The US CHIPS Bill Raises More Questions Than It Answers
The US Senate advanced a bill last week to boost the manufacturing of semiconductor chips. The Senate approved a $250 billion bill last year to expand US chip-making to compete against China’s growing clout, known as the CHIPS Act. Taking advantage of the slump in the global chip shortage and the return to pre-pandemic production levels, the US government pushed a bill to enhance the nation’s semiconductor manufacturing capabilities.
Even at the height of the Covid-19 pandemic, China’s foundries continued to run at total capacity, contributing to the state’s slow increase in market share. During the last four quarters, Chinese semiconductor firms’ operations have been dominated by Bloomberg reports. Western states have expressed alarm about the decline in influence and market share in semiconductors.
However, to what extent can the CHIPS Act accomplish the US government’s goals and objectives? Do you anticipate any unintended consequences and unfavorable effects from the Act?
Subsidies To Increase Manufacturing Output?
CHIPS Bill provides increased subsidies and financial incentives to domestic semiconductor manufacturing companies. Through the CHIPS Bill, the US government aims to provide $52 billion in subsidies to domestic semiconductor companies to encourage improved chip manufacturing capacity.
This bill has been advanced mainly to reduce reliance on Asian semiconductor manufacturers and increase domestic manufacturing. Ensuring self-sufficiency in semiconductor chip supply in case of another global chip shortage is another objective of the bill. Is it possible for subsidies to increase manufacturing?
As we’ve seen in the past, pumping in money and adopting favorable industrial policies, don’t always produce the desired results in technology sectors. Semiconductor manufacturers are particularly susceptible to this. China is a prime example. To improve semiconductor manufacturing output, the Chinese government has provided a variety of incentives, subsidies, and even funded companies.
It took over two decades for its major firm, Semiconductor Manufacturing International Company (SMIC), to succeed. The company still has a lower global share than its rivals, Intel and Taiwan Semiconductor Manufacturing Company (TSMC). Despite great potential, the CHIPS Bill will not completely protect the US from the supply chain dependency that is associated with semiconductor manufacturing.
The domestic demand will be met to some extent, but there will still be a global dependency. Taiwanese electronics giant TSMC is building a new fab in Arizona to expand internationally. Several manufacturing equipments must still be imported from abroad, which remains an issue.
Moreover, the bill stipulates that semiconductor firms cannot have Chinese investments in their companies if they receive subsidies under the bill. In addition to restrictions on imported and exported semiconductor products to China, the new legislation also includes restrictions on the export of semiconductor products to China.
As a result of the CHIPS bill, the country will be able to cater to its domestic semiconductor manufacturing demand to a certain extent and boost semiconductor manufacturing. However, looking to the bill to help the US attain self-sufficiency in the supply chain remains a futile endeavor.
Fab Verses Fabless
In addition to the division of benefits and subsidies, this legislation enacts many other changes. As it stands, CHIPS benefits firms that can design and manufacture their semiconductors. An excellent example of this is Intel, which can fabricate. The bill provides subsidies for building fabrication facilities and tax credits for purchasing equipment inside factories.
Nevertheless, this is not well received by the entire industry. Many fabless firms, including NVIDIA, AMD, and Qualcomm, disapprove of the legislation. In semiconductor manufacturing, fabless firms design their products but outsource their production to Asian suppliers. Because fabless companies do not build foundries or buy equipment, the new bill does not directly benefit them.
Intel, according to such firms, would gain a monopoly role with this and is more rent-seeking than anything else. The other companies are saying that unfair competition can result in the government picking the winners (in this case, Intel). The fabless firms support earlier versions of the FABS Act (introduced before in the House of Representatives), which provide tax credits for chip design and manufacturing activities.
In addition to the Semiconductor Industry Association (SIA), this bill version also received support. Although fabless semiconductor companies are not officially opposed to the bill, they are concerned about the impact of supporting their competitors with vast amounts of money.
Last but not least, the US has the most significant number of semiconductor fabrication facilities in the world which can also impede subsidy distribution. Incentives based on the market share will be proportionate to the company’s size, or will they also benefit smaller manufacturers? A few of these questions may need to be addressed before the bill is finalized and signed by President Joe Biden.