The race for dominance in the semiconductor industry is intensifying with countries across the globe competing to bring manufacturing operations onshore. These companies are quickly evaluating available incentives not only in the US but around the world — and they’re weighing their options.
Significant attention has been focused on the US CHIPS and Science Act of 2022, which provides $52.7 billion of grants, loans, loan guarantees and tax credits for companies that invest in new design, foundry and fabrication facilities in the United States.
In fact, US incentives will compete head-to-head with government-led incentive plans in Korea, the European Union, Japan, Taiwan, India and Mainland China, which also aim to localize semiconductor manufacturing as much as possible. (See Figure 1.)
Figure 1
CHIPS Act implications
The CHIPS Act aims to reverse the offshoring trend of recent years and restore America’s leadership role in semiconductor manufacturing. Large chip manufacturers could receive as much as $2.5 billion to $3.0 billion for each new fab they build in the US. This could translate into $10 billion to $15 billion in US government subsidies over the next five years. With the surge in new fab construction, chip manufacturing equipment makers will gain, too, as the demand for equipment will rise.
Several companies, including Intel, Micron, Wolfspeed and GlobalFoundries, are taking advantage of CHIPS Act incentives to build new factories worth billions of dollars in Ohio, Idaho, North Carolina, Vermont, New York and Arizona.
To leverage the global incentive race, semiconductor companies should consider many factors, from product and marketing strategy, to labor and tax-efficient supply chain design. The essential considerations can be grouped into four areas:
1. Strategy assessment
In the short term, semiconductor companies should assess available funding and incentive opportunities and any gaps that must be addressed prior to applying.
Companies can consider the market opportunity to expand production based on alignment with global strategy, including product portfolio, process technology and overall market strategy. A value proposition can be developed through scenario modeling that includes a review and prioritization of projects already in the planning or development pipeline. The CHIPS Act has provisions for workforce development and R&D, and these areas can be covered as well.
Tax and engineering professionals can be consulted to understand available perspectives and insights in all parts of the process.
For example, an Asia-based semiconductor foundry is investing in a leading-edge manufacturing fab in the US. The strategy is centered around diversifying a supply chain that is highly concentrated in volatile regions, supporting US-based customers and benefiting from incentives related to the CHIPS Act.
Key takeaways
-- Look to capitalize on government spending and invest in different geographies to mitigate the concentration risk and harness the growth opportunity.
-- Consider the sustainability aspect while enhancing processes to reduce waste and strain on water supplies, along with deploying renewable power sources. -- Strategically consider the desired process node mix for the long run and build the capability accordingly to remain competitive in the market.
2. Capital allocation evaluation
The assessment stage can include a review of capital allocation strategy to determine the cost/benefit of applying for funding. This should cover capital needs, development plans and a prioritization of investments over the next 12 months to 36 months. An overall approach to capital investment may help increase ROI by potentially reducing operational, tax and financial costs.
For example, a large integrated device manufacturer announced plans to partner with a private equity minority investor to jointly fund the launch of a new manufacturing facility. By using innovative financing, the company can significantly increase its manufacturing capacity while reducing the impact to its balance sheet.
Key takeaways
-- Define a future investment roadmap to tackle the heavy investment needed in setting up a manufacturing facility.
-- Realign the capital allocation strategy with growth prospects stemming from state incentivization plans to gain potentially higher ROI.
-- When outlining capital plans, consider the scenario where current investments could lead to a near-term glut of chips in the market.
3. Site selection strategy
Companies may need to secure state incentives to be eligible for CHIPS Act funding. They can adopt an overall perspective in the fab site selection stage to get the most value from this complicated process. Besides evaluating federal, state and local incentives, including taxation, companies must consider numerous business, technical and regulatory factors, including supply chain design integration, labor availability and environmental requirements, in addition to proximity to markets.
A customized incentives negotiation process is important to improve ROI. The key elements are understanding project goals and technical requirements, analyzing states’ incentives using a quantitative framework, site due diligence, and utility rate and incentive negotiations.
For example, the US Southwest is an attractive location for the semiconductor industry due to lower taxes, lower restrictions and other incentives. But like all regions there are drawbacks. For example, drought conditions in the region have forced some companies to implement water reclamation and recycling solutions that can be costly and complex.
Key takeaways
-- Weigh favorable government incentives and geopolitical factors against other crucial site selection considerations.
-- Consider a holistic approach to site selection, including operational requirements, as they have a lifetime impact on the facility development process.
-- Evaluate the proximity, cost and attributes of the workforce, as it comprises the major component of fab operations once established.
4. Supply chain optimization
Semiconductor supply chain issues are blamed for recent shortages affecting industries from home appliances to autos. Companies rely on a complex, globally integrated ecosystem to manufacture chips, as well as the state-of-the-art manufacturing equipment. The CHIPS Act offers incentives that companies can use to invest in semiconductor R&D and build advanced simulation capabilities required to establish resilient supply chains that have reduced impact to the environment. For example, companies will need to conduct continuous supply chain design evaluation that includes scrutiny of suppliers for any disruptions and sustainability efforts. In addition, capabilities such as data and analytics, digital twins and scenario modeling can help companies build resilient and environmentally friendly supply chains.
One of the largest electronics manufacturing services companies acquired a fab in Asia-Pacific to enhance chip procurement for its growing electric vehicle segment. The company was also scouting for targets in the US to further streamline the supply chain.
Key takeaways
-- Redesign the product portfolio toward chips that utilize modern capacity to extend the lifetime of available products.
-- Develop stronger partnerships with various participants of the semiconductor ecosystem (such as contract manufacturers and engineering design firms) to mitigate future issues.
-- Design alternates for key components and actively plan for semiconductor lifecycles.
Summary
The incentives introduced by the CHIPS Act are expected to be a transformation catalyst for the semiconductor and adjacent industries. Companies with a global manufacturing footprint may want to review their product, marketing and supply chain strategies, considering not only the CHIPS Act but also the evolving global market, government incentives and competitive factors. Semiconductor companies have a unique opportunity to revisit their manufacturing and broader ecosystem strategies, take concrete steps at mitigating geopolitical risks and improve supply chain resiliency for the next decade.
Ronald Hofmeister is Partner, EY-Parthenon, Ernst & Young LLP. Contributors are Elias Eliadis, Senior Director, Ernst & Young LLP and Wendy Chan, Senior Director, EY-Parthenon, Ernst & Young LLP. The views in this article are the authors’ and not necessarily Ernst & Young LLP or other members of the global EY organization.