Over the summer, Congress passed the CHIPS Act, which was signed into law by President Joe Biden. Here is how the CHIPS Act will strengthen American manufacturing and slow China’s advancement in smartphone manufacturing.
While it is well known that China leads the world in smartphone manufacturing, what is less well known is that the most critical parts of these phones, the microchips, are imported and are beyond Chinese manufacturers’ ability to produce them. These microchips, also known as semiconductors, are almost entirely made in Taiwan and South Korea using technology that is unavailable to China due to U.S. intervention. Despite billions of dollars invested by the Chinese Communist Party (CCP) in Chinese tech companies, it is believed that they are years away from being able to create the microchips required for a smartphone. The Chinese government has launched investigations and anti-corruption probes to try and understand the lack of progress despite a $100 billion investment.
The semiconductor industry is unique in that many companies designing microchips do not possess any factories at all. Instead, these designs are sent to a microchip factory, also known as a ‘fab’, where they can be produced for use in electronic devices. The most advanced chips have components that are 20,000 times smaller than a human hair at 5 billionths of a meter.
Smaller components allow chips to not only run faster and more efficiently, but allow for more features to be included. As consumers demand more capable devices with longer battery life, it is impossible to create an advanced phone today without chips manufactured in a factory operated by a leading semiconductor manufacturer, like Samsung in South Korea or TSMC in Taiwan, even if the chips are designed in the United States or China.
As the Chinese semiconductor industry is attempting to close this gap, the U.S. government, under the Trump administration, started to intervene more aggressively by restricting the sale of critical chip-making technology made by Netherlands-based company ASML to China in 2018. In 2022, the Biden administration expanded its efforts to stop companies in the U.S. and U.S.-allied countries from selling or supporting semiconductor manufacturing technology to China in a continuing attempt to slow Chinese progress in the sector.
While these export controls might slow China’s advancement in semiconductor manufacturing, their effectiveness will shrink over time. To make sure the U.S. stays ahead, the CHIPS act, passed by bipartisan majorities in both houses of Congress in July 2022, will provide $52 billion to establish more U.S.-based factories of advanced microchips. Historically, while U.S. companies have had the technology and understanding to build advanced fabs (microchip factories), the bulk of investment for building them have primarily gone to Asia. With this investment, it is expected that the U.S. will develop and maintain the capability of building microchips over the next several years.
The CHIPS act also provides funding for training and education to ensure the U.S. has a skilled workforce for these high technology manufacturing jobs alongside funding for the U.S. Department of Defense to establish relationships with U.S. universities for critical research and development for technologies related to national defense.
While the CHIPS act is expected to help establish and maintain US-based advanced semiconductor manufacturing, it is important to know that the chip supply chain is complex and relies on raw materials from all over the world as well as machinery that is exclusively produced by ASML in the Netherlands. To this end the European Union, a U.S. ally, is working on similar legislation to ensure the supply of these materials for the chipmaking industry. The first factories in the U.S. are expected to start production of advanced microchips in 2024 for a variety of corporate customers. For example, Intel, an American company better known for making computer processors, has signed a contract with MediaTek, a leading Taiwanese semiconductor company, to produce advanced smartphone chips in the U.S. and Europe under the MediaTek brand.
As of October 7, 2022, Congress, under the direction of President Biden, implemented another series of targeted export controls intended to stop U.S.-designed microchips from supporting China’s advancement in artificial intelligence and autonomous systems that could be used by China’s government to strengthen their military intelligence capabilities or better monitor their own citizens. Not only do these export controls restrict the sales of the chips and chip manufacturing technologies themselves, they also restrict US companies and citizens from providing technological support at certain semiconductor fabs in China. These sanctions are viewed as far more wide ranging than the previous ban on factory equipment under President Trump and are expected to have a large effect on the advanced semiconductor industry in China as China has historically relied on US based technologies and the work of US citizens.
In summary, the U.S. has held the knowledge to create advanced chips but there has only been limited investment into U.S. microchip manufacturing sites. After the COVID pandemic, interest in strong supply chains for America and its allies are viewed as critical, and the federal government is taking steps to ensure that U.S.-based technologies critical to chipmaking are also used in American factories. The COVID pandemic’s effect on the supply chain of the U.S. and its allies has pressured the U.S. government into taking steps to make sure that critical chipmaking capability exists in the United States.