Nik Popli
Mon, October 17, 2022
US-POLITICS-BIDEN
US President Joe Biden speaks on rebuilding US manufacturing through the CHIPS and Science Act at the groundbreaking of the new Intel semiconductor manufacturing facility near New Albany, Ohio, on September 9, 2022. Credit - Saul Loeb—AFP via Getty Images
When a group of semiconductor companies, including Intel Corp., lobbied Congress to pass the $52 billion chip-stimulus bill earlier this year—one of the biggest federal investments in a private industry—they argued in part that the subsidies and tax breaks would protect American jobs.
But now just months before the funding applications open, the nation’s largest semiconductor company is reportedly planning a major reduction in its workforce—yet could still receive billions in federal subsidies. Thousands of Intel employees are expected to be laid off later this month to cut costs amid a steep decline in demand for PC processors, according to Bloomberg. Some divisions, including sales and marketing, could lose 20% of their staff.
Intel is under intense pressure from investors, as its shares have fallen more than 50% this year. The company posted a net loss of $454 million in the second quarter, compared with a net income gain of $5 billion for the same period a year ago. Analysts are predicting more grim news to come out of the company’s upcoming earnings release, with an expected third-quarter revenue drop of roughly 15%.
Even so, the reported job cuts come at an awkward time for Intel, given that the company lobbied heavily for the subsidies and committed $20 billion to build a manufacturing mega-site on the outskirts of Columbus, Ohio earlier this year. The move also puts Intel chief executive Pat Gelsinger—who received a $179 million compensation package last year—in a difficult position. In December, he lobbied Congress to pass the funding, co-signing a letter to lawmakers that said federal subsidies would be “supporting millions of jobs for Americans.”
Intel, based in California, declined to comment on the reported layoffs to TIME. The chipmaker had 113,700 employees as of July, and plans to apply for federal funding in February when the Commerce Department starts dispersing subsidies and tax breaks to companies seeking to build factories inside the U.S, an Intel spokesperson said in a statement to TIME on Monday, adding: “We expect the Intel Ohio site to create 3,000 Intel jobs and 7,000 construction jobs.”
But the reported layoffs, which could happen as early as Oct. 27, highlight the perils of promising federal funds to private companies without enough guardrails in place, says Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics who has surveyed U.S. industrial policy for over 40 years, including at the Department of Treasury.
“It was certainly foreseeable,” he tells TIME. The Biden administration “could have put in conditions that we’re not going to give grants to companies that are cutting back their capital outlays or firing workers. But there’s nothing like that in the bill.”
How jobs could play a role in funding decisions
Another industry stalwart, the Taiwan Semiconductor Manufacturing Company, also had to cut capital spending this year due to slower global chip demand—particularly for PC processors. TSMC executives said the spending cut was around 10% but did not specify whether there were layoffs.
The Taiwanese chipmaker is the world’s largest semiconductor manufacturer and has already started building a $12 billion computer-chip factory in Arizona, with plans to hire U.S. engineers to staff the facility. But the pace of construction largely depends on how much in federal subsidies the Commerce Department approves, a Taiwanese minister told The Washington Post in June.
A number of other major chip manufacturers, including GlobalFoundries and Samsung, have also suggested they may apply for funding to build or expand U.S. facilities in February. The Commerce Department said in a Sept. 6 strategy report that it will prioritize “investments in projects that connect workforce training dollars to quality jobs that exceed the local prevailing wage for an industry in the region.”
The Commerce Department declined to comment on how expected layoffs could impact funding decisions but did say that more information on specific guardrails and restrictions will be included in the funding application.
Some members of Congress raised these exact concerns during the negotiation process, including Sen. Bernie Sanders of Vermont, who described the program as a “corporate giveaway.”
“Over the last 20 years, the microchip industry has shut down over 780 manufacturing plants in the United States and eliminated 150,000 American jobs while moving most of its production overseas after receiving over $9.5 billion in government subsidies and loans,” Sanders said in July, before the Senate voted in favor of the bill. “In order to make more profits, these companies took government money and used it to ship good-paying jobs abroad.”
Others say the law will restore American leadership in the semiconductor industry after losing manufacturing to Taiwan and China, where the vast majority of advanced semiconductors and mature nodes are now made. There’s also a national security risk of relying on foreign nationals for chips, especially for military equipment. And the funding program could create millions of jobs, a senior advisor at the Commerce Department told TIME.
“This is not a blank check for companies,” Commerce Secretary Gina Raimondo said at a White House press briefing on Sept. 6. She added that the Commerce Department would use its authority to reclaim the money if recipients “fail to start their project on time, fail to complete their project on time, or fail to meet the commitments that they’ve made.”
Demand for chips could increase again soon
But even if Intel does slash thousands of jobs this month, it’s possible the company hires them back—or hires even more employees—after receiving the federal subsidies, says Bob Johnson, the lead analyst for semiconductor capital spending at Gartner, who has studied the industry for roughly 50 years.
“It’s a question of timing. It takes 18 months to two years to actually get the physical factories in place, during which time the jobs you’re supplying are construction jobs—not fab operators,” he tells TIME.
The overall economy may also start looking better in two years when the factories are built, as semiconductor companies are currently battling excess supply and decreased demand. “It’ll last about a year, and then everything will return to more normal,” Johnson says.
The American chip industry’s $1.5trn meltdown
Mon, October 17, 2022
In licking county, Ohio, fleets of dump trucks and bulldozers are shifting earth on the future site of chip factories. Intel is building two “fabs” there at a cost of around $20bn. In March President Joe Biden called this expanse of dirt a “field of dreams” in his state-of-the-union speech. It was “the ground on which America’s future will be built”, he intoned.
In the spring it was easy to be dreamy about America’s chip industry. The pandemic-induced semiconductor crunch had proved just how crucial chips were to modern life. Demand was still rising for all sorts of chip-powered technology, which these days is most of it. Investors were less gloomy on chips than on other tech, which was taking a stockmarket beating. The CHIPS act was making its way through Congress, promising to plough subsidies worth $52bn into the domestic industry, in order to reduce America’s reliance on foreign fabs and support projects like Intel’s Ohio factory.
Half a year later the dreams look nightmarish. Demand for silicon appears to be falling as quickly as it had risen during the pandemic. In late September Micron, an Idaho-based maker of memory chips, reported a 20% year-on-year fall in quarterly sales. A week later AMD, a Californian chip designer, slashed its sales estimate for the third quarter by 16%. Within days Bloomberg reported that Intel plans to lay off thousands of staff, following a string of poor results that are likely to continue when it presents its latest quarterly report on October 27th. Since July a basket of America’s 30 or so biggest chip firms have cut revenue forecasts for the third quarter from $99bn to $88bn. So far this year more than $1.5trn has been wiped from the combined market value of American-listed semiconductor companies (see chart).
The chip industry is notoriously cyclical at the best of times: the new capacity built in response to rising demand takes several years to materialise, by which time the demand is no longer white-hot. In America this cycle is now being turbocharged by the government. The chips act, which became law in August to cheers from chip bosses, is stimulating the supply side of the semiconductor business just as the Biden administration is stepping up efforts to stop American-made chips and chipmaking equipment from going to China, dampening demand for American products in the world’s biggest semiconductor market.
Whether or not it makes strategic sense for America to bring more chip production home and to hamstring its geopolitical rival with export bans, the combination of more supply and less demand is a recipe for trouble. And if the American policies speed up China’s efforts to “resolutely win the battle in key core technologies”, as President Xi Jinping affirmed in a speech to the Communist Party congress on October 16th, they could give rise to powerful Chinese competitors. Field of dreams? It is enough to keep you awake in terror at night.
The cyclical slump has so far been felt most acutely in consumer goods. PCs and smartphones account for almost half the $600bn-worth of chips sold annually. Having splurged during the pandemic, inflation-weary shoppers are buying fewer gadgets. Gartner, a research firm, expects smartphone sales to drop by 6% this year and those of pcs by 10%. Firms like Intel, which in February was telling investors it expected PC demand to grow steadily for the next five years, are revising their outlooks as it becomes clear that many covid-era purchases were simply brought forward.
Many analysts think that other segments could be next. Panic buying amid last year’s global chip shortage has left many carmakers and manufacturers of business hardware with inventories overflowing with silicon. New Street Research, a firm of analysts, estimates that between April and June industrial firms’ stock of chips was about 40% above the historic level relative to sales. Inventories for pc-makers and car companies are similarly full. Intel and Micron blamed their recent weak results in part on high inventories.
The supply glut and sputtering demand is already hitting prices. The cost of memory chips is down by two-fifths in the past year, according to Future Horizons, a research firm. The price of logic chips, which process data and are less commoditised than memory chips, is down by 3% in the same period
Chip buyers will work through their inventories eventually. But after they do, they may buy less than in the past. In August Hewlett Packard Enterprise and Dell, two big hardware makers, hinted that demand from business customers was beginning to soften. Sales of both pcs and smartphones had started to plateau before the pandemic and this trend will probably resume in the coming years. Phonemakers cannot stuff ever more chips onto their devices for ever. For companies such as Qualcomm, which derives half its sales from smartphone chips, and Intel, which gets a similar share from those for pcs, that is a headache.
The chipmakers’ response has been to bet on fast-growing new markets. amd, Intel and Nvidia, another big chip-designer, are battling over the cloud-computing data centres, where chip demand is still increasing. Qualcomm is diversifying into cars. In September the firm’s bosses boasted it already had $30bn-worth of orders from carmakers. Intel, meanwhile, is expanding into semiconductors for networking gear and devices for the hyperconnected future of the “internet of things”. It is also getting into the contract-manufacturing business, hoping to win market share from tsmc of Taiwan, the world’s biggest chipmaker and contract manufacturer of choice for fabless chip-designers such as amd and Nvidia.
These efforts, however, are now running into geopolitics. Like their counterparts in China and Europe, politicians in America want to lessen their countries’ dependence on foreign chipmakers, in particular tsmc, which manufactures 90% of the world’s leading-edge chips. In response, America, China, the eu, Japan, South Korea and Taiwan together plan to subsidise domestic chipmaking to the tune of $85bn annually over the next three years, calculates Mark Lipacis of Jefferies, an investment bank. That would buy a fair bit of extra capacity globally.
At the same time, prospects for offloading the resulting chips are darkening, especially for American firms, as a result of America’s tightening controls on exports to China. Many American firms count the Asian giant, which imported $400bn-worth of semiconductors last year, as their biggest market. Intel’s Chinese sales made up $21bn of its overall revenues of $79bn last year. Nvidia said that an earlier round of restrictions, which limited sales of advanced data-centre chips to Chinese customers and to Russia after its invasion of Ukraine, would cost it $400m in third-quarter sales, equivalent to 6% of its total revenues.
The latest restrictions, which target Chinese supercomputing and artificial-intelligence efforts, are a particular concern for the companies which manufacture chipmaking tools. Three of the world’s five biggest such firms—Applied Materials, kla and Lam Research—are American. The share of the trio’s sales that go to China has risen fast in the past few years, to about a third. Toshiya Hari of Goldman Sachs, a bank, says that the controls are likely to cost the world’s toolmakers $6bn in lost revenues this year, equivalent to 9% of their projected sales. After the new American export controls were unveiled Applied Materials lowered its expected fourth-quarter revenue by 4% to $6.4bn. Its share price has fallen by 13% in the past two weeks. Those of kla and Lam Research have tumbled by a fifth.
American chip bosses now fear that China could retaliate, further restricting their firms’ access to its vast market. It is already redoubling efforts to nurture domestic champions such as smic (in logic chips) and ymtc (in memory), as well as domestic toolmakers, that could one day challenge America’s historic silicon supremacy. The result could be a diminished American industry with less global clout and more capacity than it knows what to do with. That is a shaky foundation on which to build America’s future.
© 2022 The Economist Newspaper Limited. All rights reserved.
Mon, October 17, 2022
In licking county, Ohio, fleets of dump trucks and bulldozers are shifting earth on the future site of chip factories. Intel is building two “fabs” there at a cost of around $20bn. In March President Joe Biden called this expanse of dirt a “field of dreams” in his state-of-the-union speech. It was “the ground on which America’s future will be built”, he intoned.
In the spring it was easy to be dreamy about America’s chip industry. The pandemic-induced semiconductor crunch had proved just how crucial chips were to modern life. Demand was still rising for all sorts of chip-powered technology, which these days is most of it. Investors were less gloomy on chips than on other tech, which was taking a stockmarket beating. The CHIPS act was making its way through Congress, promising to plough subsidies worth $52bn into the domestic industry, in order to reduce America’s reliance on foreign fabs and support projects like Intel’s Ohio factory.
Half a year later the dreams look nightmarish. Demand for silicon appears to be falling as quickly as it had risen during the pandemic. In late September Micron, an Idaho-based maker of memory chips, reported a 20% year-on-year fall in quarterly sales. A week later AMD, a Californian chip designer, slashed its sales estimate for the third quarter by 16%. Within days Bloomberg reported that Intel plans to lay off thousands of staff, following a string of poor results that are likely to continue when it presents its latest quarterly report on October 27th. Since July a basket of America’s 30 or so biggest chip firms have cut revenue forecasts for the third quarter from $99bn to $88bn. So far this year more than $1.5trn has been wiped from the combined market value of American-listed semiconductor companies (see chart).
The chip industry is notoriously cyclical at the best of times: the new capacity built in response to rising demand takes several years to materialise, by which time the demand is no longer white-hot. In America this cycle is now being turbocharged by the government. The chips act, which became law in August to cheers from chip bosses, is stimulating the supply side of the semiconductor business just as the Biden administration is stepping up efforts to stop American-made chips and chipmaking equipment from going to China, dampening demand for American products in the world’s biggest semiconductor market.
Whether or not it makes strategic sense for America to bring more chip production home and to hamstring its geopolitical rival with export bans, the combination of more supply and less demand is a recipe for trouble. And if the American policies speed up China’s efforts to “resolutely win the battle in key core technologies”, as President Xi Jinping affirmed in a speech to the Communist Party congress on October 16th, they could give rise to powerful Chinese competitors. Field of dreams? It is enough to keep you awake in terror at night.
The cyclical slump has so far been felt most acutely in consumer goods. PCs and smartphones account for almost half the $600bn-worth of chips sold annually. Having splurged during the pandemic, inflation-weary shoppers are buying fewer gadgets. Gartner, a research firm, expects smartphone sales to drop by 6% this year and those of pcs by 10%. Firms like Intel, which in February was telling investors it expected PC demand to grow steadily for the next five years, are revising their outlooks as it becomes clear that many covid-era purchases were simply brought forward.
Many analysts think that other segments could be next. Panic buying amid last year’s global chip shortage has left many carmakers and manufacturers of business hardware with inventories overflowing with silicon. New Street Research, a firm of analysts, estimates that between April and June industrial firms’ stock of chips was about 40% above the historic level relative to sales. Inventories for pc-makers and car companies are similarly full. Intel and Micron blamed their recent weak results in part on high inventories.
The supply glut and sputtering demand is already hitting prices. The cost of memory chips is down by two-fifths in the past year, according to Future Horizons, a research firm. The price of logic chips, which process data and are less commoditised than memory chips, is down by 3% in the same period
Chip buyers will work through their inventories eventually. But after they do, they may buy less than in the past. In August Hewlett Packard Enterprise and Dell, two big hardware makers, hinted that demand from business customers was beginning to soften. Sales of both pcs and smartphones had started to plateau before the pandemic and this trend will probably resume in the coming years. Phonemakers cannot stuff ever more chips onto their devices for ever. For companies such as Qualcomm, which derives half its sales from smartphone chips, and Intel, which gets a similar share from those for pcs, that is a headache.
The chipmakers’ response has been to bet on fast-growing new markets. amd, Intel and Nvidia, another big chip-designer, are battling over the cloud-computing data centres, where chip demand is still increasing. Qualcomm is diversifying into cars. In September the firm’s bosses boasted it already had $30bn-worth of orders from carmakers. Intel, meanwhile, is expanding into semiconductors for networking gear and devices for the hyperconnected future of the “internet of things”. It is also getting into the contract-manufacturing business, hoping to win market share from tsmc of Taiwan, the world’s biggest chipmaker and contract manufacturer of choice for fabless chip-designers such as amd and Nvidia.
These efforts, however, are now running into geopolitics. Like their counterparts in China and Europe, politicians in America want to lessen their countries’ dependence on foreign chipmakers, in particular tsmc, which manufactures 90% of the world’s leading-edge chips. In response, America, China, the eu, Japan, South Korea and Taiwan together plan to subsidise domestic chipmaking to the tune of $85bn annually over the next three years, calculates Mark Lipacis of Jefferies, an investment bank. That would buy a fair bit of extra capacity globally.
At the same time, prospects for offloading the resulting chips are darkening, especially for American firms, as a result of America’s tightening controls on exports to China. Many American firms count the Asian giant, which imported $400bn-worth of semiconductors last year, as their biggest market. Intel’s Chinese sales made up $21bn of its overall revenues of $79bn last year. Nvidia said that an earlier round of restrictions, which limited sales of advanced data-centre chips to Chinese customers and to Russia after its invasion of Ukraine, would cost it $400m in third-quarter sales, equivalent to 6% of its total revenues.
The latest restrictions, which target Chinese supercomputing and artificial-intelligence efforts, are a particular concern for the companies which manufacture chipmaking tools. Three of the world’s five biggest such firms—Applied Materials, kla and Lam Research—are American. The share of the trio’s sales that go to China has risen fast in the past few years, to about a third. Toshiya Hari of Goldman Sachs, a bank, says that the controls are likely to cost the world’s toolmakers $6bn in lost revenues this year, equivalent to 9% of their projected sales. After the new American export controls were unveiled Applied Materials lowered its expected fourth-quarter revenue by 4% to $6.4bn. Its share price has fallen by 13% in the past two weeks. Those of kla and Lam Research have tumbled by a fifth.
American chip bosses now fear that China could retaliate, further restricting their firms’ access to its vast market. It is already redoubling efforts to nurture domestic champions such as smic (in logic chips) and ymtc (in memory), as well as domestic toolmakers, that could one day challenge America’s historic silicon supremacy. The result could be a diminished American industry with less global clout and more capacity than it knows what to do with. That is a shaky foundation on which to build America’s future.
© 2022 The Economist Newspaper Limited. All rights reserved.
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