The looming danger of a massive chip glut

A global wave of subsidies by countries trying to become chipmakers could lead to overcapacity that will hurt the semiconductor industry.

- Vikram Khanna

Senior Columnist Excessive production of anything is a recipe for trouble and there is a danger that it's going to happen with one of the most valuable components that power countless everyday devices: semiconductors. Multiple governments are driving this, through hundreds of billions of dollars of production subsidies, all coming on stream at the same time.

The backstory is this: During the Covid-19 pandemic, people binged on computers, smartphones, home networking equipment and smart TVs, which sent the demand for the chips that power such devices soaring. In 2021, severe shortages emerged in the semiconductor market, which forced many manufacturers of cars and home appliances to shelve their production plans. The acute dependence for semiconductors on a handful of producers in Taiwan, South Korea and China set off alarm bells in many capitals.

Amid the US-China trade war, there were also heightened concerns about China's critical role in the semiconductor supply chain as a source of key materials and a hub for assembly, testing and packaging as well as its threatening posture towards Taiwan, which dominates the production of high-end semiconductors.

The US decided to regain its once-dominant position as a chip manufacturer, which it had lost since the 1980s, first to Japan and South Korea, and then to Taiwan. which pioneered the foundry model, concentrating solely on contract manufacturing.

So, in August 2022, President Joe Biden introduced the US Chips and Science Act, which lavished US$52.7 billion (S$68.2 billion) on the chip industry, including US$39 billion in subsidies for manufacturers, and US$13 billion for research and workforce training, plus investment tax credits and loan guarantees.

THE SUBSIDY RACE TAKES OFF