Even With Chips Act, True Domestic Chip Manufacturing a Long Way Away, Says Critics
Much has been said about the desire for many major global economies, the U.S. included, to decouple their supply chains from China. One of the most visible examples of this is the adoption of the CHIPS and Science Act in August 2022. The crux of this legislation is to provide roughly $280 billion in new funding to boost domestic research and manufacturing of semiconductors on U.S. shores. Approximately $54 of these funds will be distributed as direct subsidies to manufacturers, while another $24 will be given as tax credits. Manufacturers such as Intel, Texas Instruments, and Micron Technology have all been cited as forming plans to participate in the program.
There are, however, critics of the plan who are questioning how effective the legislation will be to accomplishing its objectives. One such critic is Bloomberg Opinion columnist Thomas Black. The worry, says Black, is the bill’s seeming ignorance of how globalized the semiconductor manufacturing process has become. Most corporations that operate in the chip market, even the largest ones, do not handle every aspect of the chip manufacturing process. Decades ago, manufacturers in the U.S. and other major countries discovered that they can maximize profits by still handling the most lucrative aspects of the business — namely research and design — while other aspects have migrated overseas. These aspects include raw materials acquisition; the creation of silicon substrates on which the chips are built; the creation of the wafers on which chips are engraved; and the final production process that encases and tests the chips.
While twenty years ago this system made financial sense, it presents several problems in today’s environment that funding alone will not fix. “There is an argument that the U.S. just can’t produce these components or perform these processes competitively,” says Black. “Labor costs are just too high, which means production here would only add to inflation or require perpetual subsidies. If this is the case, what’s the purpose of the Chips Act? It’s imperative for the US to have redundant sources of supplies on critical products. The pandemic and now China’s more aggressive stance on the world stage has made that clear.”
Even in the best-case scenario, the existence of these challenges means that moving away from overseas chip manufacturing in every capacity will take several years at least, and even then there is no guarantee there will be any noticeable market relief if labor laws price them out of competitiveness. For the foreseeable future, the best strategy for manufacturers is to commit to the purchasing and long-term storage of buffer stock, avoiding any shortages, price increases, or extended lead times.