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US CHIPS Act: Getting the funding is just the start

Plan to regain semiconductor production market share may be a case of too little, too late

Analysis The long-awaited US CHIPS Act has finally been signed into law by President Biden, unlocking $52 billion in funding to boost the American semiconductor industry as a part of the broader $280 billion CHIPS and Science Act. Now the industry has to make good on its promises in a market where inflation is rapidly stifling demand.

Behind all the words about driving innovation and creating jobs, the chief reason behind the CHIPS Act is a fear that the US will be overtaken by rivals such as China in the semiconductor industry, which is believed to be in the process of investing well over $150 billion by 2030 in trying to promote its own homegrown chip companies. In the face of this, America is playing catch-up.

This fear is not misplaced because the high-tech semiconductor industry plays a vital part in the global economy, and will only become more important as IT and computers play a bigger role in almost everything. Yet according to the National Institute of Standards and Technology (NIST), the US accounted for just 11 percent of global semiconductor fabrication capacity in 2019, down from around 40 percent in 1990.

The CHIPS Act thus seeks to restore US leadership in semiconductor manufacturing by "providing incentives and encouraging investment to expand the domestic manufacturing capacity necessary to produce the most advanced semiconductors," according to NIST. These will be needed to drive applications in AI and high-performance computing, but there is also a need for other less advanced chips that are found in automobiles and domestic appliances as well.

This touches on another reason for investing in semiconductor manufacturing – the supply chain problems that have hit industries such as automotive manufacturing over the past year or two, resulting in customers waiting months for new vehicles or production being cut because of a shortage of the chips that automobiles are packed with these days.

However, any new investment coming into semiconductor plants now will not bear fruit for several years, simply because it takes this long to build them and ramp up production. Construction work started in July on Intel's planned mega-fab site in Ohio, for example, and these semiconductor manufacturing plants are not expected to start producing chips until 2025.

Meanwhile, much of the shortage of chips for industries such as automobile makers has been the result of limited investment in mature process technologies, such as those at 40nm and above, which are used for cost-effective production of various low-tech components, as research company IDC pointed out earlier this year.

According to Bloomberg, lead times for some components have reduced only slightly, from 27 weeks in June to an average 26.9 weeks in July, with the supply of power management chips and microcontrollers particularly affected, and these are components that a great many products require in order to function.

But the semiconductor industry is now bracing itself for a fall-off in demand as a result of inflationary pressures being felt in economies around the world.

In June, research outfit Omdia warned that the semiconductor market reached a plateau in the first quarter of 2022 following five straight quarters of record revenues and continual growth in demand. There are also warnings that this could lead to a glut of chips in the near to mid-term, thanks to all the efforts to boost production in response to the shortages.

According to Reuters, China-based chipmaker Semiconductor Manufacturing International Corp (SMIC) told investors on a recent earnings call that the chip sector was facing some "panic and uncertainty", with a re-balancing of supply and demand expected. The company apparently spent $2.5 billion in the first half of the year on increasing its 8-inch wafer production capacity.

Back in America, Nvidia disclosed in its recent earnings call for the previous quarter that it was expecting to take a hit of $1.32 billion in charges for excess inventory, based on revised expectations for future demand of its GPU products.

What does this mean for the semiconductor industry? It means that we are heading into the downward part of the boom-and-bust cycle that is familiar to anyone who follows the memory and storage chip markets, as Richard Gordon, practice vice president for semiconductors and electronics at Gartner, told The Register a few months back.

"We've just seen a classic peak in the semiconductor market – chip shortages, prices rises, inventory build-up, all of which led to a very high growth year and record revenues in 2021," Gordon said. But this is a cyclical pattern, and the market is likely to bounce back once the glut has dissipated and demand starts to rise again.

"The bottom line is that the industry is heading in to a down cycle, probably starting in 2H22 but certainly affecting 2023 and 2024," Gordon said, "and this means that the industry will move from under-supply to over-supply (capacity investment on the supply side set against weakening end-market demand), which will put downward pressure on semiconductor pricing and result in a slow-down in revenue growth. The next up-cycle will begin in 2025 to 2026."

Handily, this will be just in time for those new Intel mega-fabs in Ohio to come online, which will hopefully demonstrate that all the investment soon to be fed into the semiconductor industry via the CHIPS Act is not being wasted.

And the US is also thinking longer term, as evidenced by the formation of a network of Midwest research colleges and universities, announced last week, which is gearing up to provide the research and the skilled workforce that will be needed to run those massive chip factories and develop the chip technology of the future.

America is not the only nation looking to expand its semiconductor industry. Last year, South Korea announced a package of investments worth over $450 billion for its chip industry, with its eyes on becoming a global supply chain leader. The EU also announced its own European Chips Act earlier this year, which is starting with €11 billion ($11.2 billion) of investment that is expected to grow to more than €43 billion (about $44 billion) by 2030.

The worry among some experts is that this will lead to a subsidy race, as different nations try to tempt chipmakers to set up manufacturing sites on their territory. Intel is said to be close to sealing a deal worth at least $5 billion to build an advanced semiconductor packaging and assembly plant in Italy, for example, and has also agreed to build a new chip manufacturing mega-fab at a site in Magdeburg in eastern Germany, for which there was said to be competition between several nations

However, Europe and America are taking steps to avoid this, with the last meeting of the EU-US Trade and Technology Council (TTC) in May seeing discussions around adopting a transatlantic approach to semiconductor investments aimed at ensuring security of supply.

The US Commerce Department has also said it will strictly control use of subsidies, and that those awarded will be "no larger than is necessary to ensure a project happens here in the United States."

But is all this too late? Techcet, a supply chain market research company for the electronics industry, fears that it is. With the US now representing about 10 percent of the world's supply of semiconductors and Asia accounting for 75 percent of global production, it will take a long time and a lot of investment to claw back a significant US share of the market.

Techcet warns that significant investments in materials production will also be needed to keep the semiconductor manufacturing supply chain full of the chemicals and materials to meet demand, and the US has a "critical dependency" on imported high-purity chemicals for chip fabrication.

Rejuvenating the US semiconductor manufacturing industry will thus be more complicated than just pouring in cash, and could take longer than anticipated. Whether it will have been a price worth paying remains to be seen. ®

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