Within a few months, lawmakers will shift into midterm campaign mode, effectively closing the window on the passage of major substantive legislation in this Congress. Apart from funding bills, particularly for defense amid geopolitical turmoil, Senate confirmation of Supreme Court nominee Judge Ketanji Brown Jackson and passage of legislation to provide $52 billion to support domestic semiconductor manufacturing form the essence of Washington's "must do" agenda.
As we've noted (Hedgeye Potomac Research, Congress Pushes Chip Production Incentives, Nov. 23, 2021) (click here), a strong bipartisan consensus backs the proposal for $52 billion in chip production subsidies and semiconductor R&D support. The Commerce Department projects the overall industry spend to approach $150 billion when matching support and state incentives are included. As many as ten new chip fabrication plants could result from these funding initiatives over the next few years, according to the agency.
The Biden Administration is pushing lawmakers to wrap up a conference that will reconcile House and Senate bills promoting domestic high tech innovation as both versions include the chip production subsidies, but the bills have sharp differences and completion of the legislative effort is proving difficult with time running short. Last year, Senate leaders considered attaching the chip production subsidies to the must-pass National Defense Authorization Act but the effort stalled as some members viewed the semiconductor provisions as critical to passage of unrelated measures in the broader tech innovation bill.
But with the clock ticking down on this Congress, an effort to pull the chip provisions into a standalone bill or employ other creative options to move the legislation is about to pick up steam. Senate Majority Leader Chuck Schumer and Minority Leader Mitch McConnell have apparently agreed on the contours of conference negotiations now set to begin in April but a final consensus is not assured. The primary focus remains the chip subsidy provisions. The passage of legislation to support the expansion of domestic chip production capacity is critical to the reduction of geopolitical supply chain risk (China's threat to Taiwan) and necessary to ensure chip shortages will not become a future choke point for critical industries. The auto industry has become the poster child for industrial disruption in this context but the chip supply problem has had pervasive economic impacts, slowing production, delaying wireless infrastructure deployments and worsening inflationary trends.
In the weeks ahead, we expect impatience among congressional leaders and within the Biden Administration will begin to force the issue. Although American semiconductor companies are critical global leaders in semiconductor design, global chip production in the United States has fallen to roughly 12 percent from about 37 percent twenty years ago. In addition, the most advanced semiconductors -- the smallest and most efficient chips -- are not produced here at all. We expect the drive to prioritize domestic chip fabrication will benefit equipment makers like Applied Materials (AMAT), Lam Research (LRCX) and ASML Holding (ASML), particularly as the most advanced production technologies are emphasized in future capacity deployments.
As we've also previously discussed, there is support in Congress for additional chip production support, including the passage of refundable tax credits that could offer a more sustainable incentive for investments in domestic manufacturing facilities. At this point, we think resistance in the House makes passage of such tax credits unlikely near term, but the current appreciation for geopolitical risk along with painful chip shortages across multiple industries have heightened legislative interest as never before. There is the prospect of additional policy upside here as some lawmakers seek even more aggressive policies to address semiconductor supply risks.
