• US$53bil subsidies for US chipmakers. US President Joe Biden has signed the US CHIPS Act into law, which pledged to subsidise US$53bil for US semiconductor manufacturers and research. The law will also provide 25% investment tax credit for chip facilities, which is estimated to worth US$24bil.

• US has been lagging in chip manufacturing capacity. While the US accounted for 46% of the global semiconductor market share in 2021 due to its highly competitive position in chip design manufacturing equipment, US semiconductor manufacturing capacity has been declining steadily from 37% in 1990 to 12% in 2021. Furthermore, the US presently does not have the capacity to manufacture the most advanced semiconductors, for e.g. 5-nanometer chips.

• Funding to alleviate structural problem for US chip capacity. Major chipmakers have been reluctant to set up new semiconductor plants in the US. Notably, TSMC’s founder Morris Chang said it costs 50% more to make the same chip in the US than in the company’s factories in Taiwan. Similarly, based on our inhouse tracking of major foundries expansion plans (Exhibit 1), only 23% of foundries’ expansions will be in the US, of which most expansions will comprise US-based companies. We believe the subsidies would partially alleviate the cost concerns for major foundries as it was noted that developments for capacity expansions have been slower than anticipated for TSMC and Intel pending funding from the CHIPS Act.

• However, not all will benefit. The law marks one of the heftiest subsidies for private businesses. However, we think only a handful of chipmakers will benefit from the initiative. Modern foundries with leading edge semiconductor manufacturing capabilities typically cost more than US$10bil. Notably, Samsung’s foundry in Texas is estimated to cost over US$17bil, while Intel has pledged a US$100bil expansion plan over the next decade to bolster research and manufacturing capability. We foresee further incentives from the US government in order to build a robust front-end manufacturing capability in the country.

• Guidelines for funding yet to be established. While the US Department of Commerce has yet to outline the guidelines for assessing grant applications, we reckon that the subsidies will be targeted at front-end semiconductor players, as the US has explicitly indicated its desire to regain its semiconductor leadership in terms of technology, and at the same time reduces its reliance on Taiwan and South Korea, which are front-end focused in fabrication.
  We are of view that our local semiconductor players, who are mainly outsourced semiconductor assembly and test (OSAT) players, will unlikely consider setting up a packaging facility in the US. Based on our channel checks, some of our local incumbents have also expressed reluctance in US expansions primarily due to cost considerations, and will only do so if they have financial support from customers. Nonetheless, we remain optimistic that the potentially higher semiconductor volume flows from the US could benefit local semiconductor players as according to the Semiconductor Industry Association (SIA), Malaysia accounted for 24% of all US semiconductor global trade in 2021. Globally, Malaysia makes up 7% of total semiconductor trade flows.

• Globally, semiconductor sales remain robust. June 2022 sales increased 13% YoY to US$51bil compared to US$45bil in June 2021. This also marked a 29-month streak of uninterrupted growth. On an YTD basis, sales grew by 21% to US$305bil, on track to meet World Semiconductor Trade Statistics’ (WSTS) 2022 global sales projection of US$601bil. Sales growth continued to be led by the Americas market, which grew 29% YoY, followed by Japan (16%), Europe (12%), Asia Pacific (12%) and China (5%).

• We maintain OVERWEIGHT call on the sector, favouring companies with sales mix that tilts towards the automotive segment given the ongoing critical supply-demand imbalance for automotive chips. We view that the subsidies may be more targeted at leading edge process nodes and any possible expansion on the trailing edge, in which automotive is heavily relying on, will likely have a lead time of 1 to 2 years, which means the automotive semiconductor shortage is expected to persist at least until 2023.

Source: AmInvest Research - 11 Aug 2022