By Clayton Cox and Ryan Bernstein, McGuireWoods Consulting
On June 8, 2021, the administration released a report detailing its findings from a 100-day review of vulnerabilities within the supply chains of four critical products:
- large capacity batteries;
- critical minerals and materials; and
The report is in response to President Biden’s Feb. 24, 2021 executive order calling for an assessment of the vulnerabilities within essential supply chains. The administration analyzed and provided recommendations on the supply chains within the report and also seeks to create a Supply Chain Disruptions Task Force to address supply chain challenges across the government. In addition, the report calls for the United States to begin the process of building comprehensive strategies for revitalizing six key industrial bases:
- public health;
- information and communication technology;
- transportation; and
- agriculture and food production
This whole-of-government approach intends to engage the private and public sector as well as government agencies to ensure essential supply chains are more resilient, in order to promote national security, economic security, and job creation.
Semiconductors are used in virtually every technology product, and the United States’ semiconductor manufacturing capacity has fallen 25 percent in the past 20 years. In the past two decades, the United States has outsourced much of its semiconductor production, and as a result, the United States is heavily dependent upon countries such as Taiwan, South Korea, Japan, and China for importing semiconductors. For example, the United States produces only 6-9 percent of mature logic chips. In addition, the U.S. relies almost exclusively on Asia for its most advanced chips, as the U.S. lacks the production capacity to fulfil demand.
Risks Associated with the United States’ Current Semiconductor Industry
- Labor shortage as 2/3 of current students in the industry are international students.
- China is continuously investing in chip production capabilities, as it attempts to lead the worldwide semiconductor manufacturing industry.
- The U.S. only has 3 percent of worldwide semiconducting packaging capacity.
- The U.S. has 41.7 percent of the Semiconductor Manufacturing Equipment industry, but is heavily dependent upon Taiwan, China, and South Korea for sales, as these nations are the largest producers of semiconductors.
- Producer consolidation of small companies, as larger companies take over small ones to account for the need to constantly advance
Recommendations for Semiconductor Manufacturing
- Promote investment, transparency and collaboration, in partnership with industry, to address the current semiconductor shortage.
- The Department of Commerce (DOC) should redouble its partnership with industry to facilitate information flow between semiconductor producers, suppliers, and end users.
- Strengthen engagement with allies to prevent hoarding and allow for fair semiconductor allocation.
- Urges Congress to fully fund the CHIPS for America Provision in the FY 2021 NDAA with at least $50 billion in funding.
- Strengthen domestic semiconductor manufacturing by Congressional authorization of funding for upstream and downstream industries through the supply chain.
- Department of Defense (DOD) should provide focused support for domestic chip production related to national security needs.
- The Departments of Defense, Energy, Commerce, and Interior should support small and medium sized semiconductor businesses through research and development (R&D) funding, support for commercialization, and capital needs for growth assistance.
- Build a diverse and accessible talent pipeline for jobs in the industry.
- The Department of Labor Employment and Training Administration should support sector-based pathways to jobs through training grants and other funding resources.
- The Department of State, U.S. Trade Representative, and Department of Commerce should engage with allies and partners to support U.S. investment and fair trade practices.
- Protect U.S. advantages in semiconductor manufacturing and advanced packaging supply chain through export controls and reviews by the Committee on Foreign Investment in the United States (CFIUS) to assess threats and vulnerabilities.
Large Capacity Batteries
The demand for high-capacity batteries, which are used in electric vehicles (EVs) for stationary storage, and for many defence applications, has increased dramatically over the past ten years. The industry will continue to grow due to new demands for passenger EVs and the value of the EV battery market, assuming $100/kWh EV batteries, is expected to be over $50 billion in 2025. The United States needs to secure a leading position in the global battery market by making improvements and creating incentives in every stage of the supply chain. There are five main steps in the high-capacity battery supply chain including raw material production, material refinement and processing, battery material manufacturing and cell fabrication, battery pack and end-use product manufacturing and battery end-of-life recycling. Currently, the United States has limited raw material production capacity and virtually no processing capacity. Therefore, the U.S. currently exports raw materials to foreign markets and then imports back the manufactured cells.
Risks Associated with the High-Capacity Battery Industry
- Weak domestic production due to material shortages, limited U.S.-based infrastructure, and lack of skilled workforce have led to other countries dominating the EV market.
- There are six key minerals needed for the production of lithium batteries: lithium, Class 1 nickel, cobalt, graphite, manganese, and copper. Each presents with different levels of availability, so it remains a top priority to research and develop suitable substitutions and recycling practices. For example, manganese may emerge in next generation cells as a preferred element.
- Foreign dependence on single source nations, potential adversaries, and other strains could lead to gaps in the supply chain that create shortages and other supply risks. Lack of diversity in supply chain sources means that one disaster, whether geopolitical, economic, or natural, could have dire effects on the supply chain.
Recommendations for High-Capacity Battery Production
- Stimulate Demand for End Products Using Domestically Manufactured High-Capacity Batteries.
- As part of the American Job Plan, President Biden has included $100 billion in incentives to encourage U.S. consumers to transition to EVs, $15 billion to build out a national EV charging infrastructure, and plans to transition both the federal vehicle fleet, the state and local government fleets, the national school bus fleet, and the nation’s transit bus fleet to EVs.
- The Federal Energy Management Program should also call for federal agencies to procure stationary battery storage for federal facilities.
- Secure a Reliable Supply Base Domestically and Internationally for Battery Minerals.
- Increase support for resource mapping at the U.S. Geological Survey (USGS) and DOE to enable informed policy and investment decisions.
- Modernize U.S. laws and regulations governing extraction of key minerals to promote strong environmental practices.
- Task the new Supply Chain Trade Strike Force to examine unfair trade practices.
- Utilize the U.S. Agency for International Development to promote the institutionalization of transparent procurement and mineral extraction rights.
- Establish a national recovery and recycling policy and form a battery recovery and recycling task force consisting of the DOE, Environmental Protection Agency (EPA), Department of Interior (DOI), USGS, Department of Transportation (DOT), Commerce, and DOD.
- Public investments, through low cost credit, tax credits, a new federal grant program and other subsidies are needed in order to obtain market competitiveness and meet the President’s climate commitments.
- Utilize existing grants like the American Recovery and Reinvestment Act of 2009, the Advanced Technology Management Loan Program and others to help with the high upfront costs.
- Invest in the people and innovations that are central to maintaining a competitive edge in the battery market.
- Transition the already existing skilled workforce in the auto industry to support the manufacture of batteries.
- Establish domestic production of future battery technologies.
Critical Minerals and Materials
Critical materials and minerals are foundational to everyday products, and as clean energy becomes a greater priority, the demand for these products will only increase. The U.S. and China are currently the world’s largest consumers of these minerals and materials. The U.S. is heavily reliant on countries such as China, Canada, and Japan for its critical mineral and material needs, as U.S. production has decreased and net import reliance has grown. Unfortunately, due to a concentration of supply, single-source suppliers, price volatility, and human capital decline, the United States lacks resilience in its strategic and critical mineral sectors.
Risks Associated with Current Critical Mineral and Material Status
- Natural disasters pose a risk to critical mineral supply chains, as the geographic location of many critical minerals are concentrated.
- Of the 283 critical materials monitored, the Defense Logistics Agency (DLA) identified shortfalls for 53 materials.
- Critical material and mineral supplier diversity decreased from 2000-2014.
- Supply is so concentrated for some minerals that it is located in a single source. For example, Manganese is a single source critical mineral.
- Currently, a domestic sole-source provider exists for 29 of the 53 unclassified shortfall materials, and 18 materials have no domestic production at all.
- Since markets are so small, supply is inelastic in the short run, causing risks for significant price shocks.
- Mining these critical minerals requires a specialized skill set, and universities are increasingly cutting their mining engineering programs. The current mining population is aging, thus causing a potential labor shortage of skilled workers.
Recommendations for Critical Materials and Minerals
- The U.S. government should work with the private sector and non-governmental agencies (NGOs) to develop sustainability metrics and standards for critical materials and minerals.
- The Federal Government with the Environmental Protections Agency (EPA) should incentivize domestic and foreign production, processing, and recycling of these minerals and materials.
- The Departments of Interior and Agriculture should create a task force to develop a plan to identify locations of critical materials that can be sustainably produced domestically.
- The DOE, DOC, DOI, and the DOD should use Defense Production Act (DPA) funding to incentivize production of critical minerals.
- Use authority granted by the DPA to convene industries and create a plan of action to satisfy national need for sustainable domestic production.
- The DOE, DOL, DOD, DVA, and the NSF should financially invest in R&D to support sustainable production and workforce training/ recruitment.
- The DOD should seek new legislation to modernize the National Defense Program, to purchase materials currently in shortfall like rare earth elements, in an effort to strengthen U.S. stockpiles.
- The DOS and the USTR should work with foreign producers to decrease US reliance on products from adversarial nations, to promote sustainable production of critical minerals, and to increase transparency across supply chains.
Rare Earth Elements
- There are 33 critical materials that are considered dominated by foreign markets and are shortfalls for the U.S. These materials include manganese and fluorspar.
- The U.S. imports substantially greater quantities of rare earth elements, leading to a decline in innovation, research, and human capital development.
- Following a 2017 report to Congress on rare Earth element extraction, the DOE cited six environmental challenges to mining these products, for which the domestic industry is trying to address.
- The industry represents great potential for economic mobility, as approximately $613 billion in U.S. consumption of rare earth elements unlocks approximately $496 billion in economic activity.
- The prices are subject to price volatility, as the 2010 Chinese economic changes caused a drastic increase in prices that did not return to “normal” until 2014.
- Research, development, and demonstration of innovative means of processing and recycling these elements from unconventional and secondary sources remains a top priority.
Recommendations for Rare Earth Elements
- The EPA to decrease barriers to recycling rare earth elements.
- The DOD and DOE provide R&D incentives for industries to develop technologies that automate removal of rare earth magnets.
- The DOD to use the DPA to increase industrial capacity for rare earth elements.
Pharmaceuticals and Active Pharmaceutical Ingredients
The integrity of the U.S.’ drug supply chain is critical to maintaining, as many Americans’ lives are dependent upon them. Currently, the Health and Human Services (HHS) comprehensive Supply Chain Risk Management Program seeks to prevent disruptions in the pharmaceutical infrastructure by identifying risks associated with dependence on critical supply chain elements controlled within foreign countries. However, it is extremely difficult to get an accurate picture of the strength of the drug supply chain due to the complexity of manufacturing and the limitations of the Food and Drug Administration (FDA). The three pillars of a secure and robust drug supply chain are quality, diversification, and redundancy. In Oct. 2020, the FDA created the Essential Medicines List (EML) which focuses on the medications most needed by patients in the U.S. It is a top priority of the U.S. Government to secure the supply chains for these medicines to prevent future shortages. The HHS Supply Chain Control Tower was established in March 2020 to provide visibility into critical medical supply chains. In conjunction with the Strategic National Stockpile and the Federal Emergency Management Agency, the Control Tower monitors the availability and supply of critical medical products, which include personal protective equipment, pharmaceuticals, new COVID-19 therapeutics, and other supplies.
Risks Associated with the Current Pharmaceutical and API Supply Chain
- 52 percent of all FDA-registered finished dosage manufacturing facilities are outside the United States. The economic pressure of the generic market has driven manufactures overseas and has created a huge barrier to entry for new competitors.
- Foreign dependence on single source nations, potential adversaries, and other strains could lead to gaps in the supply chain that create shortages and other supply risks. Lack of geographic diversity in supply chain sources means that one disaster, whether geopolitical, economic or natural, could have dire effects on the supply chain.
- Supply chains for brand-name drugs are likely less at risk. In response to Docket No. BIS-202-0034, manufactures implement risk management plans that may include alternative manufacturing sites, inventory reserves, among other things to ensure continuity of shipping lines.
- Sterile injectables are at a greater risk for shortage than other medications on the EML. Factors include the high susceptibility of the aseptic manufacturing of sterile drugs to contamination, lack of focus on quality, and concentration of the market share due to the need for highly specialized facilities.
- Just-in-time inventory management practices limit inventory and reduce the ability to respond to surges in demand.
- Reduced incentive for existing manufacturers to invest in upgrading equipment, improving supply chains, or expanding capacity.
- Information provided by drug manufacturers to the FDA does not provide sufficient insight into the supply chain, as some foreign drug manufacturers fail to register facilities and other API suppliers that contribute to the supply chain.
Recommendations for the Pharmaceutical and API Supply Chain
- Allow additional authority to the FDA to improve transparency and incentivize resilience of the supply chain.
- Increase the FDA and HHS’ ability to collect information and require that API and finished drug labels identify original manufacturers.
- Assemble a consortium of public health experts to evaluate the EML and create a Critical Drug List (CDL).
- The CDL will include up to 100 more drugs that are critical for U.S. patients and will determine potential volumes needed.
- The Emerging Technology Program will foster collaboration with the industry to reduce barriers to entry for advanced manufacturing. In addition, the Advanced Manufacturing Regulatory Framework Working Group will work to streamline the approval process of these technologies.
- Using funding from the American Rescue Plan, the National Institute for Innovation in Manufacturing Biopharmaceuticals will launch an effort to improve technological capabilities, increase domestic capacity, and reduce supply chain demands.
- Create a rating system to incentivize drug manufacturers to invest in achieving quality management maturity.
- Will promote higher quality levels of drugs and the adoption of better manufacturing technologies.
- Create a virtual strategic stockpile using the EML and CDL.
- Involves contracts with API and drug suppliers to hold surplus together instead of keeping APIs and drugs physically stockpiled at a central location.
- Identify the drugs and amounts needed within this stockpile.
- Engage with international partners to map a global supply chain for the CDL.
- Develop a centralized API supplier database to ensure geographic redundancy and diversity in production, in addition to production by allies.
The report analyzes the United States’ current supply chains of semiconductors, large capacity batteries, critical minerals and materials, and pharmaceuticals. Across all four sectors, the general theme remains the same: the United States is currently heavily dependent upon foreign imports, which exposes the country to vulnerabilities and potential supply chain disruptions. The recommendations in this report seek to strengthen the United States’ domestic capacity to manufacture across these sectors to decrease net dependence upon foreign adversaries and countries. The administration seeks to employ the private and public sectors as well as agencies such as the DOD, DOS, DOE, DOI, and HHS to increase transparency and invest in sustainable improvements across these four key supply chains. In conclusion, this report analyzes the United States’ supply chain vulnerabilities and provides recommendations to improve U.S. economic resilience and independence.