SweetBunFactory The CHIPS Act is revolutionizing the semiconductor industry, giving fabless chip designers lower production costs, improved technology access, and greater flexibility, driving innovation and competitiveness. Fabless Semiconductor Companies: Winners in the CHIPS Act Era The global semiconductor industry is experiencing a transformation driven by government initiatives like the CHIPS Act in the United States. These efforts aim to boost semiconductor production, but the ripple effects extend far beyond the factories. One significant beneficiary of this surge in manufacturing capacity is the chip design sector. By outsourcing their production, chip designers stand to gain from the increased competitiveness and efficiency of semiconductor manufacturing. CHIPS Act from Ten Thousand Feet The CHIPS Act, officially known as the CHIPS and Science Act, is a substantial government initiative aimed at revitalizing the semiconductor industry in the United States. With over $52 billion allocated for manufacturing and research, this act seeks to reduce dependency on foreign manufacturing, create jobs, and secure the supply chain. While these goals are ambitious, the broader impact on the semiconductor ecosystem is equally important. Current Funding Totals by Company Company Amount Factory Locations Intel $8.5 billion Arizona, New Mexico, Oregon, Ohio TSMC $6.6 billion Arizona Samsung $6.4 billion Texas Micron $6.14 billion New York Global Foundries $1.5 billion New York, Vermont Microchip Technology $162 million Colorado, Oregon Polar Semiconductor $120 million Minnesota BAE Systems $35 million New Hampshire Total $17.1 billion Click to enlarge Increased Manufacturing Capacity The increase in manufacturing capacity is substantial. So far, Intel (INTC) has received $8.5 billion from the Act for its semiconductor projects, including new factories in Ohio, Arizona, New Mexico, and Oregon. Similarly, TSMC (TSM) and Samsung (OTCPK:SSNLF) have received significant funding to expand their U.S. operations. The Semiconductor Industry Association estimates that the CHIPS Act has already garnered over $450 billion in private investments, further boosting global manufacturing capacity. This legislative funding and similar global initiatives are set to reshape the semiconductor industry. While the primary goal is to secure supply chains and reduce dependency on foreign manufacturing, the benefits for chip designers are clear. Increased manufacturing capacity, driven by substantial investments, could create a more competitive environment, lowering production costs and improving access to advanced technologies. Fabless, aka Chip design companies, can leverage these advantages and focus on innovation and development, ultimately benefiting from global semiconductor production’s increased flexibility and scalability. Fundamental Benefit for Fabless Semiconductor Companies Chip design companies typically do not own manufacturing facilities and rely on third-party manufacturers to produce their designs. This model, the fabless model, allows these businesses to focus on innovation and development without the heavy capital investment required for building and maintaining fabs. As global manufacturing capacity increases, several benefits emerge for chip designers: Lower Production Costs: With more fabs competing for business, production costs will likely decrease. This competition among manufacturers can lead to lower prices for chip production, benefiting designers who can negotiate better deals. Improved Access to Advanced Technology: Increased investments in manufacturing also mean more advanced technology will be available. Fabs will upgrade their processes to attract business, providing chip designers access to state-of-the-art manufacturing techniques that can improve the performance and efficiency of their designs. Greater Flexibility and Scalability: As more fabs come online, chip designers will have greater flexibility in choosing manufacturing partners. This flexibility allows them to scale production quickly in response to market demands, reducing the risk of supply chain disruptions. Focus on Core Competencies: By outsourcing production, chip designers can concentrate on their core competencies-innovative design and development. This focus can lead to more cutting-edge products and a stronger competitive position in the market. Potential Supply-Demand Dynamic Shift With substantial investments flowing into the construction and expansion of fabrication plants (fabs), the global production of semiconductors is set to rise. This increase in manufacturing capacity could create a supply-demand imbalance that benefits the chip designers. Historically, the semiconductor industry has seen periods of boom and bust. During times of high demand, manufacturing capacity often struggles to keep up, leading to shortages and higher prices. Conversely, when supply exceeds demand, prices fall, and manufacturing becomes more competitive. The current wave of investments aims to build a more resilient and flexible supply chain, but it also means that more fabs will be capable of producing a higher volume of chips. Source: VanEck as of 6/21/2024. How to Invest In Semiconductor Companies Funds like VanEck Semiconductor ETF (SMH) benefit from the CHIPS Act in two ways: investing in foundries that should see higher revenue from new manufacturing plants and allocating to fabless chip designers who benefit from more competitive pricing due to increased manufacturing. As the semiconductor landscape evolves, chip designers are poised to reap the rewards of a more robust and dynamic manufacturing ecosystem, driving the next wave of technological advancements forward. Disclosures Intel comprised 4.29% of SMH net assets as of 6/21/2024. Micron (MU) comprised 4.44% of SMH net assets as of 6/21/2024. Microchip Technology comprised 1.52% of SMH net assets as of 6/21/2024. This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned is unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees. An investment in the Fund may be subject to risks which include, among others, risks related to investing in the semiconductor industry, equity securities, special risk considerations of investing in Asian, European and Taiwanese issuers, foreign securities, emerging market issuers, foreign currency, depositary receipts, medium-capitalization companies, issuer-specific changes, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified, and industry concentration risks, all of which may adversely affect the Fund. Emerging market issuers and foreign securities may be subject to securities markets, political and economic, investment and repatriation restrictions, different rules and regulations, less publicly available financial information, foreign currency and exchange rates, operational and settlement, and corporate and securities laws risks. Medium-capitalization companies may be subject to elevated risks. Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com/etfs. Please read the prospectus and summary prospectus carefully before investing. © 2024 VanEck. VanEck®, VanEck Access the opportunities®, and the stylized VanEck design® are trademarks of VanEck Associates Corporation. Original Post Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
sekar nallalu BAESF,BAESY,Cryptocurrency,INTC,MU,SMH,SSNLF,TSM,vaneck Fabless Semiconductor Companies: Winners In The CHIPS Act Era