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Picking Winners And Losers; Subsidies


Brooklyn, New York

November 24, 2021


The following article appeared in today’s WSJ.


My thoughts.


As a free marketer. I don’t like government subsidies for the simple reason that ANY government involvement in markets is a distortion in the market.


But that’s theory. The reality is that in the global marketplace, many governments choose to support certain industries and companies as strategic for that country. Japan is well known using this approach and certainly China does the same as does South Korea. In effect they are choosing winners and losers, aren’t they?


In the United States, one political party decries subsidies (at least in public) while the other party seems to believe that subsidies are essential role of government.


This WSJ article does not address that difference in perspectives between the parties. It doesn’t take a position of the role of subsidies in convincing Samsung to site its $17 billion plant in the (red) state of Texas. Why not I wonder. Certainly the Journal is no fan of government subsidies. Perhaps it is because most of us would agree that we need to produce more semiconductors in the United Stares?


Just being curious.


The WSJ article:

More Chips Will Be Made in America Amid a Global Spending Surge

Samsung’s $17 billion bet on Texas mirrors large spending increases in Asia and elsewhere

New investment promises to boost America’s production foothold in advanced chip making after years of ceding ground to Asian nations. SEOUL—Investment in U.S. chip production is on the rise. But so too, is semiconductor spending elsewhere.

Samsung Electronics Co. ’s planned $17 billion chip factory in Texas is expected to crank out top-end semiconductors that are essential to 5G cellular networks, self-driving cars and artificial intelligence. It follows hefty bets on U.S. soil by Intel Corp. ,Taiwan Semiconductor Manufacturing Co. and Texas Instruments Inc.

The new factories won’t be operational for years. But the investment promises to boost America’s production foothold in advanced chip making after decades of ceding ground to locations in Asia like Taiwan, South Korea and China. It comes at a time, though, when chip makers are investing heavily in these locations, too. A chip shortage has snarled global business and amplified calls from governments world-wide to boost local production of the tiny tech components in devices that power much of our daily lives. Component shortages have hit everything from car production to availability of some consumer goods, raising the stakes for politicians—particularly in the U.S. and Europe—to reduce their reliance on Asian suppliers. That has triggered a spree of record chip investment—and driven governments to offer financial incentives to secure these new factories. U.S.-based companies represent about half of the $464 billion semiconductor industry, according to the Semiconductor Industry Association and market-researcher International Data Corp. But many of the biggest names, like Qualcomm Inc. andNvidia Corp. , design chips but don’t manufacture the parts themselves, choosing instead to outsource the work. And that is often done overseas.

About three-quarters of global semiconductor production capacity sits in just four Asian locations: Taiwan, South Korea, China and Japan, according to the Semiconductor Industry Association. The U.S. represents just 13%. Global chip manufacturers are projected to lay out $146 billion in capital expenditures this year, about 50% higher than before the Covid-19 pandemic began and double the level of just five years ago, according to Gartner Inc., a market researcher. The U.S. is capturing just about a seventh of that global investment, a level similar to two years ago, Gartner said. Asia, by contrast, represented more than 80% of the total spending. The ratios are expected to be similar through 2025, Gartner says.

Earlier this month, TSMC and Sony Group Corp. said they would build a $7 billion chip plant in southern Japan, a project that is expected to receive billions of dollars in subsidies from the government in Tokyo. In September, China’s Semiconductor Manufacturing International Corp., which is partially state owned, said it would spend nearly $9 billion on a new plant outside Shanghai. In May, South Korea unveiled a road map to support local semiconductor companies’ plans to invest roughly $450 billion by 2030. Only about 6% of new semiconductor global capacity added over the next 10 years is expected to be located in the U.S., according to a Monday report from the U.S. Chamber of Commerce, which urged Congress to pass legislation that provides $52 billion in direct subsidies for new chip factories. “While U.S. domestic manufacturing flatlined, China, South Korea and others are investing heavily in their own industries, aiming to ensure global manufacturing leadership and leave the United States behind,” the report said. The U.S. brings advantages as a host country for cutting-edge chip factories, from access to skilled workers, protection of intellectual property and proximity to buyers, the Semiconductor Industry Association says. But the U.S. also has drawbacks. The costs of owning a new chip factory are roughly 30% higher than in South Korea, Taiwan or Singapore, and are as much as 50% more than in China, according to the SIA report published last year. The cost differences are largely attributable to the availability—or absence—of government incentives, the SIA said.

In a speech last month, Morris Chang, the founder of TSMC who retired three years ago, warned that manufacturing chips in the U.S. was more costly and posed supply-chain challenges when compared with Taiwan.

“Even after you spend hundreds of billions of dollars, you will still find the supply chain to be incomplete and costs to be higher than what you currently have,” Mr. Chang said.

The Taiwanese government over the years has showered subsidies on its local chip industry that leaders refer to as Taiwan’s “silicon shield,” helping protect it from military conflicts. China is in the middle of a heavily subsidized drive to become self-sufficient in chips. Private investment has also grown in recent years, as U.S. companies and their Chinese affiliates have ramped up investment in Chinese semiconductor companies, according to a Wall Street Journal investigation. South Korea, aiming to double annual chip exportsfrom today to $200 billion by 2030, has offered billions of dollars in tax breaks, lower interest rates and other investments. President Moon Jae-in’s administration has pledged to cut regulations and asked local governments over the next decade to ensure adequate water supply—a key resource for chip making.

Earlier this year, Japan’s Ministry of Economy, Trade and Industry said investment of up to 1 trillion yen, or the equivalent of $8.6 billion, may be necessary to reduce the country’s reliance on foreign-made chips. New Prime Minister Fumio Kishida, vowed to revive Japan’s semiconductor industry and has created a new spot in his cabinet for a minister of economic security. The U.S.’s gains, for now, are tilted more toward quality than quantity. By 2027, the U.S. is projected to possess about 24% of the world’s production capacity for the most cutting-edge chips—those that use circuitry measured at 10 nanometers or below—according to Counterpoint Research, a market-research firm. That would be up from 16% at present.

More countries have come to see an overreliance on Asia-based chip factories as a national security risk, said Dale Gai, a Taiwan-based director at Counterpoint Research covering semiconductors and components. In addition to Samsung’s Texas bet, TSMC is currently building a $12 billion chip manufacturing facility in Phoenix. Intel has pledged to spend $20 billion on two plants in Arizona and a $3.5 billion expansion effort in New Mexico.

The Biden administration welcomed Samsung’sinvestment in Texas and added that it is working around the clock with Congress, allies and partners to boost American manufacturing capacity, according to a joint statement late Tuesday from National Economic Council Director Brian Deese and national security adviser Jake Sullivan.

“More work remains to be done to ensure America remains the most innovative and productive nation on Earth,” the statement read.

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