The CHIPS and Science Act: Strengthening US Innovation and its Leading Edge
In 2022, the US introduced the CHIPS and Science Act, a statute bringing $278 billion in new funding to support the research, design and manufacturing of semiconductors domestically. The introduction of the act comes amidst an ongoing chip shortage, and is largely influenced by the long-term loss in market share to countries like China – the US held upwards of 40% of the global semiconductor supply in 1990, now reduced to 12% in 2022. According to the White House press release, the act aims to ‘strengthen American manufacturing, supply chains and national security’ in an attempt to preserve the US as a leader in the ‘industries of tomorrow’, which ranges from appliances to automobiles to national defense.
A total of $53B of the CHIPS and Science Act targets chip manufacturing, with most of the funds going towards mature enterprise-level semiconductor companies to accelerate the reshoring process, helpful more so to large institutional funds. There nonetheless exists another purpose to this act best applicable to the early-stage investor: to fund innovation.
The Innovation Ecosystem
The CHIPS and Science Act is a catalyst for lasting changes to the entire chip industry in the US. It exists to mitigate the productivity losses from reshoring and the high costs to maintain operations domestically by incentivizing the growth of an innovation ecosystem – a set of complementary measures that help optimize business practices across the value chain. The act supports the revitalizing of fabrication processes, from chip design, materials and equipment to effective manufacturing, testing and distribution at scale. It also promotes market resilience, creating more quality job opportunities and an expansive base of large and small suppliers. Altogether, the objective of the CHIPS and Science Act is to enable a ‘vibrant domestic industry’ in the long-term, reestablishing the US as a leader in semiconductors while maintaining an edge through continuous innovation.
People First
To create a sustainable ecosystem for innovation, chip companies must first focus on talent and personnel management. A fabrication plant requires thousands of employees at all stages of production, each sharing talent and experience not readily available in the open job market. Any company positioning itself to benefit from innovative discoveries should split its time between procedures that facilitate the migration of top foreign performers and exploring new approaches to technical hiring and training of local candidates.
End-to-End Value Chain
Next, manufacturers should iterate on the production of hardware by leveraging digitalization throughout the logistics chain. The implementing of complementary technologies that support the manufacturing process helps to reduce production costs, improve chip performance, automate complex procedures, optimize pricing and increase quality and volume of output, all of which help to surmount the ‘lab to fab’ problem – the challenge of efficiently moving designs and R&D to commercial production. For US chip companies, technology upgrades to manufacturing are necessary to establish lasting defensibility, especially as others abroad continue to compete on capital efficiency above all else. A few examples of technologies include, but are not limited to, visual modeling for more complex chip designs, simulations for wafer production and materials testing, supply chain mapping to optimize the assembly of advanced packaging, and the use of a high performance cloud environment to accelerate production uptime and yield.
Optionality
The resulting process improvements in manufacturing help to assemble the next generation of chips, which in turn ushers in the next generation of applications. The removal of production barriers to US manufacturers leads to faster distribution of high-quality chips to customers and eventual end-users, increasing the available options and delivery consistency of more innovative market offerings of appliances, devices and machinery.
The Venture Perspective
The new support for reshoring the output of semiconductors in the US is also beneficial to the many venture capital funds that share an interest in deep technology. In the past few years, certain clusters of technology had enough momentum to get the attention of most funds across the venture ecosystem – recent examples include FinTech, Drones, Web3 and Generative AI. As the CHIPS and Science Act puts semiconductors in the spotlight, we expect the emergence of a ‘deep tech renaissance’, where a renewed focus on the potential of chip-level and other advanced technologies acts as the catalyst to innovation and a sustained increase in investment activity.
For startups, funds available from early investors are best allocated to managing available talent, optimizing parts of the supply chain that contribute to faster product commercialization and innovating across chip design, materials and processes. If a deep tech startup steadily improves its internal practices while simultaneously growing its market share, a venture investor can expect to exit more quickly. More broadly, we at Pursuit Ventures believe the act is pivotal in shaping a newly collaborative ecosystem between all industry stakeholders. As an early-stage investor, we see an opportunity to partner with other funds to identify and support top-performing founders and to build a rapport with growth and late-stage funds to help ensure that investments are consistent with market demand. Each leads to the discovery and fostering of industry-wide innovation in the US, which has lasting benefits to the economy at large.