U.S. chipmakers made a critical decision years ago: go fabless to slash operating costs and rake in more profits. But hiring overseas contractors to do their manufacturing had dire long-term consequences for the semiconductor industry, from national security issues to logistics snarls and critical chip shortages during the Covid pandemic.
The CHIPS Act was supposed to correct those problems. Now, two years after President Joe Biden signed the law meant to boost domestic semiconductor production, the jury is still out on whether it will succeed. Chipmaking in the U.S. is showing signs of picking up. But it's hardly the manufacturing renaissance that the government and tech industry are hoping for.
The CHIPS Act recently became an election issue when House Speaker Mike Johnson was quoted as saying the Republicans will "probably" repeal the law if they control Congress, according to media reports. But Johnson later backtracked, saying the CHIPS Act is "not on the agenda for repeal," CNN reported.
The CHIPS Act's goal is for the U.S. to reach 20% of global chip manufacturing by 2030, up from 13%, but that may prove to be a tough target to meet. Semiconductor plants are big, complex projects that take time to fine-tune equipment and processes to meet quality standards and sufficient product yields. The required workforce skills are in short supply. Pressures at certain chipmakers, especially Intel, could threaten some projects. And in the meantime, demand is shifting to new types of chips that could use more R&D focus.
"It could take three to four years from the time of funding to achieve high-volume manufacturing," Moor Insights & Strategy analyst Patrick Moorhead told Investor's Business Daily. "We will undoubtedly need a 'CHIPS Act 2' to meet that '20 by '30' goal."
Before The CHIPS Act: Semiconductor Industry Goes Fabless
The U.S. once was a major chip manufacturing center. But top U.S. chip designers outsourced fabrication of leading-edge processors, mostly to Asia. Taiwan Semiconductor and South Korea-based Samsung Electronics were big beneficiaries.
The new business model spurred the rise of fabless chipmakers and chip stocks such as Nvidia, Broadcom and Qualcomm. But there was a major downside.
The manufacturing shift led to a heavy dependence on the overseas factories of non-U.S. companies for a technology that's critical to U.S. corporations and their customers, including the U.S. government. That's created huge national security and technology supply issues.
Consider the world's top contract chipmaker, Taiwan Semiconductor Manufacturing, better known as TSMC. Its Taiwan operations face the persistent threat of a possible Chinese takeover.
What Did The CHIPS Act Do?
President Biden signed the CHIPS Act in August 2022 in an attempt to revitalize U.S. semiconductor manufacturing. The official name of the legislation is the CHIPS and Science Act, where CHIPS is an acronym for "Creating Helpful Incentives to Produce Semiconductors."
The law's main purpose is to provide funds to support the domestic production of semiconductors and support programs and activities of various federal science agencies. The Biden administration framed the importance of domestic chipmaking policy in national security terms.
Tufts University Associate Professor Chris Miller, author of the book "Chip War: The Fight for the World's Most Critical Technology," said the U.S. focus is on securing access to a critical technology.
"Their job is to think about ensuring against the worst-case scenario around losing access to manufacturing in Taiwan," Miller told IBD.
Federal Spending Under The CHIPS Act
To date, the U.S. Department of Commerce has announced nearly $34 billion in grant awards and up to $28.8 billion in loans to 20 companies across 32 projects in 20 states, according to the Semiconductor Industry Association.
Among the top recipients is Intel, which will receive $8.5 billion in direct funding plus $11 billion in loans for manufacturing projects, according to the SIA. The company plans to build new fabs in Ohio and Arizona, and expand and modernize facilities in Oregon and New Mexico.
Another CHIPS Act recipient, memory-chip producer Micron Technology, will get $6.14 billion in grants and $7.5 billion in loans for projects in New York and Idaho, according to the SIA.
The CHIPS Act also has enticed foreign chip foundries TSMC and Samsung to build semiconductor fabs in the U.S. TSMC aims to build three new leading-edge fabs in Arizona, while Samsung is planning two leading-edge fabs and other facilities in Texas.
Along with that government assistance, companies have committed about $450 billion in private investments to new chip manufacturing initiatives, the SIA says.
The U.S. is on pace to triple its manufacturing capacity by 2032 from 2022 when the CHIPS Act was enacted, the industry group says.
"The intentions are good," Robert Maire, president of Semiconductor Advisors, told IBD. "But a lot of what we were hoping to do is certainly delayed or not going to happen."
What Does The CHIPS Act Mean For Intel?
Returning the U.S. semiconductor industry to a leadership position in manufacturing won't be easy.
The struggles at Intel, once the most dominant chip company in the world, underscore this.
The tech behemoth is the only U.S. company currently capable of producing leading-edge processors for PCs, servers and AI data centers. In fact, Intel was once the king of chip manufacturing technology.
Intel dominated the chip market by leading the way in producing smaller and less expensive processors, guided by Moore's Law. The chip industry principle, named after Intel co-founder Gordon Moore, states that the number of transistors that companies are able to put on an integrated circuit doubles roughly every two years.
But production setbacks caused Intel to lose its lead in manufacturing technology to contract chipmakers led by TSMC. Fabless rivals like Advanced Micro Devices and Nvidia also outpaced Intel in critical markets, especially data centers.
Challenges Faced By Intel
On Aug. 1, Intel badly missed Wall Street's targets for the second quarter. Its guidance for the third quarter also fell short. In response, Intel announced a $10 billion cost-reduction plan and suspended its quarterly dividend. The cost-cutting plan included a head-count reduction of more than 15%.
"Intel is in significant trouble," Maire said. "They certainly don't have the money to spend on a lot of these projects. And it's not like the CHIPS Act was paying for 100% of the projects. They were all supplemental and most, if not all, of the CHIPS Act money comes with strings where you have to meet milestones or goals in order to get paid."
In fact, Intel's struggles have continued despite the CHIPS Act grants. The company pushed back completion of two chip plants in Ohio by at least a year, until late 2026.
Meanwhile, Intel is exploring alliances to bounce back. On Oct. 21, Korea's Maeil Business Newspaper reported that Intel has approached Samsung about forming a foundry alliance to better compete with TSMC.
Intel stock has shed more than 50% this year. The stock's IBD Relative Strength Rating, which compares its price performance to the S&P 500, has plunged from 90 a year ago to seven as of this week, according to MarketSurge.
Meanwhile, its longtime rivals have posted robust gains. AMD stock has gained more than 13% this year and has a Relative Strength Rating of 70 out of a best-possible 99. Nvidia stock has soared more than 180% and has a Relative Strength Rating of 98.
CHIPS Act Project Delays
Intel isn't the only recipient of CHIPS Act funding to report delays in construction of new plants. TSMC and Samsung also have run into hurdles.
TSMC has cited a lack of qualified workers to run its new U.S. plants. And Samsung reportedly has had trouble signing up potential customers for its new fab as it struggles with product yield issues.
Those delays were a major factor behind recent disappointments at semiconductor-equipment supplier ASML. ASML's third-quarter bookings and 2025 guidance both fell short.
China's Semiconductor Industry Offensive
Another challenge is brewing. China is investing heavily in its domestic semiconductor industry in what amounts to an arms race in chips. Analysts say the buildup of chip manufacturing infrastructure in China could lead to a glut of mature-node chips and pressure U.S. companies.
U.S. companies making semiconductors using older chip production technologies include GlobalFoundries and Microchip Technology.
"We're adequately supplied right now, so building more factories might exacerbate what is already an oversupply," Maire said.
Analyst Jeffrey Koch of SemiAnalysis also has concerns about China's buildup of semiconductor production capacity.
"Are U.S. companies going to be able to compete on price with this massive flood of new capacity coming online?" Koch said. "We've seen this playbook before."
He pointed to how China came to dominate solar panels by ramping up production.
Meanwhile, the U.S. has imposed trade restrictions on semiconductor companies doing business with China. The actions are meant to keep advanced processors and cutting-edge chip gear out of China, where they could have military applications.
Are There Signs The CHIPS Act Is Succeeding?
Despite some glitches, the CHIPS Act has yielded some gains.
TSMC's facilities in Arizona have attracted a cluster of support companies to the region, Koch said. In an upbeat sign, TSMC's early production yields at its Arizona plan have surpassed its factories back in Taiwan, according to a Bloomberg report.
On Oct. 3, Amkor Technology and TSMC announced that they are collaborating to bring advanced packaging and test capabilities to Arizona, expanding the region's semiconductor ecosystem.
In another positive development, TSMC reportedly is now producing Apple's A16 mobile processor at a fab in Arizona. The chip, which debuted in the iPhone 14 Pro two years ago, could turn up in Apple's next-generation iPhone SE or an upcoming iPad tablet, according to media reports.
SemiAnalysis analyst Koch is positive on the impact of the CHIPS Act so far.
"The ecosystem here is a lot stronger than it was two years ago," Koch told IBD. He cited the opening of a new TSMC advanced chip fab in Arizona and investments in companies that do chip packaging and provide support services.
Bipartisan Support For Chip Subsidies
Fortunately for the U.S. semiconductor industry, support for government initiatives to improve the domestic chip sector is a bipartisan goal.
Maire of Semiconductor Advisors said the Commerce Department might need to do a "midcourse correction" to address shortcomings in the CHIPS Act.
The CHIPS Act was conceived after the Covid pandemic exposed weak spots in the industrial supply chain. Supply chain disruptions during the pandemic led to a shortage of chips for automobiles and other products. Since then, the focus of the chip industry has been on processors for artificial intelligence.
"There are some areas of the CHIPS Act that are further along than others, but some that need a bit of a midcourse correction now that we've seen how things are," Maire said. "Maybe the industry doesn't need all the fabs we are talking about building, and maybe the companies have changed their current strategy."
One hurdle has emerged: the expected shortage of trained workers to staff the new semiconductor facilities, Maire says.
"About 200,000 people in the U.S. are employed in chip factories now," he said. "And if they build the fabs that they're talking about building, we'll need about 450,000. So that's a lot of people that have to be trained."
A CHIPS Act Sequel?
Koch of SemiAnalysis describes the current CHIPS Act as a moderate win for the U.S. semiconductor industry.
"It's accomplished the goals as laid out in terms of onshoring strategic technologies where the U.S. was weak and didn't have those capabilities — specifically, advanced logic and advanced packaging," Koch said.
But a CHIPS Act sequel may be necessary. And it should focus on two critical needs: workforce training and research and development, Moorhead said: "The U.S. needs a tremendous increase in a skilled workforce supporting advanced manufacturing."
"Just getting the CHIPS Act checks doesn't guarantee success," Moorhead added.
Alexis Garcia, IBD senior editor for multimedia, contributed to this report.
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