For the CHIPS Act to work, stop bashing China

The bipartisan CHIPS and Science Act of 2022 had a worthy goal: to revitalize domestic high-tech manufacturing by providing financial aid to the world’s best chip makers. The original emphasis was thus on reshoring and bolstering America’s supply chains. As the use of the past tense suggests, the implementation stage is off to a very rocky start. A plethora of provisions, especially those which single out China for punishment, threaten to prematurely derail the CHIPS Act unless the Biden administration makes a course correction.

Let me be clear: my problem is not with the text of the legislation. As a businessperson who was a direct participant in the shifting of supply chains to China during the 1990s, I applauded the passage of the CHIPS Act. It was a real and genuine piece of legislation that addressed long-standing institutional problems. To borrow a phrase, I hoped the act would make America great again, at least when it came to chips.

More than just chips?

But suddenly the CHIPS Act appears to be about much more than chips. Last week, the Commerce Department attached a bundle of strings to the $52.7 billion in subsidies for chip makers. Recipients must agree to pay union wages, provide childcare for employees, run their foundries on low carbon fuels, share their profits with the federal government, make a concerted effort to hire more women, and refrain from stock buybacks.

Experience tells me that companies likely will go along with the above measures, since they won’t impact construction schedules or product quality. They might shave a percentage point or two from profits; but, then again, wokeness sells well in much of America.

Unfortunately, the conditions announced by the Commerce Department extend well beyond the Democratic Party’s domestic agenda. In a recent interview, Commerce Secretary Gina Raimondo spoke of subsidy-related restrictions on “foreign countries of concern.” She was really talking about China.

Restrictions on expansion

Raimondo stated that subsidy recipients must agree not to expand semiconductor manufacturing capacity in countries of concern for 10 years after taking accepting aid. More specifically, companies must not “knowingly engage in in any joint researcher technology licensing effort with a foreign entity of concern that involves sensitive technologies or products.”

In effect, Raimondo is forcing private enterprises to choose between the two superpowers. The Biden administration clearly deems China a national security threat, and its anti-China moves reflect populist sentiments held across the political divide.

However, singling out China will very likely make chip makers think twice before submitting their subsidy applications. This reason is simple: China remains a vital cog in the world’s semiconductor ecosystem.

Potential subsidy recipients Intel, Samsung Electronics and Taiwan Semiconductor Manufacturing Company (TSMC) all have existing chip plants in China, where they continue to invest billions to expand, modernize and build on their current and planned operations. For instance, according to Taiwanese news outlets, China produces 40% of Samsung’s production of NAND flash memory chips, critical components used in everyday electronics. TSMC, in the middle of a $2.9 billion upgrade to their Nanjing factory, produces its automotive chips there.

China’s staying power

China’s centrality to the chip industry is unlikely to diminish anytime soon. According to the Semiconductor Industry Association, China’s chip sales totaled almost $40 billion in 2020, making up 9% of the world market. The total is projected to reach $116 billion in 2024, or 17% of global sales.

And China is hardly standing still. In response to the CHIPS Act, China announced its own $148 billion package last December with the clear-eyed goal of bolstering China’s indigenous semiconductor industry by subsidizing the purchase of Chinese equipment and construction of factories. While the implementation details are not public, it is safe to say that they do not include stock buyback or climate provisions. China has an unwavering goal of becoming the global leader in semiconductor technology.

Intel and other U.S.-based chip companies are eager to stay in Biden’s good graces, but the same cannot be said of foreign companies. When then Speaker of the House Nancy Pelosi visited Taiwan last year, TSMC founder Morris Chang reportedly told her that the American effort to become a semiconductor juggernaut was both “naïve” and “doomed to fail.”

The Commerce Department’s talk of “countries of concern” surely has intensified Mr. Chang’s reservations about America’s true intentions with the CHIPS Act. Under such circumstances, I would not be surprised if TSMC reconsidered or at least pared down its $40 billion investment in the U.S. After all, China, with its untethered economic goals, will gladly take TSMC’s investment and semiconductor technologies.

President Biden is conflating his domestic politics—a mixture of progressive policies and popular appeals to China skepticism—with the bipartisan support for reshoring supply chains in the name of economic stability and national security. He is trying to have his cake and eat it too, using the CHIPS Act to solidify his electoral position. This approach risks undermining the trust of foreign companies willing to sink tens of billions into the U.S. market but unwilling to reduce, never mind abandon, their stakes in China.

The question for President Biden is this: Do you want the CHIPS Act to work? Or do you just want to pick on China?

About the author:

Stanley Chao served as executive vice president from 1994–98 for Kingston Technology, the largest third-party producer of DRAM memory modules. He currently is the managing director for All In Consulting, assisting companies in their China supply chains. Twitter @stanleychao6.

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