Fabless Semiconductor Companies: Winners in the CHIPS Act Era

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

Increased Manufacturing?Capacity

The increase in manufacturing capacity is substantial. So far, Intel has received $8.5 billion from the Act for its semiconductor projects, including new factories in Ohio, Arizona, New Mexico, and Oregon. Similarly, TSMC and Samsung 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.

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Article authored by Nick Frasse .

Disclosures

Intel comprised 4.29% of SMH net assets as of 6/21/2024.

Micron 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.

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