CHIPS Act: Securing Semiconductor Supply - [Business Breakdowns, EP.167]

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0:45This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Welcome back to Business Breakdowns. We have another special episode today, diving into the Chips Act. Now, we've covered the semiconductor space in depth, most recently with some episodes on Intel, Samsung, and Integris. But if you go back in the library, we have episodes on AMD, ASML, TSMC, Cadence. So we've gone deep into the micernames in the space. But in this conversation, we go broader. We discuss the Chips Act, which was enacted by Congress in 2020. 2022, which aimed at boosting the US's semiconductor manufacturing capabilities to better compete with East Asia.

1:27And while the US has stayed at the forefront on chip research and design, our reliance on that foreign supply chain became a massive issue in the summer of 2020 into 2021. And as we were dependent on that foreign manufacturing, it created massive shortages, which had implications across some of our most important resources and defense systems here in the US. The CHIPS Act itself provides just under 53 billion in subsidies for US companies. It also provides incentive tax credits and some research budget as well. And this is aimed at companies operating in the US or US specific companies. The goal of the CHIPS Act is to build out these capabilities with leading edge logic and memory fabrication, advanced packaging facilities, and advanced capacity for current generation and semiconductor.

2:16My guest today is Todd Fisher, CIO of the Chips Act Office. Todd and the broader US Chips Act team bring very unique experience to a government program. Todd worked for 30 years in finance and was a veteran at KKR prior to joining the government and the Chips Act program. And over the past year, Todd and his team have allocated a large percentage of that capital towards projects which we dive into in this discussion. We also discuss some of the broader questions any investor might have about subsidized industry programs, how that will shift the natural free market supply dynamics that you would typically see in industries like semiconductors.

2:54It's truly a wide range of conversation and particularly timely with the recent funding announcements from the team. So please enjoy this conversation with Todd Fisher. All right Todd, thank you very much for joining us today. It's a topic that we cover mostly through the companies within the industry here, but it's great to get your perspective on the CHIPs Act and everything happening around it. And I thought one of the best places to start is a measurement of where we are today. I think you've laid out in your vision for success publication that 2020 revealed the fragility of the supply chain for chips in the US.

3:31And I'm just curious, as we stand here in 2024, how you would assess that situation today based on both just the natural market cleaning itself up, but also some of the announcements and different things that have happened in the industry since then. Well, great. Well, Matt, it's great to be here with you to answer your question from a pure supply chain perspective. Obviously, what the chips app has put in place to address was a fundamental mental, national, and economic security issue that has evolved over decades. Where our supply chain is really reliant to a large extent on unique geographical choke points, particularly in places like Taiwan, but not only in places like Taiwan that created a lack of resiliency.

4:14That multi -decade evolution of an industry will not go away in any given year or two. So our whole goal is to shift that dramatically and so that we can see the kink and the curve where it's come down, but then goes up. This was brought very much home in the pandemic, where we all, everybody noticed, you couldn't get your car because of some 50 -centre, $2 micro -processor or some other type of chip that dealt with windshield wipers on a car. And we saw that fragility of the supply chain real -time. That is obviously dissipated to a large extent in the system on its own. The semiconductor industry is a cyclical industry despite high -seclical growth trends.

4:59And over the last couple of years, that industry, parts of that industry memory, current immature, have turned down and inventory has built. And so we are not sitting here today, other than in certain components of the industry, in a constrained supply chain environment. But that is exactly the time where we need to build the resiliency. It's like you don't want to be buying the insurance and putting a new roof on and hurricane shutters on when the wind's blowing. You want to do that during the sunny times. And that's what we're doing right now. We, I think, have made a very significant amount of progress in our program.

5:35We can talk some more about some of the recent reports that have come out that are a couple years from the last one that show the progression of the industry over the last couple of years and over the next decade. And I feel that we are making very good progress us on bringing a significant amount of semiconductor manufacturing capacity on shore and into allied countries and really building fundamental economic and national security through supply change resilience. You hit on a lot there that I want to get into. One of the first things off the bat, you mentioned it was a multi -decade shift towards all of this manufacturing happening offshore and it's going to take some time to see that and then move back in the right direction.

6:18When you're approaching the various funding projects, you have different segments that you're looking to fund. If there's a way that you could simplify that, whether it's on a project basis, in terms of how you're looking to create sustainable, unsure or domestic funded projects, manufacturing, all of the different segments that you've talked about, how do you go about approaching that, whether you want to use numbers, whether you want to use qualitative aspects of it, just some simplification of the funding itself is really helpful, especially since you've announced quite a few recently. Well, let me give you a sense of the broad numbers of the programs so you have that.

6:57Chips Act was $50 plus billion. Of that, $39 billion is manufacturing incentives. That's where I sit. And then there's $11 billion that's R &D. So $39 billion of direct incentives. Together with a couple of other tools, investment tax credit, which is a very important tool. We have loans and loan guarantees which are up to $75 billion which we can talk a little bit about and then of course our state and local incentives and to get a chips act award you do need to have engaged with a state or locality in some incentives from them. So those are the government incentive programs that we have. I've just to give you some scale like $39 billion while in aggregate it seems and feels like a lot of money in the context As you well know of the kind of industry we're talking about here, we're at single leading edge fab could cost 20 to 25 billion dollars.

7:46It is not a significant amount of capital. In fact, if you look at the SA report, they would say that over the next decade, there will be about 2 .3 trillion dollars invested in the industry. And about 28 % of that would be in the US. So that's about 650 billion dollars. We have 39 billion dollars to try to impact that 650 billion. So we are taking every opportunity to crowd in capital and to align our interests so that we're using our capital in the most effective way to drive the most effective outcome. So that's the broad layout of the program. We have said that for the direct incentives, those incentives people should expect will be approximately 5 to 15 % of the overall capital expenditure spent on a project that is not an absolute hard and fast rule that we've set, but an expectation.

8:42And in fact, if you look at what we've announced the date, we've announced up to $29 .5 billion of incentives through our preliminary member end of terms. And that is over $300 billion of aggregate investment that would come along with that. So approximately 10 to one for every dollar we're putting up other money is being crowded in for the rest of that structure. It's really helpful framing, I think, and when you can tie that $29 billion to that overall aggregate gross number, I think it brings it to life quite a bit. When you're thinking about these projects, we can get into the cost structure challenges and disadvantages potentially of the US relative to elsewhere.

9:25But just as you're approaching it and thinking about the sustainability of these projects, I'm sure that's something on your mind You don't want to be throwing at funds for something that puts money into the ground and then it never gets up and off and running What have been the biggest breakthroughs or things that have brought that Into making your entire project feel comfortable and the funds actually being allocated because I'm sure that's a challenge You come from the investment world. You've looked at many projects. You have to pass or invest How have you gotten comfortable with the sustainability of these projects?

9:56It's a very good question. A couple of things to take into account. A, this is an effort of engaging with large -scale, highly professional, generally well -capitalized companies that are not in crisis. So sort of industrial policy that really the US, if ever, maybe never has done, but certainly not for many, many, many years. And so we take this responsibility super seriously. We're also not trying to distort a market. We're trying to create sustainable commercial opportunities across the board. That's really important. Number two, I do come from the private equity and investment world. We're all some part of our experiences.

10:40And coming here and thinking about how to set up an investment office within the Commerce Department, I do bring that experience to the mayor. We are looking to make really good investments. We're not looking for dollars returns. We're looking for economic and national security returns on our investments. And we're looking to make those investments in the best way possible to get them most for our dollars. And we take very seriously the fact that every dollar we're spending is your and my and other people's taxpayer dollars at work. And so we take that responsibility very seriously. So what does that mean in terms of your question?

11:16First of all, both the design and execution, we are mindful of how do we create sustainable commercial opportunities. In the design, the core design is something I just mentioned. We are 10 % of what I just said of the capital that's investing. So that whole private equity claim, but alignment of interest, everybody's got skin in the game. We're putting 5 to 15 % up. There's some investment tax credit. There's significant money coming from the companies themselves. That aspect has an ability of aligning interest and making sure what's going in the ground is going in for the right reasons, not for distorted reasons.

11:49That's number one. Number two, let's remember what we're not trying to do is just create incremental capacity no matter what. A lot of what we're talking about, you look at an announcement for TSMC, three fabs in the US. This is not just three incremental fabs. They were going to do X number of fabs. They probably would all have been in Taiwan. Now, three of those acts will be in the U .S. And that might be the same for Samsung, et cetera. So I don't want people to be thinking about this as this is all incremental capacity. It's not. In many cases, it's shifting something that might have been done in one region for another.

12:24And then the way we execute this is in a classic investment perspective. And importantly, maybe we'll talk about the team later on. I'm really proud of the team. We've recruited an envelope tier, which needed to be a team that could go toe -to -toe with these highly sophisticated companies. And we have built relationships with these companies. We have built relationships with our customers. We need to understand the demand signals in the market. We need to understand what customers are asking for and what they really want and make sure when we're doing our work, we're understanding what the long -term viability of these entities are.

12:57And that's the way we approach it as a typical investor would. Will this be able to be commercially viable over time? And then we structure our awards in a way to make sure that happens. It's not dollars out the door day one. It's the penitent on milestones, construction progress, etc. You brought up another interesting point there just in working with TSMC and with the Samsung. I think many patriots of the US immediately get a little shell shock when they see international businesses receiving these awards. You laid into a little bit of the details there in terms of those projects coming into the US.

13:31Can you talk a bit more about those dynamics in terms of US entities versus foreign entities and how you prioritize the goals in terms of something being done domestically something being done domestically by domestic entity, etc., etc. Yeah, I feel like I have one major job and that is to build the economic and national security of the United States. That is my job. My job is not to reward a US company versus a separate company. However, and we've been very clear about this and our funding opportunity, what we are looking for is companies that will be here and that will invest here over the long time, that will invest in the overall ecosystem.

14:11And that means the supply chain, putting R &D dollars on the ground in this country, building the workforce in this country. And if you're doing all those things, and we can talk about some of the announcements we've made, then we want to insend that. And that could be a foreign company or that could be a US company. We have some phenomenal US companies, Intel, TI, Microchip. We have great companies in the US that are doing phenomenal things and we want to work with those companies and the way this industry has evolved. There are certain choke points and certain technologies that only certain companies today can do.

14:47And our job is not to pick winners and losers. our job is to enable multiple flowers to grow in a fact and to make sure that more of that happens here on our shores and in our ally ecosystem than in other places. And I know some of the challenges associated you have labor dynamics you also have the not in my backyard building new things. There's been quite a few awards made and I know that it was put on the companies to make sure that they were already having those conversations with the local and state governments, as you mentioned before in the conversation, can you talk a bit about that just in terms of the progress that you've seen, obviously at time we'll tell, as these get built out.

15:28But some of the progress in your part in helping to assist these companies get across the line maybe with some of those conversations to the extent that you can be involved. I would say first of all, this is really, really hard. We talked early on in this conversation about this industry has developed over decades in a certain way, in certain locations, the supply chain here is immensely complicated. If you look at one, the ASML, UV machine, I mean, the number of component parts in that system itself, and the number of first and second and third tier suppliers, it's really quite a complicated supply chain, and we need to be mindful of that and humble about that, because this is really, really hard.

16:10And building these fabs, as you probably also know, is a ridiculous undertaking. I don't know if you've been on any of these sites, but these are massive, massive structures doing the most sophisticated, high -purity processes anywhere in the globe. So you take some statistics, for example. The amount of concrete in a given fab is two times what the amount of concrete that was in the Burj Khalifa. 600 ,000 cubic meters of concrete versus around 330. If you look at just pure cabling, it's 5 ,600 miles of cabling and that isn't a given fat. So these are massive, massive facilities that are 10 ,000 times cleaner than an operating room in a hospital.

16:58So that's the kind of thing we're working on here. And so when you start to think about that and the requirements, whether that's power, whether that's water, whether that's workforce, all of that creates a complex ecosystem that we have not truly invested in in this country for many years because what's happened over the last 35 years is that we've gone from about 40 % of the world's semiconductor fabrication capacity to based on the latest SIA report, about 10%. So our investment in a lot of these areas and the expertise to do this, we need to recreate. And again, that's not a one year or two year process.

17:39It's a multi -year decade clone process. So our path and our goal is to try to work with, we want the companies to have skin in the game and they're the execution, they need to do it. We're trying to help whether that is on the ground in Arizona or Texas or New York or Idaho or any of these places that we've already announced, helping to work with these companies to build effective workforce pathway systems relationships with state and local economic authorities. We have a whole team around environmental and NEPA that is prioritizing how we help these companies get ahead of the game. They are really think through their environmental challenges.

18:17So our path is recognizing it's difficult, recognizing these are amongst the largest and most complicated facilities built anywhere in the globe and then trying to build the resources internally and engaging externally both of the companies and the regions to help solve these challenges, which are going to continue to come up because it's hard. One of the things mentioned in that vision for success was the interest and goal to bring leading edge fabrication into the US. And I think with the supply chain issues, a lot of that could have been considered traditional, not necessarily lagging edge, but the mature node, not the leading edge chips that created challenges and especially over the past year, there's only been more and more demand for the leading edge chips.

19:06I think that's driving a big amount of the CapEx pen. Has that shifted anything with regards to the program relative to where you were in the start as you've seen this massive demand spike on the leading edge side? Let me step back for a second and give a little bit of context here. So you've mentioned our vision for success a couple of times and maybe for the benefit of everyone. What we put out very early on in our efforts back at the very beginning of 2023, was our four pillars of our vision for success by it should add a fifth for supply chain, which is our second funding opportunity. And that was that we wanted to create at least two leading edge logic clusters in this country.

19:48We wanted to create a significant start on building a significant capability around advanced packaging. We wanted to build a commercially competitive meeting edge memory business and we also wanted to selectively try to impact and solve some of the key bottlenecks it came about from the current mature industry as we saw in the pandemic and then finally we want to build the supply chains That's a core element. We put that out very clearly. We built on that over time the secretary about a month or two ago commented that actually we think we're going to be able to build three leading edge clusters for or leading edge logic, we put out by the end of the decade to have 20 % of leading edge logic in this country by the end of the decade.

20:32By the way, that's 0 % today. Over 90 % of that is done in Taiwan with the rest done in Korea right now. So going from the 0 % to 20%, the SIA report said we're on track by the early 2030s to be a 28%. So we're on path to do that. So I think from a perspective, we tried very hard because a lot of these government programs, whatever comes in the door, you reply to. One of the things I'd love to talk about is how we've approached it differently here. We're trying to figure out what do we really need and we go proactively out and try to find it. We try to push our applicants to do more to do things differently, etc.

21:10So that we're actually trying to reach our strategic goals, not necessarily their strategic goals. And so that was our guiding light and remains our guiding light going forward. With regards to leading edge logic and memory, if you look at what we've announced, we've announced all four of these companies, up to $27 .5 billion to micron Intel Samsung TSMC. Not all of that is for leading edge, some of that is for advanced packaging, some of that is for R &D, some of that is even for current mature, but a good chunk of that is for leading edge. And that is materially more than what was announced even in the wake of the chips act.

21:46In other words, Samsung announced two FABs as opposed to one FAB, plus an advanced packaging facility, plus an R &D facility, plus expanding their Austin site. So our whole effort has been about trying to push companies to do more and develop these broader scale ecosystem, which will ultimately lead to the cost competitiveness that we need in this country. AI and the demand driver. So when the chips act passed, when I took this job, AGI, artificial general intelligence was not even like a word in the lexicon, right? Now you can't go two minutes without talking about it. And it is a massive, massive demand driver that we were not anticipating at that time.

22:30That is good. That means that there is a real opportunity that we can help on the back of AI I create the AI ecosystem from soup to nuts in the US, which would be a phenomenal national economic security priority for this country. And I think that has not really changed our approach. It has just made what we're doing even more important. It means the need for leading edge, logic and memory chips is even more important. So the fact that we're able to get TSMC to do a third fab, the amount of investment going on over $100 billion by Intel, the fact that we have all three of the leading etgeologic companies committed to their version of two nanometers, the most leading edge in the semiconductor industry today, doing it in this country.

23:20And we also have micron doing leading edge, high bandwidth memory in this country. Again, we do 0 % of that today. There's no high bandwidth memory for AI and other uses being done in this country. Is it testament to what's happening in the demand in the industry? I want to talk about what you are doing differently from a government program versus what traditional funding programs may have looked like. Some of that has to do with the backgrounds that people involved coming from the investment industry. I think there was a long period of time where people were waiting for these funds to be allocated.

23:56We've certainly seen those announcements recently, but feeling that that had something to do with what you'll talk about now. But maybe you can share what has been different about this program. Yeah, let's go back and think about this. When the chips act was passed in August 2022, that was around 20 months ago. What I don't think people recognize generally, and I probably didn't recognize it until I came into the government, is that a law is passed. And then what? The reality is there is nothing, particularly for this program, which is new and different and it was going to be set up as its own self -contained unit.

24:35There are no people, there are no processes, there are no sets of rules, and there's no one focused on executed because you don't even know if the law is going to pass. So day one, Mike and I joined right after Labor Day of 2022. to do. Nobody involved. And so everything to invest $39 billion had to be put in place from that point going forward. So that's what we've been focused on. For that first period, we were maniacally focused on building a team. We now have close to 200 people from zero. And importantly, the investment team, which I'm responsible for, we have 40 to 50 people that we've been able to recruit, almost all of them from very sophisticated investment and financial consulting industry backgrounds.

25:24And that has been the critical inch pin to try to be successful here. And that means I've got senior people who spent two plus decades at Goldman Sachs at industry players like Synopsis or Intel or at private equity firms or venture capital firms from McKinsey or other consulting firms and pulling that talent together was job number one. Job number two was setting a set of processes and rules so that we could tell the industry what they needed to do. That happened in February of 2023 and an ability to really engage. What we didn't want to do, a lot of government programs are, put your application in, we'll go away for multiple months, we'll come back and we'll tell you what we decide.

26:09That wasn't going to work here. So the whole idea was how do we engage with industry? How do we have an iterative and partnership type of approach where we're really trying to understand these companies and trying to get them to do what they need to do and make sure that we're funding the appropriate amount that is going to incentivize them to do what they'd like to do in this country. And so that nature of being able to engage regularly with applicants, engaging externally with other stakeholders, particularly customers and critical demand signal and need for customers to also be part of this solution here, investors, other private sources of capital, really trying to be able to engage there.

26:50That is part of the design of this program that is not typical of most government programs. And then we partnered all of that up with a set of really talented people from a whole series of different policy areas, workforce. Maybe we talked some about workforce. It is a critical determinant of success for us. We have a phenomenal workforce team that's worked in that industry for many, many years. Environmental, I've already mentioned our environmental team, which is playing a huge role in getting ahead of some of the potential challenges from an environmental or an equal perspective, a national security team.