What does the CHIPS and Science Act mean for global supply chains?

Semiconductors or “chips” as they are often called, are essential to our lives. They are in our cell phones, our cars, our laptops, our washing machines, our TVs and airline avionics – it’s hard to imagine a world without them.

American companies in Silicon Valley invented semiconductors more than 70 years ago. And, up until the 1990s, most of them were produced in the U.S. But now, only about 12% of all semiconductors are produced domestically.

This precipitous decline was exposed during the pandemic with a worldwide shortage of chips and the vulnerability of global supply chains. It wasn’t a secret that most of the world’s production (about 80%) of semiconductors was in Taiwan at TSMC, in Korea at Samsung and in China by other companies. However, the critical nature of shortages became very apparent during Covid and calls for the reshoring of semiconductors rang loud and clear.

The Biden Administration, during its first 100 days, published a supply chain vulnerabilities report that called out semiconductor production as one of the top four industries that needed to come home. The list includes pharmaceuticals, rare earth mining, electric vehicle battery production and semiconductors.

The CHIPS and Science Act of 2022 signed into law by President Joe Biden in August is an important step in the redevelopment of semiconductors in America. The legislation provides $52.7 billion for manufacturing incentives to boost microchip production in the US.

Chip manufacturers can begin seeking tax breaks and funds to offset construction and other costs beginning in 2023. New semiconductor factories are now being built in Ohio, New York, Arizona and other locations in the US. It will take 5-10 years for these new factories to come online.

Semiconductor producers are not the only companies to benefit from incentives and funding. So will the thousands of semiconductor design companies scattered throughout Silicon Valley and around the country. That will also be the case for semiconductor process companies including lithographers, packagers, testers and others. Local communities will also benefit from employment opportunities and economic growth.

The shift to American manufacturing of semiconductors will change sourcing patterns, shorten global supply chains and shift where the assembly of finished goods is located. We are likely to see some reshoring of production and assembly of finished products to the U.S. The shift will be gradual, but steady.

Once again, supply chain professionals will be called upon to be flexible and open to re-thinking how supply chains operate today. Shorter, less risky supply chains will drive faster order fulfillment and response times. Patterns and routes will shift in response to where products are being made, and that will lead to the renegotiation of carrier contracts, selection of new services and new supply chain partners.

Producing semiconductors and other goods in the U.S. represents a significant shift in supply chain management. Be prepared.

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