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September 2022 / INVESTMENT INSIGHTS

Semiconductor Subsidies Signal Shift in U.S. Industrial Policy

Focus on shoring up key supply chains likely has legs.

With the passage of the CHIPS and Science Act of 2022, the U.S. followed Japan, Canada, and the European Union in enacting policies to support domestic semiconductor manufacturing. This legislation and the recently passed Inflation Reduction Act reflect a broader shift in U.S. policy toward reshoring critical industries.

Industrial policy in the U.S. is not new. We can trace its philosophical roots to Alexander Hamilton’s 1791 “Report on Manufacturers.” Still, this approach marks an abrupt departure from the multi-decade process of globalization that built a complex web of supply chains optimized for cost and efficiency. Adjusting these networks of suppliers and manufacturers to address concerns about security and economic competitiveness will take time and is likely to be inflationary.

It is not a fluke that U.S. industrial policy has focused on semiconductors. And these interventions will have potential implications for the economy and the industry.

It is not a fluke that U.S. industrial policy has focused on semiconductors. And these interventions will have potential implications for the economy and the industry.

An Area of Strategic Importance

The U.S. has strong capabilities in semiconductor design, the software used in that process, and the highly technical tools and equipment used in chip fabrication.

However, over the past three decades, America’s share of global semiconductor manufacturing has declined steadily. This trend reflects the push by chipmakers to outsource the highly complex manufacturing process to contract foundries that produce semiconductors designed by other companies.

Today, the bulk of the production nodes for the most advanced chips resides in Asia. Rising geopolitical tensions in the area have highlighted this concentration as a potential economic and security vulnerability.

Consider one of the lessons from the coronavirus pandemic. The Department of Commerce estimates that semiconductor shortages stemming from supply chain disruptions resulted in a USD 240 billion hit to U.S. gross domestic product last year.1

And the most advanced versions of these tiny chips are essential to fueling big innovations, including artificial intelligence and the automation of complex, real-world processes. These cutting-edge technologies have wide applications across industries. That’s why the U.S. and other governments view access to these chips as crucial to a country’s economic competitiveness and national security.

Subsidies and Restrictions

...the CHIPS and Science Act of 2022 signals that the U.S. government is committed to advancing domestic semiconductor manufacturing.

In our view, the CHIPS and Science Act of 2022 signals that the U.S. government is committed to advancing domestic semiconductor manufacturing.

Key line items include a 25% investment tax credit for U.S. semiconductor plants and specialized equipment used in chipmaking. Tax credits of this nature are often extended before they’re slated to expire, so this could be a long-term investment tool for the chip industry.

The law also allocates USD 39 billion in subsidies to expand U.S. capacity to fabricate advanced chips. The funds will be doled out through 2026, with a limit of USD 3 billion per project. The Department of Commerce has the leeway to determine which companies will receive funding and how much.

But building additional chipmaking capacity is only part of the solution. Know-how is also critical. The act includes USD 11 billion in funding for research and development and workforce training related to the manufacture of advanced chips.

Federal money comes with some strings attached. The act bars subsidy recipients from “material expansions” in “countries of concern,” including China. In these markets, chipmakers would only be allowed to increase capacity at existing facilities that operate older, 28-nanometer processes.

Takeaways for Investors

Between federal subsidies and the tax credit, we see the potential for the cost of building incremental chipmaking capacity in the U.S. to decline by 30% to 50%. This level of support could go a long way toward making U.S. semiconductor plants cost-competitive with most regions. However, these projects will take many years to complete.

Between federal subsidies and the tax credit, we see the potential for the cost of building incremental chipmaking capacity in the U.S. to decline by30% to 50%.

Key beneficiaries from the law include domestic and international chipmakers expanding their manufacturing capacity in the U.S. and companies that provide the equipment used to fabricate semiconductors. But subsidies alone do not guarantee operational or financial success. Semiconductor companies must execute well and allocate capital effectively. Investors must also monitor developments on the regulatory front that could restrict companies from selling certain chips and process technologies to some countries.

And building more semiconductor plants in the U.S. addresses only part of the supply chain—it is truly dizzying how many inputs go into this complex production process. We could see further government efforts to secure other links in the supply chain by working with allies and nearby nations. But this security may come at a cost: These efforts are likely to be inflationary.

These kinds of government initiatives also do not happen in a vacuum. We are paying close attention to how other nations might respond through their own industrial policies. 

IMPORTANT INFORMATION

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.

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