Chipmakers battle for slice of US government support
Package to reverse decline of nation’s semiconductor industry will only go so far.
Enlarge / Employees wearing cleanroom suits monitor chemical vapor deposition operations inside the GlobalFoundries semiconductor manufacturing facility in Malta, New York. Production plants for semiconductors have become a focal point as the economic recovery from the pandemic is held back in areas by a shortage of some of the critical electronic components necessary.
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The long wait for legislation to boost the US’s position in global semiconductor manufacturing is almost over. The scramble among companies to get their hands on the billions of dollars it unleashes is only just beginning.
The House of Representatives last week followed the Senate in passing a broad law to counter China’s rise as a technology power, including $52 billion in grants to support advanced chip manufacturing and research and development in the US. The law, which has yet to be signed, unlocks an estimated $24 billion more in investment tax credits for chipmakers by letting them write off 25 percent of the cost of new factories, or fabs, against their profits in the first year.
Pat Gelsinger, CEO of Intel, said the act may be “the most important piece of industrial policy” in the US since World War II. It is designed to reverse a decline in the US share of global chip manufacturing to 10 percent from 38 percent in 1990.
However, the financial support from Washington is unlikely to stretch across all the giant projects already under construction or on the drawing board in the US.
“It’s not as big as everyone thinks,” said Pat Moorhead, a US chips analyst. With advanced chip manufacturing plants costing more than $10 billion, the Department of Commerce, which will be responsible for deciding who gets the money, will face some difficult choices, he said.
The legislation includes $39 billion over five years to support the construction of new fabs, with grants of up to $3 billion for each project. Another $11 billion is set aside for R&D, with $2 billion for projects considered important by the Pentagon.
Intel alone hopes to secure $12 billion of the construction grants, or nearly a third of the total, for two fabs under construction in Arizona and two more for which it is close to breaking ground in Ohio. Others who have been angling for the money include the two chipmakers that have leapfrogged Intel in recent years to master the most advanced, or “leading-edge,” chip-making techniques—TSMC, which is building a $12 billion fab in Arizona, and Samsung, which is working on a $17 billion facility in Texas. Both plants are due to begin producing chips in 2024.
Although Congress has agreed to make the grants available to foreign companies, domestic chipmakers are lobbying hard to make sure the lion’s share of the money goes to American companies. An executive at one US chipmaker said that the commerce department should favor companies that carry out their R&D in the US and employ the largest number of workers there—things that would clearly favor American companies.
The commerce department has not yet revealed the application process or said how it will pick priorities for taxpayer support.
US officials must also decide how much of the money to allocate to the most expensive, “leading edge” fabs, which supply chips for demanding, high-volume uses like smartphones and PCs. That would mean throwing full support behind Intel, which lost its technological lead in global chip making to TSMC and Samsung and has been investing heavily to claw its way back.
On the same day that the House passed the Chips Act, Intel shocked Wall Street with a slump in its latest quarterly results and said it would cut its capital spending plans for this year by $4 billion. However, it did not change longer-term plans for its advanced new fabs. The plants are central to the company’s goal of trying to compete head-on with TSMC by becoming a “foundry” that manufactures chips on behalf of other companies rather than only to its own designs.
The financial setback last week revived suggestions from some analysts that Intel should abandon its foundry ambitions to focus instead on shoring up its existing business. However, the company has argued that it needs to become a foundry to justify the escalating costs that come with each new generation of manufacturing technology, since its existing business is not big enough to require such large-scale fabs.
Others with big plans to boost US production include memory chipmaker Micron, which has earmarked $150 billion for capital spending by 2031. The company has been waiting for the act to become law before giving the go-ahead to a big new plant that it expects will start production in the middle of this decade, according to CEO Sanjay Mehrotra. “It’s not about if these fabs will be built—it’s about where they will be built,” he said.
Memory and storage chips have grown to account for nearly a third of the semiconductor market, and Micron has world-leading technology in this field, meaning that it is likely to be seen in the US as a strategic supplier needing extensive government support, said Moorhead.
TSMC is also angling for extensive support to justify its most significant attempt so far to put down roots in the US, where costs are higher than its home base. Chair Mark Liu said in June that the US plant was turning out to be “more costly” than TSMC had expected and that a shortage of chip manufacturing talent was causing the company problems.
Morris Chang, the TSMC founder, said earlier this year that the erosion of US chip manufacturing expertise over a number of decades had made it extremely hard for the country to regain global competitiveness. Speaking in an interview with the Brookings Institution, he said it had made the Chips Act “an expensive exercise in futility.”
While the US is under pressure to regain its edge in leading-edge chipmaking, the commerce department must also decide how much cash to set aside for older process technologies that still play a central role in many chip markets. Many industrial and car-making customers, as well as the Pentagon, use chips that are produced in lower volumes to their own specifications and which do not need to meet the most demanding low-power standards.
SkyWater Technology, a chip foundry based in Indiana, in July announced plans for a new $1.8 billion fab to produce chips using older technology. Tom Sonderman, CEO, said the plant would support a wide range of industrial customers using facilities on US soil. The fab would only go ahead if it can win substantial official backing, with a third of the cost from the federal government and another third from state support, he added.
It’s official: US chipmakers will receive billions in grants and tax breaks
Chipmakers eager to receive huge subsidies stood with President Joe Biden as he signed a bill injecting $52.7 billion into their industry today. Executives from companies like Micron, Intel, HP, and Lockheed Martin witnessed the flick of Biden’s pen, alongside auto industry leaders and other stakeholders. They are hopeful that these new subsidies will end “a persistent shortage” in memory chips that Reuters reports has affected “everything from cars, weapons, washing machines, and video games.”
In total, the CHIPS and Science Act—also known as the Creating Helpful Incentives to Produce Semiconductors for America Act—authorizes up to $200 billion in subsidies over 10 years, should the US decide to continue investing. The long-term vision is to shove the US ahead of China and other invested countries in a global race to become a chip industry leader.
Once the law is enacted, the Department of Commerce will decide on rules for how grants will be disbursed, dictating who gets how much money and for how long. Because advanced semiconductor production that’s necessary for chipmaking requires a significant investment of time and money, venture capitalists have been less likely to fund long-term projects. This law positions the federal government to fill that funding gap while advancing highly coveted technology domestically.
Some chipmakers have already announced long-term investments ahead of Biden signing the bill into law, including a commitment from Qualcomm to purchase $7.4 billion worth of semiconductor chips over the next six years from a New York factory. Micron committed even more, setting aside $40 billion to fund memory chip manufacturing. Micron’s investment alone would “boost US market share from 2 percent to 10 percent”—an ample recovery that’s still relatively modest when compared to the 38 percent market share that the US used to enjoy in 1990.
In addition to federal grants, chip manufacturers are eligible for a 25 percent investment tax credit through the bill. For the entire industry, that’s another estimated $24 billion boon, on top of the $50 billion in grants.
Historically, US lawmakers consider corporate subsidies of such proportion to be counterintuitive to ensuring a fair, free market. But lawmakers seem to think it’s necessary to ward off national security risks and address global supply chain concerns by investing billions into America’s chip production—much like how the European Union and China have invested in their own production.
This could help put the US ahead as a top global chip manufacturer, but there are some signs that the US will need to monitor progress closely to ensure maximum profitability on its investment. Biden’s move today comes just after China’s chipmaking industry has “descended into chaos,” with top Chinese chip industry officials arrested on corruption charges for misusing government money. After investing $30 billion, China is still on the hook for another $20 billion as investigations begin, and their technology still lags behind Taiwan’s.
Experts have said there’s nothing surprising about discovering corruption in an industry with so much money “sloshing around.” In the US, corruption from increasing corporate welfare has been heavily criticized since the 1980s, when watchdogs first attempted to “drain the swamp” of politically motivated and financially controlling corporations working against consumer interests for profits. China is one example of how government investment in the chip industry can go wrong—wasted money on low-quality technology that can’t compete in global trade—but it also illustrates why cutting ties with foreign suppliers is considered crucial, even by more frugal lawmakers who otherwise would hesitate to approve large corporate subsidies.
