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How The $52B CHIPS Act Would Address The Semiconductor Shortage

Semiconductors are found in all things electrical, from smartphones to Javelin missiles. So when there’s a short supply of the components, everyone feels it. That’s been the case for some time now, as a global pandemic, lurching supply chain, and geopolitical conflict have contributed to a dearth of semiconductors available on the market.

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The Creating Helpful Incentives to Produce Semiconductors for America Act (CHIPS Act) would aim to change all that, and it recently passed the Senate by a vote of 64 - 32. The legislation represents an opportunity to bolster the semiconductor industry and protect against future shortages, but it’s stalled in the U.S. House of Representatives before. This time, though, Speaker Nancy Pelosi (D-CA) has said the chamber has the votes to pass the measure. Here’s what it would mean for the semiconductor supply chain and as a hedge against future chip shortages.

There’s A Semiconductor Shortage?

Yes, and the lack of these small components spells a big problem. The semiconductor shortage began in Q1 2021 as rapidly increasing demand and supply chain issues led to ballooning lead times for new silicon semiconductors. In addition, Russia’s invasion of Ukraine further disrupted the semiconductor supply chain, as Russia produces more than 25% of the world’s palladium, a metal often used in the production of semiconductors.

Semiconductor devices are found in diodes, transistors, and integrated circuits, all of which are integral to the electrical devices we use, from household appliances to electric vehicles. In other words, semiconductors are essential to the production and development of electrical devices and systems.

According to a report from McKinsey, manufacturers of vehicles, laptops, and other devices have cut production as a result of the semiconductor shortage. Semiconductors are also crucial to emerging technologies such as electric vehicles (EV) and renewable energy.

Manufacturers are responding to the shortage by ordering surplus chips, which may take between four and 18 months to arrive. This trend is placing further pressure on the semiconductor supply chain, as fabrication plants struggle to keep up with demand. The long production times required for semiconductor devices doesn’t help matters --- most semiconductor devices take an average of three months to produce.

How Has The Semiconductor Shortage Impacted The Economy?

Although there are some signs this most recent semiconductor shortage may be easing, the economic impact of slowed production has already been felt in multiple industries. In the automotive industry alone, billions of dollars in revenue were lost as production dropped 50% in the U.S., 70% in China, and 80% in the European Union (EU).

Auto manufacturers including Toyota NYSE: TM, Jaguar Land Rover NYSE: TTM, the Volkswagen Group OTCMKTS: VWAGY, and Stellantis NYSE: STLA have all made production cuts in the wake of the semiconductor chip shortage. The impacts to the broader economy have been immense as well. CBS News reported the U.S. economy suffered a $240 billion loss in 2021 alone due to the global semiconductor shortage.

However, just as a semiconductor shortage is harmful to economic output, ramping up domestic production could just as easily boost significant growth. As society undergoes a new wave of electrification, more and more efficient semiconductor devices are going to be in high demand. The anticipated need for semiconductors is so high that McKinsey estimates the semiconductor space will be worth $1 trillion by 2030.

How Would The CHIPS Act Increase Semiconductor Production?

Currently, the majority of the world’s semiconductor devices come from Asia, where they are exported by countries including China, Japan, Taiwan and Malaysia. The federal funding for the expansion of domestic semiconductor production capacity is intended to help stave off future shortages caused by a fraught supply chain and geopolitical conflict. Domestic production of semiconductors would also serve to protect U.S. intellectual property and national security interests.

The CHIPS Act earmarks $52.7 billion in federal subsidies to U.S.-based semiconductor manufacturers primarily to incentivize the construction of domestic fabrication plants. It also includes $100 billion over five years for science and technology research through the expansion of the National Science Foundation.

At the moment, the cost of a semiconductor fabrication facility is estimated to be between $15 billion and $20 billion, with only eight companies able to afford the capital investment, according to research performed by Aalbun. The subsidies would help absorb some of those costs, as well as open the door for smaller companies to ramp up production and invest in research and development. Considering it takes about three years to construct a fabrication plant and begin producing semiconductors at scale, the support cannot come soon enough.

Overall, the CHIPS Act could have a positive effect on the U.S. economy, according to research conducted by Data for Progress. If enacted, the researchers estimate, the CHIPS Act would contribute $287 billion to U.S. GDP and create or save up to 2.8 million jobs through 2027. In a global economy where supply chains have been stressed and demand for semiconductor devices continues to rise exponentially, increasing domestic production capacity is a must to ensure the continued growth and improvement of our devices, vehicles, and electrical grid.

While there are many sides to the scenario, bullish investors are banking on the substantial spending package as a method to increase economic activity in the chip manufacturing industry, which could give chip stocks a significant boost.

Provided that Capitol Hill passes the CHIPS Act, major players in the chip industry, NVIDIA, Advanced Micro Devices, Broadcom Inc., Lam Research Corporation, Intel, and GlobalFoundries Inc., among others, could see share prices trend upwards in the coming months.

Although these companies are spread across different interest markets, investors have raised interest in chip and semiconductor stocks in recent weeks despite broader market sentiment trending lower at the start of July.

The momentum of CHIPS has already played off on the stock market. Computer processing semiconductor manufacturer, Advanced Micro Dynamics (NASDAQ:AMD) saw stock prices jump by 23.5% throughout July following a 25% drop experienced in June.

AMD share prices have since stabilized, but positive earnings postings and the CHIPS Act momentum meant that stock prices could experience some significant growth after a slower June performance.

For NVIDIA (NASDAQ:NVDA), another giant in the chip industry, share prices have also been trading quite reasonably in the last few weeks, as prices managed to push further, gaining 19% in July. Throughout most of July, and for some time in August as well, NVIDIA has made substantial moves, even as broader chip stocks weigh in on the market.

Despite the market experiencing a slight cooldown, there’s still enough investors looking at the bigger picture, rather than contemplating near-term success for chip stocks. Though it’s possible that the billions in subsidies could positively influence stock prices, the situation could also swing the other way considering the current economic slowdown.

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Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Toyota Motor (TM)
3.8062 of 5 stars
3.81 / 5 stars
Tata Motors (TTM)
0 of 5 stars
0.00 / 5 stars
Stellantis (STLA)
3.6134 of 5 stars
3.61 / 5 stars
$20.35+0.7%N/AN/AModerate Buy$29.55
Advanced Micro Devices (AMD)
4.6768 of 5 stars
4.68 / 5 stars
$159.43-10.2%N/A234.46Moderate Buy$193.47
4.7414 of 5 stars
4.74 / 5 stars
$117.99-6.6%0.03%69.00Moderate Buy$129.76
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