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In the 1980s, everything was about the Cold War. TV footage was abundant in pictures with giant missiles and, after Ronald Reagan took the helm in the White House, animation of satellites shooting deadly laser rays. It was the relentless arms race that crushed the Soviets’ neck, leaving them with an economy in tatters.

Today, there is another great race running, but it does not revolve around giant war machines, but around far smaller pieces of electronic equipment: semiconductors, or chips, if you prefer it simpler. You know, those little things controlling everything from toasters to aircrafts. While in the Cold War the arms race was a competition for supremacy between essentially two antagonistic blocks led by the USA and the Soviet Union, today’s waters are more muddied.

Certainly, the US is still a primary actor on the Western or the Free World’s side, but this time the race is not only against China as an exponent not only of the Far East, but of autocratic regimes too. While they are the main characters, there are more players involved: South Korea, Japan, Taiwan, and, closer to home, the European Union.

The global competition for semiconductors is not really new, but what set the currently faster tempo was the COVID-pandemic with its heavy disruption of supply chains in the high-tech and manufacturing industry. Assembly lines standing still in car plants all over the world were a telling and startling image of that.

The new administration in Washington acknowledged the signs of the times and forged a new law with the somewhat funny name of “Creating Helpful Incentives to Produce Semiconductors Act” – or, in short, the CHIPS Act. The fact that on a fiercely aggressive political field Democrats and Republicans briefly buried the hatchet and acted in a bipartisan approach says a lot about the urgency felt from the American perspective. Indeed, based on data from the Semiconductors Industry Association (SIA), the share of modern semiconductor manufacturing capacity located in the U.S. has eroded from 37% in 1990 to 12% today, mostly because other countries’ governments have invested ambitiously in chip manufacturing incentives and the U.S. government has not. Meanwhile, federal investments in chip research have held flat as a share of GDP, while other countries have significantly ramped up research investments, the SIA noted.

So, in July of this year, the US-Congress passed the legislation, and President Joe Biden signed it into act. It plans to strengthen domestic semiconductor manufacturing, design and research, fortifying the economy and national security, and reinforcing America’s chip supply chains. The CHIPS Act is to provide federal subsidies and funding of various forms in excess of 280 billion USD and includes semiconductor manufacturing grants, research investments, and an investment tax credit for chip manufacturing. The SIA appreciated that Congress has risen to a defining challenge of our time, seized an historic opportunity to fortify US semiconductor manufacturing, design, and research and delivered a big win.

The industry took notice. Idaho-based Micron Technology announced it will invest 40 billion USD until 2030 to manufacture chips in the US – the necessary investment is propped up by grants and credits from the CHIPS Act. Micron said that the additional capacity will push the American market share of memory chip production from 2% to 10%, expecting to begin production in the second half of the decade. Other US firms also stepped up. Qualcomm is committed to spend an additional 4.2 billion USD on chips from the New York facility of GlobalFoundries and also plans to increase semiconductor production in the U.S. by 50% over the next five years. Intel announced plans to invest up to 100 billion USD in Ohio in what could be the world’s biggest semiconductor complex, aiming to boost chip capacity in a time of limited supply. To start with, Intel spoke of an initial 20 billion USD investment that could later grow to 100 billion USD, with eight total fabrication plants. Intel’s plans also rely heavily on funding from the CHIPS Act. The tech giant would have invested in a new complex anyway , but without public grants it would just not happen as fast and not grow as big as quickly, according to what Intel-chief Gelsinger suggested to Reuters.

While the Americans are pushing ahead with their agenda, something’s cooking across the Atlantic too. With more than 40 billion EUR public and private investments aimed at by a similar Chips Act proposed by the European Commission in February, Brussels wants to boost the European standing in the highly competitive industry. The European Union wants to double its current market share to 20% in 2030. The EU Chips Act will build on Europe’s strengths like world-leading research and technology organizations and networks as well as host of pioneering equipment manufacturers. It will bring about a thriving semiconductor sector from research to production and a resilient supply chain. But the piece of legislation still has a long way in front of it, as it is customary for the Brussels way of doing things – the EP rapporteur Dan Nica of Romania will probably present a report on this matter only this fall, followed by negotiations between Commission, Parliament, and Council.

Speaking of Romania: it too wants a part of the European semiconductor pie. What it brings to the table is a certain high-tech-affinity, a tradition that started in the 70s and 80s in terms of resources and human capital. “There are R&D and innovation capabilities, there are thousands of people working in tech, but it is not enough and the creation of a chip production facility is an important step, ‘’ said Florin Spătaru, the Romanian Minister of Economy.According to him, there is an uneven distribution of players in this sector in the EU and developing the market in South-East Europe would help to balance the market. Romania has initiated steps to reopen mines so that metals such as copper can be processed domestically. In the coming period we will be able to secure the necessary funding to process these raw materials, he added.

Meanwhile, China – arguably the biggest actor of this future trillion dollar market and perceived by the West as an unfriendly competitor or downright a threat – is also not resting on laurels. Although it has a huge chunk of the chip production market, China itself owns relatively few of what its foundries produce. After US-President Donald Trump cut off Chinese companies like ZTE or Huawei from American technologies in 2018, there is growing awareness in Beijing for self-reliance, because growth in tech industries is fueled by semiconductors. At present, China consumes around 40% of all chips made globally, while being only 12% self-sufficient, according to GlobalData.

From as early as 2011 China invested more than 100 billion USD in incentives for its semiconductor industry, comprising grants, equity investment, reduced utility rates, favorable loans, tax breaks, and free or discounted plots of land for chip factories, the SIA reports. China will become the world’s leading semiconductor superpower on the basis of its growing domestic demand for the chips, according to GlobalData research.

And not only the USA, the EU, and China are aiming high. The authorities in Taiwan, home to chip giant TSMC, sponsored about 150 projects for chip production over the past decade. And with South Korea pursuing incentives and aiming to encourage roughly 260 billion USD in chip investments over the next five years, and Japan spending about six billion USD to double its domestic chip revenue by the end of the decade, the semiconductor race seems to have really taken off.

But to think that huge investments automatically equate chip supremacy would be a fallacy. The Georgetown Center for security and emerging technologies warned that at the nation-to-nation level the United States should engage allies and partners to coordinate domestic manufacturing incentives and build global supply chain resilience. It is important to prevent undercutting among friendly states, the Center notes. Even common sense dictates that if everybody only acts shortsighted, funds could be squandered.

Likewise, money alone does not guarantee top notch technology. Even as China spends billions to build up its domestic semiconductor sector, it is still some time away from achieving the capabilities needed to produce cutting edge chips, an analyst told CNBC. Mario Morales, VP for enabling technologies and semiconductors at the International Data Corporation believes that they are probably three or four generations behind what is considered to be leading edge.

Last not least, one final aspect is to be taken into account: raw materials. After Russia attacked Ukraine in February, the war is complicating the supply of neon gas from Ukraine and palladium from Russia. Without essential materials like these two, chip production will grind to a halt. Subsidies or no subsidies.

Alex Gröblacher

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