Thursday, July 25

Plans to expand chip manufacturing in the United States face obstacles

In December 2022, Taiwan Semiconductor Manufacturing Company, the leading maker of the world’s most cutting-edge chips, said it planned to spend $40 billion in Arizona for its first major U.S. semiconductor manufacturing hub.

The much-publicized project outside Phoenix — with two new factories, including one with more advanced technology — has become a symbol of President Biden’s attempt to spur more domestic production of chips, the wafers of silicon that help all kinds of devices perform calculations and store data.

Then last summer, TSMC postponed initial production at its first Arizona plant to 2025, starting this year, saying local workers lacked experience installing some sophisticated equipment. Last month, the company said the second plant 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, president of TSMC, said in a call to investors.

TSMC is just one of many chipmakers facing obstacles with their expansion plans in the United States. Intel, Microchip Technology and others have also adjusted their production schedules, as plummeting sales of many types of chips push companies to manage spending on new infrastructure. New chip factories are extremely complex, involving thousands of construction workers, long construction times and billions of dollars’ worth of machinery.

The delays come as the Biden administration begins doling out the first major awards from a $39 billion pot of cash aimed at building the U.S. semiconductor industry and reducing the nation’s reliance on technology made in East Asia. On Monday, the administration said it will 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 face with their projects could undermine that hype, raising questions about the prospects for success of President Biden’s industrial policy agenda. 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, economics and security program at the Center for a New American Security, a Washington think tank. “But we will need to see progress and factories actually coming into operation in the next few years for the program to be considered a success.”

The Commerce Department is responsible for distributing federal money under the CHIPS Act of 2022 to spur domestic chip production. In addition to the grant to GlobalFoundries, the department has so far awarded two small manufacturing grants. Much larger prizes, in the billions of dollars, are expected to be awarded 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. Businesses are also still awaiting guidance from the Treasury Department on which investments will benefit from a new tax credit for advanced manufacturing, expected by the end of 2023.

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

The longer the US government waits to distribute the benefits, “the more other geographies will catch up on these investments, and the more cutting-edge investments will be made in East Asia,” said Jimmy Goodrich, senior advisor for technology analysis at RAND. Society. “So time is running out.”

A Commerce Department official disputed allegations that the department was slow in distributing the incentives. He said the department is taking time to protect taxpayers’ interests and push companies to do more to strengthen the nation’s chip supply chain.

A White House official said chip companies’ schedule changes are common small adjustments in complex projects such as new manufacturing sites. He added that forecasts suggested there would be huge demand for these chips when facilities started producing them.

A Treasury Department spokesperson said officials have provided clarity on the tax credits to companies planning investments and are working to provide additional guidance as quickly as possible.

The CHIPS Act authorized grants and other incentives to boost chip manufacturing in the United States, as well as tax credits for investments in factories and manufacturing equipment. More than 600 companies and organizations have submitted expressions of interest in the grants, the Commerce Department said, while private investment commitments so far are estimated to total $235 billion.

But most of the expansion plans were established when chips were in short supply several years ago, after a pandemic-fueled explosion in consumer spending on electronics. That demand has dried up, leaving chipmakers stuck with large inventories of unsold components and little immediate need for new factories.

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

One chipmaker feeling the pinch is Microchip, an Arizona company. Two years ago Microchip was inundated with orders. It has applied for CHIPS Act funding to spur production and will receive $162 million. However, as sales have plummeted, it recently announced two separate two-week factory closures.

Microchip still plans to upgrade its factories in Oregon and Colorado that will receive grants from the CHIPS Act, said Ganesh Moorthy, its chief executive. But to order machines intended to increase production capacity we will have to wait for the improvement in commercial conditions.

“We stalled on expansion,” Mr. Moorthy said.

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

However, Intel said neither construction of that site, nor expansion plans in the United States and three other countries, have slowed.

“The strategy doesn’t change from quarter to quarter,” said Keyvan Esfarjani, an executive vice president who oversees Intel’s manufacturing operations. “Let’s stay the course”

Some chipmakers, such as Texas Instruments and Micron Technology, are expanding chip production for competitive reasons. New factories can help produce higher quality chips, in greater quantity and at a lower price.

Micron is pushing ahead with construction of a $15 billion factory in Boise, Idaho, its hometown, and plans an even larger manufacturing complex near Syracuse, New York, despite a downturn in the market for its memory chips, that store data in devices such as smartphones and computers.

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

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

Other chipmakers are unwilling to start construction without government money. SkyWater’s Sonderman, for example, said his company’s plans for a $1.8 billion facility in Indiana are contingent on obtaining funding through a portion of the CHIPS Act designated for research.

At TSMC’s headquarters in Arizona, unexpected problems have been piling up over the past year.

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

In December, TSMC and the Arizona Building and Construction Trades Council agreed on site ground rules for safety, on-the-job training, site staffing and other issues. In an emailed statement, Mr. Liu, who recently announced plans to retire, seemed confident that tensions among workers were over.

He acknowledged the “challenges” in building the first Phoenix factory, but said TSMC was still “the fastest player” 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 plant, also known as a fab, workers’ skills were not expected to be among the reasons.

“We believe the construction of our second factory will be much smoother,” Liu said. “Workers in Arizona learn things quickly.”