Former CPO Director on chips: You want a stable long-term policy environment & incentive structure

Key Concepts:

• Chips Act: Bipartisan legislation providing subsidies and incentives to boost US semiconductor manufacturing.
• Industrial Policy: Government strategies to support specific industries.
• Cost Gap: The difference in manufacturing costs between the US and countries like Taiwan and Korea.
• Equity Stakes: Government acquiring ownership in chip companies in exchange for funding.
• Demand Side: Ensuring there are customers for the chips produced in US fabs.
• National Security: Reducing reliance on foreign chip manufacturers.
• Diversified Portfolio: Investing in multiple companies to spread risk.
• Milestone-Based Funding: Releasing funds over time as companies achieve specific goals.

1. Overview of the Chips Act and its Objectives

• The Chips Act was passed with bipartisan support to incentivize semiconductor manufacturing in the US.
• The primary goal is to close the cost gap between US-based manufacturing and countries like Taiwan and Korea, where chip production is cheaper.
• The Act aims to enhance national security by reducing reliance on foreign chip manufacturers.

2. The Debate Around Equity Stakes

• The government is considering taking equity stakes in chip companies receiving Chips Act funding.
• This approach is different from the original construct of providing grants to close the cost gap.
• Concerns are raised that equity stakes might attract companies primarily seeking liquidity rather than competitiveness.
• Equity comes with a cost to the company in terms of shareholder value.

3. Industrial Policy Tools: Carrots and Sticks

• The discussion covers various industrial policy tools, including tariffs, tax credits, loans, and grants.
• Tariffs can act as a "stick" to encourage domestic manufacturing, while incentives like tax credits serve as a "carrot."
• The Chips Act itself is seen as a "carrot" to convince companies to build fabs in the US.
• A stable, long-term industrial policy is crucial due to the high costs and long lead times associated with building leading-edge fabs (e.g., $25 billion and 3-5 years to build, with a 20-year payoff).

4. Concerns About Attracting the "Wrong" Companies

• There's a concern that offering equity stakes might attract companies that are not genuinely committed to long-term competitiveness.
• The focus should be on supporting companies that can become cost-competitive with foreign manufacturers.

5. Intel's Role and the Demand Challenge

• Intel is considered a crucial part of the national semiconductor strategy.
• The main challenge for Intel is securing sufficient demand for its chips.
• The government's role in creating demand is a complex issue.

6. Taxpayer Returns: Economic and National Security

• Treasury Secretary Benson's point is raised that taxpayers should receive something in return for the Chips Act funding.
• The argument is made that the primary return for taxpayers is enhanced economic and national security, rather than direct financial returns.
• The Chips office was structured like a private investment fund, with industry and investment professionals making decisions.

7. Risk Mitigation and Portfolio Diversification

• The Chips Act program involves taking risks, as with any investment.
• A diversified portfolio approach is used, with investments in multiple companies like Micron, Samsung, TSMC, and Intel.
• Funding is tied to milestones to protect taxpayer dollars.

8. The Government's Role in Creating Demand

• The question is raised whether the government should pressure private enterprises to buy chips from specific manufacturers.
• It's acknowledged that all forms of government intervention in the semiconductor sector are uncomfortable.
• The government could help facilitate collaboration between chip manufacturers and major customers like Nvidia and Apple.

9. The Global Semiconductor Landscape

• The current situation, where a single company (TSMC) in Taiwan manufactures most of the world's leading-edge technology, is highlighted as a concern.
• The goal is to create a more resilient and geographically diverse semiconductor supply chain.

10. Notable Quotes

• "Equity comes with a with a cost, you know, cost of equity for shareholders." - Mike Schmidt, highlighting the financial implications of equity stakes.
• "...the return for the taxpayer was in economic and national security." - Mike Schmidt, explaining the broader benefits of the Chips Act.
• "We live in a world where basically all of the world's most important technology is made by a single company that's mostly operating in Taiwan..." - Speaker, emphasizing the need for a more diversified semiconductor supply chain.

11. Technical Terms

• Fab: Semiconductor fabrication plant.
• Leading Edge: The most advanced semiconductor manufacturing technology.
• TSMC: Taiwan Semiconductor Manufacturing Company, the world's largest contract chip manufacturer.

12. Synthesis/Conclusion

The discussion revolves around the complexities of implementing the Chips Act and the potential shift towards government equity stakes in chip companies. While the goal of boosting domestic semiconductor manufacturing and enhancing national security is widely supported, concerns are raised about the effectiveness of equity stakes, the potential for attracting the wrong companies, and the challenges of creating demand for US-made chips. The importance of a stable, long-term industrial policy and a diversified investment approach is emphasized. The ultimate aim is to reduce reliance on foreign chip manufacturers and create a more resilient and competitive US semiconductor industry.