America’s manufacturing sector has been struggling of late, and has lost more than 500,000 jobs since the start of the COVID-19 pandemic. Compounding these woes is a recent, global shortage of semiconductor chips. A heavy reliance on computer chips from Taiwan and Korea has hit U.S. manufacturers hard. The nation’s auto sector has been particularly affected, with Ford
forced to cut back production of its F-150 truck and GM
halting operations at three plants.
Unfortunately, Intel is not the only chip maker preoccupied with quarterly stock profits rather than future production excellence.
All of this points to the wider problem of America’s rising import dependence. Reliance on overseas semiconductor producers has put the United States in an especially precarious position. Computer chips are a key part of cellphones, laptop computers, automobiles, and medical devices. But they’re also the brains of America’s military arsenal, including the F-35 fighter and other advanced weapons systems.
With both economic and national security at stake, the United States must rebuild its domestic chip-making capabilities. Unfortunately, that won’t happen if America’s chip industry keeps focusing on quarterly profits rather than long-term stability.
Shareholders first, investment second
for example. The California-based chip maker operates 15 foundries (“fabs”) world-wide, including four in the United States. Last year, Intel invested $14.5 billion on capital spending. However, it also returned $19.8 billion to shareholders, including $14.2 billion in buybacks of its own stock. Essentially, Intel chose to return more money to shareholders than to invest in operations.
Washington should set a goal of U.S. manufacturers supplying 50% of the chips consumed in every major category of semiconductors.
This is poor long-term thinking, especially when Intel’s business is already under threat. Recently, Apple
decided to replace the Intel processors in its MacBooks with chips sourced from Taiwan’s TSMC. Noting that Microsoft
are also shifting to chips sourced from TSMC
it’s clear that U.S. dependence on imported semiconductors will only increase in the coming years.
Unfortunately, Intel is not the only chip maker preoccupied with quarterly stock profits rather than future production excellence. A new analysis of America’s semiconductor industry by the Coalition for a Prosperous America (CPA) found that the 13 largest U.S. chip companies, including Intel, returned $42.7 billion to shareholders last year. That’s compared with just $26.9 billion spent on capital expenditures (“capex”). In contrast, Taiwan’s TSMC spent $18 billion last year on capex while returning only $9.2 billion to shareholders.
It’s troubling enough that a global chip shortage could grind U.S. manufacturing to a halt. But China is now entering the semiconductor market as well—and is pouring an estimated $120 billion into its chip industry. Given such massive subsidies for its state-owned enterprises, there’s a huge risk that China will swiftly corner the global chip market by the end of this decade.
Tax break won’t do it
Even as America’s chip makers keep losing ground, however, they remain destructively preoccupied with shareholder return. At a recent Senate Finance Committee hearing, Intel CFO George Davis urged a larger R&D tax credit for chip companies. Such a tax break would undoubtedly boost Intel’s profits. But it won’t address America’s chip problem—or constrain Intel from offshoring more production down the road.
An R&D tax credit alone simply won’t encourage more semiconductor manufacturing in the U.S. And America’s semiconductor companies will hardly gain market share or reach global leadership by propping up stock prices. Instead, Congress must take the reins to ensure the rebuilding of America’s chip-making industry.
Washington should set a goal of U.S. manufacturers supplying 50% of the chips consumed in every major category of semiconductors. That would strengthen national security, diversify supply chains, and create hundreds of thousands of good-paying jobs nationwide.
To achieve this, Congress must revise the U.S. corporate tax code to emphasize long-term investment rather than stock buybacks. Capex investment can be encouraged with accelerated depreciation. However, stock buybacks should be discouraged through taxes or other measures that compel executives to take a more long-term view. This is the only way to ensure that U.S. chip fabs can take root in the face of subsidized global competition.
Regarding China, it’s time to increase federal enforcement of the 2018 Export Control and Reform Act. America’s semiconductor equipment makers and electronic design companies must be prevented from selling to entities tied to the Chinese military.
Unless Congress and the Biden administration take swift action, the United States faces the troubling prospect of becoming completely dependent on imported semiconductors. That’s a poor recipe for long-term national and economic security. Short-term thinking has gotten the nation into this mess. It’s time to plan more carefully for the future.
Michael Stumo is CEO of the Coalition for a Prosperous America, a bipartisan advocacy organization representing farmers, ranchers, manufacturers, and labor organizations that make and grow things in the United States. Follow him at @michael_stumo