THE U.S. SEMICONDUCTOR INDUSTRY NEEDS TO INVEST AS HAS OTHER NATIONS

 

                             …A New Bosch semiconductor facility in Germany

 

The U.S. must invest billions to support new chip manufacturing facilities

 

Before I retired, I had spent all of my business life here in Silicon Valley.  I spent most of my business life in the semiconductor business, or later in the semiconductor equipment business.  I have to say that today, I am very glad that I don’t have to compete  in that industry any more.

And why is that the case?

Well, as an example, when a semiconductor company opens a factory in Taiwan, the government covers almost half of the land and construction costs and 25% of the equipment costs. In Singapore, government subsidies cut the cost of owning a computer-chip factory by more than a 25%.

Europe is cranking up financial incentives, too. And in China, the government is on track to spend as much as $200 billion to subsidize semiconductor companies through 2025.

The bonanza of perks, detailed in a White House report last week, shows what the United States is up against as it attempts to entice more manufacturers to build domestic factories to produce computer chips, the precious electronics are now in very short supply..

The United States came closer to entering the subsidy competition last week when in a rare bipartisan vote in the Senate, they endorsed legislation funneling $52 billion into new chip manufacturing and research. The measure, supported by President Biden, still must now clear the House.

But even if it does, the United States will continue to face stiff global competition for attracting the factories that make the cutting-edge technology.  This is as countries around the world, are riding a wave of industrial nationalism, as they attempt to secure their own manufacturing, rather than relying on imports in an uncertain world.

Some Asian nations have long subsidized their chip and hardware manufacturers. But the trend is spreading to more regions, and those perks are growing in size.  This is partly as a reaction against globalization and the dissatisfaction it brought many workers in the developed world, who lost jobs as manufacturing shifted overseas.

It’s also a response to the coronavirus pandemic, which sent countries into lockdown and disrupted global supply chains.  This left many Western nations without the medical equipment and other essential goods they needed to fight the virus and restart their economies.

Perhaps most of all, it’s a response to the enormous sums the Chinese government is investing in its domestic tech industries.  This is a trend the U.S. lawmakers and officials fear could further erode U.S. economic might if left unaddressed.

“We are in a competition to win the 21st century, and the starting gun has gone off,” Biden said after the Senate endorsed the bill. “As other countries continue to invest in their own research and development, we cannot risk falling behind. America must maintain its position as the most innovative and productive nation on Earth.”

The urgency of competing with China has persuaded even some Republicans to embrace more government intervention in the U.S. economy.  This is an approach known as an industrial policy that is typically more associated with the Democrats, definitely not the Republicans.

Critics of the chip subsidies, they question the need to throw billions of taxpayer funds at a currently profitable industry.  They also warn that the incentives arms race could create a glut of production, but that is highly doubtful.

“Congress should work to expand U.S. microchip production” but “should not be handing out $53 billion in corporate welfare to some of the largest and most profitable corporations in the country with no strings attached,” Sen. Bernie Sanders (Independent -Vt.) tweeted last month. He was the only one to vote against the legislation.

Willy Shih, a Harvard Business School professor who specializes in technology and manufacturing, called the U.S. subsidy plan “worrisome.”

“All the lobbyists are out there trying to ensure their firms ‘get their share’ with less focus on how the money will be precisely spent, or the outcomes measured,” he said by an email.

Sen. Mark R. Warner (D-Va.), who led the push for the funding along with Sen. John Cornyn (R-Tex.), said the United States has no choice but to subsidize, given the incentives other nations are offering.

“We need that supply chain here in the United States,” he told reporters last week. Semiconductor factories are among the most expensive manufacturing facilities to build, costing $10 billion or more because of their specialized machinery.

And I can agree with that statement.  It has always been that way in the semiconductor business.

Thomas Sonderman, chief executive of the new Minnesota-based chip manufacturer SkyWater Technology, said the company hopes to use some of the U.S. subsidies to accelerate expansion of its factory in Bloomington, Minn. The automotive industry is one customer of SkyWater’s chips, using them to power dashboard displays. Appliance manufacturers and the Defense Department also use them.

SkyWater will add equipment to the facility with or without subsidies because of soaring demand, but they can buy the machinery faster with federal support, Sonderman said, estimating their total investment to be $250 million.

With federal funding, SkyWater could double output at the factory in six to 12 months, he said. “If we did it without that funding, then you are getting into years’ time frame,” he said.

The incentives game is also heating up over lithium-ion batteries, an essential component of the new green economy. The batteries power electric vehicles and store renewable energy for utility companies. They are also expected to become increasingly important for powering aircraft and military equipment such as drones.

The European Union (EU) this year said it would spend $3.5 billion to subsidize Tesla, BMW and other companies to produce lithium-ion batteries in Europe and help cut imports from China.

India last month said it would offer $2.5 billion in subsidies for battery production to support a “Made-In-India” strategy. And the United States has begun laying out a blueprint to support domestic producers of batteries and their components, a subject Energy Secretary Jennifer Granholm will address in a summit this week.

President Biden says he wants to create millions of clean-energy jobs.  But, China and Europe are already way ahead of him.

Still, semiconductors are the most intense battleground. The tiny components are the brains behind most modern electronics, from refrigerators and vacuum cleaners to mobile phones, aircraft and automobiles. The auto industry has been hit particularly hard by the chip shortage, forced to idle factories across the United States and in parts of Europe.

When Pat Gelsinger, the chief executive of U.S. chip giant Intel, visited Europe this spring to scout potential locations for a new factory, officials rolled out the red carpet.  European nations are aiming to use part of about $175 billion euro fund, to finance chip investments and double their share of worldwide chip manufacturing by 2030, to 20% of the $540 billion global market.

In Germany, Intel’s Gelsinger met with Economy Minister Peter Altmaier and Bavarian governor Markus Soeder and visited executives from BMW and Deutsche Telekom. He also met with E.U. Commissioners Margrethe Vestager and Thierry Breton, with the later tweeting a photo of their summit.  Europe “is determined to take back leadership in global #semiconductor production,” said Breton, who has also courted Taiwanese chip manufacturer TSMC..  (TSMC Has been a giant semiconductor manufacturer for decades.)

In in a declaration last December a declaration in December, European nations said that a “new geopolitical, industrial and technological reality” was redefining the tech landscape.

“In what has long been a global business, major regions are reinforcing their local semiconductor ecosystems with a view to avoiding excessive dependencies on imports,” they said.

The Senate bill led by Majority Leader Charles Schumer (D-N.Y.) and Sen. Todd Young (R-Ind.), dedicates federal funds to industrial aims beyond chips. It earmarks $10 billion for the Commerce Department to establish regional tech hubs that would help create new companies and boost manufacturing and workforce training.

It authorizes an extra $81 billion for the National Science Foundation over five years, partly to fund a new directorate of technology and innovation to accelerate the commercialization of technology in fields such as artificial intelligence, robotics and advanced computing.

It gives $16.9 billion to the Energy Department over four years for research and development and “energy-related supply chain activities,” which could involve supporting battery production.

Of the $52 billion set aside for semiconductors, three quarters would go directly to chipmakers that are expanding existing factories or building new ones. Of that money, $2 billion is reserved for production of chips of older designs, which are used by automakers, the military and other industries.

Another $10.5 billion would fund a new National Semiconductor Technology Center, which would be equipped with advanced tools that start-ups could use to test and prototype new chip technology.

If the U.S, doesn’t spend what it takes to be competitive in this market, just as our nation’s “infrastructure” is a nation full of “pot-holes,” our position in semiconductor manufacturing will also be the equivalent of “semiconductor pot-holes”.

Copyright G. Ater 2021