Questions About the Semiconductor Bill

 

I just saw a story from Reuters (here) that a “sweeping semiconductor industry bill” has advanced in the Senate, and could be passed by both the Senate and House within the week.  The story reports that the bill “provides about $52 billion in government subsidies for U.S. semiconductor production as well as an investment tax credit for chip plants estimated to be worth $24 billion.”

The stated justification, in the Reuters story, is “to make the domestic industry more competitive with China.”

Are any of you sufficiently knowledgeable about the semiconductor industry to be able to provide a helpful explanation about this bill, or about the industry in general?

My initial hypothesis is that this bill may be a wise measure, though costly, aimed at returning semiconductor production to the US.  It appears that the main competition, however, is not China.  At least, not the People’s Republic of China, but rather its breakaway province, Taiwan.

My general impression, probably from a podcast by Peter Zeihan, was that Taiwan is the leading semiconductor manufacturer.  I found a March 2021 story from CNBC (here) setting forth market share for “semiconductor contract manufacturers” as follows:

  • 63%  –  Taiwan
  • 18%  –  South Korea
  • 6%  –  China
  • 13%  –  All others combined

I’m not sure whether this includes all semiconductor manufacturing worldwide, or only a portion performed by “contract manufacturers.”  My suspicion is that other companies might manufacture semiconductors for their own use, and that those might not be included in these figures.  I’m not sure about this, so I’d appreciate any additional information.

My thought about the semiconductor bill advancing in Congress is that its primary purpose is to reduce our dependence on semiconductor imports from Taiwan, not China.  Again, this strikes me as a good idea.

If I am correct about this, though, I wonder if there is an ulterior motive.  If I were a top US government official, and I was concerned that Taiwan might fall to China — or just be attacked and wrecked by China — I would want to take action to reduce our economic exposure to such an event.  On the other hand, I probably wouldn’t want to say that this was the purpose of the bill.

For my part, I wouldn’t object to this possibility.  While I wish the Taiwanese well, I’m becoming increasingly skeptical of the wisdom of defending the island from the mainland Chinese.

What do you all think?

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  1. WillowSpring Member
    WillowSpring
    @WillowSpring

    I worked for a small startup whose product was a semiconductor chip.  We had TSMC (Taiwan SemiConductor Manufacturing Company) build the chips on contract.  We didn’t have a lot of other choices.  We were then acquired by a huge company which had its own semiconductor fab lines, but ‘our’ chip got farmed out to China.  That seemed to me to be a very risky thing to be doing even back then (around 2010).  It seems to be much worse of a bet now.

    I think the government should stay away from trying to pick winners and losers (Solyndra, anyone??)

    The other thing that worries me is that Chuck Schumer apparently added 1,000 pages.

     

     

    • #1
  2. Zafar Member
    Zafar
    @Zafar

    A lot of the chips built in Taiwan are designed by US companies which then outsource production on contract because it’s cheaper.  I’d be surprised if they didn’t bring it back to the Western Hemisphere, but I think they might try and make in Mexico to keep the cost down while still having pretty secure supply chains.

    • #2
  3. David Foster Member
    David Foster
    @DavidFoster

    I did a post on this subject the other day:  Nancy Pelosi and I have something in common.

     

    • #3
  4. Terry Mott Member
    Terry Mott
    @TerryMott

    If we want to help our semiconductor industry, I prefer tariffs to subsidies — less chance for graft, and less opportunity for power plays like imposing conditions on continuing to receive the subsidy.  I suspect this is why tariffs are so frowned upon by the DC Establishment of both parties.

    • #4
  5. Jerry Giordano (Arizona Patriot) Member
    Jerry Giordano (Arizona Patriot)
    @ArizonaPatriot

    I found another source on semiconductor production, from the Semiconductor Industry Association, here.  If accurate, it confirms my suspicion that the data from CNBC discussed in the OP includes only a small portion of total semiconductor production.  Reading off the graph from the Semiconductor Industry Association story, for the latest year available (2020), overall market share is approximately:

    • 45%  –  United States
    • 20%  –  South Korea
    • 9%  –  Japan
    • 9%  –  Europe
    • 9%  –  China
    • 7%  –  Taiwan

     

    • #5
  6. Hang On Member
    Hang On
    @HangOn

    David Foster (View Comment):

    I did a post on this subject the other day: Nancy Pelosi and I have something in common.

     

    I’m not of the potato chips are just as important as chips persuasion as some people were making the argument back in the day. When I first read this, I thought it was the Onion or Babylon Bee, but they were serious.

    Good article and valid points. It should be for a large variety of industrial production. Glad you pointed out machine tools. That always seems to get overlooked. 

    But I would have added tariffs to the mix with exemptions for Canada and Mexico. 

    • #6
  7. Chris B Member
    Chris B
    @ChrisB

    My understanding of the bill is that it only provides funds for US based companies who are building chip fabrication plants (Fabs) in the US.

    It is designed to exclude companies like Canada based Global Foundries and Samsung, who are trying to build fabs in the US.

    As such, it is basically a bone to Intel, who is expected to collect about $42 Billion of the proposed $52 Billion, with Micron getting most of the remainder.

    Breaking the extreme concentration of chip manufacture in Southeast Asia is a strategically good idea, and probably worth a large subsidy from a national security standpoint. The way this bill is going about it is purely crony capitalism to 2 specific companies.

    • #7
  8. Stina Member
    Stina
    @CM

    Jerry Giordano (Arizona Patrio… (View Comment):

    I found another source on semiconductor production, from the Semiconductor Industry Association, here. If accurate, it confirms my suspicion that the data from CNBC discussed in the OP includes only a small portion of total semiconductor production. Reading off the graph from the Semiconductor Industry Association story, for the latest year available (2020), overall market share is approximately:

    • 45% – United States
    • 20% – South Korea
    • 9% – Japan
    • 9% – Europe
    • 9% – China
    • 7% – Taiwan

     

    And yet there’s been massive disruption in supply from global supply chain disruption. See: Freight Truck Industry where parts have been back ordered for a LONG time.

    So what’s going on? Are we overly specialized in luxury chips? Such as gaming, graphics, and sound? Or DOD specific hardware? Are other countries specialized in chips that are needed for vehicles and appliances? 

    • #8
  9. Jerry Giordano (Arizona Patriot) Member
    Jerry Giordano (Arizona Patriot)
    @ArizonaPatriot

    Stina (View Comment):

    Jerry Giordano (Arizona Patrio… (View Comment):

    I found another source on semiconductor production, from the Semiconductor Industry Association, here. If accurate, it confirms my suspicion that the data from CNBC discussed in the OP includes only a small portion of total semiconductor production. Reading off the graph from the Semiconductor Industry Association story, for the latest year available (2020), overall market share is approximately:

    • 45% – United States
    • 20% – South Korea
    • 9% – Japan
    • 9% – Europe
    • 9% – China
    • 7% – Taiwan

     

    And yet there’s been massive disruption in supply from global supply chain disruption. See: Freight Truck Industry where parts have been back ordered for a LONG time.

    So what’s going on? Are we overly specialized in luxury chips? Such as gaming, graphics, and sound? Or DOD specific hardware? Are other countries specialized in chips that are needed for vehicles and appliances?

    Stina, I’m not sure, but I have a slightly educated guess.

    The figures in the OP show that Taiwan dominates the “contract” semiconductor market, which appears to do the manufacturing for designers (and perhaps end-users) who don’t manufacture their own chips.  I suspect that this might include the US auto manufacturers (or their suppliers).

    If correct, a supply disruption in Taiwan might affect certain industries more than others.  I recall reading a story, probably last year, about chip issues causing production problems for US automakers, but I don’t know the details.

    • #9
  10. Mad Gerald Coolidge
    Mad Gerald
    @Jose

    I’m not very knowledgeable about semiconductors, but I think it varies a lot depending on how it is used.

    All the Iphones made in China surely have Chinese semiconductors.  Other categories (cars, PCs, microwave ovens), not so much.

    It’s been reported It’s been reported the Democrats are trying to stop the Trump tariffs against Chinese goods.  You know, because it raises costs so much! 

    • #10
  11. The Cynthonian Member
    The Cynthonian
    @TheCynthonian

    Chris B (View Comment):

    My understanding of the bill is that it only provides funds for US based companies who are building chip fabrication plants (Fabs) in the US.

    It is designed to exclude companies like Canada based Global Foundries and Samsung, who are trying to build fabs in the US.

    As such, it is basically a bone to Intel, who is expected to collect about $42 Billion of the proposed $52 Billion, with Micron getting most of the remainder.

    Breaking the extreme concentration of chip manufacture in Southeast Asia is a strategically good idea, and probably worth a large subsidy from a national security standpoint. The way this bill is going about it is purely crony capitalism to 2 specific companies.

    Does this bill have a good chance of passage?   If so, you’d think Intel’s stock would be up.  It’s been flat or down (with the rest of the market) for months.

    • #11
  12. kedavis Coolidge
    kedavis
    @kedavis

    Mad Gerald (View Comment):

    I’m not very knowledgeable about semiconductors, but I think it varies a lot depending on how it is used.

    All the Iphones made in China surely have Chinese semiconductors. Other categories (cars, PCs, microwave ovens), not so much.

    It’s been reported It’s been reported the Democrats are trying to stop the Trump tariffs against Chinese goods. You know, because it raises costs so much!

    And because then China has less cash floating around for The Big Guy.

    • #12
  13. Dr. Bastiat Member
    Dr. Bastiat
    @drbastiat

    WillowSpring (View Comment):
    I think the government should stay away from trying to pick winners and losers (Solyndra, anyone??)

    Very good point.

     

    WillowSpring (View Comment):
    The other thing that worries me is that Chuck Schumer apparently added 1,000 pages.

    Nothing to see here, just move along…

    • #13
  14. Chris B Member
    Chris B
    @ChrisB

    Jerry Giordano (Arizona Patrio… (View Comment):

    I found another source on semiconductor production, from the Semiconductor Industry Association, here. If accurate, it confirms my suspicion that the data from CNBC discussed in the OP includes only a small portion of total semiconductor production. Reading off the graph from the Semiconductor Industry Association story, for the latest year available (2020), overall market share is approximately:

    • 45% – United States
    • 20% – South Korea
    • 9% – Japan
    • 9% – Europe
    • 9% – China
    • 7% – Taiwan

     

    Yes, the US has a large base production for low end microchips produced on relatively old manufacturing technology with small wafers. Nearly all of the high-end processors used in computers and mobile devices are made in Taiwan. 

    This year’s processors are built on a 7nm scale process, next year’s will be a 5 nm process. I don’t think we have anything in the US that can produce on less than a 25 nm process, and Fabs for such tiny scales cost billions and take years to construct and outfit.

    • #14
  15. TBA Coolidge
    TBA
    @RobtGilsdorf

    An alternative is to make national quality standards for imports and set them so that the (I am pretty sure about this) higher Chinese failure rate will either drive them to produce a better product, or allow other countries to manufacture competitively. 

    • #15
  16. E. Kent Golding Member
    E. Kent Golding
    @EKentGolding

    I don’t think government subsidies make anything more efficient or competitive,   but having our major suppliers in Taiwan seems a touch risky.    I don’t trust Taiwan’s ability to defend themselves or our willingness or ability to defend them.

    • #16
  17. The Cynthonian Member
    The Cynthonian
    @TheCynthonian

    Tucker Carlson is discussing this bill on his Fox News show right now.

    • #17
  18. TBA Coolidge
    TBA
    @RobtGilsdorf

    btw, are we going to mine the materials as well? 

    • #18
  19. Chris B Member
    Chris B
    @ChrisB

    The Cynthonian (View Comment)

    Does this bill have a good chance of passage? If so, you’d think Intel’s stock would be up. It’s been flat or down (with the rest of the market) for months.

    I really don’t know.

    Intel has had some major stumbles in the last three years. They got stuck on a 14 nm node manufacturing process, and could not get their 10 nm process to work at production scale. Samsung and TSMC both went from trailing them in process scale to beating them by about 2 years.

    Intel finally got their 10 nm process to work, and named it “Intel 7” with a claim that it is just as good as their competitors’ 7nm process. Intel does have excellent design, which has made them competitive again, but they lost an enormous amount of market share in the Server and Enterprise processor space to AMD and Nvidia, and also  Amazon Web Services and Apple starting their own ARM based processor lines, all of which use TSMC for the manufacturing of their designs.

    Intel may have lost as much as $50-100 billion in future revenue just from loss of status as *the* high-end processor supplier.

    • #19
  20. Mark Camp Member
    Mark Camp
    @MarkCamp

    Jerry Giordano (Arizona Patrio…: My thought about the semiconductor bill advancing in Congress is that its primary purpose is to reduce our dependence on semiconductor imports from Taiwan, not China.  Again, this strikes me as a good idea.

    You have (or did, if you are now retired) local knowledge and expertise in the law and in the local conditions in your part of Arizona, which enables you to satisfy the demands of customers there for local legal services. And you have skin in the game.  If you make bad decisions, you will suffer the consequences.

    Those customers would be harmed if politicians were to shift the freedom to decide how legal services should be provided to those customers from you to them. The politicians lack the skills and knowledge, and they have no skin in the game.

    Do you have enough localized knowledge and expertise about the

    • the industry that produces products that use chips
    • the industry that produces chips
    • the ever-changing demands of the  consumers who buy products that contain chips
    • the ever-changing demands of the consumers and producers for all the products that they would not be able to buy if resources were taken away from other domestic industries, to allow increased domestic production of chips

    to know if it’s a better idea to buy chips from Taiwanese chip producers or from American producers?

    If it turns out that the law is not a good idea, what loss would the politicians who impose the law suffer? Do they have any skin in the game?

    I would say it’s a very bad idea, because this incremental shift from private toward state ownership of the means of production (central planning) would take the decision out of the hands of people who

    • have skin in the game
    • have the local industry knowledge and expertise needed
    • have, through the existence of market prices in the labor, natural resource, and capital goods markets, the non-local information needed

    to decide whether consumers would be better served by domestic or Taiwan production of chips.

    Only by allowing markets to operate–free enterprise–can we have any hope of getting it right.

    • #20
  21. Chris B Member
    Chris B
    @ChrisB

    Mark, you make a good case about why subsidies are a bad idea in general. On the other hand, we have a product (high-end microprocessors) that is seeing extraordinarily, prolonged, global demand that is only likely to increase. The product is crucial to the manufacture of critical business infrastructure, military, and consumer products. Lack of availability has already started causing major supply chain issues for the automotive industry. Something like 95% of all manufacturing for that product is either in Taiwan, South Korea, or China. If China decided to, it could completely cut off supplies of this product to the West.

    A pretty good case exists for subsidizing manufacturing of that product outside of China’s sphere of influence, and if you’re going to do that, why not do it here?

    • #21
  22. Mark Camp Member
    Mark Camp
    @MarkCamp

    Chris B (View Comment):

    Mark, you make a good case about why subsidies are a bad idea in general. On the other hand, we have a product (high-end microprocessors) that is seeing extraordinarily, prolonged, global demand that is only likely to increase. The product is crucial to the manufacture of critical business infrastructure, military, and consumer products. Lack of availability has already started causing major supply chain issues for the automotive industry. Something like 95% of all manufacturing for that product is either in Taiwan, South Korea, or China. If China decided to, it could completely cut off supplies of this product to the West.

    A pretty good case exists for subsidizing manufacturing of that product outside of China’s sphere of influence, and if you’re going to do that, why not do it here?

    I agree with you. National security is a separate justification not addressed by my argument.

    • #22
  23. David Foster Member
    David Foster
    @DavidFoster

    Chris B (View Comment):
    A pretty good case exists for subsidizing manufacturing of that product (high-end integrated circuits) outside of China’s sphere of influence, and if you’re going to do that, why not do it here?

    Same argument could be made for many other types of products, for example…pharmaceuticals and their precursor chemicals…electric motors….ships.

    Much better to craft legislation which addresses the negative incentives for locating manufacturing in the US in general
    rather than to draft inverse bills of attainder (inherently involving much log-rolling) for benefit of specific industries and sub-industries.

     

     

     

    • #23
  24. TBA Coolidge
    TBA
    @RobtGilsdorf

    David Foster (View Comment):

    Chris B (View Comment):
    A pretty good case exists for subsidizing manufacturing of that product (high-end integrated circuits) outside of China’s sphere of influence, and if you’re going to do that, why not do it here?

    Same argument could be made for many other types of products, for example…pharmaceuticals and their precursor chemicals…electric motors….ships.

    Much better to craft legislation which addresses the negative incentives for locating manufacturing in the US in general,
    rather than to draft inverse bills of attainder (inherently involving much log-rolling) for benefit of specific industries and sub-industries.

    Agreed. There is something perverse about paying people extra to make up for the money you continually take from them. I mean, sure it’s common, but it’s still perverse. 

    • #24
  25. Nohaaj Coolidge
    Nohaaj
    @Nohaaj

    The South Koreans have taken the initiative to be the “next world leaders” in high tech chip production.   Knowing their work ethic and drive, I predict they will succeed

    https://www.jakelectronics.com/news/south-korea-plans-to-build-the-world's-largest-semiconductor-industry-supply-chain

    • #25
  26. David Foster Member
    David Foster
    @DavidFoster

    Also…there is also the question of where the machines that make the chips are themselves made.  It’s a complex question, because there are many different pieces of equipment involved in the process and the equipment needs vary by chip type and quality….probably the most important single firm in the equipment market is the Dutch company AMSL.

    The US has been able to get the Dutch government to restrict to deny AMSL export licenses to China for machines capable of making the most advanced chips; there is apparently now a US initiative to also restrict some of the less-advanced equipment.

     

     

    • #26
  27. Mad Gerald Coolidge
    Mad Gerald
    @Jose

    The Cynthonian (View Comment):

    Does this bill have a good chance of passage? If so, you’d think Intel’s stock would be up.

    Paul Pelosi thought so.

     

    • #27
  28. kedavis Coolidge
    kedavis
    @kedavis

    Nohaaj (View Comment):

    The South Koreans have taken the initiative to be the “next world leaders” in high tech chip production. Knowing their work ethic and drive, I predict they will succeed

    https://www.jakelectronics.com/news/south-korea-plans-to-build-the-world's-largest-semiconductor-industry-supply-chain

    But where does South Korea get their raw materials from?

    • #28
  29. Mad Gerald Coolidge
    Mad Gerald
    @Jose

    Nohaaj (View Comment):

    The South Koreans have taken the initiative to be the “next world leaders” in high tech chip production. Knowing their work ethic and drive, I predict they will succeed

    https://www.jakelectronics.com/news/south-korea-plans-to-build-the-world's-largest-semiconductor-industry-supply-chain

    2nd paragraph: “Specifically, the South Korean government will work with related companies to build the world’s largest semiconductor industry supply chain in China by 2030-the “K-Semiconductor Industrial Belt“, and establish a collection of semiconductor production, raw materials, components, equipment and cutting-edge equipment. High-efficiency industrial clusters integrating, design, etc.”

    They’re not doing us any favors.

    • #29
  30. Brian Clendinen Member
    Brian Clendinen
    @BrianClendinen

    Jerry Giordano (Arizona Patrio… (View Comment):

    I found another source on semiconductor production, from the Semiconductor Industry Association, here. If accurate, it confirms my suspicion that the data from CNBC discussed in the OP includes only a small portion of total semiconductor production. Reading off the graph from the Semiconductor Industry Association story, for the latest year available (2020), overall market share is approximately:

    • 45% – United States
    • 20% – South Korea
    • 9% – Japan
    • 9% – Europe
    • 9% – China
    • 7% – Taiwan

     

    Taiwan dominates the high-end market.Aka the top of the line chips. Places like Russia and China are 15 to 20 years behind.  When it comes the lithograph machines. The machines that manufacture the chips. Which is pretty much a monopoly on the high end and is held by ASML Holding from the Netherlands. However, that is because of their R&D they have the only working EUV machines. This is what all the current generation of top-of-the-line aka (high-density chips) have to use to get that density. Even then ASML are as much an integrator as a capital goods firm,  they don’t own a lot of the tech. They have something like 700 suppliers who make their machines.  Their next two closest competitors in Japan are 5 or 6 years behind on tech. To set up a fab operation doing cutting-edge chips, cost billions of dollars.

    I get most of my info from Asianometry on Youtube. He does a lot of pieces on the semiconductor industry.

    • #30
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