Tuesday's announcement by the Biden administration was the first step in a surge in federal funding for the "Chips for America” program. It aims to increase semiconductor research and manufacturing in America.
The Commerce Department has $50 Billion in direct funding, federal loans, and loan guarantees. This is the largest federal investment in one industry by Congress in decades. It also highlights Washington's growing concern about America's dependence upon foreign chips.
Due to the high cost of building advanced semiconductor facilities, funding could be fast and there has been fierce competition for the money.
Here is a look at CHIPS and Science Act. It aims to accomplish certain things and will work as intended.
The construction of new and improved manufacturing facilities will receive the largest amount of money, $39 billion. An additional $11 billion will go to research in new chip technologies.
Most of the manufacturing money will go to companies that make the most advanced semiconductors in the world, such as Taiwan Semiconductor Manufacturing Company and Samsung Electronics.
Some of the proceeds will be given to manufacturers of older chips, which are still important for automobiles, appliances, and weapons.
While there are some who question the wisdom of giving grants for a profitable industry sector, executives in semiconductor companies argue that they don't have the incentive to invest here because of the higher cost of labor and the running of a factory.
Biden administration officials state that they do not intend to fund complete projects. They plan to grant grants equal to 5 to 15% of capital expenditures of companies for a project. Funding is not expected to exceed 35% of the cost. A tax credit can be applied for by companies to reimburse 25 percent of the cost of construction.
Gina Raimondo (secretary of commerce) describes the program as a foremost national security initiative.
The United States remains a world leader in chip design, but most of the manufacturing is now done offshore. More than 90% of the most technologically advanced chips used by the U.S. military are made in Taiwan today. Concerns have been raised about the supply's vulnerability due to China's aggression towards Taiwan and the possibility of a military invasion.
China is also increasing its market share for less-advances chips, which are still crucial for electronics, cars and other products. The United States produces 12 percent of all chips, but none of the most advanced in the world.
The pandemic caused factories to stop work due to chip shortages. This demonstrated how vulnerable the supply chain was to disruption. In a speech last week at Georgetown University, Ms. Raimondo stated that workers at Ford Motor factories in Michigan or Indiana only worked full-time last year due to a chip shortage. This caused a shortage of cars and drove up the cost of cars, which in turn stoked inflation.
According to the Commerce Department, the program will provide domestic sources of the most advanced chips in the world for the Department of Defense as well as the national security community.
Ms. Raimondo stated that the goal is to create at least two U.S. manufacturing centers to produce advanced logic chips as well as facilities to make other types of chips and support complex supply networks.
Commerce officials declined to speculate on the location of these facilities, saying that they have to review all applications. However, chip companies have already revealed billions in new investment plans around the United States.
TSMC, the largest producer of world-leading-edge chips, has been expanding in Arizona while No. 2 Samsung is expanding in Texas. Micron, a company that makes high-end memory chips, announced major expansion plans in New York. Intel, the U.S. technology company that has been investing heavily in order to gain a technological advantage, has opened a "megasite” in Ohio.
Ms. Raimondo stated that the goal is to return the United States to its former leadership position in semiconductor technology. Every major chip company would like to have research and manufacturing facilities here.
There is still doubt about the program's effectiveness. A 2020 study found that an investment of $50 billion in the industry would only increase U.S. market shares to 14%.
It is crucial that the Biden administration proves that industrial policy can be successful. Critics argue that the federal government is not the best judge of winners or losers. It could be subject to harsh criticism if it does not do the right thing.
Commerce Department stated that it will closely examine applications for funding from companies to make sure they are not receiving more taxpayer money than they need.
The department made a controversial decision, stating that projects that receive grants will have to share some of the unanticipated profits with federal government. This was to ensure that financial projections were accurate and that companies don't exaggerate the costs in order to obtain larger awards.
The Commerce Department stated that it would provide funding as companies meet project milestones. Priority will be given to those who pledge to abstain from stock buybacks. These tend to enrich shareholders and corporate executives through increasing a company’s share price.
To ensure that taxpayer money is not used to finance new operations in China, companies are prohibited from making high-tech investments into China or any other "countries concerned" for at most a decade.
Analysts said that it was still to be seen how difficult it would prove to enforce these provisions. It is possible for company finances to be opaque. If a company saves money in the United States, they may choose to invest that money elsewhere.
This program includes some unusual and ambitious requirements that will benefit the staff of semiconductor facilities.
One, the department will require award companies of at least $150 million to ensure high-quality, affordable child care for operators and workers in plant construction. It could be as simple as building child care centers for company employees near new or existing plants. Or paying child care providers in the area to increase their capacity at a reasonable cost. Ms. Raimondo stated that child care will help more people enter the workforce in an era when many businesses are struggling to find workers.
The applicant must also detail their involvement with schools, labor unions, and work force education programs. Preference will be given to projects that are beneficial to both workers and communities.
Other provisions encourage universities, companies and other parties offer more training to workers in advanced sciences as well as skills like welding. The department stated that it will prefer projects where the state or local governments are providing incentives with "spillover” benefits for communities such as work force training, education investments, and infrastructure construction.
This is part the Biden administration's "worker centered" economic policy. It seeks to make the federal government more beneficial for workers. Some critics fear that it could compromise the program's goal to build the most advanced semiconductor factories, and increase the costs of new projects.