Earnings hit seen from subsidies in chip sector

The US Senate is expected to pass a bill this week that will see billions of dollars pour into the US semiconductor industry in a bid to counter competition from China, but the alarm has been sounded on the likely increased costs and reduced profits in a vital global industry.

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

The legislation would provide around $52 billion in subsidies and tax breaks to domestic chip manufacturers to encourage them to build more factories and bolster production in the United States.

But industry observers see downsides from the expected passage of the legislation.

"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.

"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 margin."

Supporters of the bill said the subsidies would help address chip shortages, insulate the country from future supply chain disruptions in East Asia and counter China's tech rise. But 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 on stream, it could be three to five years away, and who knows which cycle it would be."

However, Koo said denial of market access would be 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," he 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 of Representatives and, if backed there, would be sent 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 jobs for people in the US.

Negotiations dragging on

But negotiations in Congress have dragged on, though both Democrats and Republicans are united in seeking to constrain China's economy. The Senate last year passed a bill 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 subsidy. And it's by no means certain that the subsidy would be allocated effectively and lead to desired technical advances," said Koo. "By exercising strict export controls on China, the US has successfully divided the chips market into two."

Koo added: "The sum of the two halves will not be as large as the one original global market. Everyone will take a hit in profitability."