Not Intel, but South Korea, is where CHIPS Money Should Go

The comically embarrassing timing between the final passage of the CHIPS and Science Act and Intel’s disastrous quarterly earnings, both occurring on the same day last week, elucidated one hard truth: Congress may be barking up the wrong tree.

Many have assumed that Intel – America’s semiconductor darling – just needs a new CEO, some extra incentives, and more favorable policies to regain its mojo, get back on top, and reverse America’s downward trajectory in losing its semiconductor manufacturing capacities.

Intel did get a new CEO in Pat Gelsinger in 2021. It will get some billions worth of taxpayer dollars out of CHIPS, as well as friendly local policies from states like Ohio – eagerly awaiting a new Intel foundry to be built there. But as Intel’s earnings revealed, the company’s core is rotting so precipitously that passing 10 more CHIPS Acts won’t revive it.

For analysis of Intel’s woe, I recommend reading two semiconductor-focused newsletters – Dylan Patel’s SemiAnalysis and Doug’s Fabricated Knowledge. I won’t pile on here. Instead, given Intel’s problems, to which companies should the CHIPS Act incentives go, so it is money well spent?

My proposal: the South Korean tech giants, Samsung and SK Hynix.

Samsung and SK Hynix

Even though Taiwan and TSMC get more media attention, due to its position as a geopolitical hotspot, South Korea has been a global leader in semiconductor manufacturing for decades. When Morris Chang, TSMC’s founder and ex-CEO, gave a wide ranging speech on the state of the global semiconductor landscape, he explicitly called out South Korea as a fierce competitor to Taiwan, while being dismissive of both the US and China.

(To read the English translation of Morris Chang’s speech, see “Morris Chang’s Last Speech” (premium content))

Samsung and SK Hynix are among the top four chip manufacturers globally. (The other two are Intel and TSMC.) Both companies appear to be better run and better capitalized than Intel. And both have already made successful investments in the US with plans to invest more – in fact, materially more than what is appropriated the CHIPS Act.

Samsung and SK Hynix are executing well, eager to pour money into America, and, frankly speaking, safer bets than Intel. Let’s look at each company’s footprint and plans:

Samsung: While known to most American consumers for its bendable smartphones or Smart TV, Samsung began building its first “Made in USA” semiconductor fab in Austin, Texas, in 1996. Since then, Samsung increased its Austin plant’s capacity twice in 2007 and 2017.

Samsung’s Austin fab primarily produces logic chips in the 14nm and 28nm/32nm range – as in, it does not house the most cutting-edge technologies capable of producing chips as small as 5nm or 3nm. That being said, this Samsung facility serves some marquee customers, most notably Tesla. It has been making Tesla’s all-important Full Self-Driving chip, literally the heart and brain of Tesla’s autonomous driving, since 2017 by using its 14nm technology.

With some successful experience in the Lone Star state, Samsung announced an additional $17 billion in investment late last year to build another fab in Taylor, Texas – a town 40-minutes outside of Austin – to expand its logic chips making capacity and double-down on its Texas ecosystem of suppliers and partners.

Samsung’s success, technology, and commitment in the US is arguably comparable to Intel’s, despite Intel having “home turf advantage”. Among all of Intel’s US-based fabs, only the one based in Arizona has 14nm capabilities. Globally, Samsung overtook Intel as the #1 chip maker by revenue earlier this year.

SK Hynix: I bet few in America have ever heard of SK Hynix, or its corporate parent SK Group. Yet, it is the world’s 2nd largest memory chip maker. (The largest is Samsung.) SK Group, this classic South Korean “chaebol”, has been making big moves in America lately.

Two days before Intel’s disastrous earnings call, SK Group’s Chairman Chey Tae-won (he goes by “Tony”) made a White House visit to announce his plan of investing $22 billion in America across the semiconductor, green energy, and biotech industries. Because President Biden was still in quarantine from contracting Covid, the meeting ended up being a glorified Zoom call with Chey in the Roosevelt Room and Biden in the Residence.

This $22 billion is part of the $52 billion investment that SK plans to pour into the US by 2030, which Chey announced last year. The semiconductor portion is about $15 billion, spanning R&D programs, materials, and an advanced packaging and testing facility. (The other portion is going into building batteries, EV charging stations, and other green business projects.)

Interestingly, Intel sold a big chunk of its own memory chip business to SK Hynix worth $9 billion. Effectively, SK Hynix already owns a piece of what was previously Intel. A part of that “piece” is Intel’s last manufacturing facility in China, based in the northeastern port city of Dalian. One of Intel’s last remaining memory chip products, Optane, was officially shut down last week with a $559 million write-off, presumably so it can focus on its sagging logic chip business to compete with Samsung and TSMC.

Intel’s is shrinking, while SK is expanding at its expense.

Piggyback Off Of South Korea

Seeing how Samsung and SK have already committed a combined $32 billion to build up America’s semiconductor capabilities, how much is the CHIPS Act bringing to the table? The devil is always in the details, especially in a congressional funding package.

While the headline number that often gets reported is $52 billion, money appropriated from the CHIPS Act that will directly contribute to either building more semiconductor fabs or training more workers to operate those fabs is actually $39.2 billion.

Having spent some time reading the legislation’s fine print, I have pasted screenshots of the relevant parts, which you can read here and here.

Out of the $39 billion “Manufacturing Incentives”, only $19 billion is allowed to be spent this year. The remaining $20 billion must be split into $5 billion per year chunks to be spent in the following four years. (Talk about micromanagement!) Meanwhile, the Commerce Department, which is in charge of allocating this money, can charge up to 2% per fiscal year off of the larger base of $50 billion to hire people, find office space, buy computers, etc. to do the work – a $1 billion per year administrative budget! (If you are an investor, this is basically a 2% management fee for the lifetime of this “$50 billion taxpayer fund” without “carried interest” for the American people.) See more screenshots of fine prints below.

There are already serious and legitimate concerns being raised about the implementation of the CHIPS Act. Some people are worried that the money appropriated (whether you think it is $52 billion or $39.2 billion) is a drop in the bucket. Compared to the commitments of the two South Korean tech giants, Congress looks kind of cheap. Others are worried that these incentives will be misused by companies to do share buyback or fund dividends to shareholders, not build factories. This worry was fanned by Intel’s own CEO and CFO in a “shooting yourself in the foot” moment during its earnings call last week, simultaneously announcing less capital expenditure (to build fabs), while remaining committed to increasing dividend over time. To quell this worry, the Commerce Department had to issue a late Friday statement stating it will limit the size of CHIPS Act incentives to “no larger than is necessary” – whatever “necessary” means.

Zooming out, it’s rather clear that America is relatively immature in designing, funding, and executing an industrial policy from the top-down to boost a sagging but important sector. In a previous post, “Can the US ‘Out China’ China?” I called out this problem of America simply lacking “industrial planning muscle”, which it either never had or hasn’t exercised in a while. The CHIPS Act may be America’s first serious “workout”, as it steps into a “trial and error” phase of industrial policy. As Danny Crichton articulated in the Lux Capital “Securities” newsletter:

“Trying and failing is the only way America will learn how to strategize and salvage its industrial base.”

And while America tries to figure out this “industrial policy thing”, it would be smart to simply piggyback off of the successes and experiences of companies who have been the products of an ally country, say South Korea, who is actually good at executing industrial policies.

As Americans, we want Intel to do well, and we need Intel to do well, so there is a true American “national champion” in the semiconductor space. But until that happens, there is no shame in free-riding off of our South Korean friends for a while, channeling tax incentives to Samsung and SK, and not wasting it on Intel.