The Chips Act has been surprisingly successful so far

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The writer is the author of ‘Chip War’

With recent multi-billion-dollar grants to Intel, TSMC, Samsung, and Micron, the US government has now spent over half its $39bn in Chips Act incentives. In so doing it has driven an unexpected investment boom. Chip companies and supply chain partners have announced investments totalling $327bn over the next 10 years, according to Semiconductor Industry Association calculations. US statistics show a stunning 15-fold increase in construction of manufacturing facilities for computing and electronics devices. Debate about the Chips Act has focused on delays and manufacturing difficulties, but the vast volume of investment tells a different story.

Pandemic-era shortages showed how small deficits of even lower-tech foundational chips could cause hundreds of billions of dollars of economic damage. The ensuing Chips Act aims to encourage construction of new chip fabrication facilities (fabs) in the US. This will reduce reliance on a small number of East Asian suppliers — today nearly all cutting-edge processors are made in Taiwan.

The investment surge this has driven is reducing these vulnerabilities. Samsung, TSMC, and Intel — the world’s leading chipmakers — are now building major new plants in the US. Intel will manufacture its most advanced chips there, while TSMC will introduce its cutting-edge 2-nanometre process in Arizona around two years after bringing it online in Taiwan. Commerce Secretary Gina Raimondo notes that by 2030, the US will probably produce around 20 per cent of the world’s most advanced chips, up from zero today. 

This still won’t mean complete self-sufficiency, given that the US consumes over a quarter of the world’s chips. Production of smartphones and consumer electronics would be disrupted in the event of a crisis in east Asia, an ever looming fear. But this production would be roughly enough for the needs of critical infrastructure like datacentres and telecoms. Chips aren’t perfectly fungible, of course, and not every plant can easily produce every type, but the US will have much more scope to manage shocks. 

As the pandemic-era shortages showed, it isn’t only advanced chips that are economically critical. Manufacturers of autos, missiles or medical devices require large volumes of foundational chips as well. Here, too, the Chips Act is providing significant new supply. Ford and GM have announced major long-term supply deals with US chipmaker GlobalFoundries, which is expanding production with $1.5bn in Chips Act funds. Microchip, a widely used Arizona manufacturer of microcontroller chips, also received a grant to expand. Texas Instruments is building a string of new foundational chip fabs across Texas and Utah, catalysed by generous investment tax credits. Few if any of these investments would have happened without the Chips Act. 

Production in allied countries is helping, too. Japan and Europe are investing in foundational chip capacity. Microchip and Analog Devices, another US chipmaker, have both announced plans to shift some production from TSMC in Taiwan to the company’s new plant in Japan, providing increased resilience against China risks. 

Critics worry all these incentives create a subsidy race — but this began well before the Chips Act. A 2019 OECD study found that between 2014 and 2018 at least two US companies received more money from a foreign government than from the US. That’s partly why chipmaking migrated to high-subsidy locations. Now the Chips Act and similar incentives in Japan and Europe are attracting investment back. 

Will all these promised plants get built? Many of them already are. The scale of fab construction in the US is now stretching contractors’ ability to find workers with speciality skills. TSMC plans high-volume chip production in its first Arizona plant early next year. If the chip market softens, some plants could get postponed, but the disbursement of grants is tied to progress in bringing fabs online. 

There’s still a risk that taxpayers are buying excess capacity if these new facilities can’t find customers. However, many tech executives like OpenAI’s Sam Altman are more worried about AI chip shortages than a glut. TSMC notes that its Arizona plant will work with Apple, Nvidia, Qualcomm, and AMD — four of its largest customers. Intel recently announced a deal to manufacture AI processors for Microsoft.

Equity investors will debate whether these new investments can deliver an adequate financial return. Policymakers who see the Chips Act as an insurance policy against geopolitical shocks believe it is already paying dividends.