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CHIPs Act Update: US Secures Domestic Production of Advanced Chips

CHIPs Act Update: US Secures Domestic Production of Advanced Chips

The News: On April 15, Samsung Electronics announced up to $6.4 billion in direct funding through 2022’s US CHIPS and Science Act. Since 1996, Samsung Semiconductor has invested $18 billion in operating two fabs (factories) at its Austin, Texas, campus, making its commitment one of the largest direct foreign investments in US history. In 2021, Samsung also announced expansion into Taylor, Texas, with a minimum of $17 billion to construct a new semiconductor manufacturing facility. With the additional new investment through the CHIPS and Science Act, the Samsung investment is expected to top $40 billion in the region in the coming years, making it one of the largest foreign direct investments for a US greenfield project and turning central Texas into an expansive hub of leading-edge U.S. semiconductor manufacturing. Read the press release here.

A week before the Samsung news, Taiwan Semiconductor Manufacturing Co. (TSMC), similarly announced that the US Department of Commerce and TSMC Arizona had signed a non-binding preliminary memorandum of terms (PMT) for up to $6.6 billion in direct funding under the CHIPS and Science Act. TSMC also announced plans to build a third fab at TSMC Arizona to meet strong customer demand leveraging the most advanced semiconductor process technology in the country. As the company makes progress in completing its first fab and continues construction of its second fab at its Arizona subsidiary, the third fab brings TSMC’s total capital expenditure for the Phoenix, Arizona site to more than $65 billion, making the site the largest foreign direct investment in Arizona history and the top single foreign direct investment in a greenfield project in US history.

In March, the US Department of Commerce and Intel Corporation had also announced a $8.5 billion direct funding agreement, also under the CHIPS and Science Act, to help expand Intel’s critical semiconductor manufacturing and R&D projects in Arizona, New Mexico, Ohio, and Oregon. The announcement is part of Intel’s plan to invest more than $100 billion inside the nation by the end of the decade.

CHIPs Act Update: US Secures Domestic Production of Advanced Chips

Analyst Take: Because of their importance to the US government’s dual objectives of both securing US access to critical semiconductors by de-risking its supply chain and making that supply chain more efficient for US semiconductor customers, I thought it was important to look at the TSMC, Samsung, and Intel announcements together. Together, they represent a critical milestone in the plan to expand advanced chip production in the US since the signing of the CHIPs and Science Act.

Summary of Key Geostrategic Benefits

From a national defense standpoint, convincing TSMC and Samsung to build fabs in the US is a massive national strategic win. Not that US-based companies and the Department of Defense necessarily plan to decrease their dependence on fabs operating in other parts of the world, including Taiwan and Korea, but should those traditional supply chains again be disrupted, as they were following the onset of the COVID-19 pandemic, for example, the US market will not be as heavily impacted. In fact, we were just reminded of the importance of enacting such a de-risking strategy just a few weeks ago when Taiwan was rocked by a 7.2 magnitude earthquake. Luckily, the supply of critical chips is not believed to have been affected, but we have no such guarantees about the future.

Also always looming is the constant possibility of major geopolitical disruptions involving Taiwan, Korea, and Japan, among other regional players. Hostile actors in these types of scenarios are not limited to China and North Korea, which could at any moment decide to turn to military action or computer network hacking to advance some of their regional ambitions. Unaffiliated hacker groups and terrorist organizations, to say nothing of additional pandemics and other threats, could also find ways of disrupting the production and shipping of critical chips.

Building additional fabs and locating them in the US, effectively putting them under the protection of the US defense apparatus, makes excellent geostrategic sense for Samsung and TSMC, and is an obvious win for the US technology ecosystem. A secondary benefit to markets outside of the US is that should some disruption happen that restricts or temporarily affects chip availability from the APAC region, US-built chips could help alleviate what would have otherwise been a more significant chip shortage worldwide.

It also isn’t difficult to see how securing domestic production of advanced chip technologies fits well in the US government’s efforts to maintain a competitive advantage over China in the AI space well into the next decade.

It is important to note that US chip production is unlikely to be sufficient to warrant a complete decoupling from APAC chip fabs, nor is that anyone’s goal. These new facilities add capacity and logistical efficiency to the existing supply chain. They are not meant to act as replacements.

Summary of Key Market Benefits

Looking beyond national security considerations, building advanced fabs in the US to serve the North American market was long overdue. Following both the proliferation and acceleration of demand for advanced chips, the US still relying on fabs located halfway around the world for its supply of critical chips didn’t make much sense. These chips don’t just power mobile devices, PCs, and other electronics, which often tend to be manufactured in Asia. They are now also increasingly important to the automotive, aviation and aerospace, Industrial IoT and robotics industries, all of which enjoy extensive footprints in the United States, to say nothing of data centers.

As demand for these chips continues to grow well into the next decade, driven by AI innovation, enhanced connectivity, and increasingly autonomous vehicles, expanding production capacity makes good business sense, as does locating this new production capacity closer to many of the companies that will ultimately use the chips. This is operationally, economically, and even ecologically more efficient than shipping chips halfway across the world. I also suspect that locating advanced fabs closer to customers is likely to accelerate both solutions development and go-to-market timelines – again significant potential benefits for companies building technology solutions in the US. Case in point: AMD Chair and CEO Lisa Su, Apple CEO Tim Cook, and Jensen Huang, founder and CEO of NVIDIA, all joined the US government in congratulating TSMC on the move.

Economic Benefits, Timing, Advanced Technologies, and Additional Considerations

TSMC’s three Arizona fabs are expected to create roughly 6,000 direct high-tech, high-wage jobs. According to an analysis by the Greater Phoenix Economic Council, the fabs will also create more than 20,000 unique construction jobs and tens of thousands of indirect supplier and consumer jobs, to say nothing of the economic boon such a production and support ecosystem generally brings to an area. Secondary impacts on the communities surrounding the fabs could reach into the billions for local housing, hospitality, travel, and business investment.

The first of these fabs is currently on track to begin production in the first half of 2025 and will leverage TSMC’s 4nm technology. Fab number 2 will also reportedly add TSMC’s advanced 2nm process technology – with next-generation nanosheet transistors – to the 3nm technology that was originally announced. Production is expected to begin sometime in 2028. Fab number 3 will also reportedly produce chips using 2nm (or better) processes, with production slated to start closer to 2030. All three fabs, as with all of TSMC’s advanced fabs, will have cleanroom areas twice the size of an industry standard logic fab, with nearby packaging facilities.

TSMC’s press release also carries an important footnote that touches on one of my other coverage areas: “TSMC Arizona’s fabs are designed and built with that same global vision and aims to achieve a 90% water recycling rate. The company has started the design phase of building an industrial water reclamation plant with a design goal of achieving ‘near zero liquid discharge,’ bringing nearly every drop of water back into the facility.” This is an important factor, given both the importance of securing an adequate water supply to the fabs in the coming decades, when water scarcity may impact industry, but also given the current and future water usage needs of the communities servicing the fabs.

Also worthy of note in TSMC’s press release is this note about the economics of the project: “In addition to the proposed $6.6 billion in direct funding, the PMT also proposes to provide TSMC with up to $5 billion in loans. TSMC plans to apply for U.S. Treasury Department Investment Tax Credits of up to 25% of the qualified capital expenditure at TSMC Arizona. The company remains committed to its long-term financial goals, which are 15-20% revenue compound annual growth rate (CAGR) in USD terms, 53% and higher gross margin, and 25% and higher return on equity (ROE).”

The Samsung project, for its part, is expected to create more than 17,000 construction jobs and more than 4,500 manufacturing jobs. It is slated to include two new factories that reportedly will also make 4nm and 2nm chips, with packaging facilities. The first factory is expected to begin producing chips in 2026, and the second a year later, in 2027. The funding should also expand one of Samsung’s existing facilities in Austin. In addition to the $6.4 billion, Samsung suggested that it will likely claim an investment tax credit from the US Treasury Department.

According to Reuters, Lael Brainard, director of the US National Economic Council, added that Samsung will be able to manufacture chips in Austin directly for the Defense Department.

What About Intel?

In March, the US Department of Commerce and Intel Corporation also announced a preliminary memorandum of terms under which Intel will receive roughly $8.5 billion in direct funding under the CHIPS and Science Act. The funding is intended to help expand Intel’s critical semiconductor manufacturing and R&D projects in four states: Arizona, New Mexico, Ohio, and Oregon, where the company already produces chips and semiconductor packaging technologies. Intel had previously announced plans to invest more than $100 billion in the nation over five years, in collaboration with CHIPS Act funding – making it one of the largest public-private investments ever made in the US semiconductor industry.

As the only American company that both designs and manufactures leading-edge logic chips, Intel’s role in expanding domestic production of advanced chips is obviously critical. Its stated strategy is centered on three core elements: “establishing process technology leadership, building a more resilient and sustainable global semiconductor supply chain, and creating a world-class foundry business.”

Whether the addition of advanced TSMC and Samsung fabs in the US threatens Intel’s foundry ambitions is up for debate, but my take is that it does not. Quite the contrary. Competition is good. Competition tends to keep Intel alert and nimble, and looking for opportunities for which it might not have otherwise been hunting. Intel’s ability to diversify its portfolio, for instance, may turn out to be one of its biggest differentiators once TSMC and Samsung fabs go online. I have heard it suggested that TSMC and Samsung manufacturing chips in the US will act as a brake on Intel’s market share expansion, but that isn’t the way it works. I only see upside for Intel, as its investments in R&D and funding from the CHIPs and Science Act will help accelerate its forward momentum, capabilities, and scale, and provide the company with more competitive offerings. I will also be looking to see if Samsung can leverage this expansion to address some of its recent business headwinds.

In Summary

The 2022 CHIPs and Science Act, after more than a year of negotiation, diplomatic efforts, and industry partnerships, is about to start delivering on its goals: De-risking the supply chain of critical, advanced chips, expanding production capabilities for these chips, and securing a healthy domestic supply of these chips for the US market. TSMC and Samsung joining Intel in expanding fabs and packaging capacity on US soil is a win for everyone:

  • The US government, obviously, for whom access to domestic production of advanced chips constitutes a critical strategic interest; TSMC, Intel and Samsung, who will benefit from government investments, subsidies, and overall partnership, as well as added capacity, lower logistics (shipping) costs, and easy access to the US market.
  • The US tech ecosystem as a whole (which now includes the automotive industry) whose supply of advanced chips is about to become a lot more predictable and streamlined, and far less constrained.
  • Consumers and users of technology, who may see an acceleration of innovation and improved experiences.
  • Possibly even investors, who may see in a de-risked and more efficient supply chain of critical chips a more stable and predictable environment for the tech sector to operate in, particularly after the succession of geopolitical, ecological, biological, and other crises that have defined the past half decade.

Disclosure: The Futurum Group is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.

Analysis and opinions expressed herein are specific to the analyst individually and data and other information that might have been provided for validation, not those of The Futurum Group as a whole.

Other Insights from The Futurum Group:

Intel $20B Chips Act Funding

TSMC Gets $6.6 billion CHIPS Act Funding

Bringing Intel Foundry to Life

Author Information

Olivier Blanchard has extensive experience managing product innovation, technology adoption, digital integration, and change management for industry leaders in the B2B, B2C, B2G sectors, and the IT channel. His passion is helping decision-makers and their organizations understand the many risks and opportunities of technology-driven disruption, and leverage innovation to build stronger, better, more competitive companies.  Read Full Bio.

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