The CHIPS for America Act, meant to bring the semiconductor industry back to America, has become lost in partisan politics. Republican leaders who claim to support it are using it to seek concessions on other issues. Anyone interested in semiconductor stocks should pay close attention to these developments.
Stock in companies that support the funding are hitting the ground and aren’t being picked up. Reports that the present chip shortage is easing has increased opposition. Many oppose subsidizing an industry that appears, on the surface, to be highly profitable.
While I have many friends who question the need for the act, making semiconductors is a dirty business done by highly-paid people. Low-wage countries with lax environmental protections captured it decades before the origin of chips became a national security concern.
If we want to allay the national security concern, or avoid the industry moving to Europe, taxpayers must make an investment that will pay off in jobs, taxes and repaired supply chains.
There’s less urgency among voters for the semiconductor industry. The pressure to pass the bill is all coming from the industry, which is delaying construction of new facilities until the funding is secure.
If you think the CHIPS Act is necessary and likely to pass eventually, now would be a good time to buy the companies that most benefit from it.
Intel (NASDAQ:INTC) isn’t exactly broke right now, but the economics of the industry mean its cash would be better deployed in Vietnam or Abu Dhabi if the U.S. government doesn’t help.
CEO Pat Gelsinger, a longtime Intel executive who returned from VMWare (NYSE:VMW) last year, saw Intel move offshore and wants to bring it back. But he has threatened to move production to Europe if he doesn’t get government cash.
Intel is desperate because it needs to make decisions now on where it will produce chips in 2025. By then it hopes to be making chips with circuit lines just 18 Angstroms, less than two nanometers apart.
While Moore’s Law gets the headlines, Intel is acting as it is thanks to Moore’s Second Law. That is, as circuit lines get closer the equipment to make them becomes proportionally more expensive. There’s also what I call Moore’s Third Law, the idea that as chips grow more complex their environmental footprint also grows.
In the past, Intel offset these costs by putting factories where labor cost less, or environmental regulations were ignored. For Intel, the CHIPS for America Act is necessary to offset those costs. Without it, Gelsinger argues, Intel is either overseas or uncompetitive.
No company better represents the recent past of the semiconductor industry, and its future, than Nvidia (NASDAQ:NVDA).
Nvidia makes graphics processors. These were once thought of as “helper” chips that offloaded complex graphics calculations from the microprocessor, for things like rendering video games. They’re now at the heart of artificial intelligence and metaverse applications, the future of the industry.
Nvidia doesn’t manufacture chips. It designs them, then hires a fabrication plant or foundry to make them. In recent years that has been Taiwan Semiconductor (NYSE:TSM), first to master the extreme ultraviolet lithography (EUV) technology needed to render designs at 10 nm and less.
Nvidia’s co-founder and CEO, Jensen Huang, was also born in Taiwan, in the historical capital of Tainan, six years before Advanced Micro Devices (NASDAQ:AMD) CEO Lisa Su was born in the same city.
This brings up the industry’s problem. China claims Taiwan as its territory, and regularly threatens to take it by force. The semiconductor industry is now completely dependent on Taiwan for leadership as well as for manufacturing. If Taiwan were invaded today, the entire world economy would be threatened.
Taiwan Semiconductor (TSM)
An hour’s drive outside Taipei is Hsinchu Technology Park, the most important manufacturing center in the world.
This is where Taiwan Semiconductor has most of its fabrication plants, or “fabs.” This is where it mastered EUV process needed for making today’s most powerful microprocessors.
Taiwan Semi has mastered this technology. Samsung has, too. Intel says it has. Chinese semiconductor manufacturers have not. China finds making even 14 nm chips difficult without imported technology, which the U.S. is now trying to deny it.
Taiwan Semiconductor is now building plants in Arizona and promises to build more once the CHIPS for America Act passes. This would protect the global industry from China’s threats against Taiwan Semiconductor’s home, a possible landing point for Chinese troops in an invasion. If war came, analysts at the U.S. Army War College have suggested, the Taiwanese plants should be destroyed. This would take the global economy with it.
Meanwhile, two thirds of the world’s semiconductor foundry revenue goes to Taiwan.
Micron (NASDAQ:MU) makes something the rest of the U.S. industry, including Intel, have given up on.
Micron makes memory and storage chips. Two Korean companies dominate the memory market, but Micron still has a 23% share.
Micron is known for making chips at its hometown of Boise, Idaho, but it is a global supplier, with plants in Malaysia, Taiwan and even China. Micron plans to invest $150 billion over the next decade. CEO Sanjay Mehrotra says that, depending on the fate of the act, more or less of that money will go to the U.S.
Because memory chips are commodities, unlike microprocessors, their price and Micron’s profitability are very sensitive to supply and demand. This has made the stock highly volatile over many years. It traded for just $10 as recently as 2016, and for $97 as recently as January. It’s down 37% on the year as prices for memory have eased for the first time in years.
The biggest beneficiary of the CHIPS for America Act is America’s most valuable company, Apple (NASDAQ:AAPL).
Apple has been seeking to control its supply chain for years. At the center of this are semiconductors, which it designs based on ARM Holdings designs. But Apple has no chip foundries of its own. Instead, it depends heavily on Samsung and Taiwan Semiconductor.
As Taiwan Semiconductor expands in the U.S., in other words, Apple secures its own supply chain. Apple chips are among those expected to be produced at Taiwan Semiconductor’s new Arizona plant.
Apple CEO Tim Cook has said supply constraints could cost Apple as much as $8 billion this quarter. That is one reason why Apple stock is down 18% so far in 2022. Apple’s new designs change the entire industry landscape and will let it unify its iPad, iPhone and Mac product lines.
But without new manufacturing capacity in the U.S., it may all be just vaporware.
On the date of publication, Dana Blankenhorn held long positions in AAPL, INTC, NVDA and TSM. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.