The U.S. is bringing chip-making home. Is California ready?

Silicon Valley owes its success to the invention of a computer chip that is now made almost exclusively overseas.

Can $52.7 billion lure the chip, the electronic heart of everything from cell phones to F-15 fighter jets, back home?

The CHIPS and Science Act, signed by President Biden in August, aims to inspire a manufacturing revival that is crucial to our national defense, economic security and future technical innovation.

Already, the domestic semiconductor industry is on a tear, with new megafactory construction underway in Arizona, Texas, New Mexico and soon Ohio reflecting manufacturers’ confidence that the U.S. will help pay for them.

Yet none of the planned “megafabs” will be built here in the birthplace of the integrated circuit, or chip, where in 1959 legendary entrepreneur Robert Noyce strung transistors together on sheets of silicon in a two-story warehouse built of tilt-up concrete slabs in Mountain View.

To be sure, California remains a leader in more sophisticated parts of the chip supply chain, such as research, design, manufacturing tools and the sophisticated automation devices that analyze chip performance. And those chip-related businesses could get a funding boost too.

Three of the five top chip equipment manufacturers — Lam Research, Applied Materials and KLA Corporation — are based in the Bay Area. So are powerful chip designers, such as Nvidia, Apple and Google. Synopsis and other companies provide the software to design the chips. Stanford, UC Berkeley and San Jose State conduct world-class research.

“We’re very well-positioned to accelerate the research and development around microelectronics and apply them to new technologies. On those two bases, California is well positioned to compete for a portion of these federal funds,” said Peter Leroe-Muñoz, who specializes in tech policy for the Silicon Valley Leadership Group.

“Our strength will be growing the footprint that we already have.”

Historically, “Silicon Valley was where you built the fab,” the factory that crafts chips out of silicon, said Michael Hochberg, president of Luminous Computing, which hopes to use CHIPS Act funding to build the world’s most powerful, scalable Artificial Intelligence-based supercomputer at the company’s facility in Santa Clara.

“Now,” he said, “if you want to do stuff that’s ‘best in class,’ you have to work with companies from overseas.”

Fifty years ago, offshoring in Asia made sense. It reduced costs and helped U.S. companies stay competitive against international rivals. Those Asian countries invested in their factories. According to Micron, it is 35% to 45% cheaper to build a fab in a low-cost Asian nation than in the U.S., primarily because of government support.

Now, the most advanced chips are all made by the behemoth Taiwan Semiconductor Manufacturing Company, or TSMC. It’s the exclusive supplier of Apple’s silicon processors for iPhones and Mac PCs, as well as the manufacturing partner of other major U.S. companies like AMD, Broadcom and Qualcomm.

The U.S. is the largest consumer of chips in the world. But we make only 12% of what we use.

With growing U.S.-China tensions, government officials are worried. If taken by force, Taiwan’s factory would be rendered inoperable – and we’d lose the chips that power our economy and defense, according to the Center for Strategic and International Studies, a Washington D.C.-based nonprofit policy research organization that studies the future of national security.

The pandemic-related supply chain disruptions revealed the vulnerability, causing a chip shortage that adversely affected at least 170 industries, especially automakers.

Rebooting the American supply chain will also protect our future innovation, said electrical engineering professor H.-S. Philip Wong, director of Stanford’s Nanofabrication Facility. Manufacturers need research so they can build the best new product. Researchers need manufacturers to realize their ideas.

“The semiconductor is foundational to many of the technologies that we are counting on going forward, including Artificial Intelligence, quantum computing, 5G and so on,” said Wong.

“So to have American leadership,” he said, “you need to have leadership in semiconductors.”

According to the Department of Defense, early-stage research can’t be proven in the facilities that we have here at home – instead, U.S. engineers must go to Asia to test and prove an idea.

Similarly, startups are bedeviled by a chicken-and-egg problem. Without access to a factory, they can’t prove commercial promise. Without proof, they can’t get into a factory.

The CHIPS and Science Act aims to create a new world order. The $280 billion package includes $39 billion to help with the financing of semiconductor fabrication, assembly, testing and advanced packaging, as well as $13.2 billion toward research and workforce development. It also provides a 25% investment tax credit for capital costs of manufacturing equipment.

It’s not yet known how the funds will be spent. It’s up to the departments of Commerce, State and Defense to craft the details and decide how the money will be awarded.

Building a factory – where billions of microscopic transistors are squeezed onto ever-smaller computer chips – is a complex project.

And it’s expensive. Construction of a new factory takes about three to five years and costs a stunning $10 billion to $12 billion per site, about seven times as much as sports facilities such as Levi’s Stadium or Chase Center.

The CHIPS Act is likely to boost manufacturing in regions where land and energy are cheap. There’s a specific provision of the Act that directs some spending to places that aren’t coastal research hubs.

This past week, Micron Technology announced it will build a $15 billion chip factory near its headquarters in Boise, Idaho, and is considering a plan to spend as much as $160 billion on a new factory in central Texas. Two new Intel factories will soon be under construction near Columbus, Ohio, each costing $10 billion. In Arizona, Taiwan Semiconductor Manufacturing Company is investing $12 billion in an advanced-manufacturing center. Texas is the site of Samsung’s new $17 billion chip factory. Indiana was selected by SkyWater for a $1.8 billion facility.

To attract Intel, Ohio offered the company about $2 billion worth of incentives, including $700 million for roadwork and water infrastructure upgrades. In Phoenix, where Taiwan’s TSMC is building its new plant, the city government promised to spend $205 million in public infrastructure improvements. In the small Texas town of Taylor, Samsung will pay no corporate income tax.

California’s welcome is more modest. Officials say they are recruiting – but the state’s support is currently limited to tax credits through the California Competes Program, which offers up to $180 million to qualified applicants. Startups complain that’s less useful than other incentives because they don’t yet have profits to deduct against.

“We have already begun and will continue working with companies to locate their CHIPS-eligible projects here in California,” said Heather Purcell of the Governor’s Office of Business and Economic Development. “We are the state that is known for innovation, home to the most high-quality, diverse workforce in the nation.”

But experts say that new plants are unlikely to be erected here. Manufacturing is stifled by several factors: high real-estate costs, unreliable water, expensive electric bills and stiff regulations. In general, manufacturing has plummeted in California. Since 1990, the state has lost a third of its factory jobs.

“A semiconductor fab needs a lot of land, a lot of water and a lot of electricity,” said electrical engineering professor Hiu Yung Wong of San Jose State University. “We might not be as competitive as other states.”

But the biggest challenge is finding people with the right skill sets, he said. “Many of the most-talented students go to computer science, where it is much easier to earn a higher income. They go to Google, they go to Facebook.”

“Silicon Valley became Software Valley,” said Dan Hutcheson of TechInsights in San Jose. “California is not oriented toward manufacturing. Politicians have this attitude, ‘We don’t care. We don’t have to.’”

Furthermore, some California cities are unlikely to want factories, infamous for their toxic chemicals, he said. Officials may fear fire risk or a repeat of Fairchild Semiconductor’s massive 1981 pollution of a cancer-causing solvent TCE in drinking-water wells in San Jose.

California may never again return to its industrial heyday, said experts. But federal funding could help turbocharge our many other strengths.