Bloomberg Tax
July 26, 2022, 8:46 AM

Can Chips Bring American Parity in Semiconductor Production?

Andrew Leahey
Andrew Leahey
Hunter Creek Consulting

For me, the word “Chips” is inextricably linked to the late ‘70s and early ‘80s dramatization of the California Highway Patrol. It harkens me back to my youth, where I’ve lost the remote and my laziness compels me to watch whatever follows “Knight Rider.” Tonight, I guess it’s “CHiPs.”

But for our purposes, let’s say Chips stands for Creating Helpful Incentives to Produce Semiconductors for America Act. Similarly, Fabs is the Facilitating American Built Semiconductors Act. Both bills intend to jump-start American semiconductor manufacturing, but through different means.

Under Fabs, tax credits are offered for constructing semiconductor manufacturing facilities. With Chips, grant subsidies are the incentive for manufacturing facility construction, and the regime would create federal pipelines to spur competitiveness in the space.

Ultimately, both bills have stalled in different ways. Fabs mostly got rolled into Build Back Better through the Advanced Manufacturing Investment Credit Program, which remains in limbo. Chips relied on the National Defense Authorization Act funding allocations that it never received.

It would be premature to call either initiative dead, but the odds of Chips making a triumphant return in its entirety anytime soon is unlikely. Portions of both Chips and Fabs, on the other hand, may live on in the America COMPETES Act, as Senate Majority Leader Chuck Schumer (D-N.Y.) has indicated that he intends to advance $52 billion in chip subsidies, including the emergency funding for Chips and the investment tax credit from Fabs.

The path to passage for the subsidies includes a procedural vote in the Senate followed by a vote in the House, likely to take place this week. The subsidy package has bipartisan support, as indicated by a 64-34 filibuster-proof “test vote” last week. With the start of the Congressional August recess looming at the end of the week, a final vote will likely be held in the coming days. It is worth exploring what the package will likely contain and its likelihood of success—as measured by increased competitiveness in the semiconductor space.

A chip is seen through a microscope during its fabrication process at the Institute of Microelectronics of Barcelona (IMB-CNM) in Bellaterra near Barcelona, on March 3, 2022.
Photographer: Josep Lago /AFP via Getty Images

Chips Emergency Funding

The funding for Chips comes from the United States Innovation and Competition Act of 2021. It would, among other things, fund federal grants for the construction, renovation, and rehabilitation of semiconductor fabrication plants. The “emergency” for which the bill allocates $52 billion in emergency appropriations is the acute chip shortage and chronic lack of domestic supply.

Fabs Investment Tax Credit

Breaking off the investment tax credit provisions from Fabs would fund tax credits of 25% for qualified investments in manufacturing facilities and properties. The credit won’t be available for Section 47 qualified rehabilitation expenditures for existing semiconductor facilities or properties, but it is otherwise (at this time) broadly construed to target domestic semiconductor research, design, and manufacturing expansion.

Will It Work?

The question, as the subheading not-so-subtly implies, is whether a one-time $52 billion expenditure and aforementioned tax breaks are enough to jump start domestic production when chip manufacturing has been moving off-shore for decades.

There is substantial brain drain and labor inertia to overcome. Further, it isn’t as though no other states recognize the importance of semiconductor manufacturing. The US will face stiff competition since, in February, the European Commission passed its own Chips Act—allocating 43 billion euros ($43.9 billion) to boost its chip manufacturing industry. Similarly, Japan approved $6.8 billion in funding for its semiconductor industry, and South Korea is looking to do the same.

Earlier in 2022, the Biden administration estimated the chip shortage in 2021 cost US GDP 1% of output that year, a truly staggering figure. Thus, there is no question that the problem is real—only whether it’s the sort of problem that can be solved by cutting a check.

To answer the core question of whether the Biden administration’s plan will work, it is worth looking at what has worked for the largest top semiconductor producer: Taiwan.

Lessons From Taiwan

The largest producer of semiconductors in the world is Taiwan, and their largest semiconductor firm is Taiwan Semiconductor Manufacturing Company Limited. To contrast the $52 billion number above, TSMC alone has committed to invest $100 billion over the next three years to increase production. To be fair, this includes a $12 billion factory in Phoenix, but nonetheless it gives a sense of the scale of the delta between what the US is just proposing to do and what the rest of the world has already done.

TSMC didn’t produce Taiwan’s “Silicon Shield” overnight; the Taiwanese government has backed TSMC and the semiconductor production industry since 1985. TSMC has operated hand in glove with the Taiwanese government, with guidance from the Taiwanese National Science Council and Ministry of Education and funding from the Ministry of Economic Affairs. In sum, the Taiwanese government assumed the risk of the nascent industry by providing the funding to TSMC and guarantees to private investors to bolster the private sector share of ownership.

The Taiwan semiconductor success story stands for two propositions. First, their manufacturers created an industry where there was none, getting them in early. Second, they used public-private partnerships through ongoing public investment. Taiwan didn’t get to where it is quickly or through ad-hoc funding.

So Will the US Chips Work?

Probably not, at least not in the way the funding mechanisms are currently envisioned. It remains an open question whether semiconductor manufacturing is something the US should be attempting to boost domestically, as our production costs are quite high.

However, if it’s undertaken, and if it’s to succeed, it’ll need considerably more weight and significantly more money behind it to truly compete. If political capital is to be expended to get the votes necessary to pass a semiconductor competitiveness bill, it would behoove us to think bigger.

This is a regular column from tax and technology attorney Andrew Leahey, principal at Hunter Creek Consulting and a sales suppression expert. Look for Leahey’s column on Bloomberg Tax, and follow him on Twitter at @leahey.

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