Since its enactment in 2022, the Chips and Science Act — a $280 billion splurge intended to revive US semiconductor manufacturing — has been at best a mixed success. A $7.9 billion grant to Intel Corp., announced by President Joe Biden’s administration last week, shows how this gravy train may be headed off the rails.
Boosting domestic chipmaking is a reasonable goal. Although the US leads the world in chip design, it accounts for only about 10% of global production. That has left American companies — and, more pointedly, the Department of Defense — heavily reliant on overseas manufacturers, especially in Taiwan, which makes 92% of leading-edge chips. Citing national security, Congress has offered tens of billions in grants, loans and tax credits to entice companies to build chip factories (called fabs) on US soil.
To an extent, this effort is succeeding. An industry trade group estimates that the US is on track to increase fab capacity by more than 200% by 2032, thus boosting its global share to 14%. Capacity for advanced-logic chips will rise to 28% over the same span, up from nothing two years ago. Capital expenditure may exceed $640 billion. Samsung Electronics Co. and Taiwan Semiconductor Manufacturing Co. both plan to build new US fabs, as does Intel.
All very well. Yet there’s a reason such measures rarely work out as intended, and Intel is a good example. Despite its storied history, the company is flailing. It lost nearly $17 billion last quarter amid a restructuring. It lags its competitors in manufacturing, design and artificial intelligence. It has slashed its dividend and is laying off some 15,000 workers. On Monday, its board ousted Chief Executive Officer Pat Gelsinger.
Does showering this company with billions of taxpayer dollars really make sense? Subsidies can prop up a struggling company, but they’ll also shield it from competition, crowd out new entrants, delay hard choices and set the government’s interests at odds with those of shareholders. Such support is all too likely to become permanent. “I do think we’ll need at least a Chips 2 to finish that job,” Gelsinger said in March. (Emphasis on “at least.”) The latest tranche is on top of $3 billion the company had already been awarded for a Pentagon project.
It’s true that Intel has committed to investing $100 billion in a turnaround effort — with about a quarter offset by Chips Act credits — including building a new plant in Ohio and expanding others in Arizona, New Mexico and Oregon. Local voters will no doubt be appreciative. But note that, through the grants alone, the public is on the hook for perhaps $263,000 per job theoretically created. Congress should be forthright about how much this effort is eventually going to cost and willing to change policies that are making it more expensive.
A persistent problem with the Chips Act is that lawmakers have been all too happy to write big checks but not do the hard work needed to create a viable manufacturing ecosystem. Absent serious immigration reform, the industry will face a shortfall of nearly 70,000 skilled workers. Despite some recent progress, US permitting requirements are still too costly and burdensome. Red tape attached to the subsidies will undermine competitiveness, while America’s punitive tax treatment of investment spending will make fabs more expensive than they should be. Measures to maximize union employment will raise costs industrywide.
Does Congress want to lay the groundwork for a truly competitive domestic chips industry, or simply lard favored companies and constituencies with federal largesse? Unfortunately, the Intel saga seems to be answering that question.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
More Tax Loss Harvesting Topics >
