Covid has been terrible, with its shutdowns, social isolation, work breaks and scary illnesses. The resulting inflation caused by supply chain disruptions caused global political crises. As if all that weren’t bad enough, we’re now learning that megacorporations like chipmakers Intel and Micron have cut their manufacturing investments — just as big government subsidies are coming their way.
It’s time to cry b******t.
We must blast the arrogance and hypocrisy of the chip makers. You see, they’re in a position to get significant input from the Creating Useful Incentives for America and Science (CHIPS) Act (also known as CHIPS+). (That’s a hot mouth, huh?)
However, chipmakers are cutting back on investment.
Will the “pay investors first” attitude cause them to lose what little market leverage currently exists in the semiconductor industry?
Sen. Bernie Sanders (I-VT) called it a “rigged economy” and exclaimed, “On the same day a bill was signed to hand out a $76 billion blank check to microchip companies, Intel announced it would cut back on plans to add jobs by $4 billion while increasing dividends for its wealthy shareholders.
Sanders has been a harsh critic of Congress for approving billions of dollars in handouts to big corporations. Instead, the senator pushed Congress to delegate funding for the cost-of-living crisis, the effects of the pandemic and the intensifying climate crisis.
The ebb and flow of chipmakers’ focus on manufacturing
Why are chipmakers cutting back on infrastructure investment? As with many businesses, they do so when supply exceeds demand. A rapid increase in inventory in the chip supply chain from early 2022 is believed to be the culprit. Compared to February this year, when enough chips were 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 lobbied hard and very urgently for the bipartisan CHIPS+ bill, arguing that it would have no choice but to move even more of its operations outside the US than it already does. That is, if the bill – with associated subsidies – was not approved. Intel has even delayed groundbreaking at its mega-chip 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 must be secured by a robust manufacturing base in strategic industries such as semiconductor manufacturing.
This is the same Congress that has enacted global trade relations for decades, resulting in American manufacturing going overseas and US factory jobs plummeting. In 1965, manufacturing accounted for 53% of the economy. In 1988 it was only 39% and in 2004 it was only 9%.
Regardless of the non-binding measure, President Joe Biden signed CHIPS+ into law.
Overall, the law includes $52 billion in taxpayer subsidies and $24 billion in investment tax credits for the semiconductor industry.
“Semiconductor chips are the building blocks of the modern economy — they power our smartphones and cars,” President Biden said before the legislation was formally approved by the Senate. “And for years, production was sent overseas. For the sake of American jobs and our economy, we must make them at home.”
Semiconductor chips are the building blocks of the modern economy – they power our smartphones and cars.
And for years, production was sent overseas. For the sake of American jobs and our economy, we must make them at home.
The CHIPS for America Act will do just that.
— President Biden (@POTUS) July 26, 2022
Why investment in chip infrastructure is essential
Senate Appropriations Committee Chairman Sanders was the only Democratic member of the Senate committee to vote against the CHIP+ bill. The chip factories produced by this package will not be completed in several years, as described in the analysis from Voxand the bulk of the funding won’t necessarily go to core chips, also known as legacy chips, which account for much of the ongoing shortage.
America’s supply of advanced chips, sometimes defined as chips with transistors less than 10 nanometers wide, is the primary motivation for passing the CHIPS+ Act. These chips are extremely difficult to manufacture and are also important for certain types of technology, including weapons. Chip plants are major industrial plants that typically take years to design and build before production begins.
China and Japan have invested heavily in their domestic manufacturing capacities. Just 12% of the world’s chips are made in the U.S. today, compared with about 37% in 1990, according to the Semiconductor Industry Association, a U.S. semiconductor trade group that lobbied for and is excited about the CHIPS+ Act.
Meanwhile, Intel said it would cut spending on factory construction and other investments by $4 billion in the coming months, even as it will continue to pay out hefty dividends to shareholders.
Intel’s Bait & Switch
Intel’s Q2 2022 net loss of $454,000,000 at the semiconductor mega-corporation caused consternation among market watchers. The company’s first GAAP net loss in more than 30 years had Intel executives scrambling for their own investment portfolios and lawmakers crying foul — with doubts about the company’s stability. It’s clear that even with billions in US and EU CHIPS Act subsidies, Intel has had to make some difficult decisions due to deteriorating finances.
The company’s reaction? Pay investors $1.5 billion in dividends, up 5% year over year, and keep them happy. On Intel’s Q2 2022 earnings call, CFO David Zinsner noted that Intel “will remain committed to increasing the dividend over time.” They expect to pay that much or more in the 3rd and 4th quarters of 2022, making at least $4.5 billion paid out in dividends.
CEO Pat Gelsinger noted on Intel’s earnings call that they are “also reducing core spending in calendar year ’22,” a reversal for Gelsinger, who initially said he was investing heavily in his core business. Gelsinger’s statements continued until July, when he said CNBC that the semiconductor industry needs $52 billion in subsidies to remain competitive – otherwise the big microchip companies won’t invest resources in the US. The revelation came as Intel lobbied Congress to allow it to potentially use the subsidies to put more money into its factories outside the country.
Dylan Patel on Semianalysis calling it “a shame that Intel decided to cut back on great builds while asking the US government for subsidies through the CHIPS+ Act and committing to a dividend increase.” Patel believes Intel will be underutilized in 2023 due to a weak macro economy and stiff competition.
Factors behind the decline in demand for semiconductors include a slowdown in computer manufacturing and competition from the fast-growing data center business. Intel’s true health remained in the shadows during the Covid shutdown years, when telecommuting and the data center boom took center stage in semiconductor design and manufacturing.
Now it has been revealed that Intel plans to purchase a range of semiconductor manufacturing tools from a new Chinese supplier. So much for the blow! Hurrah! build them at home.
Micron capitulates as it prepares for subsidy support
Micron issued a statement last week that it plans to “meaningfully reduce its capital expenditures next year” in response to deteriorating conditions in the chip industry and the global economy.
In an Aug. 9 press release, Micron announced plans to invest $40 billion by the end of the decade to build a multi-phase “state-of-the-art” memory manufacturing facility in the US. With the expected grants and credits made possible by the CHIPS+ Act, the company said the investment will “enable the world’s most advanced memory manufacturing in America.” Production is expected to begin in the second half of the decade, increasing overall supply in line with industry demand trends.
Starting production in the “second half of the decade” is a long, long way at a time when chipmakers and the companies that need their products are changing.
The planned investment could be the largest in memory manufacturing in U.S. history, Micron suggested, and has the potential to create up to 40,000 new U.S. jobs, including about 5,000 high-paying technical and operational roles at Micron.
Like Intel, Micron was pleased to learn that CHIPS+ had passed Congress. The company was confident that it could effectively apply “grants and loans” under the Act.
Sanders bemoaned closed-door negotiations on behalf of mega-corporations
Acknowledging it was a “terrible threat to our nation,” Sanders noted that microchip and semiconductor shortages are costing the U.S. high-paying jobs, jeopardizing family benefits and threatening U.S. national security. This also makes it difficult to manufacture cars, mobile phones and life-saving medical devices.
Instead of bowing to these industries’ full demands for compensation, Sander reminds everyone that the microchip industry helped cause this crisis over the past 20 years by “closing 780 plants here and eliminating 150,000 good-paying jobs.”
“What is Congress doing right now, at a time when we’re facing so many huge problems?” Sanders asked. “The answer is that for two months, a 107-member conference committee has been meeting behind closed doors to provide more than $50 billion in corporate welfare with no strings attached to the highly profitable microchip industry.”
As Sanders asked, will the “bribe” demand become an intransigent position?
“The five largest semiconductor companies that will likely receive the lion’s share of this taxpayer gift — Intel, Texas Instruments, Micron Technology, Global Foundries and Samsung — made $70 billion last year,” Sanders said in July. “Does it sound like these companies really need corporate welfare?”
Instead, Sanders outlined a series of conditions that would have to be met before subsidies could be awarded to these semiconductor companies.
- Companies must agree to issue warrants or equity interests to the federal government.
- They must commit not to buy back their own shares.
- They will not outsource American jobs overseas.
- This would not cancel existing collective agreements.
- They must remain neutral in all efforts to organize unions.
Sanders said the requirements are “not radical,” noting that they are the same terms that were included in the CARES Act “that passed the Senate 96-0.”
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