US Chips Act won’t end cost gap, but nearness a plus

The US’s US$39 billion of incentives to boost its production of microchips is unlikely to fully close the output-cost gap with Asia, but other benefits such as proximity to clients bolster the case for more American output, the official leading the project said.

“We have a lot of strategic advantages as a country. We also have a cost gap, which the Chips Act is designed to address,” said Mike Schmidt, the director of the Chips Programme Office in the Department of Commerce. The law aims to narrow that differential in the short term, “but then make sure that we are creating enough scale, enough cluster dynamics and enough innovation that 10 years from now the cost of doing business here is competitive enough.”

Congress last year passed the Chips and Science Act to return advanced semiconductor manufacturing to the US after pandemic lockdowns and supply-chain disruption laid bare American reliance on chips from Asia and particularly Taiwan, the target of frequent threats from China.

The law gives the Department of Commerce almost US$40 billion over five years to jump-start production, and a further US$11 billion for research and development in advanced semiconductor manufacturing, development of new technologies and training workers.

Schmidt, who spoke at an event hosted by the Information Technology & Innovation Foundation Thursday, was responding to a question by Jeff Ferry, the chief economist at the Coalition for a Prosperous America, who noted that facilities – known as fabs – in Taiwan have a 40 per cent cost advantage over those in the US.

Despite the investment and development incentives the Biden administration is providing, it will still be cheaper to make chips in Asia – where many customers are based – which could prompt plant closures in a decade, Ferry said.

Schmidt’s office is thinking about how to use the US$39 billion as starter capital to create an ecosystem that will have “self-sustaining competitive dynamics”.

“That means creating enough scale now that you have enough of a supplier base, a strong-enough workforce, the infrastructure and the kind of cluster dynamics that make ongoing investment economically attractive now,” he said. “We might not close the cost gaps, but there are a lot of attractive things about doing business in the United States right now including the major semiconductor customers in the world.”

There are “really attractive dynamics around shared innovation that happens with co-locating with those companies”, Schmidt said.

The Biden administration has received more than 200 applications from companies for access to the US$39 billion, Commerce Secretary Gina Raimondo said April 14.

Schmidt said his office, which has a team of about 80 people that will grow to about 150 by the end of the year, and is “going to have to make tough choices”.

“There are going to be a lot of really high-quality applicants that are not going to get as much funding as they might have hoped,” he said. “A lot of good applicants might get no funding at all.”

Another round of pre-applications – this time, from current generation, mature-node, and back-end output facilities – opens May 1, and full applications will be accepted from June 26. South China Morning Post