August marks the second anniversary…
Today, nearly two years later, it’s interesting to see how a single policy has reshaped an entire industry.
Originally conceived of in 2019, and introduced to the U.S. House of Representatives in June of 2020, the Creating Helpful Incentives to Produce Semiconductors for America Act – better known as the CHIPS Act – turned out to be a major inflection point for the semiconductor industry.
It came after decades of offshoring to Asia, primarily incentivized by lower costs of labor.
But in 2017, economic policy shifted, and a technology-powered trend took root to decentralize global manufacturing – and reshore manufacturing – to develop more resilient supply chains.
Learning a Hard Lesson
The world found out the hard way how vulnerable global supply chains were in 2021 during the pandemic.
All sorts of basic consumer electronics – like washing machines or cooking ranges – were nowhere to be found due to semiconductor shortages. In-demand products were backordered nine months or even a year.
And automotive production lines ground to a halt because of the shortage of a single semiconductor.
It took a crisis like that – something tangible and relatable to just about any consumer – for the government to finally act.
Signed into law in July 2022, the renamed CHIPS and Science Act provided for $52 billion in manufacturing incentives and research investments in the U.S. semiconductor industry. It was a bipartisan act that was – not surprisingly – widely supported by the semiconductor industry.
The reality is that productivity-adjusted labor costs have changed dramatically in the last decade.
Specifically, it has become far more expensive to manufacture in places like South Korea and China than in the past, and because of the advancements in automation and robotics technology, the costs to manufacture in the U.S. have declined.
Below we can see an analysis of the cost competitiveness of countries accounting for all related manufacturing and logistics costs. The U.S. market is used as the reference at 100. Higher than 100 means more expensive than the U.S. and lower than 100 means less expensive.
Source: Boston Consulting Group
Two things jump out from the above analysis. First is that the combined materials input, capital expenditure costs, and operating costs (represented by the “other” category in gray) are very similar around the world. This makes a lot of sense as these costs tend to be very similar no matter where we’re manufacturing.
The more striking data points are how the total landed costs in countries like Japan, South Korea, and China are almost on par with U.S.-based manufacturing. The difference has become quite small.
And when companies and governments begin to account for the added risks of intellectual property theft and supply chain risk, the decisions become even easier to reshore manufacturing.
This megatrend is something that I’ve referred to as the great recalibration.
This isn’t a short-term, multi-year trend.
It is a multi-decade unwinding that has the tailwinds of cost and operating benefits, as well as political and geopolitical support.
The CHIPS and Science Act was a relatively inexpensive catalyst to push any companies that were hesitating to invest in new manufacturing over the fence.
It worked.
Recalibration
The semiconductor industry has already announced more than 80 new manufacturing projects in 25 U.S. states, resulting in $450 billion in private-sector investments since the CHIPS Act was introduced in 2020.
The CHIPS Act incentives have been granted to both U.S. and non-U.S. semiconductor companies – those building new semiconductor manufacturing facilities on U.S. soil.
Major beneficiaries are Intel (INTC), Taiwan Semiconductor Manufacturing (TSM), Global Foundries (GFS), Samsung Electronics, Micron Technology (MU), and most recently, Texas Instruments (TI), which was just granted $1.6 billion in grants and $3 billion in loans for projects in Sherman, Texas, and Lehi, Utah.
And what’s more interesting is the impact that the $450 billion of industry investment and this semiconductor industry recalibration will have on the global semiconductor industry.
The below chart may be a bit tough on the eyes, but it’s very informative in that it shows us the changes that the CHIPS Act will have on the global semiconductor industry by 2032 as a result of all the new semiconductor manufacturing that will come online in the U.S.
Source: Boston Consulting Group, Semiconductor Industry Association
The major recalibrations will be:
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The U.S. production of DRAM (memory used for temporary storage & running software applications) will jump from 3% to 9%, which is primarily driven by increased manufacturing capacity by Micron Technologies.
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S. production of advanced semiconductors (as defined by manufacturing nodes less than 10 nanometers) will spike from 0% to 28% of global manufacturing.
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More mature manufacturing nodes, the kind of semiconductors used in the automotive industry and more basic consumer electronics and industrial equipment will increase from 8% to 10%.
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And DAO – discrete, analog, and others (optoelectronic devices and sensors) – will increase from 14% to 18%.
Obviously, the largest shift is in the advanced semiconductors category, which are the semiconductors used in mobile devices and data centers to power artificial intelligence workloads.
In that category, domestic manufacturing in South Korea and Taiwan is the most impacted. But we should remember that Samsung Electronics and TSM are both building advanced semiconductor manufacturing in the U.S. What has changed is simply where the manufacturing is taking place.
While we can see these clear changes in the industry between 2022 and 2032, there is a lot more nuance to the industry.
Chips are manufactured in one location and are then often packaged in another country. And once they are packaged, they are shipped to another country to be incorporated into a car or consumer electronics device.
It takes a long time to build a domestic ecosystem that is vertically integrated, which is why this recalibration will take decades.
But in a time of such intense geopolitical strife, the decentralization of the world’s manufacturing base is critical for building more resilient supply chains.
For investors, this shift is important because trillions will be spent over the next decade building the next generation of high-tech-powered advanced manufacturing plants.
Not only will this create millions of new jobs, the companies that enable this trend will benefit greatly from the spend.
And the world will benefit from a more balanced and resilient decentralized manufacturing base.