Semiconductor Subsidies Signal Shift in U.S. Industrial Policy

Transcript

The recent flurry of activity in Congress included a bill providing significant subsides for the U.S. semiconductor industry. This has prompted many commentators to ask: Is the U.S. embarking on a new path of industrial policy?

Let’s explore this question by examining the CHIPS and Science Act of 2022. 

We’ll start with the carrots.

Key line items include a 25% investment tax credit for U.S. semiconductor plants and producing the specialized equipment used in chipmaking.

Tax credits of this nature are often extended before they’re slated to expire. If so, this could be a long-term investment tool for the chip industry.

There’s also USD 39 billion in subsidies to expand U.S. capacity to fabricate advanced chips. The funds will be doled out through 2026, with a limit of USD 3 billion per project.

Know-how is critical. The act includes USD 11 billion in funding for R&D [research and development] and workforce training related to the manufacture of advanced chips.

However, federal money comes with some strings attached. 

Companies that accept a subsidy are barred from “material expansions” in “countries of concern,” including China. Here, chipmakers would only be allowed to increase capacity at existing facilities that operate older, 28-nanometer processes. 

Takeaways for Investors

The CHIPS and Science Act signals that the U.S. government is committed to advancing domestic semiconductor manufacturing.

Between federal subsidies and the tax credit, we see the potential for project costs to decline by 30% to 50%. This level of support could go a long way toward making U.S. semiconductor plants cost competitive with most regions.

What companies have the most to gain?

Chip manufacturers expanding in the U.S. and companies that provide semiconductor tooling stand to benefit from government funding.

But subsidies alone do not guarantee operational or financial success. Semiconductor companies must execute well and allocate capital effectively.

These projects will also take many years to complete. Reversing the three-decade slide in America’s share of global semiconductor manufacturing will not happen overnight.

The offshoring of chip manufacturing cut costs for end users. And onshoring moves could be inflationary. Building more semiconductor plants in the U.S. addresses only part of the supply chain. It’s truly dizzying how many inputs go into this complex production process.

Still, the push to diversify and secure critical industries and supply chains should have legs. Rising geopolitical tensions in areas that are key to semiconductor production are viewed as a potential vulnerability.

We could see further government efforts to secure other links in the semiconductor supply chain by working with allies and nearby nations.

Also, the recently passed Inflation Reduction Act included substantial investments in U.S. manufacturing on a scale even larger than the CHIPS and Science Act.

These kind of government initiatives do not happen in a vacuum. We’ll pay close attention to how other nations respond through their own industrial policies.