“Securities” by Lux Capital: Commerce’s CHIPS contortions
How not to reanimate the undead industrial base of America
America disemboweled its own industrial base, a dishonorable yet intentional seppuku of the economic dreams of the middle class and the long-term strategic competitiveness of the nation. Now after decades of watching jobs swim far away from American shores and factories rise overseas, there’s momentum to at least act like that matters.
After an era of denigrating industrial policy and letting markets be markets, Congress finally conceded the reality that well-executed, government-initiated economic coordination is foundational to industries that require gargantuan capital investment alongside complex synchronization of academic scientific research, workforce talent development and robust supply chains. The CHIPS and Science Act passed the Senate nearly 2:1, and among its many provisions, the law offers tens of billions of dollars to the semiconductor ecosystem with the goal of returning America to the competitive frontiers of fabrication.
Now for the painfully tough part: to win the victory.
This was a huge week for the Act, with the CHIPS Program Office at the Department of Commerce making its first major announcements on the application process and decision criteria it will use to select the winners for the first tranche of funding from the law. Unfortunately, those announcements showed the two-faced nature of America’s approach to its economy: leadership and a drive to win, but with a deep desire to lose in the details. The doctor gets the prognosis right, but dithers on the available treatments.
The announcements started positively with Commerce Secretary Gina Raimondo’s trenchant remarks at Georgetown last week outlining her vision for the future of America’s prosperity. A former venture capitalist as founder of Point Judith Capital and governor of Rhode Island, she began with a look at the industry back in the halcyon Silicon Valley years of the 1950s and 1960s (highlight in bold):
And although the chip companies were fiercely competitive, there was an industry-wide effort to advance the technology. The government drove these advances through purchases and tech transfers.
Tens of thousands of engineers in these companies would make daily incremental innovations in manufacturing techniques, resulting in improved scaling and yield, through expertise that is only possible by producing millions and millions of wafers.
This relentless pace of lab-to-fab and fab-to-lab innovation became synonymous with America’s tech leadership, doubling our computing capacity every two years.
This ecosystem enabled every smartphone, cloud computing service, new car, medical device, and weapons system we use today.
But what was once a self-propelling engine of innovation and production fell out of balance.
We sacrificed our manufacturing capacity and workforce in the mistaken belief that we could somehow maintain our technological leadership without them.
In 1990, the U.S. accounted for 37% of global chip manufacturing capacity. Today, that number is only 12%.
We once manufactured nearly all of the world’s most advanced semiconductors. Today, we manufacture none.
She then crescendoed to an audacious vision for America’s leadership in chips:
I want the United States to be the only country in the world where every company capable of producing leading-edge chips will have a significant R&D and high-volume manufacturing presence.
We will be the premier destination in the world where new leading-edge chip architectures can be invented in our research labs, designed for every end-use application, manufactured at scale and packaged with the most advanced technologies.
This combination of technological leadership, supplier diversity, and resiliency does not exist anywhere else in the world today.
It wasn’t the most soaring of rhetoric, but the historical perspective was accurate and the strategy for America’s future was thoughtfully constructed. The United States lost the battle for semiconductor supremacy to far more competitive ecosystems in Korea, Taiwan, and Japan, but it hasn’t lost the war in totality. The latent talent, research labs and capital exist to reconstitute the industry, and careful synchronization and capital investment could reembowel the corpse of America’s semiconductor manufacturing base.
What I (and presumably the industry) was looking for was an all-hands-on-deck competitive fusillade that would simultaneously ameliorate America’s competitive disadvantages: high labor costs, soaring construction expenses, low infrastructure investment, meager talent pipeline, and limited university-industry coordination.
Apparently, word never got through to the CHIPS program staff that the cadaver of the American semi industry is in the emergency department and not a California holistic wellness center. For what we got instead of an aggressive economic resuscitation plan was a wish list of other priorities outside the singular strategic goal: investing toward the zenith of competitiveness in an industry where America is now years behind the fab frontier.
Across six fact sheets (that’s a lot of facts!), Commerce set out its criteria for judging applications for funding. The first fact sheet outlined the application process and was complemented by five other fact sheets that highlighted the department’s criteria across a series of themes. Miraculously, the department managed to insert a poison pill provision in each theme to undermine the overall competitiveness of the program. Walking through them one by one:
- “Catalyzing Private Investment” — Smart encouragement of private capital and creative financial structures poisoned by a cash flow requirement that demands that companies receiving CHIPS funding pay back unanticipated upside resulting from CHIPS funds.
- “Protecting U.S. Taxpayers” — Rigorous transparency requirements marred by a focus on “[evaluating] applications based on the extent of the applicant’s commitments to refrain from stock buybacks. Applicants are also prohibited by law from using CHIPS funds for dividends or stock buybacks.”
- “Building a Skilled and Diverse Workforce” — Reasonable nostrums of encouraging sectoral partnerships and coordinating with workforce partners decimated by requirements to pay prevailing wages for construction (i.e. the highest union wage in a region) and requiring that on-site child care be provided to all construction and on-going semiconductor fab workers.
- “Engaging with U.S. Partners and Allies” — Excellent balance of raising up America's manufacturing in concert with allies tainted by a 10-year ban on semiconductor investments in “any foreign country of concern” (i.e. China).
- “Spurring Regional Economic Development and Inclusive Economic Growth” — Thoughtful goals to improve regional semiconductor hubs tarnished by a demand that all fabs operate with “100% renewable energy” and “[c]ommit to using iron, steel, and construction materials produced in the United States as part of their projects.”
Here we see the crux of Commerce’s CHIPS contortions: the department simultaneously wants to win the fight for semiconductor supremacy (an almost impossible goal albeit one that is still attainable) while also limiting corporate profitability and shareholder value, expanding child care and labor unions, banning global expansion, and hitting Paris climate goals.
For me and you as readers, some of Commerce’s goals might be ones we share and want to prioritize. I for one would love to see more universal child care for workers as a way of equalizing employment opportunities across all demographic groups and particularly women. But as always with American industrial policy, we can’t seem to keep our eyes exclusively on the (industry) prize; we have to multitask, with the concomitant drop in focus and ultimate performance that our approach portends.
I wrote back in “Consensus Functions” last year (with a highlight in bold):
Society, meanwhile, doesn’t have all those layers of consensus to build upon for new decisions. There’s no algorithmic blockchain ensuring that the basic facts of reality are cross-validated, or the scientific method to ensure that evidence is considered with appropriate context. Consensus is recursive, and without better consensus functions around values and tradeoffs, it’s impossible for a nation to make decisions.
America and much of the West escaped that lack of deep consensus simply through abundance. Multiple values and tradeoffs could be supported by building institutions that allowed them all to coexist. Venture funds can’t make every investment and scientists can’t accept every contradictory result, but wealthy nations can support a wide range of consensuses, each underwritten in parallel.
America is a wealthy nation, but competition is catching up very, very quickly. China, only recently a rural and immiserated economic backwater, fell just shy of the World Bank’s high-income threshold for 2022, hitting a per capita income of $12,608 against a benchmark of $13,205. Korea’s domestic Hyundai auto workers now hold salaries equivalent to American Midwest factory labor.
America isn’t a leader protecting its edge in chips. America is a follower racing to catch up with smarter and faster rivals, or as Raimondo remarked, "We once manufactured nearly all of the world’s most advanced semiconductors. Today, we manufacture none.” High labor costs and low productivity drove many factories overseas, and our response is to add wage increases and demand more benefits for workers? American fabs are the most expensive in the world to construct and operate, but they’re also supposed to solve climate change and union membership growth as well? Intel, as I wrote in “Intel’s Malaise”, hit a profitability nadir last year simultaneous with the passage of the CHIPS and Science Act. Will banning excess profits, dividends, stock buybacks and overseas expansion in China turn around its bleak corporate narrative?
One can hope that this week’s fact sheets are merely desires expressed by the department to feign fealty to President Joe Biden and liberal economic priorities, and the ultimate applications selected will be far more internationally competitive. I doubt that, for the same reason I doubt that America can get its industrial base back: it never wants to truly mobilize all facets of government and industry to “do what it takes” to win.
The patient’s organs are splayed out on the operating table, and we’re making sure the artificial heart is zero carbon and domestically made (“It uses recycled aluminum, right?”). The CHIPS rules are a perfect vivisection of America’s industrial policy malaise, and the disembowelment of U.S. factory jobs continues.
“Securities” Podcast: Observations on Generative AI
OpenAI’s ChatGPT and generative AI more broadly have been slathering the news the past few months, and that excitement has translated into a white-hot venture market for the next generation of AI startups. We previously discussed some of the limits and ethical issues around this crop of large language models with NYU professor and AI critic Gary Marcus on the podcast in “That’s 100% what keeps me up at night”, and I also talked last week in the newsletter about the coming creative class warfare in “Garrulous Guerrilla.”
This week, I wanted to get more of a ground floor perspective on what’s happening on the frontlines of the AI wars, so I had Lux’s own partner Grace Isford join me to talk about what she’s seeing in the market right now. We talk about the first-ever AI Film Festival, how a new generation of tools is empowering developers to incorporate generative AI into their applications, and how the big trio of Microsoft, Google and Amazon are approaching the market.
🔊 Take a listen to “May the AI be ever in your favor”
- “Securities” producer Chris Gates chimes in with his first-ever Lux Recommends with an episode of The Ezra Klein Show interviewing author Adrian Tchaikovsky of the Children of Time trilogy. Chris is deep into the third and final book, Children of Memory, and heartily recommends what’s described as a space opera on “humanity’s battle for survival on a terraformed planet.”
- In terms of breakthrough papers, Shaq Vayda recommends “De novo design of luciferases using deep learning” just published in Nature. "The creation of highly active and specific biocatalysts from scratch with broad applications in biomedicine is a key milestone for computational enzyme design, and our approach should enable generation of a wide range of luciferases and other enzymes.”
- Our scientist-in-residence Sam Arbesman recommends Marcin Wichary’s post chronicling the work of Dana Sibera, who devises ingenuous (and often useless) tech product designs that illuminate and reconfigure our notions of how we interact with our devices. Dozens of brilliant images included: “These ‘mock-ups that mock’ all feel great to me, a perfect antidote to the pretentious Jonny Ive white-room videos of the previous decade.”
- I recommend “Israel risks turning into a shut-down nation” in the Financial Times by John Thornhill describing how the Israeli tech community is mobilizing itself against the recently reinstated premiership of Benjamin Netanyahu. “’Restraint has been thrown out the window. Tech people are the muscle behind the protest movement,’ another entrepreneur told me. ‘It’s great that we live in a real democracy as we are seeing today. But the situation is scary as shit.’”
- Zaid Fattah recommends Florian Kronawitter’s Substack “The Next Economy”, which covers macro and micro economic trends.
- Finally, Sam recommends this retrospective from the Computer History Museum's David C. Brock in IEEE Spectrum, “50 Years Later, We’re Still Living in the Xerox Alto’s World. "They conceived and developed the Alto in a remarkable burst of creativity, used it to develop diverse and pathbreaking software, and then moved out of Xerox, taking their achievements, design knowledge, and experiences into the wider world, where they and others built on the foundation they had established.”
That’s it, folks. Have questions, comments, or ideas? This newsletter is sent from my email, so you can just click reply.