How the CHIPS Act could help the auto industry

The bipartisan CHIPS and Science Act that President Joe Biden signed into law this week gives automakers hope that the semiconductor industry will now be able to keep up with surging auto industry demand.

The law provides about $52 billion in subsidies for semiconductor research, design and production in the U.S., including $2 billion set aside for the mature node "legacy chips" that are commonly used by automakers and suppliers. The bill also includes a 25 percent tax credit for investments in microchip production through 2026.

The bill comes 18 months into a disruptive global microchip shortage that has crimped auto production worldwide and sent average vehicle transaction prices soaring.

Automakers have cut 13.5 million vehicles out of their factory schedules since the start of 2021 because of the shortage, according to estimates by AutoForecast Solutions. That includes nearly 4.3 million vehicles axed at North American assembly plants.

The industry's hunger for semiconductors will only grow in the years ahead as more electric vehicles are built and as infotainment offerings and driver-assistance systems become more advanced.

"Considering the computing power of today's increasingly digital and connected vehicles, this bipartisan investment in domestic semiconductor manufacturing is a smart investment in the future," John Bozzella, CEO of the Alliance for Automotive Innovation, said in a statement.

German supplier giant and semiconductor maker Robert Bosch, for example, estimates that microchips will account for about $800 of a vehicle's value by the end of the decade, up from around $200 today.

Since it takes up to five years for new semiconductor fabrication plants to get up and running, the bill is unlikely to show immediate results in relieving the chip shortage. Although automakers and suppliers have signaled that they see the shortage easing as the year progresses, demand is likely to outpace supply into 2023.

But new semiconductor production is already on the way.

Even before the CHIPS and Science Act became law, U.S. chip giant Intel said it would invest $20 billion in two new Ohio plants, which come in addition to the two plants it is constructing in Arizona at a cost of $20 billion. South Korean conglomerate SK Group said it will spend $15 billion on its U.S. semiconductor business, and Taiwan Semiconductor Manufacturing Co. is building a $12 billion facility in Arizona.

The White House and the auto industry hope those gargantuan investments are just the beginning and that the new law will spur more domestic production plans in the coming months and years.