Is the CHIPS Act the Answer to the US Microchip Crisis?

Semiconductor microchips are a critical component of nearly every device we consider essential. From cars to smartphones to gaming consoles and more, microchips are the powerhouse of modern-day technology. Because of ever-increasing demand, microchip production is a rapidly growing industry. In 2022, the global microchip (chip) market is projected to grow by 10.1% to $606 billion U.S. dollars. It is normal for chip supply to fluctuate between excess and shortage; however, the most recent shortage, catalyzed by the COVID-19 pandemic, has spurred dialogue on Asia’s growing dominance in global chip production. As unpredictable events like viral pandemics and climate disasters increasingly disrupt microchip supply chains, how can the United States step up and become the formidable microchip manufacturer it once was? A concrete short- and long-term political strategy is in order.

The Semiconductor Production Landscape

Microchip production is complex. It takes a 700-step process, requiring billions of dollars of investment and nanoscopic precision, to produce chips and optimize them for buyer infrastructure. Unsurprisingly, few firms have effectively mastered the process and kept up with the costs of modernizing technology. According to the Semiconductor Industry Association, in 1990, the United States produced more than 30% of all semiconductors; last year, that share fell to just 12%. Chip manufacturing is now dominated by countries in Asia, with 80% of chipmaking capacity concentrated in the region. East Asian firms like Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung now spearhead global production and power the world’s most essential goods. Projected chip production over the next decade shows China emerging as the largest semiconductor manufacturing location in the world. This production imbalance was a priority for Western leaders, but it wasn’t critical until the pandemic began and consumers started to engage with their devices like never before.

What is the CHIPS Act?

In June 2021, the U.S. Senate passed the Innovation and Competition Act containing funding for the Creating Helpful Incentives to Produce Semiconductors for America (CHIPS) Act—a $52 billion boost for microchip production. The Act is designed to “restore American leadership in semiconductor manufacturing by increasing Federal incentives to enable advanced research and development, secure the supply chain, and ensure long-term national security and economic competitiveness.” Key provisions of the bill include:

• Investment tax credits for expenses related to production, research, development, and equipment;
• Federal grants to match state incentives;
• Funding for development and adoption of secure microelectronics and microelectronics supply chains;
• National strategy on semiconductor research and development
• Skills training to build a reliable workforce and continued pipeline; and
• Department of Defense support for semiconductor technologies.

The CHIPS Act is three times as expensive as what the government spent to support COVID-19 vaccine development and manufacturing. However, the size of funding alone is not enough to determine the bill’s potential success. There must be a critical examination of what led to the downfall of U.S. semiconductor production and whether the CHIPS Act is the right solution.

Avoiding Past Mistakes

The share of global microchip manufacturing in the United States has significantly decreased over the past few decades. According to the Semiconductor Industry Association, “while U.S. headquartered companies account for 48 percent of the world’s chip sales, U.S. based fabrications – including those operated by companies headquartered abroad – account for only 12 percent of the world’s modern semiconductor manufacturing capacity, down from 37 percent in 1990.” The rapid decline is due to a shift in U.S. industrial policy.

At the industry’s inception in the 1950s, the government helped form a diverse working group of semiconductor firms using industrial and science policy and fiscal stimulus. Small and large firms from both the private and public sectors participated, with smaller firms spearheading technological development and larger firms developing formidable supply chains, process improvements, and workforce capabilities that enabled production to rapidly scale up. Since the industry was backed by the U.S. government, firms were hyper-focused on innovation and production improvements versus economic success. As a result, a robust semiconductor research and development industry was born.

In the 1960s, the United States government’s purchase of semiconductors decreased, and international competition began to rise. However, it wasn’t until the 1990s when the United States’ new focus on science policy changed the microchip production landscape. Firms eliminated redundancies in production. The collaborative semiconductor manufacturing community was replaced by many small firms specializing in science policy and research, with a few large firms solely in charge of process improvements. The industry became fragmented with substantial underinvestment in labor and capital, while international industries continued to forge ahead in the creation of new production lines and factories. Consequently, U.S. semiconductor production drastically decreased while East Asian companies grew to dominate the market.

Is the CHIPS Act Necessary?

Clearly, the Biden Administration is prioritizing investment in chip production to avoid shortages as severe as the one caused by the COVID-19 pandemic. This refreshed focus on reliable supply chains, trained workforces, and advances in processing technology versus scientific innovation alone is overdue. Technology pundits, however, question whether the CHIPS Act is necessary.

New York Times Technology columnist Shira Ovide points out that putting taxpayer money into chip plants that will take years to initiate production won’t fix pandemic-related shortages that made it tough to buy Ford F-150s and video game consoles. Ebbs and flows in the supply of semiconductors are normal, and by the time the bill passes, the shortage will be yesterday’s problem. From Ovide’s perspective, investment elsewhere may be more pressing. George Calhoun, the Director of the Quantitative Finance Program at the Stevens Institute of Technology, expressed similar concerns. According to Calhoun, U.S. semiconductor production is “fantastically profitable” with domestic firms investing “18 times as much” as Chinese firms in absolute dollars. While he agrees the U.S. is behind in terms of manufacturing, Calhoun believes the private sector should lead investment and production with substantial efforts already underway, which far exceed the benefits that the CHIPS Act alone would provide.

Why the CHIPS Act is a Step in the Right Direction

Presently, a similar bill has passed in the U.S. House of Representatives, but the two need to be reconciled into one final bill for the president to sign: a process that can take considerable time. It is true that the recent crisis could just be a small blip in what is otherwise an extremely profitable industry; however, the CHIPS Act would still bring enormous benefits. It would ensure that the U.S. is better prepared for unpredictable crises and future supply chain disruptions. Diverse firms, both large and small, would have a vested interest in the success of the semiconductor industry with government support providing continued incentive to invest. It would bring jobs and increased stability to the U.S., as well as collaboration between the private and public sector that could better hold private companies accountable. Through the CHIPS Act, the United States would become more self-reliant and better prepared for whatever happens next.