“Beware of ——- Bearing Gifts”

Government subsidies are never free and now we’re learning the price that semiconductor companies will have to pay if they choose to sign on to the administration’s industrial policy.

The recent rollout of the federal $53 billion semiconductor program (Chips) marks an historic effort to use government resources to foster favored sectors.  It should be noted that governments seldom know better than markets which technologies will succeed and often burden the effort with objectives that have nothing to do with helping the target industry to succeed.  Chips is one of two such efforts approved in the last year.  The other is the billions of dollars being poured into electric vehicles and other green energy initiatives.  History suggests that U.S. industrial policies have been more likely to succeed with a well-defined objective, such as putting a man on the moon or developing a Covid vaccine.

Under the Chips act, companies receiving incentives will be subject to a long list of requirements, including sharing part of their profits with the government and limiting stock buybacks and dividends.  Companies are also expected to employ union workers while providing affordable child care.

All of this is going to present investors with a confusing outlook for many chip manufacturers.  The impact of the Chips act on individual companies may vary considerably, affecting, among other things, their competitive position, operating margins and the ability to share financial progress with investors.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA