The CHIPS Act: What It Means for the Semiconductor Industry

Last Tuesday, President Biden signed into law the CHIPS and Science Act. It’s been touted as an opportunity to bolster U.S. national security, fortify the economy, and help working families. But with detractors and supporters pouring out from both sides of the political aisle, it’s worth examining the details of the legislation. 

The CHIPS Act, or (less appetizingly) the Creating Helpful Incentives to Produce Semiconductors Act, contains more than $52.7 billion worth of funding intended to spur semiconductor manufacturing, research, development, and more in the United States.

This includes $39 billion in manufacturing incentives, including $2 billion for the legacy chips used in automobiles and defense systems, $13.2 billion in R&D and workforce development, and $500 million to provide for international information communications technology security and semiconductor supply chain activities, according to a statement published to whitehouse.gov.

Semiconductors are an essential component of electronic devices, enabling advances in communications, computing, healthcare, military systems, transportation, clean energy, and countless other applications. In short, it’s the lifeblood of modernity. 

What does all of this mean for national security? 

At present, the U.S. contribution to the world’s total semiconductor output is historically low, leaving the country dependent on foreign production. And the aforementioned militaristic reliance on these microelectronics could put the U.S. in a national security crisis in the coming years. In an effort to avoid potential future chip shortages, lawmakers are working to ensure domestic research and manufacturing. 

“The primary motivation [for the CHIPS Act] is that the world has become dependent on one company located in one country, which has a number of risks associated with it,”

says David Yoffie, a professor of international business administration at Harvard Business School.

The company Yoffie is referring to is TSMC in Taiwan. TSMC isn’t the only manufacturer of semiconductors; the other two big companies are Samsung and Intel. But only 12% of chips are produced in the United States, a significant downturn from the 37% in 1990. 

How will the CHIPS Act address this concern? Will it work?

Experts generally agree that the measures will help, though the extent is still uncertain, and many are doubtful the act will yield any significant advantage.

“It will lead to more investment in the US than otherwise would have occurred,”

Yoffie says, citing developments from Intel, Samsung, and TSMC in Ohio, Texas, and Arizona, respectively.

“It’s a small step in what’s going to be a marathon for the US, to even make a dent,”

says Daniel Ives, a managing director and senior equity analyst with Wedbush Securities.

“The cost dynamics, logistics, and technology ecosystem [have] cemented the chip food chain in and around Asia.”

But, Ives notes that even a 5 to 7 percent increase in the U.S.’s microchip market share would be a “Herculean success for the US.”

What are the detractors saying?

Supporters of the bill argue that subsiding domestic manufacturing of semiconductors will aid the U.S. by reducing its reliance on foreign production, especially in China. But not everyone is on board. A number of detractors have emerged from both sides of the political spectrum.

Former president of the Texas Public Policy Foundation and now president of the Heritage Foundation, Kevin Roberts, firmly opposed the bill, citing concerns that the bill subsidizes the construction of semiconductor factories in China.

“I would not want to be an elected official of either party going back home to my district next month having voted for something that uses my voters’ taxpayer money to go to the construction of factories in China,” 

he added,

“Unless this bill were to have a provision that would prevent that, it really is garbage.”

Prior to the signing of the bill, Senator Bernie Sanders expressed his disapproval during a speech on the Senate floor, asking:

“Should American taxpayers provide the microchip industry with a blank check of over $76bn at a time when semiconductor companies are making tens of billions of dollars in profits and paying their executives exorbitant compensation packages? I think the answer to that question should be a resounding no.”

His efforts were for naught, however, as the bill was passed soon after, and signed by President Biden the following week. 

The China Semiconductor Industry Association, a Chinese state-backed trade group, denounced the US Chips and Science Act. They claim it violated the shared principles of fair practices in the sector, warning that the law could lead to “chaos” in global supply chains.