(Image Credit: NIST: Andrew Kim)
What’s at stake:
The CHIPS and Science Act is one of the most ambitious industrial policies the U.S. government has launched since the New Deal. Federal involvement in private industry ground to a halt in the administration of Ronald Reagan, which enforced the libertarian view that government guidelines are “business interferences” and financial assistance “handouts.” Given this recent history, the Department of Commerce has much to prove in executing the CHIPS Act fairly, effectively, transparently and on time.
The Chips Act’s stated goal is to produce closer to 20% of the world’s most advanced semiconductor chips by 2030 in the United States. Implicitly, the government must also work to gain the trust of the public. Intended beneficiaries of the CHIPS Act go beyond Wall Street and Silicon Valley, including workers, schools and diverse municipalities.
Often compared to the Apollo space program in its scale and aspiration, the CHIPS and Science Act — touted as a linchpin of economic and national security — received bipartisan support and was signed into law by President Joe Biden on August 9, 2022.
Two years in, it’s time to revisit the CHIPS and Science Act to assess its inner workings.
Eschewing the usual horserace analysis (“which companies got how much”), it’s more instructive to examine how the US government has been administering the program, who’s involved in making decisions, and how the feds plan to achieve the CHIPS Act’s goals.
While additional award announcements are expected, the Department of Commerce (DoC) to date has disbursed $32.5 billion in grant awards, 61 percent of the $52 billion earmarked for manufacturing grants and research investments.
Recommended Video: CHIPS Act Under The Hood
Diverse team
Rule number one in attempting to assess the CHIPS Act is: Never underestimate the power of the federal government.
The DoC is no stranger to semiconductor technology. For one, the National Institute of Standards and Technology (NIST), within Commerce, has conducted research on semiconductors since the 1940s, and it continues to work with the semiconductor industry to design and even manufacture chips.
But Commerce has gone head-hunting for the best and the brightest in the finance and the tech industries, forming a team, the CHIPS Program Office. Its members are responsible for overseeing $39 billion in semiconductor incentives and investing across the ecosystem and supply chain.
The CHIPS Program Office targeted experts in four different fields, ranging from the semiconductor industry and the finance/banking sector to academia and both federal and local governments.
Mike O’Brien, senior relationship director, told us, “When I joined the Chips Program Office in Feb. 2023, there were just five of us.” The team, now more than 140, is bigger than the University of Georgia’s football roster.
Those invited to join the Chips Program Office saw it as “a once in a generation opportunity for us to make a difference,” explained Lynelle McKay, senior relationship director. “Most of us working in the CHIPS Program Office are not from the government,” she noted.
The CHIPS Program’s diverse team includes seasoned executives from such chip companies as SK hynix, Intel, GlobalFoundries, NXP, Synopsys and Cadence, and experts in financing.
For instance, the Chief Investment Officer (CIO) of CHIPS Program Office is Todd Fisher, who spent 25 years at KKR, a private equity firm. DoC also tapped partners from Goldman Sachs, an investment banking cadre who “can really help us digest all this financial information in the applications,” noted O’Brien.
Drawn from federal and local governments are experts in workforce development, and lawyers who have specialized in the National Environmental Policy Act (NEPA).
Join us live at our virtual event, Business of Semiconductor Summit (Sept. 9 – 11). Meet Lynelle McKay, senior relationship director at the Department of Commerce, who will discuss on Sept. 9 the what, why and how of The CHIPS and Science Act.
O’Brien, for example, joined Commerce in Feb. 2023, after 27 years at Synopsys and Cadence. In his private sector days, he rose to Synopsys’ vice president of aerospace, defense and government in D.C.
McKay came out of retirement to join the Commerce team. Her semiconductor experience includes 16 years at Motorola. In four years at Freescale, she was senior vice president and general manager of its Networking & Multimedia Group.
How do they decide?
The stakes are high not just for awards applicants but also for CHIPS Program officers who vet the applications. Thus far, 16 large and small companies, some unknown outside their industry niches, have been chosen for 25 projects in 16 states.
Awardees include Intel, Micron, Global Foundries, Samsung, Taiwan Semiconductor Manufacturing Company (TSMC), Texas Instruments, SK Hynix, Amkor, Microchip Technology, BAE Systems, Global Wafers, Polar Semiconductor, Absolics, SolAero (Rocket Lab), Entegris and Rogue Valley Microdevices.
The hallmark of CHIPS Act grants is its diversity.
Its grants cover the breadth and depth of segments essential to secure the future supply chain and the competitiveness of chip companies.
The “technology types” covered by awardees range from mature nodes to leading edge, and advanced packaging. “Project types” include new fabs and fab expansion, fab modernization and revitalization. Hence, grant sizes vary from mere millions to multibillions.
Jumping hoops
Applicants for funding face a complex process to prove the what, why and how of their projects, and the feasibility of their plans.
In parallel, the CHIPS Program Office has developed models to help choose companies worthy of grants.
A basic tool on which the CHIPS Program Office has relied is analysis of an applicant’s financial model. Jessica Gomez, CEO of Rogue Valley Microdevices, told us that developing her company’s integrated financial model for the DoC was a very expensive risk for a small company. “We made a $500,000 investment — in hiring consulting firms — to get this done,” she said. “But in the end, I am glad we did it because it gave us just about everything we needed.”
O’Brien said that the CHIPS Program officers who were pivotal in creating these financial models were young people from “the best schools” in their 20s and 30s. “They crank through these financial models and arm us with information we need.”
As the CHIPS Program Office deliberates funding allocations, the top priority is national and economic security to be delivered by the awardees. They must also ensure awardees’ “competitive position, supply chain security and defense military security,” explained McKay.
But equally important is that “we also look at the feasibility” of their plans, she added. “Can they construct the proposed fabs? Do they have the talent pipeline necessary to run those facilities? What broader impacts do they bring to society?”
In addition to funding decisions, perhaps even more important is that the CHIPS Program Office ensures that its investments – taxpayer money — are used effectively.
$39 billion won’t be enough
It is generally conceded that $39 billion of direct investment is hardly enough for the government to deliver what the CHIPS Act has promised. McKay said, “Catalyzing private investments [from $300 billion to $400 billion] is a very important part of this, because we know that $39 billions on the commercial manufacturing incentive side just doesn’t go that far in the semiconductor industry.”
As spelled out in the notice of opportunity, only five to 15% of the funding will be covered by the Department of Commerce. McKay said, “So, companies need to go get state and local incentives, creating a buy-in at the local level. Local governments want those companies to be there for the long term.”
Additionally, the government has authority to provide loans or loan guarantees up to $75 billion. Perhaps one of the most effective tools for companies is the Treasury’s investment tax credit (ITC), noted O’Brien, because it makes long-term investments sustainable. “These are five-year investment tax credits — 25%. And those projects under CHIPS Act go on for many years,” he added. “As long as there’s continuous construction, they can continue the tax credit.”
By “combining the tax incentives, the loans and loan guarantee, state and local incentives, in addition to the $39 billion of direct funding, we’re able to show [applicants] a financially sustainable model,” McKay concluded.
The CHIPS Act ‘isn’t about short-term investments, under which we are building something and moving on.’
Lynelle McKay
Post-award portfolio management
McKay made clear that the CHIPS Act “isn’t about short-term investments under which we are building something and moving on.”
Commerce is committed to monitoring the progress of its beneficiaries. Each project has specific milestones, “directly tied to fulfilling the program priorities of the CHIPS Act,” McKay said.
To that end, McKay is now tasked as “Chief Portfolio Management Officer for CHIPS” — a position created to “do ‘post-award’ portfolio management for companies we have invested in,” she explained.
Beyond producing closer to 20 percent of the leading-edge logic chips in the United States, McKay explained that the government’s vision for CHIPS Act success is, by the end of the decade: “at least two clusters for leading-edge logic, leading-edge memory, a number of advanced packaging projects, and we partner with our allies to ensure global supply chain resiliency.”
Irony
There is a certain irony in the government’s long view of the business of semiconductor companies, which is opposite to what most US chip companies have become accustomed to. Although the U.S. chip industry invented semiconductors, most chip companies, sensitive to quarterly financial results, gave up manufacturing. Going fab lite or fabless became the accepted norm, typically promoted by investors including private equity firms like KKR and Blackstone. For many U.S. chip companies in pursuit of profit, “outsourcing” became an ideal that lifted the heavy burden of investment required for chip manufacturing.
The long-term health of the U.S, semiconductor industry and its supply chain were never the concerns of Silicon Valley or Wall Street — until the Covid 19 outbreak hammered every sector of the U.S. economy.
The role of the government
Bringing back the idea of “manufacturing” to the United States is a bold idea, but now widely acknowledged as a necessary corrective that’s long overdue.
Unlike the Apollo space program which was bolstered by a magical televised moment — as the whole world saw a man set foot on the moon — the CHIPS Act lacks spectacle.
And yet, if done right, it poses a greater and more durable impact on people’s lives and society. While it still needs to be proven, the CHIPS Act holds the promise of creating jobs in a skilled workforce, reinvigorating the supply chain, and instilling hope for many people in the middle class.
Bottom line:
During the past five years, the pendulum has already begun swinging back toward industrial policies in both the United States and globally. After 38 years, there is a growing consensus against the glib anti-government epitaph articulated in 1986 by Ronald Reagan, when he said, “I’ve always felt the nine most terrifying words in the English language are: I’m from the Government, and I’m here to help.”
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Junko Yoshida is the editor in chief of The Ojo-Yoshida Report. She can be reached at [email protected].
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