Expert explains CHIPS Act content and science, the ‘semiconductor bill’

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On August 9, President Joe Biden signed the CHIPS and Science Act, which invests $52 billion in domestic semiconductor manufacturing through tax credits, as well as supports STEM research and education initiatives through the National Science Foundation.

Semiconductor chips are key components of many electronic devices ranging from cars to refrigerators. The US currently produces approximately 12% of the global supply, with 75% coming from East Asian countries such as Taiwan, South Korea and China. As it dramatically disrupted demand patterns in 2020, the COVID-19 pandemic was often cited as the “root cause” of the global shortage, and it has continued ever since.

Maurice A. Cohen, Panasonic Professor Emeritus of Manufacturing and Logistics at the Wharton School, explains the implications of the new law and its potential to revive global competition in the semiconductor industry—even if it ends up not being as transformative as some might like .

What are the important features of the semiconductor law that was just signed into law? Subsidies and incentives seem to be most of it.

The big deal here is just as you say: there are billions of dollars going into semiconductors in various forms of incentives and rebates, and most importantly, they want to encourage companies that make semiconductor chips—the Intels of the world—yeah more manufacturing capacity was built in the US. I believe that is the purpose of what is happening here. Because historically, when this industry started many years ago, the US was in a dominant position in terms of capacity. We now have a much smaller percentage of global production and many jobs have been outsourced since production was moved overseas. It’s all about restoring capacity: bringing capacity back, bringing jobs back, and giving financial incentives to the companies that make those decisions.

Did this bill have broad support in the business world? HP, Intel, Lockheed, etc. all seemed to show up for the bill signing.

I’m sure all the companies in the industry who benefit love it. This reduces their cost of adding capacity. You have to keep in mind that decisions to add capacity have already been announced: companies like Intel and Taiwan Semiconductors have announced multiple billion-dollar projects to add and retrofit factories; it simply increases the likelihood that they will continue or perhaps increase the scope or range of offerings.

So it’s more about retention than attraction?

The argument is that it creates high paying jobs for the advanced in our economy. It also gives us security of supply for critical inputs for many products, such as automobiles, and it has defense implications because all defense products—aircraft, missiles, whatever—use a lot of semiconductors. Today, many products use semiconductors. So having more internal capacity will increase security. That’s the goal, but of course there’s a big cost here, which is why some people are against it.

If someone is against it, what is their argument?

I guess there are two. One is, “It’s a government manufacturing policy,” and that’s something not everyone agrees with. Should the government be in the business of declaring how to invest in capacity? The [government] wants to influence the decisions companies make. It’s an age-old debate whether governments or companies should make these decisions.

Companies never make capacity decisions in this industry without considering the constraints, incentives and political realities of all the countries or jurisdictions in which they operate. At the same time, they want to maximize their profit, shareholder value, and all the other goals a company has. It’s a balancing act that’s always been there. The bill will now give greater weight to decision-making that increases domestic capacity. This will have implications for improving supply chain efficiency, but at a cost. So is this the best use of our resources? What will it do to inflation? What will he do with the taxes? These are questions people ask.

Will this hurt Asia’s influence on the industry?

I don’t think it will. I think the dominance of Taiwan, the [South] Korea, and now a rising China, probably won’t go away. You have to remember that every country has similar goals: they want their population to have access to high-paying jobs, to generate new technologies, to enjoy the benefits of having high-performance, cheap and quality products. These are goals that every country shares, and therefore every country that can will compete in trying to influence domestic manufacturers to expand and attract new capacity from other companies. The argument is that growth in Taiwan, [South] Korea and China were heavily subsidized by their governments and now the US will do more than it has done in the past. So it’s a race to see who can subsidize more.

I don’t expect Asian competitors to back down and not counter with their own tariffs and incentives. What the end result will be is an interesting question.

Where is Europe with its semiconductor manufacturing?

It depends on which part of Europe. Western Europe has some very advanced semiconductor companies ie. in Germany, Holland, France and England. They have trade-offs similar to those of American companies. They don’t want to see jobs go. I predict they will compete the same way. It is a global competition and always has been.

What this bill does is try to influence through incentives what the final rate will be. No doubt it will have an impact and push things in the desired direction, but will it lead to a major structural change? That remains to be seen. I don’t think this will cause other manufacturers to stop manufacturing in Taiwan either [South] Korea. They will produce more in the US now that it will be more economically attractive, as they have already said they will. But will we go back to where we have majority capacity in the US? That probably won’t happen.

The US is still the main source of innovation in this industry and I think that will continue.

And the bill also funds research, right?

Absolutely, which is good. The dynamics of this industry are quite interesting because there is incredible volatility. The product design life cycle is a few years, the manufacturing process design life cycle for factories is a few years, and so every few years there is a new generation of product or technology, and it continues from the beginning. I’m sure you’ve heard of Moore’s Law and the result is a reduction in the cost of these products and therefore a reduction in the price of products that use these components.

Has the shortage of these chips gotten better or worse?

It must have improved a bit. There was a big, big shortage and everyone recognized it. The answer to alleviate the shortage was more capacity, and the problem is that it takes more than a year to build the factories. It can take up to a year after building them to set up the processes so that you have an acceptable yield. You’re looking at a one to two year lag from the time you make the decision you want to add capacity to actually getting it.

So I don’t think the projects contemplated and announced when this crisis developed have led to new production capacity. We are probably six to nine months away from seeing an impact. And on the margin, maybe it has changed the way some products have been allocated, but I think the aggregate capacity impact will still take a little longer.

The fact remains: Good luck finding a PlayStation or a new car

We see the result. You can’t find a new air conditioner; you can’t find a new car. And that’s because manufacturers don’t have the chips. And if they don’t have the chips, you don’t have the products in stock. It is important to note that demand is also changing.

Are you surprised that the bill is ready?

No. I think it would be very difficult not to do something like this bill, given the need for capacity and the risks that exist. We now have a better understanding of this problem. So, in the end [government] they will have to do more than they have done in the past. It is logical that something like this has passed. However, its effect remains to be seen. Ultimately, this will have a positive impact in the desired direction, but it is not clear that it will have a large impact on the location and supply of semiconductors and risk transfer – which politicians have promised, but I am not sure that these results will be delivered. But I’m not surprised that something was missed.


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Courtesy of the University of Pennsylvania

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