At the Wall Street Journal Jiyoung Sohn explains why the U. S. subsidies for chip manufacturing might not be effective:
A mega-spending package to grow U.S. semiconductor production must reckon with a tough reality: The world is already awash in chip-making incentives.
What makes the U.S. effort unique is the enormous one-time sum—roughly $77 billion in subsidies and tax credits—earmarked to boost American manufacturing of the ubiquitous tech component. But other countries, especially in Asia, have doled out government dollars and offered favorable regulations for decades. And they plan for more.
China has prepared investments of more than $150 billion through 2030, according to one estimate. South Korea, with an aggressive array of incentives, aims to encourage roughly $260 billion in chip investments over the next five years. The European Union is pursuing more than $40 billion in public and private semiconductor investments. Japan is spending about $6 billion to double its domestic chip revenue by the end of the decade.
Taiwan has around 150 government-sponsored projects for chip production over the past decade, with its leader pushing for more localized manufacturing of semiconductor equipment. Singapore landed a $5 billion chip factory earlier this year from United Microelectronics Corp., which said it had been drawn by the city-state’s vision to attract high-tech firms.
“We are in a race to subsidize semiconductor manufacturing,†said Peter Hanbury, a partner with expertise in tech supply chains at Bain & Co., a management consulting firm. Countries must compete over a limited number of chip makers that have relatively finite needs for new production sites, plus expand engineering talent, stable infrastructure and supply chains, he said.
As I’ve said before carrots will not be enough of an incentive. Sticks will be required as well. And we can’t wait to see if subsidies alone will be effective in getting more chips produced here.
In case there’s any ambiguity about what I mean by “sticks”, I mean eligibility for federal contracts. Start with defense contracts. No company whose products use chips manufactured outside the United States should be eligible to bid on defense contracts. Start with the products intended for sale to the DoD and if that isn’t enough, extend it to all products sold by that company. And if that still isn’t enough, extend it to the entire federal government.
China, Russia and other countries regard chip making as a necessary component to the national defense, and they seek to be self-sufficient in chip-making. They do not regard it to be a business. Whether we can do that remains to be seen. There was a minor scandal many years ago, when it was revealed that the newly deployed F-15’s depended on Japanese chips. Nothing came of it.
One of the areas where I believe government has a role to play is in the case of market failure. As much as I’m a free trader at heart, the mercantilist practices of China, and strategic considerations, warrant what you suggest.
There is an issue that needs to be considered, which is the behavior of producers when protectionism is available. There may be no elegant solution. But I can tell you from first hand experience, the auto industry didn’t give a damn about their product issues until the Japanese car guys were brought to bear on them.
Checking in with the computer club it sounds like Russia is at about early to mid 2000s level on its chip production, 30-40 nanometer or so. Not sure they have the ability to upgrade without help.
Steve
Personally, I’m not worried about competition from Russia. Taiwan, China, Japan, and South Korea are another story. And expect India to be coming along soon as well.