Investment

Chipmakers Cut Investments After Subsidies – Shame On You!

Covid has been awful, with its shutdowns, social isolation, work stoppages, and scary sickness. The resulting inflation due to supply chain intermittency has caused global political crises. As if all that hasn’t been bad enough, now we learn that mega-corporations like chipmakers Intel and Micron have slashed their manufacturing investments — just when major government subsidies are coming their way.

It’s time to cry b******t.

We need to blast the audacity and hypocrisy of chipmakers. You see, they’re positioned to get significant handouts from the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America and Science Act (also known as CHIPS+). (That’s sexy mouthful, huh?)

Yet chipmakers are cutting investments.

Will a pay-the-investors-first attitude cause the US to lose the little market leverage that currently exists in the semiconductor industry?

Calling it “a rigged economy,” Senator Bernie Sanders (I-VT) exclaimed, “On the same day a bill was signed into law to give a $76 billion blank check to microchip companies, Intel announced it will be cutting back on plans to increase jobs by $4 billion while increasing dividends for its wealthy shareholders.”

Sanders has been a severe critic of Congress as it approves billions of dollars in handouts to major corporations. The Senator has pushed Congress, instead, to delegate funds to the cost-of-living crisis, effects from the pandemic, and the intensifying climate emergency.

The Ebb & Flow of Chipmakers’ Focus on Manufacturing

Why are chipmakers cutting infrastructure investments? As with many businesses, they do so when supply exceeds demand. A rapid build-up in inventory in the chip supply chain since early 2022 is seen as the culprit. Compared with February of this year, when there were enough chips on hand to support about 1.2 months of production, global inventory levels jumped to 1.4 months in June and then 1.7 months in July, according to VLSI Research.

Intel had lobbied hard, very insistently, for the bipartisan CHIPS+ Act, claiming it would have no choice but to move even more of its operations outside the US than it already has. That is, if the bill — with associated subsidies — wasn’t approved. Intel even delayed groundbreaking at its chip mega-factory in Columbus, Ohio, where the company could invest more than $100 billion over the next decade.

Congress rationalized that US economic competitiveness and dominance in critical industries needed to be ensured with a robust manufacturing base in strategic industries like semiconductor production.

This is the same Congress that legislated for decades for global commerce relationships, which translated into US manufacturing to go overseas and factory work inside the US to plummet. In 1965, manufacturing accounted for 53% of the economy. By 1988, it only accounted for 39%, and in 2004, it accounted for just 9%.

Regardless of the no-strings-attached measure, President Joe Biden signed CHIPS+ into law.

Overall, the Act includes $52 billion in taxpayer subsidies and a $24 billion investment tax credit for the semiconductor industry.

“Semiconductor chips are the building blocks of the modern economy — they power our smartphones and cars,” said President Biden before the legislation was formally approved by the Senate. “And for years, manufacturing was sent overseas. For the sake of American jobs and our economy, we must make these at home.”

Why Infrastructure Investment in Chips is Crucial

Chair of the Senate Budget Committee, Sanders was the only member of the Senate Democratic caucus to vote No on the CHIP+ Act. The chip factories produced by this package won’t be complete for years, as described in an analysis by Vox, and the bulk of the funding won’t necessarily go toward basic chips, also known as legacy chips, which account for much of the ongoing shortage.

The US supply of advanced chips, which are sometimes defined as chips with transistors that are less than 10 nanometers wide, is the primary motivation for passing the CHIPS+ Act. These chips are extremely difficult to manufacture, and they’re also critical for certain types of technology, including weapons. Chip factories are major industrial plants that usually take years to design and construct before production starts.

China and Japan have invested heavily in their domestic manufacturing capabilities. Just 12% of the world’s chips are made in the US today, compared to about 37% in 1990, according to the Semiconductor Industry Association, a US semiconductor trade group that lobbied for and is delighted with the passage of the CHIPS+ Act.

Meanwhile, Intel has stated it will cut spending on manufacturing plant build-outs and other investments by $4 billion in the coming months, even as it continues to pay a sizable dividend to its shareholders.

Intel’s Bait & Switch

Semiconductor mega-corporation Intel’s 2022 Q2 net loss of $454,000,000 has market watchers aghast. The company’s first GAAP net loss in over 30 years found Intel’s executives scrambling for their own investment portfolios and legislators crying foul — with the company’s stability moving forward in question. It’s clear that even with billions in subsidies from the US and EU CHIPS Acts, Intel had several difficult decisions to make due to deteriorating financials.

The company’s response? Pay investor dividends of $1.5 billion, a 5% increase YOY, and keep ’em happy. CFO David Zinsner noted at Intel’s Q2 2022 earnings call that Intel will “remain committed to growing the dividend over time.” They expect to pay that much or more for Q3 and Q4 of 2022, which amounts to a minimum of $4.5 billion dollars paid in dividends.

CEO Pat Gelsinger noted on the Intel earnings call that they “are also lowering core expenses in calendar year ’22,” a turnaround for Gelsinger, who had professed originally to invest heavily in their core business. Gelsinger’s declarations continued into July, when he told CNBC that the semiconductor industry needs $52 billion in subsidies to remain competitive — or else major microchip companies won’t invest resources in the US. This revelation took place while Intel was lobbying Congress to allow it to potentially use the subsidies to put more money into its factories outside of the country.

Dylan Patel on SemiAnalysis calls it “a disgrace that Intel has decided to cut fab buildouts while begging the US government for subsidies through the CHIPS+ Act and committing to growing their dividend.” Patel believes Intel will be underutilized in 2023 due to a weak macroeconomy and fierce competition.

Causes for the semiconductor demand demise include PC industry slowdowns as well as competition from the rapidly growing data center business. The true state of Intel stayed in shadow during the lockdown Covid years, when work from home patterns and data center booms took center stage for design and manufacturing semiconductors.

Now it’s been revealed that Intel plans to purchase a whole lot of semiconductor manufacturing tools from a new Chinese supplier. So much for a rah! rah! build ’em at home approach.

Micron Capitulates as It Readies for Subsidy Support

Micron issued a statement last week that it plans to “cut its capital spending ‘meaningfully’ next year” in response to worsening conditions in the chip industry and the global economy.

In an August 9 press release, Micron announced its plans to invest $40 billion through the end of the decade to build “leading-edge” memory manufacturing in multiple phases in the US. With the anticipated grants and credits made possible by the CHIPS+ Act, the company said that this investment “will enable the world’s most advanced memory manufacturing in America.” Production should begin in the second half of the decade, ramping overall supply in line with industry demand trends.

Beginning production in “the second half of the decade” is a long, long way off at a time in which chipmakers and the companies that need their products are in flux.

The planned investment could be the largest in memory manufacturing in US history, Micron suggested, and has the potential to create up to 40,000 new US jobs, including approximately 5,000 highly paid technical and operational roles at Micron.

Like Intel, Micron was delighted to learn that the CHIPS+ passed Congressional muster. The company was confident it could effectively apply the “grants and credits” within the Act.

Sanders Bemoaned Closed Door Negotiations on Behalf of Mega-Corporations

Acknowledging that it is a “dire threat to our nation,” Sanders noted the microchip and semiconductor shortage costs the US good paying jobs, jeopardizes raises for families, and puts US national security at risk. It also makes it more difficult to manufacture cars, cellphones, and life-saving medical equipment.

Rather than acquiescing to these industries’ full requests for compensation, however, Sander reminds everyone that the microchip industry helped cause this crisis over the last 20 years by “shutting down 780 plants here and eliminating 150,000 good-paying jobs.”

“What is Congress doing right now, at a time when we face so many massive problems?” asked Sanders. “The answer is that for two months, a 107-member conference committee has been meeting behind closed doors to provide over $50 billion in corporate welfare with no strings attached to the highly profitable microchip industry.”

As Sanders asked, will the demand for a “bribe” become an irreconcilable position?

“The five biggest semiconductor companies that will likely receive the lion’s share of this taxpayer handout — Intel, Texas Instruments, Micron Technology, Global Foundries, and Samsung — made $70 billion in profits last year,” Sanders related in July. “Does it sound like these companies really need corporate welfare?”

Instead, Sanders had outlined a series of conditions that should be met prior to awarding these semiconductor companies subsidies.

  • Companies must agree to issue warrants or equity stakes to the federal government.
  • They must commit to not buying back their own stock.
  • They will not outsource US jobs overseas.
  • The would not repeal existing collective bargaining agreements.
  • They must remain neutral in any union organizing efforts.

Saying that these demands “are not radical,” Sanders noted that these are the same conditions that were included in the CARES Act, “which passed the Senate 96-0.”


 

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