Yesterday, the Senate passed a slimmed down version of the United States Innovation and Competition Act (USICA), the CHIPS Act. After strong initial bipartisan support for the USICA earlier this year, the Bill has languished in conference as negotiations between the House and Senate over their respective versions of the Bill stalled and a laundry list of other issues took center stage in the months since.
CEOs from major technology firms, including Pat Gelsinger of Intel and Lisa Su of AMD, signed a Semiconductor Industry Association letter to Congress last month urging action on the Bill. This is being seen as a renewed push by semiconductor players to get subsidies, tax breaks and other support cleared by Congress prior to its August recess, after which the campaign season for the November mid-term elections will take priority over legislative business. Intel even went as far as to delay the groundbreaking ceremony for its $20-billion facility in Ohio, warning that government assistance would be necessary for the company to follow through with its plans, otherwise it may choose to build its plant overseas.
As the broader USICA package becomes increasingly unlikely to pass prior to the mid-term elections, a stripped-down version of the Bill that specifically targets semiconductor manufacturers is moving onto the House. But the new Bill faces several hurdles.
Disagreements between House and Senate
First and foremost, the new Bill is likely to face the same disagreements that halted negotiations over the original USICA package between the House and Senate. The House version of USICA, the America COMPETES Act, was a more sweeping piece of legislation. It packed in provisions for financial assistance to developing countries to tackle climate change, expanded assistance to workers displaced by globalization, and included other items that were unpopular with Senate Republicans. This complicated negotiations, as Republican support was necessary for the Bill to pass in the Senate, and they are more narrowly focused on the national security and economic consequences of America’s reliance on foreign production of semiconductors. Trimming the Bill back to just subsidies and tax breaks for semiconductor manufacturers will be unpopular with progressives on the left who view this as another example of corporate welfare without addressing issues like climate change. On the other hand, conservatives on the right see this as government interference in the free market. Challenges may also emerge from Republicans as they consider whether they want to grant Democrats a legislative victory prior to the midterms and as they pose questions over the anticipated recipients’ activities in China. While the passage of the Bill in the Senate is major step forward, the passage in the House is murkier.
Source: Department of Commerce
Chip designers left out
The pared-back version of the Bill has also received some pushback from a new corner – inside the semiconductor industry. This version primarily provides subsidies for the construction of foundries as well as tax breaks to manufacturers for investment in chipmaking equipment. Key semiconductor design players like Qualcomm, AMD and NVIDIA have instead advocated for the inclusion of a provision in the House version of the Bill to provide tax breaks for semiconductor designers, which otherwise would be left on the outside looking in. But this exclusion is intentional – the US is still a global leader in chip design, while minimal production capacity for semiconductors poses a real risk to American national security in today’s shifting geopolitical environment.
Source: Department of Commerce
Guardrails on investment in China
Industry players have also pushed back against the new Bill due to stipulations regarding investments in China. As the Bill currently stands, companies receiving funds from the US government to build foundries in the country would be barred from investing in semiconductor production using the 28nm process or smaller in certain countries. Firms have pushed back on these restrictions, warning that 28nm and larger chips will become increasingly obsolete in the coming years. These kinds of restrictions are also more likely to put pressure on China to invest in developing its own separate processes and ecosystem, which could result in further decoupling down the line, or even increase the incentive for IP theft. News reports say China’s SMIC is now making 7nm chips using a process very similar to TSMC’s. The more the US and China create parallel rather than interconnected supply chains, the narrower the realm of cooperation and negotiation becomes, with the broader tech environment paying the price.
The new Bill is a useful step toward diversifying the global manufacturing of semiconductors. This should benefit the entire technology ecosystem, which is dangerously over-reliant on a geographically concentrated manufacturing base. But there is still a real chance of the Bill failing to reach President Biden’s desk before August recess as the Bill heads towards a vote in the House. Indeed, following news of a deal between Sen. Joe Manchin and Senate Democrats on climate change legislation, House Republicans announced they will oppose the CHIPS bill in protest, complicating the passage of this legislation once again.