Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lots podcast.
Speaker 3: I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 2: Tracy, I just wrote about this in our newsletter like
Speaker 2: five minutes ago. But it drives me nuts. How on
Speaker 2: all of the talk about reindustrialization of America everyone had
Speaker 2: just completely memory hold, like twenty twenty two and twenty
Speaker 2: twenty three.
Speaker 3: Well, this is the amazing thing, right, We did have
Speaker 3: a big investment program actually announced under the Biden administration,
Speaker 3: like huge amounts of money, billions of dollars, and no
Speaker 3: one seems to be talking about it that much, or
Speaker 3: at least a very important segment seems to be ignoring it,
Speaker 3: and that is the Trump administration. Trump. I think he
Speaker 3: said before that he thought it was a horrible policy.
Speaker 2: Yeah.
Speaker 3: I suspect the reason he thinks it's horrible is because
Speaker 3: it was a Biden thing. But it is also amazing
Speaker 3: that like even this, even making more semiconductors in the US,
Speaker 3: ended up being politicized and a sort of culture war issue.
Speaker 4: It's just crazy to me.
Speaker 2: It's totally insane to me, of all these influencers and
Speaker 2: LARPers or so we need to bring back physical manufacturing
Speaker 2: and national security, etc. As if this hasn't been a
Speaker 2: dominant thing in US discourse for years, is if there
Speaker 2: weren't literally battery and chip factories being announced almost every day.
Speaker 2: Throw at twenty twenty two and twenty twenty three, all
Speaker 2: across the US. It was not just a program. It
Speaker 2: was like an actual like breaking ground and new things
Speaker 2: were going up and dollars spent by the private sector
Speaker 2: partially to get public subsidies, et cetera. You could certainly
Speaker 2: say that it was like badly designed, or that it
Speaker 2: was wrong, or there were too many rules whatever, like
Speaker 2: all you know, that's all of this is fair play.
Speaker 2: But the idea that suddenly this is just some new
Speaker 2: impulse and not like something that's real, existing reindustrialization that's
Speaker 2: going on, I find it infuriating or at the very
Speaker 2: least very annoying.
Speaker 3: Shall we fix that, Joe, Let's fix it.
Speaker 2: Well, we should talk about what actually happened, right, because
Speaker 2: it does seem like, either literally or de facto or
Speaker 2: dejerie or whatever, the plug is being pulled on a
Speaker 2: lot of these different programs, and now there's talk about
Speaker 2: industrialization but the hope is that tariffs themselves spur all
Speaker 2: of this domestic investment in physical things for people to
Speaker 2: do assembly line jobs, et cetera. But we should learn
Speaker 2: a little bit more.
Speaker 3: We should talk about what trips actually are as well,
Speaker 3: because you know, yes, boost manufacturing in the US, create
Speaker 3: new jobs, spur some private investment, sort of public private idea,
Speaker 3: But there are a lot of different like threads that
Speaker 3: you can pull here into in terms of the actual goals.
Speaker 2: Well, we should learn a little bit more about what
Speaker 2: the Chips program actually was, and I it does still exist,
Speaker 2: but I'm not really sure if it seems like it's
Speaker 2: more of a husk than it was. We're going to
Speaker 2: be speaking with someone we know very well, someone we've
Speaker 2: known on the internet a long time, someone who even
Speaker 2: came on Odd Lots one several years ago, who actually
Speaker 2: worked in the Chips Program office. We were speaking with
Speaker 2: Hussan Khan. He was the director of Economic Security at
Speaker 2: the Chips Program Office. I believe he's officially left the
Speaker 2: job so he could talk now about what he saw
Speaker 2: inside Hustin. Thank you so much for coming back on
Speaker 2: Odd Lots Joe Tracy.
Speaker 4: It's always a pleasure you know your intro there. I
Speaker 4: feel very similarly. I really do feel like we forgot
Speaker 4: about what was accomplished in honestly less than two years,
Speaker 4: so excited to talk about it. What are you tells us?
Speaker 2: What did you do as the Director of Economic Security
Speaker 2: at the Chips Program Office? What was that job?
Speaker 4: So if you look at why we passed the Chips
Speaker 4: and Science Act, Congress and the President came together and said,
Speaker 4: our reliance on offshore manufacturing for semiconductors presents both an
Speaker 4: economic and national security threat. And we saw that play
Speaker 4: out in real time during the pandemic. When we couldn't
Speaker 4: make cars, we couldn't make a whole host of goods.
Speaker 4: Prices went up that posed an economic security threat because
Speaker 4: people were losing their jobs. Obviously there's a national security
Speaker 4: angle as well, because we were reliant on overseas factories
Speaker 4: for chips that go into military equipment. And as the
Speaker 4: Director of Economic Security, my role was for it was
Speaker 4: sort of twofold first, helping sort of set the strategy.
Speaker 4: What was our vision for what we wanted to accomplish
Speaker 4: with the Chips Program Office. So before I joined, we
Speaker 4: published a vision for success paper in February of twenty
Speaker 4: twenty three. I'm actually quite astonished. I think very few
Speaker 4: people who talk about chips actually read that paper, and
Speaker 4: I still think it's worth reading because it laid out
Speaker 4: a roadmap for what we wanted to do within the
Speaker 4: different categories. And then the second job that I had
Speaker 4: was helping our teams understand the value of each proposed
Speaker 4: project to US economic security. So why would the factory
Speaker 4: that X company is proposing improve our economic security? And
Speaker 4: obviously there are different ways in which you can do that,
Speaker 4: whether that's advancing technological capabilities, improving supply chain resilience, plugging
Speaker 4: various gaps in the supply chain, et cetera, et cetera.
Speaker 4: And that's why we did sort of a deal by
Speaker 4: deal analysis on those metrics. But it was really that
Speaker 4: twofold going not just strategically across the portfolio, but on
Speaker 4: a deal by deal basis.
Speaker 3: I wanted to ask you about exactly this because I
Speaker 3: imagine there are trade offs when you're deciding what or
Speaker 3: who to fund. Do you fund stuff that's going to
Speaker 3: have the most immediate impact make headlines, or do you
Speaker 3: finance stuff that maybe it takes longer to build but
Speaker 3: it's going to have a bigger effect on the economy
Speaker 3: or national security. If you're looking at two pitches on
Speaker 3: your desk or I guess it was an online application
Speaker 3: like a portal, but you're looking at those applications and
Speaker 3: one is for building I don't know, in video GPUs
Speaker 3: and the other is like making an improvement on basic
Speaker 3: chips that go into MCUs and cars or whatever, lagging
Speaker 3: versus leading. How do you decide between those different proposals.
Speaker 4: So, Tracy, that's a great question, and I would say
Speaker 4: what complicated that decision making process was when the bill
Speaker 4: was passed in August of twenty twenty two, we were
Speaker 4: solely focused as a country on the impact of shortages.
Speaker 4: And then it was in November of twenty twenty two
Speaker 4: that chat GPT came out and suddenly the conversation shifted
Speaker 4: very rapidly to AI supremacy. So in real time, you know,
Speaker 4: if you ask Congressman why are you passing this bill,
Speaker 4: they would have said, well, we can't have these car shutdowns,
Speaker 4: or we can't have car factory shutting down. Appliances are
Speaker 4: too expensive. And then by early twenty twenty three, it
Speaker 4: was what we have to win the AI race so
Speaker 4: we sat back as an office and we really said,
Speaker 4: we don't want to be chasing just one category. And
Speaker 4: I think again our strategy was, we want to make
Speaker 4: sure we're making investments across the entire supply chain. So
Speaker 4: we said, hey, we're going to functionally target a majority
Speaker 4: of our funding, the vast majority of our funding towards
Speaker 4: the leading edge. Why those are the most expensive facilities.
Speaker 4: So Intel, TSMC, Samsung and Micron between them got nearly
Speaker 4: twenty eight twenty nine billion dollars and don't you know,
Speaker 4: you can check my math afterwards. Knowing that getting those
Speaker 4: facilities in the United States at the scale that they
Speaker 4: were investing in has downstream consequences too, because now you're
Speaker 4: building out the supply chain necessary for the entire industry,
Speaker 4: and that spills over to some of the other facilities
Speaker 4: that are going to come up online. We did have
Speaker 4: a statutory requirement to invest at least two billion dollars
Speaker 4: in what we're called legacy node chips, and our office
Speaker 4: spend a lot of time trying to understand what our
Speaker 4: strategy could be on shoring up legacy supply. So we
Speaker 4: made investments, you know, large ones in TI and global
Speaker 4: foundries that are in the sort of meat of the
Speaker 4: legacy node supply chain. But we also made actually dozens
Speaker 4: of investments that I think at short shrift because they
Speaker 4: just aren't as headline grabbing, but they plugged up a
Speaker 4: lot of our capabilities in rf in power, summi conductors,
Speaker 4: the sort of un sexy types of electronics that are
Speaker 4: critical not just for infrastructure today but infrastructure in the future.
Speaker 4: And how we thought about trade offs. I think the
Speaker 4: way we tried to think about it was we really
Speaker 4: tried to bucket our funds and say, hey, for the
Speaker 4: leading edge, we want to be able to say, preserve
Speaker 4: x amount of our budget. It was about that twenty
Speaker 4: eight billion dollars for the leading edge and make sure
Speaker 4: that we retain sufficient funding on the back end for
Speaker 4: the legacy nodes, for advanced packaging, for the supply chain,
Speaker 4: because we knew that we needed to make investments across
Speaker 4: the entire supply chain just get to the resilience. That was,
Speaker 4: you know, the reason that the bill was passed.
Speaker 2: All right, I have a question, and you could just
Speaker 2: be totally honest, you know, I'll give it to one
Speaker 2: of the criticisms of Biden era industrial policy that is
Speaker 2: frequently made from our abundance brothers and sisters, is that yes,
Speaker 2: there were all of these efforts, but you know, you
Speaker 2: couldn't get the money unless you had a certain amount
Speaker 2: of workforce diversity, and you had to do a land
Speaker 2: acknowledgment on where you were going to build the factory,
Speaker 2: and also you had to have like childcare, etc. And
Speaker 2: it's like, well, do you want to build the chip
Speaker 2: plant or not? Because if you do, then why did
Speaker 2: you put all of these other burdens that have nothing
Speaker 2: to do with building chips per se onto the money?
Speaker 2: In your experience, what is the role of these other
Speaker 2: elements in the speed of grant programs or project development
Speaker 2: in the US?
Speaker 4: I know this is a topic that gets Frankly, I
Speaker 4: think it gets way too much air time. And I'll
Speaker 4: tell you why. First, there were statutory requirements that came
Speaker 4: from Congress on what the proposals had to be. Right.
Speaker 4: So Congress themselves came and said, hey, if you're making
Speaker 4: a project proposal, you need to have opportunity and inclusion
Speaker 4: language or what your commitments are to community investments. If
Speaker 4: you look at the DFAs that we write, the direct
Speaker 4: funding agreements, the terms that we had around what you
Speaker 4: might call everything. Bagel policy basically codified the commitments the
Speaker 4: firms themselves had made to the communities that they were
Speaker 4: investing in. It essentially said, hey, you told the community
Speaker 4: that you were going to be investing in, you know,
Speaker 4: the schools or water reclamation projects, whatever those community investment
Speaker 4: funds could be. All we're doing is memorializing that commitment
Speaker 4: that you've made. Secondly, on childcare, this is another one
Speaker 4: that first in terms of the amount of funding that
Speaker 4: we put towards it, I think it was a total
Speaker 4: of about ten million dollars across the thirty nine billion, Okay,
Speaker 4: So it was never a focus. It never became in
Speaker 4: any of the negotiations that I set in a discussion
Speaker 4: where the company came back and said, hey, we really
Speaker 4: want to build this plant, but the million dollars that
Speaker 4: you're giving us for childcare and the requirements that you
Speaker 4: have simply aren't enough. Many of these firms are investing
Speaker 4: in child care facilities for their workers anyways, and you
Speaker 4: see it like there's Wall Street Journal report a few
Speaker 4: months ago about a company that wanted to expand and
Speaker 4: with new workers that were mostly coming from like Hispanic background,
Speaker 4: and they found that the biggest thing they could do
Speaker 4: to help bring them on was have childcare on site,
Speaker 4: because their workers were like, I can't come to the
Speaker 4: office because I don't have a place to leave my kids.
Speaker 4: So it's just it's actually what the private sector is
Speaker 4: doing anyway, And oftentimes the funding that we brought to
Speaker 4: those initiatives actually helped them think outside the box and
Speaker 4: think across firms to come up with regional solutions that
Speaker 4: scaled better than they would on a firm by firm basis.
Speaker 4: I will say, however, where I think critics of sort
Speaker 4: of the everything bagel approach do have a point is
Speaker 4: whereas a lot of the terms that I just described
Speaker 4: were not deal stoppers. They didn't slow down negotiations, they
Speaker 4: weren't the points of contention where there are points of
Speaker 4: contention between different stakeholders, I think you need top leadership
Speaker 4: to be able to come and say our number one
Speaker 4: goal is to get the factory built, and various stakeholders
Speaker 4: have to get in line. And where I'm talking about
Speaker 4: stakeholders is where I think the abundance folks also speak
Speaker 4: to them, groups like labor and environment, right, you have
Speaker 4: to come and say, hey, do we want this project
Speaker 4: to happen? There will inevitably be trade offs. There is
Speaker 4: no world in which you can build a massive factory
Speaker 4: and have zero environmental impact. Right. You have to also
Speaker 4: even in the context of labor, we have to understand
Speaker 4: that this is a globally competitive industry, and so the
Speaker 4: demands that labor is making have to be viewed from
Speaker 4: the context of like what does it take for the
Speaker 4: factories in the US to be globally competitive? And I
Speaker 4: think you need top leadership to come and say we're
Speaker 4: not going to allow concerns that are being raised by
Speaker 4: the community to sort of halt negotiation. So there is
Speaker 4: a balance to be struck in terms of what's our
Speaker 4: number one goal. Is it to get the factory done
Speaker 4: or is it to make sure that no one's upset
Speaker 4: at the fact that the factory is getting done.
Speaker 3: Give us a sense of the actual timeline for the
Speaker 3: application process, like how quickly could you actually approve things
Speaker 3: on average? And then I'm curious, like what was the
Speaker 3: longest negotiation that you had and what were the sticking
Speaker 3: points there?
Speaker 4: Okay, so the process the way it worked, you first
Speaker 4: had to submit a what's called the statement of interest,
Speaker 4: and this was honestly like a one to two paragraph
Speaker 4: submission via Salesforce portal that basically said, we are from
Speaker 4: company why, and we want to build a manufacturing plant
Speaker 4: for semiconductors in Excity. It did not require a lot
Speaker 4: of details that basically, you know, it puts you on
Speaker 4: the map of our office to say, hey, we should
Speaker 4: go and talk to these people and understand what they're
Speaker 4: really trying to build. Then we had what we called
Speaker 4: a pre app process, and we can come back to
Speaker 4: that in just a moment my thoughts on the process,
Speaker 4: but it essentially said, hey, submit a simplified version of
Speaker 4: your final application and we'll give you some preliminary a
Speaker 4: feedback kind of like a draft application, and will help
Speaker 4: identify where we think on our scoring rubric you need
Speaker 4: to make adjustments in order to score better. By the way,
Speaker 4: our response to the pre app was non binding, so
Speaker 4: if we basically said hey we don't like your pre app,
Speaker 4: you could still apply and submit a full application. But
Speaker 4: you know, we did take into consideration whether or not
Speaker 4: you responded to the feedback from the pre app. The
Speaker 4: full application was sort of your final submission. We started
Speaker 4: to receive for our first full applications in the late
Speaker 4: summer early fall of twenty twenty three, and so you
Speaker 4: saw we got to a first preliminary announcement by the
Speaker 4: end of twenty twenty three with BAE. So it took us,
Speaker 4: you know, on the order of about a little more
Speaker 4: than a quarter to get through a first full announcement.
Speaker 4: The exact longest negotiations that it took, I have to
Speaker 4: think back for a moment, but we had one final
Speaker 4: step after the preliminary announcement following sort of exactly how
Speaker 4: you do it in the private equity world, you know,
Speaker 4: have a preliminary announcement saying, hey, we intend to make
Speaker 4: this investment, we intend to go forward with this, but
Speaker 4: it's subject to due diligence and i'd be the direct
Speaker 4: funding agreement. Those negotiations did drag on through twenty twenty four,
Speaker 4: and I think a lot of it came down to
Speaker 4: sort of dotting the eyes and crossing the t's on
Speaker 4: what did it mean for the government and semiconductor firms
Speaker 4: to make a commitment to each other on these facilities. Right,
Speaker 4: There was a lot of not on the sort of
Speaker 4: everything bagel terms, but there was a lot of negotiation
Speaker 4: and what does it mean if your company is sold?
Speaker 4: What does it mean if you violate guardrails statutory requirements? Right?
Speaker 4: We really had to work through that because we'd never
Speaker 4: worked through it as a country before with firms at
Speaker 4: this scale. But what you saw routinely was as we
Speaker 4: reached a milestone, So as we reached the first preliminary
Speaker 4: memorandum of terms and we reached the first direct funding agreement,
Speaker 4: the second, third, fourth agreements would happen much faster because
Speaker 4: we at that point had worked out a template and
Speaker 4: could say, hey, here's how other firms are thinking about
Speaker 4: doing it. There's already comfort with this format. Let's try
Speaker 4: and you work off that, and you saw them happen
Speaker 4: in rapid succession.
Speaker 2: I want to go back to what you said we're
Speaker 2: talking about earlier, that the abundance people do have some
Speaker 2: sort of point when it comes to environmental and labor stakeholders.
Speaker 2: What did you see specifically? Now you don't have to
Speaker 2: like identify the names of the projects, but look, these
Speaker 2: are different parts of the Democratic Party constituency. Late, I'll
Speaker 2: say this, the Democratic Party really wants to be liked
Speaker 2: by organized labor. I don't know if the organized labor,
Speaker 2: especially in the private sector, is a big Democratic constituents anymore.
Speaker 2: But Democratic Party certainly wants to be liked by organized labor.
Speaker 2: They certainly want people who concern about the environment talk
Speaker 2: to us about the reality of how these different impulses
Speaker 2: can collide with each other.
Speaker 4: So I think we have to take one step back
Speaker 4: and be honest about where we stand in terms of
Speaker 4: our manufacturing competitiveness. Right. I think they're a broad understanding
Speaker 4: that we are no longer at the frontier in a
Speaker 4: range of industries, and so what is it going to
Speaker 4: take for us to catch up to the frontier and
Speaker 4: be globally competitive again? We have cost disadvantages to operating
Speaker 4: in this country, it takes longer to build. We do have,
Speaker 4: you know, existing regulatory frameworks that can complicate some of
Speaker 4: these projects, right. So, I think one of the consequences
Speaker 4: of this tension of there's an urgency to move fast,
Speaker 4: an urgency to catch up to our geopolitical competitors, but
Speaker 4: not really a readiness to sort of tear down the
Speaker 4: frameworks that we had. And I think for good reason,
Speaker 4: you have to come back and say, well, what is
Speaker 4: it going to take for us to catch up and
Speaker 4: so on. A lot of these projects, you saw environmental
Speaker 4: groups raising concerns on you know, pollution impacts. You saw
Speaker 4: labor groups sort of saying, hey, unions are being left
Speaker 4: out in the cold. And I would come back and say,
Speaker 4: I think a lot of that really was noise because
Speaker 4: there was like an open negotiation going on sometimes through
Speaker 4: the media where these various groups were trying to say, hey,
Speaker 4: make sure you don't forget about us. But I do
Speaker 4: also think for policy, you have to be able to
Speaker 4: come out and say what is the most important thing.
Speaker 4: Is it for the factory to get done on time,
Speaker 4: or is it that we leverage union labor or is
Speaker 4: it that we make no impact to the environment. And
Speaker 4: there will be times in every complex project in the
Speaker 4: public or private sector, you have to make trade offs
Speaker 4: between different objective functions, and I think for what we
Speaker 4: saw was there was like an unwillingness sometimes to really
Speaker 4: say to stakeholders, hey, we hear your needs, but they're
Speaker 4: gonna be second priority in order to get the project
Speaker 4: done right. And that complicates the discussion on how are
Speaker 4: we going to get these things done quickly? And I
Speaker 4: think there was a tension between the urgency that firms
Speaker 4: and folks within the Chips Program Office felt, and outside
Speaker 4: stakeholders who really were saying, well, don't forget about us.
Speaker 3: So you mentioned a bunch of competitive disadvantages that the
Speaker 3: US has, you know, things like we're starting from a
Speaker 3: lower base at least in terms of manufacturing, higher labor costs,
Speaker 3: more rules and regulations, whether it's about the environment or
Speaker 3: something else. Do we have any competitive advantages? I'm actually
Speaker 3: struggling here, but there must be something.
Speaker 4: You know. Okay, so I think maybe not? No, I
Speaker 4: do we do? Right? We have? If you think about it,
Speaker 4: the world's most advanced firms were all designing the best
Speaker 4: chips in the world. They're all based in the US.
Speaker 4: We have the best university system, so we have a
Speaker 4: deep talent pipeline. We have a tech stack than in
Speaker 4: the United States, I think is unparalleled anywhere else. But
Speaker 4: when it comes to being able to build a factory,
Speaker 4: you know, I like to use the analogy of we
Speaker 4: basically stopped going to the gym. Do you know before
Speaker 4: the TSMC fab came online in late twenty twenty four,
Speaker 4: when the last leading edge fab in the United States
Speaker 4: was built, came online, No it's good. What is it?
Speaker 2: What's the answer?
Speaker 4: Twenty thirteen. So for basically a decade, we stopped building large,
Speaker 4: leading edge fabs in the United States, and so the
Speaker 4: muscle for how to build those factories atrophied. And that
Speaker 4: doesn't just mean construction workers, like obviously all those people
Speaker 4: went and probably found jobs elsewhere, but it also means
Speaker 4: for the regulatory apparatus for what does it mean to
Speaker 4: understand the environmental impacts of these facilities? And so when
Speaker 4: you talk about the delays in construction, oftentimes those delays
Speaker 4: are from the permitting processes that are handled at the
Speaker 4: state and local level. Well, in a lot of the
Speaker 4: places that we're building these facilities, state and local regulators
Speaker 4: hadn't seen a facility like this before because we hadn't
Speaker 4: been building them in over a decade, and so they
Speaker 4: didn't know what the impacts were, and you know, it
Speaker 4: required an education process. And I think a lot of
Speaker 4: the noise that we heard in the last two years
Speaker 4: was because we were kind of starting this again after
Speaker 4: not going to the gym for over a decade. And
Speaker 4: you know what happens when you don't go to the gym,
Speaker 4: you go back one time you're really really sore the
Speaker 4: next day, but if you keep going, your body kind
Speaker 4: of gets used to it. And that's why, for example,
Speaker 4: take TSMC's FABS in Arizona, you don't hear the same
Speaker 4: noise about labor unions or permitting concerns over Fab two
Speaker 4: because the entire system sort of got into shape, right.
Speaker 4: And I think if the chips program off is going
Speaker 4: to be looked at as a success, it's going to
Speaker 4: be because the second, third, fourth, fifth facilities that are
Speaker 4: being built at these sites are showing rates of learning
Speaker 4: in how long it takes for them to get brought online,
Speaker 4: brought up to speed, brought up to a similar capacity
Speaker 4: to what they have and their overseas benchmarks. So I
Speaker 4: would look at it's like the first fabs are like
Speaker 4: a proof of concept, can we do this? And it's
Speaker 4: really in the second, third, fourth fabs at these local
Speaker 4: projects that you'll start to see the ecosystems of the church.
Speaker 2: I asked earlier about whether environmentalists in unions are restraint.
Speaker 2: Something else that I'm very interested in is you mentioned,
Speaker 2: you know, the top semiconductor companies in the world are
Speaker 2: actually in the United States. We just don't really make them,
Speaker 2: but we design them, and that's actually much more valuable.
Speaker 2: And in Nvidia is a much more valuable company than TSMC,
Speaker 2: the legendary TSMC. And so, you know, I've been writing
Speaker 2: about for a while like how much of this is
Speaker 2: an issue of capitalism? And investors in semiconductor companies don't
Speaker 2: want US manufacturing because that's lower margins. You move that overseas,
Speaker 2: et cetera. You don't want design and fabrication in house
Speaker 2: together because then you mix a high margin company with
Speaker 2: a low margin company, et cetera. Obviously, to some extent,
Speaker 2: the idea of using public money is to solve this problem.
Speaker 2: But just when you're look in general at the questions
Speaker 2: of US manufacturing and high tech areas or whatever, how
Speaker 2: much is it about capitalist incentives.
Speaker 4: I do think there is a tension here. I know
Speaker 4: you've covered this as well. You saw TI, which is
Speaker 4: engaging in one of the most aggressive expansions in the
Speaker 4: United States, hoping to build seven fabs by the middle
Speaker 4: of next decade. Overall, had activist investors basically pressuring them
Speaker 4: to reduce their capital investments. And there is a tension
Speaker 4: where shareholders are going to say, hey, you could return
Speaker 4: money to me that would have better and I could
Speaker 4: go use it in other use cases. Yeah, I mean famously,
Speaker 4: look at the case of Intel, which for a long
Speaker 4: time was returning a lot of cash to shareholders through
Speaker 4: dividends and stock buybacks and fell behind the leading edge curve.
Speaker 4: So that tension is absolutely real. But I do think
Speaker 4: firms and investors understand the value of having these facilities.
Speaker 4: I think the challenges creating a structure where the government
Speaker 4: can help equalize the returns so that the private value
Speaker 4: is similar to the public value. Let me put it
Speaker 4: in another way, the government highly values these manufacturing facilities being
Speaker 4: in the United States for the economic and national security
Speaker 4: reasons I laid out above, right, But private shareholders don't
Speaker 4: value them as much. But there are levers that we
Speaker 4: can pull to help make them look more attractive. And
Speaker 4: I think the biggest under discuss lever was the Investment
Speaker 4: tax credit. Right. The investment tax credit is a twenty
Speaker 4: five percent tax credit for firms that invest in manufacturing
Speaker 4: in the United States. I think there's a world where
Speaker 4: the future of industrial policy I'm putting quotes around that
Speaker 4: really comes and says, hey, the focus should be on
Speaker 4: tax credits that give firms certainty on what their cost
Speaker 4: structure and return structure is going to look like for
Speaker 4: capital investments made in the United States, and maybe the
Speaker 4: disbursement funding that's subject to review by bureaucrats is a
Speaker 4: smaller pot that is really geared towards firms that have
Speaker 4: capital shortcomings or capital concerns. Right, So, I think you
Speaker 4: could plausibly make the claim that the intels and tsmcs
Speaker 4: of the world don't necessarily need cash from the government
Speaker 4: because what they're optimizing for is like an NPV function
Speaker 4: on their capital investments, and tax credits can solve all
Speaker 4: of that, in fact, can happen with less government intervention.
Speaker 4: But there are smaller firms who really do need cash
Speaker 4: infusions in order to bring, you know, to bridge the
Speaker 4: value of death that we've been talking about for decades
Speaker 4: in this country but never really had an approach to SAULT.
Speaker 4: And I think there's a slim down version of industrial
Speaker 4: policy in the future that really focuses on ay tax
Speaker 4: credits can equalize our cost structure and make investments attractive
Speaker 4: where you know, we take target smaller amounts of funding
Speaker 4: to critical technologies that we want to make sure happen
Speaker 4: in the United States.
Speaker 3: So on this note, I mean one of the discussions
Speaker 3: that inevitably pops up when you're doing this type of
Speaker 3: policy is public versus private and the sort of crowding
Speaker 3: in or crowding out effect on private capital. I imagine
Speaker 3: that part of the intent of the Chips Act was
Speaker 3: to encourage private investors to get excited about not only
Speaker 3: you know, the importance of manufacturing here in the US,
Speaker 3: but also the potential returns. To your point about the
Speaker 3: tax credit, did you see a change in behavior on
Speaker 3: the part of private investors. Did you ever talk to
Speaker 3: them about, you know, what their concerns were or what
Speaker 3: they wanted to see from this program. And were you successful,
Speaker 3: I guess in making chips manufacturing cool again.
Speaker 4: I think we were. I think the Investment Office, led
Speaker 4: by Todd Fisher, did a lot of outreach to the
Speaker 4: investment community broadly to help them understand not just our approach,
Speaker 4: but how we were working with firms to make these
Speaker 4: investments more attractive in the United States. And you know,
Speaker 4: I think there's a broad recognition that being able to
Speaker 4: build industrial capacity in the US has benefits beyond just
Speaker 4: the balance sheet. That being said, I do think it's
Speaker 4: an ongoing discussion with the investment community on how do
Speaker 4: we build certainty in these you know, government programs. Right. So,
Speaker 4: the the biggest thing that the Chips Program Office did
Speaker 4: was it gave firms confidence in what their returns would
Speaker 4: look like if they invested in the US because they
Speaker 4: had a tax credit and award dollars that would come
Speaker 4: to them, and they could go to their investors and say, hey, look,
Speaker 4: there is a cost disadvantage, but we feel confident that
Speaker 4: we'll be able to reduce it with the public dollars
Speaker 4: that are coming in. And I really think the biggest
Speaker 4: lever that the government can pull is giving firms certainty
Speaker 4: when they're making twenty to hundred billion dollar investments, because
Speaker 4: they don't want to be caught on the wrong side
Speaker 4: by a policy change that now gets them underwater on
Speaker 4: a facility that's half done, And the sunk costs of
Speaker 4: building a facility and half getting it half equipped are
Speaker 4: really large, and so I think that is the challenge
Speaker 4: for a lot of these firms and for investors. They
Speaker 4: want to be able to say, hey, is what we're
Speaker 4: modeling really going to hold in the long term from
Speaker 4: a cost structure basis for us to feel comfortable in
Speaker 4: what the returns are going to be.
Speaker 2: I just have one last question myself, is what was accomplished?
Speaker 2: We don't know what the future is or maybe you
Speaker 2: can give some insight into what is going on at
Speaker 2: CHIPS today in April twenty twenty five. But you said
Speaker 2: at the beginning about like what was accomplished during CHIPS
Speaker 2: And I'm aware the projects have been started and some
Speaker 2: have been completed, et cetera. But what did we get
Speaker 2: from all of these efforts and should we be happy
Speaker 2: with it?
Speaker 4: So if the top line number that you know, we
Speaker 4: used while the Biden administration was still around was four
Speaker 4: hundred and fifty billion dollars in announced investment, and you
Speaker 4: started to see this with the data from the Census
Speaker 4: showed that we were making more investments in electronics facilities
Speaker 4: construction spend in twenty twenty three and twenty twenty four
Speaker 4: than we had in the last two decades combined.
Speaker 2: What about like actual like production? What I care about
Speaker 2: is actual things to go into computers, cars.
Speaker 4: And one hundred percent. So we got to recognize too,
Speaker 4: right that these are not going to happen overnight. These
Speaker 4: facilities aren't going to over The bill was passed in
Speaker 4: August of twenty twenty two, right, so within a couple
Speaker 4: of years you had you know, four hundred, like I said,
Speaker 4: four and fifty billion dollars if investments announced. And I
Speaker 4: think the biggest thing is that firms have to feel
Speaker 4: comfortable moving forward with those plans. So let's take TSMC
Speaker 4: as an example. TSMC, by the end of the Biden
Speaker 4: administration has started pumping chips out for Apple and AMD
Speaker 4: out of its facility in Arizona. And as it continues
Speaker 4: to move forward with the second and third facilities, that
Speaker 4: ecosystem is going to mature to the point where the
Speaker 4: cost differentials versus Taiwan are going to be reduced. The
Speaker 4: scale is going to bring more suppliers on shore, so
Speaker 4: they're going to have more of their coems and their
Speaker 4: gases and their you know, consumable materials sourced from the
Speaker 4: United States. And as that happens, you start to you know,
Speaker 4: build out a broader ecosystem because you know, we heard
Speaker 4: all the time from suppliers who were saying, Hey, we're
Speaker 4: building a facility in the United States to service all
Speaker 4: the fabs that are coming online. Because we can now
Speaker 4: justify the investment based off of the number of downstream
Speaker 4: investments that have been made. And as they build out
Speaker 4: their facilities, then their suppliers are going to come here.
Speaker 4: So I think there's going to be an ecosystem maturation
Speaker 4: that's going to continue, hopefully through the rest of the decade.
Speaker 4: That's going to bring not just you know, front end
Speaker 4: fabrication facilities, but their suppliers facilities and then their suppliers
Speaker 4: suppliers facilities, And now you talk about getting the sort
Speaker 4: of industrial ecosystems that really had atrophy in the United States.
Speaker 4: And when you start to go you know, N plus
Speaker 4: two in terms of the supplier level, you're no longer
Speaker 4: just serving the semiconductor industry. You're building fabricated machine parts
Speaker 4: that go into semiconductor manufacturing equipment and also going to
Speaker 4: say airplanes or automobiles, and you now you know, buttress
Speaker 4: the entire industrial ecosystem, even though you're starting from just
Speaker 4: building semiconductor manufacturing plants. Right. So I think that is
Speaker 4: what the long term is going to look like. But
Speaker 4: we have to you know, in this where I have
Speaker 4: to come back to the point on we have to
Speaker 4: also be honest about where we were right. We weren't
Speaker 4: building these fabs. There's a reason it took so long,
Speaker 4: and it's not going to happen overnight. And if we're
Speaker 4: not willing to maintain the investments and the programs that
Speaker 4: we have, I think a lot of firms are going
Speaker 4: to say, Hey, the uncertainty isn't worth it for me
Speaker 4: to continue to invest. Because I can't go to my
Speaker 4: shareholders and say this investment has a solid return. They're
Speaker 4: going to look at it and they're gonna discount it
Speaker 4: with all that uncertainty and pressure me to not make
Speaker 4: these investments, or to reduce the investments I make and
Speaker 4: focus on places where the returns are much more solid.
Speaker 4: I think that's the situation that we absolutely should avoid.
Speaker 4: And you even hear that from the Trump administration, where,
Speaker 4: for example, Jade Vance at a speech at the American
Speaker 4: Dynamism Conference talked about making adjustments to tax credits for
Speaker 4: firms in terms of bonus appreciation and the R and
Speaker 4: D tax credit, those are very much in line with
Speaker 4: making these investments less risky for firms the United States.
Speaker 4: So if the Trump administration continues down that vein, I
Speaker 4: think you'll see firms feel confident that they can expand
Speaker 4: these investments and build out these ecosystems to a a
Speaker 4: size and scale that's globally competitive. Right. And then you
Speaker 4: tap into the broader tech stack that we have here,
Speaker 4: where now the smartest engineers from Nvidia, Apple, and am
Speaker 4: D don't have to fly to Taiwan. They can fly
Speaker 4: to Arizona to make sure that they're getting their designs
Speaker 4: taped out correctly, and they're working with universities all across
Speaker 4: the United States on future designs and technologies. And then
Speaker 4: you get an industrial ecosystem that really leverages our capabilities. Right.
Speaker 4: One last point on this one. I think a lot
Speaker 4: of people made this criticism when the Chips Act was
Speaker 4: passed that the United States should have just continued to
Speaker 4: invest in R and D and that's what we should leverage.
Speaker 4: We should leverage our R and D capabilities. But here's
Speaker 4: another trivia question for the two of you. When was
Speaker 4: the quiz?
Speaker 2: Right now? So actually we're going to use these and
Speaker 2: just we're putting on a trivia event. So we're going
Speaker 2: to use your questions and turn them into questions.
Speaker 4: All right, keep going, I'll send you some When was
Speaker 4: the first EUV machine installed in the United States. It
Speaker 4: was two thousand and six at Sunny Albany, which is
Speaker 4: the nanotech complex in upstate New York. We didn't have
Speaker 4: high volume manufacturing with an EUV machine until December of
Speaker 4: twenty twenty four out of TSMC eighteen years, right, So
Speaker 4: I think the critics who said we should double down
Speaker 4: on R and D actually failed to grapple with the
Speaker 4: fact that the R and D first approach was empirically failing. US.
Speaker 4: We invented EUV technology through our DD National Labs and
Speaker 4: in partnership with ASML, we installed the first alpha tools
Speaker 4: in both Europe and the United States. And then, I
Speaker 4: mean the United States was a half decade behind East
Speaker 4: Asia in bringing EUV manufacturing to scale, right, so that
Speaker 4: formula wasn't working. And one of the shortages that TSMC
Speaker 4: talked about was that they didn't have enough workers who
Speaker 4: knew how to install and bring up EUV machines. So
Speaker 4: you can see how this sort of scades the ecosystem atrophies.
Speaker 4: And then when firms come and try to do foreign
Speaker 4: direct investment, they come and say, well, you don't have
Speaker 4: the skills that we need, even though we can point
Speaker 4: to all the R and D investments, and I think
Speaker 4: the problem was we were sort of making these R
Speaker 4: and D investments in a vacuum and kind of hoping
Speaker 4: that they'd get sucked into an industrial ecosystem that, you know,
Speaker 4: despite what a lot of economists say about America still
Speaker 4: having a very high value add for manufacturing, you look
Speaker 4: on the ground and there are tons of anecdotes that
Speaker 4: the manufacturing ecosystem has atrophied and we have to make
Speaker 4: investments in order to bring it back up to be
Speaker 4: globally competitive. And I think an anecdote exactly like the
Speaker 4: delay in bringing EUV manufacturing to scale in the US,
Speaker 4: exemplifies why the old approach wasn't working. And we can
Speaker 4: debate like what the right ways are and how industrial
Speaker 4: policy should be structured, and what tax credits, etc. Need
Speaker 4: to be done, and trade reforms need to be done,
Speaker 4: but I don't think you can debate whether or not
Speaker 4: the old you know, let's call it pre twenty twenty
Speaker 4: approach was actually maintaining America's industrial competitiveness, because it wasn't.
Speaker 3: I have just one more question, and that is what's
Speaker 3: next for the Chips Program Office itself? Because I mean,
Speaker 3: under the Trump administration, fiscal spending doesn't really seem to
Speaker 3: be very popular, to put it mildly, and there's obviously
Speaker 3: a bon fight over who gets to control the pocketbook
Speaker 3: of America, whether it's Congress or the president. At the
Speaker 3: same time, we have DOGE, which is implementing sweeping changes
Speaker 3: on the government itself, you know, entire agencies going away
Speaker 3: and stuff like that. And then finally, the other thing
Speaker 3: happening which we should definitely ask about, is tariffs. Right,
Speaker 3: and maybe tariffs end up being good for domestic manufacturing
Speaker 3: like semiconductors, but I can imagine that there are also
Speaker 3: still either components or materials that chips manufacturing actually needs
Speaker 3: to import. So I guess my question is, how are
Speaker 3: you weighing all these different things that are going on
Speaker 3: right now?
Speaker 4: Now?
Speaker 3: What do they mean for the actual Chips Act and
Speaker 3: for manufacturing.
Speaker 4: So let me give you one one small anecdote to
Speaker 4: show you how firms are trying to understand what's happening. Right,
Speaker 4: I was talking to a supplier that wants to build
Speaker 4: a facility outside of Arizona. Right, they're exemplifying that ecosystem
Speaker 4: development that I talked about that's coming out of TSMC's investment.
Speaker 4: And I was on a call with them in late
Speaker 4: March and they basically said, we don't understand what's happening.
Speaker 4: We don't know what our cost structure is going to
Speaker 4: look like, and you know, our project is undergoing change
Speaker 4: constantly because our cost structure is undergoing change. So, you know,
Speaker 4: for a lot of these firms, before they're willing to
Speaker 4: make bets that you know, in some of these smaller
Speaker 4: firms can be like, you know, life or death size
Speaker 4: bets for the firm, they really want to have an
Speaker 4: understanding of what the policy framework is going to look like.
Speaker 4: And I think we have to sort of get through
Speaker 4: the period of you know, a new headline rocking markets
Speaker 4: every day or it to shake out to understand how
Speaker 4: it'll affect the long term decisions a lot for a
Speaker 4: lot of these firms. You know, the sense I got
Speaker 4: from talking to that firm and from other firms was
Speaker 4: that they're going to kind of wait it out and
Speaker 4: see They're going to try and buy as much time
Speaker 4: as they can to see where things reach a steady
Speaker 4: state before reevaluating their investment plans. I think on the
Speaker 4: flip side, However, there is a bipartisan agreement on the
Speaker 4: need to bring industrial manufacturing back to the United States, right,
Speaker 4: So I think the question is going to be on
Speaker 4: the methods by which we do it. So you know,
Speaker 4: I go back and you say, is it through tax incentives,
Speaker 4: is it through trade policy? Is it through industrial policy?
Speaker 4: I think all of those tools interact with each other. Obviously,
Speaker 4: different administrations have different approaches, so I don't know where
Speaker 4: we'll end up with that. The last thing I'll say
Speaker 4: is the methods that we developed in the Chips Program
Speaker 4: Office for trying to get firms comfortable with making investments
Speaker 4: in the United States and working to accelerate their investments
Speaker 4: by working with stakeholders across you know, environment, workforce, and
Speaker 4: other policy objectives. I think that is actually going to continue.
Speaker 4: If you look at the Investment Accelerator Executive Order that
Speaker 4: was announced by President Trump a few weeks back, the
Speaker 4: sorts of activities that he's saying, the White Glove Service,
Speaker 4: I think that was pioneered in the Chips Program Office,
Speaker 4: where we worked with firms to get through the labor issues,
Speaker 4: to get through the environmental issues, and permitting questions to
Speaker 4: make sure that these projects could move forward. It's why
Speaker 4: I've said repeatedly that there were no Chips Act construction
Speaker 4: projects that were held up by Neeper review. And I
Speaker 4: think they're going to take that recipe that was developed
Speaker 4: and try to scale it across multiple sectors. You know,
Speaker 4: certainly going to be different contextual challenges. But if they
Speaker 4: do that, I think it's going to be a vote
Speaker 4: in favor of the work that we were doing at
Speaker 4: the policy level to make sure in manufacturing investments in
Speaker 4: the United States are viable for firms, and that's going
Speaker 4: to have to be complemented with a you know, approach
Speaker 4: to make them financially viable. I don't know, and I
Speaker 4: don't know that any of us can say what the
Speaker 4: Trump administration is going to finalize its policy mix on.
Speaker 4: And I think firms are going to wait to see
Speaker 4: what that policy mix looks like from the Trump administration
Speaker 4: before you know, placing further large bets. So if there's
Speaker 4: a lot of policy uncertainty, you may see some companies
Speaker 4: come out and say, hey, we're gonna do price increases
Speaker 4: and we're gonna maybe pause equipment purchases until we really
Speaker 4: know what the fiscal impact of tariffs or other. You know,
Speaker 4: new trade negotiations are going to be for our project.
Speaker 2: Huss and con. Thank you so much for coming back
Speaker 2: on odd Lage, and I'm sharing with us lessons that
Speaker 2: you learned during your stint in the public sector. Thank
Speaker 2: you for your service. I learned a lot, so appreciate
Speaker 2: you coming back on.
Speaker 4: Joe Tracy. Always a pleasure. And the last thing I'll
Speaker 4: say is, I think the CHIP was an experiment in
Speaker 4: what industrial policy could look like. The scoreboard, the early
Speaker 4: returns look good, but I think the real measure of
Speaker 4: whether it was successful we'll know by the end of
Speaker 4: the Trump administration if these other projects come on.
Speaker 2: Fine, all right, well have you.
Speaker 4: Tracy? That was really good.
Speaker 2: It's cool that one of our past guests like started
Speaker 2: this whole other career between the last time we talked
Speaker 2: to them, Yeah, which is like in maybe early twenty
Speaker 2: twenty one, then went and got this job. And then
Speaker 2: we've been doing this a long time and someone had
Speaker 2: like a whole chunk of their career that they could
Speaker 2: fill us in on between times that we talked to them.
Speaker 3: Yeah, that's kind of crazy. So we feel old. Yes,
Speaker 3: On the plus side, we get an inside look at
Speaker 3: the Chips Program Office, which is pretty cool. I do
Speaker 3: take a Hassan's point about I guess like building up
Speaker 3: the muscle of manufacturing and his point that, well, we
Speaker 3: had been doing it a certain way, which is basically
Speaker 3: all through private capital for many many years, and it
Speaker 3: hasn't resulted in the purpose that we now want, which
Speaker 3: is actually building factories to produce these things. And so
Speaker 3: you really need some sort of catalysts to get stuff going,
Speaker 3: to get people excited about it. Yeah, maybe change the
Speaker 3: calculation in terms of profit margins and the result is
Speaker 3: the Chips Act.
Speaker 2: I'm so depressed about the twenty tens and like, seriously,
Speaker 2: just like the way we let everything hollow out, you know,
Speaker 2: we talk about it with housing and sawmills and all
Speaker 2: of this stuff that we just like didn't do when
Speaker 2: we could have, and then the costs that imposes on
Speaker 2: us or we haven't like build a fab in forever
Speaker 2: and we forgot. I do think it's interesting like this
Speaker 2: question of you know, even with TSMC's second fab or
Speaker 2: you know, you don't see any of those same headlines
Speaker 2: that you saw with the first one. That is encouraging.
Speaker 2: Maybe you have a sort of template to quickly navigate
Speaker 2: the state and local issues. Some of the questions around
Speaker 2: you know, the quote stakeholders, et cetera. Which every system
Speaker 2: has stakeholders. If this isn't not unique in that, I mean, obviously,
Speaker 2: you know, every system has to have a way. I
Speaker 2: think what's important, you know some of the I remember
Speaker 2: we did a conversation about nuclear construction in China, and
Speaker 2: it's like they have their own you know, it's not
Speaker 2: like there aren't environmentalists in China, et cetera. What they
Speaker 2: have is like a system for allocating like who wins
Speaker 2: and what the priorities are, et cetera.
Speaker 3: And top down leadership.
Speaker 2: Yeah, there are many. Yeah, a much more sort of
Speaker 2: straightforward system in that respect. But uh no, I thought
Speaker 2: that was interesting, and you know, I'm hopeful that Husson
Speaker 2: wasn't totally dooming.
Speaker 3: You know what they say about factories, Joe, No, the
Speaker 3: best time to build a factory was twenty years ago. Yeah,
Speaker 3: the second best time to build a factory is today.
Speaker 2: All right, Well, you know, I wonder, I wonder we're
Speaker 2: recording this April eighth. I wonder if there's a single
Speaker 2: new factory green broken ground today right now. I kind
Speaker 2: of doubt it.
Speaker 3: Yeah, all right, shall we leave it there?
Speaker 2: Let's leave it there.
Speaker 3: This has been another episode of the odd Lots podcast.
Speaker 3: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 2: And I'm Joe Wisenthal. You can follow me at the
Speaker 2: Stalwart Fellow Husson Khan. He's at Husson Khan. Follow our
Speaker 2: producers Carman, Rodriguez at Carmen Erman, Dash Ol Bennett at
Speaker 2: dashbod and kel Brooks at cal Brooks. More Odd Laws content,
Speaker 2: go to Bloomberg dot com odd Lots. We have all
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Speaker 2: to seven in our discord discord dot gg slash Oddlins.
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