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Congress recently agreed to throw 10s of billions of dollars at the semiconductor industry. The idea was to expand production of vital circuits in the United States. My next guest has done extensive analysis of the chip industry and says there should be more to policy than only national security.  The Federal Drive with Tom Temin  spoke to assistant professor of management at Radford University,  Zach Collier.

Interview transcript: 

Tom Temin: Let’s begin with the state of things as they are now. I mean, from what I’ve read in many areas, the chip shortage is starting to ease. What is your sense of the situation right now? And if it is easing, where are the chips that are easing it coming from?

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Zach Collier: Yeah, sure. So it really depends on what sector you’re looking at. For instance, the automotive sector is one of the sectors that was hit the most hard by the chip shortage, lots of auto manufacturers had to delay production of their vehicles and shut down their assembly lines for some time, according to what some of the people in that industry are saying is that things are starting to ease but it hasn’t gotten back to normal yet. There are still shortages in other sectors like household consumer goods, things like your washing machines, and your smart refrigerators and all those sort of things as well. They’re still looking at some shortages. There were some problems in sectors like people couldn’t get their gaming consoles, and things like that, as well. So I think things are starting to come back to normal. But I think depending on what industry you’re looking at, it may be later this year, or maybe early 2023, before things get back to normal. And I think other industries are just trying to figure out what will the new normal look like rather than get back to the sort of pre-pandemic state that we were in.

Tom Temin: In the defense sector, has that actually been a shortage because many of the circuits that are used in defense systems, embedded systems, are made here in the first place, and always have been?

Zach Collier: Yeah, so the problem with in the defense sector in particular is not always necessarily just the quantity, but the quality of the chips that we’re getting as well. Those chips have to meet very high standards. As far as the security and integrity, quality and reliability of the chips in the systems they go into. Think applications like fighter jets, and submarines, all of the electronics that go into those sorts of things have to work under extreme conditions, and they need to be able to handle data, you know, reliably. And so it’s a kind of a multi-pronged question. We want to have enough chips in the supply coming down the pipeline for those sort of applications. But we also want to make sure that they’re coming from trusted suppliers here in the States, to make sure that they meet various security requirements.

Tom Temin: And given that so many of these chips are made here. I mean, even Northrop Grumman, for example, they have fabs, so the billions I guess it was about $50 some billion  that Congress appropriated, what is the best use of that to ensure economic independence, if you will, or economic growth in the consumer sector, and whatever national security and federal type missions are needed elsewhere?

Zach Collier: Some of the discussions are starting about how to allocate the $52 billion that was in the CHIPS Act that recently passed, the White House has started to make some appointments to key positions of leadership about how to roll out the CHIPS Act, as well as the Department of Commerce. They recently put together a board of advisors and a steering committee of leadership within the federal government to try to figure out what those decisions are going to be. The Department of Commerce did put out a report sort of stating what some of the high level goals are, and some of the strategy for the CHIPS Act implementation. So some portion of the CHIPS Act is going to go towards leading edge manufacturing. So these are the new latest and greatest chips, if you will. But also we need money allocated to current state of the practice chips, as well as so called legacy chips, these sort of older, more mature chips that are in a lot of applications that we use today. The final sort of bucket of funding that was identified by the Department of Commerce is sort of a bundle of programs about R&D and economic development, workforce development and things like that. And so I think everybody’s still just trying to figure out exactly where to put those dollars to best use. And we’ll see kind of how that all take shape. I think within the next six months or so.

Tom Temin: We’re speaking with Zack Collier, he’s assistant professor of management at Radford University and a chip industry expert. Given the fact that the industry in the United States is profitable, and the whole industry was pioneered here. The shortage didn’t really emerge until the pandemic did. My question is do we need this level of industrial policy? Or things were fine before the pandemic? Why are we throwing $52 billion at a profitable industry? Just to play devil’s advocate?

Zach Collier: Sure, well, so a few things about that. One is that the supply chain is really complex for how you make a chip. And it’s not just you design it, and then you manufacture it. And then it’s done. There are other steps that happen after the manufacturing and they go out on the wafer, you have to package and assemble and test all the chips, and a lot of that is done overseas. Additionally, the stat that gets quoted often is that we manufacture about 12% of the world’s chips. But we we demand or consume somewhere between a quarter and a third, depending on who you talk to. So even though we might be producing a good number of chips, there’s still a supply – demand imbalance, right? We’ve seen over the years that the manufacturing and other parts of the supply chain have really condensed and concentrated in parts of the world like Asia, but you don’t want to put all of your eggs in one basket when it comes to the supply chain. And so it does sort of make sense to try to mitigate your risk by spreading that around and trying to bring some of those capacities on-shore, especially with some of the tensions and things going on around the world, especially in the Asian regions. Right now, we don’t want to run into a situation where we’re cut off from some of the biggest sources of supply in the global market. That would not be a position that would serve the United States particularly well. So the $52 billion is really to make sure that that 12% figure doesn’t continue to shrink relative to the investments that other countries are also making in their own manufacturing capabilities. We want to make sure we still have a global presence on the world stage.

Tom Temin: And could there be other incentives. I mean, if you look at chip fabrication facilities, they are big, they take a lot of space, they use a lot of electricity, they use a lot of water, they use a lot of chemicals, and they have smokestacks, not smoke, but exhaust stacks for whatever else is going on in there. I mean, in this country, it could take 10 years of litigation to change a two lane road into a three lane road for 10 miles. And so I wonder if there were other areas of policy that could encourage chip manufacturing on its own, because some of the disincentives have been taken away?

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Zach Collier: Yeah, sure. I mean, I think that one of the elements of the CHIPS Act is that there are tax incentives to investment tax credits for building certain types of facilities or expanding your facilities. You know, another part of it is that it’s not just the defense sector, or some other sector, it’s really a kind of a whole of government approach that they’re trying to take with it. So energy is very important. You know, they rely on chips, your health care,  aviation, all these things, really rely on chips. And so collaborating across these different government agencies and these different sectors, I think, is one incentive that can kind of push people to, to produce more chips. You know, it’s a complicated problem. There are a lot of reasons why things went overseas in the first place, the cost of labor and things like that, historically. But we’ve been seeing that since the CHIPS Act has been announced. And then past that, lots of companies are saying that they are going to bring back their manufacturing capabilities to the States or open up new facilities. Places in Ohio and Arizona and New York and elsewhere around the country. And so it seems to be effective so far in incentivizing companies to to open up new fabs.

Tom Temin: But it sounds like Congress and the administration and the federal apparatus behind all of this can’t let up now that there’s more work to do.

Zach Collier: But certainly, there’s a lot of work to be done as far as just figuring out how to allocate the money. There’ll be a, I guess, a process where people submit applications for grants to build these new facilities, and there’ll be new centers that are they’re going to be set up across the country over the upcoming year or so. And so, you know, it’s just we’re still in the early stages.

Tom Temin: You’re looking to see where the chips fall, something like that.  Zach Collier is assistant professor of management at Radford University.

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