Senate’s semiconductor aid may be opening bid in global race

Chipmakers go where the customers are, putting the United States at a disadvantage against Asian countries

Sen. Mark Warner, D-Va., chairman of the Intelligence Committee, has championed subsidies for a domestic semiconductor-making industry.  (Tom Williams/CQ Roll Call file photo)
Sen. Mark Warner, D-Va., chairman of the Intelligence Committee, has championed subsidies for a domestic semiconductor-making industry. (Tom Williams/CQ Roll Call file photo)
Posted July 27, 2021 at 6:30am

This is the third part of a series on the growing competition between China and the United States over technology and research. After initially looking at the stakes in the competition and following up with a story on the specific bills in Congress to address science and technology spending, we turn today to the semiconductor industry.

In 1965, Gordon Moore, who would go on to found Intel Corp., foresaw that by 1975 the electronics industry would be cramming 65,000 components onto a single silicon chip about a quarter of a square inch in size. 

Moore’s law, which predicted that the number of transistors on a chip would double every two years, already has led to advanced chips packed with a trillion transistors, resembling a towering skyscraper if seen under a high-resolution electron microscope. 

The race to design even thinner chips is now being joined by governments as they compete to provide subsidies to attract and keep manufacturers of the semiconductors vital to making cars, cellphones, computers, TVs, military hardware, spacecraft and many other products.

U.S. lawmakers, trying to reverse the 30-year decline in the country’s share of global semiconductor manufacturing, are considering legislation to boost domestic chip production. The effort comes as Asian countries seek to boost or retain their position. 

Chip production is emerging as yet another manifestation of the U.S.-China rivalry in technology. Beijing is ramping up the country’s production capacity, aiming to become the world’s largest chipmaker by 2030.

The Senate recently passed legislation that would provide $52.7 billion in subsidies to boost domestic semiconductor manufacturing that has fallen to 12 percent of global production from 37 percent in 1990. The House hasn’t taken action on the issue but is expected to agree to the Senate measure. 

But reversing the trend and restoring domestic manufacturing faces multiple challenges, say administration officials, lawmakers and experts interviewed for this article. High labor costs, the relative absence of industries that use the chips and doubts that Washington can sustain subsidies are among the obstacles to the U.S. effort.

“I think this notion that $52 billion is going to restore semiconductor manufacturing leadership in the United States is a little bit of a — I don’t want to call it naive, but I would say that’s not a bad opening bid,” said Willy Shih, a Harvard Business School professor who has testified to Congress on technology policy. 

He said the amount can only be considered a down payment, adding that it may take as much as $500 billion and as long as a decade to restore U.S. leadership in semiconductor manufacturing.

The immediate catalyst for the Senate action was the severe semiconductor shortage resulting from COVID-19 supply chain disruptions. U.S. automakers had to shut factories, and electronics makers scrambled to get chip supplies.

U.S. firms that design advanced chips rely on low-cost manufacturing in South Korea, Singapore and Taiwan, where both governments and companies have poured hundreds of billions of dollars to beef up production capacity. 

Taiwan Semiconductor Manufacturing Co., or TSMC, is the world’s largest maker of chips. Top U.S. chipmakers include Intel, NVIDIA, Texas Instruments, Micron and others. 

Lack of domestic customers

One obstacle to boosting U.S. chip production is that the companies that use those chips are themselves not in the United States. The vast majority of electronic goods are made in Asia, including China, Japan, South Korea, Taiwan, Thailand and Vietnam, in close proximity to chipmakers. 

Shih said the chipmakers would be more willing to shift their production to the U.S. if their customers — makers of consumer electronics, smartphones, computers and cars — were also in the United States.

That view is shared in the White House. 

A senior administration official who focuses on technology policy said the White House is debating potential policies to achieve the goal of attracting chip users to the U.S. The official spoke on condition of anonymity because the debate is ongoing.

But Colin McAuliffe, co-founder of Data for Progress, a think tank that uses data science to promote policies, said another way the U.S. can boost domestic demand for semiconductors is to invest in digital infrastructure. 

“There’s a long-term problem here, which is that the private market doesn’t generate enough demand for semiconductor products that would then justify the investment that we need in the actual production of semiconductors,” McAuliffe said. 

Expanding health care across the country, for example, and equipping hospitals with advanced medical technologies that run on semiconductors would boost demand for chips, McAuliffe said. 

Shih also said the U.S. could leapfrog over current technologies by funding research on new kinds of semiconductors that would increase computing power by 100 times by 2030 and decrease power consumption by 80 percent. 

Such innovations would automatically attract new chip manufacturing and ancillary industries, Shih said, also noting that it would make subsidies unnecessary.

Even the industry doesn’t think the U.S. can regain its market dominance without subsidies or a technology leap.  

The Semiconductor Industry Association, in making a case for U.S. government incentives, says Asian competitors have significant cost advantages because of government subsidies.

The association, which represents U.S. chipmakers, and the Boston Consulting Group estimated in a September 2020 report that 40 percent to 70 percent of the lower cost of Asian production is attributable to government incentives. 

The report said U.S. manufacturers suffered from “structural disadvantages in the cost of two factors: labor and utilities.” Labor costs for chip fabrication, construction and operation are 40 percent higher than in Singapore and Taiwan, the report said. 

But Erik Pederson, director of government affairs at the Semiconductor Industry Association, said the higher U.S. labor cost had less impact on companies’ choice of manufacturing location than subsidies abroad.

The association and Boston Consulting’s report said a $50 billion government incentive would attract 19 new U.S. chip fabrication facilities, or 10 more than would be the case without the money. The new facilities would raise U.S. capacity to 14 percent of the market by 2030 from 12 percent, the report said. 

Asian investment

Even as Washington looks for a way to revive the domestic industry, policymakers in Asia aren’t sitting idle.

South Korean President Moon Jae-in said in May that chips are “key infrastructure in all industrial areas” driven by a global digital transformation. Seoul said government and private sector investment — Samsung is one of the world’s largest chipmakers — in semiconductors would add up to about $452 billion by 2030. 

In Taiwan in March, TSMC said it planned to spend $100 billion in the next three years to expand its semiconductor fabrication capacity. 

China since 2018 has funded construction of 52 fabrication facilities and is set to inject about $150 billion in equity into chip manufacturing. 

U.S. officials and lawmakers say the $52 billion in the Senate bill is intended to spur private investment and would be only the first step. 

Speaking in May at Micron Technology’s chipmaking plant in Manassas, Va., Commerce Secretary Gina M. Raimondo, whose department would oversee the semiconductor incentive program, said the federal program could spur private investment and matching grants by state governments, yielding a total investment of about $150 billion. 

Speaking at the same event, Sens. Mark Warner, D-Va., chairman of the Senate Intelligence Committee, and John Cornyn, R-Texas, a member of the panel, who have championed the semiconductor subsidy program, said they expected a long-term focus on chip manufacturing. 

“We saw an opportunity to strike quickly when it came to semiconductors, and frankly our vulnerability there was pretty frightening,” Cornyn said in a brief interview. “We knew we needed to act quickly, but I think this is going to be a long-running campaign.” 

Pederson hopes that will be the case. 

“I would hope that they would not forget about us … that this would not be a one-time thing,” Pederson said.