Starting in February 2023, the US semiconductor industry will be getting an injection of money with the potential to supercharge innovation, revitalize US manufacturing, reduce chip shortages, and spread the promise of tech wealth across a broader swath of the country. The CHIPS and Science Act—often referred to as simply the CHIPS Act—offers significant benefits, but the money comes with strings attached. Companies planning to tap federal funding must be aware of the impact on their strategies and the critical tradeoffs. Here, I outline these considerations and share some financial strategies. But first, how did we get here?
US ingenuity invented the semiconductor. It’s now a $556 billion industry. Yet, the US retains just 12 percent of global chip manufacturing capacity—down from 37 percent in 1990. The CHIPS Act’s nearly $250 billion investment aims to reverse that trend by repatriating chip-making and protecting advanced technology development.
So, who’s poised to benefit in the short and long term? It’s a collection of both usual and unusual suspects. Let’s take a look.
The 800-Pound Gorillas Get a Helping Hand
Building a chip fabrication (“fab”) plant and outfitting it with complex manufacturing equipment is very costly. That’s why chip design decoupled from chip-making decades ago. The US remains the world leader in chip design, while the building of fabs has been outsourced to lower-cost countries where the industry is heavily subsidized. Adding CHIPS Act funding to current local and state tax breaks changes the offshoring cost-benefit equation for companies already riding the reshoring wave.
Intel, Micron, and Texas Instruments—some of the top US semiconductor companies by market cap—have been grabbing headlines with new plant announcements. Intel’s $20 billion investment in the newly dubbed “silicon heartland” of Ohio could eventually reach $100 billion and eight factories. It also intends to expand facilities in Arizona and New Mexico. Micron is investing $15 billion to build a new plant in Idaho. Texas Instruments broke ground in May on one of four new plants in Texas as part of a $30 billion investment.
A Boost For The Broader Ecosystem
Beyond the heavyweights, the wider ecosystem expects a lift. Medium-sized contract chipmaker GlobalFoundries recently partnered with Qualcomm to deliver an additional $4.2 billion worth of chips from their upstate New York facility. The company wants to hike chip production in the US by up to 50 percent over the next five years. In Massachusetts, manufacturers of machinery that measure Silicon wafers and etch circuits onto chips expect to profit. In New Hampshire, Commerce Secretary Gina Raimondo pointed to electric vehicle chip manufacturer Onsemi as an innovator the federal dollars will help elevate. CHIPS Act funds should nurture not just the sprouting of these manufacturing-centric tech hubs but domestic innovation, too.
Tech’s New Promised Land(s)
What stands out from the list of new plant investments? Their locations. Silicon Valley leaders have been vocal CHIPS Act supporters, but locales outside the industry’s storied birthplace may gain the most. The CHIPS Act will prioritize projects that, according to the New York Times, “involve economically disadvantaged individuals and businesses owned by minorities, veterans or women, or that are based in rural areas.”
Reshoring in 2022 will create more jobs than foreign direct investment for the third straight year. New facilities need chip engineers, but also a lot of union-paid workers. Most companies heralding new plants are also touting local education partnerships for training and upskilling.
One thorny problem is whether a large enough workforce with the right skills can be secured quickly enough. The SEMI trade association has called for immigration reform to draw more workers with advanced STEM degrees to the US Companies are tackling the problem themselves, too. For example, Intel’s $10 million partnership with the National Science Foundation aims to provide more higher education opportunities for minority students. Ensuring a long-term supply of skilled workers will also require the US to double down on STEM learning at the primary school level.
Be Aware Of The Tradeoffs
So, back to my point about money coming with strings attached. There are restrictions with strategic implications to consider. Here are two big ones:
Giving Up Markets: Companies taking funding are barred from growing manufacturing in China for 10 years. One exception is plants producing legacy chips for China’s domestic market. Companies taking R&D money may need to reconsider their fab partnerships. The restrictions mean funding recipients lock themselves into a decade-long bet on the reshoring trend. In the short term, companies should be prepared for investors to punish them for making that choice. Recent US export restrictions to keep the most advanced chips off the Chinese market hurt Nvidia’s and AMD’s stock prices as investors digested the potential hit to sales.
Passing On Costs: Yes, the pandemic radically disrupted the world’s thinking on supply chains. To have chips made closer to US end-user consumers makes perfect sense. However, commitments to US manufacturing more than likely spell higher costs all along the semiconductor value chain. Preparing to pass these higher costs on will be important. Companies must be realistic about their pricing power. A positive data point: More than 83 percent of Americans surveyed have said they would pay up to 20 percent more for products made domestically.
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Making Smart Financial Moves
For companies planning new plants, here are some smart financial moves to consider. Plant investments require huge initial capital outlays with the payoff coming years down the road. That means managing working capital efficiently is critical. By leasing rather than buying factory equipment, companies can avoid paying full price upfront.
Finance leaders can also optimize their cash flow and cash-conversion cycle in a couple of ways. First, they could use receivables financing to quickly monetize their receivables and shorten their DSO (days sales outstanding). Second, they could consider offering supplier financing, thereby extending their DPO (days payables outstanding).
The CHIPS Act is expected to dramatically reshape the semiconductor industry. Although its full impact may not be known for years, companies aware of the tradeoffs are smart to seize the day.
This article originally appeared on Forbes.com.