Semiconductor Capex Soars. Is It Misdirected?

Legislation now in play in Washington aims to provide as much as $52 billion in loans, guarantees, and other incentives to technology companies for retrofitting US-based chip manufacturing. That seems logical, if not politically expedient, at a time when US households are being deprived of consumer goods because of a global chip shortage. There are also important national-security and industrial-autonomy angles in the face of collapsing globalization.

But that may be a costly take on ad hoc industrial strategy. In an interview on a Brookings Institution podcast Can Semiconductor Manufacturing Return to the US?, TSMC founder Morris Chang asserts that chips made at its Oregon facility cost 50% more to manufacture than those made in Taiwan, despite a retooling of the plant over the past two decades. He speaks with authority; TSMC is the world’s largest manufacturer of semiconductors, controlling more than 50% of global chip production revenue.

Chang distinguishes between chip design, where he believes the US still has an advantage, and chip fabrication. He states, “It’s a bad thing for trying to do semi manufacturing in the US.”

The industry leader ventures to speak from two sides of his mouth. TSMC has invested heavily in an Arizona plant, albeit “under pressure from the US government.” The under-construction facility will focus on so-called 5-nanometer chips, rather than the more pedestrian chips it now forges in Oregon.

So why all the fuss? The industry may actually be in a race to the bottom.

Right now, semiconductors are a bright spot on the industrial landscape. Sales increased near 20% in 2021, according to the Semiconductor Industry Association, with further gains likely approaching 10% this year. The 2022 number may be conservative. Just-released data for February 2022 reveal that sales were up 34% year-on-year. The fact that Russia is neither a major importer—or exporter—of chips, suggests that the semiconductor business is among the few globally that are not directly impacted by the war in Ukraine.

We could end up with an unbelievable glut of chips in five-to-seven years. Corporate announcements indicate that there may be some $190 billion in capital expenditures scheduled this year after more than $150 billion in 2021. Certain types of economic modelling no doubt imply that these numbers are reasonable. But what happens if global momentum hits a wall? Many investment decisions were made before oil prices elevated and interest rates tightened. The risk is that we may see more bad news than good.

In addition to plant commitments by juggernauts Samsung and Intel, smaller companies are also in the game. Kyocera, as one example, announced in mid-April that it will build its largest facility ever in Japan with a $500 million commitment. The industry is groping in the dark with these massive outlays. It takes some two-to-three years for a new facility to come online.

Here in America, Intel remains effusive about its mega-project in Ohio, throwing caution to the wind with a $20 billion capex decision. CEO Pat Gelsigner extols, “We want to grow this to be a megafab location that is one of, if not the biggest of, any semiconductor location on the planet.” One reason may be that it is pandering to Washington for a lion’s share of the forthcoming industrial support package to complete the project. Better to use other people’s money to bolt ahead of the competition.

Semiconductor manufacturing—usually a humdrum matter—is now a politically-charged topic. We note “nanometer” is a marketing term, not a scientific one, but it sounds brilliant when talking about the need to develop new-era engineering skills to be industrially competitive. Ironically, the current debate in Washington is dominated by the Democrats, which aim to be progressive in the face of their Silicon Valley supporters. Yet the Republicans classically focus on the sort of national-security and industrial-autonomy issues which are driving US-based manufacturing policies at this time.

Our Vantage Point: The billions of dollars in private and public money going into semiconductor manufacturing may eventually be a bust for the industry and taxpayer. At least in Washington, though, it will quell the household uprising over consumer-goods shortages.

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