U.S. President Joe Biden’s Chips and Science Act strategy to revitalize U.S. semiconductor manufacturing recently took a gut punch. Intel, the program’s largest recipient, reported its foundry arm is hemorrhaging cash. Intel may spin off manufacturing and, like Nvidia and AMD, focus solely on chip design and software.

Cutting-edge chips are the engine room for training and applying AI models like ChatGPT. Intel’s woes jeopardize the U.S. goal of manufacturing 20% of global leading-edge chips by 2030. The setback could mean that American industry becomes dependent on hard-charging China for its needs.

The U.S. Department of Defense steers critical technology purchases to domestically-owned suppliers. For example, Intel is the sole recipient of a $3.5 billion program to make advanced semiconductors for military and intelligence applications.

Considering that most significant high-end foundries are owned by Taiwan Semiconductor Manufacturing and South Korea’s Samsung, finding a domestic suitor to maintain U.S. ownership of Intel’s higher end fabs would be tough.

Intel specializes more in central processing units for computers, whereas Nvidia and AMD have greater expertise in designing graphic processing units critical to AI.

Intel could be acquired by another U.S. chip designer such as Qualcomm, which designs its AI chips in-house.

Breakthroughs like conversational “agents” promise to make AI as central to productivity growth as the assembly line was to early 20^th century manufacturing. But American policy here is deficient in several ways.

First, funding is inadequate. China is offering its companies $144 billion in subsidies, and Beijing is able to direct bank loans to the industry as it has for other priority activities.

Second, the primary U.S. advantage is in semiconductor design, but the Chips Act provides just $11 billion to R&D.

Third, the Chips Act doesn’t address the core issue in the U.S. foundry business — it costs 44% more to build fabs in the United States than in Taiwan owing to environment assessments, permitting procedures, community engagement requirements and mandates to employ union labor.

The Chips Act exacerbates these by requiring firms receiving assistance to negotiate project labor agreements, invest in childcare, K-12 and higher education, and set aside employment and training opportunities for underrepresented groups.

Fourth, the Chips Act’s emphasis on packaging conflicts with the development aspirations of ASEAN nations like Malaysia, which are critical in U.S. competition for influence with China in the Global South.

Fifth, Intel’s losses stem in part from the cyclical nature of semiconductor demand. As the weaker of the cutting-edge fabricators, its vulnerability is laid bare when the U.S. and Chinese economies slow.

Intel would benefit from industrial alliances that recognize its potential role in an overall security of the broader AI supply chain — which includes Nvidia-designed high-end processors, a broader range of semiconductors, energy infrastructure, data centers, software and the like. Such alliances could carry Intel through periods of slack demand.

Sixth, the necessary cross-industry investment raises antitrust concerns, but the Biden administration is often not aligned with American industrial policy goals.

For example, Nippon Steel’s proposed acquisition of U.S. Steel would inject billions of dollars in new capital and technology to preserve American manufacturing jobs. To appease organized labor, the Biden Administration opposes the deal in favor of a tie-up with Cleveland-Cliffs, even though the latter combined entity would control 100% of the steelmaking capacity to manufacture electric vehicle motors.

Nvidia, meanwhile, up against the limits of market share in high-end AI processors, is seeking to grow in related software development, for example by acquiring Run:ai. Yet the Justice Department is in the early stages of investigating the tie-up.

An effective federal semiconductor policy should give broad deference to integrating initiatives like what OpenAI CEO Sam Altman has proposed.
Altman is seeking support from governments and sovereign wealth funds in North America, Japan and the Middle East as well as major businesses such as Nvidia, Microsoft and Apple to create such an industrial matrix to maintain western leadership versus China.

Refraining from the political impulse to divvy up the spoils for political constituencies can help ensure a prominent place for U.S. chips manufacturing in global markets and stay ahead of China.

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Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.