Economic security and resiliency

By Troy Stangarone

Earlier this month, the Electric Reliability Council of Texas, which manages the electricity for most of the state of Texas, requested customers voluntarily reduce power consumption to avoid rolling blackouts due to an extreme heat wave.

Ordinarily, the ability of Texas to maintain power through extreme weather would not be an issue for the alliance. However, with Samsung set to build a second semiconductor facility in Texas, its ability to handle extreme weather is an issue for the alliance.

After the supply chain shortages of the last few years the United States and Korea have increasingly focused on issues of economic security and developing secure supply chains. Samsung's commitment to build a second semiconductor facility in the United States is part of that effort.

It takes years to build and bring online a new semiconductor facility, meaning Samsung's investment will not address the short-term challenges in the semiconductor supply chain. However, over the medium-term the facility would address three concerns within the alliance.

The first is resiliency in the semiconductor supply chain. More than 70 percent of the world's semiconductor production is in Asia, with much of that production capacity in Korea, Taiwan, and China. Geopolitics in the region, water shortages in Taiwan, China's increasing willingness to use economics as a tool of coercion, and Beijing's increasing pressure on Taiwan for unification all make the concentration of semiconductor production in the region a concern.

Samsung's second facility in Texas would also address concerns about production capacity in the United States. As production has grown in Northeast Asia, there have been increasing concerns that the United States was losing its domestic production capacity. Having a robust semiconductor industry in both countries is in long-term interest of the alliance.

Lastly, the new facility would increase supply at a time when demand for semiconductors is expected to increase due to energy transitions and technological advances. Electric vehicles, which will be a critical part of the transition to a zero emission economy, require more semiconductors than traditional vehicles. Expanding computing power for the development of artificial intelligence will also require increasing numbers of semiconductors.

However, if one objective of the new Samsung semiconductor facility is to develop increased resiliency in the semiconductor supply chain, the concept of economic security needs to include resiliency rather than just investments within the alliance.

The recent heat wave in Texas is not a one-time event. Texas faced a similar heat wave last summer that threatened power supplies. Periods of extreme weather will also become more common due to climate change.

The ability of Texas to maintain sufficient power has already been an issue for semiconductor production. Samsung's existing semiconductor facility in Austin was shut down for more than a month in 2021 due to power shortages from extreme cold and winter storms. That disruption deepened global semiconductor shortages and Samsung itself lost $369 million from the shutdown.
Similar to Taiwan, water scarcity could become an issue. Austin is currently in the middle of a drought and has implemented Stage One of their hundred-year drought plan. The hundred-year drought plan is designed to allow the city to continue to grow over the next hundred years, but climate change could increase stresses on water supplies in the years ahead.

All of this raise the question of whether locating a second semiconductor facility in Texas is the optimal location if the goal is to improve the resiliency of the semiconductor supply chain.

The argument in favor of a second facility located near Samsung's existing facility in Texas is twofold. First, it can draw off an existing set of suppliers already in the local region equipped to support the current facility. Locating a new facility elsewhere would potentially require a new supply chain. In the past, that would be inefficient, in a world of economic security that may be a positive.

The second factor is subsidies. Power and water are clearly an issue. Part of the arrangement with Texas and local authorities includes assurances that there is a consistent flow of power to the plant and arranging for water to be piped in from a neighboring county.

The financial subsidies are also significant. Samsung will see its property taxes reduced 90 percent for the first decade and 85 percent the second decade. It will also pay reduced taxes for local schools and receive a $27 million grant from the Texas Enterprise Fund. The full package is estimated to be a little under $1 billion over the lifetime of the grants and tax breaks.

Only time will tell if the steps Texas is taking to address concerns about power and water will be successful. However, Samsung's decision to build a facility where there are questions about resiliency suggests the strong role that tax incentives play in the decision of where to build a plant. It also highlights why issues of resiliency need to be a consideration for economic security in the alliance.

Troy Stangarone (ts@keia.org) is the senior director of congressional affairs and trade at the Korea Economic Institute.