Lawmakers hoping to revitalize U.S. semiconductor manufacturing in response to a global chip shortage will find it tough to do in the near term, even if Congress throws billions in cash subsidies at the problem.
There’s bipartisan support for increasing domestic chip manufacturing capacity with some U.S. carmakers forced to idle plants as supply chains are interrupted by the global pandemic. That would make it a relatively easy political sell to include in President Joe Biden‘s infrastructure package, currently being drafted with a focus on creating jobs.But desire and money aren’t enough to jump-start an industry. The U.S. still leads the world in chip design, but manufacturing has largely been ceded to foreign firms. The few companies that do make chips domestically, including Intel Corp. and Texas Instruments Inc., don’t currently have the capacity or execution track record to compete with Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co., according to analysts.
Even China, which has invested billions of dollars in expanding its capacity, has little to show for it so far, according to Anand Srinivasan, a senior semiconductor analyst for Bloomberg Intelligence.
“It’s not for lack of trying. They put a lot of money into it and they are not competitive at all. That’s the risk here,” he said.
The chip shortage is expected to wipe out $61 billion of sales for automakers as production is stalled for want of the complex pieces of silicon. And the fallout now threatens to hit the much larger electronics industry.
Congress sees an opening to address the issue by creating tax incentives and supplying billions of dollars in federal grants as incentives for building semiconductor plants, called fabs, in the U.S. Advocates say approving subsidies as part of a broader infrastructure package could prevent the next shortage, even if it won’t do much to help the current one.
That could help U.S. companies become less reliant on a handful of foreign suppliers, and avoid supply disruptions from trade disputes or outside forces, such as the pandemic. It would also lessen the national-security risk for chips used in defense technology or government systems. And it could create scores of high-paying advanced manufacturing jobs.
The Semiconductor Industry Association is pushing for Congress to green-light tens of billions of dollars in the upcoming infrastructure bill, said David Isaacs, vice president of government affairs at the trade group. Those subsidies could offset the higher cost of producing the chips in the U.S.
Building chip plants is expensive and will require sustained investment. Semiconductor fabs making the most advanced chips can take as long as three years to build and cost roughly $10 billion each, according to Srinivasan.
A substantial taxpayer investment would pay off, the chip industry says. Approving $50 billion of incentives would mean the U.S. could capture 25% of the new global manufacturing capacity, compared to 6% without federal help, according to a Boston Consulting Group study funded by SIA. The U.S. would be the second most attractive place to build a fab, next to China, the report said, and it could mean as many as 19 new facilities, creating 70,000 high paying jobs.
Bipartisan groups in Congress have been pushing grant programs and tax credit incentives. They think they have a good shot this year in the infrastructure bill that will become Biden’s top priority after another round of virus relief passes next month.
Texas Representative Michael McCaul, top Republican on the House Foreign Affairs Committee, has spoken to the White House about the need for semiconductor manufacturing subsidies, and was well received, according to one committee aide.
“The Chinese Communist Party has repeatedly shown it has no problem weaponizing its control of the supply chain to benefit themselves and to punish their perceived enemies,” McCaul said. “We absolutely cannot let that happen with semiconductors.”
Senators John Cornyn, a Texas Republican, and Mark Warner, a Virginia Democrat, are leading the effort in the Senate. Cornyn joined bipartisan senators in a Feb. 2 letter to National Economic Council Director Brian Deese, urging the administration to act on the global shortage and secure funding to implement the semiconductor provisions approved in last year’s National Defense Authorization Act. Senate Majority Leader Chuck Schumer, a New York Democrat, also signed the letter.
“This shortage threatens our post-pandemic economic recovery, the consequences of which stand to be especially acute in dominant auto manufacturing states,” the senators wrote.
Warner, in an emailed statement, said without efforts to boost manufacturing, the U.S. is at risk from “serious supply chain and security vulnerabilities, while giving an advantage to our adversaries across the globe, who aren’t taking their foot off the pedal in this arena.”
Biden administration officials have identified semiconductors as a strategic area for domestic investment to compete with China. The president is expected to sign an executive order in coming weeks calling for a supply chain review for critical goods, including semiconductors.
The defense bill enacted in December authorized the use of federal incentives to promote semiconductor manufacturing and research in the U.S., but the bill didn’t include funding for the grants and tax credits lawmakers say is necessary to attract investment.
Taiwan Semiconductor Manufacturing and Samsung are both considering building manufacturing plants in the U.S. TSMC announced plans to build a fab in Arizona worth $12 billion -- if it can arrange enough subsidies at the state and federal level. Samsung is considering spending more than $10 billion to build its most advanced logic chip-making plant in Austin, Texas, but plans aren’t final.
“If you’re TSMC or one of the big foundries, the U.S. government is going to have to make it worth your while,” said Vivek Arya, a technology analyst with BofA Securities Inc. “Just because it is important to regional security, doesn’t mean it is a profitable endeavor.”
Europe, the U.S., China and Japan are all pushing for chip manufacturers to build cutting-edge factories within their borders, and semiconductor manufacturers aren’t going to create more production capacity than there is demand for, Arya said. Asia has a leg up because the electronics manufacturing supply chain is localized there, he added.
The U.S has increasingly fallen behind on chip-making, even as semiconductors have become more integral to the economy as a critical part of technologies ranging from cars to artificial intelligence, according to Stephen Ezell, head of global innovation policy at the Information Technology and Innovation Foundation. The U.S. share of global semiconductor manufacturing capacity fell to 12% in 2020 from 37% in 1990, according to SIA data.
An ITIF report shows the U.S. offers relatively few research and development subsidies compared to other countries -- ranking 24th out of 34 among major economies. China’s incentives are roughly 2.7 times more generous that those offered in the U.S., according to the report.
And U.S. incentives are about to get cut back. A change embedded in the 2017 Republican tax law set to take effect in 2022 shifts the accounting rules for the R&D credit, making the incentive about $40.1 billion less valuable next year, according to estimates from the Tax Foundation. The semiconductor industry says those benefits need to be preserved, and new incentives created, to level the playing field for the U.S.
“This takes long-term investments and a structural commitment,” Arya said. “It cannot be caught up in politics and the budgeting process. That’s where this has fallen behind.”
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