Analyzing the CHIPS & BIOSECURE Acts

Defending against Economic Espionage & Reshoring the American High-tech Supply Chain

Economic espionage—the practice of stealing trade secrets, intellectual property, secret research, and other forms of commercial competitive advantage—remains one of the trickiest subversive threats to defend against in the United States, especially with a relatively free market economy. While the United States affords its corporations and government contractors strong intellectual property and anti-economic espionage protections, the “leakage” of such valuable information still occurs regularly with companies situated in both adversarial jurisdictions and allied ones. The consequences of economic espionage can be severe and far-reaching: American companies can lose their competitive advantages in a given market; adversarial or rival corporations can “leapfrog” in technology; adversarial or rival governments can access more sophisticated tools for defense.

In response to growing concerns over America’s ability to remain the bastion of innovation and technological competitiveness, the American government has been proposing new bills to increase research and development expenditures, strengthen government financing of American R&D, and create market-driven incentives to promote the reshoring of high-tech manufacturing. While the long-term consequences of these bills are obviously yet to be identified, the bills themselves suggest that American high-tech manufacturing is due for a kickstart. In particular, two pieces of legislation, the already-enacted “CHIPS and Science Act” and the still-under-consideration “BIOSECURE Act,” are two significant pieces of legislation that could materially reshape the manufacturing sectors for two of the most high-tech, innovation-driven fields.

CHIPS and Science Act

Authorized into law on August 9, 2022, the “Creating Helpful Incentives to Produce Semiconductors” (CHIPS) and Science Act established a definitive financing bulwark against the outflow of research & development and manufacturing from the United States. Through this act, the Biden Administration authorized massive federally sponsored expenditures in American semiconductor research, development, and manufacturing ($52.7bn), manufacturing incentives ($39bn), and other areas of high-tech industrial innovation & development. And while the broad mandate emphasizes a focus on supply chain resilience, the thematic intention of this act was to strengthen the United States’ position as both a leader in technological innovation and manufacturing of high-technology products.

While not explicitly aimed at China, the Act does directly address the supply chain risks that deeply affect the American population. China wields the greatest influence on the American supply chain—it’s ability to produce increasingly sophisticated consumer and capital goods with economic scalability is a new form of soft power. This dependency on Chinese production has been a long-standing concern for American policymakers, and as evidenced by the COVID-related supply shocks across 2020-2021, can have material impacts on the price level in America, consumer spending, and consumer staples. And while the COVID-related supply shocks were not necessarily the result of China exercising its supply chain soft power, they did raise enough concern among American policymakers to bolster investment in American technology and manufacturing.

The CHIPS and Science Act overwhelmingly focuses on semiconductor research and manufacturing—the staple units for any computing system. However, American concern with reshoring manufacturing and R&D for semiconductors is understandable. Prior to the Act, 75% of all of the production of these fundamental units of modern business infrastructure was concentrated in East Asia. American technology, and by extension, business, is fundamentally bottlenecked by the production system around semiconductors, and any shocks to the supply chain will have far-reaching macroeconomic consequences for the country.

Economic Consequences of the CHIPS and Science Act

The Dow Jones US Semiconductors Index (DJUSSC) has observed a 220% increase over the past two years since the bill was enacted; however, much of the returns can be attributed to the concurrent demand and interest in artificial intelligence. Further, most gains in the semiconductor index can be attributed to the overwhelming interest in NVIDIA (NVDA), and not to a unilateral massive appreciation of semiconductor companies.

As such, it’s difficult to say whether the economic gains from the CHIPS and Science Act are manifest in stock market returns. However, the availability of government sponsored research and development for semiconductors does present a more significant opportunity for early-stage investors. The availability of funding for experimental programs in this space should accelerate venture & startup formation in this space over the coming years. Incumbent public semiconductor companies, therefore, have yet to fully capitalize on the growing number of early-stage emerging players; as such, despite the overwhelming public interest in artificial intelligence and its associated applications, the semiconductor space seems poised for long-term growth and can consequently support onshore innovation in the associated field of AI.

The BIOSECURE Act

Now, two years out from the authorization of the CHIPS and Science Act, US policymakers are debating another industrial concern: the reshoring of biotech manufacturing and R&D. Sponsored by Rep. Mike Gallagher (R-WI-8) and introduced on Jan 25^th, 2024, the BIOSECURE Act seems to reflect a specific concern around the engagement with Chinese contract development & manufacturing organizations as well as contract research organizations (CDMOs and CROs). This bill aims to prohibit contracting with biotechnology companies that are headquartered in or subject to the influence of a foreign adversary’s government.

It's hard to not draw comparisons in the scope, intentions, and implications between the two Acts. However, it should be noted that the BIOSECURE Act is less about stimulating domestic manufacturing and R&D through government spending, but rather it aims to curb the influence of a handful of prominent contract biotechnology companies based in China. Further, it aims to prevent the “leakage” of American biotech intellectual property to China, as the primary targets of the bill have been identified by the US Department of Defense as actors directly under the influence of the People’s Republic of China. Ultimately, by preventing American companies from contracting biotech manufacturing to Chinese corporations, and by preventing US taxpayer dollars from reaching state-sponsored companies in China, the Act addresses the security threats associated with the current system of business.

An implication of the BIOSECURE Act is that, in the absence of economically sensible offshore manufacturing options, biotech companies will shift their demand to domestic options for contract manufacturing, development, and research. Given that some estimates place the percentage of American drugs that are affected by the BIOSECURE Act ~60+%, a majority of American biotechnology companies would have to find different partners for their service-related needs. However, the BIOSECURE Act doesn’t specify any incentives to reshore this demand for services. There aren’t any outright provisions for funding allocations to support onshore biotechnology research, development, and manufacturing, nor are there any measures to enforce onshoring of such biotechnology services. As such, it is fairly ambiguous as to where this flow of demand would go.

Economic Consequences of the BIOSECURE Act

The BIOSECURE Act was recently excluded from the recent House Rules Committee amendments to include in the National Defense Authorization Act, which suggests that it may be considered as a standalone bill. Despite the uncertainty around whether it would pass into law or not, the bill’s emergence has correlated with some financial events. Since the bill’s introduction in January, Wuxi Apptec and Wuxi Biologics, two of the primary biotechnology concerns named outright in the bill, had seen their share prices drop by ~60%, although the share prices of both companies had been struggling for some time beforehand.

As described above, it is very unclear as to where the demand for contract biotechnology services would go, if the BIOSECURE Act were to be passed. While the US does have a robust domestic contract research, development, and manufacturing industry, and they will no doubt see some of the business that would have been prevented from reaching Chinese counterparts, there still remain myriad options that could prove to be more economically advantageous. India, South Korea, Japan, and Europe all present potential alternatives to American contract organizations, and as such, we may see a consolidation of global CDMOs/CROs that aim to leverage region-specific advantages for different biotechnology services.

Ultimately, the BIOSECURE Act’s existence, regardless of whether it is passed or not, presents an opportunity for new and growing CDMOs/CROs to capture a segment of business that is otherwise facing a high-degree of government scrutiny.

Takeaways

The CHIPS and Sciences Act provides a much clearer path for support to semiconductor manufacturing within the United States. Through the large amounts of government funding allocated to this realm of research and development, we are only seeing the beginning of the opportunity at-hand to invest in and develop the domestic semiconductor industry. While analogous in themes but markedly different in its implementation, the BIOSECURE Act may drive demand back to onshore contract biotechnology service providers, or we may see it spread the demand for Chinese contract biotechnology services globally.

Beyond the economic implications of either act, they represent a concerted effort to protect American innovation from economic espionage or unlawful transfers of enterprise intellectual property to potential adversarial entities. Given that government-sponsored research & development is ultimately financed by the American people, the logic goes that the American population should ultimately reap the returns to such advancements: the financial gains, the improvements in security, and the gains in quality of life. While it is an arduous effort to reshore the American supply chain, these incremental measures to protect investments sponsored by the American people should drive towards a more advanced economy & society.