The following is a ‘quick take’ interview about the recent passage of and what to expect in the implementation phase of The CHIPS and Science Act of 2022. This recent conversation was with:
Dr. Jennifer Buss is a long-time friend and OODA network member who has contributed insight to the greater national security community for years. Dr. Buss serves as the CEO of the Potomac Institute for Policy Studies, which develops meaningful science and technology policy options through discussions and forums and ensures their implementation at the intersection of business and government. She has extensive experience examining policy issues in support of NASA and has been involved in their strategic planning processes for astronaut medical care and cancer diagnostics and therapeutics. She manages a variety of OSD programs including an outreach effort for the Department of Defense to the start-up community across the country to find innovative technologies to meet the challenges faced by the Services and Government agencies. Dr. Buss performs science and technology trends analysis and recommends policy solutions to some of the country’s most pervasive problems. She has also directed and assisted research on numerous government contracts, including systematic reviews and gap analyses. Dr. Buss is an authority in her scientific field with national recognition in her area of expertise. She is responsible for major projects requiring integration/coordination across multiple scientific disciplines; and
Dr Melissa Flagg, a Senior Advisor at the Center for Security and Emerging Technology (CSET) at Georgetown University, where she previously was employed as a Senior Fellow. Melissa works and has worked in a variety of consultancy, senior fellow, and board member roles. Previously she served as the Deputy Assistant Secretary of Defense for Research, responsible for policy and oversight of Defense Department science and technology programs including basic research through advanced technology development and the DoD laboratory enterprise. She has worked at the State Department, the Office of Naval Research, the Office of the Secretary of Defense for Research and Engineering, the John D. and Catherine T. MacArthur Foundation, and the Army Research Laboratory. She holds a Ph.D. in Pharmaceutical Chemistry and a B.S. in Pharmacy. Dr. Flagg recently authored “No Time to Waste: The Pentagon Needs an Innovation Overhaul” with the tagline: “… learn to love the valley of death.”
In this Part I installment of the interview, we discuss the real policy, procurement, and contract management implications of the CHIPS Act weeks after its passage into law.
“…is the Department of Commerce able to execute those contracts? It’s not a knock on Commerce. It’s just the way that the organizations are set up.”
Daniel Pereira: The first question is, because there was so much K Street and a full court press by the semiconductor industry, I think there’s the easy assumption on this law and these monies that it’s just a “baton pass” to Intel – and “industry” was ready to implement. So, with each of your research affiliations, how are you talking about the CHIPS Act with the research cohorts and the people who track this legislation when you’re talking about the next steps after it was signed? What are some of your assumptions about the efficiency or lack of efficiency of this money getting to work?
Dr. Melissa Flagg: I will say what I like about the CHIPS Act, I can come up with lots of ways that I think this could be better, but this was a compromise bill, right? The fact that it got passed with such incredible bipartisan support at this moment in time. I think it is something that we should appreciate. So I’ll just say that.
Dr. Jen Buss: I second that for the record. Melissa, I’m going to start if you don’t mind – and I’m going to start with the point that Commerce was just handed six times more budget than they’ve ever had in a single year. So let’s premise that with they barely know how to spend 9 billion a year and they are potentially in over their heads on executing a budget. And they can spend eight and a half of it on personnel. Now they have 50, 52 billion dollars on top of that to execute in five years and they don’t know how to write a contract. They know how to do incentives. They sometimes write grants.
But what they’re not thinking about is the business side of what a grant means to these organizations. Which I’m not advocating as the way to do it by the way. But even if it was only five companies, five contracts at $10 Billion apiece, is the Department of Commerce able to execute those contracts? It’s not a knock on Commerce. It’s just the way that the organizations are set up. So that is comment number one, which is executing the money in a timely fashion is going to take the might of DoD and all the contracting processes that DoD has so rigorously beaten to death. But they’ll be able to help them execute.
“They’re going to hand all this money to Congress and/or to Commerce and say, “Spend it in a year.” And then they’re going to come back four months later and say, “Tell me what progress you are making.” That’s not even enough time to hire a contracting officer.”
Pereira: So a quick aside: I recently transcribed the OODAcast conversations of Dr. Lisa Porter and Dr. Tony Tether (former Director of DARPA) and the throughline Dr. Tether mentioned on multiple occasions, and I think Porter mentioned it too, they were trying to increase DARPA’s budget and he said “no” because he just felt like that would create a climate at DARPA of just saying yes, because they had money to throw at problems. So that’s the concern you’re describing for Commerce because they have no acumen at this level of budget?
Flagg: Can I jump in here just a little bit on this because I agree strongly with Jen on this? I think it is not the same problem that DoD has. If you give DoD more money, they just throw more money out the door, because what DoD is good at is lots of processes to move money from one place to another. And so if you have too much money, then you tend to give mediocre ideas money because you just start saying yes to everything.
Commerce has the opposite problem. Commerce has been starved to death. They have been funded below what they have needed to execute their missions because they have one of the broadest sets of disparate missions. They’ve got NOAA, they’ve got NIST, they’ve got Industrial Security. Commerce has this incredible diversity of requirements and has been starved for funding. So now you don’t have the contracting personnel that has deep experience across the breadth of the organization.
You have people in NIST that know how to do good CRADAs, that know how to do grants, and that know how to do cooperative sort of relationships. And probably some contracts with industry. You’ve got some folks in NOA that know how to do grants, but there aren’t just people sitting around in the Department of Commerce that could compete and vet billions of dollars of funds, to get them out the door. And these obligations and expenditure requirements that Congress will be in a one-year timeframe. They’re going to hand all this money to Congress and/or to Commerce and say, “Spend it in a year.” And then they’re going to come back four months later and say, “Tell me what progress you are making.”
That’s not even enough time to hire a contracting officer. So I tell me if I’m wrong, Jen, but that was how I was taking your comment – is I’m more empathetic because I think we’ve done this to them. But this is also, when I read the actual CHIPS Act, it’s not like it’s all in one place. We’re going to sprinkle it around the Manufacturing Extension Program, which I think is part of NIST.
We’re going to create a new organization: The National Semiconductor Technology Center. I mean, so we’re going to create a whole new organization, which means we must hire people. We must hire new HR and contracting officers. And then we’re going to do some of these things underneath that new organization, like the Advanced Packaging and Manufacturing Program. So how long did it take to stand up the Department of Homeland security? How long does it take the DoD who is procedurally very good at starting things not stopping things, to start things? It takes us a while to get an office up and running. The JAIC took six months to a year to get up and running…
“…if we have companies….already wanting to come to build fabrication facilities, regardless of the CHIPS Act monies, we should encourage them with any other incentive program outside of CHIPS to come and build fabrication facilities here.”
Buss: …what is it taking Space Force to get up and running, right? So I agree. The second comment I would make about the CHIPS Act is about the amount of money that was allocated: $52 billion over five years. If you look at a company like Taiwan Semiconductor last year alone thy allotted $44 billion to recapitalize their foundries in one-year. TSMC, the biggest semiconductor company in the world, spent 44 billion in one year while the United States is trying to spend $52 billion over five years to build advanced fabrication facilities in the United States.
Flagg: And just to put a cherry on top of that: China, between 2020 and 2025 has committed one point four trillion dollars to improve their domestic semiconductor sector. $1.4 trillion.
Pereira: So if I was pulling a headline a week after the signing of the CHIPS Act, there could be an editorial that said – and I think I saw a few – we are still running behind in terms of economy of scale and timeline?
Buss: Absolutely. Yes. Now all things are not equal, right? So China’s spending that money – they are printing money to go in and spend that kind of money. It is not real. At least here in the United States, we have checks and balances that $52 billion is real money and it’s supposed to be matched by the companies, right? So they have an invested stake in what they’re doing in a capitalistic society. It’s important for our society to continue the way that we are with the companies are investing three times as much as they’re getting from the government. And I don’t even know if that’s necessarily a requirement for the spending from Commerce. But I know that there were talks about it before, so they are figuring out how to make that work. So just keep that in mind.
And so then the third point that I want to make about where the money is going to go: of that $52 Billion, we don’t probably want $30 billion of it going to Intel. And I say “probably” because it depends on the eye of the beholder <laugh>, and it depends on the things that we really do want or need to protect here in this country. And if we have companies like Samsung and TSMC already wanting to come to build fabrication facilities, regardless of the CHIPS Act monies, we should encourage them with any other incentive program outside of CHIPS to come and build fabrication facilities here.
“I want them bending metal in this country. It costs billions to just build a fab, but it costs many, many more billions to keep it as capitalized as a TSMC does.”
Pereira: The conventional wisdom and some of the pushback from other companies in the final weeks of negotiation of what was in the bill, the conventional wisdom is that a sizable chunk was going to Intel, right?
Buss: Just before the CHIPS Act was signed, Intel announced they were starting up a $30 billion initiative, some of it funded by a venture community investment called the Semiconductor Co-Investment Program Some of it was funded by money that they took out of their own profits to their shareholders to like to create the next, whatever instantiation not three nanometers, but some other variety that Intel wanted to get into. And it may have just been investing in legacy technologies or state of the practice technologies, but regardless, Intel made a big PR push about 24 hours too early <laugh> and gave big the Microelectronics industry a bad name for the CHIPS Act.
Pereira: Right. It is fair to say that the mainstream business press, their takeaway was that once signed, $30 billion would go directly to Intel and other industry leaders seemed to have climbed on board in the 11th hour. Is that the baseline that the mainstream business press took away?
Flagg: But let’s take the alternative perspective, which is – say it is $30 billion goes to Intel? It feels unpalatable right? On the flip side: If you want to take back 15% of lost market share globally, you don’t do it with a bunch of startups. <laugh>, So what is the goal of the CHIPS Act? The goal of the CHIPS Act is not research. Now, the science act part of the chips and science act is a science project. Fine. And we could talk a lot about that. I have spent more time on that part of it because I’m a research person. But let’s be clear: they lead off the whole act by talking about how only 12% of chips are currently manufactured domestically compared to 37% in the nineties.
The whole contextualization of this is to bring this home so that we have supply chain security. It is through that lens we need to look at the CHIPS Act. We want Intel, I want industry invested. I want the venture capital community to believe they’re going to get a whole bunch of money, so they pour their money into it. And I want them bending metal in this country. It costs billions to just build a fab, but it costs many, many more billions to keep it as capitalized as a TSMC does.
“…there are companies that are really concerned about what’s going to happen in the future or if they are going to be able to take advantage of a true return on investment…”
Flagg: This is a long game. It’s not a five-year thing. So while the CHIPS Act is great, Intel’s not doing it for the $30 billion. One thing that we have not mentioned that is in this Act is a significant financial contribution by the U.S. And I’m curious what the sunset laws are on the tax incentives because they’re saying they’re going to add a 25% tax incentive and then they’re also giving an increased number of incentives on investments in R&D. And so they’re saying that the number of subsidies that companies are getting in Asia to that reduce the cost of doing business there, of doing manufacturing in Asia, will be fully made up for not so much by the actual money that’s going into this cash and hand out up front, but by the tax incentives that are baked into this…
Buss: …so some of those numbers I was just pulling up in front of me: it is 25% tax incentive over a five-year period. So it is only five years, which is the same as the bill and all the funding. So I’m not surprised that it doesn’t go out longer. But then the comparison is a 40% subsidy in Taiwan, Korea, and China – that these companies are getting rather than building here in the United States. So they’ll get a little bit of cash, they’ll get the 25% tax incentive. and what’s the projected revenue of all the chips that they’re going to sell? And who’s the main consumer? Well, China’s still the main consumer, so are they going to get export controls? So there are companies that are really concerned about what’s going to happen in the future or if they are going to be able to take advantage of a true return on investment.
Pereira: Right. The definitive research about onshore investment shows that the whole number – tax credit plus actual physical investment – that whole number, historically analyzed, will always net a bigger win in terms of actual in-country investment. So you take a 25% tax credit, and Asian countries are at a 40% tax credit plus their whole number of investments, and you can look at the historical record and play out that the winner’s going to be the bigger investment. It really is that simple.
Flagg: So I do not want to go at it too hard because I do think that, as compromise bills go, it could be a lot worse. I do think there is this realistic aspect of the Act – in that it is not that much money. So there is a part of me that thinks I need an Intel who can invest the amount that the company itself is going to have to invest.
Dr. Flagg and Dr. Buss are both members of the OODA Network. Join the OODA Network.
No Time to Waste: The Pentagon Needs an Innovation Overhaul by Melissa Flagg
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