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MRP Adds Long U.S. Semiconductors as a Theme |
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Summary: U.S. lawmakers are trying a completely new tactic in the US-China tech war: a subsidy policy for private industry. The CHIPS for America Act proposed to congress last week would allocate billions of dollars to help fund the construction of new semiconductor manufacturing factories in the U.S. The shifting consensus on Capital Hill in support of such a move is game-changing in itself. The move would boost capex and jumpstart a revival of the US semiconductor manufacturing industry, thereby delivering a win to capital equipment companies and chip makers. |
Related ETFs: iShares PHLX Semiconductor ETF (SOXX)
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A new piece of legislation introduced in Congress last week is proposing that the federal government allocate billions of dollars to support semiconductor manufacturing in the United States. If passed, the “CHIPs for America Act” would create a 40% tax credit for semiconductor manufacturing equipment; it would establish a $10 billion federal program that matches state and local incentives for construction of semiconductor factories; and it would provide $12 billion in R&D funding to be disbursed over the next five to 10 years.
To be clear, the $22 billion sum earmarked for spending over several years is not in itself a game-changer for the industry. After all, chip-making is one of the most expensive manufacturing processes in the world, to the point where building a single new chip factory with advanced manufacturing capabilities costs upwards of $10 billion. Also consider that US chip design and manufacturing companies spent $40 billion on R&D in 2019 alone.
As we noted in our June 15 deep dive titled US Switches Tactics to Boost its Semiconductor Industry, what is game-changing is the shifting consensus in Washington about federal intervention and where that shift could lead. In time, this bill could prove to be just the first of several government initiatives to bolster America’s chip makers.
If passed, the policy could set off a state-funded semiconductor arms race between the US and China, possibly resulting in a long-term restructuring of the industry. While shifting some manufacturing from one region to another will not necessarily change overall global demand ($5 billion of incremental demand in the U.S. would mean a $5 billion decline overseas), some players will see their fortunes rise in a decoupled industry.
Bullish for US Semiconductor Capital Equipment Companies
The CHIPS for America Act should boost U.S. chip manufacturing capex, thereby delivering a win for American semiconductor equipment companies such as Applied Materials, Inc. (AMAT), Lam Research Corporation (LRCX), KLA Corp (KLAC) and ASML (ASML), MKS Instruments Inc. (MKSI).
Not only do these companies supply machines and equipment used for chip-making, they actually dominate upstream in the process. ASML and KLAC, for example, sell semiconductor equipment that no competitors can match. More generally, “No one can stop using U.S. equipment for semiconductor production,” according to Citi analyst Roland Shu. This viewpoint is echoed by Krish Sankar of Cowen who predicts that Chinese chip makers will have to rely on at least some U.S. equipment suppliers for the foreseeable future. Whatever China business this group loses will be recouped through higher sales to U.S. chip manufacturers.
Bullish for U.S. Chip Makers
Although U.S. companies generate nearly half of global semiconductor sales, only 12% of the world’s chip manufacturing capacity is located in the country. That reflects a market share decline of 50% over just two decades. Aggressive subsidies offered by other countries, coupled with the lack of a federal U.S. incentive program have been key factors driving the location of semiconductor manufacturing facilities overseas.
The CHIPS for America legislation will start to reverse that trend. Some of the provisions of the bill, including the 40% investment tax credit will help them attain greater profitability through lower operational costs and a reduced tax burden.
In addition to this, the $1 trillion infrastructure bill currently being mulled in Washington could also benefit chip makers indirectly. That bill reportedly includes some funds for 5G wireless infrastructure and rural broadband. Such an allocation for digital infrastructure would boost U.S. telecom capex at a time when carriers are increasing their investments in response to the network traffic spikes they have seen since COVID-19 lockdowns took effect in March. According to thestreet.com, chip suppliers such as II-VI (IIVI), Inphi (IPHI) and Broadcom (AVGO) are already seeing strong demand from telecom equipment OEMs because of this lockdown effect. |
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THEME ALERT |
New MRP Theme: Long Semiconductors
MRP is adding Long Semiconductors to our active list of themes effective today. Our rationale is that the CHIPS for America Act will boost capex and jumpstart a revival of the US semiconductor manufacturing industry, thereby delivering a win to U.S. based capital equipment companies and chip makers. MRP will monitor the theme via the iShares PHLX Semiconductor ETF (SOXX).
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Semiconductors vs S&P 500 |
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