How the U.S. Is Building Its Semiconductor Ecosystem
Microchips, often dubbed as the brain of any computing device, are core to devices all around us be it a smartphone, game console, MRI scanner or a defense system. The dynamics in the chip market are complex, and the damage that can be caused by a breakdown in the supply chain can extend much beyond economics. The chip shortage caused by the pandemic and geopolitical tensions between the U.S. and China have awakened governments across the globe to the fact that localization of chip manufacturing is critical to national and economic security.
Here’s an overview of how the U.S. is working to reduce dependency for chip manufacturing from East Asia by strengthening its own ecosystem.
The chip market and its supply chain have many elements with different companies and nations dominating each one. The U.S. semiconductor industry has consistently accounted for 45% to 50% of global revenues. In 2021, the global semiconductor sales reached $556 billion, out of which the U.S. semiconductor companies accounted $258 billion or 46% of the global market.
The first segment is the electronic design automation (EDA) which “consists of software, hardware, and services with the collective goal of assisting in the definition, planning, design, implementation, verification, and subsequent manufacturing of semiconductor devices, or chips.” The U.S. remains the unchallenged leader in the electronic design automation (EDA) tools, controlling about 85% of the world market. Synopsys (SNPS) and Cadence (CDNS) together account for 62% of the total market share. The global EDA market is expected to reach $22.21 billion by 2030, growing at a CAGR of 9.1% from 2022 to 2030.
Another layer of critical inputs in the semiconductor supply chain is the specialized equipment. In semiconductor manufacturing inputs, the U.S. retains a strong position with more than 50% of the market share as against 2% for China. Applied Materials (AMAT), Lam Research (LRCX), KLA (KLAC) and Teradyne (TER) are some of the key U.S. players in this market. The global semiconductor manufacturing equipment market, valued at $95.3 billion in 2021, is projected to reach $175.0 billion by 2027.
The third important segment is specialized chemicals and materials. The global electronic chemicals and materials market valued at $62.51 billion in 2021 is expected to reach a value of $ 91.21 billion by 2027. Some of the prominent American companies operating in this sphere are Air Products (APD), Dow Chemical, DuPont (DD), CMC Materials (formally Cabot Microelectronics).
While the U.S. has held its dominance in these segments, there is a huge gap in the fourth part created by an erosion in its manufacturing capacity.
“America invented the semiconductor, but today produces about 10% of the world’s supply—and none of the most advanced chips. Instead, we rely on East Asia for 75% of global production,” as per a White House report.
The huge dependence of the U.S. on Taiwan is reflective in the region wise sales revenue of Taiwan Semiconductor Manufacturing Company (TMC). The company’s revenue from the U.S. during 2021 stood at 64% vis-à-vis 61.07% in 2020 while China’s share declined from 17.46% in 2020 to 10.37% in 2021.
Back in 2020, a BCG report highlighted that, “only 6% of the new global capacity in development will be in the U.S. In contrast, it is projected that during the next decade China will add about 40% of the new capacity and become the largest semiconductor manufacturing location in the world.”
Efforts are being made to change such predications. Here’s an overview of the announcements and investments in 2022.
In January 2022, Intel (INTC) announced plans for an initial investment of more than $20 billion in the construction of two new leading-edge chip factories in Ohio. The construction is expected to begin late in 2022 while production will go online in 2025. “Ohio will be home to Intel’s first new manufacturing site location in 40 years,” as per the company’s statement.
In February, Intel’s decision to acquire Tower Semiconductor (TSEM) to strengthen its global, end-to-end foundry business for approximately $5.4 billion was announced. TSEM, a leading foundry for analog semiconductor solutions, owns two manufacturing facilities in Israel, the U.S., Japan and Italy (some are via percentage stake and partnerships).
In addition to investing in the U.S., companies are extending support to manufacturing units in Europe. Intel plans to invest €80 billion in the European Union over the next decade along the entire semiconductor value chain right from research and development (R&D) to manufacturing to state-of-the art packaging technologies. In March, Intel announced the initial investment €17 billion into a fab mega-site in Germany, R&D, and design hub in France, and to invest in R&D, manufacturing, and foundry services in Ireland, Italy, Poland and Spain.
Texas Instruments (TXN) plans to spend around an average of $3.5 billion annually on Capex in the next four years from 2022 to 2025. During the earnings call in April, the company clarified that $3.5 billion is an average and they are likely to run below this in 2022 and would run higher in the next three years.
The Chip and Science Act of 2022 was passed by the Congress in July and Signed by President Biden this month. The Act provides $52.7 billion for American semiconductor R&D, manufacturing and workforce development. It also offers a 25% investment tax credit for capital expenses for manufacturing of semiconductors and related equipment.
The passage of the Act has spurred companies to announce additional investments in American semiconductor manufacturing.
Micron (MU), the only U.S.-based manufacturer of memory, announced its plans to invest $40 billion through the end of the decade to build leading-edge memory manufacturing in multiple phases. The investment will create up to 40,000 American jobs. This investment aligns with the Micron’s plan of $150+ billion global investment in manufacturing and R&D over the next decade. Sanjay Mehrotra, CEO and President of Micron said that the CHIPS and Science Act “will enable Micron to grow domestic production of memory from less than 2% to up to 10% of the global market in the next decade, making the U.S. home to the most advanced memory manufacturing and R&D in the world.”
To secure long-term supply, Qualcomm (QCOM) will be buying an additional $4.2 billion in semiconductor chips from GlobalFoundries’ (GFS) upstate New York facility. This builds on a prior $3.2 billion purchasing agreement between the two companies taking the total commitment to $7.4 billion through 2028. Qualcomm plans to “increase semiconductor production in the U.S. by up to 50% over the next five years.” GlobalFoundries is the only American company to rank among the top five semiconductor foundries globally. In July, GlobalFoundries and STMicroelectronics (STM) signed a Memorandum of Understanding to create a new, jointly operated 300-mm semiconductor manufacturing facility in France.
In addition, TSMC recently celebrated placing the last beam which is the construction industry is known as a “topping” milestone in FAB 21’s fab building. Two years ago, TSMC announced its intention to invest $12 billions to build a 5-nanometer semiconductor fab in Arizona.
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