Are subsidies for domestic semiconductor fabs effective for economic security?


Mitsuo Shiota


November 6, 2021

NHK revealed the draft of the measures to expand domestic semiconductor production capacity by the Japanese Government (Japanese) on November 6, 2021.

This post is not a complaint to NHK, but a complaint to the Kishida Administration.

I am basically skeptical about subsidizing domestic semiconductor productions.

  1. The current semiconductor shortages are mainly driven by demands, as consumers buy more goods, which contain some semiconductors, and less services under the constraints of Covid-19. When our lives come back to some normality, consumers will buy more services and less goods. Semiconductor shortages may be short lived.

  2. Fabs are designed for specific semiconductor products to gain the maximum economies of scale. So one finished electronic device must contain semiconductors from more than a dozen fabs. When any one fab among them is in trouble, other fabs can’t supplant immediately, so the supply chain will inevitably be constrained for a while. To help build one or two domestic fabs does not count much.

  3. Subsidies for domestic semiconductor production may violate WTO subsidy rules.

However, what astonished me most was the proposed condition. In the draft NHK revealed, the Japanese Government shall give subsidies as much as half of the building costs to fab builders, on the condition that they respond to the Japanese Government’s request to increase productions under semiconductor shortages. If the condition is violated, the Japanese Government shall request pay-back of subsides.

Semiconductor fabs are highly capital intensive, so are usually working at full capacity. More likely so, under semiconductor shortages. Can they increase production at the Government request? No, I don’t think so. I guess this draft is written by people who don’t understand the semiconductor business.