CHIPS and era of post-globalization

In the United States, the number of deaths due to the novel coronavirus infection exceeds 1,000 per day as the economy becomes sluggish, and millions of applications for unemployment benefits are submitted every week. In such a crisis, semiconductors have become the key point in the new industrial policies that are being pushed during the pandemic.

For US, domestic production of sophisticated chips is no longer under debate. Observers say the momentum lies in building necessary facilities.

The bill CHIPS (Creating Helpful Incentives to Produce Semiconductors) for America) that was submitted in June 2020 is undergoing procedures to pass through the parliamentary budget process. Politicians, bureaucrats, and semiconductor companies, including Intel, are increasingly supporting efforts to boost semiconductor production in the United States.

The other US semiconductor industry participants are rushing to join because there is a chance that actual funds in form of subsidies will be available in the fall of 2020.

The question remains whether CHIPS for America would provide substantial funding?  And more importantly, is the US government going through this new industrial policy over the long term? Both the US government and the semiconductor industry have been advocating globalization for decades, but are now in the middle of turning by 180 degrees. 

We are living in an era of “post-globalization”. The era has started in which every country begins to build walls around it. Interest has shifted from the global economy to concerns about national security. We haven’t seen anything like this since the mid-1980s.

But is impossible to manufacture semiconductors without procuring materials from overseas. Over the past 50 years, the semiconductor industry has gone through globalization, and the background to this is the fact that each country and region has its own specialisation areas. Japan excels in lithography and resist processing “The materials we source from Japan are the best in the world.”  – industry insider said. Meanwhile, in Europe, “finishing a product” tends to be very expensive. On the other hand Dutch ASML is the only supplier in the world that can offer EUV (extreme ultraviolet) lithographic equipment.

Then, what makes the idea of post-globalization attractive? First, there is a new reality of the technology cold war in the US and China. Second, China is losing cost competitiveness as wages continue to rise.

The loss of US motivation and China’s cost advantage have strengthened the perception that it is time for the US government and chip industry to reassert themselves.

Eventually, the high-end manufacturing move to the US will become attractive again.

In the United States, state and federal authorities have recently invited TSMC to build factories, allowing US semiconductor manufacturers to offer various tax breaks and other benefits. While North American semiconductor equipment manufacturers have been impacted by loss of access to the Chinese market due to new strict export restrictions, and it impacted their ability to invest in R&D. Therefore, semiconductor device manufacturers and EDA manufacturers need tax incentives to strengthen capital investment.

The CHIPS for America bill could help mitigate the damage while US export controls are beginning to affect the industry. The bill could help improve incentives and subsidies. It provides tax credits as well as tax measures, which could be seen as a US next-generation industrial policy.

Despite the recent recession, Intel has maintained its leadership position in the semiconductor market and continues to gain an advantage in major markets such as servers. In terms of R&D and capital investment, there are almost no rival companies comparable to Intel. But without the US government’s immense 1950s and 1960s funding in the military/aerospace sector, the company would not be what it is today. Since the situation is similar to that at this time, it can be said that the company has well-established interests as the world’s largest semiconductor chip maker.

Will Intel emerge as the “American champion” during the Technology Cold War with China? That wouldn’t be the case, as the factories are scattered all over the world. Intel is unlikely to be the US solution to TSMC.

Other than this, GLOBALFOUNDRIES and its partners, such as the US-only foundry SkyWater Technology, are waiting for their turn. These companies have the potential to accelerate semiconductor manufacturing technologies in areas such as packaging, testing and assembly. These manufacturing technologies have been outsourced for the past 40 years, and are now considered to be the best way for Western semiconductor manufacturers to raise the production learning curve.

Ultimately, these manufacturing technologies will prove to be as strategically important as the finer semiconductor process technologies of 7nm, 5nm and below. What’s important here is not to make only one of the U.S. companies the winner.

Meanwhile, the Chinese government is investing a lot of money with high hopes for Shanghai-based SMIC. For the Chinese government, SMIC acts as an “insurance” in the event that access to TSMC’s cutting-edge manufacturing technology is cut off. The United States will combine large investments, export controls, and sanctions as a strategy to maintain and expand its Western dominance in the semiconductor market.

Has the US chip industry reached the “Sputnik moment”? Probably so (“Sputnik Moment” = time when the United States was overtaken by other countries in its military and technological capabilities). Industrial policy has been “polluted” by political factors for decades. China’s technological improvement and huge financial power have changed that completely, but at the same time, they have also introduced external threats. Everyone knows that semiconductors are a strategic industry.

While rebuilding the US chip industry, which has been outsourced for decades, U.S. lawmakers want to start the process of reshoring. But given the global nature of manufacturing, some are not in favor of US reshoring as an industrial policy goal.

Rather, it’s better to think of moving factories out of China and ending their (supply chain) dependence on China. But will manufacturing return to the United States?

At the very least, the “iPhone” will never be manufactured in the United States. But returning high-end manufacturing, such as semiconductors, to the US is very likely. Accelerating such a move raises geopolitical concerns.In the 20th century, the US government used the machine tool industry as a hedge for weapons manufacturing. The same principle may apply to the semiconductor industry which is the backbone of modern society.

RR