The global semiconductor shortage, which began during the early stages of the COVID-19 pandemic, has caused an enormous amount of supply chain disruption in recent years. Semiconductors, or “chips” as they are often called, power almost all electronic devices today, and the shortage has resulted in less availability of smartphones, laptops, gaming consoles, medical devices, electric vehicles, and many other electronic products.
In an effort to avoid similar chip shortages in the future, a number of countries are currently making moves to boost domestic semiconductor manufacturing so that they aren’t as dependent on countries such as Taiwan — which currently produces around 90% of the world’s advanced chips — and South Korea. The US is one such country.
The US remains the undisputed global leader in semiconductor design thanks to “fabless” companies such as Nvidia, Qualcomm, and Advanced Micro Devices, which design chips, but do not manufacture them. However, it is lacking on the manufacturing front, due to a lack of “foundries” (companies that focus purely on semiconductor manufacturing such as Taiwan Semiconductor Manufacturing Company) and Integrated Device Manufacturers (companies that both design and manufacture chips such as Intel and Samsung). Today, the US only produces around 10% of the world’s chips (down from around 40% in 1990) and none of the most advanced chips. This is not ideal. Without chip manufacturing facilities on home soil, the country is vulnerable on a number of levels.
Semiconductor manufacturing: crucial to national security
While a potential chip-related shortage of consumer electronics across the US in the future could be a huge problem for the country, there’s a bigger issue at play here and that’s national security. This is because, today, all major US defence systems and platforms rely on semiconductors for their performance. Radar systems, satellites, fighter planes, drones, missiles, communication systems — they’re all dependent on chips. Without reliable access to state-of-the-art semiconductors, the country’s ability to defend itself and its allies would be compromised. So, the reliance on Taiwan for chips is a real risk from a defence perspective.
Amplifying the problem is the fact that China has emerged as a major strategic challenger to the US. It is investing heavily in its own military forces and has set a goal of building a “fully modern” military by 2027, based on areas of technology such as artificial intelligence (AI), quantum computing, hypersonics, and microelectronics. This has the US government very concerned, particularly now that China is looking to reclaim Taiwan.
As the Chair and Vice Chair of the National Security Commission on Artificial Intelligence (NSCAI) said last year: “We do not want to overstate the precariousness of our position, but given that the vast majority of cutting-edge chips are produced at a single plant separated by just 110 miles of water from our principal strategic competitor, we must re-evaluate the meaning of supply chain resilience and security.”
The cost of setting up a semiconductor manufacturing plant
So, it is clear that the US urgently needs more foundries and Integrated Device Manufacturers. However, the issue here is that building a semiconductor manufacturing plant is not easy. It can take between three to five years to fully set up a plant, and cost between $10 to $20 billion. This is why chip companies typically organise their activities around either design or manufacturing. By specialising in one of the two areas, they can be more efficient.
$53 billion in government funding
To incentivise chip companies to build plants on home soil, the US government has recently enacted the CHIPS and Science Act, also known as just the “CHIPS Act.” This is a historic bill that will channel a massive $52.7 billion towards domestic semiconductor manufacturing. It includes $39 billion in manufacturing incentives, $13.2 billion in research and development (R&D) and workforce development, and $500 million to provide for international information communications technology security and semiconductor supply chain activities. It also provides a 25% investment tax credit for capital expenses for the manufacturing of semiconductors and related equipment.
This bill should ultimately help strengthen US chip research and manufacturing, supply chains, and national security, and ensure that America remains a leader in the industries of tomorrow such as nanotechnology, clean energy, quantum computing, and AI.
Other countries are investing billions in chips too
It’s worth noting that the US isn’t the only country channelling a substantial amount of funding towards domestic chip manufacturing right now. Back in February, Europe — which relies heavily on chip production for its automotive and industrial industries — announced the European Chips Act in an effort to address semiconductor shortages and help the bloc become a technology leader. This will direct more than €43 billion towards chip manufacturing between now and 2030. Europe’s goal is to get companies such as Taiwan Semiconductor Manufacturing Company and Samsung to build manufacturing plants across the continent.
Meanwhile, in Japan, the government is set to support the Taiwan Semiconductor Manufacturing Company in building a new $7 billion chip plant. Construction is set to begin this year with production beginning by the end of 2024. This plant will supply chips to Japan’s electronic device makers and automotive companies.
What semiconductor stocks could benefit from the CHIPS Act?
This huge amount of funding set aside for domestic chip manufacturing in the US could potentially benefit many semiconductor companies. Some stocks that could get a boost from the CHIPS Act include:
- Intel. Intel — the world’s largest semiconductor company by revenue — recently committed $20 billion to build a chip manufacturing “mega-site” in Ohio. It plans to build at least two fabrication plants on the 1,000-acre site, where it will research, develop, and manufacture cutting-edge computer chips. It has the option to eventually expand to 2,000 acres and up to eight fabrication plants.
- Micron. Memory chip specialist Micron has announced a $40 billion investment in leading-edge memory manufacturing in the US. This investment alone will raise the US market share of memory chip production from less than 2% to up to 10% over the next decade.
- Qualcomm. Wireless technology powerhouse Qualcomm has announced a new partnership with GlobalFoundries that includes $4.2 billion to manufacture chips in an expansion of GlobalFoundries’ upstate New York facility. This will help it increase semiconductor production in the US by up to 50% over the next five years.
- Applied Materials. Applied Materials is the largest maker of tools for making semiconductors. Its engineering solutions are used to create virtually every new chip today. So, demand for its services could be high as companies reshore their operations.
- KLA. KLA’s process control equipment, which is used by the likes of Intel, Taiwan Semiconductor Manufacturing Company, and Samsung is absolutely crucial to leading-edge semiconductor production. Therefore, the company could play a major role in the build-out of US chip manufacturing plants.
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