The $280 billion CHIPS and Science Act (also called the Creating Helpful Incentives to Produce Semiconductors for America Act) that was signed into law in August 2022 is intended to help the U.S. regain a leadership role in the manufacturing of semiconductor chips. Technological research and consulting firm Gartner reports that, while the U.S. leads the world in semiconductor chip design, about 80 percent of semiconductor chips are produced in Asia and about 8 percent are produced in Europe.

Domestic chip production has been on the decline for several decades. The U.S. share of semiconductor manufacturing capacity has decreased from about 37 percent in the 1990s to about 12 percent in 2022, according to the Semiconductor Industry Association. This is largely due to competitive advantages held by each region of the world, which leads to U.S. companies specializing in higher-value chip design while manufacturing is offshored to places like Taiwan and South Korea, which possess world-class advanced semiconductor manufacturing capabilities and relatively low-cost labor.

In addition, high construction costs in the U.S. and the capital-intensive nature of building advanced facilities have led semiconductor manufacturers like Intel to make their proposed investments in the U.S. contingent on government incentives.

Incentives for domestic production and innovation

The main CHIPS portions of the CHIPS and Science Act include $39 billion in direct financial assistance for the construction and expansion of U.S.-based semiconductor fabrication facilities, $11 billion for semiconductor manufacturing research and workforce development, $2 billion for accelerating defense spinoffs from chip-related laboratory advancements, a 25 percent tax credit for companies that invest in semiconductor production in the United States, and $1.5 billion for public wireless supply-chain innovation.

Another provision bars chip companies that receive funding under the legislation from expanding production of more advanced chips in China and Russia.

The “Science” portion of the act allocates $170 billion to support research and development (R&D) in advanced and emerging technologies. The R&D funding will be divided among a range of federal agencies over the course of 5 years. These include the National Science Foundation, which will receive $20 billion for a new R&D directorate plus $61 billion to support research at universities and other organizations, and $50 billion for advanced energy programs within the Department of Energy.

The act also strives to level the playing field domestically. The Department of Commerce will be tasked with creating regional technology hubs to help spur the equitable creation of tech jobs across the U.S. The National Institute of Standards and Technology (NIST) also receives $9.68 billion over the next 5 years.

Broad impacts are anticipated

The primary beneficiaries of the CHIPS and Science Act are semiconductor manufacturing firms, including foreign firms with fabrication facilities in the U.S., and a range of emerging scientific and technological fields and firms among which the $170 billion in R&D funding will be disbursed.

The federal share of total R&D spending has declined sharply over the past 60 years to 0.62 percent of U.S. gross domestic product (GDP), its lowest level since 1955. Much of the research expected to be funded through the act is experimental and theoretical as opposed to the practical and application-driven R&D that is typically done by the private sector, according to advisory and advocacy communications consultancy APCO Worldwide.

Public investment in basic research is critical for facilitating major scientific and technological breakthroughs that can initiate or accelerate the development of entirely new products and industries. Public expenditures on R&D also have tangible economic benefits. In 2018, for example, public R&D helped provide funding for over 1.6 million jobs in the U.S., according to a report from Breakthrough Energy.

Secondary beneficiaries of these dollars are industries that are heavily dependent on semiconductor chips as manufacturing inputs. Chip-dependent industries include aerospace, automotive, communications, defense systems, information technology, manufacturing, and medical technology.

Chip shortages caused by the coronavirus pandemic caused severe business disruptions, particularly in the automotive and consumer electronics industries. The shortages exposed the fragility of the global semiconductor supply chain that stems from the concentration of risk coming from dominant suppliers in single locations. Taiwan, for example, accounts for 92 percent of the world’s most advanced semiconductor manufacturing capacity. Industries dependent on these types of chips will benefit from greater geographic and supplier diversity.

A long-term strategy, not a quick fix

Industry experts note that, while the $280 billion allocated via the CHIPS and Science Act is substantial from a government funding perspective, it is not a large amount relative to what is spent by the semiconductor industry.

Building a state-of-the-art facility (called a fab) to fabricate the wafers for semiconductors costs anywhere from $10 billion to $20 billion, according to David Yoffie, a professor of international business administration at Harvard Business School. The equipment involved in the fabrication process can cost around $150 million for just one machine.

The overarching goal of the act is not to create immediate self-sufficiency but to improve supply chain resiliency, according to Gartner vice president Gaurav Gupta. “As a strategy, it is a strong step. But we need to wait to celebrate. It is a marathon. Remember, it took decades for the ecosystem to shift to Asia, and it will take years to make any decent change in that,” Gupta said.

Professor Yoffie also urges some cautionary perspective on this investment. “[The CHIPS and Science Act] will lead to more investment in the U.S. than otherwise would have occurred,” Yoffie says. “At the margin, it’s going to make a difference — we’re not going to go from 12 to 50 percent [of global chip production share].”

Daniel Ives, a managing director and senior equity analyst with Wedbush Securities, is somewhat more enthusiastic in his assessment, however, noting that even seeing “5 to 7 percent of chip production move out of Asia would be a Herculean success for the U.S.”

Industry interconnectedness

The impacts of the CHIPS and Science Act will be felt by a number of related industries: aircraft and automotive production, computer manufacturers, and consumer electronics, just to name a few. Learning how this legislation will touch your clients’ and prospects’ businesses helps you tailor solutions, which, in turn, builds trust and adds value.

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