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Deutsche Bank Research analysts, in their Semiconductors: What to Expect in 2024 report, have raised concerns about the escalating competition in semiconductor production. They warn of China’s aggressive expansion, which poses a threat to Western companies selling into China and may result in overcapacity in the near future.
The U.S. CHIPS Act, designed to incentivize domestic chip production, seeks to address this challenge. With an allocation of $280 billion, the Act aims to close 40% of the cost gap of offshoring. It provides $39 billion for new facilities and a 25% tax credit for equipment spending.
The Semiconductor Industry Association (SIA) estimates that each region would need to invest over $1 trillion upfront to establish a self-sufficient supply chain at current demand levels.
The United States is projected to experience a 6% year-over-year capacity growth in 2024, with plans for the establishment of six new semiconductor fabrication plants. These include two Taiwan Semiconductor Manufacturing Company (NYSE:TSM) plants in Arizona, SK Hynix in Indiana, Samsung (OTCPK:SSNLF) in Texas, Intel (INTC) in Ohio, and Micron (MU) in New York.
The U.S. (TSM) plants are expected to achieve a monthly capacity of 60,000 12-inch wafers, constituting approximately 4.6% of TSM’s monthly wafers.
Furthermore, the Act allocates $35 million to BAE Systems (OTCPK:BAESF) for military aircraft chip production.
The European Union’s Chips Act has committed €43 billion in public and private funds to double the EU’s 10% global market share and achieve a 2-nanometer production. Progress on the 68 new projects remains limited as of now.
China, on the other hand, has dedicated $40 billion in state funding to support its global industry expansion, with 18 new projects and a projected 13% year-over-year capacity growth in 2024.
However, China faces challenges in scaling advanced chips, with its leading semiconductor manufacturer, SMIC, achieving a 7-nanometer process mode in 2023 and aiming to develop 5-nanometer chips this year.
“Scalability for advanced chips remains a challenge due to outdated equipment,” analysts stated.
SMIC and Hua Hong (OTCPK:HHUSF) are anticipated to expand legacy nodes, acquiring older equipment from ASML (ASML) that supports nodes larger than 28 nanometers.
The United States has its own set of challenges, with a gap in the production of chips larger than 7 nanometers and in legacy production. The country heavily relies on Taiwan, South Korea, and China for legacy chips, particularly those at the 28-nanometer process node or larger.
The CHIPs Act allocates $2 billion for legacy chips and $10 billion for lagging edge chips, reflecting about 4% of the total funding under the Act.
“U.S. capex at the lagging edge is projected to decline by -9% in 2024,” analysts reported. “However, this still represents a three-fold increase compared to the pre-pandemic 10-year average capex.”
