Plans to expand U.S. chip production face obstacles

In December 2022, Taiwan Semiconductor Manufacturing Company, the main maker of the world's most advanced chips, said it planned to spend $40 billion in Arizona on its first major U.S. semiconductor manufacturing hub.

The much-discussed project outside Phoenix — with two new factories, including one with more advanced technology — became a symbol of President Biden's quest to boost domestic production of chips, the bits of silicon that help all kinds of devices make calculations and store data. to beat.

Last summer, TSMC postponed initial production at its first plant in Arizona from this year until 2025 because local workers lacked expertise in installing advanced equipment. Last month, the company said the second factory would not produce chips until 2027 or 2028, rather than 2026, citing uncertainty over technology choices and federal funding.

Progress at the Arizona site depends in part on “how much incentive the U.S. government can provide,” Mark Liu, chairman of TSMC, said in an investor call.

TSMC is just one of many chipmakers facing obstacles in their U.S. expansion plans. Intel, Microchip Technology and others have also adjusted their production schedules as a slump in sales of many types of chips puts pressure on companies to control their spending on new infrastructure. New chip factories are enormously complex, involving thousands of construction workers, long construction times and billions of dollars in machinery.

The delays come as the Biden administration begins handing out the first major prizes from a $39 billion pot of money aimed at building the U.S. semiconductor industry and reducing the country's dependence on technology that manufactured in East Asia. On Monday, the administration said it would award $1.5 billion in grants to chipmaker GlobalFoundries to upgrade and expand facilities in New York and Vermont that make chips for automakers and the defense industry.

But the problems companies like TSMC are facing with their projects could undermine this fanfare, raising questions about the prospects for success for President Biden's industrial policy program. The investments are expected to play a major role in Biden's re-election campaign in the coming months.

“Nothing has failed yet,” said Emily Kilcrease, a senior fellow and director of the energy, economy and security program at the Center for a New American Security, a Washington think tank. “But we will need to see some progress and the plants actually come on line in the coming years before the program can be considered a success.”

The Department of Commerce is responsible for distributing federal money from the CHIPS Act of 2022 to boost domestic chip production. In addition to the grant to GlobalFoundries, the department has provided two small production grants to date. It is expected to hand out much larger rewards in the billions of dollars to chipmakers such as TSMC, Intel, Samsung and Micron in the coming weeks and months.

The government is engaged in complex negotiations with these major chip manufacturers over the amount and timing of the rewards. Companies are also still awaiting guidance from the Treasury Department on which investments will qualify for a new tax credit aimed at advanced manufacturing, which was expected before the end of 2023.

Any delays in the process could hurt the United States in its rush to reduce global dependence on chip factories in Taiwan, South Korea and China, analysts said. Rival countries are offering their own incentives to take chip makers to court. For example, TSMC plans to expand production in Japan and Germany, as well as in the United States.

The longer the U.S. government waits to distribute the benefits, “the more other regions will pick up these investments, and more leading investments will be made in East Asia,” said Jimmy Goodrich, a senior adviser for technology analysis at the RAND. Company. “So the clock is ticking.”

A Commerce Department official disputed suggestions that it had been slow to distribute stimulus. He said the ministry was taking time to protect taxpayers' interests and pushing companies to do more to strengthen the domestic chip supply chain.

A White House official said the chip companies' schedule changes were minor adjustments that were common on complex projects like the new manufacturing sites. He added that forecasts suggested there would be overwhelming demand for these chips if the facilities started making them.

A Treasury spokeswoman said officials there had provided clarity on tax credits for companies planning investments and were working to issue additional guidance as soon as possible.

The CHIPS Act allowed for subsidies and other incentives to boost U.S. chip production, plus tax breaks for investments in factories and manufacturing equipment. More than 600 companies and organizations had submitted expressions of interest for the grants, the Commerce Department said, while estimating private investment commitments to date at $235 billion.

But most of the expansion plans came when chips were in short supply several years ago, following a pandemic-induced burst in consumer spending on electronic products. That demand dried up, leaving chip makers with large inventories of unsold components and little immediate need for new factories.

“Companies are rethinking how and what and when investments will happen,” said Thomas Sonderman, the CEO of SkyWater Technology, a Minnesota chipmaker that has won Defense Department grants and is targeting CHIPS Act funding.

One chip manufacturer feeling the pressure is Microchip, an Arizona company. Two years ago, Microchip was flooded with orders. It has applied for CHIPS Act funding to ramp up production and is expected to receive $162 million. But as sales have fallen, it recently announced two separate two-week factory closures.

Microchip still plans to upgrade its factories in Oregon and Colorado, which are poised to receive CHIPS Act grants, said Ganesh Moorthy, chief executive officer. But ordering machines to increase production capacity will have to wait until business conditions improve.

“We have stopped the expansion,” Mr Moorthy said.

Intel, which is expanding production, has also adjusted its purchases of expensive factory tools. The company recently said it did not expect to start manufacturing in Ohio, where it is spending $20 billion on two new factories, in 2025 as it had originally expected. The change was previously reported from The Wall Street Journal.

Still, Intel said neither construction at that location nor its plans to expand in the United States and three other countries had slowed.

“The strategy doesn't change from quarter to quarter,” said Keyvan Esfarjani, the executive vice president who oversees Intel's manufacturing operations. “We remain on track.”

Some chip makers, such as Texas Instruments and Micron Technology, continue to expand chip production for competitive reasons. New factories can help make higher quality chips, more of them and cheaper.

Micron continues to build a $15 billion factory in its hometown of Boise, Idaho, and plans an even larger manufacturing complex near Syracuse, NY, despite a downturn in the market for its memory chips, which store data in devices such as smartphones and computers. .

Scott Gatzemeier, a Micron vice president overseeing the expansion, said construction projects that took several years to complete should be based on future chip demand rather than current conditions. Renting huge cranes and other equipment and securing construction workers, he added, are major expenses that may have to be repeated if a project is abandoned.

“Once you start, you don't want to stop,” he said.

Other chip manufacturers are unwilling to start construction without government money. SkyWater's Mr. Sonderman, for example, said his company's plans for a $1.8 billion facility in Indiana depend on securing funding through a portion of the CHIPS Act focused on research.

Unforeseen problems have piled up at TSMC's Arizona location over the past year.

Last summer, construction unions in the state raised workplace safety issues and objected to TSMC bringing workers from Taiwan to help install advanced equipment at its first factory. Delays in installing machines led to an announcement about the production slowdown in July.

In December, TSMC and the Arizona Building and Construction Trades Council reached an agreement on ground rules at the site for safety, on-the-job training, staffing and other issues. In an emailed statement, Mr. Liu, who recently announced plans to retire, sounded hopeful that tensions among employees would be over.

He acknowledged “challenges” in building the first factory in Phoenix, but said TSMC was still “the fastest mover” among its peers in completing such projects. Although he told analysts in January that the company would delay the start of production at its second factory, also known as a factory, worker skills are unlikely to be one of the reasons.

“We believe that the construction of our second factory will be much smoother,” Mr. Liu said. “Arizona workers are learning things quickly.”