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Meet the Chip 4 Alliance

Chip 4 Alliance

Before the Chips and Science Act passed in the United States in July 2022, there was a proposal to form a consortium of four countries with the goal of diversifying the supply chain for semiconductors. Today, the Chips 4 Alliance is in effect, comprising combined efforts from the United States, Taiwan, Japan, and Korea. The group of nations comprises the top four semiconductor producing nations outside of China, and collectively the group stands to make a major impact on the global supply chain for semiconductors.

The group of four nations reflects a new global consensus that geographically diversified supply chains are preferable to concentration in one region, especially when the local government is not always friendly. Will the new alliance substantively affect supply chains for electronic components?

What is the Chips 4 Alliance?

The Chip 4 Alliance includes the United States, Japan, Taiwan, and Korea as the four sole member states. This group of nations was intended to cooperate on policy implementation that would support sustainable semiconductor manufacturing in the member states’ home countries. There are three primary goals of the alliance in terms of global supply chain management and policy:

  • Support industry efforts to diversify their manufacturing base
  • Protect IP of companies in member countries
  • Develop policy regarding export of the most advanced semiconductors and equipment

The industry has been in need of this kind of advocacy group for some time, and yet the policy response has been slow to implement. One cited reason for this is the close non-semiconductor trading ties between Taiwan, Korea, and China; these two member states do not want to upset their relationships in this area. In addition, companies have been slow to move their manufacturing capacity back to their home countries in an effort to minimize production disruptions.

Due to the slow policy responses from the other Chips 4 Alliance members, the United States has gone forward with unilateral export controls. These controls go above the familiar ITAR controls implemented for mil-aero systems and the dual-use controls defined in EAR99. These controls specifically prohibit:

  • Export of advanced manufacturing equipment to China
  • Export of advanced semiconductors to China
  • Provision of services and consulting to Chinese companies

Even as the Chips 4 Alliance slowly finds a path forward to make collective policy, other countries are following suit with their own export control measures targeting China. On 8 December, 2022, the Netherlands (home of advanced fabrication equipment manufacturer ASML) announced its own set of export controls against China, and Japan followed suit soon according to an announcement on December 13. Other countries may continue this trend of isolation in an effort to protect IP and design data.

How Will The Group Affect Chip Supply?

It’s difficult to speculate exactly how these measures will affect the overall supply chain, and the tepid response from companies in the alliance member countries should illustrate the reluctance to make a bad situation even worse. The lead time for constructing and opening a new semiconductor fabrication facility is on the order of years, meaning the products being produced by these facilities is unlikely to become available on the market until 2023-2024.

Short term - Expect to see continued slack in production, even as consumer demand shifts away from electronic products and towards services. Don’t be surprised if we continue to see price hikes like those recently announced by Xilinx, which are necessary to make the transition away from Southeast Asia.

Long term - These measures should be generally beneficial for the economies of the member countries and their allies. Those production costs will benefit local people instead of being sent overseas to subsidize bad actors. In this context, long-term basically refers to the amount of time required to bring new fabrication capacity online and reshore existing capacity.

Because we can’t expect the semiconductor supply chain to fully recover going into 2023 and beyond, companies need to take a just-in-case approach to sourcing so that they can ensure sustainable production. As consumer demand fluctuates from products to services, it’s likely that more stock will slowly become available prior to new domestic production capacity coming online. A “just-in-case” mindset accepts that, in 6-12 month timeframes, purchasing additional components can provide a significant buffer that extends production.

How can companies implement a just-in-time approach? They need to have a

  1. Track your at-risk component inventory and identify easy-to-use replacements
  2. Identify multiple sources for these parts
  3. Order additional components and hold inventory based on planned production runs
  4. Include an inventory buffer to account for respins and additional development needs.

Until new fabrication capacity and capabilities are widely available by 2023-2024, the Chip 4 Alliance is unlikely to improve the sourcing situation. Until then, design teams must leverage their data management systems to ensure they can source the components they need for their most advanced assemblies.

Any design team working on advanced electronic products can take control of their supply chain and product life cycles with the complete set of data management tools from Cadence. From ERP/PLM integration to design library management, only Cadence offers comprehensive systems to help companies manage their portfolio of IC and PCB designs.

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