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Proposed Laws Seek to Revive US Chip Production (Part 1)

July 27, 2020
A bipartisan bill, called the CHIPS for America Act, was introduced last month in both the US Senate and House of Representatives. If the law is passed, it would roll out more than $20 billion to help bring more of the world's chip production to the US.

Federal lawmakers introduced a bill last month that proposed spending billions of dollars to lure more advanced chip production plants to the US. If the proposed law is passed, it would roll out more than $20 billion to bring more chip production to the US, replenish US funding for research and development, and strengthen and secure its domestic supply chain.

The bipartisan bill, called the CHIPS for America Act, was introduced last month in both the US Senate and the House of Representatives. Here's what you need to know about it.

The Background

For years, the US semiconductor sector has been lobbying for government funding to help keep it ahead of China, which has been burning through billions of dollars to expand its chip business and close its massive technology gap with the US. China is also trying to decouple more of the supply chain for semiconductors from American vendors, and the country has pushed ahead with its plans as trade tensions with the US have deepened in recent years.

The new bill signals that semiconductors have become a huge battleground between the US and China, which is trying to untether its semiconductor supply chain from the US. Computer chips are key components in areas ranging from artificial intelligence and 5G. Advanced ICs are also required for use in rockets, radar, missiles, tanks, aircraft, satellites, and other defense and aerospace systems. The new law could help counter rising competition from China.

Keith Jackson, chairman of the Semiconductor Industry Association (SIA), a US trade group, said it would help address the challenge of repatriating US chip manufacturing. Even though Silicon Valley is the cradle of the global chip business, the US controls only about 12% of the world's IC production capacity, a significantly smaller market share than it had decades ago.

Who Drafted the Proposal?

Senators John Cornyn, Republican of Texas, and Mark Warner, Democrat of Virginia, introduced the law, which would create more than $20 billion in funding for federal subsidies other incentives, to the Senate. Republican Michael McCaul from Texas and Democrat Doris Matsui from California rolled it out to the US House of Representatives.

“Unfortunately, our complacency has allowed our competitors—including adversaries—to catch up,” Warner said in a statement. He said that the new law “reinvests in this national priority.” It would also secure the supply chain for chips and assist the US in maintaining its dominance in advanced chip design while creating jobs, Cornyn said in a statement. Others behind the bipartisan bill said it would reduce US dependence on overseas supply chains.

"As the global economy becomes more interconnected, it is essential that the US maintains the ability to produce the hardware that our high-tech economy depends on,” Matsui said in a statement. “Ensuring our leadership in the future design, manufacturing, and assembly of cutting-edge semiconductors is vital to United States national security and economic competitiveness," McCaul said.

He added, "it is critical that we supercharge our industry here at home."

The Challenges

The US has fallen behind in the global battle for semiconductor investment in recent years because of the cost of constructing the most advanced plants. US firms are also grappling with the risk that new production plants could be outdated before chips start rolling out of the fab. US funding for more advanced factories has also lagged Southeast Asia, China, and other regions, which have rolled out large subsidies and other incentives to lure US chip vendors.

"The ad-hoc incentive packages offered by some states [in the US] have helped to attract and sustain semiconductor manufacturing facilities," said Ajit Manocha, president of SEMI, a trade group, in a statement. But the subsidies offered by "individual governors and state economic officials are often outmatched by the whole-of-government initiatives from other nations."

Building the most advanced chip factories today can cost more than $10 billion and a major part of the investment is the purchase of tools that can process and slice up silicon wafers. "However, significant semiconductor manufacturing incentives have been put in place by other countries, and US semiconductor manufacturing growth lags behind these countries due largely to a lack of federal incentives," the SIA said in a statement last month.

US Chip Production Today

The US is the global leader in chip design, accounting for more than 45% of overall sales of semiconductors. US-based companies also dominate the markets for software tools used to design chips and the machinery used to manufacture them. Even though Intel, Micron, Texas Instruments, and other leading US chip vendors continue to assemble chips in the US, the country's share of the world's installed production capacity has been dwindling.

Today, there are close to 80 production plants in 18 states rolling out memory and processors as well as analog, power-management, and radio-frequency chips, according to the SIA. But only slightly more than 40% of the fabs owned by US firms are actually located domestically. Others are scattered around the world, particularly in Southeast Asia and China. The US also commands only about 10% of the global "pure play" foundry business.

US-based Globalfoundries, which has the second largest share of the foundry market behind TSMC, halted development of its most advanced chips at the 14-nanometer node. TSMC, which holds about 50% of the market share in contract chip-making, is on pace to roll out its 5-nanometer node in late 2020, potentially a year ahead of competing technology from Intel.

How The Funds Would Be Used

If the bill passes, it would roll out up to $10 billion in funding for federal grants to match state  subsidies to encourage companies to build more advanced fabsand foundries that produce semiconductors designed by other companies—in the US. The law would also allow the Defense Department to use funding under the Defense Production Act, to "establish and enhance a domestic semiconductor production capability."

It would also create a 40% refundable investment tax credit for the purchase of new chip production equipment to reduce the cost of outfitting advanced fabs. The tax credit would be reduced over time, falling to 30% in 2025 and 20% in 2026. The law would phase out the tax credit by 2027. The latest generation of lithography tools can cost up to $100 million each.

SEMI, a trade body that represents equipment vendors and other players in the global supply chain for chips, including packaging and test companies, has long pushed for the tax credit.

Research and Development

US companies have also lamented the lack of federal funding for R&D. Last year, US vendors invested close to $40 billion—or roughly 20% of the US semiconductor industry's overall sales—into research and development, the SIA said. But only a fraction of the total funding came from the US government. The SIA said that, as a percentage of the nation's gross domestic product, US funding for R&D into semiconductors has not actually changed for years.

“As global competitors invest big to attract advanced semiconductor manufacturing to their shores, the US needs to get in the game and make our country a more competitive place to produce strategically important technology,” said SIA's CEO John Neuffer. The SIA represents leading US vendors including Intel, Micron, Nvidia, Qualcomm, Texas Instruments, and Xilinx.

What The New Law Would Do

The law would also roll out $12 billion in funding for research and development to boost US leadership in semiconductors over five to 10 years. If it passes, the Defense Department's research division, DARPA, would win $2 billion in funding for programs to prepare the US electronics industry for the end of Moore's Law, which has served as the industry's playbook for scaling transistors and rolling out faster, smaller, and cheaper chips for decades.

It would also establish $5 billion to support the return of packaging, testing, and other parts of the manufacturing process that come after chips are made. The US semiconductor industry is also looking to establish leadership in the advanced packaging of slabs of silicon—also known as chiplets—instead of cramming billions of transistors into large, monolithic chips.

Furthermore, it would create $5 billion in funding for federal research into chips, which are key components in areas from 5G technology and artificial intelligence to aerospace and defense systems. The new funds would be rolled out to US Energy Department and federal research agencies. The legislation would also create a $750 million fund for coordinating with foreign governments to hash out policies and promote more transparency in the supply chain.

Why Now?

Concerns about the chip supply chain have deepened in recent years as the semiconductor industry's factory floor has shifted to Asia. Taiwan, which is where TSMC is headquartered, is the world leader with 22% of the global chip production capacity, according to IC Insights. South Korea, where Samsung Electronics is based, is in second place with 21%.

These concerns have been compounded by the spread of the coronavirus, which has slowed the global supply chain used by US firms to outsource the production, packaging, and testing of chips. The viral outbreak has underscored the potential danger of the US semiconductor industry's heavy dependence on supply chains in China and other countries in Asia. Lockdowns to control the spread of the lethal virus also slowed shipping operations.

Fears have been worsened by the trade war with China, which has pushed it to pursue more independence for its native semiconductor industry. China surpassed the US with its share of global production capacity for chips rising to roughly 14% last year, according to IC Insights. China is projected to take over the #2 spot in capacity from South Korea by 2022.

Are There Other Proposals?

A rival proposal, called The American Foundries Act of 2020, was introduced in the Senate by lawmakers late last month. That bill will be the subject of the second part of this series.

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