How does CHIPS Act affect KLAC and other semi companies?

Introduction

CHIPS Act is a $52 billion package which aims to boost / support semiconductor manufacturing in US so as to tackle the chip shortage (unlikely to be the solution in the near term) and strengthen one of the country’s most critical industries. As it can be seen from the below graph the semiconductor manufacturing share of US declined from 37% in 1990 to around 12%.

Source: Semiconductor Industry Association, 2021 State of the U.S. Semiconductor Industry

As we are long KLAC 0.00%↑ (KLA Corporation), we run a quick check on the recent earnings/conference calls of Semi companies to get a sense on their view and expected impact from CHIPS Act and to better understand KLA’s position. From our analysis, we extracted the following:

Quotes

INTC 0.00%↑ : Pat Gelsinger, CEO, 28th July 2022

We are thrilled to see the bipartisan vote in the Congress this week and expect CHIPS Act to be on the President’s best shortly. We have been integrally involved in moving this groundbreaking legislation forward. This progress, combined with the strong momentum in Europe, will reshape our industry and bring us toward a geographically balanced, resilient supply chain that we are uniquely positioned to enable and benefit from.

this is historic legislation. Literally since World War II, there might not have been a more important piece of industrial policy that’s came forward through Congress

KLAC 0.00%↑ : Rick Wallace, CEO, 28th July 2022 & Bren Higgins, CFO

RW, It doesn’t really change our strategy. We are not going to make decisions based on that. We are going to make decisions as we always have, based on where it makes the most sense for us to build the products to support our customers where we can get the talent and where we can have the supply chains that we need. So, it will not impact our decision making.

BH, it’s very different than what our customers in terms of significant billions of dollars investment in a production facility. So, to Rick’s point, it’s much more about the operational motives that we have in terms of why we build, what we build where. And incentives, whether they come in the form of grants, they come in the form of taxes or secondary. Obviously, we always optimize for wherever we are, but the primary motive is very operational for us.

LRCX 0.00%↑ : Tim Archer, President and CEO, 27th July 2022

Well, obviously, it’s a significant benefit for the U.S. semiconductor manufacturing industry overall

I believe, in the CHIPS Act, which is going to fund longer term capabilities that help semiconductor device makers, but also equipment makers develop those next-generation technologies that keep us incredibly competitive on the global stage and allow us to create those technologies without having to necessarily fund and take on all of that risk ourselves as individual companies

TXN 0.00%↑ : Rafael Lizardi, CFO, 26th July 2022

On the Chips Act specifically, is great to see strong bipartisan support of U.S. semiconductor manufacturing that will boost domestic chip production and improve the industry’s ability to remain competitive. This provision will be meaningful and support our manufacturing roadmap.

AMAT 0.00%↑ : Brice Hill, Senior VP and Chief Financial Officer, 6th June 2022

I think it adds confidence to the customers in terms of their ability to start the projects and make the investments. So I think it is adding confidence for them. I don't picture it as -- at least relative to the demand that we see today is a trigger that will even lift the WFE higher. I think it's factored into some degree.

From the above, it can be interpreted that CHIPS Act could be beneficial to U.S. companies, with INTC 0.00%↑ expected to be the clear beneficiary of this stimulus and obviously the most sensitive to it. It is no coincidence that a month ago Intel Corporation announced a delay for its Ohio chip plant. On the other hand, KLAC 0.00%↑ management seems to place the CHIPS Act second in priority, which for us, adds confidence to the people at the wheel.

Opposing views

Despite the expected benefits from the CHIPS Act, there are opposing views, with T.J. Rodgers Former, CYPRESS Semiconductor CEO, (Chip re-shoring Former Cypress CEO) stating that the Chip re-shoring, “despite promoted as solving the chip problem, never has. That was outright deception. It’s subsidy to the industry”.

He also indicated that it will hurt Americans from further inflation due to the extra money, will hurt the industry but will be great for Intel as it will get free money.

(You might also find this video interesting regarding his thoughts on the CHIPS Act -> The CHIPS Act is 'classic pork,' says former Cypress CEO)

Further to T.J. Rodgers, Sanders Opposes All Blank Checks to Chip Companies stating that “The question before us now is whether these extremely profitable companies will work with the U.S. government on a solution to rebuild the U.S. microchip industry which is fair to the taxpayers of this country, or whether they will continue to demand a $53 billion bribe to stay here.” and added that “The five biggest semi-conductor companies that will likely receive the lion’s share of this taxpayer handout, Intel, Texas Instruments, Micron Technology, Global Foundries and Samsung, made $70 billion in profits last year. Does it sound like these companies really need corporate welfare?”

Thoughts?

We are not taking a position on whether the CHIPS Act is appropriate or not, if it’s a redistribution of wealth or not but what we note is the following, a) CHIPS Act is great for Intel but it is a red flag to depend on the Government to fight competition and b) KLA’s Management comments about CHIPS Act is a positive signal about their mindset and the way they run the business.

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