US v. China: The Chip-making Race is On

The US CHIPS and Science Act restricts chip companies from expanding chip-making in China

We covered the details of the CHIPS and Science Act of 2022 previously. The short version is, it spends $280 Billion on research and development over the next 5 years, $39 billion of which goes directly to subsidize semiconductor manufacturing, $11 billion for chip plant research and workforce training and another $2 billion for making older chips used in automotive and military applications. It's not a ton of money in the grand scheme of things but the chip companies seem excited. TSMC has committed to spend $12 billion on plants in Arizona. Samsung said it will spend $17 billion in Texas. SK Hynix announced $15 billion in investment for the US. US companies Intel and Micron also plan to take advantage of the subsidies.

But the subsidies come with strings attached. A clause in the final version that passed the House, says that a company that accepts a subsidy will agree not to make a "significant transaction" that would materially expand its "semiconductor manufacturing capacity in the People's Republic of China or any other foreign country of concern," for the next ten years. (Current countries of concern are China, North Korea, Russia and Iran) Companies would be allowed an exception to protect existing business interests or expansions that serve the "country of concern's" market, but only for "legacy semiconductors" that are made on a 28-nanometer process or older. TSMC does make chips on a 16-nanometer process in Nanjing, China, but most of the potential subsidy recipients would not be affected.

So there's a bit of a race on. China has said it aims to source 70% of its chips from domestic companies by 2025. Bloomberg estimates that China's premier chip company, SMIC is about 6 years behind Taiwan's TSMC. And advanced chip-making equipment from companies like ASML in the Netherlands, has been restricted by US export rules.

Expect this race to continue. The restrictions in the CHIPS+ Act are just the latest step in whathas been a methodical plan by the US to develop an outbound investment review framework for the chip industry. And the more of the industry it can have under its jurisdiction, the more control the US can exert over the expansion of it elsewhere, specifically in mainland China.