CHIPs: A Few Brief Thoughts

America has cut off China from being able to buy the most advanced semiconductor chips, which experts say will be the key to Artificial Intelligence in all its uses, including military.

At the same time, through the recently passed CHIPS act, America is trying to encourage more domestic production of semiconductor chips, advanced and otherwise, by offering various incentives and subsidies. The aim is to make us less reliant on other countries for our semiconductor needs.

1)    By cutting off China, we hobble their technological advancement in the near term since they were dependent on the West for advanced chip technology. In the longer term, however, now that we’ve played this card, China’s only logical response is to pour maximum resources into building their own advanced chip manufacturing ecosystem. Resources will certainly include espionage and efforts to evade America’s restrictions.

2)    It is more expensive to build and operate semiconductor manufacturing facilities in the United States than in Taiwan or, presumably, China. Taiwan’s flagship semiconductor company TSMC is building a plant in Arizona. Below are a few quotes in italics contained in a New York Times article last month:

“In an earnings call last month, TSMC said the U.S. construction could be at least four times the cost in Taiwan, driven by labor expenses, permits, regulatory compliance and inflation.”

“The most difficult thing about wafer manufacturing is not technology,” [a former TSMC engineer] said. “The most difficult thing is personnel management. Americans are the worst at this, because Americans are the most difficult to manage.”

“Three TSMC employees who trained American engineers said it was difficult to standardize practices among them. While Taiwanese workers unquestioningly follow what they are told to do, American employees challenged managers, questioning if there might be better methods, they said.”

3)    The CHIPS act imposes a number of requirements on participant companies having nothing to do with chip manufacturing. These include a restriction on stock buybacks, a mandate to supply childcare for workers, and a tax on “excess profits.”

When I put all these things together, I conclude that our approach on this issue seems dominated by short term strategic thinking and the domestic political popularity of being tough on China. My specific takeaways:

1)    We’re a high cost chip producer and probably always will be.

2)    We underestimate China’s ability to command its economy to compete with us.

3)    We overestimate how bullet proof restrictions on trade and technology leakage can be.

4)    There are many great aspects of our political system, but the CHIPS act shows once again why our system is bad at industrial policy.

5)    Since this is a serious post, I’ve refrained from mentioning the revolutionary technological breakthrough achieved by America with the invention of Pringles. But I have provided an informative and amusing YouTube on the subject