The semiconductor industry has historically been highly cyclical. The rise of personal computer in the 1980s, mobile phones in the 2000s, and smartphones in the 2010s each led to a boom in semiconductor demand that was eventually followed by a bust as demand for these products matured or economic growth plateaued.

The pandemic-era chip shortage was a function of existing insufficient semiconductor factory capacity that was exacerbated by a steep increase in demand following the early days of the pandemic. There is reason to believe, however, that these cycles may be smoother in the future as the demand becomes more ubiquitous and the new demand sources (e.g., autos, cloud farms and automation) have longer cycles than consumer electronics.

The pandemic-era chip shortage crystallized the critical role chips played in economic vitality in the minds of politicians and business leaders, as well as the importance they have to national security.

In the United States, the concerns around chip manufacturing security led to the bipartisan passage of the CHIPS and Science Act¹, which—among other things—will:

• Provide $52.7 billion in funding for American semiconductor research, development, manufacturing and workforce development; this includes $39 billion in manufacturing incentives
• Promote U.S. innovation in wireless supply chains with $1.5 billion of funding
• Catalyze regional innovation and technology hubs across the U.S. with $10 billion in funding
• Coordinate permitting for high-tech manufacturing to facilitate timely and effective reviews of all federally funded projects and act as a clearing house for best practices

The U.S. is not alone in acting. Europe is considering its own version of the CHIPS Act, while South Korea is committing funding to its own chip industry.  Japan is also working with TSMC and Sony to open a new fabrication plant by the end of 2024.

The semiconductor issues will not evaporate overnight. Getting a new factory built and producing chips can take three years or more. Yet, today’s shortages are helping to drive the investments that will eventually alleviate the supply crunch.

With the help of government incentives, the U.S. has significant plans to reshore chip manufacturing, creating good, high-paying jobs and enhancing the resiliency and security of this important ingredient to economic health. For example, Intel is planning to build two “megafab” sites costing some $200 billion, TSMC is building a new fabrication plant in Arizona, Samsung announced a $17 billion project in Texas and GlobalFoundries is investing $1 billion to increase its fabrication capacity in New York.

Sources:

1. https://science.house.gov/chipsandscienceact

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