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USA prepares billion-dollar investment in semiconductor industry

New legislation aims to alleviate America’s dependence on Asian supply chains

GlobalFoundries semiconductor production cleanroom, in the United States


US President Joe Biden signed a bill in early August that will allocate hundreds of billions of dollars to the research, development, and domestic manufacture of semiconductors, an essential element for processing and storing data in various electronic components used in smartphones, TVs, autos, and internet of things devices. The goal is to revitalize the domestic semiconductor industry and alleviate US dependence on foreign supply chains.

The Chips & Science Act took more than a year to move through Congress but ended up achieving broad support from both Democrats and Republicans. The bill authorizes investments of more than US$200 billion over the next five years. A total of US$54.2 billion will go to subsidize the construction, expansion, and modernization of industrial parks aimed toward producing some of the most advanced chips in the world. Of this amount, US$39 billion will be applied to companies that invest in the research, development, and production of semiconductors, or in materials and equipment used in their manufacture.

The Department of Commerce will be charged with selecting which companies will receive the money, as well as with monitoring these companies’ investments. To apply for the funds, companies must demonstrate the long-term economic viability of their proposals and the benefits they would bring to the regions in which they are to be implemented, such as investments in infrastructure and workforce improvement or the ability to attract new suppliers and customers. The challenge for administrators will be to ensure that the funding leverages investments that manufacturers already planned to make, rather than just replacing them with a taxpayer-funded alternative.

The new legislation will also grant tax credits to companies that invest in semiconductor production equipment or the construction of new facilities. Conglomerates like Intel, which is building two factories in Arizona and two more in Ohio, are likely to benefit the most. The recipients will not be permitted to make new investments in high-tech semiconductor production in competing countries for the next ten years. If they break this stipulation, they will have to return the funding.

“It’s a bold wager, which reinforces previous initiatives aimed at stimulating the domestic manufacture of semiconductors critical to the competitiveness and national security of the United States,” wrote economist and engineer Carlos Américo Pacheco, director-president of the FAPESP Executive Board in an article published in August in the financial newspaper Valor Econômico. “This action shows that active industrial policies—some with familiar faces—will once again be the order of the day.” The pandemic exposed the supply-chain vulnerabilities in the semiconductor market and the Ukraine war reinforced the message. “But the big motivation is the growing rivalry between China and the United States.”

Since the 1990s, the United States has lost ground in semiconductor manufacturing, while countries such as China, South Korea, Japan, and Taiwan have been increasing capacity by building their own factories and offering tax incentives for foreign companies to export their production. Currently, almost 70% of the world production of integrated circuits is concentrated in these four countries.

Alexandre Affonso

The strategy led many US companies to invest in so-called fabless manufacturing, focused only on chip design. “Instead of dominating the entire production, the fabless approach focuses on the electrical schematics and designing the circuits printed on the chips, while outsourcing the other steps, such as manufacturing the wafers [ultra-thin silicon disks that form the semiconductor substrate] and final assembly, to Asian companies,” explains chemist Elson Longo. Professor emeritus at the Federal University of São Carlos (UFSCar), Longo also directs the Center for the Development of Functional Materials, one of the Research, Innovation, and Dissemination Centers (RIDC) funded by FAPESP.

Data from the Semiconductor Industries Association in the United States (SIA) indicate that the US share of global chip manufacturing has dropped from 37% to 12% over the last three decades. Meanwhile, between 2019 and 2021, demand for semiconductors grew by 17%. Bottlenecks triggered by the pandemic have led to shortages and soaring prices for integrated circuits, causing US companies that relied on these components for manufacturing their products to slow down or halt production, hampering the nation’s economic growth and exacerbating inflation.

The automotive industry has been one of the sectors most heavily impacted by the pandemic. In February 2021, General Motors had to close one of its Kansas plants. During the same period, Mercedes-Benz began stockpiling chips for its more expensive models and stopped producing the cheaper ones, while Porsche warned dealers in the United States that customers would have to wait up to three months to buy their cars due to a lack of the chips used to monitor tire pressure. It’s estimated that the price of used cars rose 37% in 2021, while US inflation reached the highest levels in the last 40 years. European and Brazilian automakers also suffered. The shortage of semiconductors in Brazil caused 14 of the 59 auto manufacturing plants across the country to reduce their levels of production, according to the National Association of Automotive Vehicle Manufacturers (ANFAVEA).

The Chips & Science Act triggered reactions internationally. At a press conference in Beijing in August, Chinese Foreign Ministry spokesman Wang Wenbin criticized the new law, categorizing it as “protectionist” and an example of “economic coercion,” according to China Daily. On the same day, representatives of the China Council for the Promotion of International Trade and the China International Chamber of Commerce issued a joint statement, released by the Global Times, adding that the legislation “will intensify geopolitical competition in the semiconductor industry and impede global economic recovery and the growth of technological innovation.” According to The Oregonian newspaper in Portland, Oregon, politicians such as Democratic Senator Bernie Sanders also opposed the law, saying the government should not be giving public money to companies that are already extremely profitable.

It’s difficult to know what the impact of the new legislation will be or whether it will be able to create a competitive manufacturing base, since US companies didn’t stop investing in the sector due to a lack of resources, but because it’s cheaper to transfer production to Asian countries. Furthermore, the new legislation has a long-term strategic component that involves the entire production ecosystem that depends on semiconductors. Namely, because the US government will also be increasing investments in research and development (R&D) through its science-funding agencies, such as the National Science Foundation (NSF), to accelerate the development of artificial intelligence technologies, quantum computing, advanced manufacturing, 6G communications, energy, materials science, and more. Part of the funding will be used to train human resources in the areas of science, technology, engineering, and mathematics (STEM), with the goal of improving the nation’s workforce so that it can support the manufacture of new chips in the future.

The United States is not alone in moving in this direction. Several countries are launching incentive packages to open more semiconductor factories. In February, the European Commission said it would be investing €43 billion in its semiconductor industry. In August, South Korea announced that it will introduce two bills in the coming months to further strengthen the country’s competitiveness in the chip industry.

Demetrius Freeman / The Washington Post via Getty ImagesUS President Joe Biden at the signing ceremony for the new legislation, in the White House Garden, in Washington, DCDemetrius Freeman / The Washington Post via Getty Images

Brazil has also been active on this issue. Since 2007, the nation has maintained its Incentive Program for Technological Development of the Semiconductor Industry (PADIS), which waives the import tax to reduce costs for the acquisition of raw materials, machinery, and equipment used in the production of integrated circuits. The program would have ended earlier this year but was extended for another five years through Law No. 14,302. In practice, however, the effects of this measure are limited, since, with the global supply scarcity there aren’t any suppliers from whom to buy the necessary raw materials for production, such as wafers, with or without import taxes.

“At the moment, we’re waiting for the publication of the Provisional Measure that will implement the Brazil Semiconductor Plan, which will provide medium- and long-term measures for developing the nation’s semiconductor sector,” says electronic engineer Rosana Casais, director of the Brazilian Semiconductor Industry Association (ABISEMI). The subject has been under discussion since 2021 within the scope of the Made in Brazil initiative, coordinated by the Ministry of Economy. The plan aims to increase the country’s share in the world semiconductor market—valued at US$470 billion—from 2% to 4% over the next two decades, via tax exemptions throughout the production chain, R&D funding, stimulation of domestic demand, a special customs regime, and human resources training.

The Brazilian industry today focuses primarily on the final stages of semiconductor production, that is, on the thinning, cutting, encapsulation, and testing of these components beginning at the wafer manipulation stage. The wafers themselves are imported, mostly from South Korea and Taiwan. For Longo, from UFSCar, “it’s important for Brazil to master the other links in the production ecosystem to achieve technological consolidation and reduce our external dependence.”

The country has even become an investor in specific companies to fill this gap. In 2008, it created the Center of Excellence in Advanced Electronic Technology (CEITEC), a public-private partnership headquartered in Porto Alegre, Rio Grande do Sul. With the capacity to produce around 20 million chips per month, until 2018 CEITEC had in its portfolio seven low-complexity integrated circuits, used for identifying animals, people, and vehicles, and for inventory management and asset tracking, among others (see Pesquisa FAPESP issue nº 266).

In 2020, however, the government decided to liquidate the company and sell its assets to the private sector. According to the Ministry of the Economy, in its best year, the enterprise generated revenue of R$7.8 million, but had sustained average operating expenses of R$80 million per year since its creation. The difference was covered by the National Treasury. The NGO chosen to take over the state-owned company was the Association for the Promotion of Excellence in Brazilian Software (SOFTEX), but the Federal Audit Court (TCU) suspended the liquidation. The TCU had been expected to reconsider the case in August of this year, but the court postponed the vote. Minister Vital do Rêgo’s request for a review establishes a period of 30 days to put the matter back on the agenda.

According to Rosana Casais, from ABISEMI, creating a “minimum viable capacity” for producing wafers would be an important step for Brazil from a scientific, economic, and geopolitical point of view. “Brazil occupies a prominent position in the region, considering the framework of its sectoral policies and the technologies and capabilities we’ve already developed, in combination with an energetic, growing consumer market,” she says. “The other Latin American countries, by comparison, don’t have developed semiconductor industries or any type of local production, resulting in great opportunities for Brazil.”

However, it will not be an easy task. The manufacture of modern chips involves more than a thousand steps and requires intellectual property, tools, and raw materials from suppliers around the world. “It will take years of investment for Brazil to be able to reverse its external dependence and, even so, it won’t be self-sufficient in producing integrated circuits, given the complex value chain involved in their production,” says Casais.