Will Reshoring Chip Production Help Fix the Supply Chain?

Federal funding is a good start, but may not be enough to help the US overcome its East Asian competitors

Published: Tuesday, October 11, 2022 - 12:03

Billions in federal spending to boost production of computer chips is an important step toward making the U.S. more competitive in the global marketplace. But it doesn’t guarantee that a manufacturing boom will follow, says Wharton expert Michael Cohen.

“I think it will have an incremental effect that will be positive in terms of the manufacturing footprint for semiconductors in the U.S. But will it absolutely reverse the trend? No, I don’t think so,” he says.

Cohen, who is professor emeritus of operations, information, and decisions, spoke to Wharton Business Daily on SiriusXM about the bipartisan CHIPS and Science Act, which was signed into law by President Joe Biden earlier this month. The legislation provides $52 billion for companies making computer chips, and billions more in tax incentives and funding for research.

The spending is part of the administration’s effort to help the U.S. compete with China, Taiwan, and South Korea, which combined produce 75 percent of the world’s computer chips. Just 10 percent of chips are made in the United States, a deficit spotlighted by pandemic-related supply chain issues that have caused shortages in chip-reliant products ranging from cars to refrigerators.

‘Cost will always matter, but we’ve learned we have to take into consideration other factors.’—Morris Cohen

Cohen says news about the shortages hasn’t been overblown; demand for such products went up in ways that industries didn’t expect and weren’t prepared for. But the availability of homemade semiconductors won’t necessarily encourage more U.S. manufacturing of other products that need them, like cars.

“I don’t see it driving a halo effect—because we now have more chip factories, we’re going to have more manufacturing in other industries,” he explains. “Those decisions will be somewhat influenced by this, but I don’t think they’ll be driven by this.”

Cohen says the federal funding is significant because East Asian governments heavily subsidize the chip industry to maintain their dominance in the market. Meanwhile, the U.S. has experienced a long-term decline in sourcing and manufacturing. Making chips here could help reshore production, although many other factors matter.

“When a company makes a decision of where in the world to produce its product, it takes into consideration huge, complex trade-offs, risk factors, constraints, and obviously government subsidies play an important part,” he says. “They will ultimately make the decision based on an analysis of all of these factors, all of these trade-offs.”

Much U.S. manufacturing has moved offshore during the last 50 years because of cheaper labor, especially in East Asian countries. Cohen says pandemic-related issues have spurred more companies to rethink their priorities, perhaps with a greater focus on resilience and agility. Cheap labor was once considered a no-brainer.

“What we learned in our research is that it’s not a no-brainer,” Cohen says. “It’s back to these interesting, complex trade-offs, and these relative costs shifting, and governments doing everything they can to shift the balance so that the final decision will come to where they want it to be. Cost will always matter, but we’ve learned we have to take into consideration other factors and give them perhaps more weight than we’ve given them in the past.”

Ultimately, he is encouraged by the administration’s injection of cash into the semiconductor industry. Capacity will be added, and the U.S. will become more competitive, even as other manufacturing crises come along.

“I’m an optimist. I think that things will get better. Things are getting better,” he says. “I’m generally optimistic that companies and government are going to figure this out because they have no choice. They have to.”

First published Aug. 22, 2022, on Knowledge at Wharton.

About The Author

Morris Cohen

Morris A. Cohen is the Panasonic Professor of Manufacturing and Logistics in the Operations, Information and Decisions Department at the Wharton School at the University of Pennsylvania.  He is also co-director of Wharton’s Fishman-Davidson Center for Service and Operations Management.