The CHIPS Act – Is It Really Necessary? (Part 3)
The “CHIPS For America Act” is a massive government subsidy program – $50 billon or so – proposed by the wise men and women of the U.S. Senate in response to the perceived “technology gap” in semiconductors. (Which – by analogy with the famous “missile gap” of the 1950s and 1960s – may not actually exist.)
Is it wise for the Federal Government to wade into this murky matter? The U.S. has never fully embraced the idea of “Industrial Policy,” and previous efforts in the semiconductor field have been ineffectual.
Nonetheless — the CHIPS money is very likely to be approved and spent, to “fix the problem” — but what is the problem?
If CHIPS goes forward, it’s important to understand what we are trying to accomplish. There is no need to re-emphasize the many ways in which semiconductor technology is central to the modern economy, and the modern military. So if there is a weakness in the U.S. position, it is by definition a serious matter. But what does “weakness” mean in this context? And if we are “vulnerable” – What can government do? What should government do?
What Are The Vulnerabilities?
The perceived “threat” to the U.S. position in the semiconductor industry is often seen as twofold:
- a threat of supply chain disruption – Can U.S. companies obtain the chips they need? Do we control sufficient capacity to produce what we need?
- a threat to our technological leadership – Do we have the technological capability to stay on the leading edge of innovation in this field?
The idea of these “threats” is largely based on a misunderstanding of the industry. As described in the previous column, if the “semiconductor industry” is de-constructed into its key segments, the picture is clear.
- There is no significant capacity or capability problem for the U.S., which is dominant is every segment of the industry — except in the pure contract foundry segment (which is dominated by Taiwanese companies working in close cooperation with American customers).
- The threat to American technological leadership is highly exaggerated; the U.S. dominates (with its allies) all the key technologies in the eco-system. Even in the much-worried-over (and much misconstrued) “process node” technology contest in the fabrication segment, the U.S. position is functionally competitive — while China is far, far behind.
The CHIPS Misfire
And yet – the CHIPS Act, as drafted, gets both of these points wrong.
The bill proposes a generic subsidy program, to channel money to build up onshore (domestic) production capacity. It targets what is essentially a nonexistent “problem” – the private sector is already addressing this vulnerability with resources far in excess of what CHIPS would provide. (See below.)
CHIPS also calls out several specific, and somewhat peculiar technology goals, supposedly to bolster U.S. technology leadership. These over-specific targets do not reflect the subtleties of the industry’s technology landscape.
So, if CHIPS is going to spend $50 billion, how then should it be targeted?
What Can Government Do?
In a sentence: Government action should be strategic – and it should not define or lead the strategy.
First, what is “strategic” in this context?
Vulnerabilities in the semiconductor industry are either short-term or strategic. Supply chain constraints – of there sort bedeviling the automotive industry right now – are generally short-term. This problem is actually endemic in the chip business. Given the economics and logistics of adding capacity to address sudden shifts in demand, the semiconductor industry becomes highly cyclical. Boom-and-bust patterns prevail, with shortages and gluts alternating as the headline crisis du jour. The pandemic whiplash has produced an unusually severe cycle of this sort, but the natural corrections are already underway (as reported here by the IEEE in June):
- “Historians will probably spend decades picking apart the consequences of the COVID-19 epidemic. But the shortage of chips that it’s caused will be long over by then. A variety of analysts agree that the most problematic shortages will begin to ease in the third or fourth quarter of 2021, though it could take much of 2022 for the resulting chips to work their way through the supply chain to products. The supply relief will not be coming from the big, national investments in the works right now by South Korea, the United States, and Europe but from older chip fabs and foundries running processes far from the cutting edge and on comparatively small silicon wafers.”
[The entire article here is recommended as an antidote to the less knowledgeable reporting that has predominated in most of the lay media.]
This is good old supply-and-demand stuff. Market mechanisms do resolve these problems, as painful as they may be in the near term, and the case for government intervention is not strong. The timing alone works against it; government action under our democratic/technocratic system is normally much slower than the natural market adjustment process. Passing legislation, setting up programs, qualifying the recipients of funding, disbursing the money… by the time all that is accomplished, the new programs will be solving last year’s problems.
The true strategic advantage of the U.S. is the deep expertise in the private sector, embodied in decades and millions of man-years of experience with an incredibly complex technology. Which means that the soil from which sound strategy will spring is not in the government’s domain. The leadership of the effort should emerge from this foundation of private sector experience, not from government mandates.
So, for example, the CHIPS bill should not call out specific technology targets — like “3 nanometer processes.” 3 nm is today’s headline must-have, but it is of limited relevance to the goal of maintaining technological leadership. The Big Fact about semiconductors today is that Moore’s Law is, finally, yes, coming to its end, its physical limit. New paradigms like neuromorphic computing (a fascinating prospect, by the way, described here in Science magazine,), and perhaps quantum computing, are among other approaches that side-step (rather than assaulting frontally) the physical limits of traditional processor designs. These new approaches will soon displace today’s “process node” fixation. “Process node” competition (which is what the CHIPS 3 nm mandate plays to) is hardware-intensive, physics-intensive, materials-intensive technology. It is not the only way to drive progress. Design-driven solutions (software) can sometimes overleap hardware-intensive technologies, and with far superior economics. ARM (a core IP supplier) has achieved near-monopolistic dominance of some applications (95%+ of the smartphone market – the largest single processor market today), not by brute-force hardware innovation, but by the opposite – subtle-force software innovation. CHIPS’ technology targets are based on outdated sloganeering — and by writing them into the law, we risk baking this obsolescence into the industry and handicapping it for the next generation.
Nor should CHIPS focus so exclusively the fabrication segment. Yes, we need to construct more domestically focused, “on-shored” supply chains – that is one of the big lessons of the pandemic, and it applies to all industries, not just semiconductors. But we don’t need government to lead that charge. The chip industry is already addressing it, with much bigger investments than CHIPS can project (see below).
A False Justification: Foreign Subsidies
Non-U.S. competitors often benefit from foreign government subsidies. This supposedly creates a serious structural cost disadvantage for American producers. For example, the Semiconductor Industry Association states
- “the total ten-year cost of ownership of of a new fab located in the US is approximately 25- 50% higher than in Asia, and 40-70% of that difference is attributable directly to government incentives.”
This is lamentable, but does it matter? These subsidies are the modern version of mercantilism – a grievance as old as global capitalism, usually resorted to be the “losers” in the game, and long since understood to be ineffective for the most part. Japan, Korea, China especially — they have all engaged in this “crime” against free trade. Yet the U.S. still dominates the chip industry, and our position has not deteriorated in the last two decades in any way that is due to these mercantilist policies and/or truly significant (i.e., truly threatening).
Nevertheless, many policy analysts (and evidently the Senate staffers who drafted CHIPS) believe that this foreign subsidy problem – aside from being offensive to our sense of fair play – is the crux of the problem facing the U.S. semiconductor industry and the source of our national vulnerability. The (obvious) remedy, as they see it (and CHIPS is the manifestation), is to ramp up our own government subsidies to match these wily foreigners. Does this make sense?
The answer is No.
First of all, the chip industry is fantastically profitable. This not the auto industry circa 2007. They don’t need the money.
American semiconductor firms are not coasting. Even as they spew cash in enormous quantities, they are investing heavily R&D – three times as much, as a percentage of sales, as the Chinese – and 18 times as much in absolute dollars.
[Caveat: The figures here for China may be too high. According to IC Insights, cited in an article in the Asia Times entitled “Get Real About the Chinese Semiconductor Industry,” we learn the following:
- “Chinese companies accounted for only $8.3 billion, or 37%, of China’s IC output, the rest being produced by the local silicon wafer fabs (semiconductor factories) of TSMC, Samsung, SK Hynix, Intel
and other foreign companies. That was just 6% of China’s IC market and only 2% of the global market.The total value of semiconductor production by Chinese companies in 2020 was less than that of AMD, which ranked 15th in the industry with estimated sales of $9.5 billion.”
If this is correct, and the SIA figure on R&D as a percent of sales – 6.8% for Chinese firms – is applied, the absolute value of Chinese private sector R&D would be much lower.]
The Private Sector Investment Tsunami
The next ten years will see an enormous acceleration of the rate of private sector investment. It will be driven not by government incentives, but by the profit motive – the desire to capture a share of a rapidly expanding market.
The leading firms are already investing aggressively to build capacity. Some of the numbers bandied about recently –
- Intel’s proposed investment in the EU in next 10 years: $95 billion
- Micron spending plans in the next decade: $150 billion
- Samsung’s proposed investment next three years: $205 billion
- SK Hynix (Korea, formerly Hyundai Electronics – with whom I used to do business) will spend $97bn on expanding its existing foundry facilities – in addition to a previously pledged $106bn for four new plants.
- TSMC’s investment next three years: $100 billion
Stack them all up – against CHIPS, or against China’s purported plans, and the picture is clear.
Admittedly, these numbers are not perfectly calibrated, apples-to-apples comparables. They are implicitly qualified or conditionalized in various ways, according to different definitions. Some may be partly “aspirational.” All are subject to “market conditions.” They may include R&D as well as construction. They may include investments in chip design, as some of the companies mentioned here are so-called Integrated Device Manufacturers (IDMs), which combine multiple business segments. However, it is reasonable to view these figures as investments in service of adding or improving chip production (capacity and capability).
And it is not all “in the future.” The value of currently announced near-term plans by just four companies to add domestic capacity in the United States is 40% larger than the CHIPS program. These numbers are less conditional.
Tentative conclusions emerge:
- The Private Sector is capable of investing far more than the government, and is planning to do so.
- CHIPS is not going to be a major factor here. If there were no CHIPS, it would not significantly alter the outcome.
- China is not investing nearly enough to catch up, even with massive government support, and their mediocre performance reflects this.
In fact, China is so far behind at this point that a catch-up plan may simply be infeasible, for the foreseeable future (the next decade or so). According to one industry analyst:
- “We estimated a few years ago for China to become a fourth-equal semiconductor manufacturing region (equal to US, Korea and Taiwan), would cost approximately $500 bn over ten years. The price tag is now higher.”
If China would have to spend half a trillion dollars or more just to win 4th place (out of 4) in this global competition, that alone suggests that chip supremacy or even parity are not feasible goals — and hence not a threat to the U.S. in any broad sense. And nobody is standing still to wait for Beijing to catch up. Korea alone will spend $450 Bn over the same time period. China will find it very hard to gain any ground.
Which brings us back to the question at the top: Is CHIPS really necessary?