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US and allies to build 'China-free' tech supply chain

Exclusive: Biden to sign presidential order to bolster chip, battery and rare-earth industries

The issue of tech supply chains has taken on added urgency with a chip shortage this year that has hit automakers particularly hard.   © Reuters

WASHINGTON/TAIPEI -- U.S. President Joe Biden is set to sign an executive order as early as this month to accelerate efforts to build supply chains for chips and other strategically significant products that are less reliant on China, in partnership with the likes of Taiwan, Japan and South Korea.

The document will order the development of a national supply chain strategy, and is expected to call for recommendations for supply networks that are less vulnerable to disruptions such as disasters and sanctions by unfriendly countries. Measures will focus on semiconductors, electric-vehicle batteries, rare-earth metals and medical products, according to a draft obtained by Nikkei.

The order states that "working with allies can lead to strong, resilient supply chains," suggesting that international relationships will be central to this plan. Washington is expected to pursue partnerships with Taiwan, Japan and South Korea in chip production and Asia-Pacific economies including Australia in rare earths.

The U.S. plans to share information with allies on supply networks for important products and will look to leverage complementary production. It will consider a framework for speedy sharing of these items in emergencies, as well as discuss securing stockpiles and spare manufacturing capacity. Partners could be asked to do less business with China.

The issue has taken on added urgency with a chip shortage this year that has hit automakers particularly hard.

The U.S. has seen its share of global semiconductor manufacturing capacity plummet in recent decades, according to Boston Consulting Group. What was 37% in 1990 is now down to 12%.

While it has asked Taiwan -- which tops the list at 22% -- to ramp up output, plants there are already operating at full blast, and there are few options for boosting supply in the short term.

Meanwhile, Boston Consulting forecasts that China, helped by an estimated $100 billion in government subsidies, will lead the world with a 24% share in 2030.

Depending too heavily on China for important products poses security risks. Beijing has used regulations to put pressure on trading partners, such as imposing an embargo on rare-earth exports to Japan in 2010 amid tensions over the Japanese-administered Senkaku Islands, which China claims as the Diaoyu.

The U.S. imports about 80% of its rare earths from China, and relies on the country for as much as 90% of some medical products.

Restructuring supply chains is likely to take quite some time, particularly in semiconductors. Because the number of top chipmakers in the world is limited, these companies have the leverage to decide whether to follow America's lead. Doing so will require understanding and cooperation from other governments.

"I've heard that for now, the U.S. will do an intensive review of its supply chains to sort out how much it depends on which countries for semiconductors and rare earths," a Japanese government source said. "It will hash out countermeasures with allies after that."

Washington has already begun laying the groundwork, calling since last fall for economies that are rich in valuable technology or resources, such as Taiwan, Japan and Australia, to join it in disentangling supply chains from China amid simmering tensions with Beijing.

Taipei has been especially quick to respond. Senior U.S. and Taiwanese officials signed a memorandum of understanding in November to promote technological cooperation in seven areas, including semiconductors and fifth-generation wireless, as well as "safe, secure and reliable supply chains."

Taiwan Semiconductor Manufacturing Co., the world's top chip foundry, agreed last spring to build a fabrication facility in Arizona that is likely to become a symbol of this bilateral relationship. The chipmaker will invest $12 billion in the plant, which will produce semiconductors for the military and is slated to come online in 2024. The U.S. government is providing subsidies for the project.

Japan's Ministry of Economy, Trade and Industry has since last year been leading an effort to attract TSMC to the country, to not only establish a more solid three-way supply network, but also provide Japan with a secure future source of cutting-edge chips. The government has budgeted 200 billion yen ($1.9 billion) to roll out the red carpet for the foundry, with an eye toward possible cooperation with Japanese companies.

This appears to be bearing fruit. Nikkei learned this month that TSMC is making plans to build a 20 billion yen research and development center in Japan.

In rare earths, the U.S. is teaming with Australia to work around China's dominance. Australian rare-earth miner Lynas is building a processing facility in Texas with financial support from the U.S. Department of Defense.

Electric-vehicle batteries are another area where action is needed, as Panasonic and South Korea's LG Chem lose market share to Chinese rivals.

But in other fields, such as 5G, new supply chains may prove expensive for American and Japanese companies that lose access to cost-competitive Chinese suppliers like Huawei Technologies.

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