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American Semiconductors Falter as Long-Awaited CHIPS Act Arrives

Now that the bill has finally passed, it's up to the industry to ensure it delivers lasting value to the national economy.

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Was it (im)perfect timing? The long-awaited $52 billion bundle of federal subsidies couldn't have come sooner as the chip industry may need some help for the road ahead. Just as President Biden signed the historic CHIPS Act into law last week, leading American brands reported a downturn in demand and falling profits.

The Philadelphia semiconductor index dropped 4.6% on Tuesday, its biggest setback in roughly two months, with all the index firms losing ground. So how do we make sense of the chip sector rollercoaster ride, and what does it mean for the average American consumer?

Game Over

Nvidia kicked off the rocky week, its shares falling by 8% on Monday after the company warned investors its second-quarter earnings would fall way short of expectations. Its previous projected revenue of $8.10 billion for the quarter was revised down by around 20% to $6.70 billion.

Despite forays into other verticals like AI and vehicles, gaming and data centers remain Nvidia's bread and butter. While data center revenue shows steady growth, the company's gaming revenue is steeply declining, down 44% from the previous quarter and 33% year-on-year.

It's not just Nvidia, either. Gaming growth has softened this year as people emerge from the pandemic-induced homeliness and spend less on digital entertainment.

In part, the graphics card market has also been pushed down by flagging demand from crypto miners. With the Ethereum 2.0 merger expected in the coming months, the second largest cryptocurrency is edging closer to a new validation mechanism that no longer relies on computing power.

This moment presents gamers with an opportunity to get premium GPUs for a steal. Not only are crypto miners looking to offload their expensive second-hand GPUs, but shelf prices for new products are also coming down.

"As we expect the macroeconomic conditions affecting sell-through to continue, we took actions with our gaming partners to adjust channel prices and inventory," said Nvidia CEO Jensen Huang last week.

One of those partners, EVGA, which builds Nvidia GPUs, slashed the price of its custom GeForce RTX 3090 Ti models by almost half.

The market is awaiting the release of Nvidia's next-generation Ada Lovelace GPUs later this year, alongside competitor AMD's upcoming RDNA 3 graphics cards. However, it is unclear how enthusiastically consumers will respond to the latest innovations and whether these GPU makers' price points and profit margins will lift as a result.

Memory Troubles

Micron also gave off stark warning signs last week. On Tuesday, the nation's leading producer of memory chips said it predicts its fourth-quarter sales of $7.2 billion, well short of Bloomberg's average analyst forecast - of $9.14 billion.

Unlike Nvidia, Micron's leadership sees a broader demand retreat that cuts across multiple sectors.

"Compared to our last earnings call, we see further weakening in demand. Because of adjustments broadening beyond just consumers to other parts of the market including data centers, industrial and automotive," CEO Sanjay Mehrotra told Bloomberg.

The slowing market has Micron applying the brakes to its capital spending plans, which it said will be "down meaningfully" from a year earlier.

That runs counter to the aims of the CHIPS Act, which aims to bolster domestic production capacity. Yet it could become symptomatic of American firms' weakening appetite for capital-intensive infrastructure investments that facilitate the industry's expansion.

Although Micron maintains it will pour $40 billion into US semiconductor manufacturing capacity through the 2020s, that investment plan is contingent on subsidies from the CHIPS Act.

Other chipmakers, including Intel, Taiwan Manufacturing Semiconductor Co. (TSMC), and GlobalFoundries, have recently suggested they'll go slow or scale back proposed projects if federal funding doesn't come down the pipeline soon enough. Did the CHIPS Act arrive just in time?

Opening Act

Although much attention has been on the geopolitical dimensions of the CHIPS Act regarding competition with China, it is also aimed at enhancing the domestic economy and livelihood of Americans.

According to the DC-based think tank Center for American Progress, the CHIPS Act will "ease supply chain bottlenecks…put downward pressure costs families face for the essential products they use every day."

There is also a focus on job creation, particularly on STEM opportunities. For example, Micron's investment plan is expected to generate 40,000 new jobs in construction and manufacturing. Meanwhile, Intel's new plants in Ohio may bring thousands of tech jobs to the mid-west, planting the seeds for what some call the start of a " Silicon Heartland."

There are also provisions to make the investment more equitable. The Act has initiatives to ensure Historically Black Colleges and Universities (HBCUs) and other minority-serving institutions get adequate support through research and innovation funding.

American consumers and workers have a huge potential upside if the subsidies are leveraged effectively. Otherwise, they could become a frivolous waste of billions in taxpayer money.

Yet if American chip firms cannot simultaneously keep manufacturing costs down at home and maintain their technological edge over international competitors, the industry risks becoming a white elephant.

Now that the bill has finally passed, it's up to the industry to ensure it delivers lasting value to the national economy.

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