Massive Subsidies Won’t Solve the Semiconductor Supply Chain Crisis

The White House launched an effort to convince Congress to approve billions of dollars in new subsidies to American chipmakers. On the same date, the Commerce Department released a long-awaited report about the state of the semiconductor supply chain. Commerce Secretary Gina Raimondo added an exclamation mark to the entire thing.

Yahoo Finance said Raimondo that it was a crisis. We need more American chips.

This is the key argument behind the America COMPETES act. A key element of the sprawling, nearly 3,000-page bill is a $52 billion pile of cash intended to entice semiconductor manufacturers to make more chips in the United States—ostensibly to protect against the sort of supply chain crunches that have been roiling the industry for the past several months.

The Commerce Department report states that American semiconductor manufacturers have experienced stockpile shrinkage and delays in deliveries. Commerce Department reports that supply chains have been affected by “a string of black-swan events like factory fires or winter storms as well as energy shortages and COVID-19 related shutdowns.” It warns that further disruptions to global supply chains could lead to “disability of a manufacturing plant and furlough employees in the United States,” if there are no future plans for larger chips inventories.

This “crisis”, as the White House sees it, is to give a lot money. The bill will provide $52 billion of direct subsidy for chipmakers. It also provides $45 billion in grants and loans to solve vague supply chain problems. Another $7 billion would be used to develop 10 technology hubs across the United States. Adam Thierer is a Mercatus Center senior research fellow and explains why “a Silicon Valley” in each state can be created by top-down investing.

However, the semiconductors play a central role in the entire process. Before lawmakers decide to throw $52 billion at chipmakers they should ask two questions. They should first ask: Are they going to use it?

Evidently they do not. The CEO Pat Gelsinger stated last year that the new $22 billion Intel fabrication center in Arizona would be built “without any state or government support.” (Though he immediately followed that comment by saying that “of course…we want incentives” and it appears that Congress is prepared to dutifully provide them.)

There’s also a ton of private sector investment flowing into semiconductor manufacturers right now—equity markets, it turns out, are much more efficient at identifying and fulfilling a need than government subsidies are—and the big chipmakers are not short on cash. Taiwan Semiconductor Manufacturing Company was named the biggest chipmaker worldwide last year. The net profit margin of Intel for the last decade stood at more than 15% as of September.

Intel has announced that it will build two additional manufacturing units in Ohio. Both Samsung and TSMC announced plans for U.S.-based manufacturing facilities. That’s not the sort of thing that industries and companies in desperate need of government aid tend to do—though they will surely be happy to receive taxpayer funds if Congress makes the offer.

Second, is the question of whether or not the subsidy will have an immediate impact on the solution to the supply chain crisis Raimondo, and others are so excited about. The answer to this question is again a very obvious “no.”

Do you remember the Intel factories that opened in Arizona and Ohio recently? They are not expected to be online before 2024. It is unlikely that the America COMPETES Act would have any material impact on domestic semiconductor supply for more than a few years, even if Congress passes it tomorrow.

Gartner, an international market research firm, says that the current supply shortage caused by the pandemic, and the other “black Swan” events, will end by the middle year. Analysts and experts agree that this crisis will end by the end of 2011.

Also, it’s a bit speculative whether $52billion in new subsidies over many years will really make a big difference in a market for semiconductors that is expected to grow in value.

It’s true again that companies such as Intel and TSMC are open to fat checks from any government willing to issue them. Those new Intel plants in Ohio are reportedly being underwritten by the state government—the exact details are still under wraps—and South Korea has announced subsidies worth about $450 billion for its own domestic chip industry. However, there is no reason for this and little evidence that it will affect the serious supply chain problems afflicting numerous downstream industries.

We are what we It will America COMPETES Act expands and strengthens the federal bureaucracy. It proposes the creation of a national supply chain database, a new Commerce Department office for reviewing supply chain resilience and plans to allow Congress and the White House new directions in science and technology policy. Thierer points to other provisions that would allow for expanded regulations on trade and drug production, as well as federal antitrust powers.

He wrote that lawmakers and bureaucrats won’t allocate capital as efficiently as private innovators or investors. The government will never be able “shore up supply chains” or establish tech hubs for every city by using a tiny amount of magical industrial policy dust.

They will still be able create new layers of rules and bureaucracy to limit innovation and keep subsidy flowing to political favored companies. This will further entrench techno-nationalist tendencies. While the semiconductor shortage may be a valid crisis, it shouldn’t be used as an excuse to enact wasteful and damaging policies.