Incentives Essential to Ensuring America Possesses a Leading Semiconductor Industry

Stephen Ezell February 2, 2022
February 2, 2022

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This morning’s Washington Post ran an op-ed questioning a critical component of the America COMPETES Act: the legislation’s incorporation of the CHIPS Act and its allocation of $52 billion to stimulate domestic semiconductor production, research and development (R&D), and innovation. In particular, the op-ed objects to the legislation’s inclusion of $39 billion in federal funding to match state/local incentives directed toward attracting domestic semiconductor manufacturing activity. With regard to such incentives, the op-ed reasons that “the United States cannot meet China dollar for dollar, and it should not try” and contends that “much of China’s chips money will be wasted” anyway. But the op-ed’s objection is misguided on a number of accounts, including misconstruing the purpose of the CHIPS Act’s incentives, the reality of global semiconductor sector competition, and the nature of China’s attempts to compete in the semiconductor industry.

First, the simple reality is that if countries wish to have an internationally competitive semiconductor industry, given how fiercely countries compete to attract this globally mobile, high-value investment, incentives are a necessity. Indeed, virtually all governments of countries with substantial semiconductor manufacturing activity—including Israel, Japan, Singapore, South Korea, Taiwan,  and others—provide generous incentives to attract semiconductor manufacturing, such as direct grants, free land, equity investments, infrastructure support, reduced utility rates, tax holidays or credits, hiring credits, and workforce training. That’s why one study finds that foreign government incentives may offset from 15 to 40 percent of the gross total cost of ownership (pre-incentives) of a new fab. That study further 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 foreign government incentives accounting for 40 to 70 percent of the U.S. TCO gap.

Put simply, the reality is other countries provide extremely generous incentives to attract semiconductor manufacturing; if the United States doesn’t introduce a mechanism to level the playing field, it’s going to lose out on the opportunity to attract new semiconductor fabs. There’s an intense race for global advantage in this sector, and it’s going to be won or lost in large part through the incentive and attraction packages countries, states, and regions put together to attract semiconductor manufacturers. To think otherwise is to ignore the reality of global competition.

And, indeed, that has been the precise reality over the past three decades, as America’s share of global semiconductor manufacturing has shriveled from 37 percent to 12 percent—this in an industry America once pioneered. As concerningly, when it comes to the world’s most-sophisticated semiconductors—those made at process nodes 10 nanometers (nm) or below) and which power smartphones and computers, AI systems, autonomous cars, and other devices underpinning the modern global digital economy—92 percent are manufactured in Taiwan, 8 percent in South Korea, and virtually none in the United States.

This creates a potentially extreme national security vulnerability for the United States, for denial of access to those chips (whether caused by geopolitical tensions [especially from the People’s Republic of China], supply chain bottlenecks, or natural disasters) would compromise the production capacity of a wide range of downstream industries from airplanes to automobiles, as the mere recent semiconductor shortage has shown. Does the United States really want to be forced to be dependent on Taiwan for the chips it needs? For both national and economic security purposes, the United States simply must start manufacturing significantly more of the most-sophisticated semiconductor chips its economy depends on at home, and that will not happen at the scale needed without federal incentives.

Indeed, semiconductor chips aren’t potato chips. Semiconductors represent a strategically crucial general-purpose technology that not only experience very rapid growth and reductions in cost but spark the development of related industries and increase the productivity and innovation capacity of virtually every sector of an economy. As ITIF has written, semiconductors also support high-paying jobs, constitute high-value-added exports, and drive local economic growth and tax revenues. Public policy should directly support the competitiveness of this foundational industry for the American economy.

Lastly, but perhaps most importantly, the Washington Post fundamentally misconstrues the nature of subsidies—especially as China uses them to build up its semiconductor industry—in contradistinction to the incentives measures offered in CHIPS. Specifically, China is using massive industrial subsidies to stand-up new semiconductor enterprises from whole cloth with government support or to substantially capitalize enterprises that wouldn’t be competitive and would likely fail if exposed to genuine market-based global competition. For instance, Yangtze Memory Technologies Co. (YMTC) is a Chinese state-controlled joint venture launched by the National Integrated Circuit Industry Investment Fund that received $24 billion in government funding to launch its initial Wuhan factory. In other words, China’s government created an entirely new company to compete in the global memory chip business. An exhaustive OECD report, Measuring distortions in international markets: The semiconductor value chain, documented the staggering extent of Chinese government subsidies for the sector. Examining 21 international semiconductor companies from 2014 to 2018, the report found that Chinese companies received 86 percent of the below-market equity provided by their nations’ governments. And over those years, 40 percent of the revenues of China’s Semiconductor Manufacturing International Corporation (SMIC) came directly from state subsidies.

Thus, the Washington Post is dead wrong to conflate or equate the incentive measures envisioned in CHIPS with China’s subsidies to its semiconductor sector; they are mostly different in kind, scope, and intent. Many of China’s incentives are to stand up wholly new semiconductor competitors from scratch or to sustain others that aren’t economically viable. The CHIPS incentives in COMPETES would level the playing field for the incentive packages China and many other nations offer to attract globally mobile semiconductor manufacturing capacity. Editorialists at the Washington Post need to understand the reality of global competition in this industry, just as an increasing number of policymakers have woken up to the sector’s critical importance to the American economy and the need to support it with a robust legislative package.