From May 18 to 19, 2023, industry representatives, academics, and government representatives from the United States, Mexico, and Canada gathered in Washington, D.C., for the first North American Semiconductor Conference (NASC). The conference represented the fulfilment of one important pledge that came out of the annual North American Leaders’ Summit in January 2023, and comes at a pivotal moment for the semiconductor industry, which has become the subject of burgeoning geopolitical competition and industrial jostling. Given the capital intensity and lengthy time horizons associated with semiconductor investment, the conference was an important moment to galvanize efforts and align priorities among the three North American countries.
Q1: What does North America stand to gain from growing its semiconductor industry?
A1: Semiconductors are perhaps the most critical element to the global economy today. Some scholars have speculated that in the twenty-first century, semiconductors will play the same role that oil played in the twentieth century, not only in terms of powering economies, but being at the center of conflict and diplomacy. Whether or not this is exaggerated, the role of semiconductors will remain central to future economic growth, economic influence, and defense and national security in the twenty-first century, thus making semiconductors and semiconductor supply chains subject to intense geopolitical competition.
For this reason, shoring up the semiconductor supply chain has been the subject of bipartisan policies through several administrations—an effort that has only grown in intensity and resourcing following the Covid-19 pandemic and increased tensions in the U.S.-China relationship. Several pieces of legislation, most notably the CHIPS and Science Act, contain subsidies and incentives worth more than $50 billion to galvanize domestic production of semiconductors. However, the legislation also contains important provisions for Canada and Mexico, the United States’ partners in North America, to further deepen supply chains and integrate cross-border cooperation in this critical industry.
Beyond supply chain resilience, North America has the potential to serve as a critical buffer in U.S.-China competition with respect to semiconductors. Both Canada and Mexico already possess key parts of the semiconductor supply chain. Further integrating North America is key to complementing efforts to slow China’s semiconductor industry through its Made in China 2025 strategy, as outlined in groundbreaking new rules released by the Biden administration on October 7, 2022. The October policy guidance seeks to leverage export controls to curtail China’s state-led semiconductor industry and array a group of industry-leading countries, such as Japan and the Netherlands, to form a multinational coalition willing to pursue the same strategy. The U.S. strategy of “protect and promote” for semiconductors hinges on being able to fortify more elements of the semiconductor supply chain in North America in order to reduce vulnerabilities in Asia, particularly those related to China’s control of important elements of the semiconductor supply chain.
Q2: What advantages do the United States, Mexico, and Canada have in the semiconductor space?
A2: The future of an integrated North American semiconductor supply chain looks bright. One needs only to look at the integration of the automobile manufacturing sector, where individual parts and partially assembled components are shipped back and forth across the Mexican, U.S., and Canadian borders as many as eight times, as part of the final assembly process in order to leverage the competitive advantages of each country. The infrastructure, trade agreements, and regulatory environment that make this possible can power the integration of other industries, such as semiconductors.
The United States continues to lead in semiconductor research through its network of world-class national laboratories, universities, and companies; the semiconductor industry invested $50 billion in research and development (R&D) in 2021 alone, with passage of the CHIPS Act further accelerating this trend. The United States also has competitive edges in manufacturing equipment, design software, and intellectual property, and the CHIPS Act will also provide investment tax credits for semiconductor equipment manufacturing. U.S. companies employ over a quarter of a million workers domestically and semiconductor sales totaled $208 billion in 2020. Among the top 10 global semiconductor companies, measured by market capitalization and sales revenue, six are U.S. companies, including the largest, Intel. Recognizing a lack of domestic production capacity, Intel and others are investing huge sums to construct fabrication facilities, including a $200 billion investment to build and run Intel Foundry Services.
Canada has over 100 national and multinational companies conducting research and development on microchips. These companies are attracted by the country’s trade agreements, not least of which is United States-Mexico-Canada Agreement (USMCA), more affordable utilities (much of which is based on renewable hydroelectricity), and a large pool of engineers. In addition, Canada is a leader in artificial intelligence (AI) becoming the first country to have a national AI strategy. AI is expected to have a major impact in the design and productionof next generation microchips, given the exponentially larger amount of data that can be processed and stored with AI applications.
Like Canada to the north, Mexico in the south is an obvious friend-shoring location for the United States. It has lower labor costs and an educated workforce and has a strong electronics manufacturing base. Mexico is the eighth-largest electronics producer in the world, with $5 billion in annual investments in the sector and the vast majority of these goods being shipped north, with the United States being the largest importer. Mexico already has some chip manufacturing companies and exported $720 million in semiconductors in 2021. In addition, President Andrés Manuel López Obrador (AMLO) has suggested that semiconductor plants in Arizona could be powered by solar power plants in Sonora in northwest Mexico. Given the scale and proximity of the Mexican electronics and automobile industries, it is logical that Mexican and international semiconductor companies will want to grow their footprint in the country, including by taking advantage of the $500 million that the CHIPS Act earmarked for cooperation with allies and partners.
While East Asia is a powerhouse for advanced semiconductor manufacturing and will remain so in the future, North America could insulate this vulnerable industry if the three countries manage to coordinate policies to build redundancy into the supply chain. Creating redundancies in a geographic area that is less subject to geopolitical competition than East Asia will build supply chain resilience that could reap benefits for North American countries.
Q3: What are some of the obstacles to North America becoming a semiconductor hub?
A3: The development of the semiconductor industry in North America nevertheless faces a plethora of challenges. High levels of international competition, low capital investment, workforce gaps, and ongoing international trade disputes are some of the most prominent obstacles the United States, Mexico, and Canada must overcome as they work towards becoming a major semiconductor hub.
The semiconductor summit, according to the White House, will seek “to adapt government policies and increase investment in semiconductor supply chains across North America,” “[coordinate] semiconductor supply chain mapping efforts to develop a collective understanding of unmet needs,” and identify “the skills needed to develop the workforce [in] North America over the next five years.” This coordinated effort might reassure the industry of the three countries’ commitment to create a fostering environment of growth and stability in the semiconductor market, thus attracting more investment. But if the recent trade disputes are any indication of the volatile political environment in all three countries, the road ahead looks bumpy and uncertain.
While the United States has led the way in research and development in semiconductor technology, domestic political disputes over immigration and job creation are likely to hamper any transnational cooperation further perpetuating workforce gaps, especially when it comes to the United States and Mexico.
A similar coordination obstacle is expected throughout the supply chain. Although parts of the United States are rich in middle rare earths, the production of chips still requires other elements such as neon gas and palladium, of which Canada is the only emergent significant producer in the trio. Mexico, on the other hand, will most likely attract outsourced semiconductor assembly and test and printed circuit board assembly companies. However, the country’s strained water sources will not be able to sustain the chip manufacturing industry if it does not adopt more environmental practices. It is estimated that the production of one chip can take up to 2,200 gallons of water purified to high levels of specification, meaning daily water measures in the millions depending on the factory’s capacity.
And water is not the only concern. Semiconductor fabs also have an outsized demand for energy, given the pristine environment in which they are manufactured. Estimates assess that fabs require as much as 2,400 megawattsof electricity each day, equivalent to the daily energy consumption of 50,000 homes. Questions remain, therefore, about the viability of AMLO’s suggestion to power semiconductor fabs through solar energy.
The United States, Mexico, and Canada have a long road ahead if they are to compete with the current semiconductor manufacturing powerhouses in East Asia. As growing demand for semiconductors shows no sign of decelerating, regional cooperation will be of the utmost importance for the three countries to leverage their strengths and become something greater than the sum of their parts. The summit and other investments are therefore important first steps toward progress.
Q4: What progress has been made so far on building up the semiconductor industry in North America?
A4: In June 2021 the White House published the 100-Day Supply Chain Report, which had been requested as an in-depth investigation of the vulnerabilities of supply chains in an array of U.S. industries, including semiconductors. The high-level commitment embodied by the CHIPS Act was in many ways a direct response to the report, in turn driving an additional estimated $210 billion in private sector investment.
The government of Canada has also announced important investment in the semiconductor industry. Early in 2022, the minister of innovation, science and industry announced the Semiconductor Challenge Callout, a fund of $150 millionto bolster Canadian R&D, strengthen manufacturing, and contribute to a national network of supply chains to position Canada as a critical global supplier. In addition, the minister pledged to provide $90 million for the Canadian Photonics Fabrication Centre. In March of this year, the United States and Canada also pledged to create a bilateral semiconductor packaging corridor, beginning with an expansion of IBM into Canada. During this same announcement, the United States pledged $50 million for U.S. and Canadian companies working on packaging and printed circuit boards.
In September 2022, a high-level U.S. delegation invited Mexico to participate in a discussion to shift semiconductor production from Asia to North America. U.S. secretary of state Antony Blinken and Mexican president AMLO have also discussed potential roles that Mexico could play in the various initiatives encompassed by the CHIPS and Science Act. An opportunity for investment was also engendered by the Inflation Reduction Act. Mexico and Canada leveraged their influence in USMCA to amend the act to include subsidies for electric vehicles containing batteries manufactured in North America. Given that the act will benefit all parties, there could be knock-on investment into Mexican production of microchips used in vehicles.
According to the Semiconductor Industry Association, the CHIPS Act has already stimulated around $200 billion in private investment, along with the announcement of over 50 new semiconductor ecosystems projects and 44,000 new jobs. With continued cooperation and investment, Canada, the United States, and Mexico are poised to significantly bolster the semiconductor industry in the Americas.
Q5: What came out of the summit and what should the next steps be?
A5: Over the course of the two-day conference, it appeared all three countries were moving in a positive direction. Notably, the conference drew substantial participation both from the private sector and ministerial-level officials across all three countries, with the U.S. delegation led by Commerce Secretary Gina Raimondo, Mexico represented by Secretary of Economy Raquel Buenrostro, and Canada jointly spearheaded by Minister of Innovation, Science and Industry François-Philippe Champagne, and Minister of International Trade, Export Promotion, Small Business and Economic Development Mary Ng. The presence of these figures conveyed a high-level commitment on the part of all the North American governments, which is an encouraging sign, especially at the outset.
Among the more promising issues discussed at the conference were cooperation on workforce development and supply chain mapping. The first will be crucial for building up a North American labor force commensurate with the surging investments in semiconductor manufacturing and infrastructure. Indeed, no amount of new construction can make up for present shortfalls in qualified workers. To this end, the role of Arizona State University, a leading center of semiconductor research, in organizing the NASC, spoke to the vital role higher education institutions can and should play moving forward.
Supply chain mapping will also be an essential area to identify synergies and build a more efficient North American pipeline. To this end, one pitfall to be avoided lies in countries seeking to develop the whole semiconductor supply chain internally, losing out on the efficiencies which come from leveraging each country’s comparative advantages. Trying to do everything risks spreading even substantial investments too thinly and making North American semiconductor policy a matter of competition, rather than collaboration. Efforts to identify the unique geographic, economic, and research advantages each country brings to the table should be boosted in the aftermath of the conference. These initiatives could be spearheaded by groups like the Semiconductor Industry Association, another cohost of the conference alongside Arizona State University, which bring a wealth of technical expertise.
Ultimately, the NASC represents another important, but still nascent, step in the development of the North American semiconductor industry. The true measure of success remains whether the region can take advantage of the current moment to align industrial, trade, and foreign policies and seize a generation-defining opportunity.
Ryan C. Berg is director of the Americas Program and head of the Future of Venezuela Initiative at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Christopher Hernandez-Roy is the deputy director and a senior fellow with the Americas Program at CSIS. Juliana Rubio is a program manager with the Americas Program at CSIS. Rubi Bledsoe is a program coordinator with the Americas Program at CSIS. Henry Ziemer is a program coordinator and research assistant with the Americas Program at CSIS.