September 2022 / VIDEO
Semiconductor Subsidies Signal Shift in U.S. Industrial Policy
Focus on shoring up key supply chains likely has legs.
- The CHIPS and Science Act signals that the U.S. government is committed to advancing domestic semiconductor manufacturing.
- With the level of support in this legislation, we see the potential for new semiconductor capacity in the U.S. to be cost competitive with most regions.
- We could see further U.S. government efforts to secure other links in the semiconductor supply chain by working with allies and nearby nations.
The recent flurry of activity in Congress included a bill providing significant subsides for the U.S. semiconductor industry. This has prompted many commentators to ask: Is the U.S. embarking on a new path of industrial policy?
Let’s explore this question by examining the CHIPS and Science Act of 2022.
We’ll start with the carrots.
Key line items include a 25% investment tax credit for U.S. semiconductor plants and producing the specialized equipment used in chipmaking.
Tax credits of this nature are often extended before they’re slated to expire. If so, this could be a long-term investment tool for the chip industry.
There’s also 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.
Know-how is critical. The act includes USD 11 billion in funding for R&D [research and development] and workforce training related to the manufacture of advanced chips.
However, federal money comes with some strings attached.
Companies that accept a subsidy are barred from “material expansions” in “countries of concern,” including China. Here, chipmakers would only be allowed to increase capacity at existing facilities that operate older, 28-nanometer processes.
Takeaways for Investors
The CHIPS and Science Act signals that the U.S. government is committed to advancing domestic semiconductor manufacturing.
Between federal subsidies and the tax credit, we see the potential for project costs 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.
What companies have the most to gain?
Chip manufacturers expanding in the U.S. and companies that provide semiconductor tooling stand to benefit from government funding.
But subsidies alone do not guarantee operational or financial success. Semiconductor companies must execute well and allocate capital effectively.
These projects will also take many years to complete. Reversing the three-decade slide in America’s share of global semiconductor manufacturing will not happen overnight.
The offshoring of chip manufacturing cut costs for end users. And onshoring moves could be inflationary. Building more semiconductor plants in the U.S. addresses only part of the supply chain. It’s truly dizzying how many inputs go into this complex production process.
Still, the push to diversify and secure critical industries and supply chains should have legs. Rising geopolitical tensions in areas that are key to semiconductor production are viewed as a potential vulnerability.
We could see further government efforts to secure other links in the semiconductor supply chain by working with allies and nearby nations.
Also, the recently passed Inflation Reduction Act included substantial investments in U.S. manufacturing on a scale even larger than the CHIPS and Science Act.
These kind of government initiatives do not happen in a vacuum. We’ll pay close attention to how other nations respond through their own industrial policies.
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 noted on the material 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.
Canada – Issued in Canada by T. Rowe Price (Canada), Inc. T. Rowe Price (Canada), Inc.’s investment management services are only available to Accredited Investors as defined under National Instrument 45-106. T. Rowe Price (Canada), Inc. enters into written delegation agreements with affiliates to provide investment management services.
© 2022 T. Rowe Price. All Rights Reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.