America is spending billions to safeguard its supply of chips, which are the new oil.

The United States has only recently come to realize that semiconductors are now just as essential to modern economies as oil. This realization has come about in the past two years.

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As the world becomes increasingly digitized, more and more power tools and appliances are being equipped with Bluetooth chips that track their locations. In 2021, the average car contained about 1,200 chips worth $600, twice as many as in 2010. This trend is only expected to continue as we move further into the 21st century.
The chip shortage that caused a supply-chain crunch brought the lesson home. Auto makers lost $210 billion of sales last year because of missing chips, according to consulting firm AlixPartners. Competition with China has stoked concerns that it could dominate key chip sectors, for either civilian or military uses, or even block U.S. access to components.

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Now the government and companies are investing billions of dollars in a frantic effort to boost domestic manufacturing and secure the supply of chips. Since 2020, semiconductor companies have proposed more than 40 projects across the country worth nearly $200 billion that would create 40,000 jobs, according to the Semiconductor Industry Association.

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This is a major investment in an industry that is shaping the landscape of global economic competition and determining countries' political, technological and military advantage. The location of oil reserves has had a major impact on geopolitics for the past five decades. This is especially true for countries that have large reserves of oil. Intel Corp. INTC -0.59%

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Pat Gelsinger, CEO of Intel, said at a Wall Street Journal conference in October that the location of chip factories is more important than ever. "Where the chip factories are for the next five decades is more important," Gelsinger said.

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As oil became a key component of industrial economies in the 1900s, the United States became one of the world’s largest producers. However, securing a reliable supply of semiconductors is more complicated. While one barrel of oil is much like another, semiconductors come in a wide range of types, capabilities and costs, and depend on a complex supply chain spanning multiple countries. Given the economies of scale involved, the United States cannot produce all of these itself.

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According to Mike Schmidt, who heads the Department of Commerce office overseeing the implementation of the Chips and Science Act, there is currently no leading-edge production in the United States. The Act, which was signed into law by President Biden in August, directs $52 billion in subsidies to semiconductor manufacturing and research in an effort to make the United States a global leader in this area. Schmidt believes that this is a very ambitious goal, but one that is achievable.
The recent shortages of chips have hurt many industries, but not necessarily the most expensive ones.

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Jim Farley, Ford Motor Co.’s chief executive, told a gathering of chip executives in San Jose, Calif., in November that factory workers in North America had worked a full week only three times since the beginning of that year because of chip shortages. A lack of simple chips, including 40-cent parts needed for windshield-wiper motors in F-150 pickup trucks, left it 40,000 vehicles short of production targets.

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In 2014, San Diego-based ResMed Inc. started putting cellular chips into their sleep apnea machines. These chips beam nightly report cards on users’ sleep patterns to their smartphones and to their doctors. This allows for better monitoring and treatment of sleep apnea.

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As a result of the study, it was found that regular usage by users climbed from just over half to about 87%. Because mortality is lower for sleep-apnea sufferers who consistently use their devices, it was concluded that a relatively simple chip could help save lives.
During the chip shortage, ResMed was unable to keep up with demand for its machines. This was partly due to a recall of a competitor's devices. Some suppliers reneged on supply agreements, leaving patients facing months-long waits.

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Mick Farrell, Chief Executive of Irish Water, has implored longstanding suppliers to give priority to his equipment orders, though they are relatively small. "I asked for more, more and more, and to please prioritize us," he said. "This is a case of life and death—we're not just asking for something that makes you feel better."
The company redesigned its machines to replace the chips in short supply with others more readily available. It sought out new chip suppliers. It even rolled back the clock and released a version of a device without the cellular chip.

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Mr. Farrell is concerned that the chip shortage could become a bottleneck for the company's new breathing devices, which have the cellular chip back.
In May, he was one of a group of medical-technology CEOs who pleaded with Commerce Secretary Gina Raimondo on a conference call for help. Ms. Raimondo's staff asked other federal agencies to designate medical equipment as essential and helped connect buyers directly to manufacturers to bypass distributors. The CEOs' efforts were successful in getting medical equipment classified as essential, which helped to ensure a more reliable supply chain for hospitals and other medical facilities.

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The pleas for help from the semiconductor industry lent urgency to the Biden administration's efforts, led by Ms. Raimondo, to pass the Chips and Science Act. The U.S. has long been leery of industrial policy, under which the government rather than the market steers resources to particular industries. Many economists criticize industrial policy as picking winners. But many Republican and Democratic legislators argue that semiconductors should be an exception because, like oil, they have vital civilian and military uses.

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After the act was passed, Intel, which had been pushing for its passage for two years, broke ground on a $20 billion project in Ohio. The Commerce Department will announce guidelines next month on how the law's manufacturing subsidies will be awarded.

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American scientists and engineers were the first to invent and commercialize semiconductors, and today U.S. companies still lead the way in the most lucrative parts of the semiconductor supply chain: chip design, software tools that translate designs into actual semiconductors, and, with competitors in Japan and the Netherlands, the multimillion-dollar machines that etch chip designs onto wafers inside fabrication plants, or fabs.

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The actual fabrication of semiconductors has been increasingly outsourced to Asia, with the U.S. share of global chip manufacturing declining from 37% in 1990 to 12% in 2020. Mainland China's share has increased from around zero to about 15%, while Taiwan and South Korea each account for a little over 20%.

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The most cutting-edge manufacturers of advanced logic chips are Taiwan Semiconductor Manufacturing Co. and South Korea-based Samsung Electronics Co. Intel comes in third. Memory chips are primarily made in Asia by U.S.- and Asian-headquartered companies. Lower-end analog chips, which often perform just a few tasks in consumer and industrial products, are produced around the world.

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The concentration of so much chip production in three hot spots—China, Taiwan and South Korea—unsettles U.S. military and political leaders. They worry that if China achieved dominance in leading-edge semiconductors, on its own or by invading Taiwan, it would threaten the U.S. economy and national security in a way that Japan didn't when it briefly dominated semiconductor manufacturing in the 1980s.

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Since 2016, U.S. officials have been blocking Chinese efforts to procure front-line chip companies and technology. Many in Washington were surprised last July when a Canadian research firm reported that China’s largest chip maker, Semiconductor Manufacturing International Corp., had begun to manufacture 7-nanometer chips—a level of sophistication thought to be beyond its ability.

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The U.S. government installed new restrictions on chip-related exports to China on October 7. These restrictions are the broadest ever imposed by the U.S. and are designed to prevent China from catching up to the U.S. and its allies in semiconductor technology.

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U.S. officials are hoping that federal subsidies will lead to the development of factories that are large and advanced enough to remain competitive and profitable in the future. In an interview, Ms. Raimondo said that the goal is to convince companies to invest more in their facilities. “We’ve got to figure out a way through every piece of leverage we have…to push these companies to go bigger,” she said. “I need Intel to think about taking that $20 billion facility in Ohio and making it a $100 billion facility. We’ve got to convince TSMC or Samsung that they can go from 20,000 wafers a month to 100,000 and be successful and profitable in the United States. That’s the whole game here.”

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As chip makers face a sharp drop in demand for electronics, they must tread carefully when it comes to ambition. Intel is cutting capital spending in light of the slump, and TSMC has said that weak demand could lead to reduced capital expenditures this year.

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To raise the money needed for chip companies to invest in new projects, Ms. Raimondo has approached private infrastructure investors about participating in these projects. This is similar to how Brookfield Asset Management Inc. co-invests in Intel’s Arizona fabs. Last November, she pitched the idea to 700 money managers at an investment conference in Singapore that was organized by Barclays Bank.

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She also approached chip customers, including Apple Inc., about buying chips from these fabs. “We will need big customers to give commitments to purchase [the fabs’ output], which will help de-risk deals and show there is a market for these chips,” she said.

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TSMC's efforts to increase its investment in leading-edge chips appears to be paying off, with the company announcing in December that it would invest an additional $40 billion in a facility already under construction north of Phoenix. The facility, which was formerly home to wild burros and coyotes, is now bustling with construction activity and is receiving some of the most advanced manufacturing equipment in the world.

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At a ceremony that month attended by Mr. Biden and top administration officials, including Ms. Raimondo, Apple Chief Executive Tim Cook and Advanced Micro Devices Inc. chief Lisa Su pledged to purchase some of the facility's output.

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Despite excitement about its plans and local, state and potentially federal subsidies, costs for TSMC's new operation in the United States are higher than if a similar operation were built at home, according to a public letter from the company to the Commerce Department. In November, TSMC founder Morris Chang said the differential could be 50%. TSMC said it has sent more than 600 American engineers to Taiwan for training.

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Outside the U.S., Europe is planning to double its share of global production over the next 10 years. Meanwhile, authorities in Taiwan, China and other Asian nations are investing heavily in the sector. TSMC, in addition to its Arizona project, is building a chip plant in Japan and is considering potential investments in Europe.

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The high cost and scarcity of qualified labor in the U.S. has hampered previous efforts to reshore electronics manufacturing. Mung Chiang, president of Purdue University in Indiana, said computer and engineering students are drawn to chip design or software, areas where American companies are leaders, rather than manufacturing. Chiang believes that in order to bring manufacturing back to the US, there needs to be a shift in the way that students are educated, with a focus on manufacturing and not just design and software.

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"Even if they say 'Yes, semiconductor manufacturing sounds really good, I want to do it,' where can they learn the real, live experience?"
In response to the shortage of semiconductor professionals, Purdue has created a dedicated semiconductor program. The program aims to award more than 1,000 certificates and degrees annually by 2030, both in person and online. In July, SkyWater Technology, a Bloomington, Minn.-based foundry, announced that it would build a $1.8 billion fab on Purdue’s campus. The fab will be supported by Chips funding.

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Developing a strong domestic talent pool is only half the battle. The U.S. also depends on foreign countries for many key inputs to semiconductors.
The lasers that imprint tiny circuit blueprints on silicon wafers use purified neon gas. This gas is made from raw neon, which is typically harvested from large air-separation units attached to steel plants. These facilities produce the neon when they separate oxygen from the air for use in steel furnaces.
The steel industry has largely moved out of the U.S. over the past half-century, leaving very little neon gas being produced domestically. Most of the gas now comes from Ukraine, Russia and China, but Russia’s invasion of Ukraine has left China as the world’s main source.

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"There is no doubt that this is a risk for the United States," said Matthew Adams, an executive vice president at Electronic Fluorocarbons LLC. "If China bans exports of neon to the US for an extended period of time, it would shut down a significant portion of semiconductor production once inventories are depleted."
Other raw materials used in chip making, such as tungsten, are similarly sourced primarily from China. To truly untie the U.S. chip industry from China would entail undoing several decades of globalization, something industry leaders say isn’t practical.

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The U.S. has a chance to reverse the recent historical pattern of losing leadership in one manufacturing sector after another, including passenger cars, railroad equipment, machine tools, consumer electronics and solar panels. Even if the U.S. doesn't succeed in securing the entire semiconductor supply chain, it can still take steps to regain its manufacturing edge.

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According to Rob Atkinson, president of the Information Technology and Innovation Foundation, the government should support manufacturing in order to regain market share in industries where it has lost its position as leader. Atkinson believes that this is something that has never been done before in a conscious and targeted way.