By Asa Fitch and Luis Santiago 

In 1990, the U.S. and Europe produced more than three-quarters of the world's semiconductors. Now, they produce less than a quarter. Japan, South Korea, Taiwan and China have risen to squeeze out the U.S. and Europe. And China is on pace to become the world's largest chip producer by 2030.

The epicenter of chip production shifted partly because governments outside the U.S. offered often hefty financial incentives for factory construction to build up domestic industries. Chip companies also have been attracted by growing networks of suppliers outside of the U.S., and an expanding workforce of skilled engineers capable of operating expensive manufacturing machinery.

While manufacturing has left the U.S. in recent decades, many of the world's largest chip companies are still U.S.-based. Intel Corp., the largest American chip company by sales, does much of its manufacturing in the U.S., although it too has opened factories in places like Ireland, Israel and China. Other big U.S. chip companies, though, contract out all their manufacturing to Asian producers such as Taiwan Semiconductor Manufacturing Co. Nvidia Corp., for example, which is based in Santa Clara, Calif., and is America's biggest semiconductor company by market value, has its chips made largely outside the U.S. As of 2019, the share of semiconductor sales by U.S.-based companies was around 47%.

The growth of contract manufacturers like TSMC, the largest and most advanced of its kind, have helped speed the shift of chip-making outside the U.S. South Korea's Samsung Electronics Co. is another big player in the contract chip-making business, and most of its factories aren't in the U.S. The raw materials that go into chip-making, including industrial chemicals and silicon crystals, also largely come from outside the U.S.

The U.S. has kept a larger slice of the industrial pie in some other fields of chip-making -- especially in ubiquitous software tools used to design the layout of chip circuitry.

The flight of high-tech manufacturing from the U.S. has been a theme for decades as supply chains and factories in Asia developed, taking advantage not just of government handouts but cheaper labor and less regulation. That exodus is particularly pronounced in computing hardware and consumer electronics, compared with other high-profile manufacturing sectors.

If things continue on their current trajectory, the U.S.'s share of chip-making is expected to shrink further in coming years, in part because China's capacity is increasing quickly.

This trend has caused concern in Washington as the U.S.'s technological rivalry with Beijing heats up. China is pouring tens of billions of dollars into its chip industry, hoping to eventually match or surpass other countries.

Chips are increasingly being viewed across the globe as a national-security priority because of the powerful role they play not only in consumer technology but in militaries and cyberwarfare. The U.S. has placed new restrictions on China's industry in recent years, including blacklisting Chinese telecom giant Huawei Technologies Co. and preventing some Chinese chip-makers from buying American manufacturing equipment without a license.

The coronavirus pandemic has given further impetus to a U.S. push to bring more of the chip-making industry back to American soil. Factory shutdowns because of the health crisis disrupted supply chains in Asia, fueling concern that the industry's concentration there could impact U.S. access to a critical technology during times of crisis.

Analysts say U.S. government incentives could help to reverse that trend. A top chip-making factory -- the kind that makes central processing units that go into computers -- can easily cost more than $30 billion to build and operate for 10 years, analysts estimate. So financial assistance to defray some of those costs can change the calculus on whether to invest or not.

The U.S. historically hasn't offered federal incentives to chip-making, although states do provide a variety of enticements for factory-building, including subsidized land and tax breaks. In Asia, by contrast, countries typically offer free or cheap land, and give more help with purchasing manufacturing equipment that accounts for most of the cost of chip-making.

Write to Asa Fitch at asa.fitch@wsj.com and Luis Santiago at luis.santiago@wsj.com

 

(END) Dow Jones Newswires

November 03, 2020 09:11 ET (14:11 GMT)

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