Fabless Semiconductor Companies: Winners in the CHIPS Act Era
09 July 2024
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All fields required where indicated (*)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 |
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 21/06/2024.
How to Invest In Semiconductor Companies
Funds like VanEck Semiconductor UCITS 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.
Before investing, please consider risk factors of a Semiconductor ETF: industry or sector concentration risk , equity market risk and risk of investing in the IT industry. Please refer to the fund’s KID and the Prospectus for other important information before investing.
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IMPORTANT INFORMATION
This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions. This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).
The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice VanEck (Europe) GmbH and its associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.
VanEck Asset Management B.V., the management company of VanEck Semiconductor UCITS ETF (the "ETF"), a sub-fund of VanEck UCITS ETFs plc, is a UCITS management company incorporated under Dutch law registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the Central Bank of Ireland, passively managed and tracks an equity index. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets.
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© VanEck (Europe) GmbH
Important Disclosure
This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.
This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).
The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice VanEck (Europe) GmbH, VanEck Switzerland AG, VanEck Securities UK Limited and their associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.
All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.
© VanEck (Europe) GmbH / VanEck Asset Management B.V.
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