As the CHIPS act makes its way through congress, the husband of Nancy Pelosi has sold off a large number of Nvidia shares while Nancy Pelosi continues to plan her trip to Taiwan. What challenges does the semiconductor industry face in light of the CHIPS act, what are the Pelosi’s doing, and why could it be a signal of a coming challenge for non-US companies?

What challenges does the semiconductor industry face from the CHIPS act?

Since the start of the first lockdowns as a result of the COVID pandemic (and poor government planning), the semiconductor industry has seen numerous supply chain challenges. With multiple industries stopping and starting their demand for integrated circuits, the semiconductor industry has tried to respond to these demands in real-time, but the time taken to manufacture chips has now seen extremely long delays with some parts not being available until 2024. 

But while the shortage of semiconductors has seen manufacturing difficulties and a rise in the cost of living, the world has also been woken up to the fact that semiconductors, just like oil, are the blood of any modern nation. To make matters worse, it has also come to attention that the most important semiconductors are manufactured in just a few places around the world with many of them in Taiwan. Considering that China has made bolder moves to demonstrate its willingness to take back Taiwan, it is possible that the entirety of western technology becomes dependent on one of its biggest economic oppositions.

In recognition of this, governments around the world have been pushing through legislation to encourage home-grown semiconductors. In the US, this is being realised through the CHIPS act that will see over $50 billion in funding to help manufacturers open new foundries as well as provide tax credits to those who manufacture in the US.

While this act may be great for some manufacturers (such as Intel, Texas Instruments, and Micron  Technologies), it presents serious challenges to those who manufacture outside of the US. Of course, non-US companies shouldn’t benefit from the CHIPS act, but it is expected that fabless companies will also suffer (such as Xilinx, Nvidia, and AMD), as they rely on third-party foundries often located in China and Taiwan. 

Considering that foundry options in the US pale in comparison to those provided by South Korea and Taiwan, fabless companies who provide essential components will thus be unfairly penalised for outsourcing their manufacturing through anticompetitive pricing from larger businesses that are able to manufacture their own devices. Additionally, companies such as Intel only have one real competitor (AMD), and the CHIPS act could give Intel an unfair advantage from both tax credits and sales.

What does Nancy Pelosi have to do with Nvidia?

Recently, Nancy Pelosi published information that her husband had exercised a stock option by selling 25,000 Nvidia shares resulting in a calculated loss of $342,365. The reason for this announcement comes from the legal obligation of members of congress to announce all dealings with stocks and trades to the public within 45 days of executing the trade in an effort to prevent insider trading. But while many media sites are rushing to dispel rumours and conspiracy theories surrounding the trade, there could be genuine cause for concern if one looks at the CHIPS act and Nancy Pelosi’s plans to visit Taiwan.

To start, the CHIPS act is being headed by Nancy Pelosi who will undoubtedly have insider knowledge on the development of the act, its full intentions, and how it could be expanded in the future. This puts Nancy Pelosi in an unusually powerful position to exercise trades on semiconductor companies that would maximise profit long term. Of course, this would be insider trading, and no politician has ever done such a thing.

If the CHIPS act does indeed negatively impact companies such as Nvidia, it would be beneficial to offload these stocks and/or short the stock. Furthermore, purchasing stock in companies such as Intel and Texas Instruments which are about to receive tax credits and larger profit margins would present a significantly lower risk. Thus, it would be interesting to see what share announcements Nancy Pelosi makes next.

Finally, Nancy Pelosi has recently signalled her intention to visit Taiwan to show her support, but China has indicated that it would not tolerate such a move. If China is antagonised too much it could prompt China to prepare for an invasion of Taiwan. Now, it is likely that during this time the share prices of Taiwanese foundries to fall, and this would see the share prices of companies such as Nvidia also fall. In that moment, Nvidia shares could be purchased at an all-time low, and then Nancy Pelosi could launch a diplomatic mission to improve ties between China and Taiwan. If successful, the share prices of those foundries would shoot up, and this would result in large gains.

Why could this sell be an indication of tough times for semiconductor companies?

If the CHIPS act does indeed go through, there is no doubt that non-US companies and those that outsource their manufacturing will be affected. As tax credits will only be available to those that manufacture their own devices on US soil, only a handful of companies will benefit. 

But the CHIPS act may do more harm than good to the semiconductor industry in the US with its discrimination of fabless companies. Specifically, the construction of new foundries capable of manufacturing cutting-edge semiconductors is no small feat and can take years of planning and preparation. Additionally, local environmental concerns have to be taken into account which is something that Democrats have made increasingly more challenging with the introduction of red tape and bureaucracy. As such, it may be easier said than done to set up new foundries that can take advantage of the tax credits and funding. 

Finally, the dumping of Nvidia shares before a visit to Taiwan while a US carrier group sails into the South China Sea has trouble written all over it. Should any conflict break out between China and Taiwan, the world will be introduced to a whole new meaning of semiconductor shortage.