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Can U.S. Industrial Policy Bring Manufacturing Back?

  In the United States, which pursues a free market economy, the government rarely intervenes in a mature industry through direct subsidies. But now the US government’s intervention in the industry is getting deeper and deeper.
  On August 9, US President Biden signed the “Chip and Science Act of 2022”, proposing direct subsidies for domestic chip manufacturing and research and development in the United States, as well as corresponding tax credits.
  Li Wei, a professor at the School of International Relations at Renmin University of China and director of the Economic Diplomacy Research Center, commented that the US government has always claimed that it has no industrial policy in the past, but this bill is a very typical industrial policy.
  A week later, on August 16, Biden officially signed the “2022 Inflation Reduction Act”. The provisions on subsidies for new energy vehicles in this bill are a purer industrial policy. This regulation is quite similar to the “Automotive Power Battery Industry Standard Conditions” implemented in China from 2015 to 2019, that is, the “White List of Power Batteries”, so it is also called the US version of the White List Policy for Power Batteries.
  Cheng Hui, director of the Trade and Investment Security Research Institute of the International Trade and Economic Cooperation Research Institute of the Ministry of Commerce, believes that from the Cold War period to the Obama administration period, the US industrial policy towards China was actually a process of the US Congress, the government and the industry. It is affected by multiple factors such as the domestic political environment, Sino-US relations, and domestic economic demands.
  The reporter of Caijing comprehensively sorted out the US government’s industrial policy and the US innovation system, trying to answer the following questions: What are the reasons behind the current changes in US industrial policy? Can such an industrial policy in the United States achieve its wish? What is the role of the US government in the development of its industry?
The “invisible hand” is gradually revealed

  If the generalization of industrial policy can be defined as including economic policies that affect specific industries. In this way, the U.S. government has implemented industrial policies many times over the years. These industrial policies are mainly functional and service-oriented to support the R&D and innovation of basic and general-purpose technologies.
  The industrial policy of the United States is a kind of “invisible industrial policy”. For example, the US’s disruptive technologies in the fields of the Internet, GPS global positioning system, unmanned aerial vehicle stealth technology, and micro-electro-mechanical systems all came from the early cultivation of the Defense Advanced Research Projects Agency (DARPA). More typically, basic research on many of the common technologies used in Apple’s smartphones has been funded by DARPA. DARPA is an administrative agency under the US Department of Defense to develop high-tech for military use.
  The role played by the federal government is more of an indirect facilitator. However, the recently released “Chips and Science Act” and the new energy vehicle subsidy regulations make the government’s role stronger. The original invisible industrial policy has become more obvious, targeting industrial development and intervening in the market.
Table 1: US “power battery white list” restrictions

Note: *The specified proportion of key mineral raw materials for power batteries (lithium, nickel, cobalt, aluminum, etc.) must be obtained or processed in the United States or countries and regions with which the United States has signed a free trade agreement (FTA), or obtained by recycling batteries in the United States. **Proportion of power battery components (cells, modules, battery packs) manufactured in the United States. Supplement: 1. From the date of passage of the bill, new energy vehicles must be manufactured in the United States to enjoy subsidies, and imported vehicles are not eligible for subsidies. 2. From 2024, battery components must not come from “sensitive entities” in certain countries. 3. Starting in 2025, key mineral raw materials for batteries must not come from “sensitive entities” in certain countries. Source: IRA2022 tabulation: Zhang Ling

  Taking the “Chip and Science Act” as an example, the “Chip and Science Act” is divided into three parts: Part A is the “Chip Act 2022”; Part B is the “R&D, Competition and Innovation Act”; Part C is the “2022 Act”. Supreme Court Security Funding Act”.
  The bill focuses on supporting the chip manufacturing link, which is the weakest part of the chip industry chain in the United States, although this is actually the result of years of division of labor in the global chip industry chain.
  The “Chip and Science Act” proposes to provide $52.7 billion in supplementary funding for the chip industry, as well as 25% investment tax credits for chip manufacturing and chip manufacturing equipment. Its support for chip manufacturing is mainly focused on the development of advanced technology on the production.
  In addition, in the 25% investment tax credit, there is a clause stating that if the recipient conducts a major transaction involving a substantial expansion of semiconductor manufacturing capacity in China or other relevant foreign countries, the recipient will lose the credit. The policy will take effect on December 21, 2022.
  The U.S. “2022 Inflation Reduction Act” on subsidies for new energy vehicles once again supports the new energy vehicle industry in the form of direct subsidies.
  The new energy vehicle subsidy provisions in the 2022 Inflation Reduction Act are purely industrial policies. The bill stipulates that only new energy vehicles manufactured in the United States can receive subsidies, and it also sets a subsidy threshold for power batteries, key components of new energy vehicles-from 2023, the proportion of battery components manufactured in the United States, battery Only when the proportion of key raw materials from the United States or countries and regions that have signed a free trade agreement (FTA) with the United States reaches the respective standards can they receive full subsidies. Starting in 2024, vehicles equipped with power batteries from “sensitive entities” will not be able to receive subsidies.
  The precedents of Japan and China have proved that new energy and automobiles are representative areas where industrial policies have played a significant role.
  The United States also has a precedent for large-scale subsidies to the auto industry. During the 2008 financial crisis, in order to save General Motors and Chrysler, which had actually gone bankrupt, the US government directly subsidized companies with US$17.4 billion. In 2009, through the cash for clunkers program, subsidies of US$350 billion to US$400 billion were provided to American consumers to encourage them to replace old cars with high energy consumption and replace them with new ones with low energy consumption. However, most of the standards for these subsidies are indicators such as energy consumption, price, and income of car owners, and do not set country priority or exclusion clauses.
  The main reason why the U.S. power battery whitelist policy is controversial is the U.S. origin priority clause and the sensitive entity exclusion clause. Not only to support local industries through subsidies, but also to keep competitors out of the market through exclusivity clauses.
  ”The practice of directly subsidizing industries is relatively seldom used in the United States.” Jiang Feitao, director of the Industrial Integration Research Office of the Institute of Industrial Economics of the Chinese Academy of Social Sciences, told Caijing. He believes that the new changes in the “Chip and Science Act” are investment restrictions on China and export controls on advanced process technology and equipment.

  The underlying logic behind the changes is that the original interest pattern has been broken in the process of globalization, especially with the rise of China’s status, new changes have emerged in the global interest pattern and competition rules, which has triggered the adjustment of competition strategies among countries.
  If we look back vertically at the changes in U.S. industrial policy, we can find that the 1980s was a watershed. With the development of other countries’ economies, the leading position of the U.S. in many fields of science and technology was threatened. Japan began to challenge the leading position of the United States in the fields of semiconductors, televisions, tape recorders, machine tools and other technologies.
  ”The pressure of international competition has led the United States to change its practice of not interfering with private companies and expand the scope of use of federal funds to support government research institutions, universities and enterprises, as well as cooperation between enterprises.” Chinese Academy of Sciences Science and Technology Strategic Consulting Institute Fan Chunliang, a researcher and a professor at the School of Public Policy and Management, University of Chinese Academy of Sciences, said.
  In the 21st century, especially in the past decade, with the rise of science and technology in China and other countries, treating China as a competitor has become the main reason for US policy adjustments and changes.
  A number of scholars told Caijing that changes in U.S. policies will gradually expand over time and affect other industries.
  Cheng Hui believes that since 2017, with the wave of anti-globalization in the West, the process of globalization has been changed. In the past, the supply chain model with the pursuit of cost and efficiency as the main goal is constantly changing. In the future, the global supply chain will be adjusted in three aspects: First, the supply chain will tend to be short-chained. Under the new geopolitical and geo-economic conditions, a long chain will mean uncertainty and high risk. In order to ensure this security and stability, the entire supply chain will tend to be short. Secondly, the supply chain will tend to be regionalized, and a multi-regional supply chain system will be formed to meet the regional market demand nearby. Again, there may be selectivity in the supply chain. In the past, the supply chain was a purely commercial transaction, and then factors such as national security, national alliances, ideology, and values ​​permeated the entire industrial system. This is currently happening.
Is the icing on the cake or a timely gift?

  ”The chip bill is a once-in-a-generation opportunity.” U.S. President Biden said at the signing ceremony at the White House, “This bill will help the United States win economic competition in the 21st century.”
  Intel CEO (CEO) Pat Kissinger (Pat Gelsinger) commented that the chip bill may be the most important industrial policy introduced by the United States since World War II. % down to 10% now.
Table 2: Top 10 Global IC Design Companies in 2021

Note: 1. This ranking only counts the top ten manufacturers before the public financial report. 2.Qualcomm only calculates QCT revenue; NVDIA deducts OEM/IP revenue; Broadcom only calculates semiconductor revenue. Source: TrendForce

  ”It’s a fact, we need to acknowledge its existence and accept it,” said a multinational executive. The policy did not seem sudden to them, and there were signs it was happening before. For example, the review materials they submitted to the US government became more and more detailed; their investment in China became more cautious, and later, the company’s legal department reminded them more frequently of the risks of investing in China.
  Although China is a market that cannot be ignored, even the largest market, it is impossible for multinational companies to turn a blind eye to US regulations. Many industry insiders said that as long as the US government is willing, of course it can revive the chip manufacturing industry locally, but it will take time.
  The success of the US industrial policy depends on three conditions: first, the position of the country’s enterprises in this industry; second, the development of the domestic market of the industry; and third, the willingness of the country’s enterprises to develop the industry.
  The chip industry was formed in the United States. Since William Shockley invented the transistor, the chip industry has grown in Silicon Valley. Although the chip industry has formed a very mature global division of labor in more than half a century of its development, and it is not a new sunrise industry in the United States, the United States still has absolute advantages in almost all links of the chip industry chain.
  The chip industry mainly includes materials, equipment, design, packaging, and manufacturing.
  From the design point of view, according to IC Insights, a third-party data analysis organization, in the global chip market share in 2021, US IC design companies account for 68% of the market share. According to the latest data from the third-party consulting agency TrendForce, among the top ten IC design companies in the world in 2021, American companies account for six.
  On high-end chips such as GPUs and CPUs, Nvidia and AMD occupy an absolute market share, and have established solid patent barriers and a huge ecosystem.
  In the field of EDA (Electronic Design Automation), the United States occupies an absolute right to speak. The world’s three largest EDA companies – Synopsys, Cadence and Mentor, of which Synopsys and Cadence are from the United States, accounting for 96% of the market share. Although the EDA track is not big, it is crucial and indispensable for chip design. Once the United States cuts off the supply of EDA software, the chip design and production of almost all companies in this industry chain will be affected.
Table 3: Market Shares of Countries/Regions in Each Sector of Semiconductors

Source: Saif Khan, “The Semiconductor Supply Chain: Assessing National Competitiveness”; Li Wei, Li Yuze, “Analyzing America’s Semiconductor Industry Hegemony: A Political Economy Analysis of Industrial Rights”

  On the chip equipment side, according to the 2020 data released by the US semiconductor industry survey company VLSI Research, among the top ten semiconductor equipment manufacturers, the United States accounts for four, namely Applied Materials, Lam Group, Kelei and Teradyne. These four American companies have won 38.9% of the global market share. It is worth noting that even for the Dutch lithography giant ASML, the American capital behind it occupies 50% of the shares. This means that the United States can directly participate in or indirectly influence major decisions within the company to the greatest extent.
  However, due to the long-term global division of labor and the rise of the foundry model, the US chip manufacturing industry has gradually moved out, and East Asia has become the core of the manufacturing industry. But even so, the United States has not lost control of the manufacturing process.

  This model has been operating safely and soundly for decades, but in recent years, the exponential demand for chips triggered by the smart revolution, coupled with the aggravation and spread of the shortage of chips caused by the new crown pneumonia epidemic, the establishment of a safe and controllable local supply chain has become a challenge for various industries. Important tasks of the country and the region.
  ”Because most semiconductor companies rely on US capital and financing channels to varying degrees, they all need to ‘submit’ to various US laws and decrees.” Li Wei mentioned in an article, “On the one hand, The U.S. government can intervene in business activities such as mergers and acquisitions of related companies through government review on the grounds of national security, in order to achieve the strategic goal of containing competitors; on the other hand, the U.S. government can also directly cut off financing channels for semiconductor companies. Similar to the deterrent and punitive effects of cutting off the technology chain, in order to achieve control over the semiconductor industry.”
  In fact, the United States is also doing the same. Zhang Zhongmou, founder of TSMC, pointed out that going to the United States to build a factory is more of a political consideration. He believes that talent shortage is the main challenge of opening a fab in the United States. The operation and equipment operation talents of chip fabs have high requirements for their skills and experience. But this is not an insoluble problem for the United States. A founder of a semiconductor design company who has studied and worked in the United States for many years said that the factories of TI and Intel in the United States have many big talents, and skilled workers in fabs can be trained over time. The time and capital costs caused by the reflow of manufacturing links can be completely offset by the advantages of other links.
  American companies are also the most important customers of these chip manufacturers. According to data from the third-party analysis agency Gartner, among the top ten chip system manufacturers in the world in 2020, American companies occupy four seats, namely Apple, Dell, HP, and HPE. In the high-end process after entering 3nm, American companies are also the main source of customers. Only global head design companies have the strength to invest and develop, such as Apple, Advanced Micro Devices (AMD), Nvidia, and Qualcomm. come from America.
  But the same story points to a different ending in the field of new energy vehicles. In the United States, the new energy vehicle industry has entered into an initial stage of maturity from its infancy. The market is fully competitive, and some players have already possessed a dominant position close to monopoly, while American companies have lagged behind. In addition, although the total amount of the US domestic auto market is not small, the increment is almost zero. New energy vehicles can only be developed through stock replacement, which is more difficult. Secondly, American companies have obvious advantages in the competition of traditional automobiles. In the traditional automobile industry chain, American companies occupy key positions in many links. Compared with China and Europe, the United States is currently the most friendly market for traditional automobiles. Therefore, American companies invest in new energy desire is not strong.
  Take Tesla, the most successful new energy vehicle company in the United States, as an example. The rapid development of Tesla in recent years has been supported by China and South Korea. Ningde era, LG new energy, and BYD will soon come. Power batteries from China and South Korea are the primary basis for supporting Tesla’s capacity expansion. This year, the Chinese factory has become Tesla’s global production capacity center. After the expansion, the annual production capacity has reached 750,000 units, and it continues to produce and sell at full capacity. What has contributed to Tesla’s success is still the model of American R&D and design, Asian manufacturing, and global sales that American companies are most familiar with in the past.
  Now if you want to return the new energy vehicle industry chain to the United States, the resistance is greater than chips. The reason why more people are optimistic about the chip industry policy is because the chip only needs to be reflowed in the manufacturing process. And even in the manufacturing link, the United States has not completely lost its position, and it is not difficult to solve.
  But the power battery is completely different. In this industrial chain, American companies have no sense of presence at all. Even if all countries that have signed FTA agreements with the United States add up, they can only occupy less than half of the power battery manufacturing link. Chinese companies account for 55% of the global power battery market, and most of them account for more than 70% of all links in the upstream industry chain, and a few even exceed 90%.
  Faced with the absolute advantages of Chinese companies, the United States wants to return the power battery industry chain, and the time and capital costs it has to pay are unbearable. Relying on subsidies to allow disadvantaged companies to have stronger competitiveness than superior companies in the short term may still be successful in a government-led economy, but in an environment where the market is fully competitive and some companies have obvious advantages, it is almost impossible. possible tasks.
The American Model of Technology Commercialization

  If the industrial policy of the United States is more of an icing on the cake in the take-off of science and technology, then the innovation system of the United States is the core of its technological development. This is a well-organized organizational system that gathers the government, enterprises, private foundations, venture capital, universities, research institutions, etc.
  The United States is the birthplace of the modern venture capital model. It is difficult to find a second country or region in the world that maximizes the value of venture capital like the United States. The injection of venture capital funds has injected blood into start-ups, and the continuous emergence of new companies has made the United States the most dynamic economy in the world. Of the 1,339 companies that went public between 1974 and 2015, 42% can be traced to venture capital participation, according to a Stanford University study. Since 1974, venture capital-backed companies have accounted for 85 percent of all public company R&D spending.
  Zhang Xiaohui, Dean of Tsinghua PBC School of Finance, believes that since the 1980s and 1990s, the United States has vigorously developed direct financing and promoted the rise of a number of high-tech companies such as Microsoft, Google, Apple, and Amazon, enabling the United States to transform advanced science and technology into Productivity has contributed to the United States becoming the world’s technological leader.
  The important role of venture capital is also reflected in the ability of enterprises to invest in some projects that require forward-looking layout and long-term investment.
  There is a deep reason behind this: the R&D cycle is too long and the technology is difficult to implement, which are two risks in the application of new technologies. The injection of venture capital can reduce the two risks for the industry, and there will be a driving force for the continuous transformation of scientific and technological achievements. For any enterprise that wants to travel through the time cycle, it must pay attention to avoiding path dependence and maintaining the acumen of technological innovation.
  For the industrialization of forward-looking technology, venture capital is equivalent to finding the latest business model with the smallest cost.

  The pressure of international competition has led the United States to change its usual non-intervention approach to private companies and expand the scope of use of federal funds to support government research institutions, universities and companies, as well as cooperation between companies

  Entering 2000, the scale of venture capital investment in the United States has expanded by 10 times in 20 years. Historical data shows that in early 2000, the total annual scale of venture capital investment in the United States was basically maintained at US$30 billion to US$40 billion; since 2010, with the rise of the mobile Internet, the scale of venture capital investment in the United States has rapidly increased to US$70 billion to US$80 billion. This figure will reach a staggering $342.2 billion in 2021, accounting for half of the total global venture capital investment, which is equivalent to the total gross domestic product (GDP) of a medium-sized country. It can be said that venture capital, as a fulcrum to leverage capital and technology, provides institutionalized tools for the technological progress and industrialization of the United States. In every industrial upgrade, the United States can use market forces to make forward-looking layouts and consolidate time and time again. America’s international advantage.
  ”When we are still focusing on application-layer technology, American venture capital is already looking at innovations in basic research.” The executives of the above-mentioned multinational companies said. Identifying a technological innovation with commercial prospects is a job with a very high threshold. You need to understand the development of the technical route, technical threshold and market prospects.
  This kind of precise judgment and daring to invest in technology commercialization can hardly be said to have been facilitated at the moment, but are derived from the fine traditions established by various institutions in the United States over the years.
  The US federal government’s investment in the National Manufacturing Innovation Network is worth pondering. The distribution of government funding is detailed in the book Interpretation of the American Manufacturing Innovation Institute. The government’s start-up fund is mainly used for start-up capital, equipment investment, basic capital and competitive project funds, which will be invested in seven years.
  The National Manufacturing Innovation Network is a $1 billion investment over seven years. There is no strict limit on how much each of these innovation agencies will allocate. The first four years are mainly equipment investment, and the funding for basic projects increases year by year, and decreases year by year after the fourth year. In the fifth year, funding for competitive projects was increased, and in the eighth year, funding was completely stopped.
  The federal government’s investment in the early stage is mainly to make up for the lack of private investment, because once the new technology cannot obtain continuous research and development funds, it may lead to failure. But the government’s investment is not long-term. This seven-year, gradual exit mechanism also means that all innovative institutions must have a sustainable business model. SEMATECH gave up government subsidies in the 1990s and took the route of market mechanism.
  Many interviewees expressed the same point of view to the Caijing reporter. The United States is constantly revising its innovation strategy, but it attaches importance to financial support and increases investment in basic research; it attaches importance to market mechanisms and makes enterprises the main body of technological innovation; it attaches importance to training and introducing Innovative talents, these have never changed in the US innovation system.

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