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CHIPS Act: Tech Sovereignty at Cost

by Sravan Kundojjala | Mar 10, 2023

The semiconductor market has seen unprecedented demand, shortages, and inventory - all in the span of 3 years, a typical semiconductor cycle.  However, unlike previous cycles, the 2020-2022 cycle highlighted the strategic importance of semiconductors to economies.  Unsurprisingly, many nations, including the US, Japan, Europe, South Korea, India and others, rushed to announce incentives to attract semiconductor investments.  In addition, the ever-escalating US-China trade war forced China and other nations to strengthen their supply chain resiliency.

The regionalization of the supply chain will come at a cost, though necessary.  The US and Europe stepped in to offer subsidies to close the cost gap.

The $52 billion US CHIPS Act ($29 b for leading edge, $10 b for mature node and the rest for R&D) will enable leading-edge and mature node semiconductor companies to take advantage of increased onshore capacity.  As a result, smartphone, PC, data center, automotive and industrial equipment vendors in the US can take advantage of increased semiconductor capacity in the US.

Companies like Intel, TSMC, Micron and GlobalFoundries typically do not need subsidies.  However, some have a strong presence in Asia with significant subsidy support.  So, to level the field, the US and Europe need to give these companies subsidies to redevelop the supply chains on their shores.

The $52 billion CHIPS Act allocates

  • $29 b for leading-edge (Intel, TSMC, Samsung, ASML etc.)
  • $10 b for mature node (GlobalFoundries, Microchip, TI etc.)
  • $13 for R&D grants (fabless companies and start-ups)

In addition, the CHIPS Act offers 25% investment tax credit for semiconductor equipment and facilities in the US invested between 2023 and 2026 (through Dec 31, 2026).

The US Chips Act will enable smartphone suppliers (direct and indirect), including TSMC, Samsung Foundry, GlobalFoundries, GlobalWafers, ASML, Lam Research, Applied Materials, Qualcomm, Skyworks, Qorvo, Microchip, Broadcom, Cirrus Logic, NXP, Texas Instruments, Analog Devices etc. to offer onshore capacity.  These are long-term investments.

For example, multiple Apple suppliers have started to ramp up onshore manufacturing facilities in the US, including TSMC.  We expect TSMC, Samsung, Qorvo, Skyworks, Intel, GlobalFoundries, II-VI, Broadcom, Cirrus Logic, Microchip, Analog Devices, Micron, Synaptics etc., to benefit directly or indirectly.  Also, semiconductor equipment companies such as ASML (EUV lithography), Applied Materials and Lam Research benefit from the CHIPS Act.

TI, for example, will invest $6 b per fab through 2030.  The first one will come online in 2025 and the 2nd will follow soon after.  Given the long shelf of mature node process technologies, the production could last for decades once fabs go live.

GlobalFoundries (GloFo) will also invest $1.5 b+ in its US site (Malta) to ramp up 5G RF transceivers and front-end components for automotive, mobile and IoT markets.  Qualcomm, GloFo's largest customer, committed to purchase $4b+ worth of wafers through 2028 from GloFo's Malta US facility.  In addition, General Motors and Ford also partnered with GloFo to secure capacity for their suppliers.  In 2021, GM and Ford took a multi-billion dollar hit due to the shortage of components such as PMIC and MCU.

TSMC's first Arizona fab (5nm/4nm) will go live in early 2024, and the second fab (3nm) will go live by 2026.  TSMC will invest $40b in its Arizona fabs and produce 600,000 wafers annually.  The company will serve the US defence and private semiconductor industry, including Apple, AMD, NVIDIA, Qualcomm, Ampere Computing, Google, Amazon and others.

Similarly, Samsung's investments in Texas will enable some of Apple's suppliers, such as Qualcomm, to ramp up domestic production.  Qualcomm, for example, sources 20% of its chips from the US-based manufacturers and the company plans to increase this sourcing by 50% in five years.

Micron also committed to investing $100b+ in the US to ramp up its DRAM production facilities in the US.

Intel will also invest $100 b through 2030 in the US to produce 3nm and below chips.  In addition, apple could potentially use Intel's fabs in the future.  The company is seeking up to 20-30% of capital offsets to build semiconductor wafer capacity in the US.

Some of the components that will be manufactured in the US include basebands, smartphone, tablet and notebook PC processors, data centre CPU/GPU/AI accelerators, FPGA, RF front-end, RF transceivers, PMIC, DRAM/NAND memory, connectivity, advanced packaging, audio chips etc.

Foundries tend to build fabs in a cluster rather than in isolated locations.  The proximity will help them move support staff and engineers between locations quickly and make logistics efficient.  It will also help foundry suppliers set up their base near the foundry.  Most foundries tend to maintain 50%+ capacity in their core location while distributing the remaining capacity across the globe.

It is inefficient for foundries to build sub-scale fabs outside their core locations as CapEx per wafer will be very high, resulting in lower gross margins.

We think TSMC's per wafer CapEx will increase significantly in the next 3-4 years due to increased US investments.  The construction cost of building and facilities for the US fab is up to 5x greater versus a fab in Taiwan, per TSMC.  TSMC spends 80% of its CapEx on equipment and 20% on construction.  Overall, a fab in the US can cost 80% higher than a fab in Taiwan.  However, TSMC seeks to narrow this cost gap with government incentives.

Due to China pressure, designers such as Qualcomm may shift some production from Taiwan to Korea and USA.  The regionalization of supply chains will affect chip pricing, though.  While government subsidies could help companies like TSMC, we still see the gap in their cost structure.  As a result, those increased costs will be passed on to Qualcomm and other chip companies, resulting in structural price increases.

The CHIPS Act, while helpful, has some challenges and will not entirely solve the issue at hand, which is building resilient supply chains.

It will likely put pressure on beneficiaries not to invest in China.  In addition, tech sovereignty will create inefficiencies, overcapacity and structural price increases.  Furthermore, given its capital-intensive nature, the semiconductor industry regularly needs subsidies and investment tax credits.  So, a one-off CHIPS Act is unlikely to move the needle much but will likely create a platform for the future.

The semiconductor industry has multiple single points of failure across the value chain.  Not just in advanced logic wafer manufacturing, which is centred in Taiwan and South Korea.  So, it is not practical to replicate the entire ecosystem in one country with one-off subsidies.

TechInsights' Handset Component Technologies (HCT) service clients can access the detailed report here.

Sravan Kundojjala


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