On July 27, the US Senate finally passed the much-heralded CHIPS Act, a bill that will pave the way for government subsidies for the production of high end semiconductors. There was rare bipartisan 64-33 support for the US$280 billion ($387 billion) legislation that could help America build up critical tech capacity to help boost its economy and national security.
The landmark bill is probably the most important piece of US legislation that will pass both houses before the November’s midterm elections that the Republican Party is poised to win — taking control of both the chambers ahead of the 2024 presidential elections in which former President Donald Trump will likely be on the ticket. The Biden administration was able to push the legislation through with some Republican support despite vociferous opposition from the progressive wing of his own party. Senator Bernie Sanders, for example, has called the bill “a blank check” for the cash rich semiconductor industry.
The CHIPS Act (short for the Creating Helpful Incentives to Produce Semiconductors for America Act) would set aside US$52 billion in subsidies — US$39 billion for investment in chip foundries for advanced technology, US$2 billion of subsidies US chip industry and US$11 billion for investment in chip R&D and workforce development.
That is on top of investment tax credits under the House’s Facilitating American-Built Semiconductors Act (or the Fabs Act) which would help establish a tax credit for investments in constructing, expanding, and upgrading semiconductor manufacturing facilities as well as a credit for semiconductor design to encourage semiconductor companies like Intel, GlobalFoundries, Taiwan Semiconductor Manufacturing Co (TSMC) and South Korea’s Samsung Electronics to add to their manufacturing capacity in the US rather than keep building plants in Asia, Israel and Europe.
The new CHIPS Act also includes about US$100 billion in authorisations over five years for things like expanding the US National Science Foundation’s work and establishing regional technology hubs to support start-ups in areas of the country that have not traditionally drawn big funding for tech.
“It will accelerate the manufacturing of semiconductors in America, lowering prices on everything from cars to dishwashers,” US President Joe Biden said after the Senate passed the bill. “It will mean more resilient American supply chains, so we are never so reliant on foreign countries for the critical technologies that we need for American consumers and national security.”
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Semiconductors are an integral part of our lives. We use them in computing, communications, clean energy, defence equipment, transportation, medical devices and health care. Your refrigerator, washing machine, car and microwave oven have chips just as your smartphone, personal computer, smartwatch and tablet.
They enable artificial intelligence, quantum computing and advanced wireless networks. Our reliance on them continues to grow. The share of chips in PCs, laptops and servers is around 33%. In smartphones, telecom switches and routers, it is about 30%. Latest models of petrol-based sedans like Toyota Camry have nearly 1,000 semiconductors. Electric vehicles (EVs) like Tesla’s Model X have nearly 3,000. Some driverless cars that are being tested in the US have more than 10,000 chips. Chips are also used in sophisticated military equipment. An edge in semiconductors will give US and its allies a leg up against increasingly hostile rivals like China and Russia.
Management consultancy BCG estimates the global semiconductor market was valued at almost US$600 billion in 2021 and despite chip shortages due to supply chain bottlenecks, sales are likely to exceed that this year. Chips are critical to America’s technology leadership, and by extension its economy and national security. Semiconductors enable the key technologies driving the future economy including Artificial Intelligence or AI, quantum computing, cloud services and next generation communications technology like 6G.
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Reinforcing US dominance
The landmark CHIPS bill comes as a tech war between the US and China is causing a decoupling of key technologies including the internet. The aim of the CHIPS Act is to help strengthen design, research and manufacturing of semiconductors in the US and reinforce America’s chip supply chains.
The US Semiconductor Industry Association (SIA) estimates that the share of chip manufacturing capacity located in the US has declined from 37% in 1990 to about 12% currently, because other governments around the world have “invested ambitiously in chip manufacturing incentives and the US government has not” while US investments in chip research as a share of GDP has been flat even as other countries have significantly ramped up research investments.
Now it is playing catch up. To meet the capacity needs for only the critical semiconductor applications, the US needs to add about 5.5% of the global production according to US SIA. This would mean about 18 to 20 wafer fabs (wafer manufacturing facility, or a fab), and up to 90,000 fabs jobs. To become self-sufficient in semiconductors, the US needs to add almost 20% of the global chip production. That means up to 80 new fabs and 300,000 fabs jobs.
There are currently only about 102,000 semiconductor and circuit manufacturing employees in all of the US. America has outsourced chip manufacturing over the last two decades, slowly eroding the talent pool and expertise needed to produce chips. “Through the upskilling and reskilling of talent, and a focus on adjacent skills, the US can achieve a dramatic reshoring of the chip manufacturing sector,” Eightfold.ai, a tech-focused talent management firm said in a recent report. It called for more tax credits as well as other investment incentives at the federal level and government policy changes including land subsidies for fab plants and investments in talents.
No country — or company — actually makes the entire semiconductor chip. Each chip in your smartphone, or refrigerator for that matter, was probably made in a dozen different countries. It is a complex, global supply chain. More importantly, key parts of the global supply chain of chips are highly concentrated in China, Taiwan, Japan, South Korea and Southeast Asia.
Here is how the chips supply chain works: A chip might be designed in the US by a fabless chip design firms like say Qualcomm, known for its 5G baseband chips in smartphones or Broadcom, famous for its broadband chips in phones, or gaming chips maker AMD and Nvidia, who do not have a fab of their own. To make chips, you need equipment that are manufactured by Applied Materials, Lam Research or KLA Corp in the US, ASML in Europe, or Tokyo Electron in Japan. Silicone made by Japan’s Shin-Etsu Chemicals or Wacker Chemie AG of Germany may be processed and sliced into wafers in Japan then imprinted with patterns in Taiwan. The wafers could be sliced and packaged into chips in Malaysia or Vietnam.
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The chips could then be sent to manufacturing facilities in Taiwan, South Korea, China, Singapore or Israel. And the end product — smartphone or cloud computing server or laptop or tablet or networking gear —could then be sold worldwide. Asia has over 80% of the current global wafer fabrication capacity.
Other nations catching up
While the grunt work of making a semiconductor might be done elsewhere, the US is still by far the world leader in chip design and semiconductor patents. Yet ,the two most important companies in the global chip supply chain are ASML of the Netherlands and TSMC of Taiwan.
ASML makes 100% of chip equipment used by high-end foundries or customised chip manufacturers like TSMC to whom chip designers like Qualcomm, Broadcom, or indeed Apple or Amazon.com outsource their production needs. TSMC has over 92% share of world’s high-end chip manufacturing and about a quarter of all chip manufacturing. Samsung and Intel have the rest.
China may have made huge strides in tech field over the past decade, it is still several years behind in designing, manufacturing high end chips and its homegrown champions like Semiconductor Manufacturing International Co (SMIC) are barred from purchasing any high-end equipment made by ASML.
Though China has poured tens of billions of dollars to boost its own Chip equipment sector, the machines they make are at least five years behind state-of-the-art gear made by ASML. What the CHIPS Act does is provide US chip sector incentives to turbocharge its growth and pull ahead and remain several years ahead of China in top-of-the-line semiconductors.
Building chip foundries is not cheap. A large state-of-the-art wafer fab making highest-end chips in the US can cost between US$15 to US$25 billion. Due to subsidies and government incentives on taxes, land and training of talent in Asia the cost of building and operating fabs is up to 20 to 40% higher in the US than it is in Southeast Asia, Taiwan or South Korea. US$52 billion would only be enough to fund just two fabs in the US. Or possibly three, if you include the kind of subsidies, and incentives that local and state governments like Texas, Arizona, Ohio, Washington state have been willing to throw to lure plants Intel, Micron, TSMC and Samsung.
Intel, GlobalFoundries, TSMC and Samsung are also building new fabs in the US. Intel, which is building two separate US$20 billion plants in Arizona, has vowed to invest up to US$100 billion to build the world’s largest chip-making complex with eight wafer fabs in Ohio. Samsung is building a US$17 billion foundry in Texas while TSMC is building a smaller US$12 billion foundry in Arizona.
However, America is not the only country that is doubling down on Chips. China has a US$150 billion 10-year plan to bring its semiconductor industry up to par with the US. South Korea plans to spend nearly US$65 billion on its semiconductor master plan while the European Union last year unveiled its own US$49 billion Chips blueprint. Several European nations like Germany, the UK and Spain have their own national Chips initiative.
The CHIPS Act passage through the Congress comes in the wake of nearly two years of a worldwide semiconductor shortage that left cars without parts, hospitals with a shortage of medical devices and long waiting queues for everything from laptops to washing machines. Soaring demand in the aftermath of the pandemic and Russia’s invasion of Ukraine disrupted the supply chain causing shortages of key chips. BCG estimates that global GDP took a US$1 trillion hit in 2021 because of the chip shortage and forecasts a similar loss this year. The global auto industry alone lost more than US$200 billion in 2021, mainly due to the chip shortage. Auto companies around the world lost production on more than 12 million vehicles.
The bill has more than a few opponents in the US. Aside from Senator Sanders on the left, right-wing groups like the Heritage Foundation have also attacked the bill for helping giants like Intel. They note that there is nothing to stop subsidies from the bill to eventually help China whose factories have an insatiable appetite for chips. “There is a tremendous amount of FUD — fear, uncertainty and doubt — surrounding the bill” notes Ben Thompson who writes the Stratechery blog. Thompson likens the bill to “a form of corporate welfare”.
Edison Lee, a tech analyst for Jefferies & Co in Hong Kong says: “The CHIPS Act suggests the US believes China’s state capitalism works better to improve an industry’s competitiveness.” It is too easy to attribute China’s tech boom to government subsidies, notes Lee, as “China has an entire state enterprise ecosystem and industrial policy framework that work hand in hand with state subsidies, in addition to a hardworking workforce.”
While Lee believes government subsidies would attract more foundries to be built in the US, and a larger scale would help lower unit cost and create a bigger ecosystem, advances in higher nodes to compete with TSMC would still be difficult to achieve for US companies like Intel. It may resemble state capitalism, but the CHIPS Act say the bill is the first step in America’s march to widen its lead in technology.
Assif Shameen is a technology and business writer based in North America
