Congress Is Giving Billions To The U.S. Semiconductor Industry. Will It Ease Chip Shortages?

Manufacturing Editors’ Pick Congress Is Giving Billions To The U. S. Semiconductor Industry.

Will It Ease Chip Shortages? Willy Shih Senior Contributor Opinions expressed by Forbes Contributors are their own. I teach at Harvard Business School, and I write about manufacturing New! Follow this author to improve your content experience. Got it! Aug 3, 2022, 06:24pm EDT | New! Click on the conversation bubble to join the conversation Got it! Share to Facebook Share to Twitter Share to Linkedin Semiconductor chips are made by etching microscopic patterns in silicon wafers.

Many “fabs” use 300 . . .

[+] mm diameter wafers and make chips in batches of a few hundred to thousands at a time. getty The U. S.

CHIPS and Science Act, which President Joe Biden is expected to sign, allocates $280 billion for a packed list of projects and priorities, including $52 billion in subsidies for domestic production of semiconductors. It’s intended to “seize the future of decades to come,” the president said , and “bring the semiconductor supply chain from China to Michigan,” according to that state’s governor, Gretchen Whitmer . But will it resolve the chip shortages now plaguing the auto industry and others, and will House Speaker Nancy Pelosi still need to visit Taiwan’s big chipmaker in the future to ask for help? As you can imagine, the answer is complicated, so let me break it down into some digestible chunks The CHIPs bill aims to regain domestic manufacturing leadership lost to Asia The U.

S. share of global semiconductor manufacturing capacity has fallen from 37% in 1990 to 12% today. Plus, federal investments in chip R&D have been flat as a percentage share of the GDP, while other countries have invested heavily because they saw the strategic nature of the industry.

I argue that Americans lost interest in manufacturing chips (with the notable exception of Intel INTC , Micron, Texas Instruments TXN and a few others) because it was much more profitable to design them and let someone else do the really hard work of making them. MORE FOR YOU Germany’s Renk Group Seeks To Revitalize An Iconic American Defense Manufacturer What Drives Newly Minted CRISPR Unicorn Mammoth Biosciences A Million Parts Using 3D Printing? Mantle’s Printed Tooling Powers Mass Production Many people didn’t think the manufacturing side could ever be that lucrative, and for a long time, it wasn’t. But TSMC was able to aggregate volumes from diverse customers from all over the world, and it was aggressive about investing in new advanced technologies.

Companies like Apple AAPL , Qualcomm QCOM and Taiwan-based MediaTek sent TSMC a lot of volume because they needed the densest chips, and the next thing you know, TSMC is the world leader. Actually, it took the company 35 years of steady investment. For a while its investments were a few billion dollars a year; lately, it has been $30 – 40+ billion a year , $44 billion in 2022.

That makes $52 billion seem like not a lot of money, more like a down payment. Meanwhile, Intel has suffered some setbacks. It used to be two generations ahead of TSMC, now it is behind and trying to catch up.

Historically Intel has only run “fabs” – shorthand for the factories where chips are made, for its own consumption, but it went on to establish Intel Foundry Services to start producing chips for other companies. Intel Foundry Services recently won MediaTek as a customer, and though that has not been reported very widely, in my view, it’s is a big deal. MediaTek is a great company, and its just blocks down the street from TSMC’s headquarters in Hsinchu Science Park in Taiwan.

Manufacturing leadership in Asia means lots of things When we talk about the chip supply chain, different countries across the region lead in different products. Korean firms Samsung and SK Hynix are the leaders in the manufacture of memory chips, although U. S.

firm Micron is one of the big three, and Kioxia of Japan is a leader in flash memory chips. Taiwan, and TSMC specifically, is the global leader in the most advanced manufacturing processes for making logic chips, the microprocessors that go into personal computers and data center servers, and the most advanced phone chips. But it also makes many other devices on trailing edge technologies, and other Taiwanese firms like United Microelectronics are big players as well.

The People’s Republic of China (PRC) has a growing presence in memory chips, and it has many companies that produce trailing edge technologies. Shanghai-based Semiconductor Manufacturing International Corp. is the leader for logic, Yangtze Memory Technologies in memory chips.

Singapore has also long been a significant player, and is seeing a spurt in investment in new fabs. Japan is also a leader in providing many of the materials that are needed to manufacture chips. So it’s less about losing leadership to China, and more about an industry that has grown tremendously with many different specialists.

The challenge facing the U. S. is that American companies have failed to make the huge investments in domestic production to keep up with Asia, both in the chip fabs, and a lot of the raw materials to feed those fabs.

The U. S. is still far and away the leader in design tools and many of the manufacturing tools that go in to those fabs.

Packaging chips is vital to supply chain resilience, but that’s less glamorous One of the things I constantly remind people about is that manufacturing chips is one thing, they still need to be packaged for use in electronic device manufacturing. Chip packaging moved to Asia a half-century ago because it was a very labor-intensive process. Workers would slice the wafers into individual die and then look through stereomicroscopes and bond tiny gold wires to pads.

Those days are long past, but it is still relatively labor intensive. Most chips made in Taiwan, Japan, Korea, the U. S.

and Europe are sent to Southeast Asia or China for what is referred to as outsourced assembly and test (OSAT). And even the $280 in the CHIPS and Science Bill won’t solve that problem. The bill allocates $2.

5 billion for packaging, but we don’t see a lot of governors running around trying to get chip packaging plants located in their states. But they should! Will all that money restore U. S.

leadership? A good proportion of the $280 billion will go to R&D, and that will help a lot. But the Europeans, the Japanese, the Koreans, and of course the Chinese are heavily investing as well. What the U.

S. needs is staying power, and the willingness to invest for the longer term. China earmarked $150 billion back in 2014, the European Union signed up for €43 billion earlier this year, Japan with ¥1.

4 trillion. This is a long game and it will play out over decades. GM trucks parked in a large lot outside of Detroit because of a chip shortage on July 20, 2022 in .

. . [+] Auburn Hills, Michigan.

The lot is on the site of a former basketball stadium that was torn down, called The Palace. (Brian Day for The Washington Post via Getty Images) The Washington Post via Getty Images But what about those chip shortages? Chip shortages were caused by changing demand patterns brought on by the pandemic. There was a burst in demand for work-from-home gear like notebook computers, appliances, and other goods, and manufacturers had a hard time shifting production.

I explained this a while ago, but it’s important to understand that several issues have gotten conflated here: loss of leadership on the high-end, but an inadequate capacity to meet the surge in demand for trailing-edge technologies ( i. e. , the older stuff that is no longer leading-edge).

Capacity for trailing-edge technologies was tight before the pandemic because making those kinds of chips is not particularly profitable and you want to run your factory pretty fully loaded so you can make some money. If you build a new factory with some of that subsidy money, when it comes on stream in two-plus years it will certainly help with the shortage. But by then, a lot of people are already worrying about a glut, because manufacturers have already been adding capacity like crazy.

The loss of leadership in the high-end is an entirely different kind of problem. The urgency has much to do with global geopolitics. The core of the issue is that there are different views on whether Taiwan is part of China not.

The official position of the U. S. is the “One China” policy which states that the People’s Republic of China (PRC) is the “sole legal government of China,” but it only acknowledges the Chinese position that Taiwan is part of China.

As China makes more threatening noises about Taiwan and as Speaker Pelosi stirs the pot, many in the government and elsewhere have come to realize that if something bad happens to Taiwan, the West will be in a world of hurt because of its dependence on Taiwan-based manufacturers for chips. And chips are in everything. Will the shortages get better? The chip shortages will get better, but it will be hard to attribute the solution to the CHIPS and Science Act.

If anything, by the time the funding translates into new production facilities that churn out chips, we’ll likely be past our shortages and manufacturers may be staring at excess (and very expensive) capacity. That’s the time the U. S.

should worry, because that will be the time leaders need to summon up courage and political will, and not lose sight of the goal of making a stronger domestic industry. Follow me on Twitter . Check out my website .

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