The chips act: Room for improvement

In case you missed it, last week the Commerce Department announced that it would be spending another $400 million under the Chips Act, to further bolster our capacity to manufacture microchips domestically. In this case, the funds are being directed to a private company for the purpose of expanding advanced packaging capabilities for microchips — whatever that means. The company, Amkor Technologies, Inc. has committed to using the funds in connection with a prospective $2 billion investment in Peoria, AZ. I don’t mean to argue against fortifying domestic manufacturing of microchips, but I’m critical about the way this program has been structured.

In this instance, the $400 million expenditure by the government is a grant — or gift — and we shouldn’t lose sight of the fact that although it’s reasonable to expect tickle down effects, this gift directly and immediately benefits the shareholders of the company. It’s true that the program is incentivizing that company’s investment, but to my mind there are better ways to achieve that end.

Given that the direct beneficiaries of the government grant are the shareholders of Amkor, it’s reasonable to ask who these shareholders are. Typically, ownership of publicly traded companies divides into the following categories: (a) institutional ownership, (b) institutional mutual funds (i.e., mutual funds managed by institutions like Vanguard, Fidelity, etc., where the owners of the mutual fund are the ultimate investors), (c) mutual funds (i.e., funds not managed by other institutions), (d) insiders, and (e) others.

For Amkor, inside ownership accounts for 38.4 percent of outstanding shares. By way of comparison, here are the statistics for the insider holding at a relatively random set of public companies.

I don’t claim that I’ve done anything like an exhaustive investigation here, but it strikes me that in the case of Amkor, a sizable piece of our government’s largess is directly benefiting the insiders of the company in a way that appears to be disproportionate.

As beneficiaries of this governmental assistance, it seems reasonable to me to ask just how the Amkor stockholders have been doing, generally. Amkor is an established company in the high-tech sector. In our capitalistic system, aren’t the kind of investments being encouraged by the Chips Act the kind of investments that a company like Amkor should be making on its own, without government handouts. Put another way, does Amkor really need (or deserve) this Federal infusion? That’s a hard question to answer, but I think it’s telling to compare the total returns earned by the shareholders of Amkor to those of the broader market as a whole, as reflected by the S&P 500 index. By this comparison, this company has done quite well over the years. Somehow, structuring a give-away to a company with this kind of record sticks in my craw.

Ultimately, it’s a question of fairness. MarketBeat identifies 10 companies as being on Amkor’s competitors list. Given this list, I’m wondering if Amkor is unique in being able to deliver the desired output from this investment. I don’t know whether it is or isn’t; but to the extent that these other companies could compete in this same space, how fair is it that Amkor gets this subsidy while others do not?

As a rule, I don’t think the government should be in the business of giving gifts to private, for-profit companies. This is and should be recognized to be a form of corporate welfare; and it’s antithetical to our capitalistic orientation. That said, how should this program have been designed? I see two alternative approaches.

In situations where goods or services are deemed to be in the national interest and where, for whatever reason, those companies seem to be unable to achieve the funding critical to their operations through traditional (i.e., private) means, I have no problem with the government being the funder of last resort. That funding, however, shouldn’t be provided as a grant. Companies should be expected to raise the necessary funds by issuing debt or equity to the government, in lieu of alternative private funding sources. In such instances, the government would simply be stepping in where the private marketplaces failed to fulfil their traditional roles, but funding costs would still be borne by the companies that access these funds.

The alternative approach would be for the government to commit to forward purchases of goods and services to assure sufficient sales to justify making the necessary investment by a private company, without reliance on a government handout. I’d expect the promise of future government purchases to be sufficient to stimulate the kind of investment that is desired, without creating the sort of uneven playing field that seems to be an inherent consequence of the current Chips Act design.

What’s done is done, but for the future, the Chips Act would be improved considerably if outright grants to private, for-profit companies were discontinued.