Bringing Chip Makers Home. Will It Work

[00:00:00.000] - Alice

Hello. Welcome to Books in the Biz, a podcast that looks at both the financial and operational sides of success. Please welcome our hosts, Dan Paulson and Richard Veltre.

[00:00:16.450] - Alice

Dan is the CEO of Envision Development International, and he works with leaders to increase sales and profits through great cultures with solid operations.

[00:00:25.270] - Alice

Rich is CEO of the Veltre Group and a financial strategist working with companies to manage their money more effectively. Now on to the podcast.

[00:00:32.060] - Dan Paulson

 Thank you, Alice. She was in, she was out. She was in, she was out.

[00:00:39.070] - Rich Veltre

She's awesome.

[00:00:40.440] - Dan Paulson

She is awesome. Rich, how are you doing?

[00:00:43.700] - Rich Veltre

I'm good, Dan. How about you?

[00:00:45.450] - Dan Paulson

Oh, pretty good. Another exciting episode of Books in the Biz. Always. Holding you on the edge of your seat as we talk about microchips. Exciting stuff.

[00:00:57.240] - Rich Veltre

It is exciting stuff. It's huge. Although it's really small.

[00:01:01.230] - Dan Paulson

It's really, really small and really expensive. But this is what prompted our discussion today. Rich, you found this article. What did you find interesting about it?

[00:01:13.850] - Rich Veltre

I think the big question mark, do I think it's a good move? Sure. Should the government be putting money towards bringing stuff back home? Sure. I can't put a bad red flag at the end of that. Having things here, all the buzzwords were in there. Manufacturing within the United States border, national security, supply chain. All of these things were in the article And you start to say, makes sense. It makes a lot of sense. The hiccup, I think from me reading it, goes back to all the podcasts we probably had in the last year that all said, we're talking about culture, we're talking about people, we're talking about training, we're talking about who has the skillset. And there's nothing in the article about any of that.

[00:02:07.830] - Dan Paulson

No. No.

[00:02:09.470] - Rich Veltre

So that's where I read the article and said, okay, very interesting. And I can see both sides. I can see good, and I can see evil.

[00:02:22.470] - Dan Paulson

You are the soothsayer who is- I can see all...

[00:02:27.240] - Rich Veltre

Like I said, I can see all the good. I can see creating jobs. I can I can see creating jobs. I just don't know if they'll be fully filled. And if these are state of the art semiconductor fabricating plants, how much of it's going to be robotic? And it's not really going to add that many jobs because it's going to be somebody who's got an advanced education in robotics or in... Because these are manufacturing processes that I'm sure I don't know. I deal with numbers, not with how to build a microchip. So I think there's a little bit of a skepticism there. And then there's always the skepticism of, where are these things being built? Where are we getting these plants? Suddenly, I think half of them are in Arizona. So that doesn't raise flags of why did it get to Arizona. Right.

[00:03:21.860] - Dan Paulson

Well, I think there's also a plant being built in, it's either Indiana or Ohio. Intel is building one up there. Like you, I I see potential good that could come out of this. With the government, though, I don't see a lot. There's a lot of people out there that can complain about crony capitalism. And to me, In some ways, this is the government, again, choosing, in some cases, winners, losers. And I don't know, like you said, the people are going to be hired are mostly skilled labor and highly skilled labor at that. So it's going to be people that have degrees upon degrees who understand all this stuff. Now, funny enough, I have toured a microchip plant. When I was doing some stuff over in China, I actually got to walk through one and see all the stuff that's going on. Now, Chinese have At the time, they had a lot of people working these plants, but there was a lot of robotics along with it, too. It does require a lot of technology to produce these things, and they've gotten even more advanced in the time that I It was touring that plant till now.

[00:04:32.840] - Dan Paulson

But we start throwing billions of dollars at stuff. The things that always pop into my head is, okay, where are these billions coming from? The obvious answer is out of our pocket. So Our taxes are basically paying for that subsidy. And will it lead to the result that they promise? And I have yet to see a situation where the government's promises have never really, have ever really reached their full potential of what they said they were going to do. In most cases, it tends to create more problems. Now, should we have production over here? Most definitely. I think if there's one thing we've learned over the last couple of years, isolating production of especially critical components to a lot of things, such as microchips are in one area of the world that is also potentially volatile, isn't always a good thing. Is this the best way to bring jobs back? It's going to bring a few, but I don't think it's going to bring as many as they think it is. It's a huge investment to put up these plants, not to mention they suck a lot of energy. We often forget about what's the cost of producing a microchip, and it's not cheap.

[00:05:50.120] - Dan Paulson

I mean, there's a lot of electricity that goes into making those things little and working and all that good stuff. So I find it really hard, and I pulled up the article here, look at it, 8.5 billion to Intel. I didn't look up Intel's profit margins from last year, but I don't think they needed that. I'm pretty sure they were okay. Tsmc, I know less about. They got 6.6 billion, Micron, 6.1 billion, Samsung, 6.4 billion. And Samsung isn't even a US company.

[00:06:30.260] - Rich Veltre

I saw that. So where's that money going? That sparked a bit.

[00:06:35.150] - Dan Paulson

Yeah. And then global foundries. That looks like a US-based company. I mean, three of the five that are in this graphic are US-based companies.

[00:06:45.150] - Rich Veltre

Well, the other one, here's the other rub before you change the scene, right? Yeah. The TSMC, I think we don't know a lot about it because I believe it's a Taiwanese company. I don't think they're a US company either, although it's Taiwan.

[00:07:02.220] - Dan Paulson

Well, Taiwan is a much closer ally than mainland China is. That's for sure. I believe Taiwan right now is the largest producer of microchips in the world. I could be wrong on that. If they're not the largest, they're pretty darn close. They're definitely one of the top ones. I think they're in South Korea are some of the bigger ones. China is, of course, catching up rapidly because they produce a lot of... They're getting more into advanced technology. So that's going to be a challenge. But to show this again, Intel has massive plans, massive now that they're getting six billion from the government. They're receiving the largest share of the pie with 8.5 billion in grants, plus additional 11 billion in government loans. Now, government loans are usually very low interest loans. And on top of that, sometimes they're forgivable. So keep that in mind, folks. Oh, yeah. Here's where we go with things. The grants account for 22 % of the act's total subsidies for chip production. Intel is expected to invest $100 billion to construct plants in Arizona, Ohio, New Mexico, and Oregon. And this is all Also seeking the $25 billion in tax credits.

[00:08:19.290] - Dan Paulson

Okay, so we're giving them $8 billion. We're adding on another $25 billion in tax credits. That $100 billion, I'm assuming it's coming out of that $100 billion. I don't think the $100 billion is in addition to. That's a pretty good chunk of money that's coming out of the government pockets. Wouldn't we all like to get a billion dollars or a couple of billion dollars? We were talking before we got on here. I'm like, if government wants to give me six billion dollars, I'll let them tax it at 50 %. They can go ahead and have half of it back. I'll be fine with the other half. I'd be good.

[00:08:55.160] - Rich Veltre

Yeah, sure. I can work with that. I can turn it into something. I could probably I build a semiconductor plant.

[00:09:03.110] - Dan Paulson

Probably could.

[00:09:04.610] - Rich Veltre

I probably could.

[00:09:06.350] - Dan Paulson

That's Biden hikes tariffs to China made EVs. While this wasn't directly related, I did find this interesting. Because of all the talks of tariffs over the number of years, and this does relate to the semiconductor production as well, because they're increasing tariffs on that. So they're trying to offset competition by significantly raising the cost of the materials that they would be getting from that companies would be getting from China for this. So again, here we play this political game. We're subsidizing in one area, we're raising taxes higher in another area, hopefully to circumvent that competition from happening. And not so sure that's going to work out the way we wanted to either. I mean, there was a lot of talk when Trump was President about his tariffs and whether or not they actually worked. You're the financial guy. You tell me, are tariffs a good thing or are they not? I'm sure you could probably sit on the fence again and say, well, it's good and it's bad or it's good and it's evil. But I typically don't see a lot of promise for tariffs, because if anything, it slows down the evolution of products and services and technology and all that stuff.

[00:10:22.560] - Rich Veltre

I don't necessarily think that tariffs are the answer. I First of all, tariffs, penalties. I never understood when a tariff or a penalty is put in, and that puts more of our money into the government's hands. It doesn't go back to you. You're the person who suffered to cause them to be penalized, but then the government takes the money. How did that work? So when Trump did I thought something had to be done, because I think China was at a point that everything that I saw seemed to indicate China felt that they were invincible, and so they could do whatever they wanted. And up until Trump, I think nobody ever told them no. And when somebody finally said no, whether he said it in the right way or not, or whether his intentions were even the right answer, somebody said no, and China hiccuped. They literally did, I think, see that there was a chance here that somebody might actually say, This is no good. Because for 20 years, all we've done is ship all kinds of stuff over there. And then we got garbage back. So we got garbage products. We're paying more money than we should have because we're getting it manufactured somewhere else.

[00:11:53.530] - Rich Veltre

We should be getting a discount. We're not. We said it a week or two ago, the United States consumer is what? Three quarters, two thirds, somewhere in that range of our entire economy comes from people within the United States. So somebody's got to make them happy. So tariffs don't really do that. Tariffs just create an opportunity for someone to say, well, we're going to work slower and we're going to increase prices in order to cover the tariff. So the government found a way to tax us without actually saying, hey, we're taxing you.

[00:12:29.970] - Dan Paulson

It's that whole pass-through thing. They talk about trickle-down economics and how that doesn't work. Well, this is trickle-down taxation, and that works just fine. I've been reading on some of these EVs that China is developing. They've got a $10,000 car EV. Now, I think it was made by BYD. I have ridden in BYD cars. They're the equivalent of the old Hyundai Accent that you bought back 20 years ago. I mean, they tend to be cheaply made. They look cheap, they're small, but they tend to be somewhat efficient. Now, the ones I wrote in were all gas because that's EV wasn't a big thing at that time. I'm now dating myself. But Still, if it's a $10,000 car and Biden's talking about putting $100,000 tariff on it, it's a $20,000 car. And you might say, well, that's a lot. But go out and price a new car on the market today. How many cars are at $20,000? And I think you'll only find the one from BYD with the 100 % tariff on it. So I guess the theme of all this is, should the government be involved in business? Should they be able to pull the strings on, again, who's going to win, who's going to lose?

[00:13:52.070] - Dan Paulson

Typically, we see when government makes investments, it's to protect large businesses, not to protect the little guy. And on top it all, what they're doing forces us to evolve at a much slower rate. So instead of being competitive, we rely on things like tariffs and subsidies to make us, not make us grow at all. Go backwards in time. And I can look at the agriculture industry because I grew up on a farm. I can look at the automotive industry from the early '70s to early the early '90s. They were backpedaling. They were going backwards because they couldn't keep up with Honda and Toyota and Subaru and all these other car companies that were making cheap, relatively reliable and efficient vehicles. And we were still driving around in the big gas guzzling landouts. So it really slows down the process. It's not helping us be more competitive on a world scale. Yeah.

[00:14:57.620] - Rich Veltre

The EV is definitely big piece because it seems like that's the way that these cars operate, these new cars or whatever, are all operating on wrapping this together, the semiconductors, right? One of the reasons we couldn't get cars for a while was the fact that there were no chips. So the answer now is, okay, well, we're going to build plants that can make the chips. Well, number one, how long is it going to be?

[00:15:24.630] - Dan Paulson

I think three to five years is the estimate before we have a plant that's up and running.

[00:15:28.990] - Rich Veltre

So three to five In the meantime, you're not telling us anything about pricing being assisted, because I know if I go buy a car, there's got to be... I don't know how many chips there are in the car actually running it. Whether it's gas or EV doesn't matter to me, right? If I go look for a car today, it's got a number of chips in it. On top of the fact that if I go for a washer dryer, if I go for any other appliance- Your toaster has more technology in it than the first moon capsule. Exactly. So So the problem is when those people didn't have the chips and the cars went scarce, the prices of the cars went up. Did the price of the car come down since then? Now that there's chips available? No. Will they come down if we put $85 million, billion, trillion worth of... Because you know the number is not set yet. You're going to go back to them and say, We don't have enough money. So this is going to go higher than what was in the original bill. And when they do that, they're going to indicate that, hey, guess what?

[00:16:34.700] - Rich Veltre

Cars aren't available again because we're not able to get the chips. So when they finally get the chips, are you telling me that the Fords and the car makers that are out there are going to lower the prices of cars? I've never seen them lower the price of a car. A truck that I went to look at, just a pickup truck, normal. Yeah, it was a little souped up because that's just me, right? But I went to look at it and it was like $70,000.

[00:17:04.280] - Dan Paulson

You actually got to find a cheap one. You should buy that. Because I priced about at $90,000 to $100,000. That's even moving beyond a half ton pickup truck.

[00:17:13.300] - Rich Veltre

Yeah. I mean, it went to $90,000 now. You go look at the same truck, and I'm only talking about a year or two ago. I'm talking a very short window ago. That car went up from 70 to 90. So how are you telling me that this goes into the macroeconomic plan for the American people? I struggle. I struggle with that a lot because you're not giving me something that says to me, I can put myself behind that. I'm full of skepticism and sarcasm.

[00:17:46.630] - Dan Paulson

If I can get that one out with a- I appreciate your skepticism and your sarcasm. And I just looked it up. So on average, you'll find anywhere from 1,000 to 3,000 semiconductor chips in a typical vehicle.

[00:18:00.320] - Rich Veltre

A thousand?

[00:18:01.510] - Dan Paulson

One thousand to three thousand, depending upon the vehicle. So when you factor all that into play, I mean, even 20 years ago, the number was probably less than half of that. You basically have a computer on four wheels. That's really what it's come down to. And I will speak personally to that because I bought a car last year, and it is a rolling computer. And if anything goes wrong with it, I'm not going to know how to fix it because it's all controlled by different computer components and microchips and everything else, which then also means somebody else has to fix it for you. That requires a tech. Now we go back to Jay Gunnan in his discussion earlier this year, where you're going to have basically a highly trained computer geek that also knows how to wrench on a car working on your vehicle. And they're going to be making several hundred dollars an hour to do that. And what are you going to do? You're going to pay them.

[00:18:55.750] - Rich Veltre

Yeah. And then you flip that conversation into the next conversation when you started talking about EVs. I haven't seen an EV that's actually cheap.

[00:19:10.780] - Dan Paulson

No.

[00:19:12.080] - Rich Veltre

Not here. Not here.

[00:19:15.470] - Dan Paulson

Because they build those on a premium, too.

[00:19:18.090] - Rich Veltre

The people who are really interested in the saving gas, they can't afford an EV. It's too expensive. So you haven't cured that by building this. You haven't It showed me how you're curing that by putting the chip manufacturing plant here.

[00:19:36.300] - Dan Paulson

Yeah. Well, to that point with the EVs, a lot of the success that's happening with EVs is the subsidies that are put on those as well. So whether it's Tesla or Ford or Chevy or any of these companies that are building electric vehicles right now, everything from carbon tax credits to subsidizing, if you buy a car, you get $7,000 off of it from the government for a tax break. But you're still talking about a $60,000 to $100,000 vehicle in most cases. So where does that put you? It doesn't really... Some people, I'm sure it helps plenty, but typically they're the people that could afford the 60 to $100,000 car anyway. It's not the guy that lives in an apartment that's making 30 to $40,000 to $40,000 a year that's going to go out and buy an EV at this point, let alone where is he going to plug the darn thing in at if he lives in an apartment. In most cases, that's not an option Well, that's the truth, too.

[00:20:33.060] - Rich Veltre

And then on top of that, then you get into the whole conversation about the infrastructure and can it handle everybody running around with an EV? Then you're going to have the subsidies that go into, hey, we have to help out the power company because they need to revamp their grid so they can actually charge your EV. Yeah. Come on.

[00:20:55.790] - Dan Paulson

So it's just a tangled web of government and tax breaks and loans and whatnot. I guess I'm not opposed to stuff like that when it's happening more on a micro level. For example, TIF districts. I think a lot of cases, TIF districts are very helpful to promote new job growth and creation, attract businesses into the area. I will put an asterisk by that because it's not always as competitive as we think it would be. But it gives an opportunity maybe for some smaller medium-sized businesses to gain some footing and grow on their own by just giving them a tax break on the land for three to five years before they start paying into it. And the government also is looking at that, too, and looking at if it does create jobs, well, those people are going to live in the area. They're also going to pay back local state taxes. So there's something that they're recouping there fairly quickly when that plant comes online. But when you get to the federal level, there's a lot more that the feds can wheel than, say, a city or a county government can. And that's where we run into problems, where there's that push by bigger government to, again, control the marketplace.

[00:22:12.950] - Dan Paulson

And any time they get involved, I think it really hurts capitalism. And then all these issues that people complain about, I don't care which side of the fence you sit on, this is what you get. Yeah.

[00:22:23.410] - Rich Veltre

I always refer to the federal government as somebody in a very narrow street trying to make a K-turn in a tractor trailer. That's what I feel like when I think about the government, because they have to plot stuff out and they never do. And then imagine the mess that they make when they make a knee-jerk reaction, trying to do something quickly, and they didn't plan for it. So as it is, they operate on information that's eight years old.

[00:22:50.090] - Dan Paulson

Yes, very true. And the other part we're also dealing with is we have, I think, as close to $35 trillion in national debt. That's got to get paid off. Right now, we're paying what over a trillion dollars a year in interest alone. So I think it's the second or third line item on the federal budget is interest repayment. Well, if you're doing grants You're giving companies money. Where's that money coming from again? That's coming from our taxes. That's coming from that deficit. And that just pushes it that much higher. So we're getting a double and triple whammy, everything from inflation to increase our own personal taxes to whatever else that happens with all that.

[00:23:34.660] - Rich Veltre

Yeah, absolutely. And then when they're printing the money for themselves, that doesn't help. That raises in inflation. And then the feds trying to fight against that. So it's almost like when you want to sit down and think about it, you really want your head to explode. Think about that. Think about the fact that one part of the government is actually printing the money that's creating inflation. And then there's another part of government that's actually trying to raise interest rates to stop the inflation that's being created by the people printing the money. So just somebody slap their right-hand with their left hand, and maybe we can actually get something done.

[00:24:18.250] - Dan Paulson

Exactly. I mean, it's like a game of three card Monte. Find where the ace is or the Jack. And instead of playing with three cards, so you're playing with 10, and you're battling against an ocupus because they're just moving that money all over the place, which, like you said, makes your head explode when you try to say, well, it's coming out of this pocket, it's going into that pocket, but it's not staying in that pocket, it's moving over to that pocket. And it's just a shuffle game all the way around.

[00:24:45.290] - Rich Veltre

Sorry. I don't mean to laugh.

[00:24:47.210] - Dan Paulson

Oh, no, that's quite all right. It is quite funny.

[00:24:51.100] - Rich Veltre

It makes you laugh. It really does. It makes you laugh. So at least now, I'll laugh for now. Tomorrow, I'll cry. But at least for today, I'm still laughing.

[00:25:02.940] - Dan Paulson

We're sitting here and we're griping about what's going on, which is fine. I'm not a big one to gripe, because if you're going to gripe, you better come up with solutions. And I'm not saying our solutions would be right. But Rich, from a financial guy standpoint, what would you say might be a better move than government involvement and subsidies to pick winners?

[00:25:27.590] - Rich Veltre

It's a much longer conversation, I'm sure. I am very, very big. I work for a big firm. I've seen what other big firms do. I've seen what big companies do. I see how inefficient it gets at the very, very big level. My curiosity is, isn't there somewhere that you could come up with a way that the little guy or the middle guy? Little guy is probably too small. That probably doesn't make any sense. But isn't there a way to incentivize the middle guy more than we already do? I mean, throwing $2,000 at somebody that's already making $250,000 or $300,000 a profit, that's not helping them. That's not helping them come to another level of thinking that actually solves problems. At that level of income, they're just looking to feed their family and live through the life in the promised land that we all believe the United States is. And don't get me wrong, I think it is. I don't have any desire to go live in another country. But I think that there should be more incentivized programs for the middle market, the people who are going to actually create the jobs, and not create the jobs so they can lay a whole bunch of people off, and then hire them back, and then lay them off again, and hire.

[00:26:43.130] - Rich Veltre

I mean, it gets to be such a vicious cycle that you start to wonder, do they ever get anything done? So that's what I'm wondering. I'm always wondering if there's a better answer for an incentive for the middle market, because I think they'll just flat out surprise you. I think they'll come up with a solution that fixes a lot of things and you're not giving them the shot.

[00:27:06.680] - Dan Paulson

That is a good point. And I do agree with you on that. I think if you're going to put money anywhere, if you have to, put it in the small to medium size companies or at the very least, work on funding maybe promising startups. Startups are, of course, very risky. But you point out a lot of these smaller businesses that they're not going to grow to be like an Intel or something. But you look at HP and you look at Amazon and all those companies pretty much started in a garage at one point. Timing is everything, though. I think each one came along at its own right time. What's better to me is business owners working together to collectively figure out what is the timing of the market for what type of product. Is it AI now, for example? We've talked about that. There's some things where that's going to be helpful. There's other things where I think it's more hype than anything else. But if it's manufacturing like this, are there more efficient ways to manufacture that we can do it on small scale here and then ramp up that scale over time? I mean, it's going to take time to build a chip plant anyway.

[00:28:13.740] - Dan Paulson

Why not invest in somebody who has a better idea on how to do it, even if it's fully automated? I think we also have to look at our strengths as a country, all the way down to the city level or county level, and figure out where can we be competitive? And we should focus on that. We have endless resources here. We have right now a shortage of talent, but there is good talent out there that is trying to solve these problems. And I would rather see investments in areas that show promise, than just giving it to a big organization. And then we'll complain five years from now when chip prices have tripled, because cost of labor is so much higher here, and it really hasn't trickled down to us. Each site has its own version of trickled down economics. One is just more involved in the government and taxation side. But that's neither here nor there at this point. So that's what I see. I think there's plenty of opportunity out there. It just when you get the government involved, it makes it harder for the smaller and medium guys to compete.

[00:29:19.340] - Rich Veltre

Yeah. Totally, totally agree.

[00:29:25.410] - Dan Paulson

But if you are a company that's looking for some competition or get ahead in your market, Rich, you are the expert financial guru of all time. How should they get a hold of you if they need to get their finances in check and build financial strategies to help them expand when the government's not going to give them six billion dollars?

[00:29:46.140] - Rich Veltre

Email, quick email is always the best way to make an intro, and we could have a quick conversation. It's rveltre@veltregroup.com.

[00:29:54.290] - Dan Paulson

Thank you. And for me, just go to danpaulsonletsgo.com, where Rich will fix the finances. I'll work on the operational side, and maybe we can lower some of your costs and increase your profits that way. So Rich, it's always been fun. And we got a special guest next week, which I will be sending out an announcement very soon. But thanks again, and we will talk to you later.

[00:30:16.230] - Rich Veltre

All right, everybody. Take care.

[00:30:18.400] - Dan Paulson

All right. Bye.