The U.S. semiconductor industry looks set for an injection of stimulus to encourage domestic investment as the U.S. Senate votes to move ahead on legislation that would provide U.S. chipmakers with about US$54 billion in grants and incentives.
Asia, and China in particular, loom in the background as the competitors that U.S. manufacturers must face. The money is intended to benefit semiconductor manufacturers that build factories in the United States rather than overseas.
I'm typically against the idea of supporting industries that are failing at home due to competitive pressures. U.S. textiles, furniture and steelmaking were basically always going to go offshore no matter how much propping up they got. The benefits of producing in low-cost nations, where labor, land and legislation are all more competitive, are too great.
And the U.S. is better for it. It should be developing higher-tech, better-paying jobs than you get working on a cotton loom or in a steel mill. But the chip industry may be different.
For starters, it is vital to a number of high-tech sectors, not least of them defense. Chips are the underpinning of many high-tech industries that the United States does want to encourage. And there's the harsh truth that other nations are spending heavily to promote the industry, which means U.S. chipmakers are fighting on an uneven field.
Although the industry has long been moving offshore to lower-cost locations such as Taiwan, the hope is that incentive cash can restore U.S. competitiveness in an industry where China in particular is using government stimulus to develop its homegrown industry.
The United States still leads the world in the design of new chips, but the manufacturing has moved offshore to Asia. The legislation is aimed at provoking growth at home once again.
A step forward
The U.S. Senate voted on Tuesday night to start work on the CHIPS Act, short for Creating Helpful Incentives to Produce Semiconductors for America Act. The semiconductor support bill has been stalled for more than a year in Congress while lawmakers in the House and Senate haggle over more than a thousand provisions that have been added into the bill, many of them unrelated to chip manufacturing.
Chipmakers have been lobbying Congress to act or lose out on the growth in their industry. They say the United States is falling behind other nations, many of which have already agreed to provide government stimulus to the chip industry.
The lobbying looks to have worked. The 64-34 Senate vote on Tuesday night means the Senate will proceed on a version that includes research-and-development initiatives in the legislation, which the Senate and House might then pass as early as the end of next week. U.S. President Joe Biden has urged lawmakers to pass the bill before Congress leaves for its annual August recess.
Senate Majority Leader Chuck Schumer said before the vote that this is "legislation our country desperately, desperately needs." Supportive senators are calling the version with added R&D the "CHIPS Plus" package.
The details are still being ironed out during debate. Besides money to support the construction of fabrication plants to make chips in the United States, a draft circulated by Senate leadership includes a four-year, 25% investment tax credit for the manufacturing of semiconductors as well as tools to create semiconductors. That credit is valued at around US$24 billion.
There's also US$500 million to encourage the development of an international secure communications program, US$200 million for worker training and US$1.5 billion to support wireless supply chain innovation.
Senate Republican leader Mitch McConnell voted against starting debate on the bill. He had threatened to block the legislation if Democrats continue pushing a tax-and-climate package, efforts they have now dropped. But McConnell says he wants to see the details of the CHIPS legislation first -- and of course is loath to allow a "win" in such a key industry under a Democratic president.
The legislation stalled after the Senate in June 2021 approved a US$250 billion bill to boost R&D tech spending. That enjoyed bipartisan support, but the House took up a separate bill, passed earlier this year without Republican support, that not only boosted funds to chipmakers but also funneled billions to supply chain resilience and to fight climate change.
Who would gain
Intel (INTC) would be a key beneficiary of the legislation. It said in January that it will spend US$20 billion on a factory in Ohio after already beginning work last year on two new factories in Arizona. Intel CEO Pat Gelsinger said the Ohio investment could grow as large as US$100 billion and eight fabrication plants, and the incentive cash would ensure a faster pace of development.
Micron Technology (MU) also stands to gain. It and Korean competitors SK Hynix ( (HXSCL) and KR:000660) and Samsung Electronics are cutting their capex spending to combat a slowdown in demand for DRAM/NAND memory chips, which Nomura forecasts will fall 5% to 7% in the third quarter. But if a macro recession develops in the U.S. and more broadly, memory chip prices could fall more than 10% compared with the previous quarter, Nomura predicts.
The temporary slowdown in demand for consumer tech is to blame. "We believe memory customers' aggressive price cuts may result in weaker memory prices in the near term; however for the mid to long term, memory suppliers will likely reduce supply accordingly," Nomura Asia Pac tech analysts C.W. Chung and Jung Cho write in a note to clients. This would drive "a shorter and shallow memory downturn and a strong recovery once demand improve," they wrote.
I wrote last week that the recent rally in the price of Asian chipmakers suggests that the effects of price drops for DRAM chips may now be factored in. Other types of chip are still in short supply.
Taiwan Semiconductor Manufacturing Corp. ( (TSM) and TW:2330) the day after that story ran beat revenue projections by 3.3% and guided the outlook for the third quarter higher, projecting sales of US$19.8 billion to US$20.6 billion against the prior US$18.5 billion consensus.
Taiwan Semiconductor shares are up 5.2% in Taipei trading in the last week as a result. Customers for its tiny, dense chips include Advanced Micro Devices (AMD) , Qualcomm (QCOM) , Nvidia (NVDA) and Apple (AAPL) . Samsung and Intel are competing with Taiwan Semiconductor to make the smallest chips, currently at 5 to 7 nanometers, with Intel falling behind and abandoning the measurement of its chips in its product descriptions.
China is far behind Taiwan in its manufacturing capabilities. But after a bruising trade war with the United States, mainland China has vowed to create a domestic chip industry, throwing its weight largely behind Semiconductor Manufacturing International Corp. (HK:0981), or SMIC. U.S. investors are no longer able to invest directly in SMIC after it was forced to delist its ADR when it was put on a U.S. Commerce Department list of companies that are owned or controlled by the Chinese military.