The $52.7 Billion CHIPS and Science Act Of 2023 Has the Potential To Bring Back U.S. Manufacturing

Just as iron and steel formed the backbone of the U.S. industrial revolution in the 1940s, semiconductors are the foundation of today’s digital revolution. The 2022 CHIPS and Science Act focuses on bringing research, development and manufacture of semiconductors back to the United States.

This legislation injects $52.7 billion into American semiconductor research, development, manufacturing, and workforce development. Roughly $39 billion is tagged for manufacturing including $2 billion for legacy chips in car and defense systems, $13.2 billion is set aside for R&D and workforce development, and $500 million is targeted to support activities such as communications, security and supply chain.

If this effort is successful, and I believe it will be, it will result in higher value, more strategic manufacturing jobs that will be more difficult to outsource. If this hypothesis is true, semiconductor development and production will be a sustainable solution to increasing domestic manufacturing.

Semiconductor shortage key to pandemic supply chain woes

Semiconductors have become the cornerstone of modern industry due to society’s increasing reliance on electronics. Everything from smartphones to medical equipment relies on semiconductors to function faster, less expensively, and more accurately.

While the well-publicized toilet paper and hand sanitizer shortages became the quintessential supply chain problem of the pandemic, issues with semiconductor supply and demand were much more pervasive.

The?National Library of Medicine ?succinctly explains the various domino effects that occurred during 2020-21.The lockdown reduced the demand for automobiles which caused several plants to cut production or completely shut down. The automotive manufacturers subsequently canceled orders for various components, particularly semiconductor chips. In parallel, work-from-home led to increased demand for electronic products such as laptops, tablets, gaming consoles, headphones, and wireless routers; the semiconductor manufacturers reallocated their chip production capacities.

“In addition, the US imposed restrictions on trade with a few companies like Huawei and ZTE technologies based in China, which prevented semiconductor manufacturers like TSMC from trading with these firms,” the article continued. “Uncertainties in business and the potential for future sanctions led several companies to hoard semiconductor chips, further aggravating the crisis.”

This situation prompted the federal government to take steps to protect future supply chain disruptions by injecting nearly $53 billion into semiconductor research, development, manufacturing and workforce development through the CHIPS and Science Act.

But will history repeat itself?

Historically, Americans have excelled at innovation, but because of the higher cost of living in the United States, manufacturing frequently moves offshore. Unfortunately, government subsidies, bailouts, and monetary investments are often only short-term, band-aid solutions.?

Consider the evolution of the auto industry. While many individuals and countries contributed to the invention of the automobile, Henry Ford is known for accelerating its wide adoption through mass production. Throughout the 20th century, the development and manufacture of automobiles spread, both domestically and internationally.

Competition heated up with companies like Chrysler over-investing to capture both the domestic and global market. When these poor business decisions were coupled with multiple recessions, an energy crisis, and new fuel efficiency regulations, the company neared bankruptcy. On May 10, 1980, the federal government approved a $1.5 billion loan, which was, at the time, “the?largest rescue package ever granted ?by the U.S. government to an American corporation.”

Yet, in situations similar to Chrysler’s, governmental financial assistance only goes so far and for so long. We’ve since seen that automobiles have become a commodity–and commoditization often pushes for the lowest price. In the past, that has been the key factor in pushing manufacturing overseas as companies seek cheaper labor for production.

That brings up the questions of how do we create sustainable domestic manufacturing within a global economy? Will what happened to the U.S. auto industry repeat in the semiconductor industry years down the road? The answers and results will require the United States continue to find ways to balance the benefits of international trade against things like supply chain risk and long-term goals.

Why the semiconductor industry is different

Unlike the auto industry, which produces large, bulky, difficult-to-ship products, semiconductor chips are, by nature, more agile to manufacture and distribute. While initial auto demand was great, this demand naturally levels out as customers keep vehicles and the used car market satisfies other consumers. In contrast, semiconductor demand is based on the development of new electronic technologies, which means demand has the potential to continue to rapidly climb in the near future.

For example, the recent release of generative artificial intelligence tools such as ChatGPT promise a lucrative future for semiconductor developers and manufacturers. According to the?Wall Street Journal , if these new tools that require massive computing power are widely adopted as anticipated, it could result in tens of billions of dollars in net annual sales for semiconductor companies.?

This projected demand, coupled with securing supply of these highly sought after components, make bringing semiconductor manufacturing back to the United States a smart idea. If these opportunities in researching, developing and producing semiconductors are pursued domestically, I believe they will bring higher-paying, more strategic manufacturing jobs to the U.S. that are both sustainable and less likely to be outsourced in the long run.

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