Could more U.S. chip production lead to price increases?

A Qualcomm exec said the global chip supply chain should really be called "supply spaghetti" because of how many regions are intertwined in designing and manufacturing semiconductors. (Getty Images)

Chip industry officials added their voices to increasing cries for more U.S. investment in chip R&D and domestic manufacturing during a virtual presentation sponsored by the Semiconductor Industry Association on Wednesday.

The Biden administration has made major provisions for billions of dollars of U.S. investment in both R&D for chip and science research as well as domestic manufacturing of chips as part of a $2.3 trillion infrastructure plan. The success of the Biden plan is uncertain, however, and subject to the whims of a U.S. Senate equally divided between Republicans and Democrats.

Economist Chad Bown at the Peterson Institute for International Economics questioned whether government support for the chip industry could lead to some conflicts and price increases. If the government were to tell a chipmaker to boost production of more chips for automakers and “stop making chips for Zoom and more for auto…[buyers] “might have to face a [price] premium,” he said.

He also questioned what will happen if U.S. manufacturing facilities were supported by government incentives or subsidies and began to assume final chip packaging jobs now done primarily in Asian countries. “Congress won’t give money unless they tap into that [U.S.} output,” Bown said. He wondered if there might be extra unknown costs to packaging chips domestically that some economic models have not contemplated.

Bown said U.S. subsidies for the industry are a “big shift” in the historical policy position of the U.S. to rein in subsidies.  The attempts to take on China’s success in bolstering its technology and chip production seem to be a “if you can’t beat ‘em, join ‘em” approach he said. “The implications of that are that other countries might subsidize [chipmaking] more” which could lead to an overcapacity of chip production.

“The world is much different today [compared to the 90s] and the U.S. is a much smaller importer,” he said. “Our companies are now much more exposed to trade policy actions.”

Susie Armstrong, senior vice president of engineering at Qualcomm, made a plea for government support for chip research and development. “What’s critical for Qualcomm and the U.S. is that leadership in R&D is critical,” she said. “If you don’t have it, you have nothing to manufacture.”

She said Qualcomm welcomes conversations with policymakers about bringing manufacturing to U.S “and we need to make sure we recognize and support R&D that drives that manufacturing. There’s very competent competition for that R&D. “

The typical smartphone has 169 semiconductors inside, and 95% of them are built on mature designs of 28 nm nodes or above. There’s a similar situation in auto production where missing any one of those mature chips can gate the entire device, Armstrong said.

“The conversation has to include how we build or maintain or expand the access to mature node components,” she said. “It’s not an easy conversation because manufacturers make pennies on these.”

Qualcomm has invested about $67 billion in R&D over 30 years and has amassed 140,000 patents, she added. Inventions take five to 10 years before a final product is marketed.   

Armstrong summarized the concerns facing the industry. “The supply chain is really complex,” she said. “Chain is not a term for it. It’s more the supply spaghetti, very intertwined, and addressing these access questions is not a cheap and easy solution. We have to look to allies and maintaining strategic access for some chips in different parts of the world. We have to look at second and third sources.”

Armstrong said it was nice to hear semiconductors become day to day conversation with the recent chip shortage especially for autos and the need for more chips to support work from home and home learning.

“The best time to start on access [for chips] would have been five years ago, and the second-best time is today,” she said.

Jackie Sturm, corporate vice president of global supply operations at Intel, said the mission for SIA and its members such as Intel includes reminding the world the importance of chips as “an integral part of life for most people.”

Intel recently announced plans to invest $20 billion in two new chip fabrication facilities in Arizona, but Sturm noted that Intel’s design and production prowess are global, including two fabs in China.

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Still, she said, “we have to rely on globally integrated and distributed suppliers.” Intel currently produces 10 billion transistors per second with materials from 16,000 suppliers, she said.

Production of semiconductor involves the use of high purity chemicals and relies on hiring capable workers who can operate complex machinery, she noted. “Semiconductors face numerous risks that are not just limited to major events like covid,” Sturm said. Intel employs 110,000 workers, with half in the U.S.

The online event was held just days after SIA released a study with Boston Consulting Group that argued in favor of chip manufacturing subsidies, similar to the $50 billion President Biden has included in the infrastructure package. Across all sectors of science and technology, the plan calls for more than $500 billion in research and development as well.

The SIA/Boston study found that 75% of global semiconductor capacity is concentrated in China and East Asia, areas exposed to seismic activity and geopolitical tensions. The entire production of advanced chips made on nodes below 10nm is in Taiwan (92%) and South Korea (8%).

A complete shutdown of Taiwanese foundries would require three years and $350 billion to build enough capacity in the rest of the world to replace what those foundries produce.  In a hypothetical model, the study found that creating a fully self-sufficient local supply chain in each region to meet the current needs of chip consumption would require $1 trillion in upfront investment which could result in higher prices for chips and electronics.

Antonio Varas, an economist at Boston Consulting, said chip volumes based on estimated demand are expected to grow by 5% annually for the next decade and up to 10% in the next few years.  In a decade, the world will need 50% more manufacturing capacity than it currently provides, he said.

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