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Cyberattacks, Scarcity and Global Insecurity: The Semiconductor Shortage

Nir Kshetri

Professor at Bryan School of Business and Economics, the University of North Carolina at Greensboro

Research fellow at Research Institute for Economics & Business Administration of Kobe University

PhD, 2003 College of Business Administration, University of Rhode Island

Master of Business Administration (MBA) Banaras Hindu University, Varanasi, India

Master of Arts,Master of Science, Bachelor of Civil Engineering and Bachelor of Science, Tribhuvan University, Kathmandu, Nepal

Cyberattacks, Scarcity and Global Insecurity: The Semiconductor Shortage

The CHIPS and Science Act is a U.S. federal statute enacted by the 117th United States Congress and signed into law by President Joe Biden on August 9, 2022. The act provides billions of dollars in new funding to boost domestic research and manufacturing of semiconductors in the United States. The legislation seeks to return the United States to dominance in chipmaking and to combat supply chain issues that have arisen from the country’s decline in science and technology. What impact will this statute have on the semiconductor industry in the United States and around the world? Will it solve America's urgent semiconductor shortage? In this regard, the center interviewed Professor Nir Kshetri to hear his views on the CHIPS and Science Act.

Some form of public support is critical to develop the semiconductor industry. One important lesson from Taiwan and South Korea is that government support played a key role in the growth of their industry. Other economies are also formulating similar strategies to those that worked in Asia. The European Commission developed a 10-year strategy for the development of its semiconductor industry. In April 2021, Intel’s CEO met with two EU commissioners to develop a strategy to make Europe more competitive in chip manufacturing. The EU has also shown determination to reduce its dependency on the U.S. and Asia. The goal is to manufacture one-fifth of the world’s semiconductors by 2030. The EU is planning to spend more than $150 billion to develop advanced technologies including chips and artificial intelligence. The U.S. government has realized that the global semiconductor shortage has significant national security implications. The CHIPS and Science Act 2022 is thus a welcome step toward developing a vibrant semiconductor industry in the U.S.

Regarding the question of whether CHIPS and Science Act 2022 can solve the semiconductor shortage, it is first important to understand the structure of the global semiconductor industry and market. Starting the late 1980s, the business model among semiconductor designers moved towards outsourced manufacturing. In this fabless model (i.e., outsourcing the fabrication of the chips), a company designs and sells the hardware and semiconductor chips but relies on chip-making factories known as foundries to manufacture the chips. About three-quarters of the global semiconductor manufacturing capacity, as well as key suppliers of key materials, are in Asia. East Asia’s dominance is even more pronounced in the manufacturing of advanced semiconductor devices. Currently 100% of the world’s highly advanced logic semiconductor (below 10 nanometers) manufacturing capacity is in Taiwan and South Korea.

Solving the semiconductor shortage in the U.S. market requires changing the current fabless model, which is easier said than done, at least in the short run. Building a semiconductor plant is an extremely time and resource intensive process. The financial package under the CHIPS and Science Act 2022, which involves about $50 billion ($39 billion direct financial assistance for building chip manufacturing plants and $11 billion to advance chip manufacturing research and workforce training) is far from sufficient to build a self-sufficient local supply chain to meet current chip demands. Massive investments—many times higher than what is allocated under the CHIPS and Science Act 2022 would be needed to solve the semiconductor shortage. A single semiconductor fabrication plant costs $10-20 billion to build. There are also reports that Taiwan’s TSMC alone is planning to spend $100 billion over the next three years. It may not be easy to compete with companies such as TSMC.

Currently, labor cost is a major constraint. It is also not easy to attract the workforce that is needed to run a new semiconductor facility. Even if a fully self-sufficient local supply chain is built with heavy investments, the prices of semiconductors completely manufactured in the U.S. are likely to be significantly higher.

Solving the semiconductor shortage is becoming increasingly challenging due to rapidly rising demands of products utilizing chips. According to Goldman Sachs, 169 industries in the U.S. use semiconductors in their products. And more modern versions of products utilize more chips. For example, a typical car uses between 50 and 150 semiconductors and a modern car can use up to 3,000.

The current shortfall of semiconductor products has been especially pronounced in “less-advanced” chips because the world’s biggest semiconductor producers have focused on “cutting-edge” chips that offer higher profit-margins. The labor cost disadvantage that the U.S. has is more likely to affect these less advanced chips.

However, it is important to note that the U.S. is a global leader in semiconductor-related innovations. Dominant manufacturers of semiconductors rely heavily on equipment and machinery supplied by semiconductor capital equipment vendors (semi-cap). Among the top five global semi-cap companies, three are in the U.S. These semi-cap companies provide an advantage to the U.S. semiconductor industry that countries in Asia may not be able to compete with. It is possible that over time, there could be an opportunity using the strong ties between the manufacturing facilities and semi-cap companies to boost semiconductor production. However, it may take many years for the impact of the CHIPS and Science Act 2022 to be felt.

On the plus side, U.S. and foreign semiconductor manufacturers have been responding to the favorable policy environment. In February 2021, the U.S. firm Intel announced a plan to spend $20 billion to build two chip factories. This might contribute to reducing the current reliance on foreign semiconductor foundries such as TSMC and Samsung. Major foreign semiconductor manufacturers are also considering entering the U.S. market. In 2020, TSMC announced a plan to spend $12 billion to build a semiconductor plant in Arizona which is expected to be completed in 2024. Samsung was reported to be considering Texas and Arizona for a new logic-chip facility; this facility would likely be the most advanced in this category in the U.S. Overall, while fully meeting the current semiconductor demand is a challenging task, these actions have the potential to address part of the problem.


Contacter: Baoyi Deng

Editor: Yaqi Zhou

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