Now that the CHIPS and Science Act of 2022 is law, semiconductor companies are evaluating how — and whether — to pursue a piece of the $52.7 billion in federal subsidies allocated to support chip manufacturing.
The bipartisan legislation follows severe semiconductor supply chain disruption and marks the culmination of years of political wrangling over how best to bolster US competitiveness in an industry viewed as essential to national and economic security. US semiconductor manufacturing capacity has dropped from nearly 40% of global supply in 1990 to 12% today.
About three-quarters of the CHIPS funding to be allocated over the next five years ($39 billion) is earmarked for the construction of semiconductor fabrication plants, or “fabs,” including $2 billion specifically designated for mature semiconductors essential to the military as well as the automotive and manufacturing industries. The remainder of funds will foster a more robust domestic ecosystem for semiconductor production, including research and development and workforce cultivation.
These subsidies could offer a necessary cushion for semiconductor companies, not only to close the yawning talent gap they face today, but also to upskill and diversify their workforce. The law provides an opportunity to make step changes in digital manufacturing and relevant workforce skills. This approach could be key to keeping up in the race to reduce the size and power of chips while also increasing performance.
The funding, however, comes with a catch: new geographical manufacturing restrictions.
- To make the most of the CHIPS Act, semiconductor companies should reassess global strategy, while also planning for grant pursuit, digital transformation, capital project management and financial planning.
Funding recipients are prohibited from expanding semiconductor manufacturing in China or any countries that pose a threat to US national security.
These subsidies could offer a cushion for semiconductor companies to upskill and diversify their workforce.
Restrictions on overseas manufacturing
The CHIPS Act prohibits funding recipients from expanding semiconductor manufacturing in China and countries defined by US law as posing a national security threat to the United States. These restrictions would apply to any new facility, unless the facility produces legacy semiconductors predominately for that country’s market.
Further, these restrictions — which would apply to funding recipients for 10 years from the date of funding — could shift. To make sure the restrictions remain current with the status of semiconductor technology and US export control regulations, the law states that the Secretary of Commerce, in coordination with the Secretary of Defense and the Director of National Intelligence, would be required to regularly reconsider, with industry input, which technologies are subject to this prohibition.
Companies should carefully consider whether the potential value of federal funding would sufficiently offset these geographical manufacturing constraints.
Assessing the value of the CHIPS Act
Companies aiming to leverage CHIPS Act funding should consider these five key issues.
At the start, companies should fully assess their corporate strategy to determine how they operate globally. Key considerations include:
- Research and development
Companies that design and sell semiconductors but contract with foundries to manufacture them may need to consider new partnerships to comply with the CHIPS Act’s geographical restrictions. This would also apply to non-semiconductor companies that design their own chips and outsource manufacturing of them.
- Manufacturing footprint
As the semiconductor industry has become more essential to geopolitical security, governments around the world have offered chip manufacturers subsidies — often with their own geographical requirements. With this as a backdrop, companies should consider how CHIPS funding and its accompanying restrictions would require a rebalancing of their manufacturing strategies.
- Sourcing and supply chain
As fab capacity expands in the United States, companies should consider whether it’s time to also seek new partners for back-end assembly, testing and device packaging. Integrated device manufacturers (IDMs) and foundries may also need to consider whether it’s more cost effective to expand fab capacity in the United States, rather than pursue foundry partnerships.
- Alliances and go-to-market capabilities
Successful expansion of capacity will require companies to work together across their partner ecosystem, including foundries, semiconductor equipment, intellectual property, design services, fabless companies and system manufacturers.
The funded grant opportunities are expected to be very competitive. Developing a compelling grant application that describes not only the project, but also its potential to shore up the US supply chain, job growth, economic benefits and social effects will be critical.
In addition, federal funds require compliance and reporting. Companies need to understand these requirements, which may include eligibility and allowability of costs, substantial reporting around performance and costs, procurement regulations, and project accounting and tracking. Other laws, such as the Davis-Bacon Act regulating labor on federally funded construction projects, may apply. Companies will need a plan to acquire the appropriate talent or consider engaging an outside provider to manage the grant upon its award.
Given the recent upheaval in the supply chain and the ongoing skilled workforce shortage, semiconductor companies are stretched more than ever before. Companies investing in expanding semiconductor capacity need to maintain strong capital project management capabilities to confirm they can carry out projects in an environment of high inflation and high industry cyclicality. It will be essential to have the right talent in place to provide thorough risk management and oversight of large, complex construction projects.
It will be critical to balance the financial incentive to quickly bring new fabs online with the need to innovate. Industry-specific cloud solutions designed to speed up time-to-market through improved productivity and optimized resources may offer a competitive advantage.
As companies consider whether to apply for CHIPS Act funding, they would do well to plan for multiple scenarios. Given the potential for the geopolitical climate to shift over 10 years, companies should consider whether they could absorb any financial losses related to changing manufacturing prohibitions.
In addition to direct subsidies, the law includes a temporary 25% advanced manufacturing investment credit for spending on semiconductor manufacturing property, creating incentives for purchasing specialized tooling equipment. Eligible taxpayers would need to comply with the CHIPS Act’s geographical manufacturing restrictions and could elect to treat the credit as a payment against tax (“direct pay”).
The path forward
The CHIPS Act may present semiconductor companies with an opportunity, but realizing its potential will require a rethinking of global strategy as well as a plan for digital transformation, capital project management and financial planning. Geopolitical uncertainty, combined with recent dramatic shifts in the market, requires companies to make careful assessments about their place in the semiconductor value chain and how they can improve their position — not just for agility today, but for stability tomorrow.
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