Facing geopolitical pressure, chipmakers look to expand US production

As tremors in global supply chains continue to rattle everything from auto manufacturing to baby formula, the especially intricate domestic semiconductor industry is looking to Washington for help bringing more of its production to the U.S. and getting insulated from geopolitical hazards.

But it won’t be easy. State-of-the-art chipmaking and packaging has long been centered in East Asia and particularly in Taiwan, where powerhouse fabricator TSMC has been working for decades to position itself as an indispensable mass producer of chips for client companies including AMD, Apple and Texas Instruments.

“Tiny microchips are in everything and right now there’s a global shortage,” Sen. Mark Kelly (D-Ariz.) told a conference on a technology and trade bill last week that could include significant tax breaks for chip manufacturers. 

“This means that consumer goods like cars, washing machines, your cellphone are just more expensive. And it threatens our national security, with production lines for advanced fighter jets and other weapons systems delayed or reliant now on microchips that are made overseas,” he said.

Kelly and several other senators are working to get two different semiconductor subsidy packages, which include $50 billion in grants and a 25 percent tax credit for domestic chip manufacturing, funded and passed into law.

But the White House-backed bill, known currently as the Bipartisan Innovation Act, is likely at least a few drafts shy of a vote, as some Republicans resist what they see as another spending push by the Biden administration.

“There are lots of positive things in the bill,” Sen. Ted Cruz (R-Texas) said in an interview. “I had roughly a dozen different amendments that were adopted that were incorporated in one form or another. But ultimately, the bill got a lot worse.”

“It includes far too much pork barrel spending and corporate welfare. The House version of it is even worse. We’ll see what comes out of conference, but the direction it’s moving is not encouraging,” Cruz said.

TSMC founder and former CEO Morris Chang dismissed the new U.S. initiative to increase domestic market share of global chipmaking last month as “a very expensive exercise in futility.”

“The U.S. will increase onshore manufacturing of semiconductors somewhat, but all of that will be a very high-cost increase, high unit cost. It will be noncompetitive in the world markets where you compete with factories like TSMC,” Chang said at an event co-hosted by the Brookings Institution and the Center for Strategic and International Studies, two Washington think tanks.

According to market research firm TrendForce, TSMC had 55 percent of chip fabrication, also called foundry, revenues for 2021, while Samsung had 17 percent. Together, they made up more than 70 percent of the global foundry market, while the total output of Korea and Taiwan made up more than 80 percent.

Chang’s assessment of his company’s importance is echoed by analysts and industry professionals in the U.S., who caution that Washington’s chipmaking ambitions should stay grounded in reality.

“Anyone who says that the U.S. is going to succeed in short order in onshoring all semiconductor manufacturing, or anything close to that, is wrong,” Chris Miller, a visiting fellow at the American Enterprise Institute (AEI) who specializes in the geopolitics of semiconductors, said in an interview. “The type of funding that the U.S. government is considering is a tiny fraction of what would be necessary to do that, and that’s not really a realistic goal.”

“It is reasonable for the U.S. to do what it’s trying to do, which is close the cost gap between opening a facility in the U.S. and opening one in other countries, and thereby reduce the incentive that currently exists to build more manufacturing facilities abroad,” he said.

It’s not just the volume of chips produced in Taiwan and East Asia that’s responsible for the region’s dominance. It’s also manufacturing technology and practical industry know-how that allows foreign companies to build on smaller scales, resulting in more powerful chips.

One industry expert, who spoke on the condition of anonymity, said that even the phase of the moon and its location relative to a fabrication facility can affect the viability of a microchip wafer and needs to be adjusted for in the production process.

There’s also the issue of packaging semiconductors into circuit boards after they’re fabricated, much of which is done by companies in east Asia.

“Only 3 percent of semiconductor packaging is done in the U.S.,” Travis Kelly, chairman of the Printed Circuit Board Association of America trade group, said in an interview. “So if we have to ship the semiconductors back to Asia anyway, how does this fix the supply chain issue?”

But experts say that the irreplaceability of the Taiwanese and Korean chip markets is only one of the forces behind the U.S. initiative to wedge itself into the chipmaking sector, despite a geographic concentration of the industry that’s contributed to global shortages.

“It’s really about China, because it’s China right now that is pouring government subsidies into its own chip [fabrication facilities], doing so in a way that is not at all connected to market forces, and potentially is going to put real cost pressure not only on American firms, but really the entire world, because they’re going to have this slew of capacity for building chips,” the AEI’s Miller said.

“Finding a way to begin to move the needle against that is really the key goal of this legislation. And this is just one part of a broader effort to use trade mechanisms, export controls, a broad front of measures the U.S. has been imposing to restrain its semiconductor ambitions,” Miller added.

In 2014, China’s Ministry of Finance set up its National Integrated Circuit Industry Investment Fund, known in China as the Big Fund, to invest in its own domestic semiconductor industry.

While the fund’s total capital investments are difficult to confirm, the U.S. Semiconductor Industry Association trade group estimated last year that the fund to date has “invested $39 billion, of which 69.7 percent has been for front-end manufacturing with the goal to increase China’s share of global semiconductor production. In addition, China has announced more than 15 local government [integrated circuit] funds for a total of $25 billion in dedicated funding to Chinese semiconductor companies.”

According to a statement from the Chinese government, “the fund implements market-oriented operation” and has “a management system and operation mechanism in line with the laws of the market economy.”

However deep-pocketed the Chinese investment in its domestic chip industry proves to be, the Taiwanese market is likely to remain an influential force on the Chinese mainland just as it is in the U.S.

And while Taiwan views its chip dominance as a “Silicon shield,” as Taiwanese President Tsai Ing-wen described it in an article in Foreign Affairs last year, it could just as easily be viewed as a spoil of potential conquest in a country that China regards as merely an unruly province.

Sen. Lindsay Graham (R-S.C.) led a six-member delegation of U.S. lawmakers on a two-day visit to Taiwan last month, a visit that prompted a Chinese Foreign Ministry spokesperson to say that the U.S. is headed further down a “dangerous path.”

“There are people who point out that maybe Taiwan is not safe,” TSMC’s Chang said last month. “Now, that’s of course another topic. Now, I’m assuming that there will not be any war. Frankly, if there is a war in Taiwan Strait, then I think the United States will have more than chips to worry about.”