Massive Subsidies Won't Solve the Semiconductor Supply Chain Crisis

Chipmakers don't need the money, and they won't get it until after the current mess has been resolved.

On the same day that the White House kick-started an effort to get Congress to approve billions in new subsidies for American chipmakers, and the Commerce Department published a long-awaited report on the status of semiconductor supply chains, Commerce Secretary Gina Raimondo put an exclamation point on the whole thing.

"It's a crisis," Raimondo told Yahoo Finance. "What we need is to make more chips in America."

In a nutshell, that's the main argument for passing the America COMPETES Act. A key element of the sprawling, nearly 3,000-page bill is a $52 billion pile of cash intended to entice semiconductor manufacturers to make more chips in the United States—ostensibly to protect against the sort of supply chain crunches that have been roiling the industry for the past several months.

It's true that American manufacturers that require semiconductors to make everything from cars to video game consoles to home appliances have seen stockpiles dwindle and deliveries delayed. Supply chains have been disrupted, the Commerce Department report says, due to "a series of black swan events such as factory fires, winter storms, energy shortages, and COVID-19-related shutdowns." Further disruptions in the global supply chains, it ominously warns, could "disable a manufacturing facility and furlough workers in the United States" if domestic manufacturers can't count on larger inventories of chips in the future.

The White House's solution to this "crisis" is, no surprise, to throw a lot of money around. In addition to the $52 billion in direct subsidies for chipmakers, the bill would spend another $45 billion on grants and loans meant to address vague supply chain issues and another $7 billion to help develop 10 "technology hubs" around the United States. (Read Adam Thierer, a senior research fellow at the Mercatus Center, on why top-down investment meant to create "a Silicon Valley in every state" is folly.)

But the semiconductors are central to the whole thing. And before lawmakers vote to hurl $52 billion at chipmakers, they ought to ask two important questions. The first is: Do they need it?

They clearly don't. Last year, when Intel announced plans to build a new $20 billion fabrication facility in Arizona, CEO Pat Gelsinger said the project "would not depend on a penny of government support or state support." (Though he immediately followed that comment by saying that "of course…we want incentives" and it appears that Congress is prepared to dutifully provide them.)

There's also a ton of private sector investment flowing into semiconductor manufacturers right now—equity markets, it turns out, are much more efficient at identifying and fulfilling a need than government subsidies are—and the big chipmakers are not short on cash. The Taiwan Semiconductor Manufacturing Company (TSMC), the world's largest chipmaker, reported record profits last year. As of September, Intel's net profit margin for the past decade was more than 15 percent.

In fact, Intel announced plans just this week for at least two new manufacturing facilities in Ohio. Samsung and the TSMC have also announced plans for U.S.-based factories. That's not the sort of thing that industries and companies in desperate need of government aid tend to do—though they will surely be happy to receive taxpayer funds if Congress makes the offer.

The second question is whether the subsidies will make an immediate impact in solving the supply chain crisis that Raimondo and others are so worked up about. Again, the answer is a pretty obvious "no."

Remember those new Intel factories in Arizona and Ohio? Neither is expected to come online until 2024 at the earliest. Even if Congress passed the America COMPETES Act tomorrow and the money was magically distributed by the end of next week, there's no way it would make a material difference in domestic semiconductor supplies for at least a few years.

Meanwhile, the current supply crunch caused by the pandemic and those other "black swan" events is going to work itself out by the middle of this year, according to Gartner, a global market research firm. Other analysts and experts seem to agree that the crisis will pass before the end of the year.

It's also pretty debatable whether $52 billion in fresh subsidies spread over several years will make much of a difference in a global semiconductor market that was worth $425 billion last year alone, and is only going to keep rising.

Again, it's certainly true that companies like Intel and the TSMC will happily accept fat checks from whatever government is willing to write them. Those new Intel plants in Ohio are reportedly being underwritten by the state government—the exact details are still under wraps—and South Korea has announced subsidies worth about $450 billion for its own domestic chip industry. But there's no need for any of this, and there's little reason to believe it will have an impact on the current, serious supply chain issues afflicting many downstream industries.

What we will get from the America COMPETES Act is an expanded and more powerful federal bureaucracy. The bill proposes a new "national supply chain database," a new office in the Commerce Department to review supply chain resiliency, and new plans for the White House and Congress to direct national science and technology policy. As Thierer points out, other provisions of the bill would expand regulations on everything from trade to drug manufacturing to federal antitrust powers.

"Lawmakers and bureaucrats are not going to allocate capital more efficiently than private innovators and investors," he writes. "Nor are they going to be able to 'shore up supply chains' or create tech hubs in every city just by sprinkling a little magical industrial policy pixie dust thinly across the entire nation."

But they will be able to create layers of new rules and bureaucracy that limit future innovation, keep subsidies flowing to politically favored firms, and entrench techno-nationalist tendencies. The semiconductor shortage is a legitimate crisis in some ways, but it should not become an excuse for enacting wasteful, damaging policy.