'It's Like Putting A Band-Aid On A Bullet Hole'
BY RICHARD McCORMACK
The Department of Defense is developing a broad strategy to deal with the growing migration of semiconductor fabrication plants and electronics assembly operations offshore. The strategy will encapsulate DOD's "trusted" foundry access program, which has expanded beyond its initial contract with IBM to supply the military and the National Security Agency with safe chips from its wafer fabrication (fab) plant in Essex Junction, Vt.
There are now 10 companies that have been accredited under DOD's "trusted" supplier program for electronics production facilities located in the United States. The little-publicized program is expanding to include companies throughout the electronics supply chain, due to growing worry that more sectors of microelectronics -- from design to fabrication, assembly, packaging and testing -- are being outsourced overseas.
"We are not in a position to dictate the strategic direction of the integrated circuit market so our posture is how can we rely on the commercial products being developed while minimizing the risks to us," says Gary Powell, Deputy Undersecretary of Defense for Industrial Policy.
Powell's office has been given the task of developing the "trusted" supply policy, but it is proving difficult. Former Defense Deputy Secretary Paul Wolfowitz requested the policy in an October 2003 memo to the secretaries of the military departments, the chairman of the Joint Chiefs of Staff and all the senior-most appointed officials in the Pentagon. The Department of Defense "should ensure the economic viability of domestic IC sources," Wolfowitz wrote. "The health of the defense IC supplier community depends on the health of the larger commercial IC base....Therefore the DOD will support policies that provide a level playing field internationally for the procurement of commercial products."
That was followed in 2005 with a stunning Defense Science Board (DSB) report that raised national security concerns over the migration of the electronics industry offshore, particularly to China. That report, from the Task Force on High Performance Microchip Supply, has received no attention from policymakers in Congress or the Bush administration. It recommended that the Defense Department immediately develop a comprehensive industrial policy aimed at stemming the hemorrhage of the semiconductor industry to foreign nations. The DSB task force said the Defense Department was the "logical steward to lead, cajole and encourage a national solution to this critical problem regardless of which arm of government must act...There is no longer a diverse base of U.S. IC fabricators capable of meeting trusted and classified chip needs."
Since the DSB report, more U.S. companies have shifted production overseas, have sold or licensed high-end capabilities to foreign entities, or have exited the business.
Most of the newest, highest tech semiconductor fabrication plants are being built offshore, and the Department of Defense continues to lose access to integrated circuits, according to analysts specializing in the electronics supply chain. Market trends are not reversing.
Raising even greater alarm in the defense electronics community was the recent announcement by IBM to transfer its 45-nanometer bulk process IC technology to Semiconductor Manufacturing International Corp. (SMIC), which is headquartered in Shanghai, China. In January, SMIC announced that it would be partnering with the Shenzhen municipal government in China to build a fab that will produce 45-nanometer chips based on its IBM license. IBM provides SMIC with a shot in the arm -- allowing it to move beyond its present 90-nanometer capabilities, and leapfrog its Chinese competitors that are producing 65-nanometer chips.
There is a concern within the defense community that it is IBM's first step to becoming a "fab-less" semiconductor company. IBM is the only state-of-the-art IC manufacturer that has a "trusted" take-or-pay contract with the Defense Department and the National Security Agency at it plant in Vermont. Intel, the other cutting-edge U.S. integrated circuit maker, does not want to do dedicated work for the U.S. government. It is building a new fab in China, thanks to $1-billion in Chinese government incentives.
"Where is this going to lead us?" asks one defense industry analyst. "Urgent action is needed to stem this tide."
But urgent action isn't on the immediate horizon. Instead, as a stop-gap, DOD has embraced the "trusted" approach of accrediting U.S. facilities for production of electronics so that they do not contain any "Trojan Horses." The trusted strategy of validating and approving U.S.-based factories does not address the broader issues of foreign incentives and subsidies, and it is described by some in the defense electronics community as "putting a Band-Aid on a bullet hole."
Little has been written about the trusted foundry program and its implications, and a formal policy was expected more than a year ago. DOD's Office of Industrial Policy is working on putting together that strategy, but it has a long way to go.
"We decided to do this by partnering with industry associations -- both the Government Electronics and Information Association (GEIA) and the Aerospace Industries Association (AIA) -- to try to develop a consensus across the community," says Sydney Pope, microelectronics industrial analyst in DOD's Office of Industrial Policy. "You have to work across the entire supply chain to develop consensus because we're not going to get microelectronics companies like IBM, Intel and Texas Instruments to impose controls and additional protections on their normal process of doing things through a government contract," says Pope. "You need to have a blueprint -- an overarching document that people can poke holes at and chomp on and build consensus with." Adds Powell: "What the implementation vehicle or vehicles might be, that's to be determined, but it is important to get all of the issues in one group so they can be addressed holistically."
The trusted program is already driving investment and DOD contracts to U.S. producers able to provide microelectronic components for military and national security applications. "Not everyone is going to want to sign up as a trusted foundry," says Pope. "Those companies that do will get a certain portion of the Department's business. We have put in some of our critical contracts language that requires our primes to come back as part of their systems engineering master plan with a strategy for insuring trust in the electronics components used in their systems, and we offer them as an approach the Trusted Foundry Program."
It is not mandated that contractors utilize products from the companies that have been accredited as trusted sources. "The prime can come back and utilize the trusted foundry or they can use another approach," adds Pope. "It's a program management decision and the program office responsible for that program has the responsibility to determine whether or not that will meet their needs. If it's a major acquisition program, it comes up to OSD for review."
Globalization has compounded the challenge of assured supplies. "We have circuit design in the United States," Pope explains. "We have wafers that are produced in Taiwan, packaged in the Philippines, tested in Singapore and sent to a distributor in Arizona. The supply chain is constantly changing. Even if the intent isn't malicious, a change in a design could have terrible consequences if we were not aware of it. So configuration management of the microelectronics is a major concern across the industry and the government."
Powell notes that DOD cannot require a 100-percent defense unique solution to its electronics supply chain woes. "We have to figure out what's really important from a system level and make sure those have an adequate level of protection and for less important systems, we have to rely more extensively on commercial best practices."
Fortunately, other industries are in a similar situation. The banking industry is dependent on equipment such as routers that cannot be corrupted.
But a company like Cisco Systems has pronounced that it is a "Chinese company," and that virtually all of its products are produced under contract in factories overseas. Does it matter if DOD is buying products made offshore so long as they are being produced under contract by an American-owned firm?
You bet, Pope responds. "Basically, if it's produced in the United States, then it's an American company. The rationale for that is this: If it is produced in the United States, then it is subject to our laws and therefore we have a lot more control over what happens than if it is produced anywhere else. I don't know if I'd say that a [subsidiary] in Singapore that is owned by a United States company is a United States company....I don't think we're saying that all of our microcircuits have to be produced in the United States. What we're saying is we have these trusted suppliers for these integrated circuits -- foundries for particularly sensitive applications. For other applications, we're going to have to make sure they have documented, well-maintained supply chains even if they're not in the United States."
Release of a trusted policy "is dependent on industry agreeing with it," Pope explains. "I am working with committees of people who essentially are volunteered by their companies so this isn't the kind of thing that people are on the payroll to address. People are putting in their own time to try to work resolution, so it's hard to say, 'Here is our timeline.' The most important thing is to get a quorum of opinion that points in the same direction."
The trusted program is being run out of the Defense Electronics Agency in Sacramento. It oversees the initial contract with IBM. Shortly after that contract was signed some of the military services were not too keen on providing their portion of funding. But that problem was resolved when the Office of Secretary of Defense took a stand and stopped the bickering. The program has been fully funded. According to government budget documents, DOD and NSA are each providing IBM with about $45 million this year.
There is worry about the IBM deal, particularly since the military and national security agencies have growing demand for high-performance application-specific integrated circuits. The IBM contract is due to expire in 2011. But IBM may no longer be in the semiconductor fabrication production business.
If that were to occur, the federal government might be forced to open its own semiconductor facility, or at least contract with a company to run a dedicated plant to supply integrated circuits to the entire U.S. government. But it would come at a cost: such a fab would likely not produce state-of-the-art components. Being one or two generations behind would be the tradeoff for an assured supply.
The overall problem of trusted sources can only be solved by Congress and the President creating an industrial policy aimed at reviving and re-building the U.S. microelectronics manufacturing base. "This needs to be a priority," says one defense microelectronics analyst. "If we weren't in the middle of a war, things like this would be getting more attention. The real threat is being dependent on your potential adversaries for defense components. That is a big problem."
Companies That Have Signed DOD Contracts For "Trusted" Production Facilities:
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