How The CHIPS Act Could Affect The U.S. And Your Business

Semiconductors have evolved from being devices found only in advanced electronics to being integral to virtually every electronic device on which companies rely. From the trucks that deliver our products and the computers that we use to send emails and track sales, down to the coffee machine in the break room, businesses cannot escape some relationship to semiconductors. The chip industry trickles down into almost all aspects of the U.S. economy, including electronics vital to national security, such as defense, cybersecurity, healthcare and domestic energy industries. To help encourage investment in the U.S. semiconductor industry, President Biden signed the $50-billion-plus CHIPS Act into law in August of 2022.

There are several factors that likely contributed to the passage of the CHIPS Act:

1. Covid lockdowns caused worldwide chip manufacturing to slow in 2020, while simultaneously skyrocketing sales in work-from-home electronics, virtual learning and healthcare industries, exacerbating a supply/demand imbalance.

2. The U.S. share of global semiconductor manufacturing has dropped from 37 percent to just 12 percent since 1990. Increasing labor costs and regulation have made it approximately 25-50 percent more expensive to construct and operate a semiconductor facility in the U.S. compared to overseas.

3. Today, 75 percent of the world’s chip manufacturing is concentrated in East Asia. Investment-attracting policies coupled with attractive manufacturing wages have caused this area of the globe to dominate global chip production.

The CHIPS Act is a bold play by the U.S. government to attract chip manufacturing investment to the U.S. and alleviate our dependence on East Asian chips. The cornerstone of the CHIPS Act is the “Advanced Manufacturing Tax Credit” (AMTC) of 25 percent of depreciable property of any “advanced manufacturing facility” associated with semiconductor production. Additionally, projects that qualify for CHIPS Act funding will also receive “coordinated permitting” between federal agencies to speed up the often one-year-plus permits necessary to begin construction on manufacturing facilities.

The $52 billion CHIPS Act is predicted to stimulate over $140 billion in direct investments before the construction cutoff date. By comparison, South Korea recently offered up to 50 percent in investment tax credits to new semiconductor facilities, spurring over $151 billion in investment commitments between now and 2030 from a single large chip producer. Such government incentives and favorable operating structures have helped catapult South Korea to be the No. 2 global producer of non-memory semiconductors and No. 1 in memory semiconductors.

Likewise, Taiwan sits securely in the No. 1 global position for overall semiconductor production, responsible for approximately 63 percent of global chip production between 2020 and 2021. While Taiwan has not doled out large tax incentives as readily as South Korea, the government did partake in spurring the creation of multiple semiconductor companies in the 1980s, and then housing them in a dedicated “science park.” Similar to Silicon Valley tech companies, this cluster of small chip makers competed, innovated and eventually grew into some of the largest semiconductor companies in the world. In 2020, Taiwan’s largest chip producer has grown to command a 54 percent share of the global semiconductor manufacturing market, the largest in the world by far. Considering the already $60 billion investment announcements in chip facilities in 2022 thus far and the historical success of tax incentives to the semiconductor industry, it is expected that the CHIPS Act will increase the U.S.’s global share of semiconductor production and reduce U.S. reliance on foreign chips.

Such a step-change expansion of the U.S. semiconductor manufacturing industry over the next 5 to 10 years may have transformational impacts on the states and communities that receive wafer fab investments. Growth in technical talent development, expansions in infrastructure, responses by academia to meet the demand for specialized degrees and movement by semiconductor industry suppliers are just a few potential examples of local impacts.

If you believe your business may qualify for CHIPS Act funding, keep an eye out for government rules, guidelines and updates on how to qualify and ensure that your overseas operations do not affect your eligibility. As new production facilities ramp up in the coming years, we may expect to see the global chip shortage ease. Leaders should understand how specific types of semiconductors operationally and financially affect their business, closely follow current and projected supply, and prepare for at least some degree of improvement over the pandemic-induced global chip shortage.