More than 120 companies including Intel, Nvidia and Texas Instruments recently signed a letter urging Congress to accelerate negotiations to get a bill passed that would massively scale chipmaking in the U.S.
The group of A-list companies, which also includes Amazon
AMZN
and Microsoft
MSFT,
design, manufacture or provide critical infrastructure to the semiconductor industry.
It was an encouraging sign from a diverse set of often-competitive companies, which agree that the $52 billion Chips Act needs to move forward to free up supply-chain bottlenecks and push America’s technology-leadership agenda forward.
Recap of the Chips Act
For those unfamiliar with the Chips Act, the bill was designed to encourage greater investment in domestic research, design and production of semiconductors. With only a small share of semiconductors being produced stateside, and nearly all of the most advanced semiconductors being produced abroad — largely in Taiwan — the bill set out to bring a level of parity back to create a more resilient supply chain that also addresses concerns about national security and America’s continued technology leadership.
The reason for the stalling of the current bill is politics as usual. There is bipartisan support for the measure, but it has languished after Congress attached it to complex legislation having to do with the U.S.’s competitiveness with China. The Senate passed the bill in June 2021, and the House this past February.
Stakes are rising
Semiconductors have come into focus in the pandemic, but the industry is still highly technical, creating a vacuum in communicating the critical importance of the U.S. stepping up its investment in the semiconductor space. While the U.S. has some of the world’s leading semiconductor design companies like Nvidia
NVDA,
Qualcomm
QCOM
and AMD
AMD,
most don’t manufacture their products, instead going “fabless,” which entails outsourcing the manufacturing. In most cases, these companies use Taiwan Semiconductor Manufacturing
TSM
for their most advanced manufacturing needs, and almost all of these chips are produced in Taiwan.
With shutdowns from Covid, screaming demand created through dovish monetary policy and stimulus, and a lust for high-tech items that consume sometimes dozens if not more chips, we saw the dependence on foreign production cause massive delays in everything from automobiles to GPUs.
The Chips Act incentivizes U.S.-based companies looking to expand domestic manufacturing. This includes Intel’s
INTC
proposed mega-fab in Columbus, Ohio, which has been put on pause due to the indecision of the Senate — a decision I believe to be prudent at this juncture. At two-plus years from dig to completion, this isn’t something that can be easily rectified — further delays only extend the risk of further shortages or other complications.
National security is another major issue that must be dealt with. With connectivity in almost everything from transportation to weapons, the security of semiconductors is a factor that should be weighed in the passing of the Chips Act. The act calls for greater investment in ensuring the security of semiconductors as well as protecting critical intellectual property that stems from domestic research and development.
China has been clear in its ambition to, at nearly any cost, surpass the U.S. as the technology leader. This is evident just by looking at some of the current tooling and project data around semiconductors. China is estimated to be increasing tooling investment by 5% to 10%, while domestic investment is flat to down. Furthermore, China has 40 proposed fab projects, while Taiwan has 20, and the U.S. has only five. Staggering numbers show a massive gap between the U.S. and China with a clear dependency on Taiwan’s continued expansion rather than increasing domestic production.
Biggest winners
For investors, it’s important to know that the total addressable market (TAM) of semiconductors is set to become a trillion-dollar industry, growing at 6%-8% for the next eight years. The need for greater investment is tenable.
The immediate winners of passing the Chips Act and expanding domestic manufacturing will, of course, be those that build fabs here in the U.S. Intel is a clear winner, and I would expect Micron Technology
MU
and GlobalFoundries
GFS
to benefit as well.
However, the fabless and the consumers of semiconductors also stand to benefit. They include R&D powerhouses IBM
IBM,
Arm, Qualcomm, AMD, Marvell
MRVL
and Lattice Semiconductor
LSCC.
Also, ASML
ASML
and Applied Materials
AMAT
would get a boost as substrate, materials and machinery would see increased demand.
Finally, there is a strong argument that the broader technology sector would see near- to mid-term growth as the economic slowdown turns companies to lift tech spending, which means more semiconductors. Amazon, Microsoft, Dell, Alphabet
GOOG,
Salesforce
CRM,
Cisco
CSCO,
Oracle
ORCL,
SAP
SAP
and ServiceNow
NOW
are among a plethora of other names that run on massive computing power, which has been in short supply.
Furthermore, greater incentives to develop and build more domestically will propel investment, especially in some cases such as Microsoft and Amazon, which are building their own chips on Arm technology. It’s a snowball of growth that will be incentivized by the $52 billion bill passing into law.
The biggest winner of enhanced capacity will be consumers and global citizens. Improved economics should lead to lower prices. Increased research and development will likely mean more powerful, yet less power-consuming, chips to run our cars, computers and gadgets. We Americans would have more peace of mind with greater security and technology leadership, helping us play a role as a leader in democracy and foreign policy.
As we know, technology and connectivity are the most critical infrastructure battles of the 21st century, and to continue to stall rather than proceed with a semiconductor agenda is putting at risk the U.S. and the world — something that should not be tolerated in any circumstance.
Daniel Newman is the principal analyst at Futurum Research, which provides or has provided research, analysis, advising or consulting to Nvidia, Intel, Qualcomm and dozens of other companies. Neither he nor his firm holds any equity positions in companies cited. Follow him on Twitter @danielnewmanUV.
