Enterprise

Chipmakers got their $52 billion. It will now take years for American chipmaking to flourish.

After more than two years of Congressional debate, the chip industry is poised to receive $52 billion in manufacturing subsidies. There’s a long road ahead to generate a return on that investment.

US President Joe Biden reacts to a note given to him saying that the CHIPS-plus bill has passed the House during a meeting with CEOs about the economy in the South Court Auditorium of the Eisenhower Executive Office Building, next to the White House, in Washington, DC on July 28, 2022. - The $280 Billion Industrial Policy was passed in the Senate on Wednesday with rare bipartisan support and will boost domestic production of semiconductors, the in-demand microchips that power everything from smartphones to cars to weapons. (Photo by MANDEL NGAN / AFP) (Photo by MANDEL NGAN/AFP via Getty Images)

It will take years to understand if this was money well spent.

Photo: Mandel Ngan/AFP via Getty Images

After more than two years of Congressional wrangling — and at least $100 million in lobbying expenditures — the chip industry is poised to receive tens of billions of dollars in federal tax breaks and subsidies to build more semiconductors inside the U.S. It will take years to understand if this was money well spent.

The $76 billion the industry will receive is aimed at jumpstarting domestic chip manufacturing in the name of national security, halting the chip shortage and returning the U.S. to its former leadership position. After the Senate approved the bill Wednesday, the legislation cleared the House on Thursday by a vote of 243-187, and is headed to President Biden, who is expected to sign it as early as next week. The funds were expected to be released from federal coffers this year.

The money is part of a total $280 billion package of legislation with far-flung objectives that range from directing federal research dollars toward AI and quantum computing to opening 20 regional tech hubs and a relatively small portion directed at developing an open wireless communications standard.

“We are in fierce competition with other countries,” Democratic House member Anna Eshoo, who worked on the legislation, told Protocol. “You can hardly point to a product that doesn't have chips in it, so we can win this global competition. Because American technology is the best in the world. But we have to have a plan for that. And that's what the legislation is.”

To much of the chip industry, Thursday’s vote represents a victory. Federal funding and tax breaks will ease the burden of building new factories, or fabs, that can cost more than $10 billion each. And even for fabless businesses such as AMD, Nvidia and Qualcomm that only design chips, it may create more advanced manufacturing options — where today there are arguably only three (TSMC, Samsung, Intel).

“By passing the CHIPS Act, Congress has risen to a defining challenge of our time, seized an historic opportunity to fortify American semiconductor manufacturing, design, and research, and delivered a big win for our country,” Semiconductor Industry Association President and CEO John Neuffer said in a statement.

Nearly $40 billion of the total $52 billion is marked for chip manufacturing incentives that will almost certainly benefit the likes of Intel, GlobalFoundries, Samsung and TSMC. Notably, $2 billion of the federal cash is set aside to specifically fund manufacturing and other aspects of chips made with older technology that are vital to automaters and various weapon systems and other military applications. A further $24 billion in tax breaks for factory construction rounds out the package.

“The U.S. doesn't want to see itself in a situation where it is hostage to Chinese control of such a critical industry and we've been delinquent and we've been remiss in letting our capacity and capability decline like that over the past couple of decades,” Harvard Business school professor Willy Shih said.

The subsidy money itself will largely be allocated by the Commerce Department, which has been working for more than a year to build up the personnel and other infrastructure necessary to do so, Undersecretary of Commerce for Standards and Technology Laurie Locascio said in a recent interview. “We have a very well-developed plan,” she said.

Chip manufacturers lobbied hard to get the bill passed into law. Chipmakers based outside the U.S. and their domestic counterparts steadily increased their lobbying expenditures as lawmakers debated the measure, and some foreign companies such as TSMC and MediaTek launched lobbying operations when they previously had none.

At one point when the bill appeared to teeter Intel — which potentially has the most to gain — claimed it would delay a groundbreaking ceremony for a multibillion-dollar investment in new factory construction in Ohio, but at the same time acknowledged that its construction plans would go ahead unhindered. But other chipmakers had threatened to move forthcoming construction to outposts in Europe or Asia if Congress didn’t agree to use U.S. taxpayer money to help finance their operations here.

“[Intel’s] lobbying activities around the legislation have run the gamut from lobbying to begging to blackmail to get it done,” Bernstein chip analyst Stacy Rasgon wrote in a report last week.

Rasgon vocalized an inconvenient truth about the legislative package at a recent San Francisco chipmaking conference: For an industry that expects gross profit of more than 50% and now routinely plans new fab complexes that could cost hundreds of billions of dollars, $52 billion isn’t a lot of cash.

“I don’t know if this is politically correct in this audience, but I’m going to say it anyway,” Rasgon said. “The kind of numbers that they are talking about for the Chips Act at $52 billion over five years. For the entire U.S. semiconductor industry this is a rounding error. Who cares?”

To some industry watchers, the focus on the legislation also misses some of the nuance and complex supply chain around chips. There are provisions included that ensure some of the subsidy money goes toward producing the raw materials and equipment needed for chip manufacturing.

But thousands of inputs are needed to make chips. For example, the tools required to make the most-advanced chips are exclusively produced in Holland; the chemicals and gases needed are made elsewhere in Europe or Ukraine; and other crucial components are made in Japan.

“There isn’t a lot of investment in packaging technology; we will build all these fabs in the U.S., but will still fly the chips over to Asia for testing and packaging for a lot of them,” Shih said. “This is a good down payment for rebuilding the sector in the U.S. But we shouldn’t be confused, there’s not going to be a magic bullet.”

Building new chip factories is a years-long process, and it's unlikely the U.S. will experience a meaningful boost in capacity until the new fabs begin to operate. Intel has said it doesn’t expect its Ohio fab to begin producing chips until 2025; TSMC signaled it would begin volume production in 2024.

But chipmaking tools are in short supply to begin with, and it's difficult and complicated for toolmakers to ramp up production to suit the breakneck expansion the manufacturers are on. Chipmakers must also secure enough people to run the new factories, even though the U.S. has struggled to attract such talent for years.

The legislation is not perfect. But to Congresswoman Eshoo, that’s not the point.

Simply put, in her view, too many chips are needed for too many things — important or otherwise — to let the issue fall by the wayside. It tackles the national security issues she views as pressing, and sends a signal to the industry that the U.S. intends to be competitive with Europe, China and elsewhere when it comes to chip manufacturing and technology.

There is one outcome that Eshoo is going to measure the law’s success by: “More chips,” she said. “I should add: more chips made in America.”

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