Global chips battle intensifies with $110 billion subsidy surge

WASHINGTON – Superpowers led by the United States and European Union have funnelled nearly US$81 billion (S$110 billion) towards cranking out the next generation of semiconductors, escalating a global showdown with China for chip supremacy.

It is the first wave of close to US$380 billion earmarked by governments worldwide for companies like Intel and Taiwan Semiconductor Manufacturing Company (TSMC) to boost production of more powerful microprocessors. The surge has pushed the Washington-led rivalry with Beijing over cutting-edge technology to a critical turning point that will shape the future of the global economy.

“There is no doubt we’ve passed the Rubicon in terms of the tech competition with China, particularly on semiconductors,” said Mr Jimmy Goodrich, senior China and strategic technology adviser to the Rand Corporation. “Both sides have basically made this one of their top strategic national objectives.”

What began as concern over China’s rapid advances in key electronics blossomed into full-scale panic during the Covid-19 pandemic, as chip shortages highlighted the importance of these tiny devices to economic security. At stake now is everything from the revitalisation of US tech manufacturing to the assertion of an upper hand in artificial intelligence (AI) to the balance of peace in the Taiwan Strait.

Chips spending by the US and its allies marks a new challenge to Beijing’s decades of industrial policy – albeit one that will take years to bear fruit. The rush of funding has hardened battle lines in the US-China trade war, including in places like Japan and the Middle East. It is also giving a lifeline to Intel, the one-time global leader in chip manufacturing that in recent years has lost ground to rivals, including Nvidia and TSMC.

Investment plans have reached a critical juncture in the US, where officials in April unveiled US$6.1 billion in grants for Micron Technology, the largest American maker of computer-memory chips. That was the final multibillion-dollar grant for an advanced chipmaking facility in the US, capping a flurry of commitments nearing US$33 billion to companies including Intel, TSMC and Samsung Electronics.

US President Joe Biden opened that funding spigot with his

signature 2022 Chips and Science Act

, promising a total of US$39 billion in grants for chipmakers, sweetened by loans and guarantees worth an additional US$75 billion plus tax credits of up to 25 per cent. It is the heart of his high-stakes bid to revive domestic semiconductor production – especially of leading-edge chips – and deliver a rush of new factory jobs to help convince voters he deserves re-election in November.

Those investments by the US seek to do more than just counter China, which still trails the rest of the world by several generations in advanced semiconductor technology. They also aim to close the gap on decades of state-directed incentives from Taiwan and South Korea that have made those places the centre of the chip industry.

The spending spree likewise is fuelling rivalries among the US and its allies in Europe and Asia, all chasing a piece of the growing demand for devices powering advances in AI and quantum computing.

Global investment plans

Across the Atlantic, the European Union has forged its own US$46.3 billion plan to expand local manufacturing capacity. The European Commission estimates that public and private investments in the sector will total more than US$108 billion, mostly in support for large manufacturing sites.

Europe’s two largest projects are in Germany: an Intel fab planned in Magdeburg worth about US$36 billion and receiving nearly US$11 billion in subsidies, and a TSMC joint venture worth roughly US$11 billion, half of which will be covered by government funds. Even so, the European Commission has not yet given final approval for state aid to either, and experts caution that the bloc’s investments will not be enough to achieve its goal of making 20 per cent of the world’s semiconductors by 2030.

Other European countries have struggled to fund major projects or attract companies. Spain announced in 2022 that it would put nearly US$13 billion towards semiconductors but has only doled out small amounts to a handful of companies owing to the lack of a semiconductor ecosystem in the country.

Emerging economies are also looking to break into the chips game. India in February approved investments powered by a US$10 billion government fund, including a Tata Group bid to build the country’s first major chipmaking facility. In Saudi Arabia, the Public Investment Fund is eyeing an unspecified “sizeable investment” in 2024 to kick off the kingdom’s foray into semiconductors as it seeks to diversify its fossil fuel-dependent economy.

In Japan, the Trade Ministry has secured about US$25.3 billion for its chips campaign since its inception in June 2021. Prime Minister Fumio Kishida is targeting a total of US$64.2 billion in investment, including sums from the private sector, with a goal of tripling sales of domestically produced chips to about US$96.3 billion by 2030.

Seoul, by contrast, has avoided direct financing and subsidies like those embraced by Washington and Tokyo, preferring to act as a guiding hand to its deep-pocketed chaebol. In semiconductors, the South Korean government plays a supporting role in an estimated US$246 billion of spending – part of a broader vision for home-grown technology from EVs to robotics. That effort stands to get a boost from a US$7.3 billion chips programme that the finance ministry said on May 12 would be unveiled soon.

One potential danger overshadows the global surge of government support: creating a glut of chips.

“All of this investment into manufacturing driven by government investment and not primarily market-driven investment could eventually lead to a situation where we have more capacity than we need,” said Bernstein analyst Sara Russo. However, that risk is mitigated by the length of time it will take for the planned new capacity to come online.

China’s building boom

For now, companies such as Nvidia, Qualcomm and Broadcom lead the world in design of chips vital to key fields such as AI. But there is debate on how wide that lead is. Some experts argue that China is years behind, while others insist that the world’s second-largest economy is on the cusp of catching up.

China now has more semiconductor plants under construction than anywhere else in the world, building production of less-glamorous legacy chips while amassing the expertise needed for a home-grown technological leap. It is also working on domestic alternatives to Nvidia’s AI chips and other advanced silicon.

The amount of money Beijing is pouring into the sector likely dwarfs US spending. China was on track to spend more than US$142 billion, the Washington-based Semiconductor Industry Association estimated last week. As part of that effort, the government has been raising another US$27 billion for what is known as the Big Fund to oversee state investments in scores of companies, including local chipmaking champions Semiconductor Manufacturing International Corporation (SMIC) and Huawei Technologies.

Export controls

China’s efforts have been slowed by a wall of restrictions imposed by the US to deny its geopolitical rival access to the latest semiconductors. The Biden administration is enlisting allies in Europe and Asia to adopt export controls on sophisticated equipment needed to make the most advanced chips.

SMIC, China’s top chipmaker, joined Huawei on the US government’s so-called restricted entities list in 2020. Two years later, Washington hit Beijing with export controls designed to further block China’s access to the latest manufacturing technology.

The Biden administration is now trying to close remaining loopholes, including on equipment repair, though some US allies, including the Netherlands and Japan, are baulking.

The US-led crackdown has provided “a huge incentive for Chinese firms to improve their capabilities, move up the value chain, collaborate among themselves, and galvanise more government support to firms like Huawei that are driving the industry forward”, said Mr Paul Triolo, a former US government official who specialises in China and technology policy at Albright Stonebridge Group.

Political stakes

Looming over the global chips push is the risk of a Chinese invasion of Taiwan that the Pentagon estimates Beijing would be ready to undertake as soon as 2027. The island is home to industry leader TSMC and supplies 90 per cent of the world’s most advanced chips.

The chips race also carries the added stakes of Mr Biden’s pursuit of a second term, putting his promise of a manufacturing revival at the heart of his re-election campaign against Donald Trump.

So far, Trump has yet to spell out his plans for semiconductors – including the Chips Act funds that will not begin flowing until some time around Election Day after a long period of due diligence. Trump is threatening tariffs of up to 60 per cent on Chinese goods if he becomes president again. That risks triggering a much more forceful response from Beijing.

“It doesn’t really matter who is president going forward,” said East West Futures Consulting director John Lee. “The US-China tech war is going to get worse, not better.” BLOOMBERG