In U.S. Chip-Making Push, Wall Street Shrugs

"Intel Corp.'s Patrick Gelsinger might be Washington's favorite CEO right now. At the groundbreaking for a $20 billion-plus semiconductor-fabrication plant in Ohio on Friday, he was joined by politicians from both parties, Ohio Gov. Mike DeWine, a Republican, and President Biden, a Democrat.

"We're going to build the most advanced stuff in the world, right here, in Ohio," Mr. Gelsinger declared. "We put our chips on the table, to help the U.S. regain its manufacturing heart, as well as unquestioned technology leadership."

Those words are music to the ears of U.S. lawmakers. The reception on Wall Street to Mr. Gelsinger's plans, which include spending up to $100 billion in coming years on semiconductor-fabrication plants, or fabs, globally, has been cooler. Intel's stock price is down about 50% since Mr. Gelsinger took the company's helm in February 2021. Its market value has fallen below that of Advanced Micro Devices Inc., which has long lagged behind Intel in selling advanced microprocessors.

The share price is suffering from Intel's failure to keep up with rivals in adopting the most advanced manufacturing processes (which it is rushing to correct), slumping PC sales and recession fears. But a deeper tension is at work: that the growing bipartisan consensus in Washington that key technology, from chips to electric-vehicle batteries, must be made in the U.S. instead of in Asia, in particular China, might be at odds with what shareholders want.

In the U.S., private markets allocate capital to where returns are highest. That used to be advanced manufacturing. For a long time, Intel designed the world's most popular processors in fabs unmatched in scale and efficiency.

Starting over a decade ago, necessary economies of scale became overwhelming; the price of a fab now tops $10 billion. All but the largest manufacturers lacked the scale to generate satisfactory return on capital.

AMD, much smaller than Intel, struggled to shoulder the cost. In 2009, it went "fabless," spinning off its factories while outsourcing chip fabrication, mostly to Taiwan Semiconductor Manufacturing Co. Had AMD stuck with fabs, "they would have gone down the drain -- and they very nearly did," said Gus Richard, an analyst at Northland Capital Markets.

The fabless trend dovetails with Wall Street's embrace of asset-light companies whose intellectual property, brands or multimillion-user platforms can offer spectacular returns on minimal capital. Conversely, valuations of companies reliant on tangible assets have suffered, said Jason Thomas, chief economist at private-equity manager Carlyle Group Inc. Tangible assets, he said, aren't "reversible -- you can't sell half a factory you don't need," and their value would be even more depressed in situations when the owner is most desperate to sell it.

Management gurus like Clayton Christensen challenged the wisdom of prioritizing return on capital, and some Asian companies agreed. "There is capital everywhere," TSMC's founder and CEO, Morris Chang, told Mr. Christensen in 2009. "And it is cheap. So why are Americans so afraid of using capital?" (Ironically, TSMC today is the world's most valuable chip company.)

Japanese, Taiwanese and Korean companies could long focus less on return on capital, earnings and stock price than U.S. counterparts because founding families, allied companies or the government were dominant shareholders.

As in many industries, chip manufacturing migrated to Asia, where labor and capital were plentiful and heavily subsidized. Meanwhile, U.S. companies excelled where intellectual content mattered most: chip designers like Nvidia Corp., AMD, Qualcomm Inc., and for some products, Apple Inc.; makers of chip-design software like Cadence Design Systems Inc. and Synopsys Inc.; as well as makers of chip-making equipment such as Applied Materials Corp. and Lam Research Corp.

For a long time, American leaders saw this as a demonstration of mutually beneficial comparative advantage. But pandemic supply-chain disruptions and the belligerent behavior of Russia and China have awakened them to the strategic risk of importing vital products from Asia. Mr. Biden said Friday that it was no longer enough for advanced technology to be invented in America -- it must be manufactured here.

Mr. Gelsinger has positioned Intel as a company that does both. In 2020, it faced pressure to go fabless, but after assuming the CEO position last year, Mr. Gelsinger doubled down on manufacturing. Intel is "the only company in the United States that can do both leading-edge design and manufacturing in-house," he told Congress in March. But, he warned, it was fighting a 30% to 50% cost disadvantage against Asia.

Lobbying by chip makers helped persuade Congress to pass the Chips and Science Act in July, extending nearly $53 billion in subsidies to build or expand fabs in the U.S. For Intel, it helps, but it isn't enough: The company needs to finance both new fabs, revamped manufacturing processes at existing fabs, and its dividend, all while margins are pressured. To conserve capital, it enlisted Brookfield Asset Management Inc. as a co-investor, and it will build the factory structures first and equip them only when demand materializes. Intel also benefits from U.S. restrictions on the supply of vital technology to Chinese chip companies.

"The more important part of their strategy is to regain dominance in process technology, and I think they can do that -- it's just going to take two or three years," Northland's Mr. Richard said.

Yet, even if a meaningful share of semiconductor manufacturing returns to the U.S., that might be of limited applicability for the U.S.'s wider effort to reshore manufacturing. Countless other companies face the same intense pressure to maximize shareholder returns, without Washington's helping hand." [1]

1. U.S. News -- Capital Account: In U.S. Chip-Making Push, Wall Street Shrugs
Ip, Greg. 
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 15 Sep 2022: A.2.