Eight Months In, What Is Happening With Biden's CHIPS Act?

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1:27Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. Tracy, you know, one of the things we talk about and the themes we come back to quite a lot is just this idea of like U.S. government, really all government, but I guess sort of U.S.-centric government intervention active role in the economy, which is something that I would say is characterized a lot of early Biden policymaking so far. Yes, and a perhaps unappreciated role at certain times. So we talked a lot about the history of Silicon Valley and how there was a lot of U.S. government money that actually flowed into both that place and that industry, and that had a massive impact.

2:08And now fast forward to you know, the post-pandemic era. And it feels like we're seeing a bit of a resurgence. Yeah, that's a good thing that you remind that reminder. Like, it feels like, you know, the U.S. political appetite for public investment, public direction of money and capital into certain industries. It ebbs and flows. Sometimes that's really out of favor. It's seen as anti-capitalism or something like that. And clearly, at least the last few years, it's been sort of back in favor, or at least, you know, maybe even a little bit under Trump, but certainly under Biden in a very significant way, both with the CHIPS Act and, of course, the Inflation Reduction Act of seriously public investment and the infrastructure bill, public investment into different industries.

2:54Right. I think we spoke about this with Ezra Klein, the new sort of supply side liberalism, this idea that the pandemic really exposed a lot of fault lines in the economy and also in supply chains. And now there's a lot of attention focused on actually fixing those. And I'm glad you mentioned one of the preeminent sort of set pieces of this particular type of policy, which is, of course, the CHIPS Act. So the big CHIPS Act, other than the Infrastructure Act, the CHIPS Act is the kind of, I guess, the shining symbol of this new direction. Well, you mentioned supply chains, and we did a lot of episodes on broken chip supply chains.

3:34So this brings it together. But here's the other thing that I think is key, which is that if there's going to be momentum on this front, if active public investment into industry is going to be something that's sustained and not just like a two-year, a couple bills passed, there's a big question like, is it being done well? Are people happy with the results? And I presume if people are happy with the results and people see change, then maybe there's more momentum. And if people are like, oh, this is what happens every time the government gets involved in some industry and it's red tape and cost overruns and wasted taxpayer money and so forth, then that really sort of like kneecaps any momentum.

4:12Yeah. And it feels like the stakes are quite high for this particular program, the CHIPS Act, because it is, you know, symbolic in many ways. First of all, there is always an, I would say, a almost knee jerk suspicion of government spending from, you know, certain parts of America. But then secondly, this particular bill, I believe it did come with some new sort of conditions attached to it, requirements that companies receiving government funding have sufficient child care, things like that. And that has garnered additional scrutiny recently. So there are lots of questions over exactly how this is being implemented and how we'll measure its success.

4:52You mentioned scrutiny. I think some of it's from our own colleagues at the Bloomberg opinion side. There was a headline eight days ago,$52 billion chipmaking plan is racing towards failure. That was the opinion side of the house. That's not our opinion. Nonetheless, this is the question. So let's have this question. Like, where are we? This bill was passed last August. We're already seeing a lot of activity in the wake, but how is it actually going? I'm very excited about our guests. We're going to be speaking with Mike Schmidt, director of the CHIPS program office, as well as Todd Fisher, Chief Investment Officer of the CHIP Program Office.

5:28I didn't even know CIOs were a role within government. So that's interesting. Anyway, Mike and Todd, thank you so much for coming on Oddlot. Thank you. Thank you, Joe. Thank you, Tracy, for having us, really. I'm a big fan of the podcast, so very excited to be on. This is Mike Schmidt. I'm the Director of the Program Office, and Todd is our Chief Investment Officer. And we're excited to be here to talk chips. Fortunately, your listeners won't need us to explain how critical chips are, given all the episodes you've already done on it. But just to lay that foundation, chips are critical to virtually every technology that underpins modern life, anything with an on-off switch, automobiles and medical devices, but also satellite communications and military technology.

6:14They're going to be foundational to the technologies that will fundamentally shape society and geopolitics in the coming years, things like artificial intelligence, biotech, and clean energy. And so, you know, we at the U.S. have long been a leader in chip design and R &D, and that's a really, really good thing. But we've fallen significantly behind in manufacturing. We account for only about 10 % of global semiconductor production today, down from several times that a few decades ago, especially where some is on the advanced chips, the leading edge chips, where we produce functionally none of that today.

6:53And so at Commerce, we have$50 billion to address this problem. $39 billion is that for manufacturing incentives. $11 billion is for R &D. Todd and I are on that incentive side, on that$39 billion side. And we view ourselves fundamentally as managing a$39 billion investment program on behalf of taxpayers. But our return is not financial. Our return is in supply chain resilience and in advancing our economic and national security. And I think we're off to a pretty good start here. Right. Well, I was going to say, you know, Tracy mentioned at the beginning, there's a big symbolic element, but also just like a very real element.

7:30You mentioned the geopolitics, which is like the stakes are literally very high for all modern life of whether, you know, the U.S. always has a ongoing supply of sort of advanced and less advanced chips. So, Mike, that was a really good intro to the sort of stakes involved. But why don't we bring in Todd? And maybe, Todd, you could explain, you know, Joe alluded to this in the intro, but what does the chief investment officer of the CHIPS program office actually do? Thank you, Tracy. It's really great to be here. I'm also a big fan of your show. We call it chief investment officer. The role is basically to figure out how to effectively invest and allocate the$39 billion that we have to accomplish our overall goals and vision for success.

8:20So I spent my career, I spent 30 years in the financial industry, 25 years at KKR, basically making investments, sitting on investment committees, et cetera. And given that this is a new government program that really hasn't been done in this way in many decades. That concept of creating a chief investment officer and an investment office to think about the way we are allocating this money seemed to make sense to us. I was just going to jump in and maybe explain a little bit of like the broader theory of the case in terms of how we're building the team. Because fundamentally, we have two objectives here, right?

8:56Number one, we need to make a set of investments that are advancing our economic and national security. So we have a set of strategic objectives, but then we have to do so in a way that is safeguarding taxpayer dollars and really getting good deals. So we built our office here around chief strategy officer, managing an office of strategy, technology and policy. That's Morgan Dwyer. She comes from the senior leadership of the Defense Department and the Office of Science Technology Policy. And then Todd bringing his considerable financial commercial expertise as the investment office, you know, gives us a way of kind of like mediating a conversation and coming up with an overall approach that is going to advance both the taxpayer protection side of the equation, but also the kind of strategic and economic.

9:42Well, let me ask, and with a sort of traditional investment, CIO, it's fairly easy to measure. Did they do a good job or not? Because you can look at returns, maybe you can look at volatility and a few things. It's like, oh, this investor made money or they at least avoided losing money, et cetera. Obviously, as you mentioned, Mike and Todd, both of you, it's different with public money because the goal is to foster an industry and the goal is to build something that creates sort of positive externalities. But still, I mean, I wonder, like, are there hard benchmarks that we can look at in terms of was taxpayer money well spent?

10:19Are there hard benchmarks in terms of how much chip production is happening in the United States today, verse 2028, verse 2033, that we can say if we don't hit these levels, it was unsuccessful? Or if we do hit these levels, that's a success. What can the public look at to know whether it's working or not? We've spent a lot of time thinking about this. I mean, we fundamentally believe that we've been entrusted with a very large sum of taxpayer money, and it's a public investment in private industry without recent precedent in terms of its scale and its strategic significance. And so we think we kind of owe it to the public and a broad range of stakeholders, industry and applicants, foreign governments, Congress, to explain what we're trying to get with their money.

11:08And we put out, after a lot of analysis, what we call our vision for success document. And that lays out what we want the future to look like after we've invested these funds in 2030 and beyond. And so we say in leading edge logic, we want to have at least two large scale leading edge logic manufacturing clusters. We talk about the importance of advanced packaging, which is absolutely critical, both from a supply chain resiliency standpoint, but also from a technology leadership standpoint. We talk about memory. We talk about current generation and mature. So really across these segments, we have tried to put some kind of north stars out there that we're going to tie ourselves to.

11:50The measure I think about a lot, Joe, beyond all those specifics, is whether we can create self-sustaining dynamics going forward. So can we be in a position where, you know, in the coming years, based on the investments we've made, based on the scale and the ecosystems we've been able to create, do the major chip manufacturers view investing in the United States as quarter their business model? And if we're able to do that, then I think we will be on a really solid trajectory with respect to our economic and national security objectives going forward. Todd, do you want to add to that at all? Yeah, I would say, you know, in 10 years, when we look back, we want to really see this act in this period of time as an inflection point.

12:38Mike's already said that over the last 30 years, we've seen the percentage of manufacturing of chips happening in this country go from 37 percent to 10 percent. We need to turn that around. And so the success will be to see that number, instead of continuing to go down, to start to go up. And then in the very specific areas that we've already laid out, meaning leading edge logic, where we now today produce 0 % of the world's chips in leading edge, we've said very clearly we want to see two self-sustaining ecosystems at a minimum. And we have no real advanced packaging in this country either. We want to see quite robust aspects there, and we want to start to see cost-competitive memory plants being done in this country.

13:19And we want to see all the pieces of the ecosystem, including suppliers, come together around those goals. And so that's how we're thinking about measuring ourselves.

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15:05Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market. Paid for by Public Investing. Brokerage services by Open to the Public Investing, Inc., member FINRA and SIPC. Advisory services by Public Advisors, LLC. SEC Registered Advisor. Generated Assets is an interactive analysis tool. Output is for informational purposes only and is not an investment recommendation or advice. Complete disclosures available at public.com slash disclosures. I have a bunch of questions about how the government can help build a resilient industry that can sort of manage through various economic cycles.

15:43But before we get to those, maybe just to back up for a second, could you talk about how the process of dispersing this substantial amount of money, you know, you talked about 50 billion,$39 billion for manufacturing, and then$11 billion for R &D. How does it actually work in terms of handing it out and applying it? Do people come to you, or do you identify prospective companies that could benefit from this? How exactly does that work? The broad aspect of what we've laid out in our Notice of Funding Opportunity is a very clear cut and very specific application process. So we are expecting companies to come to us.

16:25Our portal is right now open for what we call statements of intent, where anybody that qualifies for this or any of our later funding opportunities can put in a statement of the kind of project that they're looking for potential funding for. And then there is a series of other approaches, a pre-application, an application that accumulates very detailed information that we can then evaluate and make decisions based on to put money out to the various parts of the ecosystem. In addition to that, I would say that we are trying to be proactive to date before we put our funding opportunity out. We've talked to dozens of industry players and companies.

17:04We are trying to identify the parts of the ecosystem that are potential barriers or roadblocks so that we can encourage specific applicants. But ultimately, the applicants have to come to us. Yeah, we'll do like a review of the application and we'll decide, you know, based on the criteria we've laid out, based on our economic and national security objectives, this is a project we want to support. That will lead us to extending what we call a preliminary memorandum of terms, but basically a term sheet, right? And then you're in a commercial relationship with the company where we're going to try to align on a set of economic terms that allows a project or a set of projects to move forward.

17:43If we can align, then we'll do our due diligence and we'll move towards making that award. Let's jump right into some of the criticisms. One of the big ones that got a lot of attention a few weeks ago was this message that was put out about new construction and the requirement that companies had to take child care of the employees seriously. And I think the concern was, or some of the criticism, was that Democrats, having failed to pass some sort of child care bill in the first two years, are trying to attach sort of progressive interests onto the bills that they did pass and that this is potentially going to sort of lard up the whole process.

18:19And that companies, if we really want them to just move, move fast, compete, be dynamic, then why are we adding all of these extra strings and obligations that aren't related to the production of advanced semiconductors? Why is that criticism wrong in your view? The NOFO lays out six evaluation criteria. It has economic and national security, which we say is the core criteria, the primary criteria, and will receive the most weight. And then we're going to evaluate applicants based on commercial viability, financial strength, technical feasibility, workforce, and a set of broader impacts. And we view workforce as absolutely essential to meeting the economic and national security objectives.

18:59Every time we talk to a company, workforce concerns are at the top of their list. We know it's a tight labor market. We need workforce to build these fabs. We need workforce to operate these fabs. It's absolutely essential. And the statute requires us to ask applicants for a workforce plan. And as part of that, one thing we hear a lot from companies is that lack of access to affordable, accessible child care is a barrier to getting the type of broad, diverse workforce we need in the system in order to achieve our objectives. So we view child care as really part and parcel of the broader set of objectives that we have around workforce, which is then, of course, essential to meeting the broader objectives on economic and national security.

19:46So as part of the workforce plan, we have asked companies to provide a plan with respect to access to child care that will be part of that holistic evaluation process that covers those six evaluation criteria. Yeah. But if I could add one or two things to that, I left KKR five years ago with the intention to like shift my whole second career to something in the public and not for profit sector. And my main focus was workforce. And so I spent the last four years with a maniacal focus on workforce, because I believe the workforce system in this country is broken, or at least not where it needs to be.

20:23And when you look at this industry, where over the last 20 years, we've lost a third of the workers in the semiconductor industry at the same time as the industry has tripled globally, and you listen to the companies in terms of their one of their one of if not their biggest challenge is attracting workers for their desire to build plants in this country, it is very clear that workforce is going to be a really critical aspect of success in the long term. In fact, when you look at someone like TSMC or Samsung over in Asia, a core part of their success is the product, the productivity they're able to get out of their, their workers and the sort of aligned system that the Koreans and the Taiwanese have around workforce.

21:07And so this aspect is really critical. And so childcare is part of sort of expanding that fundamental funnel at the front end so that there is more capability for different types of workers to enter the semiconductor industry. And I did a little bit of Googling this weekend. I literally went on the TSMC and Samsung and Intel and Micron website. All of them, all of them offer some kind of child care. Micron just announced in Idaho that they're building a child care center where there are in DFAB out there. And so I think this is a little bit of a red herring because I think it's really core to what all of these companies need to do to attract their workers.

21:45So I'm glad we're talking about the labor force of this industry, because this is something that's come up in various ways. So aside from childcare, what else are you doing in order to attract people to this space? Or what can be done? Because, you know, one of the reasons that people need childcare for these types of jobs is they are very intense. And, you know, in some parts of Asia, we're talking about 12 hour shifts where you have to be incredibly focused and diligent and detail oriented. And I know there has been some concern about whether or not the U.S. will be able to find enough people who want to do this type of work.

22:31I mean, I think these are really high quality jobs for many people in this country. And what we need to do is to help individuals across this country understand what these jobs involve, understand the quality and attractiveness and potential for advancement in the jobs. And so that means that we need a system that trains and attracts that skill set. There should be no reason that our workforce in the U.S. can't be as productive as any other workforce around the globe. And so the other things, in addition to things like child care, you would talk about aligning local systems, community colleges, four-year institutions, training organizations with appropriate wraparound support around transportation and technology skills and things of those nature and aligning those systems so that there's clear pathways and clear curriculum and clear training paths.

23:28so that more talent can experience the quality of the jobs that there are in this industry. The other thing I would just say is on the kind of engineering side of things, this is just a personal view. But I think we as a country would be really better off if more engineers were interested in working on semiconductors, as opposed to, say, software. And I think all of us can play a role in trying to shape that narrative. I mean, semiconductors, it is really like the peak of human innovative capacity. And I think, you know, we need to make semiconductors cool here. It does seem like, I don't know, and you could go into software and make a lot of money and, you know, hang out and play ping pong and stuff like that.

24:15Or sit on beanbags. Yeah, go to semiconductors and it'd be like really grueling and not sit on beanbags. And that's like kind of tough. Like if you want to like attract the most advanced technical talent. I want to ask another question. And I'm sorry, I'm going to keep cribbing question ideas from our brutal Bloomberg opinion columnist. The$52 billion chipmaking plan is racing towards failure. But this is something they bring up, and it's something I've heard from many, you see a lot, which is that one challenge in America is things like local environmental regs that make buildings slower than it does in other countries, land use questions, environmental reviews, lawsuits, things like that.

24:55Just so far in the eight months since this bill was passed, what are you seeing on the ground specifically in terms of the challenges that potentially new fabs have in dealing with the local laws that govern the ability to build anything? It's a great question. I think it is a reality of our American system, the federal system, that we have kind of overlapping expectations or requirements on the kind of permitting and environmental review side, including both federal and state and local. We are building a team here that is focused exclusively on those issues. Right. And, you know, so our job is not is not to admire the problem, but to kind of jump in and try to solve it.

25:41And I think with the right capacity on our side, as well as the right capacity being brought to bear from our applicants, it's just a lot of blocking and tackling. But we are optimistic that permitting and environmental review won't end up being what we call the long pole in the tent. But there's no question it's a challenge, and we are taking it very seriously and investing in necessary resources in order to make sure that we're able to meet our objective. Sorry, can you just talk a little bit more specifically? Are there specific types of issues that come up in the applicants you've seen? And I know we've already seen various investment announcements over the last eight months, but are there specific types of things that companies run into when it comes to the permitting necessary to sort of fulfill the goals of the program?

26:30What you do see is that it is very project specific, right? And so you might have a set of dynamics in one area, right, that are very different than another in terms of what federal, state, local permits are required, what the NEPA review process will look like. And so what that means for us is it ends up being a pretty bespoke interaction, right? And so we need substantial resources on our side in order to help manage that. So this actually reminds me of something I wanted to ask you, which is, you know, you spoke about diversity of labor force. Is geographic diversity a concern for you? Because my impression is that so far, a lot of the money seems to be heading towards Arizona and Texas, which, you know, speaking about regulation and perhaps environmental concerns, you know, those are not the two states that spring to mind when we're talking about, you know, an abundance of water, which is necessary for the state.

27:32for fabs and things like that. So how are you sort of dispersing the money from a geographical perspective? We're not, you know, driving the geographical diversification. We are trying to encourage applicants to find the best locations that work for them from, and you mentioned water and electricity and also local labor force and the quality of educational institutions in those areas and state and local incentives that might be part of any application. The large leading-edge fabs that are written mostly about are already focused on certain geographic locations. That is where many of them have even started to construct on those locations.