The Journal. - Why Washington Went to Wall Street to Revive the Chips Industry

Episode Date: August 21, 2023

Since the Chips Act passed last summer, the Commerce Department has been building a small team of elite Wall Street financiers to help allocate $39 billion in taxpayer-funded subsidies to hundreds of companies. We speak to WSJ’S Yuka Hayashi about the Chips Program Office team and to Todd Fisher, the man who leads it.  Further Listening: - The U.S. Wants American-Made Chips. Can Intel Deliver?  - The $1 Trillion Company That Started at Denny’s  Further Reading: - Why Washington Went to Wall Street to Revive the U.S. Chips Industry  - Chips Are the New Oil and America Is Spending Billions to Safeguard Its Supply  Learn more about your ad choices. Visit megaphone.fm/adchoices

The U.S. is on the cusp of a manufacturing boom. A major expansion of America's chip production with Intel announcing a new $20 billion chip factory in Ohio. Micron planning to build the largest U.S. semiconductor factory ever. Taiwan Semiconductor announced a tripling of its spending here. $40 billion on two chip plants in Phoenix. All of these factories are building semiconductor chips, technology that's become the lifeblood of the modern economy. Chips power every electronic system, from cell phones and toasters to cars and weapons

for the military. It's been driven by a promise of billions of federal dollars in one of the most significant acts of government intervention since World War II. But who gets that money is largely the responsibility of one government agency, the Department of Commerce, under Secretary Gina Raimondo. Folks, the stakes couldn't be higher, could not be higher, which is why we have to win. And the department has turned to a surprising group of people

to help decide who gets the funds. Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Monday, August 21st. Coming up on the show, with billions of dollars of funding available, can the U.S. revive a major manufacturing industry? Embrace the summer vibes We'll see you next time. That's Summersbee. Must be legal drinking age. Please drink responsibly. Carlsberg, Canada, Inc., Waterloo, Ontario. The U.S. was once the leader in designing of chips,

coming up with the most advanced technology. That's our colleague, Yuka Hayashi. But if you look at manufacturing of chips, the U.S. is not a very significant player anymore. In fact, the U.S. only makes about 10% of global chip supplies. How did that happen? The cost of production was much cheaper in countries like Japan initially than countries like South Korea and Taiwan caught up. Korea and Taiwan caught up and they started building their factories very fast with very generous help of their governments. And a lot of companies have maintained their production facilities in the U.S., but they've also outsourced a lot of their chip needs to Asian countries. So the manufacturing of chips in this country

just shrank drastically over the past decades. And in recent years, it's become clear that that's a problem. There were chip shortages exacerbated by the pandemic, supply chain snags that hobbled technology companies that rely on semiconductors. And then there's China. As relations between the U.S. and China have continued to sour, chips have become a flashpoint. China's been investing heavily in its semiconductor industry. And one thing the U.S. does not want is for China to be able to develop the most advanced

semiconductor chips, the kind that could power artificial intelligence and military technology. Right now, there's really only one place that's capable of making those kinds of chips, Taiwan, which is also, in the U.S.'s view, a problem. Taiwan is a very close ally of the U.S., but it's at the center of the geographic tension in East Asia. China claims Taiwan to be part of its own territory. So if some kind of emergency happens and supplies of chips from Taiwan get suspended, we are going to be in a lot of trouble. Taiwan get suspended, we are going to be in a lot of trouble. So last year, the U.S. passed the CHIPS Act, which was meant to strengthen national security by cutting reliance on imported chips. The law sets aside billions of dollars to make producing

chips here in the U.S. more attractive to companies. And in charge of managing those funds is the Commerce Department. Secretary Gina Raimondo gave a speech in February outlining the vision for the CHIPS Act. The research, innovation, and manufacturing sparked by this law will enable the United States to be the technological superpower securing our economic and national security for the next generation. Just like our leadership in nuclear energy and the space race, our ability to maintain our competitive edge in advanced

technology is essential to our ability to ensure the responsible deployment of that technology. Starting in February, companies could apply to the Commerce Department for a piece of $39 billion. But instead of turning to the typical government bureaucrat to figure out who gets the money, Raimondo did something unusual. She brought in a team

largely made up of former Wall Streeters. These people are professional dealmakers. They know how to use data, how to negotiate people in, you know, very sophisticated ways. banker at Goldman Sachs, and he just left recently. And he traded his $5 million job on Wall Street to a government job that pays $185,000. I mean, that's a big pay cut. That's a big pay cut. And he said that it was a hard, hard decision to make. He said that it was a hard, hard decision to make. So I asked him why he made that switch. And he said that he's an Indian immigrant.

He came to the U.S. for grad school and stayed on and became a very successful investment banker. And somebody showed him this opportunity. And he thought that this was a great way for him to give back to the country that gave him so much. Linga is one of about three dozen professionals who've been recruited to work on this project. They come from private equity, investment banking, or consulting firms. They've left their high-paying jobs and nice offices to work out of a cavernous government building in D.C. in cramped rooms with steel furniture. And the head of the team is this man. We are working literally as hard as we can. I'm probably working as hard as I ever have worked in my life. This is Todd Fisher. I spent my career in the private sector, 30 years in the financial world, 25 years at KKR, major asset management

company. And I wanted to have a second chapter to my career. I wanted to focus on being directly impactful on the world. The government recruiting an entire team of private sector professionals is unprecedented. And according to Yuka's sources, it reflects just how high priority this project is. Not many in the team have direct experience in the semiconductor industry, but they do work closely with defense experts and economists. How do you see your skills kind of applying to this particular effort?

I am not an expert in semiconductors. What I'm bringing to the team is a knowledge of how do you create the right structure and how do you create the right evaluation to make decisions as to where to put your money, how to allocate money that is most effective and also protects taxpayer dollars. In effect, creating within commerce like a mini private equity firm. Those aspects are something I've done, you know, for my whole career in the private sector. Todd and the team are in the middle of deciding who will receive billions from the U.S. government. That's next. Thank you. a pet groomer, a contractor, or a consultant. You can get customized coverage for your business. Contact a licensed TD Insurance advisor to learn more. Tim's Maple Bacon is back, featuring crispy, naturally smoked bacon

with a sweet and savory maple glaze and a 100% Canadian fresh cracked egg, all on a new cheddar croissant. Try Tim's Maple Bacon Breakfast Sandwich today at participating restaurants in Canada for a limited time. It's time for Tim's. More than 460 companies have expressed interest in getting funding from the CHIPS Act. What can you tell us about the pool of applicants? Well, what I can tell you is that the statements of interest have been growing significantly over the last, I guess it's been four months since we've put out our funding opportunity. That we didn't know what

to exactly expect, I would say that has surpassed our expectations in terms of interest in the program. Todd couldn't get specific, but the companies likely include some of the biggest names in the semiconductor industry, like Intel and Samsung, and also some smaller ones. Todd did say that about half of them want funding to actually build chip manufacturing or fabrication plants, called fabs.

But there are others interested in supporting these plants through supplying equipment or packaging. They really do span a spectrum of the ecosystem. Okay, so I was sort of picturing the companies that would provide these statements of interest would be more like focused on actually like building the factories. But it sounds like it's broader than that what you're getting. It is broader than that because the program itself is broader than that. So which includes a supply chain. If you only solve this issue by having the fabs in this country and all the supply chain is somewhere else or in countries of concern, we haven't really addressed the full challenge.

So I'm curious about what your team considers, you know, when you're thinking about divvying out this government money. By far, the single biggest thing we spend our time on is the economic and national security. Topic two is really about commercial and financial viability. You know, can this be successful after Chip's money runs out? What are we incenting? And how will the company over time create that as a sustainable and growing company? And another piece they're looking at?

Workforce is a critical component of this. It's in the news a lot, but the fact is, to try to do something new, we also need a workforce and a skill set that has not been in the U.S. for many years. And so how do we make sure that these companies are going to have the workforce that they need to run those plants? And then a series of other topics, particularly around R&D and some other sort of supply chain and ecosystem aspects. There are strings attached to the money, strings that line up with Biden

administration priorities. Some projects have to provide plants for high-quality childcare for plant workers. Companies may have to share part of any unexpected profits with the U.S. And preference will go to companies that promise not to buy back stock, basically trying to ensure that money gets reinvested in the company itself and not with Wall Street investors. that money gets reinvested in the company itself and not with Wall Street investors. There are other policy guidelines, like restrictions on firms trying to expand in China.

It's a broad effort to use policy to influence business. Some have pressed the government to scale back on these conditions, saying they pose an unreasonable burden. If this project is meant to help address national security issues stemming from the fact that most manufacturing of semiconductor chips happen abroad, it almost seems natural to assume that you would want to also give more money to American companies versus non-American ones. Is that something your team is thinking about at all? Actually, not really.

Is that something your team is thinking about at all? Actually, not really. The funding opportunity does not show a preference for an American or a non-American company. What we want is we want strong companies, whether they're American or not, to consider building and creating their broader ecosystems in this country. The fact that the money is available to non-U.S. companies has drawn some criticism. The CEO of Intel, the U.S.'s largest chip manufacturer, said that his company should, quote, benefit more from the funds than some of his foreign competitors. But there's a reason why the U.S. is opening it up to foreign companies. A big goal for the U.S. government this time is to attract some of the East Asian chip manufacturers

who have the most advanced technologies to come to the U.S. and build or expand their facilities. One big target company is Taiwan Semiconductor Manufacturing, TSMC. That is the company that makes most of the world's most advanced semiconductors. And TSMC is currently building a big chip factory in Arizona, and they are hoping to get the help from the CHIPS Act to support that construction effort. It may still be months before the applicants are granted the money.

And even then, Yuka's reporting suggests that the $39 billion might not be enough. Some economists believe that it takes $3 trillion to sort of bring the semiconductor industry to the sort of modern standard. So compared to that, you know, $39 billion in subsidies is very small. But compared with other government intervention effort in the U.S., in the private sector, I would say this is a significant amount. The U.S. does have a very competitive semiconductor industry. You know, we have companies that have the world's most advanced technologies.

It's just that their manufacturing of products has not been taking place much in this country. So we have the technology base for that. And also the U.S. government has a lot of resources. So when the U.S. government gets serious and spends a lot of money trying to support these industries, it could have very meaningful impact. That's all for today, Monday, August 21st.

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