In the short term, the Chinese semiconductor industry can respond in two ways, while in the long term, it needs to build strength to catch up with advanced process technologies.
By | Caijing reporters Chen Yifan and Gu LingyuEditor | Xie LirongOn August 9 local time, U.S. President Biden signed the CHIPS and Science Act, marking the culmination of nearly three years of interest negotiations, and this significant legislation for the development of the U.S. domestic chip manufacturing industry has officially become law.Several senior semiconductor industry professionals believe that this round of U.S. actions will, in turn, accelerate the domestic production process of China’s semiconductor industry, and China can further layout in mature processes to respond.The CHIPS and Science Act is divided into three parts: Part A is the “2022 CHIPS Act”; Part B is the “Research, Competition, and Innovation Act”; Part C is the “2022 Supreme Court Security Funding Act”.The act primarily supports the semiconductor manufacturing sector, providing $54.2 billion in supplemental funding for the semiconductor and wireless industries, of which $52.7 billion is specifically allocated to the U.S. semiconductor industry. The act also includes a 25% investment tax credit for semiconductor manufacturing and semiconductor manufacturing equipment.In the next decade, the U.S. government will allocate $200 billion to promote scientific research in areas such as artificial intelligence, robotics, and quantum computing.For leading semiconductor companies, the signing of the act was not unexpected. Intel CEO Pat Gelsinger commented that the chip act could be the most important industrial policy enacted by the U.S. since World War II, aimed at reversing the trend of the U.S. share of global chip manufacturing falling from 38% in 1990 to 10%.“As long as you open your eyes, you can see this matter and its impact,” a multinational company executive told Caijing reporters. They felt such signs years ago and made early layouts.Since the U.S. had not previously enacted similar industrial policies, the passage of this act not only has a huge impact on the U.S. and global semiconductor industry but also represents a concrete manifestation of the U.S. strategic competition with China. Beyond the chip act, the U.S. is also promoting the formation of a Chip4 alliance with Japan, South Korea, and Taiwan.Many semiconductor industry professionals told Caijing reporters that compared to this act, the impact of the Chip4 alliance, if realized, could be even greater.
How to Spend $52.7 Billion
This long-awaited act will provide $54.2 billion in supplemental funding for the semiconductor and wireless industries, including $52.7 billion specifically for grants and incentives targeting the U.S. semiconductor industry.How will this $52.7 billion be spent?First, the Department of Commerce will provide $39 billion in financial assistance to incentivize investment in semiconductor facilities, with $6 billion available for direct loans and loan guarantee costs.Another $11 billion is allocated for advanced semiconductor R&D, which includes multiple programs, such as establishing a National Semiconductor Technology Center (NSTC), a National Advanced Packaging Manufacturing Program, and other R&D and workforce development programs.Additionally, $200 million is allocated for the U.S. Workforce and Education Fund to cultivate semiconductor talent; $2 billion is for the U.S. Chip Defense Fund to support the transformation of laboratory research results; and $500 million is for the U.S. Chip International Technology Security and Innovation Fund, aimed at establishing a secure and reliable semiconductor supply chain.Besides financial grants, this act also includes a 25% investment tax credit to offset expenditures on semiconductor manufacturing and equipment.Among these investment tax credits, one provision states that if the recipient engages in significant transactions involving substantial expansion of semiconductor manufacturing capacity in China or other relevant foreign countries, it will result in the loss of the credit.This policy will take effect on December 21, 2022.“In the past, the U.S. government has always claimed that it has no industrial policy, and this act is a very typical industrial policy,” said Li Wei, a professor at the School of International Relations at Renmin University of China and director of the Center for Economic Diplomacy Research.
U.S. Government Considerations
In recent years, the ongoing “chip shortage” has highlighted the decline of U.S. domestic manufacturing. One of the important goals of this chip act is to revitalize the U.S. domestic chip manufacturing industry.The semiconductor industry originated in the U.S., with key segments including design, equipment, materials, packaging, and manufacturing. Since 1980, the semiconductor industry has gradually moved towards global division of labor. However, the U.S. still holds an absolute advantage in semiconductor design. According to third-party data analysis firm IC Insights, U.S. semiconductor IC design companies accounted for 68% of the global semiconductor market share in 2021. Companies like NVIDIA, AMD, Qualcomm, and Xilinx dominate the global CPU, GPU, and FPGA markets and have established strong patent barriers. It is not easy for chip design companies from other countries to bypass U.S. firms.In the semiconductor equipment sector, U.S. companies also lead the market. In the 2017 SEMI statistics of the top 12 semiconductor equipment manufacturers globally, U.S. firms occupied three positions. The global leader in photolithography, ASML from the Netherlands, also has strong U.S. capital backing. In 2020, U.S. capital groups and BlackRock held nearly a quarter of ASML’s shares, most of which have voting rights. This allows the U.S. to directly participate in some of ASML’s decisions, such as whether to sell the most advanced photolithography equipment to China.In key areas such as semiconductor design and equipment, the U.S. still holds an absolute advantage; however, in the manufacturing segment, the global semiconductor manufacturing focus is gradually shifting towards Japan, South Korea, and China.Against this backdrop, U.S. domestic semiconductor production and manufacturing have relatively declined.According to market laws, the capital-intensive and talent-intensive chip industry will ultimately form an industrial cluster in East Asia. Currently, the U.S. government is unwilling to see this happen.In recent years, the U.S. has been promoting the reshaping of its domestic chip supply chain. In 2020, the world’s largest wafer foundry, TSMC, established a factory in Arizona, using 5nm advanced process technology, with an investment of about $12 billion. Samsung also announced plans to establish a factory in the U.S. in May this year. Intel, which has always followed the IDM model (IDM refers to a vertically integrated industry chain model that includes chip design, manufacturing, packaging, testing, and sales), also announced the establishment of a wafer foundry in Arizona.Micron Technology, one of the global memory giants, stated in a statement on August 9: “With the anticipated funding policies from the CHIPS and Science Act, this investment will enable the U.S. to have the world’s most advanced memory manufacturing technology.” The company stated that production will begin in the second half of 2025, ultimately creating up to 40,000 new jobs in the U.S., with Micron generating 5,000 new technical and operational positions.On August 8, Qualcomm and the foundry GlobalFoundries announced a new partnership, which includes Qualcomm providing $4.2 billion in chip manufacturing funding for the expansion of GlobalFoundries’ northern New York factory. Qualcomm also announced plans to increase U.S. semiconductor production by 50% over the next five years.Several senior chip R&D professionals told Caijing reporters that the U.S. will ultimately be able to establish a high-end domestic chip supply chain, but the process may not be smooth, mainly because the U.S. does not have the advantageous soil for developing semiconductor manufacturing.TSMC founder Morris Chang previously mentioned that Taiwan’s advantages in wafer manufacturing include a large number of dedicated and skilled engineers, technicians, and operators who are willing to engage in manufacturing. In contrast, U.S. manufacturing is no longer attractive, making it difficult to find willing and excellent engineers for the manufacturing sector. Additionally, Taiwan’s geographical location and the industrial clusters formed in Hsinchu, Taichung, and Tainan are something the U.S. cannot currently replicate.The new act may stimulate more professionals to enter the semiconductor industry, but the formation of industrial clusters clearly requires more time.For Intel, which has always followed the IDM model, a senior chip R&D professional stated that Intel’s technology is strong, but its costs are too high, and its factory efficiency and cost control are not as strong as TSMC. Transitioning to a foundry model will also take time. Foundry and IDM are two entirely different business models.This act plays an important guiding role for the U.S. semiconductor industry. After all, whether for the entire semiconductor industry or for companies, over $50 billion is just a drop in the bucket, especially since this amount needs to be distributed among different companies. A senior semiconductor industry professional told Caijing reporters that what is more important are local government tax incentives, various federal government grants, and investment funds, which together constitute the main components of the U.S. semiconductor industry development.One provision of this act states that companies receiving federal funds are prohibited from significantly increasing advanced process chip production in China for ten years. Companies that violate this ban or fail to rectify the violation may be required to repay the federal government’s subsidies in full.Li Wei believes that the U.S. is forcing chip companies to choose sides between China and the U.S. through this act, reflecting the U.S.’s desire to support domestic chip manufacturing while simultaneously suppressing China’s industrial upgrade, which is one of the main methods of U.S.-China strategic competition.He told Caijing reporters that whether it was the various means used to restrain Japan’s semiconductor industry in the 1980s or the recent strong suppression of Chinese high-tech companies in the semiconductor field, it reflects the use of technology control, financial control, and market control as strategic tools to maintain U.S. hegemony in the global semiconductor industry.He believes that semiconductors are a battleground for U.S.-China industrial and technological competition, as well as for the entire great power strategic competition. The U.S. will continue to strengthen its capabilities in technology control, financial control, and market control while striving to avoid any signs of hegemonic decline in this strategic industry through both domestic and foreign policies.On one hand, the U.S. is accelerating the return of the industry through the cooperation of the political and business sectors, revitalizing domestic semiconductor manufacturing capabilities, further upgrading semiconductor R&D capabilities, and striving to reduce its dependence on overseas semiconductor supply chains to avoid “hollowing out” of the semiconductor industry; on the other hand, the U.S. is actively constructing a semiconductor industry alliance that excludes China through economic diplomacy, attempting to leverage the strength of its allies to expand its industrial power’s influence, ensuring its supply chain security while preventing the rise of China’s semiconductor industry.Compared to the broad suppression methods of former President Trump, Biden’s “small courtyard high wall” technology policy is more “precise,” but the overall direction of the policy towards China will not change. Before the signing of this chip act, the U.S. Department of Commerce had already notified U.S. equipment manufacturers regarding the licensing for exporting 14nm or even more advanced equipment to China. The 14nm process is currently the most advanced process that mainland China can achieve.
China’s Two Response Strategies
Several senior semiconductor industry professionals believe that this round of U.S. actions will, in turn, accelerate the domestic production process of China’s semiconductor industry, and China can further layout in mature processes to respond.Due to supply chain security considerations, many Chinese chip design companies have shown a trend of prioritizing domestic suppliers in recent years. Design companies are seeking to collaborate with foundries to co-develop production lines, which has subsequently driven the domestic equipment market. The response of China’s semiconductor industry chain has been ongoing for several years.Previously, several employees from domestic equipment manufacturers and component suppliers told Caijing reporters that without a large number of customers, equipment and products would not have the opportunity for continuous rapid iteration, making it difficult to develop. In the past two years, this situation has been changing, with a significant increase in the bidding rate of domestic equipment. This has provided a good environment for technological improvements for domestic equipment manufacturers.A research and development head from a domestic component manufacturer told Caijing reporters that in the past, they supplied MOCVD equipment to Zhongwei Semiconductor. MOCVD is an important device in LED manufacturing, with procurement costs generally accounting for more than half of the total investment in LED production lines. Now, they not only have entered the supply chain of Sanan Optoelectronics but also supply to a leading MOCVD manufacturer in Germany.Increasing layout in mature processes is another path chosen by Chinese enterprises. 28nm is generally considered a dividing line, with processes of 28nm and below referred to as “advanced processes”; those above 28nm are referred to as “mature processes”. (Note: 28nm is sometimes also classified as a mature process). Electronic products that require advanced processes mainly include smartphones, while chips needed for other electronic devices, such as 5G RF chips, Bluetooth chips, wearable devices, fingerprint chips, and automotive chips, mostly fall within the mature process category.According to third-party data agency IBS, in 2020, the market share of 28nm and above processes in the semiconductor foundry market accounted for about two-thirds. In the next five years, the market for advanced processes will continue to expand, but the market share of mature processes will remain no less than 50%. This presents broad opportunities for China’s semiconductor industry.As more design companies choose to iterate products with mainland China’s foundries, a virtuous cycle will form. One reason for the slow development of mainland China’s chip foundries is the lack of customers and their joint completion of the trial-and-error and upgrade process.“Accelerating domestic production is a necessity, and it is also a good approach,” a research and development expert from a chip foundry stated.
Creating Markets Outside of China
This act may also lead to benefits for regions and countries that are relatively neutral and can radiate business to the Chinese market.According to third-party data consulting firms BCG and SIA, the final consumption of the Chinese market accounts for 24% of global chip products, comparable to the largest demand market, the U.S. If we add the chips purchased by China that are manufactured into products and then exported globally, this market size rises to 35%. This is a point that no semiconductor industry chain company can ignore. From a business perspective, they need to layout close to their customers. However, currently, commercial factors are intertwined with political factors, requiring a re-evaluation of investments and layouts.“This issue needs to be viewed from a global perspective,” a semiconductor industry insider stated. If viewed from the perspective of a semiconductor company CEO, “entering the Chinese market does not mean that investment in China is the only method.” For example, he recently found that Singapore is becoming a hot investment destination due to its proximity to the Chinese market, its foundation for developing semiconductors, and its favorable policies for promoting technological innovation. Especially in the context of increasing geopolitical risks, this geographical advantage becomes even more pronounced.In the 1990s, the Singapore government promoted the localization of the semiconductor industry. In 1991, Singapore established the Institute of Microelectronics (IME), which was sponsored by the Singapore government and national universities, engaging in research and development in the microelectronics field, with some development projects in collaboration with enterprises and others directly serving enterprises. By the late 1990s, Singapore had established a relatively complete semiconductor industry ecosystem, including IC design, wafer foundry, packaging, and testing.Over the past few decades, global semiconductor giants such as Infineon, STMicroelectronics, and Micron have chosen to set up factories in Singapore. According to statistics from the Singapore Semiconductor Industry Association, the semiconductor industry is the fastest-growing part of Singapore’s electronics sector, with a 30% year-on-year increase in output value in 2021. In 2018, the Singapore Semiconductor Industry Association stated that Singapore accounted for about a quarter of the world’s semiconductor equipment export share.One exaggerated statement is that now in Singapore, one could “make money with their eyes closed.” Many multinational companies also suggest that the enterprises they invest in can set up factories in Singapore.
Editor | Xiao ZhenyuThis article is an original piece from Caijing magazine and may not be reproduced or mirrored without authorization. For reprints, please add WeChat: caijing19980418