On Friday, the White House blamed part of December’s 7% annual rise in consumer prices on disruptions in the auto industry sparked by the pandemic. Specifically it cited a dearth of microprocessors as a key inflationary cause after the supply of new cars hitting the market last year was slashed by nearly 8 million vehicles, as prices went up.

“COVID-19 has compounded that problem many times over, especially with computer chips,” President Joe Biden told reporters at a briefing alongside the CEO of Intel. “Everything from cars to dishwashers are delayed getting to showrooms and customers just as demand is up, because the economy is growing.” 

The U.S. is currently home to only 12% of the world’s semiconductor manufacturing, importing much of its needs from abroad. Worse, it is entirely dependent on Asia when it comes to the smallest, most advanced chips typically found in notebooks and smartphones. Currently only two companies on the planet are capable of mastering so-called 5 nanometer process technology – Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung. 

Since Asian nations shower chipmakers with financial aid to attract investment, Biden wants to ensure the manufacture of microprocessors on U.S. soil can compete with plants abroad. The administration is urging the House of Representatives to sign off on $52 billion of taxpayer aid to the industry under a bill dubbed the “Creating Helpful Incentives to Produce Semiconductors for America Act.” The Senate has already approved funding.

The CHIPS Act would provide companies like Intel the extra financial firepower they need to bulk up their U.S. manufacturing operations without risking profitability in the process. Once these new fabrication facilities, or “fabs,” are up and running, the improved supply of semiconductors should broadly reduce pressure on consumer prices across the board and in the auto industry in particular.

The new capacities are needed, as demand for advanced processors is only expected to grow going forward as virtually every digital device needs a chip. And thanks to Tesla, automobiles that had in the past been equipped with relatively simple circuitry are set to become electric, autonomous and connected to the Internet over the next decade. 

Citing Intel’s own estimates, Biden said a fifth of the raw materials cost in a premium car will stem from microchips alone by 2030, a five-fold increase from roughly 4% currently.

Reward for bad behavior?

In December, 59 chief executives running major tech and automotive multinational companies—including Apple, Microsoft and Google parent Alphabet—warned Congress the ongoing chip shortage “poses risks to our entire economy.” In an open letter, they demanded the U.S. House of Representatives to follow the Senate in approving a bill that would give the industry funding, because “time is of the essence”. 

U.S. Commerce Secretary Gina Raimondo told reporters on Friday rapidly rising car prices were currently responsible for a third of domestic inflation because a lack of chips meant automakers could not keep up with demand. By passing the CHIPS Act, legislators would be taking steps now to secure a sufficient U.S. production capacity in the future, they can mitigate U.S. inflation risks down the line.

“Semiconductors produced right here in America will allow us to shore up our supply chains, bring down cost, keep manufacturing facilities up and running and create American jobs,” said Raimondo. 

Despite broad consensus in Washington that more semiconductors need to be produced domestically, the CHIPS Act has not been entirely without critics.

Senator Bernie Sanders, head of the influential Senate Budget Committee, argued the industry already had the money it needed to invest in new plants: it just preferred to reward their investors instead. Speaking in November on the floor of the Senate, he said the five chipmakers that stood to benefit the most from the bill, including Intel and Nvidia, spent more than $18 billion buying back their own stock in 2020, and collectively earned nearly $35 billion in profits that year. He also estimated that those five companies eliminated 150,000 jobs, or around 29% of their U.S. workforce over the past two decades in order to shift more production to lower-cost countries overseas, which he blamed for helping create the current chip crisis in the U.S.

By simply gifting the industry the $52 billion it wanted, Congress risked reward them for this bad behavior, according to Sanders. He wants to protect taxpayers footing the bill by ensuring they are rewarded for their risk as well. He introduced an amendment that would force chipmakers receiving aid to grant the government warrants, a form of stock options issued by companies that are convertible into equity.

This attempt to socialize rather than privatize profits, however, amounted to a poison pill that the industry would never accept, according to the Commerce Department. It blasted the senator’s proposal last month as “a doomed-to-fail government effort to own and manage a cutting-edge industry.”

Threat from China

One of the 59 CEOs to sign the open letter to Congress in December was Intel boss Pat Gelsinger. He hopes the government assistance to chipmakers will help the leading U.S. producer of semiconductors catch up technologically to its two more advanced rivals, TSMC and Samsung. 

On Jan. 21, Intel revealed plans to spend more than $20 billion on the construction of a new chip fab outside of New Albany, Ohio, creating 3,000 jobs that pay an average salary of $135,000 annually. Not only is this Intel’s first new manufacturing site in 40 years, it represents the largest single investment in the state’s history, according to the company. 

“Our announcement today (on the Ohio factory)is motivated by the CHIPS Act,” Gelsinger said on Friday, arguing the bill would tackle the rising costs shouldered by American families by addressing long-term constraints in the semiconductor supply chain. “Now Congress needs to finish the job.” 

Intel, which is analyzing similar plans for Europe, also dangled the prospect of spending an additional $80 billion in Ohio in front of state and federal officials in the coming 10 years. To help unlock that though, however, legislators would need to sign off on the $52 billion aid package now.

The political pressure appeared to work. Later that day House Speaker Nancy Pelosi informed her Democratic colleagues they would soon be proposing their version of the CHIPS bill.

For the Biden administration, there is more at stake than simply ensuring automotive plants can churn out new cars or even reduce broader inflationary pressures building up in the economy. 

He pointed to estimates that 90% of the world’s supply of the most advanced microchips comes from Taiwan, a country claimed by China as part of its sovereign territory. The U.S. President said he fears Beijing is “doing everything it can” to build up its domestic chip industry in part to benefit its military might. 

“We don’t have the ability to make the most advanced chips right now,” Biden said. “That’s why I want to see Congress pass this bill right away and get it to my desk.”