US semiconductors falter as long-awaited CHIPS law arrives

Was it (im)perfect timing? The long-awaited $52 billion federal grant package couldn’t have come sooner, as the chip industry may need help moving forward. Just as President Biden signed into law the landmark CHIPS law last week, major US brands have reported falling demand and falling profits.

The Philadelphia semiconductor index fell 4.6% on Tuesday, its biggest pullback in about two months, as all companies in the index lost ground. So how do you make sense of the roller coaster of the chip business, and what does that mean for the average American consumer?

Game over

Nvidia kicked off the week tough, with its shares falling 8% on Monday after the company warned investors that its second-quarter earnings would be well below expectations. Its previous forecast revenue of $8.10 billion for the quarter was revised down about 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 is showing steady growth, the company’s gaming revenue is down sharply, down 44% from the prior quarter and 33% year-on-year.

It’s not just Nvidia either. Gaming growth has slowed this year as people emerge from pandemic-induced conviviality and spend less on digital entertainment.

In part, the graphics card market was also pushed lower by falling demand from crypto miners. With the Ethereum 2.0 merger expected in the coming months, the second-largest cryptocurrency is one step closer to a new validation mechanism that no longer relies on computing power.

This moment offers players an opportunity to get premium GPUs for a steal. Not only are crypto miners looking to offload their expensive used GPUs, but the sale prices of new products are also dropping.

“While we expect macroeconomic conditions affecting sales to continue, we have taken action with our gaming partners to adjust pricing and channel inventory,” Nvidia’s CEO said last week. Jensen Huang.

One such partner, EVGA, which builds Nvidia GPUs, has slashed the price of its custom GeForce RTX 3090 Ti models by nearly half.

The market is expecting Nvidia’s next-generation Ada Lovelace GPUs to release later this year, alongside rival AMD’s upcoming RDNA 3 graphics cards. However, it’s unclear how enthusiastically consumers will react to the latest innovations and whether prices and profit margins from these GPU makers will increase as a result.

Memory issues

Micron also issued warning signs last week. On Tuesday, the nation’s top memory chip maker said it expects fourth-quarter sales of $7.2 billion, well below Bloomberg analysts’ average forecast of $9.14 billion.

Unlike Nvidia, Micron’s leadership sees a broader decline in demand that affects multiple sectors.

“Compared to our last earnings call, we are seeing further weakening in demand. Due to adjustments extending beyond just consumers to other parts of the market including data centers, industrial and automotive,” CEO Sanjay Mehrotra told Bloomberg.

The market slowdown is forcing Micron to rein in its capital spending plans, which it says will be “significantly down” from a year earlier.

This goes against the objectives of the CHIPS law, which aims to strengthen national production capacity. Still, it could become symptomatic of America’s weakened corporate appetite for capital-intensive infrastructure investments that facilitate industry expansion.

Although Micron says it will inject $40 billion in semiconductor manufacturing capacity in the United States during the 2020s, this investment plan is dependent on subsidies from the CHIPS Act.

Other chipmakers, including Intel, Taiwan Semiconductor Manufacturing Co. (TSMC) and GlobalFoundries, have recently suggested slowing or scaling back proposed projects if federal funding doesn’t arrive soon enough. Did the CHIPS Act arrive just in time?

Opening act

While much attention has been paid to the geopolitical dimensions of the CHIPS Act regarding competition with China, it also aims to improve the national economy and American livelihoods.

According to the Washington-based Center for American Progress think tank, the CHIPS Act “will ease supply chain bottlenecks…put downward pressure on the costs families face for products.” essentials that they use on a daily basis”.

There is also a focus on job creation, especially STEM opportunities. For example, Micron’s investment plan is expected to generate 40,000 new construction and manufacturing jobs. Meanwhile, Intel’s new factories in Ohio could bring thousands of tech jobs to the Midwest, sowing the seeds of what some are calling the start of a “Silicon Heartland.”

There are also provisions to make investing fairer. The law provides initiatives to ensure that historically black colleges and universities (HBCUs) and other minority-serving institutions receive adequate support through research and innovation funding.

American consumers and workers have enormous potential if subsidies are used effectively. Otherwise, they could become a frivolous waste of billions of taxpayer dollars.

Yet if U.S. chip companies cannot simultaneously reduce manufacturing costs 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 is up to the industry to ensure that it brings lasting value to the national economy.

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