Update on the implementation of the CHIPS Act

Nearly two years ago, a bipartisan Congress passed and President Joe Biden signed the CHIPS and Science Act, a sweeping American foray into protectionist industrial policy for one of the most strategically important technologies in the world.
 
Chips are small integrated circuits critical to proper functionality in everything from computers to stealth bombers. Without them, modern life – along with national defense capabilities – would grind to a halt.
 
In 2020, America produced about 12% of the world’s chips, and 0% of the world’s most advanced chips. If trends continued, America would produce less than 8% of all chips by 2032, according to a Boston Consulting Group (BCG) study.
 
The CHIPS Act authorized $39 billion in taxpayer funds to help American companies (and some foreign companies with operations in America) build or expand semiconductor facilities in the U.S. That’s a lot of direct government investment, but the advanced manufacturing facilities that produce chips can cost $20 billion each – as much or more than a nuclear power plant.
 
Even if all recipients of CHIPS Act funding follow through on their manufacturing plans, the measure will not place America in pole position for share of global chip manufacturing. BCG estimates the U.S. proportion of chip production will increase only slightly, to 14%.
 
“What the CHIPS Act is going to do is arrest that terminal decline, right the ship and put it back on a more stable path,” Jimmy Goodrich, a senior advisor at Rand Corporation, told the Wall Street Journal. “It might slightly increase U.S. overall chip production, but the more significant increase is going to be the relative share [of advanced chip production].”
 
On that count, BCG expects America to capture 28% of global advanced chip production by 2032 (up from 0% today).
 
The case for the CHIPS Act is straightforward. Aside from a direct military strike, a dearth of chips is among the most serious threats to America’s economy and national defense. The U.S. doesn’t produce nearly enough for self-sufficiency, and the world’s largest chip producer, Taiwan, sits 100 miles off the coast of America’s greatest adversary.
 
Indeed, Taiwan’s position as the world’s chipmaker (it produces 60% of the global supply, and 90% of the most advanced chips) probably does more to secure its defense against Chinese invasion than anything else. That’s why some Taiwanese policymakers grumbled when Taiwan Semiconductor Manufacturing Corporation (TSMC) announced a $40 billion investment in chip manufacturing facilities in Arizona.
 
No other recent development underscores the international movement towards protectionism in strategic industries than TSMC’s action in Arizona. It’s not in Taiwan’s interest to move any chip manufacturing abroad, but TSMC clearly saw no other choice (TSMC’s founder, Morris Chang, said at the Arizona groundbreaking that globalization is “almost dead”).
 
As The Economist reported, “The chip industry was built on globalization, with every part of the supply chain supporting it. TSMC’s fabs, based on efficiency and high-skilled, long-hour labor, could make chips faster and more accurately than any rival. Experts agree that replicating this supply chain elsewhere would be inefficient. Mr. Chang told reporters in November that the cost of making chips in America would be 55% higher. . . Yet the shift to local supply chains is happening.”
 
Indeed, America’s low (and declining) share of global chip production proved that underlying market dynamics did not make for an efficient industry in this country. Hence the need for a large infusion of government cash to make the math work. And as far as expensive government programs go, the CHIPS Act has fared well so far. About $30 billion of the $39 billion available has already been spoken for, with factories planned or under construction.
 
But the big question was never whether companies would crowd round the Treasury vault – they always have and always will. The question was whether the American market and labor force can see the projects through to completion and sustain production thereafter. In short, would $39 billion in government cash have a long-term impact on underlying market dynamics?
 
On this count, stress fractures are beginning to show. TSMC and Intel have already delayed projects because of high labor and materials costs. And it’s not at all clear the American labor force can fully service a glut of chip manufacturing plants, now or in the future.
 
Fortune reported this week, “After a yearslong trend of outsourcing skilled chipmaking labor to Asia, the leading semiconductor trade group estimates the U.S. is currently short roughly 67,000 skilled workers—or 58% of all new jobs that will be created by CHIPS Act investment by 2030. Federal officials, nonprofits, and educators are already hard at work figuring out how to close that gap, and confronting the consequences of the United States’ long-term turn away from manufacturing.”
 
Still, policymakers seem determined to see this industrial through, and it’s hard to argue with them. Chips are to the American economy right now what water is to the human body. Onshoring chip production, even if it’s more expensive and less efficient, is the only way to guarantee supply.
 
Thomas Friedman authored a famous book titled, “The World is Flat,” at the peak of globalization. The world may be becoming round once again.