Supply Chain Matters provides added perspectives to this week’s announced developments involving planned U.S. semiconductor fab investments.

U.S. Chips and Science Agreement Funds Release

This week the Biden Administration announced a grant of up to $8.5 billion to Intel to aide in the funding and the construction of proposed advanced semiconductor fabrication facilities within four different U.S. states. The monies come from the U.S. Chips and Science Act signed into law in August 2022.

According to a White House briefing, Intel itself has plans to invest upwards of $100 billion to build and expand these semiconductor fab and supply network support facilities in Arizona, Ohio, New Mexico, and Oregon with the potential to create upwards of 30,000 jobs.

The announcement specifically notes that Intel’s investments not only involve upwards of four leading-edge logic fabs, but also advanced chip packaging capabilities in New Mexico critical for producing advanced next generation chips including graphical chips supporting advanced AI processing and computational needs. There are further plans for added investment in an advanced lithography innovation hub at Intel’s existing Oregon facility.

Intel CEO Pat Gelsinger has specifically indicated that the plans for Columbus, Ohio complex include being: “the largest AI chip manufacturing site in the world.” Gelsinger further indicated to The Wall Street Journal: “It took us three plus decades to lose this industry. It’s not going to come back in three to five years.”

In essence, these investments are being geared toward domestic fabrication along with the other essential supply network capabilities required to re-institute a semiconductor supply chain hub domestically.

In the area of fostering a skilled workforce, the announcement includes $50 million to train and develop local workforces, with provisions for the U.S Department of Commerce and Labor to further assess needs not only in production worker skills, but in facility construction and operation, among other deemed priorities.

This week’s announcement follows prior investments stemming from the CHIPS Act. That includes a February announced $1.5 billion grant for GlobalFoundries to support the development and expansion of fab facilities in Malta, New York, and Burlington, Vermont. In January, the Biden Administration announced a $162 million grant to Microchip Technology to increase its production of microcontroller units and other specialty semiconductors involving  fabrication facilities in Colorado Springs, Colorado and Gresham, Oregon.

As Supply Chain Matters has highlighted in our prior industry specific coverage, industry dominants Samsung Electronics and Taiwan Semiconductor Manufacturing Company (TSMC) are also investing in U.S. fab and associated capabilities.

Nagging Delays and Added Concerns

In the light of this week’s U.S. focused news are reports of continuing nagging delays and added concerns regarding the unexpected costs and setbacks related to the construction, staffing and supply network needs.

Supplier Challenges Ongoing

This week, a published report from Nikkei Asia (Paid subscription) indicated that at least five suppliers to TSMC and Intel have delayed construction of their production facilities in Arizona due to unanticipated surging construction costs and labor shortages.

While business media will be keen to amplify this development, there are important industry supply network factors that surround such actions.

The report indicates that the five key suppliers each have acquired land but have placed a hold on construction or are scaling back on original plans. The reported reasons relate to surging costs for construction materials and construction labor, along with a shortage of qualified construction workers experienced in the construction of such facilities.  Noted in interviews with sources is a realization that facility construction costs are four to five times higher than what they would be Asia.

All of the above is likely to be expected given that the U.S. is not Asia, and as reinforced by Intel CEO Pat Gelsinger, that this whole effort is about reestablishing a U.S. sourced capability.

A vulnerability was exposed during the global pandemic and has taken on more significance with heighted geo-political actions and developments related to trade and domestic high tech demand and supply capabilities.

Added Realities

There is a further reality that is often not mentioned in these news reports.

As our industry supply chain readers are becoming increasingly aware, domestic semiconductor production presence is and remains a fundamental part of domestic policy among certain Asian nations such as Taiwan, South Korea or Japan. So much so that the level of government subsidies is significant, in the hundreds of billions.

Industry suppliers across the multiple supply network tiers know of this, and they have come to expect the government subsidies and tax breaks that become available.

The U.S. CHIPS Act currently pales in comparison to Asian based subsidies. None the less, the U.S. market for semiconductor supply is significant. The notion of most all of the influential advanced chip producers committed toward supporting a domestic presence in order to be not locked out of U.S. demand needs remains compelling.

We have cited the Nikkei report because it is balanced. It is seen from the interviews with industry supplier executives that product margins among suppliers is far lower than that of major chip producers. These suppliers have to ultimately predicate their plant investments based on the actual operating U.S. presence of an Intel, Samsung or TSMC supply volume and required capacity needs.

This is an overall time phasing effort and that affords downstream industry material suppliers the time to ascertain if construction costs can be reduced, more workers can trained in the necessary plant construction and operational support skills. Initial capacity needs can be adjusted based on the actual planned go-lives of the major fabs being invested in.

Subsequent added investment phases in training required workforces and/or additional federal or local government funding are all anticipated and likely to be a part of this effort.

Reader Takeaways

The reader takeaway for our high tech, consumer electronics and advanced technology supply chain readership is to stay attuned to these ongoing industry developments.

Semiconductor supply networks have been notorious in the building out rather expensive and often too much capacity to meet existing market demand cycles. The underlying reason is that of being the first to provide the most advanced chip technology and fabrication capabilities while garnering the profit margins for doing so. Depending on the chip technology cycle, other providers can find their chip fab facilities underutilized and that is a rather expensive and intolerable condition.

However, we point out that this is a period unlike past cycles as governments and production regions understand the semiconductors are the equivalent of the new oil in fueling strategic economic and industry growth capability. This is the new arms race, and supply network strategists are coming to understand that semiconductor supply resiliency has become fundamental.

Thus is the global semiconductor demand and supply balancing act that will present itself over the next three to five years. It is why this industry’s ongoing structural changes and developments were included in prediction ten of our 2024 Predictions for Industry and Global Supply Chains as an industry to watch.

 

Added Note: An additional follow-on Supply Chain Matters commentary will highlight added investment dynamics occurring in global commodity semiconductor production plans.

 

Bob Ferrari

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