Initiatives to Boost U.S. Semiconductor Leadership
Addressing the Chips Shortage
For the past two years, the world has experienced a shortage of semiconductors. This shortage may be less the result of a decrease in chips supply and more the outcome of a rapid increase in demand for connectivity during the COVID pandemic. The chips crisis has led to increased prices for consumer goods that use chips and extended wait times for product deliveries. This surging demand for chips has impacted more than 169 industries.
As a result of the chips shortage, the Biden Administration and Congress have sought to ramp up the U.S. domestic semiconductor industry, which has dwindled in recent years. In January, the Commerce Department released the findings of its Request for Information (RFI) on the semiconductor supply chain. The Commerce Department found that chip shortages were most acute in microcontrollers that are primarily made of legacy logic chips (40, 90, 150, 180, and 250 nm nodes), analog chips (40, 130, 160, 180, and 800 nm nodes), and optoelectronics chips (65, 110, and 180 nm nodes).
The U.S. Government’s efforts to increase semiconductor manufacturing in the U.S. have prompted debate on onshoring the supply chain, import restrictions on semiconductor products, and export controls on chips technology. The U.S. business community has fought any notion of import bans, which it argues could exacerbate the global chips shortage. These issues have also been central in designing export controls and import bans on Russian materials and technologies in response to the war in Ukraine.
White House Supply Chain Report
During his first week in office, President Joe Biden ordered a report on the reliance of the global supply chain for key industries, including semiconductors. The White House report on Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth included seven key recommendations regarding the semiconductor industry.
First, the report argued the U.S. should work with “allied” countries to maximize their chip production capabilities. The term “allied” is not defined in the report. However, the report expressly endorses collaboration with specific entities such as the Quadrilateral Alliance (the Quad, consisting of Australia, India, Japan, and the U.S.), the E.U., and South Korea.
Second, the report called for the CHIPS Act to be fully funded, noting that the CHIPS Act authorizes the Commerce Department to award financial assistance to private entities or public-private consortia to finance, construct, expand or modernize facilities to support semiconductor fabrication, APT, and advance packaging across multiple nodes. On domestic manufacturing, the report calls for “leading-edge production in logic production” for general competitiveness; “production of mature node logic chips and analog and discrete chips” for industry and defense; and investments in memory chips to remain competitive with China.
In terms of research and development (R&D), the report envisions CHIPS Act funds being used by the National Semiconductor Technology Center (NSTC) to promote innovation and “bridge the gap between R&D and commercialization.” The report also expresses support for providing resources to the National Institute of Standards and Technology (NIST) to create new programs to help advanced packaging and testing capabilities onshore. Additionally, the report suggests that the Multilateral Fund, authorized by the CHIPS Act to be managed by the Department of State, should be used to support diplomatic efforts with foreign partners to align policies on export controls, foreign direct investment screening, supply chain security, intellectual property (IP) protection, and transparency requirements on subsidies.
Third, the report argues that the U.S. should strengthen semiconductor production by investing in industries domestically that require semiconductors, such as electric vehicles, broadband, and clean energy. It also broadly encourages support for upstream materials in the supply chain, including manufacturing equipment, specialty gases, and other critical materials.
Fourth, the report notes that small and medium sized enterprises should be prioritized because they constitute the majority of semiconductor manufacturers. It outlines several ways the federal government can support these stakeholders, including R&D support from the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (SBTT) programs, commercialization guidance from federal agencies, and capital support from the Small Business Administration (SBA) and the Import-Export Bank.
The final three recommendations regard the semiconductor workforce, international cooperation on the supply chain, and IP protection. The report advocates for the Department of Labor (DOL) to work with educational institutions to promote recruitment and training in engineering fields. It argues for greater investments in STEM education funding and visa increases for skilled workers. In terms of international cooperation, the Quad is cited as a supply chain partner while South Korea is mentioned as a potential investment partner in semiconductors. The report recommends export controls for chips that may have national security or IP implications.
USICA/America COMPETES Act
Congress has also grappled with these issues as part of its work on the U.S. Innovation and Competition Act (USICA), which passed the Senate in June 2021 and the America COMPETES Act, which passed the House in February 2022. A formal conference committee to iron out the differences between the two bills is now underway. The overarching legislation is aimed at bolstering U.S. competitiveness vis-a-vis China.
An April 2021 Congressional Research Service (CRS) report on China’s industrial goals for semiconductor manufacturing production. The “Made in China 2025” initiative aims to have the country produce 70 percent of its own semiconductors by 2025 and 80 percent by 2030. The Chinese Government plans to accomplish its goal by incentivizing more international companies (including those from Hong Kong, Macau, and Taiwan) to operate in China with a legally independent subsidiary. However, companies that attempt to do this are required to share their R&D, patent information, and other IP with the Chinese Government. The report argues for more investment domestically in R&D and manufacturing, IP protections, export controls to impede China’s innovation, and additional engagements with partners like the E.U. and Japan to counter China’s trade practices.
Both USICA and the America COMPETES Act include $52 billion in appropriations to implement the Semiconductor Financial Assistance Program, the NTSC, and the Advanced Packaging Manufacturing Program authorized by the CHIPS Act. While the semiconductor language in the House bill closely mirrors the language in the Senate bill, there are a few key differences. First, the House bill would extend eligibility for financial incentives to include the materials used to manufacture semiconductors and semiconductor manufacturing equipment. The House bill would also allow the Commerce Department to issue direct loans and loan guarantees under the financial assistance program. Meanwhile, the Senate bill includes a section directing the U.S. Comptroller General to study the global semiconductor shortage and its impact on the U.S.
Also worth noting, the America COMPETES Act includes language from the National Critical Capabilities Defense Act (NCCDA), which would establish a review process for outbound transactions related to the offshoring of certain supply chains and other “national critical capabilities” for the U.S. Government to protect domestic manufacturing capacity. Specifically, this provision would establish a Committee on National Critical Capabilities similar to the Committee on Foreign Investment in the United States (CFIUS) that would have the authority to review any “covered transaction” that would shift or relocate to a “country of concern” or that would transfer to an “entity of concern” any essential elements involving one or more national critical capabilities, or that could otherwise “result in an unacceptable risk to a national critical capability.” Importantly, the legislation would require any U.S. business that engages in a covered transaction to submit a written notification of the transaction to the Committee. Within 60 days of receiving notification of a covered transaction, the Committee could review the transaction to determine whether it is likely to result in an unacceptable risk to one or more national critical capabilities. If the Committee determines that the transaction could pose such a risk, it could recommend that the president take action to address or mitigate the risk, including by suspending or prohibiting the transaction.
Other Issues Related to Import Bans and Export Controls
On April 7, Commerce Secretary Gina Raimondo emphasized that “with demand for chips at an all-time high, it’s crucial that we bring chip production, and it’s good-quality manufacturing jobs, back home to the U.S.” She emphasized also “this is essential to our national and economic security.”
Secretary Raimondo has also been increasingly vocal about the need for the U.S. semiconductor industry to remain competitive with China’s. In 2019, the Commerce Department implemented measures against the Chinese telecommunications firm Huawei, essentially cutting the company off from the global supply of chips and other electronics made with U.S. technology. The actions had a profound impact on both Huawei’s mobile and broadband businesses. Huawei along with SMIC, (Semiconductor Manufacturing International Corporation) have both been added to the U.S. Entity List.
There are a few ongoing Commerce Department investigations of note. First, the U.S. Department of Commerce is looking into potential export control violations by Synopsys, the biggest supplier of software used to design semiconductors. This American company is being investigated for working with affiliates in China to pass along key technology to banned Chinese companies, including Huawei Technologies Co’s HiSilicon unit for manufacture at SMIC. It has also recently been reported that the Commerce Department is probing claims that Yangtze Memory Technologies (YMTC) has supplied Huawei with smartphone memory chips since Huawei was added to the U.S. export control list. As noted above, the Commerce Department’s Bureau of Industry and Security (BIS) has designated both SMIC and Huawei as threats to national security meaning U.S. companies are barred from selling them certain types of technology.
Earlier this week, reports surfaced suggesting that the Commerce Department is now weighing a ban on American companies selling advanced chipmaking equipment to Chinese firms. The rules would expand an existing ban on U.S. companies selling such equipment to China’s leading chipmaker, SMIC. A more comprehensive ban could prohibit transactions with additional Chinese companies, including state-backed Hua Hong Semiconductor, CXMT, and YMTC. Our understanding is that a potential ban is in the early stages of being debated and the conversations could take months to produce a policy change.
Activity at the Commerce Department, in addition to activity around the USICA/CHIPS Act Conference, continue to drive debate in the administration related to policy aimed at restricting external investments outside the U.S. Recent reporting suggests that there is no uniform position on such export controls within the Biden Administration. Earlier this month, the Treasury Department allegedly provided lawmakers with an alternative, “watered down” version of the NCCDA included in the House-passed America COMPETES Act. The Treasury Department’s framework proposes a pilot to monitor U.S. investments in China without any new enforcement measures. While National Security Advisor Jake Sullivan has previously alluded to the administration having some interest in exploring “a mechanism to review outbound investment” White House national security officials have distanced themselves from the Treasury Department’s recent proposal.
Since then, Sens. John Cornyn (R-TX) and Bob Casey (D-PA) have set to develop a compromise between the NCCDA language in the House bill and the Treasury Department proposal. Their plan would establish a federal commission to screen major American investments in China involving information communications technology (ICT), as well as deals with companies that receive taxpayer funds or work with national security agencies. The commission would be empowered to deny any American investment in China it sees fit. This proposal is so new that it is unclear where the Biden Administration stands. However, industry has already come out in opposition. It remains unclear what, if any, language on outbound investment reviews will be included in the final USICA/America COMPETES Act conference report.
In terms of import bans, the U.S. would face World Trade Organization (WTO) sanctioned reciprocal retaliatory tariffs in overseas markets if it were to impose WTO-illegal tariffs on chip imports from other countries. Industry argues such actions would negatively impact the sales that support jobs in the U.S., as well as undermine the global semiconductor trade surplus. In addition, around 60 percent of U.S. semiconductor imports from China are originally made in the U.S. and then distributed through various international supply chains before being reimported to the U.S. by American companies. Industry argues this means there are currently no benefits to enacting import bans on chips. The U.S. continues to monitor China as a threat to the American telecommunications industry but there is no public reporting on any imminent plans to restrict imports on semiconductor technology from any foreign country.
Industry Perspectives and Incentives for Investment
During an April 27 appearance before the Senate Commerce, Science, and Transportation Committee to testify on the agency’s annual budget request, Secretary Raimondo urged lawmakers to pass legislation funding the CHIPS Act, arguing that other nations are “wooing” companies to set up factories elsewhere. In particular, Secretary Raimondo pointed out that Germany, Singapore, Spain, France, and China are attracting investments from Intel, Micron, and Texas Instruments, warning that if Congress cannot quickly pass compromise USICA/America COMPETES Act legislation, then this investment will continue to be made outside the U.S.
A report recently published by the Semiconductor Industry Association (SIA) found that 25 fab construction and expansion projects have been announced by American allies including the E.U., South Korea, Japan, Taiwan, and Singapore, while the U.S. announced only four in 2021. U.S. efforts to create investments incentives via the CHIPS Act have stalled, as the $52 billion in appropriations to implement the CHIPS Act remain pending in the USICA/America COMPETES Act conference. These funds would assist with semiconductor research, design, and manufacturing in the U.S.
Meanwhile, foreign governments with large footprints in the global semiconductor industry, such as South Korea, Japan, Taiwan, Israel, Singapore, and others, are prioritizing major federal incentives including direct grants, free land, equity investments, infrastructure support, and more to both domestic and foreign companies in order meet the demands of today. Additionally, the E.U. has dedicated 20 percent of its $917 billion COVID recovery package for digital infrastructure, while individual member countries such as France and Germany are offering their own investment funds for microelectronics. The attractiveness of an already successful semiconductor industry, coupled with the fact that the ten-year total cost of ownership (TCO) of a fab located in the U.S. tends to be 30-50 percent higher than in competing countries, has made investment outside of the U.S. more desirable to some companies.
It is also worth noting that as part of its efforts to bolster semiconductor, the Biden Administration has pursued cooperative agreements with other countries with successful semiconductor industries. For example, just this week, Commerce Secretary Raimondo and Malaysia’s Senior Minister for International Trade and Industry Datuk Seri Mohamed Azmin Alin signed the U.S.-Malaysia Memorandum of Cooperation on Semiconductor Supply Chain Resilience. The cooperative effort aims to provide guiding principles, increase transparency, and promote investment as the nation’s strengthen their semiconductor supply chain resiliency. Malaysia is expected to garner over $3.3 billion in new investments from the several high-technology companies in the U.S., including Texas Instruments and Indium Corp.