A political standoff that may delay semiconductor initiatives is raising concerns about the viability of the US as a prime location for chip production.

According to a Bloomberg report that cited sources in the know, a provision that would have allowed projects funded by the 2022 CHIPS Act to skip federal environmental checks was removed from key defense legislation due to opposition from Republican lawmakers.

Without an exemption from environmental reviews, key semiconductor initiatives including those by Taiwan Semiconductor (TSMC) in Arizona and Intel in Ohio - expected beneficiaries of the Chips Act funding - could encounter substantial delays. Notably, the permitting measure had received support from both parties and in both chambers.

Analysts speculate various factors could have prompted such a political move. Pareekh Jain, CEO of EIIRTrend & Pareekh Consulting, pointed out that these include uncertainties on the fluctuating demand for semiconductors and upcoming elections in the US. According to World Semiconductor Trade Statistics, the global semiconductor market could decline by 9.4 percent year on year in 2023.

Risk of falling behind in the global chips race

The biggest concern that analysts highlight now is that this could hurt US ambitions in the current global chips race. Other governments, especially in Europe, Japan, and India, are trying to strengthen their presence in the chip manufacturing business.

Robert Quinn, an independent market analyst, pointed out that the US decision to halt the acceleration of semiconductor chip projects would be a significant move with far-reaching economic implications.

"On the domestic front, this decision could lead to a stagnation in technological innovation," Quinn said. "The US, known for its leadership in tech innovation, particularly in AI and IoT, relies heavily on advanced semiconductors. Any delay in the production of these critical components may slow down development and deployment in these crucial sectors."

Internationally, the implications are even more profound. The global tech industry's reliance on a limited number of semiconductor manufacturing hubs, particularly Taiwan, poses significant supply chain risks.

"Previously, Taiwan was the primary driver of demand in the region," Jain said. "However, there's now a recognition that production will globalize to meet demand wherever it exists. If the US doesn't establish its presence swiftly, other regions, including Europe, India, and Japan, will gain an advantage. China's situation is unique due to the numerous sanctions - they are now developing their own chips. This shift could allow other regions to accelerate their own semiconductor initiatives, presenting an overall risk to current market leaders."

Interestingly, environmental permissions are just one of the challenges companies face in the US. Previous reports have identified multiple obstacles at TSMC's US site, such as a scarcity of trained personnel and higher operational costs compared to Taiwan.

How companies may respond

To address challenges such as talent shortage, TSMC is transferring some of its staff to the Arizona facility. But it remains to be seen how they, along with Samsung, Intel, and others, would respond to the latest roadblock.

Significantly, the latest development comes as the Dutch manufacturer of chipmaking gear ASM plans to invest$324 million in a new US headquarters in Arizona. 

Neither Samsung nor Intel responded to requests for comments. TSMC refused to comment on the latest Bloomberg report.

Vijaykumar Hegde, partner at Zinnov, pointed out that while this would definitely not be happy news for the ecosystem as a whole, companies are likely to find a way around it.

"The way I see it, for major investors like Intel, the impact from this news could be significant, considering the current situation," Hegde said. "As for TSMC, while they have committed to investing, they also have a strong global base. TSMC has even discussed beginning fabrication in Japan and potentially Germany. So, the effect on them might not be as pronounced. However, I believe they [the other companies] will also find a way to navigate these challenges."