On Aug 9, US President Joe Biden signed into law the controversial CHIPS and Science Act of 2022, which provides huge subsidies and funds for the US chips industry but prevents the subsidy and fund recipients from conducting any major transactions with or investing in the advanced chip-making sector in China or other countries of concern for 10 years.
The United States leads the world in chip design, but it has lost ground to East Asian economies in chip manufacturing with its global share dropping from 37 percent in 1990 to 12 percent today. On the other hand, East Asian economies' share has risen to 73 percent. What further complicates the matter for the US is that it cannot make advanced chips smaller than 10 nanometers.
Since chip manufacturing is a capital-intensive industry, any decline in revenue will directly affect their invest-ment in research and devel-opment, and thus slow down innovation
Worse, by 2030, the share of the US in chip production is expected to further decline to 10 percent, while that of the Chinese mainland is likely to increase to 24 percent, not least because 19 of the 20 fastest-growing chip makers in the world are mainland companies. This fact is hard to swallow for the US and hence the CHIPS and Science Act.
Like the US' efforts to build a "Chip 4 alliance" with Taiwan, the Republic of Korea and Japan, the CHIPS act too is aimed at curbing the growth of the mainland's chip industry, increasing the US' chip production and controlling the global chip supply chains.
But the act will not hinder the development of China's chip industry; instead, it may accelerate it.
To begin with, the US is deficient in chip manufacturing and lacks the economic foundation needed to increase chip production. To reverse the trend of the hollowing out of its manufacturing by promoting re-industrialization, the US has been working hard for more than a decade, but with minimal results. Also, in recent years, companies such as the Fuyao Group and Foxconn have encountered great difficulties in building factories or investing in the US. And even US companies including Apple have refused to "reshore" their production units or increase investment in the US.
More important, the funding provided by the act may not be enough to change the overall situation in the US. The act provides $280 billion, but only $39 billion of that is for subsidizing chip manufacturing for five years when tens of billions of dollars are needed every year to boost the high-end chip industry.
For example, Taiwan Semiconductor Manufacturing Company's fixed asset investment in 2021 was $28 billion, and its planned capital expenditure in 2022 is as high as $40-44 billion. And Samsung announced that it is building a chip foundry in Texas with proposed investment of $17 billion.
According to Bain & Company, it would take about $40 billion a year to increase the US' chip production capacity by 5-10 percent. According to Morris Chang, CEO of the TSMC, the cost of producing chips in the US is expected to increase by 50 percent, so the 25 percent tax cut the act offers is far from enough to make the US competitive in chip production.
Moreover, the CHIPS and Science Act will seriously disrupt the current production pattern of the global chip industry and have a big impact on chip production in economies such as Japan, the ROK and Taiwan.
At present, the Chinese mainland has the most complete industrial chain, highest production efficiency, and the most extensive team of talents in the world when it comes to chip manufacturing. Many global chip companies, including those from the US, have maintained their competitive edge because they have factories in China and benefit from the country's complete industrial chain. If these companies don't raise production in China after getting US funding, as the CHIPS and Science Act stipulates, they will lose their competitiveness.
Thanks to the US' increasing pressure and intervention, many Japanese chip companies have not been able to carry out normal cooperation with their mainland counterparts. The TSMC, Samsung Electronics and SK Hynix and other global companies that have multiple chip factories on the mainland, too, will suffer because of the US act. No wonder Intel Corporation has asked the US administration to not restrict chip companies from investing on the mainland.
Since the chip industries of the mainland and other economies are deeply integrated, the CHIPS and Science Act will damage the global chip industry because it is designed to decouple the mainland from the global chip supply chains and give its reins to the US. That's why Japan, the ROK and Taiwan are wary of the US act and the "Chip 4 alliance".
The act will also lead to surplus chip production and worsen global competition. The shortage in the chip markets over the past two years is already giving way to surplus, thanks to the emergence of independent supply chains in the US, the European Union, Japan and the ROK and other economies and the release of latent production capacity. As a matter of fact, many industry analysts are saying the chip bubble is about to burst.
Moreover, China is the world's largest chip market. In 2021, in the global chip trade of $555.9 billion, China's share was $432.6 billion, or 77.8 percent. Similarly, of Intel's total revenue of $74.7 billion, $20 billion－or nearly 30 percent－came from China. Samsung and SK Hynix, too, earned 30 percent of their sales revenue from China.
Equally important, major chip companies depend on China in terms of market demand even though they rely on US technology for chip production. Little wonder that the Boston Consulting Group said that if the US insists on hard technical decoupling from China, American chip companies may lose 18 percent of their global market share and 37 percent of their revenue.
Since chip manufacturing is a capital-intensive industry, any decline in revenue will directly affect their investment in research and development, and thus slow down innovation.
The CHIPS and Science Act hopes to make up for the US' shortcomings through industrial subsidies, and increase domestic chip production, so as to curb the development of China's chip industry. But the act violates the laws of the market and will disrupt the global production order. As for China, the US act may have a negative impact on its chip industry in the short term, but it will boost its development in the long run.
The author is a researcher with the Chinese Academy of International Trade and Economic Cooperation.
The views do not necessarily reflect those of China Daily.