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U.S. Aims to Boost Semiconductor Production With the CHIPS Act

August 3, 2022
CHIPs

[UPDATED 8/10/2022: CHIPS Act signed by President Biden]

This week, President Biden signed H.R. 4346, the CHIPS for America Act of 2022, which is designed to provide over $50 billion in appropriations aimed at driving massive industrial growth and innovation within the U.S. Semiconductor industry.

In an effort to define this key funding area, the U.S. Senate earmarked $52 billion to expand domestic semiconductor capacity, including a provision to provide $2 billion specifically for critical “mature node” semiconductor chips used in the automotive industry, in the U.S. Innovation and Competition Act (USICA) in June 2021. Now, the CHIPS for America Act provides specific program guidance for semi-conductor industry spending over the coming five years.

Chip shortages

Historically, semiconductor chips, or simply “chips,” have become scarce for a number of reasons, including regulatory issues, technological advancements and even natural disasters. The current chip shortage is no different and was caused, in part, by a reduction of the chip supply as a result of COVID-19, which severely impacted the national economies of a number of crucial chip manufacturers. In addition, since 2020, chip demand has spiked from certain technology advancements within the automotive, consumer electronics, and cryptocurrency industries as well as lifestyle changes by many Americans now working from home wanting not only more but also better household items. Currently, global demand for semiconductor chips is expected to be 10-30% greater than the present supply, according to BCC Research.

For instance, in early 2021, semiconductor manufacturers’ order fulfillment began to lag significantly, with large enterprises having to wait up to 17 weeks for a microcircuit, while many semiconductor manufacturers had to wait up to a year for semiconductor components or abandon projects entirely. While the supply shrunk and demand increased, some 30 major semiconductor producers hiked their prices by an estimated 10% -30%, which had a serious impact on both the availability and price of products using those chips (e.g., cell phones and televisions).

Complicating the increased demand is the semiconductor market’s unsustainable structure. Currently, many U.S. companies depend on a few Asian suppliers of silicon wafers in manufacturing chips. With the CHIPS for America Act, the U.S. legislature aims to increase domestic supply and reduce reliance on foreign manufacturing.

Turning the Tide

Compounding the current chip shortage, only a small number of chips are manufactured domestically. Over the last thirty years, U.S. production of chips has decreased dramatically, with now an approximately 12% of global semiconductor chips manufactured domestically – down from 37% in the 1990s. Facing this decline and other concerns, Congress drafted the CHIPS for America Act, which will provide requisite appropriations to implement currently authorized programs that resulted from previous bipartisan legislation contained in the National Defense Authorization Act (NDAA). House lawmakers passed the act in a 243-187 vote after the Senate approved the package on July 27, 2022.  The NDAA authorized the precursing CHIPS Act at the end of 2020, but it did not provide specific appropriations. The primary goal of these acts is both “to ensure the Congressional goal of promoting domestic competitiveness,” while also including safeguards aimed at growing domestic production.

Intel Support in Ohio

Congressional brinksmanship over the CHIPS for America Act has been a source of frustration for industry leaders like Intel, which is poised to invest more than $20 billion in new fabrication facilities near Columbus, Ohio. The Chips for America Act is crucial to industry leaders; despite canceling the July 22 groundbreaking ceremony, Intel CEO Pat Gelsinger stated that the company is now ready to move “full speed ahead” on a plan to build semiconductor factories in Central Ohio after Congress passed legislation.  “This is a critical step to support the entire U.S. semiconductor industry and to help ensure continued American leadership in semiconductor manufacturing and R&D,” Gelsinger further said in a statement. “Congress has done its part, and now we are going to do ours. I’m excited to put shovels in the ground as Intel moves full speed ahead to start building in Ohio.”  With the CHIPS for America Act, Intel has said it could bump its projected $20 billion investment to as high as $100 billion.

What’s in the Act: Creating Helpful Incentives to Produce Semiconductors (CHIPS)

The Act allocates more than $52 billion in subsidies and direct program funding to help companies research, design and manufacture semiconductors and provides a 25% tax credit for companies that build facilities in the U.S.

Direct Industry Assistance

The Department of Commerce will be the main agency administering these funds, providing manufacturing incentives amounting to $39 billion in financial assistance to “build, expand, or modernize domestic facilities and equipment for semiconductor fabrication, assembly, testing, advanced packaging, or research and development,” (including $2 billion for “mature semiconductors,” a priority for which broad congressional consensus was evident), and $6 billion in direct loans and loan guarantees to industry.

Research & Development Funding

The Act also includes $11 billion in funding (also administered by the Department of Commerce) to fund research and development (R&D) activities such as a new public-private partnership called the National Semiconductor Technology Center (NSTC), designed to invest in technological innovation and workforce training and development.

Other R&D-driven programs include:

  • A Federal R&D program designed to strengthen advanced assembly, test, and packaging capabilities (the National Advanced Packaging Manufacturing Program).
  • A partnership between government, industry and academia to research the virtualization of semiconductor machinery and the development and deployment of new training programs aimed at expanding the available workforce (the Manufacturing USA Semiconductor Institute).
  • And a new program funding for R&D through the National Institute of Standards and Technology (NIST) to advance measurement science, standards, material characterization, instrumentation, testing and manufacturing capabilities.

CHIPS for America Workforce and Education Fund

Two-hundred million dollars is allocated to “kick start development of the domestic semiconductor workforce,” working with the National Science Foundation to develop and oversee programs to meet the increasing demand for qualified domestic labor in this high-tech manufacturing sector.

Defending U.S. Industry

Within the Act, a new “CHIPS for America Defense Fund” allocates $2 billion for the US Department of Defense to implement the “Microelectronics Commons,” a national network for onshore, university-based prototyping, lab-to-fab transition of semiconductor technologies—including DoD-unique applications—and semiconductor additional workforce training.

The Defense fund is augmented by the “CHIPS for America International Technology Security and Innovation Fund,” which allocates $500 million to the US State Department and other agencies to support international information and communications technology security and semiconductor supply chain activities, including supporting the development and adoption of secure and trusted telecommunications technologies, semiconductors and other emerging technologies.

Enhancing Competitiveness of U.S. Wireless Technologies

The CHIPS Act also provides appropriations needed to implement the 2021 USA Telecom Act, which was aimed at shoring up the global telecommunications supply chain and limiting the growth of companies that are deemed to have close ties to the Chinese government.

CHIPS Act funds will be used to capitalize on U.S. software advantages, accelerating the development of an open-architecture model (known as OpenRAN) that would allow for alternative vendors to enter the market for specific network components. According to the OpenRAN Policy Coalition, CHIPS Act funding “is critical to the ongoing development and deployment of 5G and advanced wireless networks and will encourage continued innovation and competition in the telecommunications ecosystem.”

Addressing the need to “spur movement towards open-architecture, software-based wireless technologies, funding innovative, ‘leap-ahead’ technologies in the U.S. mobile broadband market,” the Act appropriates $1.5 billion to the National Telecommunications and Information Administration, in coordination with NIST and other agencies through a “Public Wireless Supply Chain Innovation Fund.”

Ohio Leads the Charge

The U.S. Senate, led by Republican Sen. Rob Portman and a bipartisan group of lawmakers, voted to approve the latest version of the CHIPS Act in the Senate with a 64-33 vote on July 26 and the House approved it shortly thereafter. Other Ohio members of Congress, such as Democratic Sen. Sherrod Brown and Democratic Rep. Tim Ryan, have continuously tried to work together to make this plan possible — with  many crediting the two for laying the groundwork.

While the economic impacts of these programs will take years to realize, the long-term economic impacts on this key sector (and the dozens of industries it supports) will have a dramatic impact on both national competitiveness and the ability of U.S. manufacturers to mitigate the risks of supply-chain breakdowns and dysfunctionalities for decades to come. Locally, Intel’s new facility will put enormous pressure on the booming Central Ohio economy, which already faces labor shortages and rapidly rising home prices. Meanwhile, the CHIPS Act provides significant new resources that have the potential of training new workers and providing new financial incentives for suppliers and value-chain players to enter this critical market.

For more information about how these and other public sector programs can help with your business, please contact KJK attorneys Ted Theofrastous (TCT@kjk.com; 216.736.7290); Samir Dahman (SBD@kjk.com; 614.427.5750) or Kyle Stroup (KDS@kjk.com; 216.736.7231).

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