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SAGE © Madeline Rae 2022 Business Cases Abstract This case examines the steps that the United States and the European Union are taking to mitigate the chip manufacturing shortage that has hobbled global supply chains since the start of the coronavirus pandemic. These steps include public and private funding for manufacturing, tax incentives, and mega-site factories to facilitate the move toward “digital sovereignty” as these regions attempt to extricate themselves from expensive, slow, and politically fraught supply chains. Students are asked to assess what this means for domestic manufacturing, supply chains, labor, and consumers. Case Learning Outcomes Students are asked to apply their learning in supply chain management, manufacturing, and global business to discuss the proposed solutions to the chip shortage. Source: Photo by Saul Loeb/AFP via Getty Images The Issue The coronavirus pandemic has endured for two years now and chip manufacturing shortages are still affecting supply chains in industries around the world. Production times have been delayed and products requiring semiconductors have become more expensive and increasingly scarce for consumers. Experts estimate that Page 3 of 5 United States and European Union Expand Chip Manufacturing SAGE © Madeline Rae 2022 Business Cases the chip shortage has cost the U.S. economy USD 240 billion in 2021. The CHIPS for America Act, passed last year, authorized federal investments in chip manufacturing. In June, the Senate set aside USD 52 billion in funding for domestic chip manufacturing. Congress authorized another USD 52 billion in subsidies for chipmakers, with USD 10 billion earmarked for fab projects (that is, manufacturing/fabrication facilities) and a cap of USD 3 billion per project. Intel recently committed USD 20 billion to build a manufacturing mega-site in Ohio. Construction is set to begin this year and the site is scheduled to be operational by 2025. Other microchip heavyweights investing in U.S. factories include Taiwan Semiconductor Manufacturing Co. (TSMC), spending USD 12 billion on a semiconductor factory in Arizona; Texas Instruments, throwing USD 30 billion into four plants in Texas; and Samsung, setting aside USD 17 billion for a chip plant in Texas. The European Union Commission recently adopted the European Chips Act, which secures EUR 43 billion in public and private funding to support research and investment in chip manufacturing. Of that sum, EUR 11 billion taken from public funds will directly fund semiconductor capacity support under a Chips for Europe Initiative. Under the Chips Act, a Chips Fund will support equity by facilitating access to finance for start-ups and scale-ups in the semiconductor industry to help them mature their innovations and attract investors. The European Union hopes this funding will promote microchip development and strengthen the bloc’s position in the global semiconductor industry by doubling its share of global chip production by 2030. Countries are eager to establish “digital sovereignty”—the ability to maintain technological independence from global supply chains. Globalization has led to companies building their supply chains across borders, intertwining national economies. During the pandemic, countries saw how crippling it was when they did not have multiple supply sources—when China first shut down, chip manufacturing for the world nearly ground to a halt. On the other hand, the current rise in nationalism is also making countries hesitant to work together to come up with any kind of long-term solution for worldwide supply chain issues. Why Is It News? The pandemic saw a surge in demand for medical devices and personal electronics, all of which contain semiconductor computer chips, meaning there weren’t enough for carmakers. Ford halted or cut production at eight major plants, Toyota slashed worldwide production by 40% in 2021, while General Motors switched production to cars that didn’t require those specific microprocessors. Since car manufacturing has slowed because of the chip shortage, the price of used cars has increased 24% over the past year. Like many other forms of manufacturing, chip manufacturing was shipped overseas because labor was cheaper and incentives were greater. The Semiconductor Industry Association (SIA) reports that, during its prime, it cost 30% more to build and operate a microchip manufacturing facility in the United States than in East Asia over ten years, partly because of enormous government incentives. Increasing automation in chip factories, plus new government incentives to encourage domestic manufacturing, allows companies to produce microchips in their home countries while still being cost-effective. The Ohio General Assembly recently expanded its tax incentives, allowing projects with more than USD 1 billion in investment—like Intel’s new manufacturing mega-site—to be allowed to benefit from tax credits for up to 30 years. Communities in Ohio are speaking out because small businesses are not being given the same kind of tax abatements and benefits as these multinational tech companies. While governments are trying to build up the area for manufacturing, the sites will largely be automated and won’t add very many jobs to the community. Small businesses are seeing costs go up locally (which will only increase if more traffic is being driven into the area) but they themselves see no tax incentives. The sand used to make semiconductors already comes from the U.S. South, so Intel believes some chips could be feasibly produced in their entirety on domestic soil. Since domestic manufacturing of microchips Page 4 of 5 United States and European Union Expand Chip Manufacturing SAGE © Madeline Rae 2022 Business Cases doesn’t insure against future supply chain disruptions (Intel chips manufactured in the United States are still sent to Asia for assembly, testing, and packaging), the push is largely for political reasons. Three-quarters of the world’s semiconductor manufacturing capability is within the flight path of the Chinese Air Force, which national security experts believe is problematic, particularly in an era of growing geopolitical tensions. Analysts predict the chip shortage will likely continue into 2023, but J.P. Morgan estimates shortages will lighten up if industries invest in long-term solutions. Unfortunately, any boost in chip manufacturing will be slow to take root and is not likely to help the current disruptions. https://dx.doi.org/10.4135/9781529605532 Page 5 of 5 United States and European Union Expand Chip Manufacturing United States and European Union Expand Chip Manufacturing Case Author: Madeline Rae Online Pub Date: March 07, 2022 | Original Pub. Date: 2022 Subject: Supply Chain Management, Strategic Management & Business Policy, International Business & Management Level: | Type: Indirect case | Length: 918 Copyright: © Madeline Rae 2022 Organization: Intel| Samsung | Organization size: Large Region: Global, Northern America | State: Industry: Manufacture of computer, electronic and optical products Publisher: SAGE Publications: SAGE Business Cases Originals DOI: https://dx.doi.org/10.4135/9781529605532 | Online ISBN: 9781529605532 SAGE © Madeline Rae 2022 Business Cases © Madeline Rae 2022 This case was prepared for inclusion in SAGE Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes. 2022 SAGE Publications Ltd. All Rights Reserved. The case studies on SAGE Business Cases are designed and optimized for online learning. Please refer to the online version of this case to fully experience any video, data embeds, spreadsheets, slides, or other resources that may be included. This content may only be distributed for use within University of South Florida. https://dx.doi.org/10.4135/9781529605532 Page 2 of 5 United States and European Union Expand Chip Manufacturing
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