Time to Get Bullish on U.S. Semiconductor Companies?

In August of 2022, a $53 billion piece of legislation called the CHIPS Act was signed into law. The hope: to catalyze semiconductor production in the U.S. and to “onshore” innovation and advancement of this critical technology. The question is, will it work?

Any time the federal government intervenes in markets and “picks winners” – as it seems to be doing with the CHIPS Act, it is known as ‘industrial policy.’ For decades, industrial policy has been largely frowned upon, as it is effectively the government deciding what sector or industry the economy should advance – instead of letting the market decide.¹

In the 1950s and 1960s, industrial policy in the U.S. was largely centered around investing in NASA to develop new technologies like jets and lasers, and to put a man on the moon. But the industrial policy also dates back to the country’s founding, when Alexander Hamilton favored policies to promote U.S. manufacturing instead of relying on the UK.

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The results throughout history have been mixed. The U.S. engaged in an effort to develop supersonic airliners and fast-breeder nuclear reactors, but neither project delivered a commercially viable result. Tariffs and quotas have also been used, particularly in recent years, in order to protect industries and jobs sometimes for political reasons. Tariffs on imported steel and aluminum, for example, led to higher prices for American consumers while not delivering a meaningful boost to either industry.

The hope is that a targeted approach on semiconductors will yield a better result. Back in the 1960s, as the government was involved in developing ballistic missiles and the Apollo spacecraft, they became early customers of semiconductor manufacturers Texas Instruments and Fairchild Semiconductor, which led to a surge of growth for both companies and eventually resulted in the founding of Intel.

Fast forward to 2023, and industrial policy largely centers around making the U.S. competitive with the world’s top semiconductor manufacturers, namely Taiwan, South Korea, and China. The inclusion of China as a competitor turns this industrial policy into a national security issue as well, since the U.S. largely doesn’t want to be dependent on China for such critical technology.

But the origins of this new spending on semiconductors come from the Covid-19 pandemic, when snarled supply chains meant many cars and other finished products were stalled because the U.S. could not get enough semiconductor chips from East Asian trading partners. The U.S. is hoping to ramp up production domestically and use federal dollars to become competitive. From an investment standpoint, the buy thesis for U.S. semiconductor manufacturers depends on whether the U.S.’s pivot to industrial policy is successful, which is far from assured.

Bottom Line for Investors

The semiconductor industry is vital to many of the technologies that will drive the global economy forward, including Artificial Intelligence. Whether or not U.S. companies can leap ahead to become competitive with Taiwan, however, remains to be seen. Industrial policy and the CHIPS Act may work, or it could fall short.

Thus far, there are signs that the investment dollars are starting to flow pretty strongly. Spending on nonresidential construction rose 17% year-over-year in February to nearly $1 trillion, putting the backlog of contracted nonresidential projects at 9.2 months. Some of the key areas of investment in the construction industry have come from new plans for electric vehicles, warehouses for e-commerce, and semiconductor manufacturers.

There’s a problem however with ballooning demand for construction projects—there aren’t enough workers and sometimes materials are in short supply. Carpenters and electricians are in high demand but in short supply. According to the National Association of Manufacturers, the industry is short about 800,000 workers, which raises questions about whether the demand boom is sustainable. The CHIPS Act can boost the ability to build factories and plan for more innovation and production, but it can’t provide the workers needed to carry it through.

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¹ Wall Street Journal. February 28, 2023.

² Zacks Investment Management may amend or rescind the A Better Way Forward: Actively Managing Passive Index Funds guide offer for any reason and at Zacks Investment Management’s discretion.

³ Zacks Investment Management may amend or rescind the A Better Way Forward: Actively Managing Passive Index Funds guide offer for any reason and at Zacks Investment Management’s discretion.

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