British taxpayer{And US) money is being painfully wasted on hopeless strategies
https://finance.yahoo.com/news/british-taxpay...00098.html
President Biden has sunk $52 (£42bn) billion of subsidies into the industry, while protecting it with a wall of trade and tariff barriers. The European Union has mobilised $43 billion in financial support to secure production, on top of which major member states such as France and Germany are spending more.
Even in the UK, the Chancellor has been hunting down the back of the sofa to see if he can find a billion or two for the British industry. Over the last year, major global economies have been pouring billions into subsidising microchip manufacturing.
The tiny transistors on silicon chips that power modern technology, from computers to satellites or weapons, have been described as the “new oil”. We can all understand that this resource, critical to the electronic devices required in a modern economy, is extremely important. And we will need a lot more chips in the future.
Yet last week, Samsung revealed its profits were falling on weak chip demand. This week, Taiwan’s TSMC, the semiconductor manufacturing firm, reported shrinking order books. Device sales have been slowing since late-2022, inventory has recovered, and chip levels have approached normal.
Which means that we are facing massive spare capacity in the coming years. In reality, the micro-glut will expose the folly of industrial strategy all over again – with tens of billions of taxpayer money painfully wasted in the process.
Over the last couple of years, every government in the world has been worrying about how to increase production of micro-processors. Last year, President Biden signed into law the $280 billion Chips and Science Act, with around $52 billion committed towards microchip production.
In an unprecedented step, Biden banned US companies from supplying chips to Chinese companies. To compete, the EU launched its own Chips Act, mobilising more than $40 billion for a mixture of direct handouts to manufacturers and tax breaks. EU executives have been courting the microchip industry’s big three – Intel, Samsung and TSMC, to up Europe’s market share in global semiconductors to 20 per cent by 2030.
And the UK has its own microchip strategy, although so far it mostly consists of a “consultation study” launched in December, along with some vague noises about blocking the sale of our largest manufacturer, Newport Wafer Fab. To listen to the grand speeches made as each fresh multi-billion package of subsidies was unveiled the message was clear: there is a catastrophic lack of microchips, and if countries don’t generate their own supplies then economies will grind to a halt. Only a state-led industrial strategy can resolve these potentially catastrophic shortages.
Yet, as mentioned, Samsung last week reported that profits had dived by 90pc, and announced it would be cutting production of memory processors, largely because there were too many on the market. TSMC has missed earnings estimates on weak sales of its processors, while overall chip production in Taiwan is expected to be down by 5.6pc this year.
Meanwhile, last month Intel asked the German government to come up with another $5 billion in subsidies to help it complete a plant in the country, hardly a sign of a project that is economically viable. Add it all up, and a picture starts to emerge of an industry with too much production, rather than too little.
It is not hard to work out why. Global demand is slowing as interest rates rise and demand cools. The tech industry is reportedly cutting back on staff and new product launches, while sales of products such as electric vehicles, huge consumers of microchips, have started to decelerate. During the pandemic, there were shortages as supply chains snarled up, and demand for electronic devices surged, but that massive disruption has calmed. The cycle is turning.
Of course, we can all understand why governments might want to boost domestic production. The world is critically dependent on Taiwanese chip factories – the island accounts for 65pc of global output – and Beijing moves on Taipei, then we will be glad for having diversified our supply chains.
Likewise, relying on Chinese factories may prove risky, though China itself is the second largest importer of semiconductor devices in the world. There is a case to be made for putting together a back-up plan for domestic production in case of a major conflict.
But creating a new, mass market manufacturing capacity from scratch? That is already starting to look like a very expensive mistake. Over the next few years, all those heavily subsidised plants in the United States, Germany and France are going to come on stream, selling chips into a global market where there are too many of them, and prices are tumbling. The losses could be vast. Taxpayer money will have been put to terrible use and, in the UK, Treasury officials will
perhaps be quietly breathing a sigh of relief that we were too hopelessly disorganised to launch our own strategy.
There is a lesson to be taken from the microchip experience, not least at a time when “industrial strategies” are more popular than ever. Just because a product is important, it does not mean any particular country has to produce it. And if demand is growing, as it has been for microchips, it is safe to assume that private companies will be capable of meeting that need without any help from the state.
Too often, governments end up subsidising the wrong industries at the wrong time. They have a poor record of picking winners, and should instead set low and fair taxes, lower tariffs, keep competition open, and break-up any cartels. Once they have done all that, the market can decide which are the industries of the future.
https://finance.yahoo.com/news/british-taxpay...00098.html
President Biden has sunk $52 (£42bn) billion of subsidies into the industry, while protecting it with a wall of trade and tariff barriers. The European Union has mobilised $43 billion in financial support to secure production, on top of which major member states such as France and Germany are spending more.
Even in the UK, the Chancellor has been hunting down the back of the sofa to see if he can find a billion or two for the British industry. Over the last year, major global economies have been pouring billions into subsidising microchip manufacturing.
The tiny transistors on silicon chips that power modern technology, from computers to satellites or weapons, have been described as the “new oil”. We can all understand that this resource, critical to the electronic devices required in a modern economy, is extremely important. And we will need a lot more chips in the future.
Yet last week, Samsung revealed its profits were falling on weak chip demand. This week, Taiwan’s TSMC, the semiconductor manufacturing firm, reported shrinking order books. Device sales have been slowing since late-2022, inventory has recovered, and chip levels have approached normal.
Which means that we are facing massive spare capacity in the coming years. In reality, the micro-glut will expose the folly of industrial strategy all over again – with tens of billions of taxpayer money painfully wasted in the process.
Over the last couple of years, every government in the world has been worrying about how to increase production of micro-processors. Last year, President Biden signed into law the $280 billion Chips and Science Act, with around $52 billion committed towards microchip production.
In an unprecedented step, Biden banned US companies from supplying chips to Chinese companies. To compete, the EU launched its own Chips Act, mobilising more than $40 billion for a mixture of direct handouts to manufacturers and tax breaks. EU executives have been courting the microchip industry’s big three – Intel, Samsung and TSMC, to up Europe’s market share in global semiconductors to 20 per cent by 2030.
And the UK has its own microchip strategy, although so far it mostly consists of a “consultation study” launched in December, along with some vague noises about blocking the sale of our largest manufacturer, Newport Wafer Fab. To listen to the grand speeches made as each fresh multi-billion package of subsidies was unveiled the message was clear: there is a catastrophic lack of microchips, and if countries don’t generate their own supplies then economies will grind to a halt. Only a state-led industrial strategy can resolve these potentially catastrophic shortages.
Yet, as mentioned, Samsung last week reported that profits had dived by 90pc, and announced it would be cutting production of memory processors, largely because there were too many on the market. TSMC has missed earnings estimates on weak sales of its processors, while overall chip production in Taiwan is expected to be down by 5.6pc this year.
Meanwhile, last month Intel asked the German government to come up with another $5 billion in subsidies to help it complete a plant in the country, hardly a sign of a project that is economically viable. Add it all up, and a picture starts to emerge of an industry with too much production, rather than too little.
It is not hard to work out why. Global demand is slowing as interest rates rise and demand cools. The tech industry is reportedly cutting back on staff and new product launches, while sales of products such as electric vehicles, huge consumers of microchips, have started to decelerate. During the pandemic, there were shortages as supply chains snarled up, and demand for electronic devices surged, but that massive disruption has calmed. The cycle is turning.
Of course, we can all understand why governments might want to boost domestic production. The world is critically dependent on Taiwanese chip factories – the island accounts for 65pc of global output – and Beijing moves on Taipei, then we will be glad for having diversified our supply chains.
Likewise, relying on Chinese factories may prove risky, though China itself is the second largest importer of semiconductor devices in the world. There is a case to be made for putting together a back-up plan for domestic production in case of a major conflict.
But creating a new, mass market manufacturing capacity from scratch? That is already starting to look like a very expensive mistake. Over the next few years, all those heavily subsidised plants in the United States, Germany and France are going to come on stream, selling chips into a global market where there are too many of them, and prices are tumbling. The losses could be vast. Taxpayer money will have been put to terrible use and, in the UK, Treasury officials will
perhaps be quietly breathing a sigh of relief that we were too hopelessly disorganised to launch our own strategy.
There is a lesson to be taken from the microchip experience, not least at a time when “industrial strategies” are more popular than ever. Just because a product is important, it does not mean any particular country has to produce it. And if demand is growing, as it has been for microchips, it is safe to assume that private companies will be capable of meeting that need without any help from the state.
Too often, governments end up subsidising the wrong industries at the wrong time. They have a poor record of picking winners, and should instead set low and fair taxes, lower tariffs, keep competition open, and break-up any cartels. Once they have done all that, the market can decide which are the industries of the future.
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