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In an exclusive interview with EE Times, Keith Krach, former Under Secretary of State for Economic Growth, Energy, and the Environment in the Trump administration, speaks on the significance of the CHIPS Act, which has since been passed by the House in a 243–187 vote.
It has yet to be signed into law by President Joe Biden.
Along with former Secretary of State Mike Pompeo, Krach is one of the key people who helped shape the CHIPS Act. In May 2020, Krach’s effort led to an agreement by Taiwan Semiconductor Manufacturing Co. (TSMC) to build a $12 billion 5-nm chip fab in the U.S., the most advanced facility of its kind in the nation.
Krach is also an accomplished businessman as former chairman of DocuSign and co-founder of software company Ariba. Here are Krach’s thoughts on the impact the stimulus measures will have on the American semiconductor industry.
First of all, Keith, thank you very much for taking time out of your schedule today. I know you as the person who helped facilitate TSMC’s Arizona project.
It was one of the greatest collaboration experiences I ever had, whether it was as Under Secretary of State or CEO. It was about trust. TSMC opened their books to us. We opened our thoughts to them, and we made the $12 billion deal happen in two weeks’ time. Up to that point, it was the largest onshoring in U.S. history. It was based on our word to do our best in helping cover their incremental costs. The caveat was no guarantees because, literally, “this will take an act of Congress.”
Now you’re seeing the implications of that. Our objective was that TSMC’s announcement would provide the necessary impetus to spark four additional areas to further fortify a trusted supply chain. First, it would attract TSMC ecosystem suppliers, which it has. Second, it would persuade other chipmakers, particularly Intel and Samsung, to get off the dime and to build in the U.S., which has happened in a big way. In less than a year, Intel CEO Pat Gelsinger announced a $20 billion investment in Chandler, Arizona. Then Samsung came in with a $17 billion investment in Texas. And recently, Intel’s investing $20 billion in my home state of Ohio, which could grow to be $100 billion.
Third, we hoped to spur universities to start programs in semiconductor engineering. My alma mater, Purdue, has just announced a master’s degree program in semiconductor engineering. Fourth, we also believed TSMC was the crucial catalyst to design a bipartisan bill (CHIPS for America) providing the necessary funding to bring back American semiconductor manufacturing. We also hoped the deal would inspire Congress to pass the bipartisan Endless Frontier Act that we architected with Senate Majority Leader Charles Schumer and Senator Todd Young back in November 2019 to boost investment in high-tech research. Now these two bills are combined to make up the CHIPS and Science Act. It was good karma.
Maybe you could say what, from your point of view, are the salient points of the CHIPS Act as it stands right now.
It’s about securing the semiconductor supply chain and bringing back chip manufacturing to the United States. It’s critical that we do this. It’s the most important industry in the world that fundamentally underlies 99% of technology. It’s about bringing high-skill jobs back, but also our economic competitiveness. But the headline should be the fight for freedom versus authoritarianism.
China has amped up their aggression. They are obviously totalitarians. They signed their love letter with Russia. Xi Jinping is absolutely obsessed with the semiconductor business. China has committed $1 trillion over the next 10 years. You know what the CHIPS Act represents. Xi’s biggest fear is that the United States will have a Sputnik moment. What they’re waging is a four-dimensional game of chess in military, economic, diplomatic, and cultural terms. Technology is an intersection point on the main battleground. The CHIPS Act is one of the most important things that we can do in terms of our offensive capabilities.
What Xi fears is that we will have another Sputnik moment and launch a moonshot. The Chinese leader is so worried about the implications of the CHIPS Plus bill, his minions are lobbying against it. That should tell you how consequential this legislation is. This is the beginning of that moonshot because it’s going to have a ripple effect in all our high-tech industries. It’s going to be a catalyst. It’s going to be a great carrot to work with our closest technological allies. And it’s going to send a great message to our citizens, private sector, and our allies that America is committed to preserving our freedoms. There is nothing that General Secretary Xi fears more than a united United States.
There are concerns about whether the CHIPS Act will successfully rebuild the U.S. semiconductor supply chain. What do you say to that?
It will give a tremendous boost, because if you look at rebuilding the semiconductor supply chain, what do you need? First of all, you need to build fabs. Those fabs are critical. They need to be in the United States, because the equipment manufacturers — the Applied Materials, the Lam Researches, the KLA Corps — they need that to design their next generation of chip equipment.
We’ve got a preeminent position in equipment. I mean, ASML, obviously that’s a key goal. You need to iterate back and forth, so it’s key from that perspective.
The other perspective is that in these fabs, 60% of the production workers have a master’s degree or higher. This is the ultimate skilled workforce that we’ve lost maybe over a generation. The CHIPS Act is going to help rebuild our workforce. When we did the TSMC deal, we planned to send 500 U.S. engineers over to Taiwan. TSMC would train them up and send them back here. When the TSMC Arizona fab opens, they will send us another 500 of their guys.
Then look at what it sparked in the universities. This bill is going to spur research funding. This is about the ecosystem. One of the things that’s unique about the semiconductor business is the clustering effect. That’s why Silicon Valley became Silicon Valley. You need all those suppliers there, close to you. I can’t think of anything that’s going to better secure our semiconductor supply chain in the long term.
The chip industry is so foundational. One result of the subsidization is a 40% to 50% cost differential between Asia and the U.S. General Secretary Xi has appointed a chip czar with a trillion-dollar budget over 10 years. The United States effort is going to be equivalent to the Apollo program. The Apollo program was $140 billion in today’s dollars. That gave the United States a leadership position in aerospace, electronics, and computer software. It still pays dividends worth about $4 trillion a year.
Will certain companies in the ecosystem be left out? There are the chip designers like AMD and Nvidia. They look at Intel getting subsidies and say, “Hey, our main competitor gets subsidies from the U.S. government, and we get nothing.”
You have the chip designers, the chip manufacturers, and the hybrid companies (like Intel). Chip designers are in a pretty good position. We need to keep that leadership position. Then there are the EDA companies like Synopsis. That’s something we don’t want to give to China. That’s what I said to CEO Aart de Geus a couple of years ago.
Chip design software is a prized technology, but there’s also a lot of money in the CHIPS Act for semiconductor research. They will be a beneficiary of that.
The big capital costs are on the manufacturing side. That’s where the economies of scale are that really matter. The CHIPS Act is going to benefit the whole industry. If the manufacturers do well, this is going to help the design guys. They should applaud that.
How about the chip packaging folks and other parts of the ecosystem — the PCB makers, the IC substrate makers? There are no IC substrate makers in the United States.
The ecosystem has left here. When I was Under Secretary of State, that was an important part we were focusing on. The soon-to-be president of Purdue, Mung Chiang, who I brought to the State Department to be our science and technology expert, is trying to attract the packaging and assembly companies to the United States. That’s the next piece of the puzzle that we want to do. That was always in the plans. We want the whole ecosystem over here. So you bring up a very important point.
You’re only as strong as your weakest link, right?
Exactly. The chip packaging part is in Asia now. You’ve got Amkor, which is listed in the United States, but all of its manufacturing operations are in Asia. Then you’ve got the No. 1 chip packager, ASE of Taiwan, which is all in Asia. So how do you get those guys to come over here and invest?
I was recently at a global Economic Security Summit at the Indy 500, and Indiana Governor Eric Holcomb said he wants to bring these packaging guys over. There’s a lot that state governments can do, and they’ve got to be more aggressive. We should utilize the big companies like Apple and the end-user companies. It’s one slice at a time. This bill puts serious funding in research in these different areas, so this also can help attract those companies. This bill gets executed in the executive branch, and the primary person is Commerce Secretary Gina Raimondo, who is extremely capable. It’s one step at a time.
It’s good that you mentioned the Department of Commerce, and there’s also the Department of Defense. The Department of Commerce will be the main government body that decides how to disperse these subsidies and research grants and so on. Isn’t it a little bit dangerous putting the government in charge of picking the winners in this business?
Well, I think it depends on how you do it. Congress passed it. It goes to the executive branch. One of the things when we designed the Endless Frontier Act with Senator Schumer and Senator Young is we talked about a governance model where you would have a group of private-sector people deciding where the money should go and making sure there’s a strong return on investment. You’ve got to make sure there are no conflicts of interest or those kinds of things. And Gina’s proven that she works well with the private sector and across the aisle. She set up the semiconductor roundtable that I was on with Eric Schmidt, Matt Pottinger, H.R. McMaster, and Senator Young. Gina’s proven that’s in her DNA.
This is industrial policy, right? It’s not the sort of thing that the U.S. government typically gets involved in.
It is global economic security strategy. The mission I got tasked with as Under Secretary of State was to develop and operationalize a global economic security strategy to drive economic growth, maximize national security, and combat China’s economic aggression.
We had three pillars for that. The first one was to turbocharge economic competitiveness and innovation. These two bills we designed were part of that. The second was to safeguard America’s assets, intellectual property, our financial system, health-care system, and educational system. I’ll come back to that because guardrails are important.
The third pillar was to build a network of trusted partners. That’s what we did when we built the Clean Network alliance of democracies. That was the first government-led initiative that defeated China, a master plan to control 5G around the world. We built that as an alliance of 60 countries. We also designed the Techno Democracy 12 with our 12 closest technological allies. This bill is a catalyst for working with our allies not just in defensive maneuvers like export controls and investment screening but also on joint R&D, because there are big economies of scale in that. More than anything else, this is a fight for freedom versus authoritarianism.
On safeguarding America’s assets, there’s been a lot of talk about the guardrails necessary to keep the fruits of this bill from falling into China’s hands. Guardrails to safeguard the assets that come out of this work is key. Now, there is probably not as many in there as we’d like. However, it is much better than the status quo where there are none. This bill will provide a carrot and stick to strengthen those guardrails. In other words, if a university or a research lab wants some of this money, there must be guardrails that this research won’t get in the hands of China. One of the things that we’re doing at the Krach Institute for Tech Diplomacy at Purdue [is we’re] putting out a policy procedure and process document that can serve as a best-practices template for the government when they allocate money.
Then another kind of concern that’s come up: How should the CHIPS Act successfully rebuild the U.S. semiconductor industry without distorting investment and ruining profitability? We’ve got all these companies now with these huge expansion plans, not just in the United States but also in Europe and other parts of the world, just as it looks like this shortage of chips appears to be ending. Is this a trainwreck in the making? Pretty soon, profitability is going to plunge just because there’s all of this excess capacity. Is that a concern?
I don’t think so, because the growth in terms of the need for semiconductors has gone through the roof. It’s going to be a long, long time before there’s overcapacity in the semiconductor business. And by the way, if there is, well, that’s a better problem than having a shortage, isn’t it?
Not good for shareholders. Shareholders wouldn’t like that too much, but consumers certainly would like it. Right?
Think about shareholders of the auto companies where they couldn’t get enough chips. That’s a big ripple-down effect, right? You have the shareholders of the semiconductor guys, but who they supply is everybody.
So I’d rather err on that side. That’s an easier one to balance out a little bit.
We hear companies like TSMC saying that if shortages are ending, the duration of shortages is not going to be very long.
The problem is once you get behind the curve.
When I talk to some of these companies here in the United States, the feeling is that the Department of Defense really has the most at stake. It’s facing these huge risks by not having a trusted supply in the United States for semiconductors. For the private sector and for Intel and other big, listed companies, defense isn’t really a big part of their business. Shouldn’t this effort to rebuild the chip industry in the United States be more focused on defense than the consumer companies and high-performance computing, the data centers, those types of people?
A lot of the chip industry is multi-use. If it comes to specialized chips for the DoD, it has a $700 billion budget. They’ve got quite a bit of money. I don’t look at that as an issue. A lot of the research that will be done to help the DoD, that money is there. That’s actually the first time I heard that concern. The important thing is that we can control our own destiny in the United States, because the No. 1 factor of this is national security. It’s securing that supply chain and jobs, right? There’s a tremendous ripple-down effect.
I was in Taiwan and Hong Kong for most of my career, and I’ve always felt very deeply that there’s this great sucking sound going on in the technology and electronics industry as it’s all shifting over to Asia. One of these days, the United States is going to be in deep trouble if it doesn’t do something to turn the situation around.
What happened is we got lackadaisical. We got overconfident. These other countries came in and they bought it away from us. What we must do is buy it back and, this time, keep it and not be so arrogant and lackadaisical about it, because this is a prize.