The semiconductor chip pendulum is slowly swinging west


In recent decades, investors have operated on the basis that the global balance of power is shaped by the source — or “prize”, as the writer Daniel Yergin puts it — of oil. Now, however, a new tagline is percolating: computer chips are the 21st century strategic version of the fossil fuel. Or that, at least, is the message being promoted by Pat Gelsinger, chief executive officer of Intel, America’s biggest chipmaker. “[The location of] oil has defined geopolitics in the past five decades. But fabs [ie fabrication factories for chips] will shape the next five — this is the new geopolitics,” he recently told a conference in Aspen, lamenting that while America initially created the semiconductor industry, 80 per cent of production currently sits in Asia. Or as Rob Portman, a Republican senator from Ohio echoed at the same event: “Thirty years ago 37 per cent of semiconductors in the world were made in the US . . . today it’s 12 per cent and is going the wrong way.” Is this just special pleading? Certainly in part. Intel has lost ground to its Asian rivals in recent years and has been furiously lobbying Congress to provide $52bn of funding to back a bill passed last year to boost American-made chip production. And this week the lobbying paid off: a key Senate committee finally agreed to fund the $52bn plan. This will be signed by President Joe Biden “before the August recess”, Mark Warner, the Democrat senator who chairs the Senate intelligence committee, tells me. This is still only a “skinny chips” bill, as Warner says; in other words, it omits parts of the original legislation. But skinny or not, dollars will flow. Intel, for example, is about to build two $10bn fabs in Senator Portman’s district of Ohio, and expects to receive a $3bn subsidy for each. Hence why Gelsinger — and Portman — are promoting the chips-are-the-new-oil mantra. But leaving aside the issues of obvious self-interest, the reality is that this new credo is grounded in fact. That is partly because chips are playing an increasingly crucial role in military hardware. One issue that has hobbled Russia’s ability to replenish its battlefield equipment in recent months, say, is that it has been cut off from chip supply chains by western sanctions. Moreover chips — like oil — are increasingly shaping inflation trends: in recent decades, western disinflation was supported by declines in the cost of Asian-produced chips and cheap manufacturing. But now that dynamic has gone into reverse due to supply chain disruptions. Then there is growth. Since almost every modern industrial sector needs a reliable supply of chips, the 2021 supply chain disruptions alone are calculated to have reduced American gross domestic product by $240bn that year, Portman says.  And John Cornyn, a Republican senator from Texas, reckons that if America ever lost access to supplies of advanced semiconductor chips in the future “GDP could shrink by 3.2 per cent and we could lose 2.4mn jobs” in a single year. “Over three years, more than $2tn US GDP could be lost, with over 5mn people losing their jobs,” he adds. Hence the growing alarm in Congress — and America’s C-suite — about the fact that almost all advanced chip production is currently located in Taiwan, which is being threatened by a newly assertive China. Or as Warner says: “The vulnerability of Taiwan has been driven home by the invasion of Ukraine.” This also explains Warner’s frustration that Europe is already racing ahead to subsidise chip production, essentially copying the bill that the US adopted (but did not fund) last year. Intel, for example, has already received commitments of €6.8bn in subsidies from Germany. “When Brussels and Germany and France move faster than Americans we know we have got problems,” Warner says. Or as Gelsinger adds: “This complex 27-member socialist union . . . is now ahead of the US by a solid six months.” So will the (belated) funding of the Chips Act become the computing equivalent of America’s shale industry — namely a trigger for more self-sufficiency? Not quickly or easily. It takes at least two years to start a fab. And America lacks the talent base and infrastructure that has enabled Taiwan to dominate. As a result, Morris Chang, founder of Taiwan’s dominant TSMC group, says that production in its US TSMC factories costs 50 per cent more than in Taiwan. Moreover, while $52bn sounds a big number, China is estimated to be giving three times that — or more — in support to its own sector. And the Chips Act caps subsidies at $3bn per plant (which typically cost around $10bn), but other countries provide up to 50 per cent in help, Gelsinger says. This leaves Warner fretting about a looming “race to the bottom on chip subsidies” between Europe and America — or Asia. Yet, even if it will be tough to shift the supply chain pattern, nobody should doubt that the pendulum is swinging. Gelsinger is now promoting a target whereby America produces around 30 per cent of all chips in the future and Europe some 20 per cent (compared, he says, with the current 12 and 8 per cent levels, respectively). Under this vision, which is backed by key senators, Asia would account for just 50 per cent of all chip production. This bold reform may not be achievable; or not anytime soon. But the message for investors is clear: the geopolitical chip wars could soon turn even more interesting. And they should count themselves lucky that western companies do not depend on Russia for chips.