(Bloomberg) -- For years the titans of finance have argued Wall Street could spend money more efficiently than the government can. Now a handful of bankers will get the chance to see if they’re right.
Deep inside the Commerce Department, Secretary Gina Raimondo has pulled together a team including former executives from Goldman Sachs Group Inc. and KKR & Co. to divvy up about $100 billion worth of subsidies and loan guarantees the government has set aside to turn the US back into a semiconductor powerhouse. The tiny electronic components that run everything from electric vehicles to nuclear missiles are at the center of a geopolitical struggle between Washington and Beijing.
Raimondo’s team — which also includes specialists from national security to workforce development — aims to use the cash to lure the biggest chipmakers and suppliers to build a string of new factories here, reversing a decades-long shift of their production to East Asia that Washington worries has left America vulnerable.
“This is the first time in a very long time that the government is giving significant quantities of money to really well-run, sophisticated, well-capitalized companies in a sort of industrial-policy kind of way,” said investment chief Todd Fisher, who spent over two decades at KKR. “And that takes a different approach and a different set of people.”
The Wall Streeters are trying to bring an investor’s eye to the program, measuring their returns in economic and national security instead of dollars and cents. They say they are using their dealmaking skills to make government money go further — and avoid the expensive failures that have plagued Washington’s previous efforts at giving taxpayer dollars to business.
Commerce hasn’t given out any money yet, and the first hints of who might get it aren’t expected until later this year, according to people close to the effort, even as political pressure for results grows. The team has had to confront the limits of its leverage over powerful chip giants with global reach in an industry where new factories easily cost $20 billion or more.
“The biggest challenge they have is they’ve got what sounds like a large amount of money, but it’s actually small in the industry,” said Chris Miller, author of “Chip War” and a professor at Tufts University in Medford, Massachusetts. The $39 billion over five years the team has to spend in direct subsidies isn’t much more than a year’s capital spending by just one of the top chip companies.
Insiders already are trying to temper sky-high expectations for the program, the centerpiece of the Chips and Science Act passed last year. The kind of massive shift of production some in Washington are hoping for is unlikely to happen nearly as fast as politicians hope, according to industry officials. The sector is already struggling to find enough engineers and workers in the US with the skills needed for the jobs the new factories will create.
Taiwan Semiconductor Manufacturing Co., the world leader in the business, in July delayed the opening of its $12 billion plant in Arizona, which was announced before the Chips Act was passed but is seen as a bellwether for the broader drive to boost domestic chip production. The company said it wasn’t able to find enough workers with the skills needed to outfit the plant.
The Chips Program Office now has more than 130 staff, administering the largest US government investment in industry since World War II. It includes a 45-person strategy side pulling mostly from the public sector, with expertise in things like national security and workforce development, plus an investment arm with some 33 financial experts. It’s already received more than 500 expressions of interest and 100 full and preliminary applications.
Joining Fisher from Wall Street are a pair of former Goldman Sachs partners, Kevin Quinn and Brad Koenig, who serve as liaisons with semiconductor firms seeking funding. Also lured away from Goldman Sachs was Srujan Linga, a managing director at Goldman whose experience helping companies use assets like frequent-flyer miles to secure funding is to aid in structuring chip deals to draw in more private capital alongside the government subsidies.
Though the team boasts several former chip-industry executives, limited experience in the business leaves the Commerce office at a disadvantage in often-tough negotiations with the biggest players, according to several industry officials.
The Commerce Department rejects that, pointing to more than a dozen people with semiconductor experience, saying the team has plenty of staff who’ve worked for years in the business to complement the dealmakers.
The process is structured as an open competition among all comers, but in fact only a few major companies are realistic contenders for the biggest grants for their ‘fabs,’ the massive plants that make the most advanced chips.
Those companies are choosing between rich offers of subsidies and other benefits from countries around the world to build plants — often with fewer strings attached — that they can use as leverage in negotiations.
Intel Corp., the biggest US player, has signaled the Commerce Department should go easy on restrictions of exports of chips to China if it wants the company to commit to huge new investments in the US.
Export controls are handled by a different office in the Commerce Department. Fisher rejected the idea that the biggest companies have the upper hand. A provision that requires firms to share returns above their forecasts with the government, the Department said, aims to guard against companies padding their numbers and ensure that financial gains are shared with taxpayers.
“Goal number one is get the right people who can engage with these companies in a sophisticated, credible, trustworthy and highly professional way so that right away you start to balance it,” Fisher said.
Commerce also is trying to get major chip consumers to publicly commit to buy a set share of US-made semiconductors to create demand, according to people close to the effort. The US is also seeking to agree with friendly countries on an “allied supply chain,” dividing up expertise to avoid competing with each other head to head on subsidies, the people said.
Reshaping the global footprint of a $500 billion industry isn’t a small task, even with the budget the US has set aside. The concentration of production in East Asia arose because of the overarching need for efficiency in an industry that has brutal economics.
“The challenge with the Chips funding is there’s a real desire to spread it out among businesses, opportunities, etc,” said Charles Freeman, senior vice president for Asia at the US Chamber of Commerce. “The reality is the more you cut that pie up, less is not more.”
While the financial industry sees the risk an investment goes south as the inevitable cost of a portfolio that includes more winners, in Washington, the political stakes for failure are much higher.
“My number-one job is to hit the national security goals but also to protect taxpayer money,” Raimondo said at a congressional hearing on Sep. 19. “Not to give any company a dollar more than they need to hit the mission.” Grants will be given in tranches tied to the companies meeting milestones and Commerce can suspend or even claw back funding from those that don’t deliver, she said.
Washington’s recent track record isn’t great. In 2017, Foxconn Technology Group committed to invest $10 billion and employ up to 13,000 workers at a new display-panel plant in Wisconsin, aided by $3 billion in subsidies. But four years later, the company slashed investment to less than $700 million and cut the number of projected jobs to about 1,500.
“Foxconn is a big red flag,” said Gary Hufbauer, a Washington-based senior fellow at the Peterson Institute for International Economics. “What does the government extract from the firms to carry out what they say they’re going to do and if not, reimburse the government?”
--With assistance from Sridhar Natarajan.
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