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This little-known piece of semiconductor legislation might be bigger than $52 billion in subsidies or Nancy Pelosi’s Taiwan visit

August 3, 2022, 6:30 PM UTC
Employees work on the assembly line of computer at a computer manufacturing enterprise
On the assembly line of a computer manufacturing enterprise set up by Tsinghua Tongfang Co., in February 2022, in Jinhua, Zhejiang province, China.
Hu Xiaofei/VCG/Getty Images

Two stories have dominated the semiconductor sector over the past week: the imminent passage of $52 billion in federal subsidies for chipmakers, and House Speaker Nancy Pelosi striding across a Taiwanese tarmac en route to meeting with the world’s largest chip manufacturer.

A third, under-the-radar development, however, might go down as the most consequential piece in this eventful “summer of semis.”

As Bloomberg and other news outlets reported this week, the landmark CHIPS-Plus legislation set for President Joe Biden’s signature includes a provision designed to handicap Chinese chip manufacturing for decades to come. The move could put America back on a path to semiconductor supremacy—or further inflame long-simmering tensions between two geopolitical and military giants.

The little-discussed language in the CHIPS-Plus bill specifies that semiconductor producers accepting American subsidies cannot materially expand advanced chip manufacturing in China for 10 years. The U.S. defines “advanced” chips as those with circuits smaller than 28 nanometers, which are already required for virtually all new smartphones, vehicles, factory equipment, and other electronics. Smaller nanometers make for more powerful chips. 

Bloomberg reported that Taiwan Semiconductor Manufacturing Co., which produces about 90% of the world’s most advanced chips, is the only potential CHIPS-Plus subsidy recipient currently making sub–28-nanometer semiconductors in China, though Intel also lobbied against the restriction

In essence, the provision would halt virtually all modern chip manufacturing in China by companies benefiting from the U.S. government’s benevolence, potentially preventing China from turning its extensive manufacturing base into a future hub of advanced chip fabrication.

The bill’s anti-China stipulation is already causing some of top chipmakers to reexamine their plans.

The Financial Times reported Tuesday that Samsung, which aspires to overtake TSMC as the world’s largest producer of advanced chips, and one of its smaller South Korean counterparts, SK Hynix, are reevaluating their Chinese fabrication footprint. The FT cited sources familiar with the views of both companies, including one senior Korean official who said several investments in China likely will be “abandoned.”

Korean chipmakers “have been rethinking their strategies because of the U.S.-China technology war, and they are now tilting further towards the U.S. because of geopolitical risks,” Kim Young-woo, head of research at Seoul’s SK Securities and an adviser to the Korean government on semiconductor policy, told the FT. 

As it is, the world’s three leading chipmakers—Samsung, TSMC, and Intel—are all in the early stages of building semiconductor plants in the U.S., with each complex expected to cost at least $12 billion to $20 billion. The bill’s anti-China restrictions, as much as any of the hefty financial incentives being doled out by the U.S. government, could help bring chip manufacturing back to American soil.

Will China respond to what will likely be viewed domestically as “bullying” by the U.S. over its technological development capabilities? 

After the tit-for-tat tariffs and restrictions on tech trade that began during the Trump administration, it’s not difficult to imagine the bill’s anti-China stipulation mushrooming into a broader conflict. And given how deeply connected American businesses are to China for general manufacturing needs, chipmakers and other tech companies could end up being caught in the middle of an unwelcome geopolitical standoff.

For now, some experts believe U.S. and Asian chipmakers face relatively minimal risk of retaliation by China. That’s because China is still heavily reliant on foreign semiconductor producers for the advanced chips that it needs to assemble cars, smartphones, and other products at its factories.  China doesn’t have the capability to produce leading-edge chips on its own. As a result, Chinese leaders have little to gain from levying sanctions against chipmakers like TSMC, Samsung, and the like.

But if China’s domestic semiconductor companies, which are heavily subsidized by the government, catch up on the technological front at some point in the future, the situation will be different.

“Maybe after five, 10 years down the road…if the tables have turned in a sense that Chinese companies are supplying most of the semiconductors for China, and they don’t need to rely on TSMC and Samsung, then they will be in a position to sanction companies that take the U.S. government money,” Louis Lau, director of investment at advisory firm Brandes Investment Partners, told Nikkei Asia.

China has, to date, shown little evidence that it will keep pace with its Taiwanese, South Korean, and American semiconductor rivals. But perhaps it just hasn’t had enough motivation to do so.

Want to send thoughts or suggestions for Data Sheet? Drop me a line here.

Jacob Carpenter


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From the article:

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