ELECTRONICS

CHIPS Act Gives Hope to U.S. Semiconductor Industry

9/28/2022
By Meredith Roaten

iStock photo

Semiconductors have always been in widespread use across the nation, but with the Pentagon’s increasing use of more advanced systems and tensions in East Asia, shoring up the supply chain is more important than ever.

That’s what was on the minds of domestic manufacturing advocates and industrial policy watchers as Congress passed a law to protect the vulnerable supply chains.

In August, President Joe Biden inked the $280 billion bill — the Creating Helpful Incentives to Produce Semiconductors, or CHIPS, and Science Act — to the excitement of its many advocates and microelectronics industry executives, said Doug Crowe, the director of an other transactional authority program at the National Security Technology Accelerator.

The act does not immediately protect the supply chain from Chinese competition and influence, but it marks a change in attitudes and a step toward the future, Crowe and other experts said in interviews.

“It’s a start,” he said.

The legislation primarily creates financial incentives for chip manufacturers to onshore production and ensure that access to the critical technology is never cut off.

Currently, U.S. semiconductors make up 10 percent of global production. Most chips are produced in East Asia, particularly South Korea and Taiwan, according to the Biden administration.

China’s increasing assertiveness in the region also motivated Congress to pass the bill, which includes $52.7 billion to spur domestic semiconductor manufacturing. The legislation will impact the nation’s China policy and generate conversations around the future of that relationship, said Mira Ricardel, a former deputy national security advisor during the Trump administration. She currently heads the geopolitical and regulatory risk practice at the consulting firm The Chertoff Group.

“We have to determine what that relationship is going to be,” she said.

While Russia is seen as an acute threat, the Pentagon sees the pacing threat in East Asia. Chinese relations with Taiwan — a major producer of microelectronics — have grown even more strained in recent months. In August, China and Taiwan reported completing military exercises in the South China Sea in close proximity to each other.

The National Security Technology Accelerator hosted a microelectronics conference in Indianapolis the same day the bill was signed. Crowe said he watched industry leaders from across the country stop what they were doing and live stream Biden’s press conference on the legislation.

“That made a huge impact” at the conference, he said.

The conference wasn’t the first of its kind. Crowe noted that the Defense Department, the Navy, and the Defense Advanced Research Projects Agency created programs and initiatives with industry in recent years to promote domestic semiconductor manufacturing.

The COVID-19 pandemic turned the tide, he said. As the deadly virus ran its course, it was difficult to find many products because of the semiconductor shortage.

The bill allocates $2 billion specifically for the legacy chips used in automobiles and defense systems, according to the administration.

As advanced technologies such as artificial intelligence become a bigger part of defense platforms, the Pentagon will need even more semiconductors, Ricardel said.

“If you think how many chips an average car needs — a new car coming off [the line] needs 8,000 chips — imagine what our weapon systems need,” she said.

In the immediate future, the conflict in Ukraine has demonstrated the consequences of the chip shortage, said Megan Lamberth, an associate fellow for the technology and national security program at the Center for a New American Security think tank.

“We’re sending these big weapons packages, and chips are required to build back those stockpiles,” she said.

In one Javelin anti-tank system, there are about 250 chips, Commerce Secretary Gina Raimond said in a recent Senate hearing.

Wes Kremer, president of Raytheon Missiles and Defense, said earlier this year that the company is already struggling to replenish the U.S. supply.

While the effects of the bill could take time to manifest, there are already signs that companies are pushing forward, Crowe said. The legislation allocates $39 billion for manufacturing incentives alone, and companies are already eager to take advantage.

San Diego-based Qualcomm Technologies announced it would team up with chip manufacturer GlobalFoundries to expand the manufacturer’s capacity at its facility in Malta, New York. The $4.2 billion investment is an example of the kind of innovation the legislation was intended to spur, Crowe said.

“It is definitely influencing their business decisions, how they’re going to establish new foundries, how they’re going to be able to bring back onshore technologies and capabilities that have been moved offshore over the last few decades,” he said.

Roawen Chen, senior vice president and chief supply chain and operations officer at Qualcomm, said in a press release that “our continued collaboration with [GlobalFoundries] helps us to expand the next generation of wireless innovation as we move toward a world where everyone and everything can be intelligently connected.”

Micron Technology also announced a $40 billion investment in memory chip manufacturing, according to the White House.

Another reason to be optimistic for building future supply chain resiliency is the support the legislation received from both sides of the aisle, Ricardel noted.

“The good news is … that you have bipartisan consensus that the [United States] has to focus on it,” she said. “But it’s a big problem.”

One part of the strategy focuses on the talent necessary for a thriving manufacturing industry.

The bill includes $13.2 billion for research-and-development and workforce development, but there is still a lack of political will for policy that would make a substantial difference, Lamberth said.

“There’s knowledge that there is a skills gap, but I don’t think we’ve begun to scratch the surface of what it will take to make sure that we have the requisite talent,” she said.

The funding that encourages workforce development at universities is a useful tool, but immigration policies will have to be addressed as part of a comprehensive industrial policy, she noted. Because high-skill immigration gets lumped in with the broad issue of immigration, it is generally seen as politically dangerous.

“No one really wants to touch it,” she said. “I think people have tried to touch it and then have backed off because I think it’s unpopular in some ways.”

But without increasing the number of H1-B and other types of special visas, the industry will have to rely on education and training programs which can take much longer to produce results, she said. The National Science Foundation is authorized to double its budget over five years, including $13 billion for science, technology, engineering and math education.

“There’s just no way to look at the numbers of talent we have and say, ‘Well, this will be enough,’ because it’s just not,” Lamberth said. “The numbers don’t match up.”

While the investment into microelectronics and other strategic technologies is important for national security, the part of the legislation that could have impact beyond supply chains is the development of regional technology hubs, Lamberth said.

The bill authorizes the Department of Commerce to spend $10 billion on 20 regional innovation and technology hubs geographically distributed around the country. If the federal government can pull it off, the bill could leverage pockets of talent around the country to advance science and technology and the economies of different regions at the same time, Lamberth said.

The hubs will positively impact national semiconductor capacity, and spread the jobs out to different regions, she said.

It could be at least six months before the structure and other details of the regional hubs will be revealed, Crowe noted. It will help build up and balance the workforce needed for microelectronics and other technology areas.

“It really shows that multiple areas of the country can benefit from it,” he added. “And it’s not just one party or the other or red states or blue states.”

The legislation is also unclear regarding manufacturing regulations, Ricardel said. For example, since the bill’s funding mechanism is not known yet, it’s not clear if the Buy America Act will apply to manufacturers who accept funds.

“I thought it was important to reinforce that if we’re trying to build more capability in the United States and make it more resilient, that we can reinforce that by favoring American suppliers,” she said.

Creating a reporting structure for the CHIPS Act would help create metrics to see if policy changes, like requiring manufacturers adhere to Buy America, would be appropriate, she added.

Similarly, a reporting structure could identify if there should be additional tax incentives for companies. The bill already includes a 25 percent investment tax credit for capital expenses, but Ricardel said a comprehensive strategy guided by metrics could ensure the stability of the supply chain long after the initial funding is dried up.

“$52 billion is not the answer,” she said. “It’s a very small amount of money when you think of what it costs to build a [fabrication plant].”

“Let’s say the company gets a billion dollars,” she said. “Theoretically, if their taxes go up by $2 [billion] or $3 billion, that’s going to have an impact on what other resources they have for research and development for improving manufacturing operations, so you have to look at it in totality.”

Microelectronics is one of the 14 emerging technologies that the Pentagon has identified as critically important to national security. Some of the other strategic technologies could reap the benefits of the CHIPS Act.

Ricardel said one area that’s getting investment is 6G, the successor technology to 5G wireless. The legislation sets aside $1.5 billion for “promoting and deploying wireless technologies that use open and interoperable radio access networks,” a White House press release said.

“I’m excited to see that 6G is getting attention before it’s becoming a major issue, like a fear that we’re already running behind,” Ricardel said. “So my hope is that perhaps we’ve learned some lessons from our experience with 5G that we’re trying to rectify in the future.”

The bill also approves billions of dollars for the Department of Energy, National Institute of Standards and Technology and NASA. Research in areas such as multivalent ion materials in electric energy storage systems and electrochemistry modeling and simulation will receive about $120 million over the next five years.

The legislation also directs NIST to create a program for “artificial intelligence-enabled defense research,” according to the legislation.

Ultimately, building a more resilient chip supply chain is not something that can be taken care of in one presidential administration. The pandemic was a “focusing event” but supply chain issues will not end without a more comprehensive strategy, Ricardel said.

“The only thing uncomplicated about the problem is that it’s clearly a huge national security priority,” she said. “It’s just very difficult.”

 

Topics: Electronics, Manufacturing, Industrial Base

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