US Chip Industry Sees Niche to Beat China, if Only Congress Acts

The US is uniquely positioned to achieve self-sufficiency in the packaging of the fastest, smallest, and most energy-efficient semiconductors if Congress acts fast, industry officials said.

Legislation being negotiated now would spend roughly $50 billion in the research, development, and manufacturing of semiconductors. Although policymakers have focused on the creation of the chips themselves, industry officials say quick action on the measure could bolster the US’s nascent production of back-end hardware needed to put the chips to use.

Advanced semiconductor chips have enabled innovations worth trillions of dollars and power the products key to the country’s national security and critical infrastructure sectors—from missiles to fighter jets. Packaging such chips—one of the last manufacturing steps—is an attractive bet for the US, which leads the world in research and development on the process. It also isn’t labor-intensive, making it even more ideal for the US where labor costs are high.

US companies such as Intel Corp., Advanced Micro Devices Inc., and Micron Technology Inc. are leading development of advanced packaging but the supply chain is concentrated in Southeast Asia.

Photo: Olivier Matthys/Bloomberg

A 300 millimeter semiconductor wafer.

The legislation under negotiation aims to reduce US reliance on China, an adversary with robust chip manufacturing capacity. If the House and Senate can reconcile their bills before midterm politicking takes over, industry officials say the US can not only get up to speed but command the advanced packaging part of the global supply chain for key products.

However, Republicans’ skepticism of the competition bill, coupled with Democrats’ focus on gun legislation, is making the prospect of passage increasingly fraught. Some GOP lawmakers want to hold off to write their own version of the bill if they take control of Congress next year.

“We need to start thinking about technology advantages, which will mean a lot of advanced packaging,” said Raj Varadarajan, senior leader of consulting firm BCG’s technology, media and telecom practice. “Money should be targeted toward that.”

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National Security

Back-end assembly, testing, and packaging involves taking a thin sheet of semiconductor, slicing individual chips from it, encasing them in plastic, and putting them through a quality control process.

It requires highly specialized machinery and was traditionally the most labor-intensive part of the supply chain. The US therefore has historically depended on countries with low wages to complete this step, such as Malaysia, Vietnam, and the Philippines.

But back-end production is becoming more technologically advanced through 3D packaging, for example, giving the US, a leader in R&D, the opportunity to become more self-sufficient. While this stage only accounts for 10% of a chip’s value, analysts said it’s a crucial part of the manufacturing process for the type of chip defense weapons, 5G communication, and cybersecurity, all rely on heavily.

“The back-end of the production is huge for achieving greater national security because without it you don’t finish the chip,” Bloomberg Intelligence analyst Paula Penkal said. “If lawmakers really want to achieve independence, they are going to need more funding. It can’t just stop here for the back end.”

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Subsidies, Tax Credits

The roughly $50 billion in chip subsidies is broadly supported and viewed as the centerpiece of the bicameral China competition package. That money is expected to be largely spent on the front-end production processes where value-add is higher. But companies expect they could use at least some of the subsidies to upgrade for the back-end process.

Even if those subsidies are approved, companies will still likely have to send most chips back to Asia for the back-end of production because the supply chain is so complicated, Penkal said. The US only is seeking to be independent for the technology most critical to national security.

The US should be able to ensure its critical infrastructure and military can continue operating in emergencies, while consumer electronics are a lesser priority, an industry official concurred.

In addition to the one-time government subsidies, the semiconductor industry is pushing to include in the package a recurring tax credit to provide long-term manufacturing financial assistance to companies.

The leaders of the Senate Finance Committee—Chairman Ron Wyden (D-Ore.) and ranking member Mike Crapo (R-Idaho)—are pushing for the inclusion of such language but are facing pushback from the top Republican on the House Ways and Means Committee, Rep. Kevin Brady (R-Texas).

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Ways and Means Chair Richard Neal (D-Mass.), meanwhile, wants to add the language and expand it to include research and development.

The measures passed by the Senate (S. 1260) and the House (H.R. 4521) would also create an Advanced Packaging National Manufacturing Institute meant to make the U.S. the leader in the technology. The institute would promote standards for such packaging and foster partnerships between the government and private sector. It also would establish a fund to support startups and secure domestic supply chains.

Jon Hoganson, AMD government affairs vice president, lamented the lack of domestic production options available to the company, which is a leader in high-performance computing. AMD does not own any manufacturing facilities or “fabs.”

“Even with front-end manufacturing, the industry is still sending that product overseas to have it finalized,” Hoganson said, adding that his company would like to build more domestically. “If you think about supply chains you have to address the back end.”

To contact the reporter on this story: Maria Curi in Washington at mcuri@bloombergindustry.com

To contact the editors responsible for this story: Cheryl Saenz at csaenz@bloombergindustry.com; Sarah Babbage at sbabbage@bgov.com