How the U.S. Senate got woke on China and chips

China's buildup of advanced technologies, including chip production facilities, became more of a threat when the pandemic hit and supply chains were threatened, two U.S. senators said on passage of bill that includes $52 billion for grants for domestic fabs and chip research. (Getty Images)

Two U.S. senators described how “a new reality” has set in regarding China’s economic and technology threat and lagging domestic chip production that culminated in this week’s rare bipartisan vote to approve the $250 billion U.S. Innovation and Competition Act (USICA).

“It really is for all of us...a wake-up call,” said U.S. Senator Mark Warner, D-Virginia, who joined U.S. Senator John Cornyn, R-Texas, on a call with reporters on Thursday.  Both men were co-sponsors and serve on the Senate Select Committee on Intelligence, which Warner chairs.

The bill now heads to the U.S. House. It includes $52 billion for domestic chipmaking and research, including $39 billion in grants to companies to build or expand seven to 10 fabs in the U.S. in coming years. USICA passed by 68-32 after an earlier authorization vote had easily succeeded by 96-4. 

RELATED: U.S. Senate passes sweeping $250B bill to address China threat

Over several years serving together on the Intelligence committee, Warner said both men have steadily become aware of China Communist Party plans for “dominance in a whole series of technologies—semiconductors, AI, quantum—and have executed on the plans at a level never seen.”

“The Soviet Union was not an economic threat, but China with its digital Silk Road is,” Warner added. “We’ve seen China dramatically ramp up R&D and intellectual property theft. China’s committed to spending $150 billion and wants 70% of the [chip] market by 2030 manufactured in China.”

Cornyn added, “We all have to sort of think anew given China’s approach to spending huge amounts of money to dominate the U.S. while building up its military.”

“We’ve got to compete and can’t let China dominate us,” Cornyn said. “They are a police state, in essence, and with very aggressive ambitions in the South China Sea and I’d argue worldwide.  We’ve had to reset how we think about this and got good support in the Senate. At a time when more people are worried about federal spending, this [bill] was absolutely essential for the supply chain and maintaining the economy and national security.”

The pandemic played a critical motivator role. “Covid made it very plain that if the supply lines are shut out, we’re in a world of hurt,” Cornyn said.” We’ve become overly reliant on imports and Covid has exposed a huge yawning vulnerability in terms of critical products.”

 Cornyn compared semiconductors to oil and recalled that that former President Jimmy Carter had said stoppage of the nation’s oil supply lines in the Middle East could be considered an act of war.   With such an essential product as semiconductors and medical supplies, senators reacted in a bipartisan way in approving USICA. “Some say bipartisanship is dead, the Senate can’t function, but they are wrong,” Cornyn said. “This bill is evidence we can and will work together when it’s really, really important.”

Corporate welfare?

The senators defended the bill against claims that billions in grants will be seen as corporate welfare. “These fabs are going to be built,” Warner said. “Plenty of other countries are offering dramatically richer incentives.” He mentioned South Korea, Taiwan and even The Netherlands.

In addition to the grants, the senators said other legislation is being discussed that includes tax credits or other tax provisions to provide a predictable stream of federal support for fabs. ”This is not the last strategic investment we need to make,” Cornyn said.

Commerce Department officials will dole out the grants for as many as seven to 10 fabs, potentially with a preference to domestic companies or those that locate intellectual property and build in the U.S.  Taiwan’s TSMC, which makes the majority of the world’s most sophisticated chips, is already building a fab in Arizona. “Each deal with be evaluated on its own, but there will be some incentives to bring intellectual property here if they are foreign companies,” Warner said.

It could take two or more years to build a high tech fab in the U.S., and Warner said the grants should be offered at a measured pace to avoid disrupting the chip market with an oversupply. Over the past 30 years, the domestic semiconductor market has gone from “boom to bust,” he said.

 A fab in Richmond, Virginia, he recalled, is sitting vacant now because owners did not resize machinery for the latest advanced chips.  From conception to completion at a cost of $12 billion to $14 billion, it could take a new fab up to a decade to become cash flow positive, he added.

“My fear is you can’t rush this so quickly you flood the market,” Warner said. “It could be disruptive. If we suddenly build 10 new fabs, that could end up hurting us.”

Both senators expect strong support from the House and President Biden has committed to sign the measure.  Asked if the bill could see finalized by the August break, Warner said, “I’d love to see that.”