With an eye to keeping the country's technological edge over superpower rival China, the U.S. Senate has passed a long-awaited CHIPS Act. The bill will unlock $52 billion in investment incentives to revive the domestic semiconductor manufacturing industry.
The Senate passed the bill on Tuesday, July 19, leading to a final version being passed by the House of Representatives last week. It now sits on President Biden's desk, and he's pledged to sign the bipartisan-backed legislation next week when he emerges from his latest COVID-19 quarantine.
The industry has been anxious to see the bill pass with massive tax breaks and other subsidies on offer. Several firms, including Intel, Taiwan Manufacturing Semiconductor Co. (TSMC), and GlobalFoundries, have suggested that their expansion plans in the U.S. are directly dependent on government funding. Further delays to the bill's passing may cause them to scale back.
The CHIPs Act represents a fundamental paradigm shift as Washington takes on more of the burden of directly subsidizing the strategic sector.
For decades, America's chip industry epitomized the tenets of neoliberal globalization, as firms offshored production to reduce labor costs and increase profitability. Yet shocks to the global trade system, such as the COVID-19 pandemic, the war in Ukraine, and rising technological competition with China, have changed the calculus.
"We are recognizing that we live in a hostile, unpredictable… "post-neo-liberal world," Tim Ferry, former tech executive and chief economist at the Washington D.C.-based Coalition for a Prosperous America, told Al Jazeera this year.
Ferry said American companies must accelerate their decoupling from China and double down on efforts to relocate back home. They should also reconfigure their global supply chains in tandem with reliable allies (a process referred to as " friendshoring"), he said, singling out Taiwan as a key partner the U.S. has a lot to learn from.
The CHIPS Act is designed to reverse the long-term decline of domestic chipmaking capacity. According to the leading industry group, Semiconductor Industry Association (SIA), America's share of semiconductor manufacturing has fallen from 37% in the 1990s to roughly 12% today. The vast majority of chipmaking now occurs in East Asia.
Generous government subsidies underpin chip industries in Japan, South Korea, Taiwan, and China, which is why constructing a new fab in the U.S. is 30% to 50% more expensive for firms than building one in East Asia, per research done by Deborah Wince-Smith of the Council on Competitiveness.
Though close U.S. partners like Taiwan and South Korea still dominate production for the most advanced processes, China has rapidly gained in total market share. China's industry boomed at the start of the pandemic, with firms accounting for nearly 10% of global sales in 2020, up from just 3.8% in 2017. If it sustains this growth rate, China could seize 17.4% of the global market by 2024.
"We are in a race for technological ascendancy, and it isn't a level playing field. Over the past decade, China's investment in R&D has grown at twice the U.S. rate," Eric Schmidt, former CEO of Google, said this month.
Even Playing Field?
Yet trying to counter China could tilt the playing field within the U.S., too.
The Act's arrival has fuelled speculation over which firms will get what. Though primarily aimed at boosting American firms, SEMI, a global industry alliance, has called for funding to be inclusively spread across the whole ecosystem, including foreign firms based in the U.S.
While Intel is expected to get the lion's share as it builds a 20 billion dollar mega-plant in Ohio, TSMC, which makes the world's most advanced chips and is building a $12 billion fab in Arizona, is also expected to benefit. As the subsidies come down the legislative pipeline, rival firms are jockeying for positions.
A minor war of words broke out late last year between Intel CEO Pat Gelsinger and retired founder of TSMC, Morris Chang after the Taiwanese industrialist said it would be impossible to build an end-to-end chip supply chain in the U.S.
"Even after you spend hundreds of billions of dollars, you will still find the supply chain to be incomplete, and you will find that it will be very high cost, much higher cost than what you currently have," he said in Taipei.
In early December, Gelsinger told a forum in California that " Taiwan is not a stable place " and that the CHIPS Act must prioritize investing in American companies over East Asian firms like Samsung and TSMC.
Chang hit back days later, describing Gelsinger's comments about Taiwan as opportunistic rhetoric designed to secure more U.S. government funding. He also cast doubt on the American CEO's ability to revive Intel to its former glory, citing his age. Later that month, Gelsinger flew into Taiwan on a private plane to meet with senior TSMC managers.
Don't Forget Design
Even between American companies, there are calls for a more equitable distribution of government funding.
While the CHIPS Act will support manufacturing players like Intel and Micron, American fabless design firms like Qualcomm and Nvidia could miss out on the benefits since they outsource their production elsewhere, per a Reuters report.
The FABS Act, another bill that has been introduced, contains investment tax credits for purchasing production tools, which again would go to chipmakers like Intel. While not opposing the current legislation, fabless firms support a revised version of the FABS Act that also includes design tax credits, and industry lobby groups are behind them.
"The FABS Act should include expenditures for both manufacturing and design to help strengthen the entire semiconductor ecosystem," said the SIA.
Doubling on Decoupling?
While questions remain over exactly who will get what - one thing is clear - the bill will push firms to distance themselves from the Chinese ecosystem. Whether American or foreign, recipients of CHIPS Act funding will be forbidden from making advanced chips (process nodes 28nm or smaller) in China.
More restrictions could be coming. While the U.S. restricts supplying select Chinese firms on national security grounds, some U.S. legislators, like Republican Representative Michael McCaul have called for further bans to interrupt China's rapid buy-up of chipmaking gear.
Last year, Chinese orders for chipmaking equipment from international suppliers jumped 58%, cementing its position as the largest market for such products. Gaurav Gupta, an analyst at Gartner Inc., said China is embarking on this shopping spree in anticipation that Washington will soon enact more blanket bans.
Some American chipmakers have accused the Chinese of paying above-market rates, threatening their own access to the tools. However, Secretary of Commerce Gina Raimondo has signaled that her department will hold back from further intervention at this stage.
Yet if the U.S. and China's race for technological dominance further accelerates, the hitherto highly-integrated global chip industry could bifurcate further.