The battle for chips self-sufficiency - the Chips and Science Act (August 2022)
Globalization has brought the world together, allowing the arbitrage of products & services.
National GeographicsdefineGlobalization as the following:
Globalization is a term used to describe the increasing connectedness and interdependence of world cultures and economies.
Globalization is a term used to describe how trade and technology have made the world into a more connected and interdependent place. Globalization also captures in its scope the economic and social changes that have come about as a result.
Globalization has led businesses to expand their operations internationally, taking advantages of lower labour costs, material costs, supply chain costs and to be closer to their target markets.
This has led some “strategic” industries like computer chips to be largely produced in Asia. Given the recent supply chain challenges, countries like America needs such critical/strategic industries to be in USA, without over-reliant on Asia for supplies.
The importance of Chips
Just like energy, in its various forms, chips have becomean essential input into production because of digitalisation, for most if not all economic activities. A lack of them can cause a severe disruption to production. The pandemic saw a sudden increase in demand for chips that could not be met in real-time.
This is an extract from a New York Times article published in May 2021 on the importance of chips in our daily living:
That changed during the coronavirus pandemic whenfirst bathroom rollsand then chips became scarce. Computer chips aren’t so disposable, but they are equally essential as electronic brains for products like smartphones, cars, airplanes and most modern appliances.Chip shortageshave stalled new car manufacturing, maderental cars harder to findand complicated business even for thedog washing industry.
Thus, US government rolled out the Chips and Science Act in August 2022 for fear that chips could be “weaponized” (used as a political or economical ransom) after they realized that the US is way behind in chips production.
US’s CHIPS and Science ACT
More details about the Chips and Science Act can be found in the White House link below:
Here is an extract from the White House website pertaining the Chips and Science Act:
The CHIPS and Science Act will:
- Bolster U.S. leadership in semiconductors.The CHIPS and Science Act provides $52.7 billion for American semiconductor research, development, manufacturing, and workforce development. This includes $39 billion in manufacturing incentives, including $2 billion for the legacy chips used in automobiles and defense systems,$13.2 billion in 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 percent investment tax credit for capital expenses for manufacturing of semiconductors and related equipment. These incentives will secure domestic supply, create tens of thousands of good-paying, union construction jobs and thousands more high-skilled manufacturing jobs, and catalyze hundreds of billions more in private investment.
The bill requires recipients todemonstrate significant worker and community investments, including opportunities for small businesses and disadvantaged communities, ensuring semiconductor incentives support equitable economic growth and development.
The Chips and Science Act is needful to ensure that America has access to key resources like chips so that the supplies (and supply chain) challenges during Covid19 would not happen again.
This is needful so that America can manufacture their own supplies of chips - a key resource in modern manufacturing without reliance on other countries. This move is strategic but needful in terms of self sufficiency. This will lead to research & development and new jobs being created. This should provide a boost for the US economy in the coming years. The building of these wafer factories require much investment and time.
This setup of the chips industry within the US will also imply the following:
- Manpower will need to be sourced locally to do these jobs in the new wafer plants. The manpower will require training.
- Materials will need to be sourced (locally and internationally) and brought to US for production.
- Machinese will need to be sourced (locally and internationally), set up, maintained within the US
- Research - there will be focus on chips with the hope of US assuming world leader in this field in the future. The technology of the chips evolve continually with them getting smaller, lighter and offering more processing power.
- Supply Chain network will need to be set up and this will include the transport, handling and storage of dangerous goods (DG).
- Regulations - this is something that the US government should revisit to ensure that the current regulations are adequate for the industry. Personally, there seems to be some over reaching to limit another’s country access to chips. This may lead to some geopolitical tension that includes Taiwan.
- Infrastructure - apart from good access to various inter-modal transport, there is a need to look into waste management. All industrial waste should be properly handled, disposed without harming the community and environment. Local water network, electrical grids, sewage and telecommunications will need to be upgraded to meet the increase in demand.
The tasks ahead would not be easy but self sufficiency of such resources is critical as chips’ importance continues to surge.
Unfortuntely, it is likely that these “made in USA” chips could end up being more costly if we look into the labour, material and supply chain costs. The US economy will need to beef up their supply chain resources as they are still short of 80,000 drivers since October 2021.
An aging workforce is partly to blame. The American Trucking Associations last October estimated the industry is short of 80,000 drivers.
For US to be self-sufficient in chips, it would take a couple of years. While we can anticipate success from this move, we are not certain that these “made in USA” chips can be priced competitively. This can end up with some inflationary impact though there are other benefits of job creation, GDP contribution from a more self reliant chips industry within the USA.
With the various restrictions imposed on China, it is not surprising for China to take similar measures to develop their own chip industry. The geopolitical fallout could have various short to mid term impact as the chips factories are still being constructed in USA.
This can also be seen as USA acknowledging the global power status of China and the gap they have in their own chips industry. I would prefer for more collaboration over restrictions from these 2 world powers. However, the lines have been drawn and hopefully, this would not become a “black swan” for the rest of the world.
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