There’s a latent tension at the heart of the Bidenonomics agenda between industrial policy and competition policy. Efforts to reshore manufacturing can lead to government-protected national champions. Some policy architects favor this for the purpose of efficiency, but concentrated industrial producers in the U.S. can then wield market power without substantially improving supply chain “resilience,” the main principle cited by Biden administration officials for their reshoring initiatives. And for other potential downsides, just think about Boeing’s current engineering problems.
This threat looms over the implementation of industrial policy programs, especially the $53 billion in the CHIPS and Science Act earmarked for grants, loans, and other incentives to bolster U.S.-based semiconductor production. The firms that the Commerce Department selects for those programs, and the conditions attached, will structure the domestic market, either to favor bigness or resilience.
So far though, the CHIPS Program Office (CPO) has only awarded a small number of grants and issued few directives on what will determine the department’s review process, other than a very general paper put out last year called Visions for Success. One concrete proposal is to create geographic clusters of chip makers.
With the Biden administration eager to deliver victories before the presidential election, a major round of funding is expected within the next several weeks. Recent reports indicate this round will entail several multi-billion dollar grants which will likely go to two of the largest semiconductor players: U.S.-based Intel and the Taiwanese semiconductor giant TSMC, the most dominant player for logic chips. TSMC holds a 57 percent market share for global foundry revenues, almost five times that of the nearest competitor Samsung, and even higher profit pools at around 80 percent.
Intel, one of the few remaining U,S.-based chip makers, is both in the top ten globally for foundries and also holds an effective duopoly with AMD over CPUs, a specific niche of logic chips.
These big block grants were in some ways inevitable. The industry is already highly concentrated across most logic chip market niches with high barriers to entry. The funds can’t all go to incubate startups if the goal is to fundamentally reshape the market in the near term. But the new funding still raises the issue of whether the CHIPS Act can successfully revamp the American semiconductor industry, or if it will just amount to corporate welfare that builds concentrated power.
A timely new paper from the American Economic Liberties Project addresses this challenge head-on and provides a roadmap for how lawmakers can fix chip markets moving forward. The focus is not only on reshoring as a proxy for addressing the supply-chain shortages that the U.S. experienced during the pandemic, but actually restructuring the markets so those shortages can be wrung from the system.
If companies had been smarter about putting earnings into capital investments over the past decade then the government wouldn’t have to step in.
The paper argues that the goals of U.S. semiconductor policy should be to undo the “fabless” model of outsourcing overseas, which is favored by Wall Street, and to break the chokehold of TSMC on foundries. It will also require a “thickening” of the market of suppliers with footprints in the U.S.
FIRST THE AUTHORS MAKE A DISTINCTION between the economic structure of the leading-edge processing chip market and the mature-node market. Leading-edge logic chips are the most advanced chips used for high technology and operate in a highly concentrated market. The market for the mature-node segment, which are still the most common ones used in consumer electronic devices, is more diffuse, and if anything suffers from gluts in overproduction because of foreign dumping practices and commodification.
Similar historical forces drove the development of both markets. The U.S. pioneered semiconductor technology in the middle of the 20th century, largely on the back of government-funded research and development projects at centers like Bell Labs. As a result, American chipmakers both powered the tech industry and were held to competition regulations such as open licensing requirements to allow for new entrants.
At that time, chipmakers were almost all vertically integrated and did everything from the design of the chips to the production in house.
But trade agreements opened up the global economy to foreign competition. Under pressure, chipmakers both offshored production and scaled up by acquiring competitors, which were allowed by a lack of antitrust enforcement and changes to IP…
Read More: Will Biden Get Chip Markets Right?