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As the world grapples with a shortfall in semiconductor supply, US President Joe Biden has moved to provide tens of billions of dollars towards boosting domestic manufacturing. But industry figures say the funding will do little to help American firms in a swathe of sectors reeling from a current scarcity of chips.

As part of its sprawling new US$2tn infrastructure proposal, the Biden administration has pledged to commit US$50bn in funding towards semiconductor manufacturing and research through the new CHIPS for America Act.

With support from both Republicans and Democrats, the bill has already passed through Congress and includes plans for a new Commerce Department Program to issue grants to semiconductor manufacturing projects, authorisations for semiconductor research programmes, as well as a refundable investment tax credit.

Given semiconductors are used in a slew of products, from mobile phones to fighter jets and cars, the legislation aims to ensure the US’ “long-term national security and economic competitiveness”.

At the same time, Biden’s American Jobs Plan further lists semiconductors as a field of focus in its call for an investment of another US$50bn in the National Science Foundation.

The moves have been welcomed by semiconductor industry bodies, which have long called for the US federal government to ramp up incentives and help the domestic sector take on foreign rivals.

“Reversing the 50% decline in the US share of semiconductor manufacturing capacity over the past 20 years requires bold action, and the Biden administration’s support for significant funding to bolster the industry in its American Jobs Plan is an important step forward,” says Ajit Manocha, president and CEO of industry group SEMI in a statement.

The group did, however, point out in February that while Congress signed the CHIPS for America Act into law in January, it “failed to provide new funding” for the legislation.

US-based trade body, the Semiconductor Industry Association (SIA), which had made the case in a September report for federal manufacturing grants and tax breaks of US$20-50bn, has also praised the recent announcements.

“Funding the chip manufacturing incentives and research investments… will strengthen US semiconductor production and innovation across the board, so all sectors of our economy have the chips they need,” says CEO and President John Neuffer.

In the face of rising global competition, SIA says that that the share of global semiconductor manufacturing capacity in the US has decreased from 37% in 1990 to 12% today.

SIA notes in a statement this week that the decline is “largely due” to substantial subsidies offered by competitor governments, placing the US at a disadvantage in attracting new construction of semiconductor manufacturing facilities (fabs).

Fabs can cost around 30% more to build over a 10-year period in the US than Taiwan or Singapore, SIA says in the September report.

It further noted that 75% of all semiconductor manufacturing is now based in East Asia or China, and 100% of the world’s highly advanced (below 10 nanometers) logic semiconductor manufacturing capacity is in Taiwan (92%) and South Korea (8%).

Such geographical specialisation is a risk for the industry’s supply chains, with the region vulnerable to seismic activity and flare-ups in geopolitical tensions – a fact which will not be lost on the new Biden administration.

Rob Handfield, a partner at trade and supply chain finance consultancy firm Prism Global Partners and a Bank of America University professor of supply chain management at the North Carolina State University Poole College of Management, notes that defence is likely the main reason for Biden ramping up semiconductor funding at home.

“I think defence is the biggest concern. The defence sector is highly reliant on semiconductors, and there are concerns about counterfeit products, spyware, malware, and other issues, as much of the technology comes from Asia,” he tells GTR.

 

The crisis at hand

While the industry has widely praised Biden’s infrastructure plans, others in the semiconductor space question the president’s ability to resolve the current semiconductor shortage in the US.

Companies around the world have been hurt in recent months by a shortage of semiconductors, with a report from SIA noting in February that there has been a “supply-demand” imbalance in the wake of the Covid-19 pandemic.

Issues have been caused by the “rapid and large” shifts in demand, SIA says, with orders for semiconductors from automotive companies rallying “much more quickly” than expected after a lull in 2020.

At the same time, there’s been surging demand for semiconductors used in remote healthcare, home-working and virtual learning products.

“Restoring market balance takes time… Making a semiconductor is one of the most complex manufacturing processes. Lead times of up to 26 weeks are the norm in the industry to produce a finished chip,” the SIA report says.

Automotive companies in the US have been particularly hurt, with Ford saying in recent weeks that it would reduce output at seven North American assembly plants in response to the squeeze on semiconductor stock, while Kia Motors said it would cut two days of production in Georgia, Reuters reports.

Biden convened a meeting with CEOs and leading figures at major companies such as Intel, Ford and General Motors this week to resolve the crisis.

While few details were released about the discussion, Biden previously said at the signing of an executive order on supply chains in February that – in a bid to remedy issues in semiconductor supply – the government was “reaching out to our allies, semiconductor companies, and others in the supply chain to ramp up production to help us resolve the bottlenecks we face now”.

But some in the industry have cast doubt on Biden’s ability to affect the situation in the immediate term, and have in fact warned the administration to avoid intervening too heavily in the crisis.

In a response letter from US telecoms conglomerate Verizon, to a public review into semiconductor supply chains by the department of commerce, William Johnson, a senior vice-president at the firm, says that “while the short-term challenges are real, the administration’s ability to increase output in ways that could alleviate the current shortages is limited”.

Johnson adds in the letter that Biden should refrain from attempting to help certain sectors reeling from the semiconductor crisis if it risks hurting companies in other areas – such as communications providers.

“Unfortunately, we do not believe there is much the US government can do to address the current supply constraints. Any efforts to redirect production or sale of semiconductors to help one industry, will only lead to disruptions in other sectors,” Johnson adds.

 

Export controls

In recent months, semiconductor industry groups have warned Biden to refrain from following his predecessor’s example of imposing unilateral export controls on foreign semiconductor companies.

SEMI wrote in its response to the department of commerce review of semiconductor supply chains that the short-term national security benefits of imposing unilateral export controls on foreign firms erode over time, as companies will likely source equivalent goods from elsewhere.

The letter attacks Trump’s expansion of export controls on Huawei in August 2020 in particular, which sought to block the Chinese firm from buying computer chips that used US-equipment, materials and design software at any point in the supply chain.

“This dramatic expansion of US controls… creates strong and unique disincentives to purchase US origin items and technology. Purchasers of US origin items reasonably fear losing access to other customers for items with no conventional nexus to national security,” the report reads.

Instead, SEMI says the US should work with other semiconductor producing countries to roll out “narrowly tailored and multilateral export control policies”.

Biden is yet to row back export restrictions on Huawei, however, and Reuters reported in March that the administration had amended licenses for firms selling to Huawei Technologies, further restricting companies from supplying items that can be used with 5G devices.

As Biden works to onshore semiconductor supply chains, analysts expect the president will also weigh up whether to use export restrictions on foreign entities.

“If the government response to shortages of PPE during the pandemic is any guide of where this all might be heading, I expect that we will see the Biden administration take a ‘carrot’ and ‘stick’ approach, with the infrastructure plan representing a big part of the ‘carrot’.  The ‘stick’ could include export restrictions on semiconductor equipment and technology,” says Kerry Contini, international trade partner at Baker McKenzie.