The House of Representatives on Thursday passed the CHIPS Act, which has been lauded as essential to bringing semiconductor and microchip manufacturing back to the United States; the bill now goes to the President’s desk. But experts warn that even after passage, the United States must overcome severe challenges that hurt U.S. competitiveness in the chip-making market, even as it faces increasingly stiff competition from other countries—including China. 

The  Senate on Wednesday passed the Creating Helpful Incentives to Produce Semiconductors, or CHIPS (and Science) Act, which gives chip companies $39 billion in subsidies to move some of their manufacturing to the United States, as well as roughly $11 billion to support research into innovation. 

The sourcing of microchips for key pieces of hardware has long been a concern for the Pentagon. Michael Griffin, the former undersecretary of defense for research and engineering, listed microelectronics as one of the Defense Department’s key research priorities in 2018. 

“The department must have assured access to state-of-the-art microelectronics to effectively deliver innovation and modernization into our military systems without compromise. Historically, the department has relied upon a flawed approach to security that has resulted in an inability to access advanced microelectronics,” he testified in 2020. 

Griffin’s replacement, Heidi Shyu, has also listed microprocessors and semiconductor manufacturing as a key priority, and has supported the CHIPS Act.

China has made reshoring U.S. chip manufacturing is a significant national security concern for the United States. While U.S. companies are still the largest players in microchip design and sales, an increasing amount of the actual chip manufacturing is done overseas in places like Taiwan (via a company called TSMC) and South Korea. TSMC, South Korea’s Samsung, and U.S.-based Intel are the only three manufacturers that make the highly complex 3 nm node transistors that are essential for many advanced electronics. 

While China isn’t the largest player in semiconductor manufacturing, it is a fast-growing one, according to the Semiconductor Industry Association, which forecasts that Chinese chip manufacturing could reach 17 percent of global market share in 2024—up from just 3.8 percent five years ago. “This would place China behind only the United States and South Korea in global market share,” the association writes. 

China is also able to mass produce and mass acquire key processors for its military, including chips that are designed by U.S. companies but manufactured overseas, according to a recent report from CSET. 

Another major concern is that chip manufacturing in Taiwan could soon be in jeopardy. 

U.S. Indo-Pacific Command leaders have said that China could make a military play for Taiwan in the next few years. If that happens, it would affect the global supply of semiconductors, even those outside of Taiwan, experts say. 

“The Biden administration is already supporting alternative facilities in places like South Korea and Israel. But these locations are still far-flung, and Seoul’s sea lanes would be equally affected by an invasion of Taiwan,” Ryan Fedasiuk, a research analyst at CSET, told Defense One. 

“Reshoring semiconductor manufacturing is the top concern in the U.S.-China technology relationship, and it’s not close” he said. 

The CHIPS Act was an important step, Fedasiuk said, but “without necessary tools to screen outbound technology investments, there is a risk that American investors will keep inadvertently boosting China’s own chipmaking industry.”

Sanjay Banerjee, the director of the Microelectronics Research Center at the University of Texas at Austin, doubled down on that point in an email to Defense One. 

“If China were to take over Taiwan and TSMC, that would seriously impact our supply chains,” he said. “Even if that worst-case—somewhat unlikely—scenario did not take place, re-shoring would be very important for the [United States.] There is always a risk that when DOD-critical chip designs are shipped overseas to be fabricated at foundries, the technologies could leak out to our adversaries. Even more scary is the possibility of the designs being tampered with, where the chips could be made to fail during combat.”

While the CHIPS Act is a critical first step, Banerjee said, the United States needs to work harder to develop highly skilled factory workers to actually staff the new facilities that chip makers build on U.S. soil. 

“This will involve increasing funding for STEM R&D and encouraging more domestic students to get into this field,” he said. “Government policies should make it easier for foreign students getting advanced degrees in STEM to get visas to stay and work in the U.S.”

But the biggest barrier to reshoring microelectronics are various costs, and direct subsidies to chip manufacturers don’t address all of them. 

Banerjee says a state-of-the-art fabrication facility costs $10 to 20 billion. “Roughly 90% of that cost is for equipment, the rest is the cleanroom itself,” he said.

And there are other costs to consider. Peter Bermel, a professor of electrical and computer engineering at Purdue, told Defense One that “Labor costs can be addressed by increasing productivity of workers (e.g., through education), but building depreciation and energy costs are often subsidized in certain locales. Policy makers have to consider how to level the playing field on these factors when crafting policies to reshore manufacturing.” 

Bermel said that even if the CHIPS Act becomes law, a larger, whole-of-government approach would be needed to get at those costs.  

“The semiconductor manufacturing sector had $595 billion in revenue in 2021, and the CHIPS Act, while very substantial, does not permanently address leveling of the playing field to make the US preeminent in manufacturing,” he said. “It’s also important to note that many major countries with large economies have recently passed analogues to the CHIPS Act, so the landscape could evolve rapidly in the near future.” 

Foreign governments, particularly China, have been providing huge subsidies to build fabrication centers (chip factories), so the CHIPS Act just keeps the United States in the race. It doesn’t guarantee victory, especially since China, South Korea, Japan, Taiwan, and the European Union all have their own aggressive subsidy programs, as Jonathan Panikoff and Jesse Salazar recently wrote for Defense One. 

Will Hunt, a research analyst at CSET, said the CHIPS Act does address many of the key concerns that he and others have voiced on the reshoring problem. But that just means other parts of the government, like the Commerce Department, now have their own work to do.

“The next step is for the Department of Commerce to ensure that the funds target the most important types of chips…It’s essential that manufacturing incentives—which comprise the bulk of the funding in the bill—prioritize leading edge capacity.” The Commerce Department needs to work with TSMC to make sure that they have a permanent presence in the United States, he told Defense One.

“Further steps include ensuring that fab permitting processes will progress quickly; building up the U.S. semiconductor workforce and reducing barriers to high-skilled immigration; and partnering with allies on export controls to ensure that we protect the fruits of CHIPS from China’s technology transfer efforts,” Hunt said. 

The U.S. government also has a big interest in promoting research into emerging chip designs, such as chips that are produced from biological materials and new computer paradigms like quantum. Given the potential size of the future markets and the difficulty of the technological challenges, the $11 billion in research funding included in the CHIPS Act may not go far.