In August of last year, the White House signed the CHIPS and Science Act of 2022, a bipartisan effort to bring more advanced semiconductor manufacturing onto US shores. Of course, it already has plenty of critics. There are concerns that the bill is being larded up with red tape, or non-core progressive priorities, that will undermine the bill. On this episode, we speak to two leaders playing key roles in the act's implementation. Mike Schmidt, director of the CHIPS Program Office, and Todd Fisher, the program's chief investment officer, join us to talk about the act's goals, what's been achieved so far, and why they believe it can succeed. This transcript has been lightly edited for clarity.
Key insights from the pod:
The purpose of the program — 4:19
What does the CHIPS Act CIO actually do? — 6:43
Are there performance benchmarks? — 9:20
The application process for funding — 13:06
The childcare requirement — 15:27
Environmental regulation — 22:04
Supporting mature or leading edge chips? — 26:52
A buyer of last resort for semiconductors? — 31:53
What chips companies are saying now about investment — 35:12
Share buybacks and private investment — 37:06
How do US trading partners feel about the CHIPS Act? — 42:05
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Joe Weisenthal: (00:10)
Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway: (00:15)
And I'm Tracy Alloway.
Joe: (00:16)
Tracy, you know, one of the things we talk about and one of the themes we come back to quite a lot is just this idea of US government, really all government, but I guess sort of US-centric government intervention, active role in the economy, which is something that I would say has characterized a lot of early Biden policymaking so far.
Tracy: (00:37)
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 US government money that actually flowed into both that place and that industry. And that had a massive impact. And now fast forward to, you know, the post-pandemic era, and it feels like we're seeing a bit of a resurgence.
Joe: (00:58)
Yeah, that's a good reminder. It feels like, you know, the US 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, that'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. It certainly is under Biden in a very significant way, both with the CHIPS Act and of course the Inflation Reduction Act of serious public investment -- and the infrastructure bill -- of public investment into different industries.
Tracy: (01:36)
Right. 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 kind of, I guess the shining symbol of this new direction.
Joe: (02:12)
Well, you mentioned supply chains and we did a lot of episodes on broken chip supply chains. So 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 [thing], a couple bills passed, there's a big question, “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, “ugh, 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 kneecaps any momentum.
Tracy: (02:54)
Yeah. 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, I would say an almost knee jerk suspicion of government spending from 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 childcare, 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.
Joe: (03:34)
You 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. Look, where are we? The bill was passed last August. We're already seeing a lot of activity in the wake, but how's it actually going?
I'm very excited about our guests. We are going to be speaking with Mike Schmidt, director of the CHIPS program office, as well as Todd Fisher, chief Investment Officer of the CHIPS program office. I 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 Odd Lots.
Mike: (04:19)
Thank you. Thank you, Joe. Thank you Tracy for having us. 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 technologies. They'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 as the US 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.
And so at Commerce [Department] we have $50 billion to address this problem. $39 billion is 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.
Joe: (06:06)
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. You mentioned the geopolitics, which is, the stakes are literally very high, for all modern life of whether, you know, the US always has an ongoing supply of sort of advanced and less advanced chips.
Tracy: (06:27)
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?
Todd: (06:43)
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. So I spent my career, I spent 30 years in the financial industry and 25 years at KKR basically making investments, sitting on investment committees, etc. 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 seem to make sense to us.
Mike: (07:29)
I was just going to jump in and maybe explain a little bit of the broader theory of the case in terms of how we're building the team. Because fundamentally we have two objectives here, right?
Number 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 going to advance both the taxpayer protection side of the equation, but also the kind of strategic and economic.
Joe: (08:25)
Well, let me ask, and, you know, 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 or maybe you can look at volatility in a few things. It's like, “oh, this investor made money, or they at least avoided losing money, etc.”
Obviously as you mentioned, Mike and Todd, both of you, you know, 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 are there hard benchmarks that we can look at in terms of was taxpayer money well spent? Are there hard benchmarks in terms of how much chip production is happening in the United States today, versus 2028, versus 2033, that we could 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?
Mike: (09:20)
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, you know, industry applicants, foreign governments, Congress, to explain what we're trying to get with their money. And 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 to 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. The measure I think about a lot, Joe, beyond all of 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 core to 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?
Todd: (11:13)
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. Mike'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% to 10%. 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. And 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.
Tracy: (12:27)
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. But before we get to those, maybe just to back up for a second, could you talk about how the process of disbursing 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, you know, and applying it? Do people come to you or do you identify prospective companies that could benefit from this? How exactly does that work?
Todd: (13:06)
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. Our 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. We 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.
Mike: (14:08)
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. If we can align, then we'll do our due diligence and we'll move towards making that award.
Joe: (14:39)
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 childcare 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 childcare 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. And that company is, if we really want them to just 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?
Mike: (15:27)
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 national security objectives. Every 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, you know, one thing we hear a lot from companies is that lack of access to affordable accessible childcare 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 childcare 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. So as part of the workforce plan, we have asked companies to provide a plan with respect to access to childcare that will be part of that holistic evaluation process that covers those six evaluation criteria.
Todd: (16:52)
If I could add one or two things to that. I left KKR five years ago with an intention to 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.
And 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 one of their, if not their biggest challenge is attracting workers for their desire to build plants in this country. It's 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 productivity they're able to get out of their workers and the sort of aligned system that the Koreans and the Taiwanese have around workforce.
And 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 childcare. Micron just announced in Idaho that they're building a childcare center for their R&D fab 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.
Tracy: (18:38)
So 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 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 US will be able to find enough people who want to do this type of work.
Todd: (19:24)
I 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 skillset. There should be no reason that our workforce in the US can't be as productive as any other workforce around the globe. And so the other things, in addition to things like childcare, you would talk about aligning local systems, community colleges, four year institutions, training organizations with appropriate, you know, 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 so that more talent can experience the quality of the jobs that there are in this industry.
Mike: (20:27)
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 of us can, you know, play a role in trying to shape that narrative. I mean, semiconductors, it is really the peak of human innovative capacity. And I think, you know, we need to make semiconductors cool here.
Joe: (20:58)
It does seem like, I don't know, you could go into software and make a lot of money and, you know, hang out and play ping pong and stuff like that…
Tracy: (21:07)
Sit on beanbags…
Joe: (21:08)
… Or go to semiconductors and it be like really grueling and not sit on beanbags. And that's kind of tough 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 Plan Is racing Towards Failure,” but this is something they bring up and it's something I've heard from many, you see it a lot, which is that one challenge in America is things like local environmental regs make building slower than it does in other countries. Land use questions, environmental reviews, lawsuits, things like that.
Just in 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?
Mike: (22:04)
It's a great question. I think it is a reality of our American system, the Federalist 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.
You know, we are building a team here that is focused exclusively on those issues, right? And, you know, our, so our job is not to admire the problem, but to kind of jump in and try to solve it. And you know, I think with the right capacity on our side as well as the right capacity being brought to bear from from our applicants, it's just a lot of blocking and tackling.
But, you know, we are optimistic that permitting an environmental review won't end up being what we call the long pole in the tent. But, you know, there's no question it's a challenge and we are taking it very seriously and investing necessary resources in order to make sure that we're able to meet our objectives.
Joe: (23:01)
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 like 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?
Mike: (23:22)
What you do see is that it is very project specific, right? And so you might have a set of dynamics in one area 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 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.
Tracy: (23:55)
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, 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 fabs and things like that. So how are you sort of dispersing the money from a geographical perspective?
Todd: (24:32)
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, you know, 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. And we hope and expect to see, you know, broad ecosystems of suppliers and customers and others, you know, build around those ecosystems. However, that is not all of our money.
We also are trying to support current and mature nodes of semiconductors. Some of the things that really cause some of the slowdowns in the pandemic – auto, healthcare, MRI machines, etc., that are not like the leading edge of logic, but are, you know, mature nodes that have been produced for a while but are still really necessary to produce lots and lots of different consumer products and auto products and communications products.
Those will be spread throughout the country, I'm sure. And I think there are many, many states and localities that are vying to build effective ecosystems and attract companies to their own geographies. And my guess is we'll have a relatively broad dispersion of that money in that regard.
Tracy: (26:06)
Oh, so this actually leads very nicely into another thing that I wanted to ask, which is, I know you mentioned placing an emphasis on leading edge tech in the beginning, but one of the things that we learned from the past couple of years was that a lot of the, I guess, pressure points that emerged in various supply chains -- and you just mentioned the car industry for instance, that had to do with pretty basic chips that were no longer coming from traditional sources like Asia -- so how are you sort of balancing those two mandates, the sort of basic bread and butter chips, for lack of a better expression versus the sort of leading edge high tech stuff that you want the US to be a specialist in in the future?
Mike: (26:52)
That's a really good and I important question, and it's those types of questions, which is why we felt compelled to put out that “Vision For Success” statement that I talked about earlier where we are trying to articulate the broad range of objectives that we are kind of realistically trying to achieve, with what -- let's be real -- is a is a limited sum of money. I mean, $39 billion is a huge amount in an absolute sense, but relative to the global semiconductor investment we expect to see over the next several years, it's a small amount.
And we are ultimately going to take a portfolio level approach, right? Where we're going to try to maximize what we can achieve on the leading edge side, but also we hope to see really strong applicants on the current generation and mature side that are meaningfully contributing to supply chain resiliency and meaningfully providing that kind of resilience to critical industries like critical infrastructure like auto, like the defense, industrial base obviously being a critically important factor there from a national security perspective.
And we'll look across these various priorities and overlay the importance of putting the taxpayer money to work efficiently and getting kind of the most bang for our buck and try to produce an overall portfolio that is achieving this range of objectives.
Todd: (28:21)
So maybe just a few comments to add there, if it's all right. The statute itself calls for $2 billion of investment into current and mature nodes. We view that very much as a floor. So to Tracy's point, these companies and these nodes of semiconductors are really important to the fundamental supply chain resiliency of this country.
And actually, if you look at the auto industry, the auto industry is really very interesting. The global semiconductor industry grows by about 6% a year, $600 billion market. It, you know, by 2030 it'll likely be about a trillion dollars. The auto industry and the demand for chips within the auto industry is growing double that. So the estimate for the next eight or 10 years is about 12%, and that's driven by classic, you know, EVs and autonomous vehicles, etc.
And so what you're seeing, you're seeing the auto companies really clearly with their pocketbooks and with their statements, demanding that the supply chain for those chips sits in this country. You saw recently GM announced a dedicated capacity corridor with global foundries and a big deal in New York. You've seen BorgWarner that has put $500 million into a recent debt offering from Wolfspeed in an effort to secure $650 million of annual capacity a year. You've seen similar things being done by Renault, you know, by different auto companies. And so there's real demand and there's real action by the customers to try to push and force that supply chain diversification and resiliency.
Mike: (29:54)
Yeah, the importance of the customer piece cannot be overstated here. And it's true, as Todd said, for current generation and mature, but it's also true on leading edge where the major leading edge customers like in Apple, like the big fabless firms, are also now more interested in geographic diversification of their supply chain. And that puts us in a position where we are allocating our funds in a way that is kind of building on tailwinds in the industry already. And those dynamics and trying to sustain those dynamics are going to, is going to be hugely important going forward.
Joe: (30:49)
So I want to ask you a question, and I posed this to former NEC Chair Brian Deese when we had him on right before he left the job. But you know, when you think about prior periods of big public investment in tech, a key element was this sort of buyer of last resort, particularly the defense department.
And so you mentioned the importance of the customer, and I get, you know, of course GM and some of these other car companies are thinking about geographic diversity and it's understandable after the last few years, but, you know, legacy nodes, legacy tech, it does seem like it's a very boom and bust cycle industry and there's not always going to be a chip shortage, presumably.
Are you worried about, you know, okay, right now there is a lot of demand and a lot of investment, but that in a few years while you hope to have this sort of self-sustaining industry, that some of these fabs will not have an end buyer because there is no sort of sustained government buyer of last resort? And how do you sort of think about that risk of commodification, the bust cycle, a few years down the road?
Todd: (31:53)
I would answer that question yes and no. I mean, yes, of course we focus a lot and will focus a lot at the fundamental analysis of each of these applications, on the overall supply demand and long-term projections for those specific products and those specific nodes. And we're also going to be very focused and the funding opportunity lays this out, on specific evidence of customer demand over time. And you've seen in this industry many customers who are willing to make, you know, forward commitments, three-year forward commitments, etc.
So we're really looking for that because we're very mindful that the supply and demand dynamics and these sort of micro parts of this industry are really critical. All that being said, and I know we're right now in a situation where we've seen in a very rapid fashion, sort of the buts side of your boom and bust as the economy shifts. But when you look over long periods of time in this industry, there are massive secular trends that are tailwinds for this industry.
It will always be somewhat cyclical, that's the nature of it. But even if you go back decades, you can see within those cycles the chart is up and to the right. And I think those fundamental drivers, which I mentioned a couple before, like EV but also AI and Cloud and 5G and internet of things, all of those aspects are driving fundamental mid to high single digit growth in this company, in this industry secularly, which are really important.
And so our job is to take advantage of that, to make sure more of that capacity gets built in this country and to make sure we're also doing our job by taxpayers and making sure that we are really mindful of the way supply and demand dynamics evolve over time.
Mike: (33:39)
And, agree with all of that. And would just add, one other dynamic, Joe, which is that we will be a part of the capital stack, right? As the federal government and there's an investment tax credit and you know, there's going to be state and local incentives, right?
But private investment is going to be driving this, right? And so fundamentally, when it comes to the kind of supply demand dynamics of any particular fab or any particular award, we're going to do our due diligence, as Todd said, we think that's core to our job, but we're going to be investing in a sense alongside private capital who will also have a measure of confidence that yes, there will be ups and downs as there always are in this industry, but that the overall demand profile is going to lead to healthy and self-sustaining dynamics.
Tracy: (34:34)
On the topic of private investment, it does feel like the semiconductor industry is in some respects in a weird place right now because there is a lot of concern about demand potentially slowing down, about a potential glut of supply. And yet there is also simultaneously this recognition that long-term it feels like people are just going to want more and more chips. So I'm curious what you're hearing from applicants right now in terms of their appetite for investment. What are they telling you and what are their major concerns at this point in time?
Todd: (35:12)
What we've heard from companies is broadly what we've already talked about, which is long term, this industry is very clearly driven by some really strong secular drivers. There is no reason in the current sort of economic shift to doubt that. And so most companies are, you know, looking forward with their capital investment and saying, you know, over a X-year, five-, 10-year period, we still expect to spend the same amount of money that we anticipated before that might take different shapes, we might invest it a little less next year, particularly in certain parts of the industry that are much more cyclical like memory. But broadly speaking, they don't see any changes to their overall capital investment over time.
Joe: (35:58)
I want to ask a question about stock buybacks -- very controversial in almost any area and people are always fighting about them. And the reason I'm curious about them is I've seen some comments from the White House or from the administration about, you know, making sure the money doesn't go towards stock buybacks.
And I kind of get that on some level, but on the other hand, if there's going to be a self-sustaining sort of self-propagating industry in the United States that this initial investment of $52 billion is going to sustain, then presumably it's going to be because shareholders are going to want to see returns. And obviously all these companies are for profit companies and shareholders are going to want to see overtime [their] stock go up.
And so I'm sort of curious, how you think maybe buybacks specifically or more broadly about the sort of tension, it's like, okay, you don't want this money to just go straight in the hands of shareholders, but on the other hand, there's not going to be an industry that booms in the United States unless people see that they're making a lot of money at it, because ultimately that's why people would invest in anything. And so I'm curious how you think about the shareholder return element of making sure that the CHIPS Act does its job?
Mike: (37:06)
Level set, to start. We want this industry to be hugely successful, right? We want the economic returns from these investments to propel additional investment going forward that is hugely critical to our long -term success. So I fully agree with you there, there's a provision in the law that says the money we give companies can't be used for stock buybacks. That's kind of self-evident because they're supposed to use the money to build fabs.
So there's not much of a, you know, trade off there. We have also said that we will favor applications that want to make long-term investments in R&D and manufacturing capacity and production here in the United States, which we believe is absolutely critical to meeting those economic and national security objectives as well.
Todd: (38:01)
Yeah, I think that's an important point when you, there is no restriction on stock buybacks in our funding opportunity. The only comment about stock buybacks is in relation to what Mike just said. And basically we're saying that what we really want to see is long-term companies commit to continue to invest in this country, both capital, R&D dollars, for people, for facilities, for process improvements etc.
And one way, way to show that is to demonstrate your commitment to those dollars, but also to, you know, limit or otherwise, you know, restrict your buybacks or dividend programs to show that you're doing that. That is not a restriction or a requirement. It is just an example of how to demonstrate that over time your plan is to continue to invest in this country and in this industry.
Tracy: (38:59)
So this is a related question, but if the goal of this program is to build up a more resilient domestic semiconductor industry so that it creates lots of good jobs and also ensures that the US isn't vulnerable to supply chain disruptions in the future, does that mean that companies who take this money, and by the way, I stole this question off of our Discord that we're running -- the Odd Lots Discord, so people who are interested should definitely check that out. But does that mean that companies who take this money, these subsidies to build fabs, do they have specific obligations to prioritize US customers?
Mike: (39:43)
Well I think there are a few elements to that. Number one, some of that pressure as we indicated earlier is coming from the other direction, right? Which is to say, it's US customers who are saying we want additional supply chain resilience and driving interest in geographic diversification, and then specifically investment in the United States.
And in particular the fact that we have such a thriving, fabulous semiconductor company ecosystem here. So these are the semiconductor companies who don't manufacture the chips, but they then design them and work with a foundry to produce them. The fact that we have so many of those leaders here means that there are a lot of synergies to be gained by investing in the United States doing joint research and development, and that kind of thing.
So there's a push coming from that direction, which again, we find to be hugely constructive. And then in terms of serving kind of our economic and national security interests, I think, you know, one thing we have said in the NOFO is that we will really encourage companies to submit projects that are going to support our defense industrial base, right? And, you know, producing chips that will end up supporting in a very direct way our national security is obviously a hugely important part of this program and something we're going to be looking to do at scale.
Joe: (41:18)
I have one last quick question, but on that point, and I hear this conversation more in the context of the Inflation Reduction Act, what have you encountered so far about some of the reaction of our trading partners, particularly Europe? You know, CHIPS is a really global industry and we know how any given, you know, wafer or product crosses a million, you know, 30 borders before the time it enters a US consumer's hands. Have we seen some of our trading partners want to invest in their own? What is the reaction elsewhere? And do any countries feel defensive about, okay, well if the US is doing this, trying to bring industry here, do we have to do this? And will there be sort of this like de-globalization or reversal, or every country trying to recreate what you're doing for themselves?
Mike: (42:04)
Yeah, that's a really important question. I'm glad you raised it. One way to think of our goal, what we're trying to do here, is contribute to global supply chain resilience, right? And working with partners and allies to develop a more resilient global supply chain. As you said, the semiconductor supply chain is already massive in scale, very complicated and very global. That's not going to change, nor should it, right? There are tremendous efficiencies that are gained as a result of that. And so in no way is our goal to build a self-sufficient semiconductor ecosystem. And if we have allies and partners that are also investing in various parts of the supply chain and increasing capacity, I think that's good for all of us. The important thing is that we don't let kind of unconstructive competitive dynamics take hold, right?
We don't want a race to the bottom. We want to have healthy dialogue. And to the extent we can, a coordinated global approach with partners and allies, I mentioned at the outset, our office of strategy technology and policy under Morgan Dwyer, one of the offices within that office for the CHIPS program is an office of international engagement, right?
So we actually just had a team who was out in Korea, Taiwan, Japan, having these meetings directly with our international counterparts. Secretary Raimondo has been raising these issues directly with foreign leaders. It's a really important part of the agenda for our trade and technology council with Europe. So we are really, really active in this international dialogue. I think you're right that there's a risk of these kind of unconstructed dynamics, but there's also a huge opportunity for us to work with partners and allies in ways that are mutually beneficial.
Joe: (44:03)
Mike Schmidt and Todd Fisher, thank you so much. There's a million more things we could talk about, but let's do them a year from now. Come back on the show.
Tracy: (44:11)
We'll check in again.
Mike: (44:13)
Sounds great. Let us know. We'll do that.
Joe: (44:14)
Thank you. That was great. I really appreciate your time. Yeah, thank you.
Tracy: (44:18)
Yeah thank you, that was really interesting.
Joe: (44:30)
Tracy. I’ve got to say, this seems like it's going to be really hard. No, seriously. Like really hard.
Tracy: (44:37)
It feels like there are a lot of different considerations, not necessarily even stakeholders, like official stakeholders, but a lot of different things you have to be considerate of. What I will say though is, you know, I read that editorial and some of the criticisms that were in it and, I think one of the lines in it was that writing checks was never going to be enough. But frankly, I'm always kind of surprised when we do manage to write a check of this size. And I think, you know, $50 billion in total going into this area, clearly a sizable amount. And clearly there are some big questions over exactly how it's being dispersed, but that is still a huge sum.
Joe: (45:25)
Yeah. You know, so my takeaway is I thought that the two of them, Mike and Todd, they have clearly really thought about these things, including say, you know, there's a lot of flack about the childcare component and I kind of suspect that's not going to be ultimately, like that's not going to make or break this program. That's a pretty minor thing. And I think they've like all of these things that people bring up, local permitting, etc., they've clearly thought about them.
On the other hand, that's really tough to overcome and these are going to be real challenges. So my takeaway is that all of these concerns that people, Mike and Todd and others within the administration and the commerce are taking them very seriously. The question is whether taking them very seriously is enough to sort of overcome some of this inertia that we've seen from the long-term decline of domestic manufacturing.
Tracy: (46:17)
Yeah. That to me is the bigger issue. And I'm glad you asked that question about sort of managing through the cycles and the whole buyer of last resort idea because that's the point at which, you know, if you keep flinging money at an industry that can't stand on its own or has significant pro-cyclicality issues, that's when it becomes really problematic
Joe: (46:42)
And we're not going to have like supply chain problems in cars forever. I take the point about how there are serious tailwinds, particularly related to EVs and so forth, but still at some point you would expect some sort of, I don't know, maybe I'm wrong. Maybe the tailwinds from auto is just so great because of the great transition that that isn't a concern. And again, you know, they pointed out it's not like they're not taking these things into account when they're looking at an applicant, but it does seem like still this very big difference between sort of past periods of successful domestic US industrial policy versus now. How much is that going to sustain the industry going forward for years?
Tracy: (47:20)
Yeah. You're kind of thinking fundamental questions about how capitalism and private investment is supposed to work, plus the future of technology.
Joe: (47:28)
I think Mike and Todd can figure it out, they can do it, fundamental issues of capitalism.
Tracy: (47:33)
All right. On that happy note, shall we leave it there?
Joe: (47:36)
Let's leave it there.
You can follow Mike Schmidt on Twitter at @mikereedschmidt.