The Real Test Begins Now as US Chips Act Funding Is Nearly Fully Allocated

The Biden administration is nearing completion of the allocation of $39 billion in grants as part of the Chips and Science Act, a groundbreaking bipartisan initiative designed to revitalize the domestic semiconductor industry. While the administration has made significant progress in distributing these funds, the real challenge lies ahead in ensuring the sustainability and effectiveness of this ambitious project.

The Chips Act, which was enacted two years ago, represents the most substantial attempt at industrial policy in the United States since World War II. The legislation aims to bolster domestic chip production, particularly focusing on four major companies: Intel Corp., Micron Technology Inc., Taiwan Semiconductor Manufacturing Co. (TSMC), and Samsung Electronics Co. One of the primary goals of the Chips Act is to increase the U.S. share of the global market for advanced processors to 20% by 2030, a substantial increase from the current figure of virtually zero.

Despite signs of progress, the journey has been fraught with challenges. Hundreds of companies have spent months negotiating the distribution of the funds, and even within the U.S. government, there has been disagreement regarding which segments of the semiconductor industry require the most support. In a notable development, Intel was awarded the largest preliminary grant, earning the designation of “an American champion” from Commerce Secretary Gina Raimondo. However, Intel's recent announcement of substantial job cuts and declining sales has raised concerns about its stability as a cornerstone of the U.S. semiconductor landscape, with its stock trading near a decade-long low.

The broader question now is whether the United States can maintain the momentum necessary for success across the entire semiconductor sector. Industry leaders caution that while the $39 billion investment is significant, it may not be enough to cover the extensive needs of the industry. A crucial element of this undertaking is the recruitment of over 160,000 skilled workers, a task made more complex by the impending presidential election, which adds an additional layer of uncertainty.

At the forefront of this initiative is Mike Schmidt, who heads the Commerce Department's Chips Program Office (CPO). Schmidt and his 175-person team, composed of experts from various sectors, face the daunting task of reducing the U.S. reliance on Asian manufacturing, particularly in Taiwan, for semiconductors that power a wide array of devices, from household appliances to military equipment.

Schmidt highlights that both American and foreign companies are now making significant investments in semiconductor manufacturing within the United States. He describes this as a major milestone, stating, “If you could go back two years and tell us that we’d be where we are now, I would take it 100 times out of 100.” A key priority for the CPO is to establish at least two large manufacturing clusters for advanced logic chips, which serve as the core of electronic devices. Additionally, the agency aims to enhance production of legacy chips and advanced packaging, critical components in the semiconductor manufacturing process.

Progress is evident, as nearly 100 companies have pledged approximately $400 billion in investments in U.S. facilities in recent years. A significant portion of this investment is attributed to major players like TSMC, Intel, and Samsung, which are planning to construct advanced chip fabrication centers (fabs) to produce state-of-the-art technology.

However, many of the semiconductors produced in the U.S. may still require processing in Asia. Reports indicate that the CPO was unable to persuade TSMC to establish packaging capacity at its Arizona site, resulting in many chips being shipped overseas for vital processing steps. This reliance on international supply chains raises concerns about national security and supply chain vulnerabilities, prompting warnings from senior Commerce officials.

In addressing the challenge of promoting memory chips, which typically have lower profit margins, the administration has opted to focus on Micron’s memory projects in Idaho and New York. Micron has plans for multiple fabs in the Syracuse area over the next two decades, but the funding strategy has been cautious, as the CPO is prioritizing projects that can initiate production by the end of the decade.

Despite these plans, the Environmental Protection Agency has expressed concerns regarding Micron’s compliance with the Clean Water Act at one of its proposed sites, which could significantly delay progress. Micron is currently working on a mitigation plan, but the timeline for its third fab in New York remains uncertain as the company also considers additional facilities in Japan.

Intel, on the other hand, faces its own set of challenges. CEO Pat Gelsinger's turnaround strategy heavily relies on funding from the Chips Act, with the Ohio facility envisioned as the largest chipmaking plant in the world. However, Intel has experienced setbacks, including recent layoffs and dividend cuts, which raise questions about the company’s ability to execute its ambitious plans. The CPO has built-in safeguards, allowing the agency to withhold funding until companies meet specific construction and production milestones, and it can reclaim funds if projects fail to materialize.

An important aspect of the Chips Act is its focus on national security, particularly through the Secure Enclave initiative, which aims to create a dedicated area within Intel's factories for manufacturing semiconductors used in defense applications. This initiative has sparked significant debate, especially following the Defense Department's decision to withdraw its financial support for the program. In response, lawmakers directed the CPO to assume the full financial responsibility, leading to a reallocation of funds and the cancellation of other projects.

While the Chips Act has attracted substantial commitments from companies, many of these promises remain contingent on successful execution. Some projects have already experienced delays, exacerbated by extended environmental review processes and regulatory hurdles. Efforts to streamline regulations have faced opposition, further complicating the landscape for semiconductor manufacturers.

CPO is also grappling with labor-related challenges, particularly regarding the Davis-Bacon Act, which establishes prevailing wage standards for federally supported construction projects. Compliance with these regulations may impose additional costs on semiconductor companies and complicate negotiations as they seek to finalize funding agreements.

The White House has expressed a desire for semiconductor subsidies to benefit labor unions, and in some cases, construction projects have already established agreements with unions. However, the dynamics between semiconductor manufacturers and labor organizations remain complex, with ongoing discussions indicating varying levels of satisfaction with progress.

In conclusion, while the Chips and Science Act represents a monumental effort to rejuvenate the U.S. semiconductor industry, the path forward is fraught with challenges. As the administration navigates the complexities of funding distribution, labor relations, and regulatory compliance, the stakes remain high. The success of this initiative will ultimately depend on the ability of key players like Intel and Micron to deliver on their commitments while fostering a resilient domestic semiconductor ecosystem that reduces reliance on international supply chains. The coming months will be critical in determining whether the ambitious goals set forth in the Chips Act can be realized in a rapidly evolving global landscape.