Why Are Semiconductor Companies Shifting to the United States?

Overview

Semiconductor technology has long held a close association with Asia, especially Taiwan. This is in large part due to the fact that a whopping 68% of semiconductors are produced in Taiwan, with industry giant Taiwan Semiconductor Manufacturing Company (TSMC) accounting for more than 50% of the global market.

But that perception is changing.

While there’s no expected slowdown of output from the APAC region (in fact, there are 20 new fabs planned for the area and 12 expansions currently underway to existing semiconductor fabrication sites), there is a global shift to minimize the semiconductor’s industry’s dependence on the region. 

In recent years, companies including TSMC, Intel, Micron Technology, and Samsung Electronics have begun to invest in new semiconductor fabrication sites in the United States. As a result of this recent push, some 40% of new fabs planned for the next four years will be built in the U.S., with many of them pursuing 28 nm or more advanced technology nodes. 

Why Are Companies Building Semiconductor Fabs in the U.S.?

Analyzing this trend at the highest level, companies are looking to mitigate their risk. Geographical concentrations in anything—be they critical minerals, semiconductors, or shipping containers—create opportunities for bottlenecks in a supply chain. All it takes is one or two large-scale events, such as a strong typhoon, a union strike, or a new sanction, and suddenly there’s a shortage or price spike that manufacturers are forced to contend with. 

By diversifying where chips are produced (especially those of advanced design), companies can spread out their risk and ensure a steady flow of supply with minimal interruption, even when disruptions do occur.

But Why Are They Moving to the U.S. Specifically?

There are three key reasons companies are investing in semiconductor fab development in the U.S.:

The Growing Influence of the CHIPS and Science Act

Signed into law in 2022 by the Biden administration, the CHIPS and Science Act (with CHIPS standing for “Creating Helpful Incentives to Produce Semiconductors) is a piece of legislation designed to boost the domestic semiconductor industry. 

At the time of its signing, the bill earmarked nearly $53 billion for semiconductor manufacturer construction projects in the U.S. In the two years since its introduction, a number of funding awards have been announced, amounting to $30.4 billion in grant awards and $25.3 billion in loans. The funds have gone to manufacturers based in 14 different countries, and are set to spur innovation across 14 different states.

Here are the key beneficiaries:

• BAE Systems: $35 million
• Microchip Technology: $162 million
• GlobalFoundries: $1.5 billion in grants, $1.6 billion in loans
• Intel: $8.5 billion in grants, $11 billion in loans
• TSMC: $6.6 billion in grants, $5 billion in loans
• Samsung: $6.4 billion in grants
• Micron: $6.14 billion in grants, $7.5 billion in loans

These grants have propelled a variety of projects in semiconductors, research and development, packaging, and more.

Crucially, funds from the CHIPS and Science Act are not limited to companies headquartered in the U.S. As a result, the grants and awards can entice investment from companies like TSMC, who have the advanced technology and skilled labor required to get America’s domestic semiconductor industry up and running. 

Geopolitical Sanctions Loom Large on the Horizon

It would be an understatement to say the United States and China aren’t exactly on the best of terms when it comes to sharing chip technology. Since the U.S. Commerce Department’s 2020 announcement that it would “be banning companies around the world that utilize American technology from designing or producing semiconductors for Huawei, China’s telecommunications behemoth,” relations between the two countries on the subject of semiconductors have steadily eroded. 

This shift is partly driven by national security concerns, with Biden administration officials aiming to maintain a strategic edge in technological development. But why take such an aggressive, arguably hostile approach to China’s progress in semiconductor manufacturing?

The primary reason is the country’s rapid integration of commercial technological advancements into military applications, all of which are aimed at transforming the People’s Liberation Army (PLA)—which boasts around 4 million personnel—into a “world-class military” by 2049. This ambition, along with ongoing militarization in the South China Sea, signals the rise of a potential superpower—and rival to the U.S.—that the Biden administration feels compelled to counter. 

Since 2020, both countries have engaged in a growing list of sanctions designed to restrict access and trade around semiconductor technology. For a full timeline, including all of the restrictions and regulations imposed by both countries, read A Brief History of the Crazy, Momentous, Billion-Dollar Chip Wars Between the US and China.

In addition to this large-scale tech war ramping up between both countries, there’s also another kind of sanction to consider: trade regulations.

In an effort to curb human rights violations in the supply chain, the United States has enacted trade regulations like the Uyghur Forced Labor Prevention Act, a law designed to prevent the import of goods that utilize forced labor from China’s ethnic minorities. 

Since its signing in December of 2021, some 60+ entities have been added to the list for suspected ties to forced labor. While most of these companies fall into textiles and agriculture, a growing number of companies are part of technology supply chains. 

While no semiconductor company has been added to the UFLPA List up to this point, Chinese companies are potentially at risk, depending on their supplier relationships. This is especially true of state-owned companies like Semiconductor Manufacturing International Corp. (SMIC), China’s largest chipmaker. 

As a result of the growing body of restrictions and potential pitfalls around doing business with Chinese entities, many companies are simply choosing to establish sourcing and supplier relationships elsewhere–or, if  they can’t find viable existing alternatives, build them. 

The Rise of Nearshoring: Keeping Your Supply Chains Close

For decades, companies outsourced parts of their supply chain all over the globe for a variety of reasons: cost savings, access to specialized expertise, risk mitigation, etc. For most companies, who made their parts and where was rarely of concern unless the manufacturer or location had a history of major disruptions.

But the pandemic changed that. From 2020 until at least 2022, companies scrambled to understand why they couldn’t get parts for their products. Where parts were made, and by whom, became a central obsession for companies rocked by semiconductor shortages. 

In the aftermath of several years of sleepless nights and lead times hundreds of weeks long, surviving companies came out with a new motto: never again. Sprawling supply chains, which had long been heralded as a good thing, were now seen as fragile structures rife with vulnerabilities. A factory shutdown here, a flood there–it would only take a minor disruption or two to snarl the whole affair. 

The last few years have only bolstered this notion as new logistical headaches have cropped up for companies that rely on overseas suppliers to meet their needs. From pirates in the Red Sea following the conflict in Israel and Gaza—which effectively dropped cargo flow through the Suez Canal by 75%—to longstanding droughts in the Panama Canal, global supply chains are continuously being battered by events that threaten to delay companies from delivering products to their chosen markets on time. 

To avoid some of these problems, which have no discernable end in sight, companies are seeking to nearshore more of their critical supply chain needs to domestic or adjacent countries. 

What Does This Mean for the Semiconductor Industry?

Ultimately, spreading the semiconductor industry across different regions strengthens its resilience against various potential disruptions, such as natural disasters and geopolitical tensions. However, establishing these advanced and sophisticated industries from the ground up introduces new challenges, including securing investment, recruiting and training skilled labor, and investing the time  required to reach full production capacity.

Despite these obstacles, this strategic shift will likely enhance the flexibility and continuity of the global semiconductor industry and the businesses that rely on it.