The US was awakened by the COVID-19 pandemic to the gaping holes in its supply chains for crucial medical supplies and electronics. One of the most significant was semiconductors, the pieces of silicon that hold millions of tiny transistors that are needed in everything from vehicles to toys.
The US’ Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act devotes US$52 billion to begin to remedy a decades-long trend of US production drifting away to lower-cost regions, mostly to Asia and especially to China. The rebuilding of that supply chain and manufacturing capacity will take years, but it will come to naught unless all the components, even the low-margin ones, have a presence in the Americas, if not the US.
The production of semiconductors is arguably the most globalized industry, and the small size and higher value of chips make them ideal for ferrying around the globe by aircraft. The ability to move materials and components at a negligible cost and time of transport made them an early candidate for moving manufacturing overseas.
Illustration: Yusha
The combination of this mobility and the push of US chipmakers to improve profit margins over the decades resulted in the industry being broken down into several distinct activities, with specialized manufacturers at each stage. US companies have kept the research and design, which is the most lucrative part of the business. Although there are some integrated chipmakers, most of the manufacturing has migrated overseas: the raw materials, silicone substrates on which the chips are built, the wafers on which chips are engraved, and a final production process than encases and tests the chips.
Like any chain, the one that produces semiconductors is only as strong as its weakest link. It does not make any sense for the US government to invest billions of dollars to support the manufacturing of chips if they need to be shipped to Asia anyway to be completed. Each stage of production should be readily available to make it much easier to ramp up if supplies were disrupted instead of having to start from scratch.
Farming out the lower-margin businesses made sense at the time. Stand-alone chip designers have gross margins of 60 percent, while companies that assemble the chips and test them manage gross margins of only 17 percent, Bloomberg Intelligence data show.
The US dominates chip design with 68 percent of the global market, but has only 3 percent of the outsourced semiconductor assembly and testing. The US market share is even lower for production of the integrated chip substrates.
This strategy left the industry dependent on Asia, which has built up the supply chain to become a one-stop, low-cost area to manufacture computer chips. The products that require the chips, such as laptop computers and TVs, are also mostly made in Asia because the US ceded manufacturing to others.
The CHIPS act has made headlines for enticing new so-called fabs, the factories that jam millions of transistors onto silicon wafers. Companies including Intel, Samsung and Micron are among the companies planning large investments. It is unclear how much of the other separate processes of the chipmaking chain will remain abroad. It is even more unclear how the government plans to entice these low-margin activities to locate in the US.
Amkor Technology is an outsourced assembly and testing company based in Tempe, Arizona.
However, the company does not have any factory operations in the US. Its factories are in Taiwan, China, Malaysia, the Philippines, Singapore, South Korea, Japan and Portugal. It is building a plant in Vietnam that would be up and running next year.
Amkor, which completes the semiconductor assembly process so the chips can be used by makers of electronics, vehicles and consumer goods, has no manufacturing operations in the Americas. This is not only about wages — Japan and Portugal are not low-wage countries. Chip assembly and testing is already highly automated manufacturing.
There is an argument that the US just cannot produce these components or perform these processes competitively. Labor costs are just too high, which means production in the US would only add to inflation or require perpetual subsidies.
If this is the case, what is the purpose of the CHIPS act?
It is imperative for the US to have redundant sources of supplies on critical products. The pandemic and now China’s more aggressive stance on the world stage has made that clear.
The promises of China bending more toward a free-market economy and open society after the world’s most populated country was admitted to the WTO in 2001 are now broken.
“We are deglobalizing. There’s no going back on this,” Moody’s Analytics chief economist Mark Zandi said in an interview with Bloomberg TV last week. “Xi is moving in a different direction. US is moving in another direction. We are pulling apart.”
The US will have to lean on automation to have cost-competitive manufacturing. In those areas where it is more difficult to replace low-cost labor with automation, Mexico, Brazil, Costa Rica and other partners can help fill that gap. The bottom line is that if the CHIPS act does not bring back the whole chain — even the less lucrative parts — it will fail to achieve its goal.
Thomas Black is a Bloomberg Opinion columnist covering logistics and manufacturing. Previously, he covered US industrial and transportation companies, and Mexico’s industry, economy and government.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
The gutting of Voice of America (VOA) and Radio Free Asia (RFA) by US President Donald Trump’s administration poses a serious threat to the global voice of freedom, particularly for those living under authoritarian regimes such as China. The US — hailed as the model of liberal democracy — has the moral responsibility to uphold the values it champions. In undermining these institutions, the US risks diminishing its “soft power,” a pivotal pillar of its global influence. VOA Tibetan and RFA Tibetan played an enormous role in promoting the strong image of the US in and outside Tibet. On VOA Tibetan,
Sung Chien-liang (宋建樑), the leader of the Chinese Nationalist Party’s (KMT) efforts to recall Democratic Progressive Party (DPP) Legislator Lee Kun-cheng (李坤城), caused a national outrage and drew diplomatic condemnation on Tuesday after he arrived at the New Taipei City District Prosecutors’ Office dressed in a Nazi uniform. Sung performed a Nazi salute and carried a copy of Adolf Hitler’s Mein Kampf as he arrived to be questioned over allegations of signature forgery in the recall petition. The KMT’s response to the incident has shown a striking lack of contrition and decency. Rather than apologizing and distancing itself from Sung’s actions,
US President Trump weighed into the state of America’s semiconductor manufacturing when he declared, “They [Taiwan] stole it from us. They took it from us, and I don’t blame them. I give them credit.” At a prior White House event President Trump hosted TSMC chairman C.C. Wei (魏哲家), head of the world’s largest and most advanced chip manufacturer, to announce a commitment to invest US$100 billion in America. The president then shifted his previously critical rhetoric on Taiwan and put off tariffs on its chips. Now we learn that the Trump Administration is conducting a “trade investigation” on semiconductors which
By now, most of Taiwan has heard Taipei Mayor Chiang Wan-an’s (蔣萬安) threats to initiate a vote of no confidence against the Cabinet. His rationale is that the Democratic Progressive Party (DPP)-led government’s investigation into alleged signature forgery in the Chinese Nationalist Party’s (KMT) recall campaign constitutes “political persecution.” I sincerely hope he goes through with it. The opposition currently holds a majority in the Legislative Yuan, so the initiation of a no-confidence motion and its passage should be entirely within reach. If Chiang truly believes that the government is overreaching, abusing its power and targeting political opponents — then
RSS