The CHIPS Act has been signed into law: Now what?

Engineer showing a computer microchip on motherboard background. Electronic circuit board with processor.
Image: Adobe Stock

Industry experts are reacting to the news that President Biden signed into law the CHIPS Act of 2022 on Tuesday. The act provides $52 billion for semiconductor manufacturing incentives and research investments, as well as a 25% investment tax credit for semiconductor manufacturing.

The Semiconductor Industry Association lauded the signing, saying it will strengthen the ability of the U.S. to compete by offering incentives to chip manufacturers.

“By enacting the CHIPS Act, President Biden and leaders in Congress have fortified domestic semiconductor manufacturing, design, and research, thereby strengthening America’s economy, national security, and supply chains for decades to come,’’ according to a statement by the SIA.

The share of modern semiconductor manufacturing capacity in the U.S. has decreased from 37% in 1990 to 12% today, according to the SIA. “This decline is largely due to substantial manufacturing incentives offered by the governments of our global competitors, placing the U.S. at a competitive disadvantage in attracting new construction of semiconductor manufacturing facilities, or ‘fabs.’”

Additionally, federal investment in semiconductor research has been flat as a share of GDP, while other governments have invested substantially in research initiatives to strengthen their own semiconductor capabilities, and existing U.S. tax incentives for R&D lag those of other countries, the SIA said.

Mike Burns, executive chairman and co-founder of iDEAL Semiconductor, said that this is more than “a chips and science package” but “an indication that America is willing to engage in heavier industrial policy if needed to counter non-market forces where technology is of national importance. This package is generally very positive as an attempt to curb a long-term trend driven by economic incentives.”

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‘Flurry of activity’ in fab announcements

Over the years, the big cost disadvantage of setting up a fab or any other facility, including testing, packaging and manufacturing raw silicon wafers in the U.S., was one of the primary reasons for the ecosystem shifting to Asia, according to a Gartner report on the impact of the passage of the CHIPS Act.

“In certain parts of the chip manufacturing value chain, the U.S. has 100% dependence on Asia, but with financial support from the act, there is a strong potential that this will change. Even before the passage of the act, because of concerns about exposure to critical points of failure in the globalized supply chain, we have seen a flurry of activity in terms of fab/facility announcements … and multiple new projects are already underway.”

The impact will be over the long term

There will not be an immediate impact felt by the act’s passage, Gaurav Gupta, vice president of emerging technologies and trends at Gartner, told TechRepublic.

Most of the investments will be at the leading edge in building semiconductors that are seven nanometers and below and not in mature or lagging technologies, Gupta said. Given that semiconductor manufacturing can take a few years, the earliest opportunity for customers to buy chips will be in 2024, he said.

“Even in 2024 and ‘25 when some chips are manufactured here, it doesn’t mean customers will buy chips here because there is still a high percentage that will be bought in Taiwan,’’ Gupta said.

However, the CHIPS Act is “a good first step because there is a big imbalance in the share of chip manufacturing with too much dependency on Asia, he said. It’s important that the U.S. develop a more resilient and diversified supply chain given the geopolitical issues right now, Gupta said.

“It shows the government has the right policies and can support the reshoring of chip manufacturing, and it gives confidence to chip makers to at least think of” putting their fabs in the U.S.

Burns suggested that Congress may want to take an even more prescriptive approach to industrial policy. “We last saw things of this magnitude after World War II, where at that time the government was specific in the needs of the nation within technology segments,’’ he said. At the same time, he noted that “there is a fine line to walk between maximizing the benefit of industrial policy and interfering with private business strategy.”

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What to expect from the CHIPS Act

There are four expected impacts of the CHIPS for America Act, according to Gupta:

  • Chipmakers and other players in the chip supply chain will rush to leverage government funds, subsidies and tax credits to set up fabs and facilities in the U.S.
  • Fabless customers and OEMs in the U.S. will have a choice to procure semiconductors fabricated domestically.
  • Chipmakers will compete for a limited pool of money, talent, wafer fab equipment and resources in the U.S. for their fab projects.
  • Guardrails associated with the act will prevent companies that receive funding through the act from investing in China.

Those guardrails apply to companies including Samsung, SK Hynix and TSMC, which “will have to rethink their China strategy’’ in terms of whether they want to expand there, especially for advanced node logic and memory, Gupta said.

Consumers should also know what kinds of chips will be fabricated in the U.S. versus Asia, Gupta added.

He doesn’t believe anything fundamental is missing from the act. “What would be important now … is how funding is allocated and how the government tracks it,” Gupta said.

“The CHIPS Act says you can’t use the funds for paying dividends,’’ he explained. “Once the cash is given out there has to be a mechanism to ensure the money is actually being spent to build these fabs and hold them accountable,’’ he said. “The success of all of this will depend on how well the companies are able to execute. That’s the most critical aspect.”

Gupta also observed that “I don’t think the government has taken such a step to support this industry in a while.”

Steps to take

In addition to rethinking their China strategy, Gartner recommends that chip manufacturers plan projects in the U.S. in accordance with the act “by fully understanding how it will work from an awards and implementation perspective.”

The firm also suggests companies evaluate the possibility of co-investment in fabs/facilities with customers that would be interested in procuring chips fabricated in the U.S. They should also evaluate talent plans for projects over the next five-to-eight years “by establishing a detailed roadmap.”

In the meantime, the chip shortage is getting resolved, thanks to inflation and higher costs for goods, driving consumer demand for electronics down, he said.

“We are also projecting a downturn in the semiconductor industry with the reduced revenue projections for both this year and next,’’ Gupta said. “So shortages will get resolved toward the second half of this year or in some cases, the first half of next year.”

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