Countering China Supply Chains, US Bill Seeks to Boost Domestic Production of Electronic Chips

Semiconductors on a circuit board that powers a Samsung video camera at a Samsung media and analyst event in San Jose, Calif., on March 23, 2011.  (Justin Sullivan/Getty Images)

Both houses of Congress have tabled new legislation to boost domestic production and development of semiconductors, which are chips that power everything from smartphones, computers to missiles systems.

The move comes as the U.S. administration seeks to reduce its reliance on foreign supply chains, especially those in China.

“Ensuring our leadership in the future design, manufacturing, and assembly of cutting edge semiconductors will be vital to United States national security and economic competitiveness,” said Rep. Michael McCaul (R-Texas), in a press release.

“As the Chinese Communist Party (CCP) aims to dominate the entire semiconductor supply chain, it is critical that we supercharge our industry here at home,” he said.

The bill would require that the secretary of commerce create a $10 billion federal program to match incentives offered by state and local governments to companies for constructing semiconductor manufacturing plants in the United States.

Companies would also be entitled to tax benefits in the form of refundable investment tax credits (ITC) for expenses related to purchasing semiconductor equipment or building manufacturing facilities. The ITC rate would be 40 percent through 2024, 30 percent in 2025, and 20 percent in 2026.

Additionally, the bill would set aside $12 billion in research and development funds for various federal agencies. For example, the National Science Foundation (NSF) would receive $3 billion to implement basic research programs.

A $750-million trust fund over ten years would also be established for activities such as aligning U.S. policy on developing microelectronics with those of foreign government partners.

Named the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act, it was introduced by John Cornyn (R-Texas) and Mark Warner (D-Va.) in the Senate on June 10. According to the press release, McCaul and Rep. Doris Matsui (D-Calif.) will introduce the House version on June 11.

If passed, the U.S. president would be required to establish a subcommittee on semiconductor leadership through the National Science and Technology Council, to ensure U.S. leadership in semiconductor technology and innovation.

“This legislation would help stimulate advanced semiconductor manufacturing capabilities domestically, secure the supply chain, and ensure U.S. maintains our lead in design while creating jobs, lowering our reliance on other countries for advanced chip fabrication, and strengthening national security,” Cornyn said in the press release.

U.S. trade body Semiconductor Industry Association (SIA) welcomed the new bill in a statement on June 10.

“The U.S today accounts for only 12 percent of global semiconductor manufacturing capacity,” said Keith Jackson, SIA chairman and president and chief executive officer of U.S. firm ON Semiconductor.

Jackson added that the bill would allow the United States to “remain the world leader in chip technology, which is strategically important to our economy and national security.”

According to SIA, U.S.-based semiconductor firms, which primarily do research and development, design, and process technology, have the largest global market share, with 47 percent in 2019. South Korea comes in second at 19 percent, followed by Japan and the European Union at 10 percent each, Taiwan 6 percent, and China 5 percent.

But in terms of manufacturing, there are three companies in the world capable of producing the fastest and most advanced chips: U.S. firm Intel, South Korean tech giant Samsung, and Taiwan-based TSMC, the world’s biggest contract chipmaker.

Intel has six chip plants: three in the United States, one in Ireland, another in Israel, and one in Dalian city, China.

In May, TSMC announced a plan to build a $12 billion manufacturing plant in Arizona.

Although China lags behind in semiconductor manufacturing capabilities—with China’s chipmakers at least two generations behind TSMC—some parts of the supply chain are based in China. For example, TSMC and Samsung both have chipmaking factories in China.

China, which is heavily reliant on foreign imports for semiconductors, had set a target for domestically producing 70 percent of its semiconductor needs by 2025, under its ambitious industrial policy “Made in China 2025.”

But China is unlikely to fulfill those ambitions. According to estimates in a May report by Arizona-based semiconductor market research company IC Insights, China’s domestic semiconductor production would only reach 20.7 percent in 2024—about one-third of its 70 percent target. China’s domestic production stood at 15.7 percent in 2019.

IC Insights pointed out that China-based companies only produced $7.6 billion (38.7 percent of production) worth of semiconductors, while the remaining $11.9 billion (61.3 percent) of chips were produced by foreign companies such as TSMC, Samsung, Intel, and Korean chipmaker SK Hynix that have factories in China.

“IC Insights forecasts that at least 50% of IC [integrated circuit] production in China in 2024 will come from foreign companies such as SK Hynix, Samsung, Intel, TSMC, UMC, and Powerchip with fabs in China,” the report stated. UMC and Powerchip are both Taiwan-based semiconductor companies.