US Chips Act Takes New Form Before August Recess, Leaves Some Unhappy

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.

CHIPS Act Infographic

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.

Closing thoughts

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.

China's 'Two Sessions’ See a Great Wall of Supply Chain Resilience, Next-Gen Technologies

The March 5-11 plenary sessions of the two organizations that make China’s national-level political decisions introduced a range of important policies which will have a significant impact on the domestic economy and society, including national and local budgets, the ambitious 14th ‘Five-Year Plan’, and initiatives in areas such as financial regulation, job creation, manufacturing, poverty alleviation and climate change. Commonly known as the ‘Two Sessions’ in China, these annual sessions are organized by the National People’s Congress (NPC) and the National Committee of the Chinese People’s Political Consultative Conference (CPPCC).

The decisions related to China’s tech policy at these sessions received enormous attention from both domestic and international observers, especially given the context of the tech war between China and the US, as well as the global supply chain constraints exposed during the COVID-19 pandemic. In the longer term, countries will be looking over their shoulders to understand other players’ policies and roadmaps, as tech interdependence gives way to tech resilience and independence.

Before delving into the policies discussed and finalized during the Two Sessions, it is important to emphasize that a single authoritative ‘plan’ rarely drives China’s technology initiatives. Instead, headline announcements are merely directives or top-level ‘gestures’ which are then followed by detailed local plans from a myriad of agencies and local government bodies.


Increased R&D Spending

The headline that grabbed everyone’s attention was the pledge to increase R&D spending by more than 7% per year between 2021 and 2025. This will also take the share of R&D spending to a higher percentage of the gross domestic product (GDP) than in the previous five years. China’s spending on R&D climbed 10% to 2.44 trillion yuan ($378 billion) in 2020, accounting for 2.6% of GDP. The country’s R&D budget eclipsed the EU’s budget last year and is projected to reach the US’s 2018 levels (the most recent year for which the data is available) by 2025.

China's Annual R&D Budget
China’s Annual R&D Budget (Source: National Bureau of Statistics)


From ‘Made in China 2025’ to ‘Sci-Tech Innovation 2030’

The ‘Made in China 2025’ plan received a huge backlash from American and European policy circles, and signs are that the policymakers in China have decided to all but shelve it. On the other hand, the ‘Sci-Tech Innovation 2030’ strategy gained momentum in 2020 and received significant coverage during the Two Sessions. The strategy is part of a broader roadmap to enable China to become a leading global innovation engine, catch up with the average income level of developed countries, and showcase strength in areas like the economy, global governance, soft power and green development.

Resources and policy priority will be given to seven critical areas – artificial intelligence, quantum computing, integrated circuits, aerospace, neuroscience, genetics and biotechnology research. Some of these also happen to be among the sectors most severely impacted by US sanctions in the past few years.

The Chang’e 5, China’s first lunar sample-return mission
The Chang’e 5, China’s first lunar sample-return mission, December 2020 (Source: Sina)


Modernization of Industrial and Technology Supply Chains

One of the strong points of the Chinese economy in 2020 was manufacturing, with the country turning in record-high trade surpluses – 2.117 trillion yuan ($325 billion) just in the last three months of 2020. Policymakers in China are doubling down on investing considerable bureaucratic and financial resources on upgrading and digitizing the country’s already-dominant manufacturing base, focusing on building a more resilient and flexible industrial chain as an important foundation for the economy.

Initiatives such as computer vision, robotics, clean energy, autonomous vehicles, cloud computing and 5G have been recognized as crucial to increasing the efficiency and productivity of factories across the country. Some of the first steps include the development of basic common standards in platforms, networks and security, and realizing data interconnection and intercommunication between platforms and industrial apps.

Haier’s COSMOPlat industrial IoT platform
Haier’s COSMOPlat industrial IoT platform, which allows customized features on home appliances (Source:


Recognition of ‘Digital Infrastructure’ as Strategic Initiative

The phrase ‘New Infrastructure’ gathered momentum among policymakers and observers in the second half of 2020. The 2020 stimulus package eventually included a significant amount of infrastructure spending, it focused on ‘digital, smart and innovative infrastructure’ and refrained from repeating errors similar to the ones committed a decade ago.

At the 2020 Two Sessions, the NPC introduced a digital infrastructure public spending program of around $1.4 trillion. The new infrastructure includes seven key areas: 5G networks, industrial internet, inter-city transportation and rail system, data centers, AI, ultra-high voltage power transmission, and electric vehicle charging stations. During the 2021 Two Sessions, more policy guidance, public and private participation methods, and use cases have been announced.

China will set up 600,000 5G base stations in 2021
China will set up 600,000 5G base stations in 2021, on top of the 718,000 already in operation by the end of 2020 (Source: Xinhua)


For detailed analysis of these topics, please refer to the full report China’s ‘Two Sessions’: Spotlight on Supply Chain Resilience and Next-Gen Technologies.


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Podcast: Huawei Losing TSMC Access is a Bigger Deal than Losing GMS

A year ago, Huawei was put on the US Entity List, which cut off the Chinese smartphone giant and telecom equipment maker from doing businesses with most businesses in the US. The resulted of this was losing access to Google Mobile Services (GMS), including the Play Store. Now, on May 15, the US Bureau of Industry and Security (BIS) released new orders, specifically targeting Huawei, making it harder to acquire semiconductors that are created using certain U.S. software and technology. As a result, TSMC has stopped taking chipset orders from the Chinese smartphone maker. For more insights you can read this.

Though TSMC needs to follow the new US BIS restrictions, it has 120 days to clear the WIP (wafer in process). Huawei heavily relies on TSMC for chipsets to use in its range of smartphones, including the ones from sub-brand Honor. Losing access to TSMC chips is a bigger deal than losing access to GMS. At the same time, TSMC is also at a loss, as around 10-15% of its business comes from Huawei.

TSMC sure has been caught in the crossfire between the US and Huawei. But what options does Huawei have? Will it hamper the company’s upcoming product launches? Can China retaliate? We have covered all these questions and concerns in our podcast. In the latest episode, “The Counterpoint Podcast” host Peter Richardson and associate director Brady Wang discuss the implications of the new rules announced by the US.

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Canada’s Decision on Huawei, a Defining Moment in Relationship with China

Canada is caught in the middle of the raging trade war between the US and China. The re-elected government under the leadership of Justin Trudeau will soon decide the role of Huawei in the development of 5G networks.

But the decision on Huawei goes far beyond the company’s role in building the 5G network in Canada. The decision is likely to define the Canada’s political stance in the US-China trade conflict. Both US and China have been pushing to turn the decision in their favor.

Politics at Play

The decision comes amid ongoing diplomatic strife between Canada and China, while recent events also indicate some awkwardness between the US and Canadian heads of state.

Canada-China relations are on thin ice. In December 2018, Huawei’s global CFO and the founder’s daughter, Meng Wanzhou was arrested in Vancouver on suspicion that she had been involved in violating U.S. trade sanctions with Iran. Canada was bound to arrest her thanks to Canada’s extradition treaty with the US. Meng Wangzhou was eventually released on bail but has not been able to leave Canada and lives under house-arrest in Vancouver.

This event proved to be a turning point in the China-Canada relationship. In July 2019, China retaliated by arresting a former Canadian diplomat and a businessman in China on espionage charges. Another two Canadian citizens were arrested, and who still remain under threat of trial in China without access to lawyers. Later, China also blocked imports of canola seeds from Canada. In view of the events, the Canadian government has formed a committee to review its relationship with China.

Canada’s relationship with the US is also under strain. At the NATO summit in December 2019, US president Trump described the Canadian prime minister “two faced” concerning Canada’s low contribution to defense spending. And Trudeau was filmed apparently joking about Trump with other NATO leaders.

Since 2016, the Trump administration has been threatening to pull-out of the NAFTA agreement that eliminates most trade barriers between the US, Canada and Mexico. Such a move would be harmful for the Canadian economy.

The US Continues to Mount Pressure on Canada

The decision regarding Huawei’s potential involvement in 5G is likely to be one of the toughest for the newly re-elected government. The criticality of the situation can be gauged by the Canadian government’s move in July 2019 to delay the decision on Huawei’s participation until after the federal elections in October 2019.

At an international security event in Halifax, Nova Scotia, in November 2019, the US national security advisor, Robert O’Brien, commented that having Huawei infrastructure in Canada’s 5G network would be like a “Trojan Horse” compromising national security and potentially enabling espionage.

He said, “Huawei trojan horse is frightening, it’s terrifying. When they get Huawei into Canada (through 5G) or Western countries, they’re going to know every health record, every banking record, every social media post; they’re going to know everything about every single Canadian. I find it amazing that our allies and friends in other liberal democracies would allow Huawei in.”

Canada is a part of the decades old intelligence-sharing network – The Five Eyes, which comprises the US, Australia, New Zealand and the UK, as well as Canada. The US government representatives have indicated that intelligence sharing will be impacted if Canada chooses to allow Huawei to build the 5G network in the country. So far, the US, Australia, New Zealand have taken a strong stance against Huawei, completely banning its participation in building the 5G network, while the UK has allowed Huawei in non-sensitive (other than network core) infrastructure.

Why China and Huawei are important to Canadian economy?

China is Canada’s second largest export partner accounting for 4.3% of its exports, worth more than $20 billion each year.  Top export categories include wood pulp, oil seeds and soybeans. China is also one of the most important import partners, accounting for 12.6% of total Canadian imports, worth $71 billion. Among imports, most popular product categories include computers, telecom equipment, smartphones and accessories. These numbers make the trade deficit between Canada & China, slightly bigger than Canada’s overall annual trade deficit.

China is also a significant source of capital flows in Canada’s real-estate market. According to National Bank of Canada estimates, Chinese homebuyers accounted for one-third of Vancouver’s real-estate market by value during 2015, spending approximately $9.6 billion of the $29 billion of total real-estate sales. Patterns are similar in other metropolitan areas in Canada, including Toronto, which is also counted among one of the costliest cities in North America.

Furthermore, Huawei has heavily invested in Canada since 2008. Out of Huawei’s 21 R&D centers worldwide, six are in Canada, compared to three in Japan. Canada has also benefitted from Huawei relocating its US workforce to Canada. In 2019, Huawei Canada announced a 15% hike in its CAD$180 million R&D budget, already one of the highest in Canada, and the hiring of an additional 200 engineers, a one-third increase in its Canadian R&D workforce.

But apart from the financial and strategic importance of China and Huawei, Canada is also locked into a free trade agreement (FTA) with China. So, breaking an FTA would have further repercussions and would mean a direct conflict with China at the WTO.

What’s at Stake and Position of the Big Three Carriers

Huawei has earned a reputation for making high-quality network equipment, with significantly lower costs than its competitors. Its strong R&D spend has ensured strong intellectual property within 5G portfolios with more than 2,700 patents; a higher number than its competitors, though questions remain about the nature of all the patents. Huawei also leads in 5G base station shipments globally, though again, it’s early days in 5G roll-outs.

Canada already has among the costliest mobile data rates globally, so keeping Huawei out would likely imply an uptick in capital expenditure for the Canadian carriers. Cost increases would either hit carriers’ bottom-lines or be passed on to consumers.

At present, Bell and Telus both use Huawei equipment, while Rogers uses Ericsson equipment. In February 2019, Telus stated that Huawei had been good for Canada and that a ban on its 5G wireless network could potentially add costs and delays to its rollout. A 5G ban without compensation or other accommodation could lead to a “material” increase in the cost of Telus’s 5G deployment.

Meanwhile, Bell Corp. which shares infrastructure with Telus indicated that a decision on Huawei was unlikely to impact its short-term capital expenditure or 5G launch plans. In February 2019, George Cope, the CEO of Bell Canada, said,

“It’s important to know we’ve made no selection yet of our 5G vendor, and if there was a ban or if we chose a different supplier than Huawei for 5G, we’re quite comfortable all those developments would be addressed within our traditional capital intensity envelope, and therefore no impact from a capital expenditure outlook. Nor would the government decision affect the timing of Bell’s 5G service. No launch date has been announced. Bell is doing 5G tests.”

Another one of The Big Three carriers in Canada, Rogers Communications, has already decided not to use Huawei equipment and is going ahead with its current partner, Ericsson. The company executives have been quite vocal about limiting the role of Huawei in Canadian network infrastructure.

So, considering the current political scenario and rising anti-China sentiment, it makes the situation look unfavorable for the Chinese telecom equipment giant. Allowing Huawei to participate as a 5G vendor will put pressure on Prime Minister Justin Trudeau, who runs a minority government and has already been accused of a soft stance towards China. But Trudeau’s administration will remain wary of Chinese aggression and potential repercussions that the decision will entail to the Canadian economy. So a compromise approach, like that of the UK, remains a strong possibility. At the same time, the Canadian government cannot afford to infuriate the US administration, as the stakes are even higher with its neighbor.

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