The Chips Act Is Working. Why a Big Investor Is Bullish on U.S. Production.
Last week, China launched a $48 billion fund to build a world-beating semiconductor industry, and surrounded Taiwan in a military war game.
“If you want to be scared in a geopolitical way,” says semiconductor investor Paul “Chip” Schorr, “if China were to take over Taiwan, you could still build a toaster oven, because the chips you need are available from other locations. But advanced servers based on Nvidia chips? Not so much.”
One of the longest active private-equity specialists in technology, Schorr lined up $120 million from the U.S. Commerce Department in May to help expand Polar Semiconductor’s factory in Minnesota, which makes power management chips for auto and aerospace customers.
The federal contribution is part of the $53 billion that’s aimed at returning chip production to American shores, under the Biden Administration’s Chips and Science Act.
“What the Chips Act is doing is leveling the playing field,” Schorr says. Chinese factories may be less burdened by things like environmental rules and building codes. The Chips Act money helps U.S. factories match China’s cost profile.
Schorr knows the semiconductor business. At Citi’s venture fund in 1997, he arranged one of the chip industry’s first management buyouts. It carved out three units of National Semiconductor and put them into Fairchild Semiconductor. After tripling its profit, Fairchild came public in 1999. Schorr went on to run technology investing at Blackstone and then the J.P. Morgan-affiliated One Equity Partners.
When Schorr was starting in the 1990s, America manufactured all the world’s advanced semiconductors. Now, more than 90% of leading-edge processor chips are made in Taiwan by firms like Taiwan Semiconductor Manufacturing. Nearly all the memory and logic chips that accelerate artificial intelligence are fabricated there, in Korea, or Japan.
Globalization cut costs, but it created unanticipated dependencies. “With Covid, people really suddenly found out where their supply chains were,” Schorr says.
Chip shortages stalled U.S. auto makers. Car prices spiked nearly 30% in 2021 and jump-started today’s inflation.
The next year, Biden signed the Chips Act, with bipartisan support. In February 2023, Commerce Secretary Gina Raimondo began taking applications for the Act’s $53 billion in investment and other incentives.
“Failure is not an option here,” she said at the launch.
The Chips Act awards began this year. Micron Technology, Samsung Technology, and Taiwan Semi each will get $6 billion to build U.S. chip factories. Intel will get more than $8 billion.
Private capital is investing alongside the government. The Polar foundry’s upgrade will be backed by midsize private-equity firms like Prysm Capital and Schorr’s Niobrara Capital. Apollo Global Management has backed other chip fabs.
America has a mixed record with industrial policy subsidies in synthetic fuels and solar power. Schorr is optimistic that the Chips Act is getting it right.
“If you want to feel better about our government, go meet the Chips Act office,” he says. “It is incredibly well staffed, from Gina Raimondo on down.”
China can pour money into chip fabs, but it lacks the drivers of semiconductor success. The leading production process engineers in the world are in the Western ecosystem, says Schorr, and U.S. firms like Nvidia and Advanced Micro Devices lead chip design.
“If you can get the same cost here as you can get there, but you know that the supply chain is safer here, then you’re absolutely going to want to use a fab here,” he says.