More than 120 companies including Intel, Nvidia and Texas Instruments recently signed a letter urging Congress to speed up negotiations to pass a bill that would boost chip making in the US
The group of A-list companies, which also includes Amazon AMZN,
and Microsoft MSFT,
design, manufacture or provide critical infrastructure to the semiconductor industry.
This is an encouraging sign from a diverse range of frequently competing companies, who agree that the $ 52 billion Chips Act needs to move forward to free supply-chain bottlenecks and push America’s technology leadership agenda.
Recap of the Chips Act
For those unfamiliar with the Chips Act, the bill is designed to encourage greater investment in local research, design and production of semiconductors. With only a fraction of semiconductors being made stateside, and almost all of the most advanced semiconductors being made overseas – mainly in Taiwan – the bill is set to restore a level of parity to create a more resilient supply chain that also addresses concerns about America’s national security and continued technology leadership.
The reason for stopping the current bill is political as usual. There was two -party support for the proposal, but it weakened after Congress attached it to complex legislation related to U.S. competitiveness with China. The Senate passed the bill in June 2021, and the House this past February.
The stakes go up
Semiconductors are focused on the pandemic, but the industry is highly technical, creating a vacuum in communicating the critical importance of the U.S. increasing its investment in the semiconductor space. While the US has some of the world’s leading semiconductor design companies such as Nvidia NVDA,
Qualcomm QCOM,
and AMD AMD,
most do not make their products, instead becoming “fabless,” requiring outsourcing to manufacturing. In most cases, these companies use Taiwan Semiconductor Manufacturing TSM,
for their most advanced manufacturing needs, and almost all of these chips are made in Taiwan.
With shutdowns from Covid, screaming demand created by dovish monetary policy and stimulus, and a craving for high-tech items that sometimes consume dozens if not more chips, we see the reliance on foreign production caused massive delays in everything from vehicles to GPUs.
The Chips Act provides an incentive to U.S. -based companies looking to expand domestic manufacturing. These include Intel’s INTC,
proposed mega-fab in Columbus, Ohio, which was paused due to Senate skepticism-a decision I believe to be prudent at the moment. With two extra years from excavation to completion, this is not something that is easy to correct – additional delays only increase the risk of further deficiencies or other complications.
National security is another major issue that must be addressed. With connectivity in almost everything from transportation to weapons, the security of semiconductors is a factor that must be weighed in the passage of the Chips Act. The law called for greater investment in ensuring the security of semiconductors as well as protecting critical intellectual property arising from local research and development.
China’s ambition is clear to, at almost any cost, surpass the US as the leader of technology. This can be seen simply by looking at some of the current tooling and project data around semiconductors. China’s investment in tooling is estimated to increase by 5% to 10%, while domestic investment is flat to the bottom. Furthermore, China has 40 proposed fab projects, while Taiwan has 20, and the US has only five. The surprising figures show a huge gap between the US and China with a clear dependence on Taiwan’s continued expansion rather than increasing domestic production.
Biggest winner
For investors, it is important to know that the total addressable market (TAM) of semiconductors is set to become a trillion dollar industry, which will grow at 6% -8% over the next eight years. The need for larger investments is tolerable.
The immediate winners of passing the Chips Act and expanding domestic manufacturing, of course, are the fab makers here in the US Intel is a clear winner, and I hope Micron Technology MU,
at GlobalFoundries GFS,
to benefit as well.
However, the fabless and the semiconductor consumers will also benefit. These include IBM R&D powerhouses IBM,
Arm, Qualcomm, AMD, Marvell MRVL,
at Lattice Semiconductor LSCC,
Also, ASML ASML,
and Applied Materials AMAT,
will get help because the substrate, materials and machinery will see increasing demand.
Finally, there is a strong argument that the broader technology sector will see near-to-mid-period growth as the economic slowdown causes tech companies to lift spending, which means more semiconductor. Amazon, Microsoft, Dell, Alphabet GOOG,
Salesforce CRM,
Cisco CSCO,
Oracle ORCL,
SAP SAP,
and ServiceNow NOW,
is among a plethora of other names that run on massive computing power, which has been in short supply.
Furthermore, greater incentives to build and develop more domestically will drive investment, especially in some cases such as Microsoft and Amazon, which make their own chips with Arm technology. It’s a snowball of growth that will be incentivized by the $ 52 billion bill that will become law.
The biggest winners in enhanced capacity are consumers and global citizens. An improved economy should lead to lower prices. Higher research and development is likely to mean more powerful, but less energy consuming, chips to power our cars, computers and gadgets. We Americans will have more peace of mind with more security and technological leadership, which helps us perform as a leader in democracy and foreign policy.
As we know, technology and connectivity are the most critical infrastructure battles of 21st century, and continuing to stop rather than continue with a semiconductor agenda puts the US and the world at risk – something that should not be tolerated in any situation.
Daniel Newman is the principal analyst at Futurum Research, providing or providing research, analysis, advice or consulting to Nvidia, Intel, Qualcomm and dozens of other companies. Neither he nor his company holds any equity positions in the companies mentioned. Follow him on Twitter@danielnewmanUV.
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