The potential impact of the CHIPS and Science Act on the data center hardware market

The CHIPS (Creating Helpful Incentives to Produce Semiconductors) and Science Act was recently signed to bolster the U.S. microchips industry. The bipartisan bill will invest around $280 billion into the industry, which can greatly impact the data center hardware market.


Importance of microchips

Microchips (integrated circuits) are quintessential building blocks in modern electronics. Microchips and their components are made from silicon, which is a semiconductor material because it can behave as a conductor or an insulator under different circumstances.

The versatile ability to turn currents on or off allows microchip transistors to function as an electrical switch. This is essential to modern computing because electronic devices use the transistors’ on and off inputs to perform different functions or tasks. Modern microchips contain anywhere from a million to a billion transistors to handle many of the IT applications of today’s world.


Industry outlook

Despite the importance of microchips, the American chip industry has stagnated in recent years. While domestic chip companies continue to thrive in the chip design segment of the business, domestic companies have fallen behind in the chip manufacturing (fabrication) segment. Domestic chip manufacturing currently accounts for only around 12% of the global manufacturing output.

Meanwhile, geopolitical rivals have been aggressively investing in their own chip industries to catch up to the U.S. and its allies. This has raised concerns for national security because chip manufacturing produces components such as guidance chips for missiles, chips for surveillance drones, etc.


Manufacturing challenges

The decline in domestic chip manufacturing likely stems from a general lack of investment in chip manufacturing. This is because chip manufacturing is, at its core, an elaborate and complex process that incurs high capital costs. 

Part of what makes chip manufacturing notoriously expensive and difficult is that, as computing demands level up, an increasing amount of transistors are needed . As Moore’s Law states, the number of transistors on an integrated circuit doubles about every two years.

It is incredibly difficult, however, to cram more and more transistors onto a single chip. With modern chips packing a million plus transistors, each transistor is around 1/100,000 the width of a single hair strand. Finding ways to further shrink transistors so that they can fit on a chip requires top tier R&D and a great deal of innovation.


High upfront costs

To accommodate this process, chip manufacturers must build semiconductor manufacturing facilities (fabs) housing the most advanced equipment and lithography tools. These tools enable manufacturers to manipulate materials at a subatomic level with greater precision.

Building fabs are highly expensive, however, as it can cost around $10 billion USD for a single fab. New chips (and fabs) must also be built every generation to accommodate annual product releases such as the iPhone line.

As such, chip designers such as Apple, AMD and Nvidia will outsource manufacturing to companies like TSMC and Samsung Electronics, who have the proper resources and level of craftsmanship needed to produce advanced microchips on a much larger scale.


Impact on the data center hardware industry

Although cost-effective, solely relying on overseas chip manufacturing can be a bit risky especially when chip demand is high and chip supply is low. This problem manifested itself in the 2021 global semiconductor shortage.

The purpose of this bill is to reinvigorate the domestic chips industry and level the playing field for domestic chipmakers. This is likely to impact the production of data center essentials such as RAM memory and flash-based storage devices, in more ways than one.


Increased production

Projections show that the new bill will increase the domestic market share of memory chip production from less than 2 percent to up to 10 percent over the next ten years. Fab capacity will also be increased as more fabs are built on home soil.


Stabilize supply

The bill also helps diversify the supply chain. $500 million is being invested to bolster semiconductor-based supply chain activities.

This will help stabilize the supply of flash memory and prevent drastic supply and price fluctuations. Consumers will benefit from being able to acquire all the necessary hardware upgrades for their IT infrastructures.


Increasing domestic competitiveness

Both domestic and foreign manufacturers alike have been incentivized to build fabs on US soil. Companies such as Intel, Micron, IBM as well as foreign powerhouses Samsung and TSMC are building new fabs based in the U.S. 

The onshoring of foreign based companies is expected to help stimulate domestic competition and ramp up domestic chip production by up to 50 percent in the next half decade.


Higher quality hardware and greater yield

Data centers rely heavily on hardware components such as DDR5 SDRAM memory modules and SATA/M.2 SSD storage devices for a wide assortment of applications.

Increased R&D should help improve overall chip quality. Higher quality chips mean improved hardware performance, allowing users to extract the level of memory and storage performance needed in today's data centers to tackle AI, 5G, and IoT applications.

Improved chip manufacturing techniques and process nodes also improve the yield. With greater yield, the costs of production are lower. Consumers can benefit from better price per gigabit performance to scale their data centers more efficiently.


Increased job opportunities and production

Micron is investing $40 billion of its funding into the memory market. This is projected to create more than 40,000 jobs related to memory manufacturing and increase STEM opportunities, which should help domestic companies cultivate and retain homegrown talent.


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Sources

1. https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/09/fact-sheet-chips-and-science-act-will-lower-costs-create-jobs-strengthen-supply-chains-and-counter-china/

2. https://www.semiconductors.org/chips/

3. https://www.pwc.com/us/en/library/chips-act.html

4. https://www.commerce.gov/news/speeches/2023/02/remarks-us-secretary-commerce-gina-raimondo-chips-act-and-long-term-vision

5. https://www.theverge.com/2022/7/28/23282494/semiconductors-chips-and-science-act-joe-biden-congress-nvidia

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