Assessment of the Critical Supply Chains

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Overview of the ICT Industrial Base

1. The US ICT industrial base is highly specialized and depends on complex, global supply chains that are geographically concentrated. (p. 15)
2. The US ICT industry has shifted from being vertically integrated to highly outsourced, with the US leading in technology design and innovation, and China leading in manufacturing. (pp. 15-17)
3. US companies stopped manufacturing because of low profit margins and the need for mass production to turn a profit; Asian economies, including China and Taiwan, offered lower labor costs, subsidies, infrastructure benefits, and the availability of capital and land. (pp. 16-17)
4. Broadcasting and telecommunications equipment (communications equipment) is the backbone of the US critical communications infrastructure, which encompasses emergency services communications, air traffic control systems, and systems conducting financial transactions. (p. 18)

Current State of ICT Manufacturing and Related Challenges: 5 Key Products

1. Printed Circuit Boards (PCBs) are maps for the placement and interconnection of semiconductors, passive components, and electronic connectors, and are in all ICT hardware. (p. 21)
   
   
   • Large-scale PCB manufacturing is concentrated in Asia, particularly China, Japan, Taiwan, and South Korea; US production is primarily low-volume, high-mix specialty boards. (p. 22)
   • Key risks to the US PCB supply chain include 1) facility inefficiencies, as most facilities are older and dependent on manual rather than automated labor, lacking the ability to scale up production and the business case to attract investment for upgrades; and 2) heavy dependence on US defense contracts supplying PCBs for specialized use, which keeps them from developing economies of scale. (pp. 23-4)

2. Fiber optic cable is composed of strands of glass that transmit large amounts of data using light beams, supporting international, national, and local communications. (p. 24)
   
   
   • While the US maintains an industrial base, a large and growing share of fiber optic manufacturing takes place in Asia and increasingly China, which benefits from industrial subsidies. (p. 25)
   • A key risk is China’s expected manufacturing capacity of 600 million kilometers per year by 2024, an amount that outstrips domestic demand by 300 million kilometers, leading to concerns over dumping that could put competitors out of business. (p. 26)

3. PCB assemblies (PCAs) are semiconductors and other components placed on a PCB, which runs electronic functions in ICT and a broad range of goods. (p. 27)
   
   
   • Most PCA assembly is done by Original Equipment Manufacturers (OEMs), Electronics Manufacturing Services (EMS) companies assemble 43% of all electronic goods globally, with China as the leading location for EMS production and most EMS companies headquartered in Taiwan. (p. 27)
   • A key risk to the US supply chain is the use of counterfeit or used parts in PCAs or electronics, particularly those assembled in China given the high concentration of production there. (p. 28)

4. Networking equipment, including routers, switches, and servers, is critical for transmitting data, distributing data processing, communicating across devices, and connecting networks. (p. 28)
   
   
   • The US has several leading companies that supply networking equipment; most production is concentrated in Asia through EMS companies headquartered in Taiwan. (p. 29)
   • Asia, in particular, leads in the final assembly of networking equipment manufacturing, with China developing an ecosystem through decades of target investments creating advantages for its capital, labor, and supplier and demand base, allowing for cost efficiencies, and faster product upgrades and customization; there is no significant capacity outside of China for key components of the networking hardware supply chain (p. 29)
   • As demand for networking equipment increases and Chinese companies gain market share, there will be increased competition and price pressure for US companies. (p. 30)

Current State of the ICT Software Sector and Related Risks

1. A software supply chain is the entire sequence of events that impacts software from the point of origin to the point of end-use; every sequence affects the software and can strengthen it or introduce weaknesses. (p. 34)
2. The US dominates the supply chain in terms of revenue and labor force; India is expected to overtake the US with the largest population of developers by 2024; Asia has the fastest growth rate for developers, ahead of Latin America. (p. 35)

3. Open-source software (OSS) plays a critical role in software composition, with some components included in 75% of all code bases and comprising 70% of overall code; even well-known software and cybersecurity companies are among OSS users. (p. 36)
   
   
   • OSS accelerates innovation and provides benefits, but can also introduce vulnerabilities, and lacks a single responsible entity to help organizations fix security issues. (p. 38)
4. The use of software libraries allows for supply chain compromises, including package typo squatting, dependency confusion, and malicious injects. (p. 39)

Current State of the ICT Workforce and Related Risks

1. The US has approximately 274,000 ICT manufacturing-related jobs or around 5% of the domestic ICT workforce; about 54% are in semiconductor manufacturing; another 71,000 produce components like fiber optic cable and batteries; fiber optic production employment is expected to grow as demand increases. (pp. 44-45)
2. 50% of employees are unskilled and require training when hired; 25% have some skills; 25% are in management (pp. 45-46)
3. US PCB manufacturing suffers from a lack of qualified workers, driving outsourcing; component manufacturing relies on manual labor that can take years and large investments to train, leaving China dominant in this production; PCA factories require a wide range of skills and ongoing training. (pp. 46-47)
4. The US software workforce accounts for 40% of domestic ICT employment and is a well-paid sector, characterized by intense and widespread competition for talent; demand for software developers is expected to increase in the US and globally in the coming years, from 24.5 million in 2021 to as much as 45 million in 2030. (pp. 47-49)

5. A key risk is the lack of qualified workers, leaving a talent gap in the face of increasing demand; inadequate development of ICT-tracked educational and training programs, lack of inclusive access and awareness of training and opportunities, and limited capacity and development of broadband infrastructure contribute to the lack of qualified workers. (pp. 50-53)

Cross-Cutting Supply Chain Vulnerabilities Impacting the US ICT Industrial Base

1. The pandemic created sudden supply and demand shifts and bottlenecks, with dramatically increased demand for electronic devices and digital infrastructure occurring while pandemic-related work restrictions cut production, including of key components and inputs in the ICT supply chain; delays negatively affect US economic growth and activity. (pp. 54-55)
2. The US lacks an ecosystem for electronics production compared to China, whose government-sponsored funding and policies created advantages in terms of capital, labor, and supplier and demand bases to create production efficiencies; China continues to be an attractive global manufacturing base; lack of geographic proximity to key components and high costs of capital and labor are barriers to the investment needed for geographic diversification. (pp. 55-57)
3. ICT supply chains are long and complex, and products incorporate many components, some of which have only a single source or come from a single region due to limited options, unique qualities of a product, and need to control costs; lack of flexibility can have devastating consequences when the sole supplier cannot provide components; initiatives like O-RAN and diversifying production locations can mitigate this risk. (pp. 57-59)
4. The complexity and size of ICT supply chains mean that companies lack visibility of their junior-tier suppliers which can introduce vulnerabilities into a supply chain and make it difficult to adopt strategies to provide redundancy and flexibility. (pp. 59-61)

5. Increased competition and compressed profit margins have driven companies to adopt just-in-time inventory management, which relies on flawless production and execution, but breaks down during unexpected disruptions like natural disasters; firms are beginning to hold more inventory, a practice that favors larger firms but places SMEs at a disadvantage. (p. 62)
6. ICT manufacturers and suppliers and every company, organization, or individual that uses ICT products, are part of a vast, global supply chain, which provides a large attack surface for anyone who wants to infiltrate it or cause harm; threats can include insider threats, vulnerabilities from extended supply chains, and dangers from counterfeit parts. (pp. 63-68)

External Risks to the ICT Industrial Base Supply Chain

1. Malicious cyber intrusions, including stealing intellectual property, corrode the development, utilization, and innovation of hardware and software applications throughout the ICT supply chain, while state-sponsored cyber intrusions threaten domestic industry and national security. (pp. 70-71)
2. Economic risks stem from the offshoring of ICT manufacturing, which limits capital inflows to the US, inhibiting the development of a domestic ICT manufacturing sector that could bring greater innovation and employment in high-quality jobs. (pp. 71-72)

Recommendations to Strengthen ICT Supply Chain Resiliency

1. Revitalize the US ICT manufacturing base by supporting the private sector in expanding manufacturing capacity through financial incentives and procurement preference. (pp. 76-77)
2. Build resilience through secure and transparent supply chains, including through promoting supply chain risk management practices through procurement and monitoring efforts. (pp. 77-78)
3. Collaborate with international partners to improve supply chain security and resiliency, including by improving international collaboration to advance shared interests. (pp. 78-79)
4. Invest in future ICT technologies by sustaining the R&D ecosystem through federal programs and legislation. (pp. 79-80)
5. Strengthen the ICT workforce pipeline by supporting and expanding programs that attract, educate, and train the ICT workforce. (pp. 80-81)
6. Ensure sustainability remains a cornerstone of ICT development by promoting environmental standards through financial incentives and government programs. (p. 81)
7. Engage with industry stakeholders on resiliency efforts by strengthening public-private engagements; carry out a continued study of the ICT industrial base - guide long-term policy through further studies. (p. 82)

Conclusion

The Assessment of Critical Supply Chains is a useful resource for understanding the current state of the ICT industry globally and the role of US ICT companies in this industry, as well as the weaknesses, vulnerabilities, and threats to US economic and national security that are part of the current structure of the sector. US policymakers can use this report to understand challenges to the US supply chain and create new policies and laws to address those challenges. Readers in other economies can also apply this resource to evaluating their own interests, weaknesses, and vulnerabilities and gain ideas for how to develop their ICT sectors in the future.

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External Resources

• The complication of concentration in global trade – McKinsey Global Institute (MGI)
  This article builds on the findings of MGI’s recent research on global flows, analyzing concentration across more than 120 countries, roughly 6,000 products, and eight million individual trade corridors.
• How Apple tied its fortunes to China – Financial Times
  Patrick McGee offers a deep dive into how Apple decided to tie its fortunes to China.
• Supply Chain Diversification in Asia: Quitting China Is Hard – Macro Polo
  The electronics and machinery sector would be a useful proxy to examine supply chain shifts, as it is the largest category in global trade by value.

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