Compromised By Design? Securing the Defense Electronics Supply Chain

http://www.brookings.edu/research/papers/2013/11/4-securing-electronics-supply-chain-against-intentionally-compromised-hardware-villasenor

Executive Summary:

Electronic “chips” are found everywhere—not just in critical defense systems, but also in the broader infrastructure for power, finance, communications, and transportation. All of these systems function effectively only when the electronic circuits at their heart can be trusted to operate as intended.
Unfortunately, ensuring trust has become much more difficult in recent years. Concern over the growth of counterfeit electronics (parts that have been harvested from discarded systems, relabeled, and sold as new to unsuspecting buyers) has grown in recent years. These parts can fail prematurely, with potentially disastrous consequences. Thanks to recent congressional attention, improved detection methods, and heightened screening requirements for parts destined for defense systems, however, the threat of counterfeits is being actively addressed.
Yet the supply chain is almost completely unprotected against a threat that may turn out to be more significant in the long term: Chips could be intentionally compromised during the design process, before they are even manufactured. If placed into the design with sufficient skill, these built-in vulnerabilities would be extremely difficult to detect during testing. And, they could be exploited months or years later to disrupt—or exfiltrate data from—a system containing the compromised chip.
As chips have gotten more complex and design teams have grown larger and more globalized, the opportunities to insert hidden malicious functionality have increased. If the history of cybersecurity has taught us anything, it is that these opportunities will be exploited. The prudent question, therefore, is not “will intentionally compromised hardware will end up in the defense electronics supply chain?” but “how do we maintain security when it inevitably does?” This paper aims to help frame the discussion regarding how best to respond to this important and underappreciated aspect of cybersecurity.

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U.S. Manufacturing Expands At Best Pace In 2½ Years

http://www.manufacturing.net/news/2013/11/us-manufacturing-expands-at-best-pace-in-2%C2%BD-years-0?et_cid=3574502&et_rid=490548696&linkid=http%3a%2f%2fwww.manufacturing.net%2fnews%2f2013%2f11%2fus-manufacturing-expands-at-best-pace-in-2%25C2%25BD-years-0

WASHINGTON (AP) -- U.S. factory activity expanded in October at the fastest pace in 2½ years, suggesting that the 16-day partial shutdown of the government had little effect on manufacturers.
Instead, overseas demand and healthy U.S. auto sales appear to be supporting factory output. The housing recovery is also lifting the furniture and wood products industry despite a recent slowing in home sales.
"We've become accustomed to the way Washington operates in the past couple of years and assume that it will get resolved eventually, however painfully," said Bradley Holcomb, head of the survey committee of the Institute for Supply Management, a trade group of purchasing managers that on Friday reported a solid manufacturing figure for October.
The ISM's manufacturing index rose to 56.4 from 56.2 in September. A reading above 50 indicates growth.
Factories also expanded in Europe this month, though at a slightly slower pace, according to surveys in that region. Manufacturing indexes have all picked up in China, Japan, and South Korea.
The overseas strength is boosting demand for U.S. factories. A measure of export orders jumped to its highest level in nearly a year and a half in October, the ISM report said.
"The outlook for manufacturing looks far more constructive now than it did over the past several months, in light of the improving global backdrop," said Michael Dolega, an economist at TD Economics.
U.S. factory activity has now risen at an increasingly fast pace for five straight months, according to the ISM's index. In October, a measure of new orders rose slightly. And a gauge of production fell but remained at a high level. Factories added jobs, though more slowly than in September.
The shutdown did depress activity at some companies that make metal products and electrical equipment. And while the survey's findings suggest stronger output in coming months, the most recent measures of factory production remain tepid.
"The strength of this hasn't yet been reflected in actual manufacturing output," said Amna Asaf, an economist at Capital Economics.
On Monday, the Federal Reserve said factories barely increased their output in September. Automakers produced more. But that gain was offset by declines at companies that make computers, furniture and appliances.
Companies reduced demand for long-lasting factory goods in September, the government said last week. Orders for industrial machinery, electrical equipment and other core capital goods fell. And August's figures were revised down.
Economists pay particular attention to core capital goods, which exclude aircraft and defense-related goods, because they reflect business confidence.
Analysts were also encouraged by a survey of companies in the Chicago region, released Thursday. It found that the companies expanded at their fastest pace in more than two years in October. New orders jumped, and hiring also rose.
Still, economists don't expect manufacturing to boost economic growth in the coming months. Growth likely fell to a weak annual rate between 1.5 percent and 2 percent in the July-September quarter from a 2.5 percent pace in the April-June period.
Most economists expect similarly slow growth in the final three months of the year.

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Cliff Waldman, senior economist for the Manufacturers Alliance for Productivity and Innovation (MAPI), offered the following analysis:
“The October report on U.S. manufacturing activity from the Institute for Supply Management (ISM) contributes to growing evidence that modest improvements in global financial stability and growth are benefiting U.S. factories. The Purchasing Managers’ Index rose slightly from 56.2 in September to 56.4 in October, the highest level for this closely watched leading indicator of factory sector performance since April 2011.
“The demand components of the index were notably positive, with the new orders component remaining above the strong 60 percent level and the backlog of orders, a measure of the pressure on the factory production schedule, increasing nicely from contraction territory in September to growth territory in October,” Waldman continued. “Neither the data nor the respondent comments in October suggest any measurable impact from the government shutdown, although reports for coming months need to be interpreted carefully for any distorting influence of Washington difficulties.

“In recent months, the survey-based data from the ISM have painted a more optimistic picture of manufacturing performance than the industrial production reports from the Federal Reserve,” Waldman concluded. “Federal Reserve data show that the third quarter rebound from the modest contraction of manufacturing output in the spring was a disappointing 1.3 percent. Fed data also show that the slowdown in the U.S. housing recovery is impacting overall manufacturing performance. Taken together, the ISM data and the industrial production data suggest positive but muted near-term performance for U.S. factories, as the beneficial impacts of an improved global growth picture are at least somewhat neutralized by uncertainties about the sustainability of the rebound in key parts of the world and the potentially harmful effects of historic policy uncertainty in Washington.”

Airbus Promotes Its U.S. Links On Boeing's Turf

http://www.manufacturing.net/news/2013/10/airbus-promotes-its-us-links-on-boeings-turf?et_cid=3559583&et_rid=490548696&linkid=http%3a%2f%2fwww.manufacturing.net%2fnews%2f2013%2f10%2fairbus-promotes-its-us-links-on-boeings-turf

WASHINGTON (AP) -- Airbus, headquartered in France, is pitching its value to the U.S. economy as it takes its battle for dominance in the global airplane market onto rival Boeing's home turf.
This week for the first time Airbus is holding its annual meeting with its suppliers from around the world in Washington instead of at home in Toulouse. It's the company's way of underscoring that 42 percent of its procurement spending — about $13 billion in 2012 — goes to U.S. companies.
Earlier this year, Airbus broke ground on a $600 million assembly plant for its popular A320 airliner in Mobile, Ala., the company's first such facility in the U.S. A poster at the company's offices only a few blocks from the White House promotes the A320 as made in America.
Airbus currently claims less than 20 percent of the U.S. commercial airplane market, but is aiming for 50 percent — roughly the same as its market share worldwide, Airbus CEO Fabrice Bregier said in an interview Thursday.
"There is room to maneuver to do better in the United States," he said. "We care about this country, we have extremely good partners here, we are competitive and we want to grow with them."
Airbus is having some success with its campaign for the U.S. market, Bregier said, noting that Delta Air Lines and JetBlue have ordered A320s.
"This is first of all because of the quality of the product, but also because we are seen as a U.S. citizen and assembling our aircraft here in the United States," he said.
Boeing officials, however, scoff at Airbus' attempts to emphasize their value to the U.S. economy, noting that Boeing employees 160,000 workers across the country, about half of them involved in commercial airplanes and the rest mostly in the company's defense business.
"Their starting up of one very small plant in Mobile versus our 160,000 employees in the United States, it's a significant difference," said John Wojick, senior vice president, global sales & marketing, for Boeing Commercial Airplanes.
Both companies draw on many of the same suppliers scattered all over the world. A significant portion of Boeing's 787 parts, for example, are made in Japan. The company also has suppliers in Europe.
The U.S. is the world's largest airplane market, but it is a "mature" market and not growing nearly as fast as Asia, Wojick said.
Boeing reclaimed the title of world's largest airplane maker from Airbus last year, delivering 601 planes in 2012 to Airbus' 588 deliveries. But earlier this month, Airbus secured its first ever order from Japan Airlines, a deal that undermines Boeing's long-held dominance of the Japanese aviation market.
So far this year, Airbus has sold slightly more planes than Boeing, but both companies "are having a very good year," Wojick said. Boeing will again deliver more planes this year than Airbus, he predicted.
Bregier said he anticipates Airbus will regain the lead on deliveries around 2017 or 2018, when the company ramps up production of the A350, a family of long-range, two-engine, wide-body jet airliners due to come into service next year.
The contest between the two aircraft makers is about a lot more than bragging rights. Boeing forecasts that over the next 20 years the global demand for new airplanes will exceed 35,000 aircraft valued at $4.8 trillion.
The two companies are also challenging each other in legal arenas. They are locked in an international trade dispute at the World Trade Organization in Geneva, each claiming that the other receives illegal state subsidies.

Samsung to cut chip investment

http://www.koreatimes.co.kr/www/news/tech/2013/10/133_144910.html

By Kim Yoo-chul

Samsung Electronics, the world’s top supplier of memory chips, plans to cut its investment in components by as much as 30 percent next year.

The company doesn’t plan to build any more plants to make memory chips because the industry is undergoing rapid structural change.

Industry officials at Samsung's local primary parts suppliers say that aggressive investment does not guarantee high returns anymore due to industry consolidation as well as rising uncertainty surrounding technology and sluggish demand.

“Investment in chips will be cut by 30 percent next year, at least, because we believe Samsung doesn’t have plans to build new fabrication facilities. Total investment in components will remain under 10 trillion won throughout 2014,” said a senior executive at one of the company’s suppliers by telephone.

“It is unlikely that the industry will see cash-burning business projects in chips next year as complexity is increasing because the market is approaching scaling limits.”

Samsung planned to invest 13 trillion won this year. So far it has spent 4 trillion won to transition its Texas plant toward processors, 3 trillion won to build the first line of its NAND flash chip plant in Xian, China, and 2.3 trillion won to build its 17th processor assembly line in Hwaseong.

The remainder will be used for maintenance, technology migration and equipment, said industry sources.

“Samsung’s primary target for its semiconductor business is to churn out advanced flash memory chips including V-NANDs in a strategy to actively meet the industry’s demand for NAND-intensive digital devices such as smartphones, tablets and solid state drives. It may invest more in flash chips. However, the factory expansion, if it materializes, will cost less than 1 trillion won from next year’s tentative investment budget,” said an official from another partner of Samsung.

“Next year’s key issues are how to operate new factories and expanded lines, effectively.”

Strategy change

Samsung’s “golden pricing strategy” encouraged heavy investment in chips in an attempt to gain a larger market share, regardless of the market’s volatility.

“As a new order prevails, you don’t have to invest heavily in chips. Samsung is sourcing conventional DRAM chips from its strategic partners such as SK hynix and Micron Technologies. Rather than building new factories, Samsung can secure enough chips via cross-licensing deals with them,” said a fund manager at a U.S.-based investment bank in Seoul.

Its earlier investments in the 17th processor assembly line and the U.S. plant were aimed at supplying processors to major clients such as Apple.

“Samsung’s factory in Xian will be tasked to sell NAND chips to be used in corporate servers and to leading technology solution majors such as IBM and Apple,” said a Samsung source asking not to be identified.

The company’s in-house solid-state drives with flash chips are used in Apple’s MacBook Air, said the suppliers.

“Samsung will continue to improve semiconductor earnings as it gains more share in non-memory areas including foundries and processors. The company will enhance earnings from NAND as the market continues to grow rapidly, powered by smartphones and solid state drives. In addition, the company plans to improve DRAM margins and share as the DRAM industry moves towards a profitable oligopoly,” said Sanford C. Bernstein in a recent note to clients.

SIA reports semi sales up

http://news.techeye.net/chips/sia-reports-semi-sales-up

According to the latest statistics from the Semiconductor Industry Association (SIA), there has been a six percent quarterly boost in sales, topping the expected industry forecast.

Quarterly sales reached $74.65 billion for Q2 2013, up from the first quarter's $70.45 billion. The SIA claims this is the largest quarterly increase in three years. Global sales for June 2013 were $28.8 billion, a 2.1 percent increase compared to the same time last year and 0.8 percent higher than May. Sales in the Americas grew 8.6 percent in June 2013 compared to last year.

These were higher than predictions by industry group the World Semiconductor Trade Statistics, which expected quarterly growth of 4.6 percent globally and 3.4 percent for the Americas.

Total year to dates sales were at $145.1 billion, above the WSTS' expected $144.1 billion, and in June were 1.5 percent higher than the same time in 2012.

For the month of June, compared to May, there was sales growth in the APAC region of 0.4 percent and a dismal 0.1 percent in Europe, and a 0.9 percent decline in Japan. But this was still 5.4 percent and 0.8 percent growth for APAC and Europe, respectively.

Though together the results are strong enough, individually some SIA members may have reason to worry. Take Intel - its net profit in the quarter ending July 2013 dipped 29 percent , down 5.1 percent year on year and way below market estimates. AMD, meanwhile, posted a loss.

CEO of SIA, Brian Toohey, commented positively, saying in a statement: "There's no question the global semiconductor industry has picked up steam through the first half of 2013, led largely by the Americas.

"We have now seen consistent growth on a monthly, quarterly, and year-to-year basis, and sales totals have exceeded the latest industry projection," Toohey said, adding that memory products sold particularly well.

How money and markets are shaking up semiconductors

http://www.usatoday.com/story/tech/2013/08/05/semiconductor-industry-minyanville/2618625/

For every dollar they earned in the first half of 2013, Intel and Taiwan Semiconductor Co. spent $1.40 in capital investments. That's a lopsided number, and a sign of how competitive the semiconductor industry has become. At one time, TSMC dominated the independent foundry business, churning out everything from graphics cards to smartphone chipsets. In recent years it has become a three-horse race, with Samsung Electronics and Globalfoundries carving out large portions of the market, and Intel threatening to open things up even further with a move into mobile processors.
Both TSMC and Intel hope that, by throwing enough money at the problem, they can distance themselves from the competition. For Intel, this might be true. "Chipzilla" has a fat wallet, and a position in the PC industry that guarantees a decent return on its investment. TSMC has neither advantage, and may struggle to get ahead in the rapidly evolving mobile industry.
For both companies, costs are rising.
Gartner estimates this growth at 7%-10% annually, and predicts that by 2016, a capex budget of $8-$10 billion will be de rigueur for chipmakers like TSMC. Intel is naturally happy about this, and former CEO Paul Otellini speculated last year that new technologies -- such as 450mm wafers, which are expected to be more cost-effective than today's industry-standard 300mm, and EUV, or "extreme ultraviolet lithography," an up-and-coming technology that Intel hopes will allow it to further miniaturize its processors -- would cut the competition by half. "We've got [a] transition to 450mm [wafers] at some point; we've got a transition to EUV at some point," he said. "Both are going to be expensive, and are going to require scale."
Scale that Intel – which generated $19 billion in cash last year, and holds net working capital of $17 billion – can easily afford. Despite high capital expenditures and soft earnings in the first two quarters, the company still generated free cash flow of more than $4 billion. TSMC, on the other hand, had to tap debt markets to the tune of $3 billion as free cash flow turned negative. With working capital of less than $4 billion, and plans to maintain its current level of capital spending in 2014, the manufacturer is going to accumulate debt quickly. Samsung and Globalfoundries are spending less, but they have deep resources to draw upon, and aren't going anywhere.
TSMC's investments need to pay off soon, and in a big way – but this is a certainty that only Intel can count on. With its virtual monopoly in personal computers, and control over both chip design and production, Intel can force the adoption of new manufacturing technologies. Customers generally want these improvements, and are willing to pay for them. New processors typically account for one-third or one-fourth of the price of a new machine. Notwithstanding the dismal PC market, prices have held steady for both computers and processors, and with sales declines leveling off in the US – a leading indicator – it looks as though Intel's investments will pay off, regardless of its success in smartphones and tablets.
Taiwan Semiconductor faces a tougher road in the consumer device industry. Here, processors generally account for 2%-3% of the final product's retail price, and large improvements often go unnoticed by customers. There's small demand for a high-performance chip, and with long battery life already the norm, competition has focused on price. IDC estimates that smartphone prices have fallen 17% since the beginning of last year, and that's a potential problem for TSMC, which makes $9 on a high-end smartphone but only $4 on a low-end unit. To be practical, new factories need to lower costs – and Nvidia doesn't see this happening. Last year, the long-time TSMC customer complained that the new few generations of fabs will do little to cut costs.
That could end up being a moot point, if supply issues prevent customers from taking advantage of a new technology in the first place. Last year, shortages forced Qualcomm to second source its chips – to have some of them made by an alternative supplier, in this case Samsung. In the second quarter conference call, TSMC CEO Morris Chang was candid about his approach to customers. "We don't always put in the amount of capacity that a customer requests…. We have not and will not always follow the customer's estimates for their capacity need."
This obviates any technological advantage Taiwan Semiconductor might have, by forcing customers to design chips that can be moved between suppliers. TSMC expects to have a 20nm fab ready for mass production next year, but if Samsung and Globalfoundries are still at 28nm – in this industry, smaller is better – then Qualcomm has good reasons to stick with the older technology. TSMC might have solved this problem in the near-term by signing a deal with Apple, but without a change in philosophy, the new client probably won't end up any happier than the previous ones.
It's easy to underestimate the value of a strong balance sheet, or the security of a mature market. Intel can probably buy its way into the future, while Taiwan Semiconductor probably can't. On the other hand, neither one is likely to reinvent the industry through massive capex budgets. As smartphones and tablets continue to fall in price, it will become harder for TSMC CEO Chang's "grand alliance" – the ecosystem of chip designers and independent foundries – to push the envelope on performance, and just as difficult for Intel to compete with them on price. Change is the rule in any market; but it may be that the more the semiconductor industry changes, the more it stays the same.

U.S. Manufacturing Grows At Record Pace

http://www.manufacturing.net/news/2013/08/us-manufacturing-grows-at-record-pace?et_cid=3399825&et_rid=490548696&linkid=http%3a%2f%2fwww.manufacturing.net%2fnews%2f2013%2f08%2fus-manufacturing-grows-at-record-pace

WASHINGTON (AP) -- U.S. factory activity expanded in July at the fastest pace in two years, fueled by surges in new orders, production and hiring The gains show manufacturing is rebounding and should provide a spark to growth in the coming months.
The Institute for Supply Management said Thursday that its index of factory activity jumped to 55.4 in July, up from 50.9 in June. A reading above 50 indicates growth.
A measure of employment rose to its best level in a year, an encouraging sign ahead of Friday's July employment report. And a gauge of production soared 11.6 points to 65, the highest since May 2004.
Stronger growth at U.S. factories could aid a sluggish economy that has registered tepid growth over the past three quarters. And it could provide crucial support to a job market that has begun to accelerate but has added mostly lower-paying service jobs.
Manufacturing had struggled in first few months of the year, held back by weaker global growth and steep government spending cuts. And slower production led factories to slash jobs from March through June.
But those trends have started to reverse. Europe's economies have shown signs of life in recent months. That likely contributed to a healthy gain in U.S. exports in the second quarter.
Businesses also spent more on equipment in the April-June quarter and have boosted orders for four straight months. As those orders are filled, factory output should increase.
Auto sales are also supporting factory output and will likely remain strong this year. July sales figures will also be released Thursday. Auto sales topped 7.8 million in the first six months of 2013, the best first-half total since 2007.
The Federal Reserve will likely take note of the manufacturing gains because the ISM index is one of the earliest signs of how the economy is performing in the second half of the year. Fed policymakers slightly downgraded their assessment of the economy in a statement, but said they expected growth to improve later this year.
The economy grew at a lackluster 1.7 percent annual rate in the April-June quarter, the Commerce Department said Wednesday. That's better than the 1.1 percent rate in the first quarter, which was revised sharply lower. But it's still far too sluggish to quickly reduce unemployment.