In the concern of a government shutdown, the ambitious semiconductor goals of the United States are at risk.
According to NextGov, the potential government shutdown crisis poses a serious threat to the U.S. semiconductor policy, especially the CHIPS and Science Acts, said Commerce Secretary Gina Raimondo. While short-term measures have prevented direct interruptions, long-term uncertainty still exists.
“It goes without saying that China, Russia, and Iran have not shut down,” Raimondo said Wednesday before the Senate Committee on Commerce, Science, and Transportation. “The work we’ve done in the CHIPS Act is critical to our national security, and any shutdown would greatly disrupt our ability to stay on track with this vital work.”
Raimondo expressed concern about the impact of a government shutdown on ongoing semiconductor efforts, with a focus on the CHIPS and Science Acts, the government plans to strengthen the national economy and security through this legislation. She emphasized the importance of ongoing operations, implying that countries like China would not face such interruptions and would continue to fund their semiconductor plans.
The CHIPS Act launched in 2021, allocates nearly $280 billion for U.S. semiconductor research and manufacturing over the next decade, with $200 billion specifically designated for scientific research, development, and innovation promotion. In addition, $52.7 billion is earmarked for semiconductor manufacturing, research, and talent development, complemented by $24 billion in chip production tax incentives.
With this funding, the United States hopes to progress in semiconductor manufacturing and reduce dependence on foreign supply chains. Raimondo further emphasized the urgent nature of this task in the context of the global competitive landscape.
A $10 billion plan embedded in the CHIPS Act aims to promote technology-led economic growth nationwide. The program, set to launch in 2023, has received $500 million in funding, as evident from its popularity with over 400 applications.
“We are overwhelmed by the quality and quantity of applications for technology center programs,” Raimondo said. “If we don’t have anything else, it’s clear that this deserves more funding.”
However, broader government funding issues persist despite the short-term spending bill providing temporary relief until November 17. Aside from political turmoil, Congressman Kevin McCarthy faces an unprecedented role as Speaker, showcasing a tense atmosphere and potential obstacles for future spending bills.
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U.S. Policy Impact on the Global Semiconductor Industry
On October 7, 2022, the U.S. Bureau of Industry and Security issued new regulations concerning the export of certain semiconductor manufacturing equipment. These rules attempt to prevent China from obtaining advanced artificial intelligence chips by combining new controls on software, personnel, technology transfer, manufacturing equipment, and U.S. components integrated into foreign products.
These new rules signify a significant shift in the export control policy that the United States has pursued for nearly 30 years. Previous policies aimed to keep competitors, primarily mainland China, technologically behind the United States by raising control levels for new technologies and subsequently releasing older-generation products for export.
This approach had three effects: China mainland was denied access to cutting-edge technology, U.S. companies could sell old technology to China mainland and use the generated revenue for research and development, and providing old U.S. technology to China reduced its incentive to develop alternatives.
The deteriorating U.S.-China relationship and diminishing returns on the third point—China embarked on its own path of autonomous technology development years ago—led to the implementation of the new U.S. rules. The key difference in the new policy is the establishment of technology control lines that the current U.S. government does not intend to move.
The United States has shifted its policy from merely attempting to block China’s progress to actively seeking to reduce its military capabilities. Export controls will remain at the same level regardless of future technological developments, meaning that over time, the scope of controlled items and technologies will expand. This also implies that enforcement will become more challenging, and the costs for U.S. manufacturers will increase.
The short-term impact of the new rules appears relatively small for chip manufacturers since the number of chips directly affected is relatively limited. However, it is more significant for equipment manufacturers with significant markets in mainland China. Assessing the long-term impact requires examining three questions: How do the new rules affect the revenue of U.S. companies? Will the new controls accelerate China’s policy of autonomous technology development? Will the new controls ultimately lead to “design obsolescence,” where products developed by other countries do not contain U.S. technology and are therefore outside the scope of U.S. export controls?
Currently, these questions cannot be fully answered, but there are indications of what might happen. Regarding U.S. company revenue, the direct impact may be relatively small for chip manufacturers but more significant for equipment manufacturers. As time goes on and the scope of controlled items expands, the negative impact on revenue will also increase, and U.S. companies may find themselves financially strained, which could adversely affect their research and development expenditures for next-generation technologies, thereby undermining their competitive advantage.
Regarding China’s policy, the new U.S. rules are almost certain to accelerate China’s plans for autonomous technology development, which were already underway but will now be pushed forward more rapidly due to the broad scope of the new rules. They may also increase excess capacity for legacy chips in mainland China, further reducing revenue for U.S. companies.
The third question is more challenging to predict. We have seen instances of “design obsolescence” before—the most notable example being in the late 1990s and early 2000s with commercial communication satellites. In the short term, it appears that no country can completely eliminate U.S. technology from chip or equipment development, but the “short term” in the semiconductor industry is a matter of several years.
As the United States’ controls cover more and more items, the motivation to develop products without U.S. technology will increase, and we may witness a replay of the satellite incident, where the global market share of the U.S. satellite industry declined from 75% to 25%.
In the long run, these rules may pose significant challenges to U.S. companies in maintaining market share and revenue expectations. As China continues on its path of autonomous development, U.S. enterprises will inevitably face more competition from China and possibly new competition entering the market from other sources unaffected by U.S. export restrictions. This may not be an immediate concern, as the barriers to entry in this industry are very high in terms of capital and technical expertise, but the longer the control measures remain unchanged or expand in scope, the more likely competition will intensify.
This situation provides opportunities for other Asian countries in two opposite directions. Firstly, as existing companies seek to remove mainland China products from their supply chains, they will look for alternative manufacturing locations, with Southeast Asia being an obvious choice, although opportunities vary from country to country. Secondly, market newcomers seeking to develop products without U.S. technology may consider Asia as a suitable location for their new supply chain component.
Several regions in Asia have extensive experience in manufacturing chips and other parts of the supply chain, including packaging, testing, and assembly. Japan has already joined the United States in imposing additional controls on semiconductor products, while South Korea and Taiwan, China, face increasing pressure to do so. As the United States considers the impact of current and future controls, it must take into account the political and economic costs it demands from its allies.
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