Semiconductors power today’s digital economy. Approximately 1.2 trillion semiconductors will be sold this year. The United States runs on semiconductors.
Semiconductors, chips, are fundamental in maintaining and growing a strong economy. They are equally critical for our national security. Artificial intelligence is powered by semiconductors designed by Nvidia, the world leader in the most advanced chips. The U.S. must remain the clear leader in semiconductors, AI, and the technologies that make AI a reality. To understand why this matters so much, consider that while the U.S. accounts for about 26% of global GDP, it maintains almost a 50% share of the world’s intensely competitive semiconductor market.
The U.S. is competing aggressively against China, its key adversary, and against friendly countries such as South Korea, Taiwan, Japan, and the United Kingdom. But to maintain their preeminent market position, the domestic semiconductor companies are aggressively reinvesting profits in research and development and in intellectual property more generally. Profit drives greater investment in R&D. Domestic semiconductor companies reinvest almost 19% of revenues in R&D, more than businesses in any other sector of the economy, save for pharmaceuticals.
Globally, U.S. chip companies invest more in R&D than any other geographies. U.S. investment is about 25% higher than in Europe, where companies spend about 15% on R&D. By a factor of 2.5, U.S. semiconductor companies outspend China on R&D. The semiconductor space is characterized by distinct processes: design, production of equipment, fabrication, and final assembly. Among domestic companies, only Intel is fully integrated. Most U.S. companies are fabless, that is, they design the chips and associated software but outsource the balance of the processes. Fabless operations generate higher returns. Semiconductor fabrication is capital-intensive. Design is not. The U.S. is preeminent in design, but it is deficient in foundries, fabrication.
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Taiwan Semiconductor, UMC of Taiwan, and Samsung of South Korea are the leading foundries. And the U.S. is totally dependent on a Dutch company, ASML, for the most advanced lithography technology that is necessary to manufacture cutting-edge semiconductors, such as the graphics accelerators that Nvidia designs. But because semiconductors effectively run the U.S. economy and are vital to national security, the clear vulnerability is in the foundry space. The U.S. only has a 12% share of fabrication capacity and is completely absent from the most advanced foundry processes. The CHIPS and Science Act, which became law almost 18 months ago, was designed to address U.S. weaknesses regarding semiconductor manufacturing. But money from the legislation is only trickling out when time is of the essence. China could invade Taiwan at any moment. Moreover, Taiwan Semiconductor says U.S. labor is not competitive for state-of-the-art semiconductor manufacturing and that construction costs in the U.S. are too high. Taiwan Semiconductor has pushed out until 2025 the opening of its advanced manufacturing facility located in Arizona.
U.S. policy must thus address obvious problems: permitting, construction costs, inadequate labor, and the cash flow drag of amortizing R&D spending. The CHIPS and Science Act is not sufficient. Given the grave threat that China poses and the economic imperative of dominating the global semiconductor industry, the country must have a forceful commitment to semiconductor manufacturing. The Biden administration’s controls on the export of proprietary technology to China are appropriate policy, but the controls should be strengthened through increased funding and authorities for the Commerce Department, which administers the controls.
Semiconductors are the high ground. Chips are our future.
The writer owns stock in Nvidia.
James Rogan is a former foreign service officer, attorney, and banker.