A $40 billion manufacturing plant, paid for by the US government

Posted by Jacob Radke

First off I’ll say that the government of course isn’t paying for everything. It is not some luxurious check that helped Taiwan Semiconductor build a new plant, but the US government did heavily incentivize it through federal aid and tax breaks.

Semiconductors are an important choke point for the US economy and bringing manufacturing closer to the end consumers is ultimately more beneficial to our society than the risk of not having them here.

In this post I will break down:

  1. Taiwan Semiconductor’s investment in the US
  2. What was in the CHIPS and Science Act
  3. Why the US wants local semiconductor manufacturers
  4. Disinflationary versus inflationary policies

Taiwan Semiconductor’s investment in the US

Semiconductors are used in just about every piece of technology we have today and are used in the processes that create goods that don’t have semiconductors.

Taiwan Semiconductor (TSMC) announced an additional $25 billion in its second manufacturing plant in Arizona. TSMC is a contract manufacturer, meaning they take plans from Apple, Ford, Microsoft, etc. then manufacture and send those chips back to the US.

TSMC is the largest contract chip maker and in this new plant, they plan to produce more technically advanced chips than originally proposed. TSMC recently started making 3-nanometer chips in Taiwan and by 2026, those chips would likely be at least two generations behind the leading edge.

The number of nanometers is roughly how much processing power is packed into the chip’s small space, with a lower number indicating a more advanced chip.

The White House said the first TSMC factory in Arizona, which originally was supposed to produce 5-nanometer chips, now it will also produce 4-nanometer chips. That factory is expected to start mass production in 2024.

One of the best things to come out of this is that once the TSMC plants open they will produce enough advanced chips to meet the U.S. annual demand, about 600,000 wafers per year, according to Ronnie Chatterji, National Economic Council acting deputy director for industrial policy who oversees CHIPS implementation.

TSMC has said that it still plans on developing its most advanced chips in Taiwan though, that doesn’t matter all that much as we, in the US, produced highly advanced chips that would replace the need for TSMC to produce those here.

What jump-started this investment was the CHIPS and Science Act that Biden signed into law in early August.  

What was in the CHIPS and Science Act

High level, the act invests $280 billion to bolster US semiconductor capacity, catalyze R&D, and create regional high-tech hubs with a larger STEM workforce.

In fact, CHIPS stands for Creating Helpful Incentives to Produce Semiconductors and the science part is to incentivize research and development.

The CHIPS Act intends on spending $280 billion over the next ten years. The majority of the $280 billion is for scientific R&D and commercialization and about $52.7 billion is for semiconductor manufacturing, R&D, and workforce development, with another $24 billion worth of tax credits for chip production. There is $3 billion slated for programs aimed at leading-edge technology and wireless supply chains.

Of the $52.7 billion for semiconductor manufacturing, R&D, and workforce development a $39 billion fund would provide direct financial assistance for the construction and expansion of manufacturing facilities. That means part of the $40 billion that Taiwan Semiconductor is investing in Arizona’s plants is paid for by the US government.

And with that TSMC, and other semiconductor companies, will also be able to take advantage of tax credits.

Why the US wants local semiconductor manufacturers

The US makes about 12% of the world’s semiconductors, compared with 37% in the 1990s. Now many US firms are dependent on chips made abroad, and the fragility of supply chains, particularly those in China, has been damaged deeply over the last 18 to 24 months. McKinsey research estimates that worldwide demand will keep growing, with semiconductors poised to become a $1 trillion industry by the end of the decade.

So then it makes sense.

If the US can’t meet its own demand, which is a growing demand, and crippled supply chains make it harder for US companies to get their hands on the precious component it’s only right that they would want that component to come closer to home.

Going back to what I said earlier:

Semiconductors are used in just about every piece of technology we have today and are used in the processes that create goods that don’t have semiconductors.

That means that if we can’t get semiconductors we won’t be able to produce the goods that consumers demand. When there is a mismatch in the supply of goods and the demand for those goods, you get price growth or contraction. In this case, fewer goods and no change in demand means higher prices. That is partly what we saw in Covid and that would affect our markets today.

By bringing back manufacturing back to the US, especially economically important manufacturing, it allows the economy to grow uninterrupted by the woes of global supply chains and geopolitical tensions.

The only problem is that it causes inflationary pressures in the US.

Disinflationary versus inflationary policies

The cost of manufacturing in the US is high. The price of transportation and labor is higher, and that means the price of the end product must also be higher. That is an inflationary pressure.

That makes the CHIPS and Science Act an inflationary policy, right?

But technology is also deflationary, so is the CHIPS and Science Act actually deflationary?

Inflationary policy is basically policy that has the chance to raise prices, and deflationary policy triggers a fall in prices, or a slowdown in price growth.

That makes the CHIPS and Science Act both inflationary and deflationary, because of short-term price growth due to the higher cost of doing business in the US, but also deflationary because as technology is mass produced here in the US at scale prices will fall. In the long term, this will have great effects on the US’s ability to grow its economy and retain its status as a global leader.

Going forward

Supply chains will continue to localize all around the world, or at the very least diversify.

We are already seeing this will Apple and China as Apple moves its supply chains away from China.

As the US continues to incentivize localization of supply chains one thing to be aware of is the implication of policy that can cause growing prices, ie inflation.

But ultimately it will be more beneficial than the uncertainty of not being able to produce goods here in the US.

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