Manufacturing Semiconductor Chips in the U. S.

There’s quite a bit of bickering going on right now about the bill making its way through the Congress, the presumed intention of which is to increase the proportion of semiconductors manufactured in the United States. I’m not entirely in agreement with the editors of the Wall Street Journal whose inclination is to oppose the bill, making a more or less laissez-faire argument:

Global semiconductor capacity increased 6.7% in 2020 and 8.6% in 2021 and is expected to grow another 8.7% this year. The risk of over-capacity is growing as China heaps subsidies on its semiconductor industry as part of its Made in China 2025 initiative, and the U.S. and Europe race to compete.

Some 15,000 new semiconductor firms registered in China in 2020. Some have drawn investment from U.S. venture-capital firms. Intel has backed Chinese startups even as CEO Pat Gelsinger lobbies Congress for subsidies to counter Beijing. Intel has threatened to delay a planned Ohio factory unless Congress passes the subsidy bill.

The other claim for the bill is that the U.S. must subsidize domestic chip-making to compete with China, but this also isn’t persuasive. The companies like to point out that the U.S. share of the world’s chips has fallen to 12% from 37% in 1990. They don’t mention that the U.S. leads in chip design (52%) and chip-making equipment (50%). Seven of the world’s 10 largest semiconductor companies are based in the U.S. China trails American companies by years in semiconductor technology.

Chip fabrication has moved to South Korea and Taiwan because many chips are commodities with low margins. But chip makers are working to diversify their manufacturing bases to avoid future supply disruptions and have announced $80 billion in new U.S. investments through 2025. Samsung plans to build a $17 billion factory in Texas. TSMC has a $12 billion plant under construction in Arizona.

Uh, no. Most businesses in the United States have very small margins. If what the editors are saying were true most retail establishments, particularly grocery stores, would close. Taiwan, South Korea, Japan, and China dominate chip fabrication because their governments subsidize them and they subsidize them for strategic reasons. The editors continue:

History shows that easy government money can undermine competitiveness. It often leads to inefficient spending and investment. The politicians will also attach their own strings, perhaps with limits on stock buybacks and dividends. Wait until Bernie Sanders is heard from on the Senate floor.

The chip bill isn’t needed to compete with China, and it will set a precedent that other industries will follow. Anybody who can throw up a China competition angle will ask for money. Why Republicans want to sign up for this is a mystery, especially when they might control both houses of Congress in six months.

I also don’t think that the editors understand engineering. Production engineering inevitably follows production and design engineering inevitably follows production engineering. We have seen that in any number of industries.

We need to ensure that more chips are fabricated in the United States for security reasons if for no other. My preference would be to start with strategies other than subsidies although we may end up with subsidies. A good start would be to require that companies bidding on defense contracts have supply chains 100% within the United States, a tall order that goes well beyond chip fabrication. The notion that we can be prepared to go to war with China when we are dependent on China for everything we use to make war is absurd on its face. Today if you walk into any federal government office including DoD offices you will be confronted with masses of things, all made in Taiwan and China or with components or materials made in Taiwan, China, or Russia. That needs to change and in my view the most organic, market-oriented way to accomplish that is by hitting companies on their bottom lines. Start with doing business with the federal government. However, we may ultimately end up with subsidies which is what Taiwan, Japan, South Korea, and China have been doing.