Microchip shortage: Why US is poised to take rare action

David Zalubowski/AP/File
A prospective buyer looks over cars at a Mazda dealership in Littleton, Colorado, on June 14, 2020. A shortage of semiconductors has affected availability and pricing in the auto industry – and has helped fuel a push for legislation to expand U.S. government support for key high-tech industries.

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For the first time since the 1980s, Congress is poised to help the commercial microchip industry regain its technological leadership. Back then the threat was Japan, which was grabbing market share from U.S. chipmakers.

Now it’s more complicated. A shortage of semiconductors is pushing Congress to act, even though the shortage is likely to end before federal incentives can kick in. More directly, competitors from Taiwan and South Korea have moved ahead in producing the most advanced semiconductors.

Why We Wrote This

A global shortage of microchips has crimped the availability of cars and other products. It’s also stirring discussion about something longer term: whether the U.S. needs an industrial policy to retain an edge in innovation.

But the real threat, in the eyes of many in Congress, is China’s effort to catch up and dominate the sector. This has led bipartisan majorities in both the U.S. House and Senate to support the CHIPS Act, which would offer a 40% investment tax credit to companies that build chip fabrication facilities in the U.S. Funding for it remains to be passed. 

Typically, conservatives and many economists oppose government meddling with technology development because such efforts are inefficient and don’t always back the winning technology. 

“I’m not a fan of a lot of that,” says Mike Watson, of the conservative Hudson Institute. But “it does make sense to try and put us in a position where we are going to be more competitive economically.”

The computer chip shortage, which has disrupted supplies of everything from automobiles to wheelchair accessories, is pushing Congress to take big steps in helping America’s high-tech industry.

Congress has already passed legislation to encourage semiconductor firms to build chip fabrication facilities, or fabs, in the United States. It has not yet authorized the funding. Not for the first time, the nation is poised to dramatically pump up funding for scientific research and, more controversially, help high-tech companies to meet an international challenge.

“Rather than a sea change, we’re on another wave,” says John Alic, an author and visiting scholar at Arizona State University’s Consortium for Science Policy and Outcomes. 

Why We Wrote This

A global shortage of microchips has crimped the availability of cars and other products. It’s also stirring discussion about something longer term: whether the U.S. needs an industrial policy to retain an edge in innovation.

The wave wouldn’t solve the chip shortage. The current mismatch between constrained supply and soaring demand will likely be over, perhaps by next year and almost certainly before any federal incentives make a meaningful contribution. But they could induce a big leap in domestic production, possibly making future chip shortages less acute. And, politically speaking, the current shortage is so visible to car buyers and other consumers who have seen soaring prices and huge delays in product shipments, that Congress is eager to act.

“The continuing impact of the chip shortage – epitomized most recently in the news that GM will be forced to idle plants across North America – speaks to the urgency of passing bipartisan legislation,” said U.S. Sen. Mark Warner, a Virginia Democrat and champion of the Creating Helpful Incentives to Produce Semiconductors Act, or CHIPS. Funding more U.S. production won’t solve things overnight, he said, but “the longer we wait, the worse this supply chain crunch will become.”

If Congress funds CHIPS and passes two other bills now before it – the Innovation and Competition Act and energy demonstration projects in the new infrastructure bill – it would represent a big shift toward more of the collaborative efforts between government and industry known as industrial policy.

“There is a shift,” says William Bonvillian, a lecturer at the Massachusetts Institute of Technology and author of a new report on the subject for the Information Technology and Innovation Foundation, a Washington think tank. “There is a sense that the U.S. faces major technology challenges and that our longstanding basic-research-only approach, outside of defense, is not working. It’s not giving us the technological leadership that we need.”

Rising urgency in Congress

The U.S. semiconductor industry remains a leading designer of chips. But it has fallen behind in their manufacture. Nominally, the competition is from the Taiwan Semiconductor Manufacturing Co. and South Korea’s Samsung, which have moved ahead of U.S.-based Intel in producing the smallest and most advanced semiconductors. But the real threat, at least in the eyes of many in Congress, is China. Although it remains far behind in state-of-the-art fabrication, it is throwing huge resources in the sector to catch up.

Traditionally, the U.S. has used a hands-off approach with civilian industry and technology development. Republicans and many economists oppose industrial policy, because governments have not proved very adept at picking high-tech winners. But in the face of a strategic challenge, they have supported more federal intervention beyond the funding of basic scientific research.

In the 1980s, it was Japan, whose chipmakers were taking over the memory chip industry. Two Republican administrations supported various efforts to boost corporate research and development and funded a private-public partnership, called Sematech, to help U.S. semiconductor equipment manufacturers regain the lead over Japan.

Today, it’s China. Bipartisan majorities in Congress have supported the $53 billion CHIPS Act, which would offer a 40% investment tax credit to companies that build chip fabrication facilities in the U.S. The act also authorizes the Defense Department to conduct research and development, workforce training, testing, and evaluation for chip-related programs, projects, and activities. The act also calls for the government to act as a customer for the domestic semiconductor industry. (The military, which already uses these methods, is the exception to America’s aversion to industrial policy and has maintained the U.S. lead in military technology, sometimes expensively so.)

“It does make sense to try and put us in a position where we are going to be more competitive economically,” says Mike Watson, associate director of Hudson Institute’s Center for the Future of Liberal Society in Washington. But “I’m not a fan of a lot of that. ... A concern about trying to throw a bunch of money into research and development right now is that as these numbers get larger and larger, our ability to actually meaningfully track anything that we’re doing starts to go down.”

If CHIPS Act funding is approved on the order of $50 billion, the U.S. could see 19 fabs built domestically by the end of the decade, more than double the nine that would be built if the status quo prevails, according to a Boston Consulting Group report a year ago.

One bill, 10 sectors of innovation

The Innovation and Competition Act, which is being hashed out by House and Senate conferees, represents another step toward a more coherent commercial industrial policy. The broad Senate version would expand the National Science Foundation, which currently funds basic research, into an organization that’s also dedicated to aiding development in 10 areas, including artificial intelligence, quantum computing, and other advanced technology. The House version of the legislation is much narrower in scope. 

One of the challenges of industrial policy is that what’s implemented by one administration can be undone by another. The most enduring programs are those with broad constituencies, argues Andrew Schrank, a professor of international and public affairs at Brown University in Providence, Rhode Island. 

In perhaps the earliest example of American industrial policy, President George Washington made sure the U.S. Navy’s first six frigates were built in six different ports, bolstering their local economies and at the same time broadening political support for the program. Successful modern iterations of industrial policy have done the same thing, says Mr. Schrank. The Manufacturing Extension Partnerships, authorized in 1988, are mandated to operate in all 50 states and Puerto Rico, helping small and midsize manufacturers adopt new techniques and new technologies. 

By focusing exclusively on smaller companies and conducting performance reviews, the program also insulates itself politically from criticism that it’s a corporate giveaway. A real danger of the CHIPS Act is that the largest tech companies will try to make sure federal funds flow to them.

“I worry that a relatively small number of very, very powerful manufacturing firms, electronics firms, and chip firms can capture this thing,” says Mr. Schrank. “We need this industrial policy to pay attention to the little guy, partly for economic and moral reasons, but partly for political reasons.” That might well ensure its longevity.

Editor's note: An update has been made to correct the name of Mike Watson.

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