The Semiconductor Wars

Explain it away as you will, but America has fallen behind in the semiconductor wars. Congress has just passed the Chips Act, designed to allow us to catch up, but it will take more than a bunch of money to overcome our deficits.

Steven Ratner explains the challenge clearly:

Worse, today the United States does not manufacture any of the highest-performing chips; 92 percent of those are produced by the Taiwan Semiconductor Manufacturing Company, 100 miles from mainland China. (The rest are manufactured in South Korea.)

 If China took control of Taiwan and cut off our chip supply, that would be economically devastating, akin to (or worse than) the loss of oil exports from a major Middle Eastern producer.

But, you will be thinking, we keep reading in the news that foreign semiconductor manufacturers are now building new plants in America:

In part as a result, Taiwan Semiconductor Manufacturing Company, the world’s biggest maker of advanced computer chips, has broken ground on a major plant in Phoenix and announced that it will increase its investment there to $40 billion; Intel has announced plans for a $20 billion facility outside Columbus, Ohio; Micron is building a fab (as chip factories are known) complex in Syracuse, N.Y.; GlobalFoundries is expanding in New York and Vermont; and Samsung is considering the construction of 11 facilities in Texas.

Good news, or inflated promises. Ratner offers a counterpoint:

For one thing, these new facilities are just a tiny first step. The output of the Phoenix facility will amount to only a single-digit percentage of TSMC’s total output. For another, TSMC has historically insisted on producing its most cutting-edge chips in Taiwan, at least partly to ensure that the United States, whose official policy toward Taiwan is one of strategic ambiguity, will nonetheless protect the island against any mainland aggression.

Worse yet, manufacturing in America is far more costly than manufacturing in Asia. Not only would the regulations slow down the process, but all told it cost more to manufacture here. Ergo:

Our ability to truly compete with Asia remains uncertain. In a recent submission to the Commerce Department, TSMC complained that the cost of the Phoenix facility would be much greater than its equivalent in Taiwan (partly because of regulatory requirements), wage costs substantially higher, productivity lower, construction delays more likely and taxes higher.

The founder of Taiwan Semiconductor is not optimistic about the chances for building in America:

 Morris Chang, the 91-year-old founder of TSMC, who was born in China and made his early career in the United States, acknowledged the national security considerations while calling America’s semiconductor efforts “a wasteful and expensive exercise in futility.” He noted that his company has had a smaller facility in Oregon for 25 years and chips produced there cost 50 percent more than those it manufactures in Taiwan.

So, we are setting out to compete with Asia, even with Asian democracies, and we seem to be holding a losing hand.

Onshoring is a great idea. We know that we can do it. But, are we willing to pay for it? If everything containing semiconductors goes up in price-- that is called inflation-- will we still be beating the drums of onshoring? That is the question.