US chip bill may crimp profits for global market

The United States Senate is expected to pass a bill this week to invest billions of dollars in the US semiconductor industry to boost competition with China, but one expert is concerned that it could lead to higher costs and reduced profits for many companies in the global market.

The Senate voted for passage of the funding bill, known as the CHIPS Act, last week in a procedural vote and is expected to hold a formal vote this week.

The bill would provide around $52 billion in subsidies and tax breaks to US chip manufacturers to give them incentives to build new factories and bolster production in the country.

“Before the US decided to suppress China’s access to semiconductor technology, it was a globalized market where each supplier competed based on the comparative advantages that it enjoyed,” George Koo, a retired international business adviser in Silicon Valley, told China Daily.

“It was an efficient market where the best manufacturer with the lowest cost won. By artificially creating one US-centric market that excludes China’s participation, everybody loses,” he said.

“Chipmakers that are forced to abide by US restrictions will not be able to sell to China, the largest market in the world. China will be forced into developing their own advanced chips that they have been buying from US suppliers. Each semiconductor camp will serve a smaller market with higher cost and reduced profit margins,” he added.

Koo, who recently retired from Deloitte, a global financial risk and tax group, has been a business adviser to high-tech companies based in the US, China and Japan.

Supporters of the bill said the subsidies would help address the chip shortages, insulate the country from future supply chain disruptions in East Asia and counter the rise of China’s technology sector.

However, Koo said, “There are indications that the chip shortage may already be coming to an end, and a glut could be around the corner.

“The industry has a history of quick shortfall-to-glut cycles. By the time the CHIPS Act-funded new capacity comes onstream, it could be three to five years away, and who knows which cycle it would be,” he said. “Being denied access is only a temporary obstacle for China.”

“There are already reports in Asia Times and Bloomberg that China has already found ways to work around the critical technology that they can’t have because of the American embargo,” Koo said. “The net effect is that China will become a formidable competitor in due course.”

If the bill is approved by the Senate, it would head to the House for passage and then go to President Joe Biden for his signature. The Biden administration has been pushing for the legislation to advance, saying it would address the global chip shortage and create new jobs in the US.

But negotiations in Congress have dragged on, though Democrats and Republicans are united in seeking to constrain China’s economy. The Senate passed a bill last year to strengthen the semiconductor industry and US research and development, but the House had its own legislation.

“The CHIPS Act, even if approved, would provide $52 billion in subsidies. And it’s by no means certain that the subsidy would be allocated effectively and lead to desired technical advances,” said Koo. “The US may no longer have the technical skills needed.

“Whether it becomes law or not will not have much effect on the world’s semiconductor industry. By exercising strict export controls on China, the US has successfully divided the chips market into two,” he said. “The sum of the two halves will not be as large as the one original global market. Everyone will take a hit in profitability.”