The world’s largest semiconductor makers — Intel, Samsung and Taiwan Semiconductor Manufacturing Company (TSMC) — have all announced plans to build new chip factories in the United States. Everyone is bragging about its plans: U.S. lawmakers say bringing chip manufacturing back to U.S. soil will strengthen national security, while chipmakers hit by this year’s disastrous semiconductor shortages are diversifying their supply chains to avoid future crises .
But there’s a question: who’s going to pay?
Intel, Samsung and TSMC have all threatened to cancel their U.S. factory plans unless government subsidies are on the table. Company executives claim they will build semiconductor factories elsewhere if they don’t get a generous package of incentives and tax breaks.
Willy Shih, a Harvard Business School professor who studies the semiconductor supply chain, calls these threats empty talk. Whatever the U.S. government offers these companies, manufacturers will almost certainly follow through on their plans to build factories in the U.S. to take advantage of the country’s skilled labor force and maintain close ties with specialized U.S. equipment makers that make many tools. Cutting edge semiconductors need to be made. “But if they could get government subsidies, would they try?” he said.
Chipmakers are fighting the government for factory subsidies
Sports team owners have mastered the art of confronting the government for a deal (or a new stadium). Local governments are often in lavish races to give court teams hundreds of millions of dollars in taxpayer dollars to renovate or build stadiums. No matter where sports teams end up, they can enjoy the benefits of a gleaming new facility at a steep discount. Local residents who pay the bill rarely see financial benefits in return.
Other industries follow the same playbook. Chipmakers are now vying for the same position after their products have become vital national assets in short supply.
Intel CEO Pat Gelsinger led the lobbying campaign by embarking on a global sales tour where he met political leaders in the U.S., European Union, Germany, France, the Netherlands and Italy to discuss the possibility of opening new semiconductor factories in their jurisdictions. In return, he demanded subsidies for Intel’s next factory. “Never waste a good crisis,” Gelsinger told the Wall Street Journal about using national security concerns to negotiate subsidies.
In a bid to increase pressure on U.S. lawmakers, Intel has threatened to scrap plans to build two chip plants in Arizona unless Congress passes the CHIPS Act, which promises $52 billion in subsidies for domestic semiconductor manufacturing. The bill is currently on hold in the House of Representatives. “We wouldn’t be able to do this without CHIPS funding,” Al Thompson, Intel’s director of government relations, told Bloomberg.
TSMC made a similar threat ahead of breaking ground on a new $12 billion plant in Arizona that it intends to finance in part from the CHIPS Act. “Subsidies will be a key factor in TSMC’s decision to set up a fab in the U.S.,” TSMC chairman Mark Liu told Bloomberg in 2020. “Our request is for the state and federal governments to work together to bridge the cost gap between the U.S. and Taiwan.”
Samsung has drawn up its own plan to build a new $17 billion cutting-edge factory in the United States under subsidies. The company tentatively named Arizona, New York and Texas as potential locations for the new plant. But in a regulatory filing to the Texas Comptroller’s Office in June, Samsung made it clear that the tax break was a “determining factor” in its location decision.Samsung wrote that if Texas does not provide satisfactory tax relief, “the company may locate projects in Arizona, New York or[韩国]South Korea. “
Chipmakers worry about bullwhip effect
Manufacturers do have some reasons to be afraid to put in new factories. Building semiconductor factories is always a risky proposition because they cost billions of dollars and take years to build, said Harvard’s Schech. If manufacturers overestimate future demand for chips, they could end up with a very expensive factory producing fancy silicon that few people want to buy. They may not get their investment back and lose money on the project.
The stakes are especially high today because the semiconductor market is so chaotic. Customers have stockpiled a large number of some chips, while repeating orders for other types of chips, which makes the real demand in the market difficult to measure. At the same time, manufacturers are opening new factories that may not come online until the current supply chain crisis passes. The result could be a chronic shortage of chips, followed by a glut of chips — an economic phenomenon known as the bullwhip effect. “Usually, when everyone is scrambling to expand capacity, the next scene is not very good,” Shi said.
It’s in their self-interest for chipmakers to scramble to take taxpayer dollars to cover operational risks, even if it may not get much sympathy from those paying the bills. “As long as the government is going to throw out subsidy money, they want a piece of the pie,” Shi said. “I don’t blame them. If it were you, you’d probably do the same thing.”