Two cheers for the new CHIPS and Science Act

On Tuesday, President Joe Biden will sign the CHIPS and Science Act. The $ 280 billion bill was passed with a solid bipartisan majority in both the House and Senate, which is a rare feat. But these are unusual times: a severe shortage of semiconductors that hindered industrial production for two years also underscored the nation’s dire situation regarding chips that drive everything from cars to ovens to computers. The United States invented the microprocessor only to see its production and development migrate to other nations.

The bill is, all in all, a plus for the United States. It is expected to increase microchip production by providing $ 52 billion to chip makers and subcontractors to build facilities in the United States. Most of the bill’s funding goes to scientific research.

There are assorted barriers in the account to ensure that semiconductor money only goes to in-house chip manufacturing. While guardrails tend to be outdated, this is, at least, a start. Without the federal cash infusion, the United States will find it even more difficult to reach Taiwan and China.

Unfortunately, the deed that Biden will sign does not hold back the tactics that have reduced our ability to produce vital goods.

It’s a family story. Manufacturers close their plants in the United States and offshore much of their capacity in one or two locations, creating an extreme concentration of industrial production. When production is so concentrated, supply chains become incredibly fragile, as is the case with semiconductors. During the pandemic, much of the shortage of used and new cars was a shortage of semiconductors. Modern cars can have hundreds of them in one vehicle; no fries, no car.

In particular, the chip industry, motivated by the goal of returning value to shareholders, has taken advantage of the liberalization of global trade, which has facilitated the relocation of manufacturing facilities in some locations overseas.

Many of these companies have sought single-source suppliers and used just-in-time distribution to reduce costs by increasing the fragility of the chip supply chain. A new report from the Open Markets Institute points out that a single source dominates the critical nodes of the supply chain. (I work at OMI and have worked on this report.)

Eighty percent of the refrigerants needed for the chip industry come from a plant in Belgium and 10 percent from one in Italy. Together, China and Taiwan account for at least 66% of the chip assembly, testing and packaging (ATP) market. Japan controls 90 percent of the market for photoresists, which create circuit-on-chip patterns. DuPont, with factories in Taiwan and Japan, holds 78% of the market for CMP sludge, which prepares microchips for lithography. Dutch company ASML has a 90% market share in the lithography required for chip manufacturing, while 55% of the sputtering process required for the chips is controlled by a company, JX Nippon, in Japan. NuFlare Technology owns 50 percent of the electron beam mask writer market and has a listed facility in Yokohama, Japan. Mycronic Technologies, based in Sweden, is the sole supplier of laser mask manufacturers. You understood.

This dangerous concentration of manufacturing doesn’t just exist in the chip industry; it is also in every other industry that the Biden administration has identified as needing a resilient supply chain.

Take pharmaceuticals. In 1984, generics made up 19% of prescriptions in the United States, but in 2019, they accounted for 90%. Passing the Hatch-Waxman Act in 1984 led to this increase in the use of generic drugs by simplifying the regulatory approval process. As the act increased competition and lowered drug prices, companies like Pfizer, GlaxoSmithKline, and Novartis have shifted manufacturing to Asia to take advantage of lower operating costs and government support. This change has had such an impact that, up until this year, the last major plant producing active pharmaceutical ingredients in the United States was built 30 years ago. Now, China and India produce, according to some estimates, 80% of the active ingredients used to make the generics sold in the United States.

While the CHIPS Act’s emphasis on domestic semiconductor manufacturing is welcome, Washington should also ensure that chip makers diversify manufacturing and suppliers in the US and abroad as a condition of receiving taxpayer funds.

In addition, restrictions on share buybacks, executive payments, mergers and relocation should be imposed. Since the 1980s, corporate investments in capital and labor spending as a percentage of profits and debt have dropped dramatically. Share buybacks are hitting record highs, with $ 319 billion in March alone. Meanwhile, Chinese semiconductor company SMIC announced last month that it has achieved 7nm microchip production despite US sanctions against the company. Advanced microchips will be the basis for emerging technology ranging from quantum computing to artificial intelligence. More worrying is that the American manufacturer Intel has not yet introduced 7nm chips. According to reports, SMIC has copied the process technology of Taiwanese manufacturer TSMC, which holds 90% of the market share of these advanced chips. So now, only two countries can produce 7nm chips and the US is not one of them. That is why the CHIPS Act is a beginning, but only a beginning.