Global Supply Chain Outlook: Macroeconomic Factors Impacting Energy & Industrials
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Since the onset of the COVID-19 pandemic, semiconductor stockpiles have been dangerously low for international manufacturers, causing massive delays in supply chain production. This shortage has been further exacerbated by a myriad of macroeconomic events, specifically the conflict in Ukraine and Russia.
As Russia continues their relentless warfare, analysts question how Ukraine–the world’s largest exporter of neon, neon being an essential component to manufacturing microchips–will fare in the throes of Putin’s regime and impact chip output.
As semiconductor prices continue to increase, how are global leaders reconsidering their current resource options?
What is the CHIPS Act?
To lift pressures off of Ukraine and stabilize manufacturing demands, Congress introduced the CHIPS (Creating Helpful Incentives to Produce Semiconductors) and Science of Act of 2022. This $52.7 billion bipartisan agreement will incentivize domestic chip manufacturing and technology research and development while offering a new 25% tax credit for companies that invest in semiconductor manufacturing equipment or manufacturing facilities in the US. The act will secure the US’s position as the leader in software and chip design and ensure that domestic semiconductor manufacturing is globally competitive after many years of offshoring.
Biden’s administration had previously unscored the legislation, but in the wake of the China-Taiwan conflict, has signed the Act as of this August, noting that the vitality of Taiwan’s semiconductor industry is a matter central to America’s national security. Taiwan Semiconductor Manufacturing Company Ltd (TSMC) outturns roughly 90% of all the world’s microchips, so a potential Chinese seizure of TSMC’s fabs and any others in Taiwan would most likely result in the US and other countries being cut off from a supply our economy depends on.
With the CHIPS Act signed into legislation, national and international technology companies are jumping on the potential growth opportunities Congress has proposed.
Global Responses to the Act
The core of the CHIPS Act is to provide over $52 billion in subsidies to help build, expand, and modernize US semiconductor facilities in the next five years. In addition, the Advanced Manufacturing Tax Credit (AMTC)–a key provision of the act– will allocate roughly $24 billion worth of temporary, refundable, non-transferable tax credits for investments in semiconductor manufacturing facilities in the United States between 2022 to 2027. By enacting legislation that places monetary and competitive gain on investing in American semiconductor manufacturing operations, the US will become more self-dependent and self-sufficient in terms of chip needs and, in the long term, wean dependency on foreign production and importation.
Roughly 70% of the cost difference between manufacturing in the United States and offshore facilities stems from foreign subsidies that other governments provide. As a result, only 12% of global chips are produced in the United States, compared to 37% in the 1990s. But, the cost incentives associated with The CHIPS Act have already begun rendering these percentages inaccurate. Foreign companies continue to express interest in opening semiconductor operations within the US and compete for its incentives. TSCM has shared plans for constructing a $12 billion US facility to the Commerce Department, while GlobalWafers has offered a multi-billion investment that would fill a gap in the US chip manufacturing supply chain. Domestic chipmakers will likely receive the majority share of the subsidies, but SEC and TSMC are sure to be foreign beneficiaries based on our findings in AlphaSense.
Europe has already invested heavily in its Chips Act, contributing more than 43 billion euros of public investment to support the legislation until 2030. This massive funding will drive Europe’s competitiveness and resilience in semiconductor technologies and applications and help achieve both the digital and green transition. Longterm, the act will promote economic growth in the coming decade, as it is vital for Europe to reduce its dependence on Asia and elsewhere for chip importation and mitigate geopolitical risks.
Recently, European and US officials met at the second Trade and Technology Council meeting to coordinate semiconductor subsidies and discuss measures against Russian disinformation. Moreso, European officials are focused on an initiative to coordinate investment into the semiconductor industry in order to avert a “subsidy race” amidst ongoing worldwide chip shortages. “We hope to agree on high levels of subsidies – that they will not be more than what is necessary and proportionate and appropriate,” European Competition Commissioner Margrethe Vestager said.
Taiwan is a powerhouse producer of semiconductors, with multiple powerful countries like China and the US depending on its exportation of chips. Even with the development of the US working towards establishing independence and self-sufficiency in their chip needs, Taiwan’s positioning as one of the world’s major semiconductor producers has not faltered. In fact, Taiwan is profiting from the US’s CHIPS Act. As mentioned, TSMC, the world’s largest contract chipmaker, has invested $12 billion into building one of their plants in Arizona.
“After 50 years of continuous innovation, investment and generations of talent, our country’s semiconductor manufacturing efficiency, supply chain integrity and energy innovation have always been at the world’s top, and Taiwan’s key position in semiconductors will not be shaken,” Taiwan’s Economy Ministry says. “Whether in the past, present or future, Taiwan will continue to play the role of an indispensable partner in the global supply chain.”
The Chinese state media outlets, trade institutions, and government have echoed a similar voice of criticism for the CHIPS Act’s intentions, with Beijing suggesting that Washington is using this legislation as a means to undermine China’s role in global supply chains. The fabrication insinuates that the CHIPS Act was created to lure semiconductor talent and investments into the US while attempting to prevent global chip giants like TSMC and Samsung Electronics from expanding their capacity in China if they use US funding.
In the eyes of Chinese officials, the legislation further confirms their beliefs that Washington is strategically limiting China’s technological advancement, as the US is also pushing for the so-called “Chip 4 Alliance” with South Korea, Japan and Taiwan; China being excluded.
“If Samsung and SK Hynix tap into [Washington’s] funding, it is almost certain that it would affect their expansion in China, especially given their dependence on US equipment.” Gary Ng, a Senior Economist at Natixis, says.
South Korea’s involvement with the CHIPS Act is divided, as both China and the US play a heavy role in their decision-making process.. The South Korean government has expressed caution in joining a US-led chip alliance that is widely believed to be targeting China. They believe President Biden is intentionally convincing or even pressuring major corporations to participate in this mission.
However, the US aims to oppose China’s influence in the region and boost South Korea’s technology capabilities with the CHIPS Act. While Seoul officials have not commented on the semiconductor trade wars, there’s pressure from China, its biggest trading partner, to take a stance. “Tax deductions need to be further extended considering the US is seeking to offer up to 40 per cent of tax deductions for new facility investments,” Yoo Hwan-Ik, an Industry Division Chief at the Federation of the Korean Economies, says.
As China expands its chip market share and takes an increasingly aggressive stance toward Taiwan, Japan is keeping an eye out for the potential disruptions of chip manufacturing. To increase production, the Japanese government is investing billions of dollars in its domestic semiconductor industry and offering enormous subsidies for joint ventures with companies from Taiwan and the United States.
This past July, Japan and the United States announced plans for a joint research center focusing on advanced semiconductors that would be open to other “like-minded” nations. “The era where the world is at peace, and it doesn’t matter who supplies our semiconductors, is over,” Kazumi Nishikawa, a director at Japan’s Ministry of Economy, Trade and Industry, says.
The Energy Transition and supply chain are top of mind across nearly every industry, even more so with Oil & Gas, Automotive & Manufacturing, and Aerospace & Defense. Interested in how the four perspectives–executives, analysts, experts, and journalists/regulatory bodies–are forecasting and discussing supply chains for these three industries? Download our latest report, Global Supply Chain Outlook: Macroeconomic Factors Impacting Energy & Industrials.