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How the Commerce Department Can Implement CHIPS for Maximum Impact

How the Commerce Department Can Implement CHIPS for Maximum Impact

February 17, 2023

The landmark CHIPS and Science Act of 2022 laid the foundation to turbocharge U.S. competitiveness across a variety of advanced-technology industries, but none more than semiconductors. The “CHIPS” component of the bill allocated $52.7 billion to bolster that sector, including $39 billion in manufacturing incentives and $13.2 billion for research and development activities. The legislation affords a once-in-a-generation opportunity to restore U.S. competitiveness in manufacturing the most important core technology for the modern economy—potentially reversing an ominous slide that has seen the U.S. share of global semiconductor manufacturing decline from 37 to 12 percent over the past three decades—but only if policymakers implement the legislation effectively and with alacrity. In particular, CHIPS implementers should focus on large-scale semiconductor fabs that represent “the tip of the spear” in sustaining regional semiconductor manufacturing ecosystems, on projects that can be launched and scaled quickly, and on applying the financial levers in CHIPS to achieve maximum investment impact.

A central reason the United States has fallen behind in semiconductor manufacturing—and a key rationale for the CHIPS legislation—is the stark reality that it’s more expensive to build and operate fabs in the United States than elsewhere across the world. The 10-year total cost of ownership (TCO) to build and operate U.S.-based semiconductor fabs is 25 to 50 percent higher than in other locations, with foreign governments’ incentives accounting for as much as 40 to 70 percent of the U.S. TCO gap. In large part because of that cost differential, the semiconductor fabs that have been built in the United States recently haven’t been built to the scale of their Asian peers. That helps explain why U.S. semiconductors fabs on average are only about one-half the scale of Asian fabs.

That’s why ITIF argued in its response to the Commerce Department’s request for comment on CHIPS implementation that, “In general, the CHIPS Incentive program should be concerned with stimulating greater investment in more and larger-scale semiconductor fabs in the United States, in logic, memory, and analog alike.” In other words, attracting large-scale semiconductor fabs should be viewed as the “the tip of the spear” in recapturing greater U.S. share in global semiconductor manufacturing, because if America can attract the fab, then not only will a wide variety of downstream suppliers be more likely to follow, but they’ll also be financially healthier from the economic opportunity that flows therefrom.

To encourage semiconductor manufacturers to build at the largest scale possible, projects shouldn’t be seen in isolation but as multiple, individual fab investments.

It’s imperative to recognize that manufacturers’ ability to secure CHIPS incentives will be instrumental to the extent and scale at which they build their fabs in the United States. For instance, in January 2022, Intel confirmed plans to invest $20 billion to construct two new leading-edge chip factories in Ohio. However, the company may eventually construct as many as eight fabs at the site with investments surpassing $100 billion. Similarly, Taiwan’s TSMC had already expanded its footprint in Arizona from one to two fabs with a $40 billion investment—but it may build as many as six fabs at the Phoenix-area site. Likewise, in July 2022, Samsung revealed plans to invest as much as $200 billion in the United States over the next 20 years, including building as many as 11 new semiconductor production lines in Texas. For all three companies, and more, these expanded investments will be limited without CHIPS funding.

To encourage semiconductor manufacturers to build at the largest scale possible, these projects shouldn’t be seen in isolation but as multiple, individual fab investments. Why would a manufacturer be eligible for less support if it built two fabs in two different states as opposed to two (or more) fabs within a “megafab” at one site? Again, lawmakers’ objective in designing CHIPS was to incentivize the maximum amount of semiconductor fabrication in the United States by offsetting the significant cost differential that exists in building and operating a semiconductor fabs(s) between the United States and elsewhere. Incentives should be positively correlated to overall capital expenditures, not to the geographic diversity of investment.

To incentivize such massive investments, Congress included two instruments in the CHIPS Act:

1. an investment tax credit (ITC) equal to 25 percent of the value of qualified investments in buildings and other eligible depreciable tangible property for advanced manufacturing facilities; and

2. the $39 billion in incentives, which Commerce may administer in the form of grants, cooperative agreements, or loans and loan guarantees.

But again, the goal is to maximize the extent of semiconductor fabrication in the United States. Both these instruments—which were enacted separately—are crucial in offsetting the cost gap, and as such they should operate independently and not be commingled for purposes of assessing companies’ applications for incentives. These instruments should be viewed as operating in combination to incentivizing semiconductor manufacturing, and so the notion that the incentive grants available to companies would be potentially offset or diminished by the value of the ITC they’re eligible to receive would be counterproductive to the initiative’s goals. Moreover, it introduces technical difficulties that could introduce uncertainty in grant applications and may delay investments, including that companies can only estimate the ITC tax impact up front and don’t know its true effect until year-end taxes are filed. Given the very significant differences in cap-ex and op-ex costs in the United States vs. Asia, the United States will need both incentives—direct grants and tax incentives—operating full bore for the United States to regain global chip market share.

Both instruments in the CHIPS Act are crucial in offsetting the cost gap for U.S. semiconductor fabs. They should operate independently, not be commingled for purposes of assessing companies’ applications for incentives.

Finally, it’s imperative that CHIPS funds start to flow quickly. While the worst of the recent chips shortage appears to have abated, Commerce Secretary Gina Raimondo’s January 2022 comment that “It’s alarming, really, the situation we’re in as a country, and how urgently we need to move to increase our domestic capacity” certainly still stands. At the time, Goldman Sachs economists estimated that the 2021 semiconductor shortage, triggered by COVID-19-induced supply chain disruptions, likely reduced U.S. GDP by as much as 0.5 percent that year, while increasing prices for affected goods by 3 percent and contributing to higher inflation rates. And that was just a mere semiconductor shortage. Another study estimates that a hypothetical one-year disruption of the Taiwanese semiconductor supply (whether due to natural disasters, geopolitical conflict, or other causes) would cost global fabless companies $80 billion in revenues and electronic device manufacturers alone $500 billion, and that’s not even factoring downstream impacts to the broader economy.

But there is an even more compelling reason for alacrity by the Department of Commerce and that is that other nations are not standing still; they have or are implementing their own expanded incentives. If we don’t act quickly, other nations will gain a higher share of this planed cap-ex investment than America would otherwise.

So, it’s critical the United States manufactures far more leading-edge semiconductors, and quickly, both for compelling national and economic security reasons. Time is of the essence in restoring the United States to a leading position in manufacture of the device that represents both the brain and beating heart of the modern global digital economy.

Toward that end, the CHIPS Program Office (CPO) should be disbursing these grants quickly and efficiently. And the program should be easy to use for companies; who after all have choices around the world as to where to invest. Commerce should structure disbursements along the lines of 40 percent up front, 30 percent the following year, and 30 percent the third year. As, the Chips Program Office (CPO) notes in its Chip for America strategy, “The CPO will not hesitate to claw back funds or pursue other remedies if recipients misuse taxpayer dollars.” In other words, there’s already a clawback provision in place, so the government needn’t be concerned about providing funds up front.

The CHIPS Program Office (CPO) should be disbursing these grants quickly and efficiently.

Moreover, while the government is certainly correct that taxpayer funds need to be used judiciously and appropriately, the reality is that even for the semiconductor companies receiving the most incentives, such incentives will still represent only a fraction of the $20 billion or more it costs to build a leading-edge fab. The point is that companies putting far more skin in the game with at-risk investments are already incented to make economically sensible investments and utilize any taxpayer-funded grants or incentives received to that end responsibly.

Further to the conditions that attain to the disbursement of CHIPS funds, it makes no sense to prohibit companies from buying back stock if they receive subsidies, as some in Congress have called for, because there would still be other ways they can return money to shareholders, such as increasing dividends. Moreover, if a chip company receives, for example, $3 billion from the Commerce Department to help offset fab costs, it will need every cent to pay for the higher operating and capital expenditures it will face in America. There will be nothing left for shareholders.

It makes no sense to prohibit companies from buying back stock if they receive subsidies.

Ultimately, it’s time to realize America is no longer a “seller” that can afford high corporate taxes and heavy regulation and no investment incentives. America is now a buyer—and, in the case of chips, a desperate one—so, if we want fabs here, the government needs to help pay for them in a streamlined and expeditious way.

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