Congressional Report Could Be Major Step To Strengthen US Defense Supply Chain

WASHINGTON: A bipartisan congressional task force has concluded that China used the COVID-19 pandemic to target parts of America’s defense and healthcare supply chains — and warns that if fixes are not made quickly, the US will find itself lacking key components needed in case of a major conflict.

It’s an issue experts have been sounding the alarm on for years, but now, armed with an official take from Congress, there is hope that there will be statutory requirements and real money put towards solutions.

The Defense Critical Supply Chain Task Force report, released July 22, is the result of a bipartisan congressional effort stood up in March and co-chaired by Rep. Elissa Slotkin, D-Mich., and Rep. Mike Gallagher, R-Wis. The goal was to produce “actionable” recommendations for strengthening the US defense supply chain.

“Throughout the pandemic, US adversaries like China weaponized supply chain vulnerabilities in a way that threatened Americans’ health and security,” Gallagher said in a statement. “Our defense critical supply chain faces similar weaknesses that, if exploited, would impair our ability to compete with our adversaries and respond to crises.”

“Last year, we all saw how the shortages of PPE cost American lives,” Slotkin said in a statement. “It was obvious that our supply chains had failed. It was so clear we could never let that happen again, especially on items that are directly connected to our national security.”

To this end, the report provides six legislative recommendations that the Task Force has sent to House Armed Services Committee chair Adam Smith, D.-Wash., and ranking member Mike Rogers, R-Ala. The six recommendations are intended to become amendments to the 2022 National Defense Authorization Act. It’s unclear right now which of these recommendations will be adopted and the specifics around each.

The Task Force’s six recommendations for bolstering the Defense Department’s supply chain include:

• Requiring DoD to develop a risk assessment strategy and system for actively managing risk.
• Developing a method for DoD to have better visibility across its supply chain.
• Reducing DoD’s reliance on “adversaries” for resources and manufacturing.
• Improving the workforce through public-private partnerships.
• Strengthening the US’s ability to use allies’ and partners’ capabilities to address weaknesses.
• Securing the supply chain for rare earth elements (REE).

The Importance of Rare Earth Elements

The report emphasizes several issues, including rare earths. A key component for many DoD technologies, from electronics and magnetic materials to glass and lasers, REEs are also used in many industrial processes.

“For me, [rare earth elements are] the most serious issue brought out by the report, [and they] highlight the most egregious problem that US faces,” Hudson Institute expert Bryan Clark told Breaking Defense in an interview.

The term “rare earth elements” is a bit of a misnomer. Some REEs are, indeed, rare, but most are readily abundant in the earth’s crust. The issue, Clark said, is that China currently has a “stranglehold” on the sourcing as well as the processing of REEs required to transform them from their natural state into a form they can be used in for electrical, electronic, and industrial applications.

One reason the US has not developed this domestic capability is due to the environmental impacts. Toxic chemicals are used to separate REEs from other elements, and US environmental regulations make the process “more onerous and expensive” for US companies, Clark said. China has agreed to take on the environmental risk because it views REEs as a strategic priority.

“It has nothing to do with how many [REEs] are in the ground,” Clark said. “It has everything to do with how much environmental degradation they’re willing to accept for the purpose of refining it.”

Clark agreed with the report’s recommendation to diversify the sources for mining and refining REEs, suggesting “it would be nice” if US allies and partners such as Australia, India, and some European countries developed these capabilities to provide the US with an alternative to China, which controlled approximately 80 percent of REEs in 2019, according to the US Geologic Survey.

Microelectronics Supply Chain

The Task Force’s report also emphasizes microelectronics. While DoD buys only a small number of semiconductors directly, chips are used in a broad range of DoD tech, from commercial off-the-shelf (COTS) products to weapons platforms and systems. The small number of special-purpose chips DoD does buy directly it gets through domestic trusted foundries. Given DoD’s miniscule role as a direct buyer (~1 percent of the market), it has no influence over most chip designers, foundries, and packagers.

Nonetheless, the DoD faces issues revolving around the role of chips as critical components in its tech. While many weapons platforms and systems do not use the same size of chips as those used in the commercial market, the department’s prevalent COTS products do. Shortages in the broader commercial market could impact DoD’s supply chain for COTS.

The Task Force’s report notes, “The centralization of the commercial ME industry off-shore, and the corresponding lack of domestic semiconductor manufacturing capacity, create critical supply chain vulnerabilities that impact the national security and economic prosperity of the United States.”

Clark and Hudson Institute colleague Dan Patt recently wrote an in-depth report on microelectronics — entirely independent of and separate from the Task Force — published ahead of the congressional report. Regaining the Digital Advantage examines the current global microelectronics market and suggests the US adopt a “demand-focused strategy.”

“To address the current chip shortfall, advocates renewed their longstanding calls for federal support to expand US semiconductor fabrication, which fell from nearly 40 percent in 1990 to just 12 percent of global production in 2020,” Clark and Patt’s report says. “These proposals, however, are trying to solve the wrong problem.” Instead, the report notes, “Concentration—not globalization—threatens the US microelectronics supply.”

While globalization was meant to spread the supply chain, thereby creating resilience through geographic diversity and redundancy, components of the supply chain — design, fabrication, packaging — actually became concentrated among a few “national champions,” Clark explained. The US still leads in chip design and sales, while Taiwan and South Korea lead in fabrication, and Japan, Taiwan, South Korea, and Malaysia lead in packaging. (China is not an issue for the microelectronics supply chain.)

“So you can see in each step of that semiconductor supply chain,” Clark said in the interview, “we globalized and then countries realized there was a lucrative opportunity here, if they’re willing to pay to build themselves national champion. They took a bunch of the market share, and now we’ve evolved to the point where it gets globalized but still highly concentrated. So the problem with that, of course, [is] that [if] you have any event that affects Taiwan, for example — a weather event, a military action, an economic action — it shuts down enormous parts of the chip making capacity of the world.”

Asked about the US Innovation and Competition Act (formerly known as the Endless Frontiers Act), Clark said it was “a step in the right direction,” as far as the US “recogniz[ing] it has a problem” that requires “deliberate steps” to fix.

But Clark said the bill was “going in the wrong direction” in its approach, because it emphasizes funding fabrication facilities to build today’s chips rather than research & development for next-generation chips. Despite the bill’s shortcomings, Clark said he still sees the solution to the issue as “definitely a legislative and policy issue.”

Based on the current situation — including myriad factors beyond the scope of this story but covered thoroughly in Clark and Patt’s report — they recommend two main courses of action.

The first, the report says, is to invest in “exploiting the emerging transition in chip design from simply increasing density to growing complexity and specialization in architecture and design.”

Clark said there’s two specific issues here: The first is shrinking the size of chips to get better performance, and the second is creating new chip architectures to increase information throughput. And through efforts such as those by the Defense Advanced Research Projects Agency, or DARPA, the DoD is “actually at the cutting edge of this,” Clark said, but “it’s just that there’s not the scale.”

If the US pursues commercial investment, innovation, and scalability, there will be a direct benefit to DoD. “I definitely think that these smaller chips and these more heterogeneous chip designs are going to become more prevalent in weapon systems,” Clark said. The issue is that many legacy weapons systems — such as planes, ships, and missiles — have much longer shelf lives than iPhones.

“So that’s why you’re not seeing more of this transition to the smaller node sizes or these more heterogeneous chips in DoD weapon systems, but it will happen, as the systems get replaced by new generation systems.” Clark noted updated chips are more readily and frequently incorporated into DoD’s COTs products as well as its computer-supported tech, such as combat and communications systems.

The second course of action calls for “modest government funding to catalyze greater diversity in production of today’s generation of chips, which would improve supply chain resilience and assurance and grow the fabrication and packaging capacity needed for future [integrated chip] technologies.”

Reducing Foreign Reliance

The congressional Task Force also recommends reducing the US’s reliance on “adversaries.” Aside from the ambiguous term “reduce” — a drop in Chinese REEs imports from 80 percent to 75 percent would be a “reduction,” but would it be meaningful? — the questions revolve around feasibility.

“I think it’s gonna be very difficult to nearly eliminate the US military’s dependence on products that come out of China,” Clark said. “China has embedded itself at a kind of fundamental level in a lot of products, where even though we’ve got Made in America provisions, and we’ve got US manufacturers that actually sell to the military, there’s going to be subsystems — or sub-sub-sub-sub-subsystems — that use components that might have come from China.”

One example Clark provided was lithium. Developing lithium mining, refining, and manufacturing capacity in the US will be “extremely expensive and environmentally challenging. We’re gonna have to accept the fact that China will continue to be a big provider of lithium.”

The best the US could do — with lithium, REEs, and likely myriad products — is to reduce reliance on China while building some domestic capacity so the US could survive a short-term shock to the supply chain. “But to expect that we’ll be able to cut ourselves off day to day,” Clark said, “you know, not ever go back to China, it’s probably not realistic.”