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CHIPS Act takes step forward on long road to production

If Congress approves the CHIPS Act, it will funnel billions into domestic chip production and provide companies like Intel and TSMC with tax breaks to build U.S. facilities.

The CHIPS Act may cross the president's desk next week, and stakeholders believe it will boost U.S. competitiveness in domestic chip production, despite it being slimmed down from a broader competition package.

The U.S. Senate passed the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act in a preliminary 64-34 vote earlier this week, with a final vote anticipated early next week. Chipmakers such as Intel began to pressure Congress to pass the CHIPS Act specifically, threatening to delay plans to build U.S. chip manufacturing facilities without the guarantee of federal funding.

Experts said moving forward with the CHIPS Act will address concerns such as national security, as only 12% of global chip production occurs in the U.S. A majority of semiconductor chip production takes place in countries like China, Taiwan and South Korea, and the chips are used to power devices such as cars, phones and laptops. The U.S.'s lack of domestic chip production has been highlighted amid a global semiconductor chip shortage.

Proposed by the Senate in 2021, the $52 billion CHIPS Act was originally included as a piece in a larger $250 billion China competition bill, the U.S. Innovation and Competition Act. The legislation stalled, however, as Republicans and Democrats fought over provisions in the competition package to boost technological and scientific competition with China, with the House eventually proposing its own version of a competition bill. The House and Senate spent the last year trying to reconcile differences between the two bills but were unsuccessful, with the Senate opting to move just the CHIPS Act forward this week. 

Gartner analyst Gaurav Gupta said although the CHIPS Act could be moving forward without the rest of the competition package, he doesn't anticipate that to negatively affect the chip industry.

"In the previous version, there were add-ons to compete with China, a lot of ancillary aspects that were not related to the semiconductor industry," he said.

Now, the CHIPS Act will need to receive a final vote of approval from the Senate before moving to the House for approval. The last step is for the bill to head to President Joe Biden's desk to be signed into law.

The Senate's preliminary vote this week signals a step forward and positions Congress to fully pass the legislation next week, said Stephen Ezell, vice president for global innovation policy at the Information Technology and Innovation Foundation.  

"This is a momentous step," Ezell said.

Some see the strategic importance of the CHIPS Act going beyond increasing U.S.-based chip production. They see it as a move that better ensures the security of the country against a range of geopolitical threats, most notably a potential takeover of Taiwan by China.

CHIPS Act boosts national security

"This is a step in the right direction," said Dan Newman, principal analyst of Futurum Research and CEO of Broadsuite Media Group. "Our government needs to recognize the risks of not being focused on technology leadership, national security and establishing a reliable supply chain."

Newman and others see the $52 billion as only a first step by the government to alleviate the problem. Another tranche will be needed to bolster the efforts of manufacturers providing the necessary components leading chipmakers need to produce the final product.

"We need redundancy across the entire [chip] supply chain for companies like Micron, Texas Instruments, the substrate makers and other raw materials providers, not just for the finished chips," Newman said.

Spokespeople for the leading chip manufacturers, including Intel, AMD and Nvidia, declined to comment. An AMD official said the company preferred to let the "industry body representing us," meaning the Semiconductor Industry Association (SIA), speak for it.

In a statement on its website, SIA president and CEO John Neuffer praised the actions taken by the Senate, saying the association is "encouraged that the legislation is progressing,'' and that it will continue to support enactment of the bill along with investment tax credit for both chip manufacturers and designers.

How the CHIPS Act affects chipmakers

There are stipulations placed on those chip manufacturers that will receive a cut of the $52 billion. They will not be allowed to use the funding for stock buybacks, to invest in partnerships of any kind with China-based chip companies or to build facilities in China, and there are no tax credits awarded for research and development and chip design.

On the other hand, incentives are being offered to those offshore companies building plants in the U.S. Those companies will receive a tax credit of between 20% to 25% to purchase tools for use inside those plants.

"That incentive is added specifically to get TSMC [Taiwan Semiconductor Manufacturing Company] to commit to coming over here," said Frank Dzubeck, president of Communications Network Architects, Inc. "They are one of the top two chip suppliers, and having them in the U.S. is the best hedge we have against a potential takeover of Taiwan by China."

Earlier this year, TSMC officials said they planned to build a next-generation chip facility in the U.S., its first in over 20 years, and was hoping the CHIPS Act could provide such incentives for offshore manufacturers.

Already there is some dissatisfaction with two of the three major chip providers over the allocation of the $52 billion. With Intel expected to receive $20 billion, plus an additional $5 to $10 billion in tax credits as a U.S.-based manufacturer, Nvidia and AMD reportedly see this as an unfair advantage. Nvidia and AMD design their own chips but manufactures them using offshore partners.

Gartner's Gupta said the idea behind the CHIPS Act when it was originally conceived was to improve domestic chip manufacturing in the U.S. Gupta said ultimately, the CHIPS Act serves as an indicative step from the U.S. government that they are ready to support and implement polices to improve domestic chip production.

If this funding goes through, it gives a push in the right direction. But to improve the U.S. share in chip manufacturing, it will need a much higher investment.
Gaurav Gupta Analyst, Gartner

While it gives companies incentives to invest in the U.S., Gupta said investing in the U.S. chip market has to be a "continuous process."

"If this funding goes through, it gives a push in the right direction," he said. "But to improve the U.S. share in chip manufacturing, it will need a much higher investment."

Even with the $52 billion investment, it will still take Intel and TSMC at least two years to build their respective facilities. Another few months could be tacked onto that as ASML, a Netherlands-based company, has its own growing backlog of orders from Intel, AMD and Nvidia since last year, a problem compounded by a fire earlier this year that stopped delivery of its systems. The company holds a virtual monopoly on a complex but essential proprietary machine using lithography to make microprocessors.

"Despite the chip shortages, ASML never stopped taking orders from Intel and AMD, and so are building their own backlog of orders," Dzubeck said. "At this point, it's unknown how long it will take for [ASML] to catch up, and how long Intel and others will have to wait for delivery."

As Editor At Large with TechTarget's News Group, Ed Scannell is responsible for writing and reporting breaking news, news analysis and features focused on technology issues and trends affecting corporate IT professionals.

Makenzie Holland is a news writer covering big tech and federal regulation. Prior to joining TechTarget, she was a general reporter for the Wilmington StarNews and a crime and education reporter at the Wabash Plain Dealer.

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