ChainMail | Chips Ahoy

Why more semiconductor factories are finally coming

ChainMail | Chips Ahoy

Two shocks to the global supply chain — one sudden, the other gradual — are strengthening the U.S. economy by spurring desperately needed investment in the domestic production of computer chips.

The first shock is the pandemic, which knocked supply and demand out of whack. The Commerce Department in January reported a severe shortage of semiconductors. Inventory levels at some manufacturers that rely on chips dropped below five days.

The second is the rise of China as an economic competitor and potentially destabilizing force. China is spending tens of billions to develop its own sophisticated chip industry while making political and military threats against Taiwan, the world leader in chip production.

Semiconductors are an American invention, developed in the 1950s and first used in ballistic missiles. Having pioneered the computing era, U.S. companies gradually lost interest in maintaining control of chip production, choosing to outsource rather than invest in expensive fabrication plants. The U.S. share of global chip manufacturing decreased from 37% in 1990 to 12% in 2020, according to the Semiconductor Industry Association.

Today one company, Taiwan Semiconductor Manufacturing Co., produces about 90% of the world’s most sophisticated chips. China lags five years behind in the development of next-generation chips. Overall, 75% of total chip production is in East Asia. “Zero percent of leading-edge chips are made in America right now,” Commerce Secretary Gina Raimondo warned.

Chips are found in everything from smartphones and medical equipment to vehicles. The U.S. is still a leader in chip design and research, but ceding production to Asian factories at the far end of the American supply chain is now clearly too risky. Shipping delays have had disastrous consequences. Elon Musk described 2021 as “chip hell.”

The current shortages represent an uncomfortable harbinger of what could happen if China were to gain control of market share and curtail supply. “Your two biggest producers are Taiwan and South Korea and both are vulnerable spots on the world stage,” Glenn O’Donnell, an analyst at Forrester Research, told the Associated Press.

The U.S. and China already are embroiled in a chip war of sorts: The U.S. has denied some technology exports to China on national security grounds.

The risks are being addressed now. Intel announced plans to invest at least $20 billion in Ohio to build two factories to produce advanced chips. The investment could balloon to $100 billion encompassing eight plants. In Arizona, Taiwan Semiconductor is building a $12 billion complex. In Texas, Samsung plans to build a $17 billion factory.

Tech companies aren’t the only ones interested in chip production. The Biden administration and Congress are working on a $52 billion subsidy package for semiconductor manufacturing and research. The plan has bipartisan support but differing priorities could complicate a deal. The Senate and House have passed versions of the bill that will need to be reconciled. GlobalFoundries, a semiconductor fabrication plant in New York, says it would use the subsidy to expand production.

These investments won’t solve the current chip shortage because it takes years to build a plant. But they will help satisfy future demand and protect the American economy from potentially devastating disruptions. Consider it one positive twist for the supply chain after two years of troubles.

Read the complete Issue 3 of ChainMail here.

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