Thursday, April 25

Plans to expand U.S. chip manufacturing face obstacles

In December 2022, Taiwan Semiconductor Manufacturing Company, the leading maker of the world’s most advanced chips, announced plans to spend $40 billion in Arizona for its first major U.S. semiconductor production center.

The high-profile Phoenix project — with two new factories, including one with more advanced technology — has become a symbol of President Biden’s quest to further boost domestic production of chips, those silicon wafers that help all kinds of devices for performing calculations and storing data.

Then last summer, TSMC pushed back initial manufacturing at its first plant in Arizona to 2025 from this year, saying local workers lacked the expertise to install some sophisticated 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 “the level of incentives that the U.S. government can provide,” Mark Liu, president of TSMC, said on an investor call.

TSMC is just one of several chipmakers facing obstacles in their U.S. expansion plans. Intel, Microchip Technology and others have also adjusted their production schedules as declining sales of many types of chips force 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 of machinery.

The delays come as the Biden administration begins doling out the first major awards of a $39 billion package aimed at growing the U.S. semiconductor industry and reducing the country’s dependence on manufactured technologies. in East Asia. On Monday, the administration announced it would provide $1.5 billion in grants to chipmaker GlobalFoundries to upgrade and expand its facilities in New York and Vermont that make chips for automakers and the automotive industry. defense.

But the problems companies like TSMC face with their projects could weaken that fanfare, raising questions about the prospects for success of President Biden’s industrial policy agenda. These investments are expected to play an important role in Mr. Biden’s re-election campaign in the coming months.

“Nothing has failed yet,” said Emily Kilcrease, 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 commissioning of these plants in the coming years for the program to be considered a success.”

The Commerce Department 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 so far awarded two small production grants. It is expected to award much larger awards, running into billions of dollars, to chipmakers like TSMC, Intel, Samsung and Micron in the coming weeks and months.

The government is engaged in complex negotiations with these major chipmakers over the amount and timing of rewards. Businesses are also still awaiting guidance from the Treasury Department on which investments will be eligible for a new high-tech industry tax credit, expected before the end of 2023.

Any delay in the process could hurt the United States because it would lead to a reduction in global reliance on chip factories in Taiwan, South Korea and China, analysts said. Rival countries are offering their own incentives to chipmakers. TSMC, for example, plans to increase production in Japan and Germany as well as the United States.

The longer the U.S. government waits to distribute profits, “the more other regions will attract these investments, and the more cutting-edge investments will be made in East Asia,” said Jimmy Goodrich, senior adviser for technology analysis. from RAND. Company. “So time is running out.”

A Commerce Department official disputed suggestions that it had been slow to distribute incentives. He said the department was taking the time to protect taxpayer interests and incentivize companies to do more to strengthen the domestic chip supply chain.

A White House official said the chipmakers’ schedule changes were minor adjustments that were common in complex projects such as new production sites. He added that forecasts suggested there would be overwhelming demand for these chips when facilities began manufacturing them.

A Treasury Department official said department officials have provided clarification on tax credits for businesses planning investments and are working to issue additional guidance as quickly as possible.

The CHIPS Act authorizes grants and other incentives to boost U.S. chip production, as well as tax credits for investments in manufacturing plants and equipment. More than 600 companies and organizations have submitted expressions of interest for the grants, the Commerce Department said, while estimating private investment pledges to date at $235 billion.

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

“Companies are rethinking how, what and when investments will take place,” said Thomas Sonderman, chief executive of SkyWater Technology, a Minnesota chipmaker that has won Defense Department grants and is seeking funding under the CHIPS Act.

One chipmaker feeling the pinch is Microchip, an Arizona company. Two years ago, Microchip was overwhelmed with orders. It requested funding under the CHIPS Act to fuel production and is expected to receive $162 million. Yet as sales have plummeted, the company recently announced two separate two-week factory shutdowns.

Microchip still plans to upgrade its plants in Oregon and Colorado that are expected to receive CHIPS Act grants, said Ganesh Moorthy, its chief executive. But to order machines to increase production capacity, you will have to wait until economic conditions improve.

“We have taken a pause in our expansion,” Mr. Moorthy said.

Intel, which is increasing production, also adjusted its purchases of expensive factory tools. The company recently said it does not plan to start manufacturing in Ohio, where it is spending $20 billion on two new factories, in 2025 as it had initially planned. The change was reported earlier by the Wall Street Journal.

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

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

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

Micron continues construction of a $15 billion factory in its hometown of Boise, Idaho, and plans an even larger manufacturing complex near Syracuse, N.Y., despite a slowdown in market for its memory chips, which store data in devices like smartphones and computers. .

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

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

Other chipmakers 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 getting funds through a portion of the CHIPS Act intended for research.

At the TSMC site in Arizona, unforeseen problems have accumulated over the past year.

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

In December, TSMC and the Arizona Building and Construction Trades Council agreed to ground rules on site regarding safety, workplace training, on-site personnel and other issues . In an emailed statement, Mr. Liu, who recently announced his intention to retire, seemed hopeful that tensions among workers were over.

He acknowledged the “challenges” of building Phoenix’s first factory, 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 starting production at the second plant, also known as the manufacturing plant, worker skills would likely not be a reason.

“We believe the construction of our second manufacturing plant will go much more smoothly,” Mr. Liu said. “Arizona workers are learning things quickly.”