In-Depth

Then There are Semiconductors

The National Security Commission on Artificial Intelligence

Then There are Semiconductors
Then There are Semiconductors
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Chart from the 'Final Report' by the National Security Commission on Artificial Intelligence

NSCAI: Final Report

2

March 11, 2021

Not long after the Commission published its report, 'China’s Rise Drives a U.S. Experiment in Industrial Policy' appeared in The Wall Street Journal.

The Problem. ‘While American companies pioneered semiconductors and still dominate chip design, many have outsourced the actual fabrication of chips, mostly to Asia.’

  • ‘The U.S. share of global chip-making has shrunk from 37% in 1990 to 12% now and on current trends will slip to 10% by 2030.’

The Threat. ‘Semiconductors today resemble oil in the 1970s: a critical input to the economy whose supply is a matter of national security.’

  • ‘ “Semiconductors are the fundamental building block of thousands of products that our lives depend upon,” he said. “We’ve never had a time where … the control over the technology is as much at stake. And we’ve never had a competitor with the size and skill of China,” said Sen. Mark Warner (D., Va.), who co-sponsored the chip incentive program, described below, with John Cornyn (R., Texas).’

And ‘China is dialing up threats to reunite, by force if necessary, with Taiwan, a democratic self-governing island that Beijing claims as its territory.’

  • ‘Taiwan supplies 22% of the world’s chips and 50% of its most advanced.’

‘Imagine American leaders discovering at the height of the Cold War that its most sophisticated jet engines were all made in West Berlin, surrounded by the Red Army.’

  • ‘You get a sense of the urgency in Washington over semiconductors now.'

The Conclusion. ‘In a different era the U.S. may have quietly let chip making migrate overseas, as it had with televisions, laptop computers and cellphones.’

  • ‘What changed? In a word, China.’
  • ‘Its state-guided pursuit of technological dominance has infused economic transactions with national-security implications.’

The Solution. As an initial step: ‘In January Congress enacted legislation – the ‘Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act’ - to match state and local incentives for new semiconductor fabrication plants (fabs), and bankroll extensive new research, development and training.’

  • ‘Congress hasn’t appropriated funding for those provisions, or enacted a related 40% tax credit toward the capital costs of new fabs.’

‘However, Mr. Biden has signaled support for funding and announced a 100-day review of supply-chain vulnerabilities in four industries: semiconductors, batteries, pharmaceuticals and strategic materials.’

  • ‘ “We’ll be using a mix of incentives to encourage production here,” said Peter Harrell of National Security Council.’

‘ “We have a crummy record on industrial policy when we try to pick winning companies, but I don’t think that’s right when we try to pick winning industries,” says Sen. Warner.’

My Take. A speaker at a recent panel I put on for a major hedge fund said that in a race you can either trip the other runner, or you can run faster.

During the Trump administration, much of the emphasis was on tripping China on semiconductors.

  • He banned the sale of chips to Huawei and slapped Section 301 tariffs on Chinese semiconductors and manufacturing equipment.
  • This effort to starve China – who, despite pouring in hundreds of billions of dollars, still cannot produce cutting-edge chips and may not be able to for perhaps another decade - has been very effective.

But Mr. Trump also aimed to run faster.

  • He pushed to “re-shore” semiconductor manufacturing to bring more fabrication plants to the U.S.
  • And he coaxed Taiwan Semiconductor Manufacturing Company into building a $12 billion fab in Arizona.

President Biden has yet to announce its decision about to what extent and how it will limit China’s access to semiconductors.

But, besides his 100-day review, he has announced:

  • “I’m directing senior officials in my administration to work with industrial leaders to identify solutions to the semiconductor shortfall.”
  • “Congress has authorized a bill [CHIPS for America Act] but they need ... $37 billion to make sure that we have this capacity. I’ll push for that as well.” '

All good but far from an industrial policy for semiconductors.

  • Perhaps that will be announced after the 100-day review. Or not.
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