Another move to counter China
By Chen Ke
A recent decision by the U.S. government could end up wreaking havoc on the already turbulent world economy. On August 9, U.S. President Joe Biden signed into law the CHIPS and Science Act of 2022, also known as the Creating Helpful Incentives to Produce Semiconductors for America Act. Earlier this year, Washington proposed a so-called Chip 4 Alliance comprising four global chip powerhouses including the U.S., Japan, the Republic of Korea (ROK), and China’s Taiwan region.
The White House stated that the legislation will lower costs, create jobs, strengthen supply chains, and revitalize domestic manufacturing. But all things considered, the Act is another brash attempt by Washington to counter China in the semiconductor industry and force major chipmakers to take sides through a guardrails provision in part of the law that restricts companies’ normal operations in China.
In the era of globalization, industrial production and supply are essentially market-based corporate behavior.
Only certain technical specifications differentiate chips, semiconductors, and integrated circuits, placing them in the same product category, explained Cai Cuihong, a professor with the Center for American Studies at Fudan University. After decades of development, a mature ecosystem to serve the global semiconductor industry has been established. Chip makers like Taiwan Semiconductor Manufacturing Company (TSMC) specialize in manufacturing, while high-tech firms such as Qualcomm and Broadcom in the U.S. and MediaTek in China’s Taiwan mainly focus on research and development. Companies highly competitive in both design and production include U.S.-based Intel and Texas Instruments.
Typically, in the U.S., high value-added chips are designed locally and the manufacturing outsourced abroad. As a result, the U.S. global market share of semiconductor production fell from 37 percent in 1990 to 12 percent in 2020. During the same period, other major chip producers saw growth of their share, with Chinese mainland and Japan both rising to 15 percent, ROK to 21 percent, and China’s Taiwan to 22 percent—East Asia accounting for 73 percent collectively.
Such data were cited by the U.S. President at a virtual meeting on the chip industry held on July 25. “America invented the semiconductor,” Biden said. “It’s time to bring it home.”
The CHIPS and Science Act authorizes a total of US$280 billion government support in the next five years from 2022 to 2026, a generous federal incentive rarely seen for decades. Noticeably, it provides US$52.7 billion industry subsidies for semiconductor companies, including US$11 billion in research and development and US$39 billion to build, expand, or upgrade wafer fabs in the U.S. It also provides a 25 percent investment tax credit for capital expenses for manufacturing of semiconductors and related equipment.
In addition to Washington’s emphasis on the strategic importance of semiconductors, several other factors drove passage of the Act, according to professor Cai. First, rapid development of the digital economy left a shortage of chips used in mid-to-high-end products which came to dominate the global market. Second, the semiconductor production and supply chain was severely disrupted by the COVID-19 pandemic over the last couple of years, which has exacerbated the chip shortage globally. “The law also serves political purposes and may help the U.S. better compete with China,” opined Cai.
Specifically, the Act contains a guardrails provision that requires recipients of government funding not to engage in any material expansion of more advanced semiconductor manufacturing in China and other countries of concern for a 10-year period. Any beneficiaries of the Act who violate the law or fail to correct the violations may be asked to fully refund their federal grants.
Cui believes that the Biden administration is seizing the opportunity of the chip supply chain crisis caused by COVID-19 to tighten its technological blockade against China. “The blockade imposed by the U.S. government serves nothing but intentions to contain China and achieve American hegemony,” Cai said to China Report ASEAN. “The intentions will show when and how it will implement such measures.”
Designed to revive the American chip industry, the CHIPS and Science Act provides US$52.7 billion government grants to related companies. Four funds under the law have been established to support semiconductor manufacturing, research and development, international cooperation, and workforce development, respectively.
The incentives are strong. Recipients of the subsidies are not specified in the Act, and Cai Cuihong believes the U.S.-based Intel and Micron Technology, who are now actively lobbying for the federal funding, would be the biggest beneficiaries. Smaller local firms worry that their share might be gobbled up by industry giants, while non-U.S. companies operating in the country such as Samsung, SK Hynix, and TSMC are concerned about whether they would qualify and for how much.
Spurred by passage of the Act, major computer memory producer Micron and wireless industry leader Qualcomm have expressed enthusiasm with ambitious business plans. The former announced that it would use grants under the legislation to bring the U.S. global market share of advanced memory chip production to 10 percent from less than 2 percent at present. The latter agreed to buy an additional US$4.2 billion worth of chips from the New York factory of GlobalFoundries, bringing its total commitment to US$7.4 billion by 2028.
Li Zheng, an associate researcher at the Institute of American Studies under the China Institute of Contemporary International Relations, said he hasn’t yet seen any negative response from American firms. “The U.S. government incentives for the manufacturing industry will surely benefit market players,” he opined. “But the move is more about making investors believe that building chip plants in America with federal funding helps hedge some of their risk. It remains to be seen whether it will make business lucrative.” On the day the bill was signed, all three major U.S. stock market indexes—S&P 500, Dow Jones Industrial Average, and Nasdaq Composite—fell, and the share of Nvidia and Micron in the semiconductor sector slid by more than 3 percent.
Both Li Zheng and Cai Cuihong agreed that major multinationals such as TSMC, Samsung, and Intel would likely get caught up in a dilemma because the motives behind the CHIPS and Science Act is to force companies like these to take sides and thus undermine China’s competitiveness in the semiconductor industry.
According to open data, TSMC makes 16-nanometer (nm) and 28 nm chips in Nanjing, Samsung has a memory chip production facility in Xi’an, SK Hynix has memory chip plants in Wuxi and Dalian, and Intel and Micron also have semiconductor packaging and manufacturing factories in China.
In the U.S., chips above 14 nm are considered to require mature processing and those below need advanced processing. “The guardrails provision in the Act is aimed to restrict TSMC, Samsung, Intel, and other chip suppliers equipped with complete process technologies from business expansion on the Chinese mainland and subsequently to hinder the development of advanced semiconductor manufacturing processing in China,” Li Zheng said. “However, since many such companies don’t intend to produce advanced chips in the Chinese mainland, their existing mature processing should carry on.”
The Act may not achieve its goals by breaking up already deeply integrated global industrial chains on purpose. Experts interviewed by China Report ASEAN suspected that the importance of factors like the funding costs, labor costs, and market conditions have been underestimated by the U.S. government.
In 2021, global chip sales totaled US$555.9 billion, and sales volume in China reached US$ 192.5 billion. Boston Consulting Group estimated that if the U.S. insists on technological decoupling from China, its semiconductor companies could lose 18 percentage points of global share and 37 percent of their revenues and that these drops in revenue would lead to a loss of 15,000 to 40,000 highly skilled jobs.
The industry generally agrees that the threshold for building a chip factory is around US$10 billion and additional investment for years is also needed. According to the Act, about US$50 billion will be allocated directly to semiconductor production in a five-year period. Founder of TSMC Morris Chang once noted that the U.S. chip industry faces a labor shortage and the costs of chip manufacturing in the country is about 1.5 times higher than in Taiwan. “Numbers tell the story,” said Cai. “In the short term, the CHIPS and Science Act is unlikely to produce the impact on the supply chain for the global semiconductor industry that media outlets have been suggesting.”
“The CHIPS and Science Act of the U.S. is directed against certain countries and seeks to court semiconductor companies, which serves to remind China of the importance of technological independence and controllability and the growth of international competition,” Li Zheng stressed.
Chip suppliers who have shown interest in obtaining government grants under the Act have gained large market shares in China. “Companies such as TSMC and Samsung play a lead role globally in chip technology,” Li explained. “Their operations in China help connect us with the global supply chain. Although Chinese firms are making rapid progress in semiconductor research and development, it would still take quite some time for their products to be recognized on the international market.”
With chip technology at the core, semiconductors are usually replaced by newer generations of products in three to five years. Li noted that without cutting-edge techniques and equipment, it is almost impossible for Chinese chip makers to create commercial value when their research and development fails to catch up with the market trends.
Experts told China Report ASEAN that major chip firms would be left in a delicate situation if China were to enact policies similar to that of the U.S. Noticeably, some provisions in the Act are not well articulated and vague, leaving room for interpretation by enterprises. “According to the legislation, companies can receive subsidies only after they relocate their wafer fabs to the U.S.,” Li said. “Chip manufacturers may be concerned about their global market share if the U.S. government takes a bold move like enforcing a complete technology embargo against China after the factories are moved to America. These companies would explore solutions, for example, through their relations with the government.”
Three days after the CHIPS and Science Act came into effect, the U.S. Department of Commerce’s Bureau of Industryand Security (BIS) announced an expanded ban on the export of four emerging and foundational technologies including fourth-generation semiconductor materials and Electronic Computer-Aided Design (ECAD) software specially designed for the development of chips at 3 nm and below.
“Washington’s containment of China has only made us more determined to achieve self-reliance on cutting-edge technologies,” opined Cai. “To gain independence and controllability of core technologies, we need to increase investment in research and talent development and build a complete semiconductor industrial chain integrating research with production.”
Against the backdrop of a global shortage of chips, Cai emphasized the importance of developing the overseas market. “China has now realized mass production of 14 nm chips, which meets 70 percent of domestic demand,” she said. “Next, Chinese chip makers need to enhance their production capacity and seek opportunities in neighboring countries.”