Why America Needs Semiconductor Legislation to Bolster Its Economic and National Security
American innovators produced the world’s first semiconductors, and for decades U.S. companies led the world in this crucial industry, which powers the global digital economy. But U.S. leadership of the sector has faltered, with the country’s share of global semiconductor production cratering from 37 percent in 1990 to just 12 percent by 2019. To reinvigorate America’s semiconductor industry competitiveness, Congress needs to pass two critical pieces of legislation now up for consideration—the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act, which is part of the U.S. Innovation and Competition Act (USICA), and the Facilitating American-Built Semiconductors (FABS) Act. Congress should do so because it’s imperative the United States starts manufacturing more semiconductors domestically, for a multitude of economic and national security reasons.
The CHIPS Act, as incorporated in the USICA legislation that passed the Senate on a bipartisan basis last June, envisions $52 billion worth of investments, including $39 billion in federal matching grants for state and local incentives toward attracting semiconductor fabs and $10.5 billion for semiconductor research and development (R&D) activities. The latter element includes $5 billion for semiconductor R&D initiatives across various government agencies, $2 billion to establish a National Semiconductor Technology Center, and $2.5 billion for a National Advanced Packaging Program. Meanwhile, the related FABS Act proposes a 25 percent investment tax credit for semiconductor manufacturing investments, both for manufacturing equipment and the construction of semiconductor manufacturing facilities.
Ensuring Long-Term Competitiveness
While almost all in Congress have indicated support for the R&D-related elements of the CHIPS Act, some have objected to its federal incentive-matching grant package or to the FABS Act’s investment tax credits, contending they are tantamount to corporate handouts to enterprises already worth billions.
But the reason Congress needs to provide the incentives is not that capital markets can’t provide investment, but because without them the U.S. share of semiconductor production will continue to shrink. The reality is that countries compete fiercely to attract globally mobile, highly capital-intensive semiconductor investment to their shores—new fabs cost $15 to $20 billion to construct before a single semiconductor rolls off the line—and competing nations’ willingness to offer highly attractive investment incentives explains a considerable part of America’s deteriorating share of global semiconductor production over the past four decades. In fact, the Boston Consulting Group has found the 10-year total cost of ownership (TCO) of U.S.-based semiconductor fabs is 25 to 50 percent higher than in other locations, with government incentives in those countries accounting for 40 to 70 percent of the U.S. TCO gap. Foreign government incentives that reduce up-front capital expenditures for land, construction, and equipment may offset 15 to 40 percent of the gross TCO of a new fab (pre-incentives), depending on the country.
The existence of such incentive packages represents a reality of global semiconductor investment. Consider Samsung’s November 2021 announcement of plans to build a $17 billion fab in Taylor, Texas. The city of Taylor and surrounding Williamson County offered Samsung property tax breaks greater than 90 percent for the first 10 years while the local school district provided a tax break and the state of Texas kicked in an additional $27 million in incentives. As Williamson Country Judge Bill Gravell explained, affirming the importance of the incentives, “We beat out every location in the world… because we wanted it.” Similarly, Columbus, Ohio bested 40 other sites across the United States to attract Intel’s announcement last week that it would build a $20 billion facility set to become the world’s largest fab. As The Wall Street Journal reported, “The regions landed Intel’s investment, in part, by offering infrastructure upgrades, a massive space with room for expansion, and other incentives.”
On the tax side, as noted, semiconductors represent the world’s most-capital intensive industry: It is expected to invest $150 billion in Capex in 2022 alone and a total of $3 trillion in R&D and Capex over the course of this decade. That’s why investment tax credits represent an important component of many nations’ semiconductor strategies. For instance, South Korea provides 10 to 20 percent tax credits for semiconductor fab investments. Taiwan offers tax credits for companies building new manufacturing facilities, including semiconductors. And many other countries, including China and Japan, offer significant tax breaks for semiconductor manufacturers, even where not structured specifically as a semiconductor manufacturing investment tax credit.
With the 10-year cost of a state-of-the-art fab, including both initial investment and annual operating costs, reaching up to $40 billion, there’s no question that a nation’s, state’s, and/or regions’s tax credits and related incentives make a significant difference at the margin for companies deciding where in the world to site fabs. And the United States nationally would be far more globally competitive at attracting semiconductor investment if it finally gets in the game and invests to match state and local incentives to attract such investment. America’s competitors have been competing at the national level for decades, while U.S. states and regionss have been left to their own devices to scrape together packages as best they can.
And this is why the CHIPS/FABS legislation focuses on financial support mechanisms. The need is not an emergency bailout of the industry, as per the government’s 2008 intervention to rescue the auto industry with a package of loans and warrants (options to buy shares at a set price). In other words, the issue is not ensuring the short-term viability of the industry, but securing its long-term competitiveness and capturing a greater global share of global production for the United States in this critically important, high-value added industry. That is why any package structured as loans or warrants would be next to worthless: Companies are not capital-short; but they do respond to government incentives around the world.
Does It Matter Where Semiconductors Are Fabricated? Yes.
Others argue that so long as U.S companies have access to the chips they need, it doesn’t really matter where in the world they are manufactured, or by whom. In fact, this matters for many reasons.
First, the industry supports good-paying jobs. On average, workers in the sector earn $80,000, which is almost 40 percent more than the average U.S. job at $51,000. The sector already supports 277,000 U.S. jobs directly, plus another 1.6 million jobs indirectly. Moreover, analysts predict the CHIPS/FABS Act would create an annual average of 185,000 temporary U.S. jobs and add $24.6 billion to the U.S. economy as new semiconductor manufacturing facilities are constructed from 2021 to 2026.
Second, the industry’s $49 billion of semiconductor exports in 2020 placed it as America’s fourth-largest exporting sector. Although, unfortunately, given America’s faltering share of global semiconductor production, U.S. semiconductor exports in 2020 were actually less than in 2005 at $53 billion (even without adjusting for inflation). But more semiconductor production would help reduce ever-burgeoning and unsustainable U.S. trade deficits.
Third, greater U.S. semiconductor production would help forestall semiconductor supply chain shortages that led to prices for affected goods rising 3 percent, thus contributing to inflation and cutting as much as 1 percent from U.S. GDP growth in 2021. Indeed, the health and vitality of a wide variety of downstream U.S. industries—from airplanes and automobiles to medical devices and wind turbines—depends on ready access to the semiconductors constituting the digital brains of these devices. Greater domestic capacity would put the United States in a better position to wither or preclude supply-chain shortages. This is especially important given that the median U.S. company now has only a five-day chip inventory of chips.
Finally, and most importantly, beyond the economic considerations lie national security ones. Currently, 92 percent of the world’s most-sophisticated semiconductors (those made at process nodes 10 nanometers (nm) or below) are manufactured on the island of Taiwan (and the remaining 8 percent in South Korea). Highlighting the potential impact of this dependence, one study estimates that a hypothetical one-year disruption of the Taiwanese semiconductor supply (whether due to natural disasters or geopolitical conflict) would cost global electronic device manufacturers alone $500 billion, making the current semiconductor shortage a drop in the bucket. This dependence constitutes a significant national security vulnerability the United States needn’t expose itself to in nearly the same degree if it commanded a greater share of semiconductor production. Should China take over Taiwan, it would have massive leverage over America. As it is, the dynamic certainly complicates U.S. defense calculations in the South China Sea.
Moreover, although many U.S. defense systems and platforms do regularly use so-called legacy chips (those at process nodes 14 nm or higher), the newest 3-5 nm chips are vital to applications such as artificial intelligence, next-generation computing, or signals processing where there exist significant military applications for functions such as communications, detection, sensing, targeting, etc. Indeed, access to these sophisticated chips is critical to achieving DOD’s goals of a so-called third offset strategy, which includes, among other things, intelligent battlefield technology and hypersonic weapons. And that’s why USICA includes $2 billion for a “CHIPS for America Defense Fund” for R&D, testing, and evaluation of chips specifically needed to support defense and intelligence missions. But even without that, the CHIPS and FABS acts represent important steps to securing America’s strategic autonomy and promoting national security.
The World’s Most Strategically Important Industry
Put simply—alongside biotechnology amidst a pandemic—semiconductors represent the world’s most strategically important industry. By definition, they are instrumental to any product or device in the world that has an off/on switch or that processes information or leverages computational capacity. In short, they represent the foundational industry for the entire global economy. The United States, creator of this industry, needs to ensure both that it fields leading companies across the memory, logic, and analog segments of the semiconductor industry, and that it maintains sufficient domestic semiconductor manufacturing to support its economic and national security needs. And, to be sure, while the CHIPS/FABS Act won’t immediately solve the current semiconductor shortage (as it takes two to three years for new fabs to come online once ground breaks), they represent a mid- to long-term investment that will help to preclude America from finding itself in a similar position again.
Thus, the CHIPS and FABS Acts are about much more than simply the competitiveness of the U.S. semiconductor industry; they’re more fundamentally about U.S. economic and national security. And they fit precisely with the investments the broader USICA legislation would make in R&D, innovation, and technology transfer and commercialization to facilitate American economic competitiveness.
Leading in today’s global economy means leading in semiconductor innovation and production. It’s time for Congress to pass the CHIPS and FABS Acts.