The CHIPS Act won’t reduce reliance on Asia for semiconductors: Goldman Sachs
Goldman Sachs argues that more funding will be needed to reshape the global semiconductor industry
Source: Unsplash
KEY POINTS
- Goldman Sachs doubts US federal funding to build chip manufacturing facilities in the US will deliver on expectations
- The broker believes the CHIPS Act will only be able to ‘fully’ support an increase in the US’s market share of global chip capacity of less than 1%
- Most of the world’s semiconductor manufacturing capacity is based in Asia, which serves as the production hub for up to 80% of global chip manufacturing
The recently passed CHIPS Act, which earmarked $39bn in US federal funding to build chip manufacturing facilities in the US, might serve as a valuable hedge against future supply chain disruptions.
However, Goldman Sachs (GS) Research doubts it will go close to derailing Asia’s dominance in the sector.
In case you’ve been living in a cave these last three years, you’ll be only too aware of the scarcity of chips, courtesy of supply chains grounding to a near halt during covid.
What’s currently exacerbating the scarcity of chips is an expected acceleration in demand.
Chip shortage was emerging well before covid
But GS Research reminds investors that semiconductor supply had been falling well before covid hit.
For example, in the US the share of global semiconductor manufacturing capacity has dropped to 12%, down from 37% in 1990.
Over the same period, Europe share global semiconductor manufacturing capacity fell from 44% in 1990 to 9% in 2021.
According to GS Research, megatrends such as 5G, electric vehicles, artificial intelligence (AI) and high-performance computing has positioned global semiconductor revenue growth on an even steeper trajectory than it has been on in the past several decades.
Source: SIA, Data compiled by Goldman Sachs Research
Asia’s dominance comes at a price
While most of the world’s semiconductor manufacturing capacity is based in Asia – which serves as the production hub for up to 80% of global chip manufacturing – GS Research argues that the region’s dominance has come at everyone else’s expense.
Despite the promise of alleviating the global reliance on Asia, GS Research doubts the CHIPS Act will shore up as much domestic manufacturing capacity as expected.
“In the US, it’s significantly more expensive (44% higher) to build and run a new fab than it is in Taiwan, according to the analysts,” GS Research notes.
Out of that 44% premium, the broker notes that:
21% is coming from higher capital expenditures in the US than in Asia
18% from higher operational costs over a 10-year period
5% from operational inefficiencies tied mainly to culture, operation and management style differences, and other factors
Less than 1%
While the CHIPS Act will help boost production, GS Research believes current incentives in the Act will only be able to ‘fully’ support an increase in the US’s market share of global chip capacity of less than 1%.
That’s because the broker expects the industry’s capital expenditures to continue trending up due to:
The move towards more advanced technologies.
A doubling of capex over the next three years.
Capex to surge by a 17% compounded annual rate of growth, compared to just 8% over the past decade.
While the CHIPS Act will help create a domestic pressure valve when future supply disruptions occur, the broker argues that more funding will be needed to reshape the global semiconductor industry.
“We believe the CHIPS Act should be viewed more in the context of US geopolitical strategy, ‘hedging’ against future crisis or major supply chain disruptions rather than efforts to replace Asia’s current position and importance within the semiconductor supply chain.”
