US is investing $52 billion to boost chip manufacturing in the country

The US government is making every effort to boost domestic semiconductor manufacturing, pumping billions of dollars into the beleaguered sector and flexing every available political muscle to give it an edge over Asian competition.

When the pandemic hit in 2020, companies initially reduced orders for these necessary micro building blocks for smartphones, computers, cars, and many other products.

So when people started working from home, demand for information and communication technology skyrocketed – and the chips that power them. A shortage of chips followed, and car factories had to stop production because they couldn’t get chips.

That contributed to soaring prices for new and used vehicles, one of the main drivers of the painful inflation Americans were experiencing.

In a statement earlier this year, Secretary of Commerce Gina Raimondo called the semiconductor shortage a “national security” issue because it exposed US manufacturing’s dependence on semiconductor imports from abroad.

The chips also serve critical military applications and are needed for cybersecurity tools.

The Biden administration and lawmakers have teamed up in response, passing CHIPS and the Science Act into law in August. The legislation includes $52 billion to strengthen semiconductor manufacturing in the United States.

Of these, $39 billion is for manufacturing incentives, $13.2 billion for research and development and workforce training, and $500 million for international information communications technology security and supply chain activities. semiconductors.

In this context, several prominent companies have announced significant investments in US manufacturing. Taiwan Semiconductor Manufacturing Company (TSMC), an industry powerhouse, has committed at least $12 billion to build a semiconductor factory in Arizona, with production expected to begin in 2024.

Earlier this year, Intel said it planned to build a $20 billion semiconductor factory in Ohio, and the innovation of the new chip factory took place last month. And this month, Micron said it would invest up to $100 billion over the next two decades to build a massive semiconductor factory in upstate New York.

In a series of tweets earlier this month, President Joe Biden promised: “America will lead in microchip manufacturing.”

The United States must lead the world in producing semiconductor chips, and the CHIPs and Science Act is going to make sure that it will.

— Joe Biden (@JoeBiden) October 7, 2022

But the US has a lot to do. US-based factories, or chip factories, currently account for just 12% of the world’s modern semiconductor manufacturing capacity, according to data from the Semiconductor Industry Association trade group.

About 75% of the world’s modern chip manufacturing is now concentrated in East Asia — most of it in Taiwan, a geopolitically vulnerable region. And even with these renewed efforts, the United States does not currently have the same talent and supply chain pipeline that some Asian markets have to support a robust local industry.

To complicate matters, the increase in public and private investment comes at a questionable time, as concerns about a global chip shortage have eased. Pandemic-related supply chain lockdowns are easing somewhat and the worsening economic outlook has detracted from demand.

On an earnings call last week, TSMC CEO CC Wei warned that he expects the “semiconductor industry is likely to decline” in 2023. “TSMC is not immune either,” added Wei, but said he expects “to be more resilient than the general semiconductor industry.”

Promoting semiconductor manufacturing in the United States now can lead to overcapacity and oversupply. And with demand weakening, it’s not immediately clear whether government subsidies will be enough to overcome other obstacles the country faces in developing a competitive semiconductor manufacturing hub.

the US problems

To understand the latest US efforts, it’s important to be clear about the country’s position – not just in the general chip industry, but in relation to specific and valuable pockets of it.

“The US is very unlikely to increase its share of global production because even if the US makes more manufacturing capacity available online; TSMC, Intel and others are advertising fabs elsewhere and building them even faster,” said Scott Kennedy, senior advisor to the Center for Strategic and International Studies.

“But I don’t necessarily think that’s a really big problem,” he added. He noted that measuring manufacturing based on pure production groups together high-end chips and high-end chips that are a more realistic and meaningful measure of chip manufacturing success. “The US needs to expand chip production for a specific type of chips, which are directly related to US national security,” he said.

Last Friday, the Biden administration imposed new export restrictions aimed at restricting China’s access to advanced semiconductors made with US equipment, in a move aimed at manufacturing advanced weapons systems.

Although only “about 10% to 14% of chips sold [globalmente] come from US factories,” according to Columbia Business School professor Dan Wang, the US has other strengths. “In terms of design experience, a lot of that still resides in the US.”

Still, the shortcomings are real. “When it comes to foundries, which are the semiconductor manufacturing side, the US has not been a major player for many, many years,” Wang said.

While it used to be, manufacturing began to migrate to Asia during the 1980s and 1990s, Wang said. “One of the big reasons for this is that the labor cost is lower and it is much cheaper to produce very large-scale integrated circuits and chips in these parts of the world,” added Wang. Morris Chang, founder of TSMC, said it costs 50% more to make chips in the US than in Taiwan.

Now, simply having the facilities already set up to produce or expand chip manufacturing gives Asia a big advantage. Wang said he thinks that might be why you see the US “throwing so much money at companies to set up factories in the United States”.

It’s not just to respond to demand and become more self-sufficient, “but also because you need to get these things up and running very, very quickly to be in the race.”

what is needed

Building new chip factories is an expensive and time-consuming endeavor. “A modern factory is something like 46,500 square meters,” said Bob Johnson, an analyst at Gartner, and requires “monstrous clean rooms with massive air-handling capabilities.”

He added that these massive buildings require “exceptionally strong foundations”. As he said, “you can’t have any vibration in the factory because it can destroy the manufacturing process”.

Furthermore, a single extreme ultraviolet lithography machine needed to map chip circuits costs about $150 million, and Reuters reports that “a high-end chip factory needs 9 to 18 of these machines.”

In addition, semiconductor manufacturing requires a number of specialist inputs, including pure chemicals such as fluorinated polyimide and etching gas, chip etching machines, and more.

In places like Taiwan and Fukuoka, Japan, supply chains have developed where suppliers of these products are located close to semiconductor factories.

There are also one or two companies that produce vital inputs and that have been trusted suppliers to companies in Asia for a long time. That’s not yet the case in places like Arizona and Ohio, where plans are already underway to build large chip factories.

You also need a willing and able workforce to get the job done.

In the United States, there is a shortage of recent college graduates and experienced workers with the technical and engineering knowledge needed to manufacture semiconductors. Many of those who may have the right experience prefer to work in more modern industries, according to Kennedy.

“If we were snapping our fingers today and we had ten new factories with the world’s top chips, we probably wouldn’t have enough people to operate them,” Kennedy said. “This is the biggest bottleneck for expanding US manufacturing capacity, not capital.”

Intel has tried to establish close relationships with Arizona State University to recruit engineers, but it is unclear whether it and other companies that build factories in the United States will be able to hire sufficiently trained engineers and technicians.

Otherwise, even the billions of dollars committed by the public and private sectors may not be enough to reorient semiconductor manufacturing.