Recent Developments

On March 20, 2024, the U.S. Department of Commerce announced it signed a nonbinding preliminary memorandum of term with Intel Corp. for up to $8.5 billion in direct funding through the U.S. CHIPS (Creating Helpful Incentives to Produce Semiconductors Act) and Science Act to advance Intel's commercial semiconductor projects domestically.

Intel will also benefit from U.S. investment tax credit of up to 25% on more than $100 billion in qualified investments and have the option to draw upon federal loans of up to $11 billion.

The agreement is subject to due diligence and negotiation before the award is finalized; it is conditional on the achievement of certain milestones and remains subject to funds availability. Once agreed on final terms, S&P Global Ratings expects the Department of Commerce will start delivering funds by the end of the year.

Intel is one of hundreds of global semiconductor firms that have applied for funding by the U.S. CHIPS and Science Act. We've long believed Intel would be a major beneficiary of the CHIPS Act funding given its domestic manufacturing build plans and its importance to U.S. national security from a semiconductor supply chain perspective. We believe Intel's funding allocation will soon unleash a flurry of grant announcements to other semiconductor manufacturers such as Micron Technology Inc., Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC), Samsung Electronics Co. Ltd., and Texas Instruments Inc., removing a major obstacle before these firms solidify their semiconductor fab build plans without further delays.

Ratings Implications

From a credit perspective, we view grants to semiconductor manufacturers favorably because they partially offset planned capital expenditures. With the exception of Intel, we have not included assumptions for grants from the U.S. CHIPS Act in our base-case financial forecasts of rated issuers. While favorable, any grants that would be awarded are unlikely to materially change our assessment of our rated issuers' credit profiles.

For Intel specifically, the company introduced its "smart capital strategy" in August 2022 as part of its joint venture with Brookfield Asset Management to co-invest in the manufacturing expansion at its Ocotillo campus in Chandler, Arizona. Intel indicated this strategy includes lowering its significant capital expenditure outlays by about 20%-30% from not only co-investments with partners (i.e. Brookfield JV) but also from government incentives and customer prepayments. The U.S. CHIPS Act grant of up to $8.5 billion to Intel is within our expectations and included in our base-case financial forecast; as such, there are no significant changes to our view of Intel's credit profile or their credit metrics as a result of the U.S. CHIPS Act funding announcement.

As for loans, we would only include those as debt in our S&P Global Ratings-adjusted credit metrics if they are drawn. We understand the loans may be guaranteed by the U.S. government and could have terms at below-market interest rates. We will review the rated issuers' overall debt financing plans and financial policies, rather than assume any CHIPS Act loan drawn by rated issuers will be incremental to their previously planned debt issuance requirements.

U.S. CHIPS Act Funding Announcements To Date

The CHIPS Program Office has announced over $10 billion in grant awards and about $12.6 billion in loans to date to four semiconductor manufacturers across investments in eight states.

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Overview Of The CHIPS Act

The U.S. CHIPS Act was enacted on Aug. 9, 2022, and aims to bolster domestic semiconductor manufacturing and research capabilities in the United States. The Act, administered by the U.S. Department of Commerce, provides incentives for both U.S. and foreign corporations to strengthen domestic manufacturing, supply chains, and national security; to invest in research and development (R&D); and to create jobs.

The Act authorizes about $280 billion in funding for scientific R&D in the U.S., of which $39 billion is for manufacturing incentives and $13.7 billion for semiconductor R&D, workforce development, communications technology security, and supply chain activities. Of the $39 billion of manufacturing incentives, the Department of Commerce may allocate up to $6 billion and use leverage to support loans and loan guarantees of up to $75 billion to manufacturers.

The Act also provides a 25% investment tax credit for capital equipment for chip manufacturing.

The Department of Commerce is in the process of evaluating applications submitted and have only announced preliminary agreements with a handful of chip manufacturers, of which Intel Corp is one.

Limitations and restrictions to the CHIPs Act

The CHIPS Act's financial incentives are subject to certain funding restrictions. For example, they prohibit investment in the development of advanced chip manufacturing in China and other countries of concern, such as Iran, Russia, and North Korea, for 10 years. Any violations of these restrictions may result in the claw back of CHIPS Act funding.

Additionally, there are restrictions to prevent recipients from spending CHIPS Act funding on shareholder returns including share buybacks and dividends; it also requires workforce development plans that include partnerships with labor unions, academic institutions, and community groups to meet workforce needs.

In our view, these restrictions could be minor roadblocks and do not derail companies' plans to participate in the CHIPS Act funding program, as demonstrated by the large number of applications.

Rebuilding America's Chip Supply Chain Got Off To A Rocky Start

Prior to the latest CHIPS Act funding announcements in March, several major semiconductor projects that we expected to be funded by the CHIPS ACT grants experienced construction delays. These delays can be attributed to various factors, including weaker-than-expected semiconductor demand amid a challenging macroeconomic environment, shortage of skilled labor in the U.S., rising raw material prices, and slower-than-anticipated grant approval processes.

Additionally, difficulties in meeting the eligibility requirements for subsidy--such as sourcing building materials and components only from U.S. suppliers--have also added to the challenges. Demand environment and operational issues aside, the delays may potentially be aimed at drawing the government's attention to accelerate the allocation and funding of grants, and resolve any impending negotiations.

Notable delays

• TSMC's $40 billion Arizona project pushed back the launch of its first factory for N4 process technology to 2025 and the second factory to 2027 or 2028, citing lack of skilled workforce, demand uncertainties, and its plans to add production in Kumamoto, Japan, Dresden, Germany, and Nanjing, China, along with the United States. The company expects to start production at its Kumamoto fab in late 2024 and to commission its new fab in Dresden in late 2027.
• Samsung Electronics postponed the launch of its $17 billion Taylor, Texas, fab to 2025 from the second half of 2024 due to delayed CHIPS Act subsidies and permit-related issues. The new fab will manufacture chips for Samsung's own application processors as well as chips for third parties.
• Micron's investment plans for its New York plant are on hold pending environmental review and the awarding of federal grants. The company had planned to start fab construction in 2025 and chip production by 2029.
• Intel's $20 billion Ohio plant will not be completed until late 2026 at the earliest and will not be operational until at least 2027, compared to their original plan to start producing chips by late 2025. The delay was due to sluggish industry demand and slow government grant rollout. The recently announced $8.5 billion grant to Intel removed one of those concerns.

The various instances of delay could be pointing to much broader systemic challenges. Among them are supply chain complexities, lack of skilled labor, higher cost structures for facilities in the U.S. than in Asia, and incentives in other countries to entice the same set of large fab manufacturers to build fabs in those locales. We believe the overall cost of manufacturing in the U.S. is much higher relative to fabs built outside of U.S.

Industry Perspectives On CHIPS Act Vary

U.S. government's perspective

U.S. policymakers envision the CHIPS Act will deliver a number of national security and economic benefits. It will begin the process of diversifying the semiconductor manufacturing base away from the geopolitically fraught island of Taiwan, which makes the vast majority of leading-edge chips. More importantly, the Act will focus on strengthening the U.S. semiconductor commercial and defense industrial base. The global semiconductor supply will continue to rely heavily on TSMC, but we believe boosting geographic diversity will help mitigate risks associated with Taiwan like water shortages, earthquakes, and geopolitical risk.

From an economic perspective, the Act will create good-paying advanced manufacturing jobs and add semiconductor manufacturing know-how to the U.S. labor force. Semiconductor manufacturing capacity in the U.S. has been in decline, down to 12% today from 37% in the 1990s. The Act provides $13.2 billion for R&D and workforce development to boost domestic semiconductor intellectual property and human capital. These funds will support advancements in various areas like material science, quantum computing, and biotech, and support more semiconductor research at domestic universities.

The U.S. CHIPS Act spurred initiatives from other governments to support their semiconductor industries. The E.U. passed the European Chips Act in 2023, a €43 billion package of public and private investments to support similar goals as the U.S. CHIPS Act. It aims to double Europe's share of semiconductor production to 20% by 2030 from 10%. Germany is also providing subsidies separate from the E.U. Chips Act, attracting investments from Intel and TSMC. Japan, South Korea, and the U.K. are also taking actions to support their semiconductor industries.

Customers' perspective

Some fabless semiconductor firms have demonstrated a willingness to buy U.S.-made chips. Apple Inc. confirmed that it will buy processors made in TSMC's Arizona factory. Advanced Micro Devices Inc. indicated that some of its chip manufacturing will be in the U.S. Also, chip designers for defense applications will likely be interested in U.S. manufactured chips due to national security concerns. Reports suggest TSMC could charge up to 30% more for chips made in the U.S. because of higher construction and operating costs. In addition, customers will need to revamp their supply chains to accommodate U.S.-made chips. There are some indications that customers are willing to absorb some, if not all, of the higher costs and take on additional supply chain complexity to improve geographic diversification in chip production.

Semiconductor manufacturers' perspective

We don't believe semiconductor manufacturers would respond to incentives alone. They need to believe there is customer demand at the necessary price points--meaningfully higher than outside the U.S.--to fully utilize new sites, and that capacity additions are unlikely to trigger oversupply conditions. Some customers have indicated publicly their interest in U.S. manufactured chips, and we expect the chip manufacturers have had in-depth discussions with the largest prospective customers to support moving forward with their plans.

However, planned capacity additions only represent a small fraction of global capacity. For example, TSMC's two Arizona fabs will be able to produce 600,000 wafers annually, compared to the 16 million total that TSMC produced in 2023. They will also phase-in capacity over time, with the first Arizona fab beginning volume production in the first half of 2025 and the second facility starting two or three years later. Therefore, we believe the relatively small incremental capacity coming online will be relatively easy to fill.

CHIPS Act Is A Good Start Toward Diversification

We see the CHIPS Act as a good down payment on a diversification effort, but insufficient to fully achieve its aims. We mentioned above that the projects in the pipeline represent a small portion of global wafer starts. NVIDIA Corp. CEO Jensen Huang said supply chain independence could be up to two decades away. However, we believe the Act will be successful in seeding the market, creating manufacturing and R&D centers that can accumulate talent and capabilities, and expand over time.

All companies receiving CHIPS Act funding are winners, but Intel could be the biggest. It has a long history of operating fabs in the U.S. and is the only U.S. company that can make leading-edge chips, so it would likely be the cornerstone of any successful domestic semiconductor manufacturing strategy. Such an effort could be decisive for Intel's turnaround effort.

If implemented successfully, China is likely to face the greatest headwinds. The program will indirectly weaken China's geopolitical leverage over the global chip manufacturing and supply chain through diversification. The Act also restricts recipients of incentives from expanding semiconductor manufacturing in countries including China, particularly for leading-edge chips, and some joint research and technology licensing efforts. This will likely apply to TSMC and Samsung because we expect they will participate, forcing China to rely on its own solutions. Considering the chip export ban, we believe these restrictions will likely keep China's chip innovation behind the western world.

China is also investing heavily in its own technology supply chain, having raised $41 billion for its semiconductor industry subsidy program last September. We expect China will boost its domestic chip production and increasingly favor their own chips over foreign alternatives as semiconductor technology is of national interest and top priority for the Chinese government. Excess supply could be an unintended consequence if each country boosts its own semiconductor manufacturing capacity in the pursuit of its own interests without regard for the balance of global demand and supply.

Success Is Not Guaranteed

The outsourcing of semiconductor manufacturing has allowed U.S. chip firms, such as NVIDIA, Qualcomm Inc., and Advanced Micro Devices, to focus on chip design and marketing and freed up their capital base. However, rising geopolitical tensions and COVID-led supply chain disruptions have caused the U.S. and other countries to rethink their semiconductor supply chain strategies and the need to create domestic manufacturing capabilities. The CHIPS Act provides the necessary financial incentive to steer semiconductor firms to manufacture domestically.

To unwind over three decades of semiconductor manufacturing outsourcing will take time. Behaviors will need to change. For example, Intel has grand ambitions to create a world class foundry business serving global semiconductor customers. Yet, it has a steep learning curve ahead, despite its long history of manufacturing its own chips. TSMC and Samsung have established long track records as foundries and have proved to their customers their stable process technology development, reliability, and good customer service.

Intel's announcement in late 2023 to split its design and manufacturing businesses into independent business groups (still under same Intel corporate banner) is a good first step to establish accountability internally and externally. We believe execution is key; Intel will need to prove that its foundry business can meet customers' needs, attract customers from mature process nodes to leading edge, and generate good returns. This will be a multiyear process. Nevertheless, we believe Intel's customers would also be in favor of helping the company succeed because it would allow them to reduce reliance on a concentrated supplier base and particular geography.

For Samsung, given the importance of U.S. fabless customers to volume production and process node advancements, its foundry presence in the U.S. will be important to break into TSMC's stronghold in the leading-edge foundry business (over 90% market share in leading-edge chip production).

Semiconductor firms that receive funding for internal manufacturing in the U.S. (i.e. Micron, Texas Instruments, NXP Semiconductors N.V.) or for R&D facilities (i.e. Applied Materials Inc.) do not have to worry about signing new customers. Still, concerns about cost controls and regulatory compliance remain.

A Long Road To Self Sufficiency

In our view, the measure of success will be continuous. At the current stage, CHIPS Act funding to a broad set of firms across the semiconductor supply chain would be key. Advanced chips include processing layers that involve nonleading-edge nodes. Back-end test and assembly are also required to complete the chipmaking process. To that end, in order to ensure the resilience of domestic chipmaking capabilities to satisfy U.S. semiconductor supply chain resilience and national security needs, financial incentives are needed to develop a reliable near-shore or onshore ecosystem.

The long-term viability of a domestic supply chain will also depend on customers' confidence in U.S.-based fabs or foundry to manufacture chips, at the leading edge as well as at mature nodes, at reasonable costs. Key customers to watch include fabless semiconductor firms NVIDIA, Broadcom Inc., Qualcomm, and Advanced Micro Devices; cloud service providers and web-service companies who design their own chips such as Microsoft Corp., Amazon.com Inc., Alphabet Inc., and Meta Platforms Inc. For now, we expect customers are willing to pay more for their own supply chain procurement risk management. However, for how long they are willing to do so is a big question. These companies represent a high volume of the semiconductor industry output and their buying behavior will be highly consequential to the pace and trajectory of U.S. semiconductor manufacturing growth.

We view getting the process off the ground as the most difficult step. A sustainable end state would include the private sector funding manufacturing investment with limited government support, a diverse set of chip vendors that have a global manufacturing presence, and narrow price differences between geographies.

We recognize the long timeline for U.S. manufacturing to become self-sufficient. In the meantime, U.S. produced chips will likely be pricier than those produced overseas given the structurally higher cost of labor, construction, manufacturing, regulatory and compliance concerns, and other costs. U.S. Secretary of Commerce Gina Raimondo said the CHIPS Act alone will not be sufficient for the U.S. to regain leadership in the semiconductor supply chain, which is the goal. She said, "I suspect there will have to be...CHIPS Two or some sort of continued investment." Her suggestion of further government support may be possible since the Act was a bipartisan effort and the importance of domestic semiconductor production for both commercial and military applications is clear.

We share her views, but further government support would likely require semiconductor industry demand to remain robust; firms to rapidly develop the chip manufacturing know-how to operate in the U.S.; customer confidence to grow; and private capital to invest in the U.S. chip production ecosystem.