DoD and the intelligence agencies lose commercial 
     advanced chip production capability, off of which they have 
     sharply leveraged over the past two decades to greatly reduce 
     their costs and to improve war-fighting capability, the 
     ability to benefit from such cost-saving relationships will 
     be permanently lost. DoD can attempt to achieve temporary 
     solutions, such as building its own next generation 
     government-owned chip fabrication facility, but this is 
     likely to be both expensive and ineffective. If the best 
     research and design capability shifts to China along with 
     manufacturing, this approach will not work past the next 
     generation or two of semiconductor chip production. In 
     addition, such temporary solutions are not only unworkable 
     over time if the U.S. wishes to retain the best capability 
     that is required for defense and intelligence needs, but will 
     be far more expensive than the solutions proposed above. This 
     is because the opportunity to leverage off the commercial 
     sector (an approach which the DoD and intelligence community 
     rely upon at present) for new advances and cost savings will 
     be lost. The U.S. policy goal should not be to seek to 
     prevent China from obtaining significant chip-making 
     capability in the very near future. That will happen. The 
     issue is whether the U.S. can improve its competitive 
     position and remove unfair distortions in order to retain 
     significant on-shore manufacturing capacity.


                     conclusions and further action

       A prompt, concerted effort by the defense and intelligence 
     community can reverse this trend of off-shore migration of 
     manufacturing, research and design that is now underway and 
     that will become essentially irreversible if no action is 
     taken in the next few months. I am requesting a report and 
     plan of action from DoD and the intelligence community, based 
     on the steps enumerated above, on how they will act to 
     prevent the national security damage that the loss of the 
     U.S. semiconductor industry will entail.
       The loss goes beyond economics and security. What is at 
     stake here is our ability to be preeminent in the world of 
     ideas on which the semiconductor industry is based. Much of 
     applied physical science--optics, materials, science, 
     computer science, to name a few--will be practiced at foreign 
     centers of excellence. This stunning loss of intellectual 
     capability will impede our efforts in all areas of our 
     society.
       I hope that by bringing attention to this matter, we can 
     avoid a potential national security crisis in terms of 
     reliable access to cutting edge technology necessary to the 
     critical defense needs of our country. We are being 
     confronted by one of the greatest transfers of critical 
     defense technologies ever organized by another government and 
     the time for action is overdue.

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