About the author: Glenn O’Donnell is the vice president and research director at Forrester Research.
It was a long time coming, but the sparring factions in Washington finally passed the Chips and Science Act. President Biden signed it into law on Tuesday. It is a huge appropriation of $280 billion, but the big focus is on the $54 billion segment commonly known as the “Chips Act.” Most of the lobbying efforts to pass this legislation revolve around national security issues to bring more semiconductor manufacturing facilities, or fabs, to the US soil and compete more effectively on the world stage.
While such motives may be valid, the real value to having more fabs in the US and Europe is a more diverse—and, therefore, more resilient—semiconductor supply chain. Just shy of 80% of semiconductor chips are now made in Asia. The Covid-19 pandemic showed the dangers of having too many eggs in that basket. The ongoing chip shortage has many causes, but this overweight geographic focus was certainly prominent among them.
Regardless of your political feelings about the Chips Act, semiconductors are too important to ignore. Politicians, business leaders, investors, technologists, and consumers alike recognize the transformative power of modern technology, and semiconductors form the foundation upon which all of this technology is built—all of it, bar none. If the chip supply is at risk, the whole economy is, too.
Beneficiaries of the Chips Act are obviously the chipmakers. Intel, Micron, Samsung, and TSMC are some of the most prominent names at the center of this movement because they actually own and run the fabs. Many others, such as AMD, Apple, NVIDIA, and Qualcomm, are one step away. This “fabless” group doesn’t manufacture their chips; someone like TSMC does. While chip makers will get help, a few points are worth noting:
- This isn’t a bailout like the automakers got in 2009. Detroit car makers were suffering from the Great Recession in 2009. They had already cut many jobs, and the prospects were grim for the rest. Because the auto industry is another major linchpin of the overall economy, the ripple effects were profoundly destructive to the economy. Chip makers face numerous pressures, but they are hardly destitute. This Chips Act is about building more manufacturing on US soil, not about lining the pockets of wealthy tech behemoths.
- Don’t expect a windfall for any of the chipmakers. Even in government circles, $54 billion is a lot of money. As this pie gets sliced and diced, however, the actual amount each chipmaker will get is far smaller. Any of this money that is spent on a new fab must result in significant economic growth and skills development for the local community.
- Funds will indirectly benefit players in the chip supply chain. Chip making requires a lot of specialized equipment from companies like ASML, Lam Research, and Teradyne and a lot of chemicals and gases from companies such as Air Products, DuPont, and Entegris. As chipmakers build more fabs, these suppliers will emerge. They will also set up a local presence in the community where the new fab is built, adding more jobs.
- Foreign companies can get a share. A particularly interesting point here is that the act is not protectionist of US companies. TSMC is Taiwanese and Samsung is South Korean. Both made huge commitments to building fabs in America. Chips Act funds can only be applied to fabs on US soil, but the company’s HQ location doesn’t matter.
- Don’t expect immediate returns. Chip making is a long process. Building a fab chip takes even longer. The new fabs planned in places like Arizona, Texas, and Ohio will each take two to three years to build and cost about $20 billion each. Only a few of these proposed facilities have broken ground, and only recently. We won’t see them producing chips until the 2024–2026 time frame.
Each of these points requires strict oversight. An entire government bureaucracy is under construction to ensure this oversight, and independent watchdogs will be watching closely.
One big question remains: Will the new investment from the Chips Act relieve the chip shortage? The legislation offers hope but not before 2024. The chip shortage is easing slightly thanks to softening demand, but we anticipate that demand will remain high. Recent earnings misses and warnings from AMD, Intel, and NVIDIA reveal softening demand, but we need to view it in context. PC sales skyrocketed in 2020 and 2021 as anywhere-work became entrenched. With so many new PCs on hand, a retreat from that exuberance is no surprise. A similar drop in gaming and the “crypto winter” eroded NVIDIA earnings. We expected data center spending to return as the pandemic eased, but current economic headwinds now prevents that expectation and even cloud expansion.
Semiconductor company investors are in for a rough ride for the short term, but we are optimistic for the long term. Despite the current “silicon sag,” demand remains high. Everything we touch seems to need semiconductors, and that need is growing despite the economy. The human race’s infatuation with technology will keep semiconductor shipments going strong for years to come. The additional capacity that we will have by 2026 will satisfy the tech junkies among us.
More of that arises will come from fabs in the US and Europe, geographically rebalancing the supply while also sustaining Asian sources. The global economy needs such balance, so everyone will benefit, including Asian economies.
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