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August 10, 2022

CHIPS act creates long-term plan to address semi-conductor vulnerability

This act comes at a time when the US is increasingly concerned about reliance on foreign players, especially those based in South-East Asia.

By GlobalData

Congress on Thursday passed the CHIPS act (Creating Helpful Incentives for the Production of Semi-conductors) aiming to bolster the capacity of domestic infrastructure base to produce semi-conductors and reduce reliance on imports for supply. The $280 billion act will provide subsidies to US chip manufacturers as well as provide funding for technology and research development. The war in Ukraine has had dual effects on semi-conductor demand, simultaneously damaging supply chains and depleting US supplies of weapons that have been sent to Ukrainian forces. Systems such as the Javelin anti-tank missile, used prolifically in Ukraine, use semi-conductors and are reliant on the semi-conductor supply chain.

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This act comes at a time when the US is increasingly concerned about reliance on foreign players, especially those based in South-East Asia due to concerns about being cut off from the supply of key parts in the event of a potential conflict. The act is explicitly targeted to increase competition with China and will have a significant impact on the defense supply chain with critical products including disruptive tech such as hypersonics and AI relying on semi-conductors. $2 billion of the act is designated for the defense supply chain, and this will be targeted at companies attempting to get production lines off the ground for semi-conductor production.

The act will likely still leave the US trailing China and Taiwan in terms of semi-conductor production, secure microelectronics are an ongoing concern for the US as they are present in almost every advanced weapon system, with the US currently only producing 12% of global semiconductors, leaving the country reliant on imports to meet demand. Whilst the CHIPS act provides future solutions it leaves near-term production in limbo, and the US will continue to be reliant on imported chips for now. The crisis in Ukraine and ensuing supply chain issues have underscored the danger of being reliant on complex import chains for critical supplies.

The geopolitics around Taiwan are of particular concern to the US supply chain, threats by China to unify Taiwan raise the spectre of China taking over factories that the US defense supply chain is reliant on. This concern was heightened in August 2022 when China suspended the export of sand to Taiwan following House Speaker Pelosi’s visit, sand is a key component of semiconductor manufacturing and will affect Taiwan’s production capacity. Major defense companies recognize this vulnerability and companies including Lockheed Martin, Raytheon and Northrop Grumman endorsed the act in May. The complexity and cost of semi-conductor production factories are barriers to overcoming supply chain problems, meaning that the US needs to provide funding as soon as possible in order to develop facilities and ramp up production. China provides significant subsidies to semi-conductor manufacturers, as do Taiwan, South Korea and the EU – increasing the amount of foreign competition that the US has in terms of production.

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