Semiconductor expansion may require smart capital spending processes

Author: Deidra DenDanto

Semiconductor companies are building manufacturing capacity at feverish pace with new fabs expected by 2025, and nine in the United States alone. Deloitte estimates the cost of building one fab starts at $10B with an additional $5B of costsⁱⁱ for machinery and equipmentⁱⁱⁱ. Additionally, overall capex costs have grown over 1.5x from 2019 to 2022 and will likely slow a bit as chip growth and the global economy slow^iv.

Figure 1: By the numbers: Potential costs of building a new leading edge fab

The US CHIPS Act, which provides $52 billion in funding for the building, growth, and modernization of the semiconductor industry, is meant to encourage semiconductor companies to grow domestic production capacity, rather than ceding it to foreign locations^v. At the same time, the EU CHIPS Act is trying to grow European capacity by a similar amount.^vi Since the US and EU CHIPS Acts are just the tip of the investment iceberg, semiconductor manufacturers should improve capital investment processes, capital allocation decisions, and accountability for performance.

To help ensure capital is being spent on the right priorities at the right time, chip companies may find value from:

• Setting capital allocation targets
• Optimizing portfolio management
• Managing capital project delivery
• Managing capital asset lifecycle

Many organizations struggle to optimize deployed capital due to disconnected data, operating models with loose accountability and misaligned metrics (what, when and how to measure). As semiconductor supply chains transition to connected datasets, real time visibility of the supply chain network will likely become an expectation. CFOs and COOs should commit capital wisely and drive improvements in their organization’s capital allocation, planning, deployment, expenditure and asset management processes to determine if they are getting the most value from their investments. 

Since capital allocation is one of the most important decision-making responsibilities of an organization, senior management should consider modernizing and optimizing processes, integrating tools and systems, digitising, and leveraging end to end lifecycle data to help transform how they deploy capital and deliver on the corporate vision. 

Capital expenditures should be prioritized and aligned to global market conditions. Monitoring and managing how much, when, and how efficiently capital is being invested may be required for internal decision making and external disclosures. Effective use of available funding could require organizations to strengthen operational discipline and financial metrics to confirm that deployed capital is aligned with strategic priorities while providing real time visibility into investment status, project progress, and production to proactively monitor and adjust mid to long-term priorities based on market conditions. 

Capital Transformation could start with understanding the current state of Capital management and scope of play; determining which areas within Capital you may want to focus and develop a roadmap to execute. Understanding Capital Process Maturity, your organizational operating model, technology enablement landscape, data strategy and performance measures of success can help drive digital transformation.

Figure 2: Capital Framework Considerations to Maximize Value Creation^vii

Constructing the right foundational data model could also be important to connect capital investments, to automate the planning processes, and to inform decisions. 

Effectively managing and monitoring deployed capital may require processes, tools and systems to be integrated into the enterprise performance process. This could enable analytics to generate insights into:

• Capital Optimization: Provides insight into capital productivity, inactive assets, asset utilization and return on invested capital (ROIC)
• Assets Under Construction (AUC): Measures the total value of all capital assets for which ownership has transferred to goods received, but are not yet in use or currently depreciating
• Project performance: Measures whether a project has met its KPIs
• Asset utilization: Measures the percentage of assets that are still active
• Availability of excess capital: Shows the capital that is currently not scheduled for production
  

Personalized dashboards to monitor important capital performance metrics could allow organizations to be more agile and responsive to the market.

As funds become available from the CHIPS Acts, it is expected that companies will engage in smart planning practices and track long-term capital allocation strategies capital investments by considering:

• Establishing an iterative capital budgeting process that allocates funding down to the direct ownership level
• Developing an effective data driven project prioritization methodology that quantifies value and risk considerations
• Implementing a capital management governance structure with clear roles and responsibilities

How Deloitte Can Help

Improving capital processes could facilitate insights and reporting for effective management and new statutory disclosures aligned to funding sources.

Deloitte has advised companies on how they can optimize their capital allocation, capital investment and asset management processes, develop data driven decision models, plan, execute and manage major capital projects and help get their troubled projects back on track.  

As organizations improve Enterprise Capital Capabilities they will begin to unlock value that impacts monitoring, reporting and responding to internal and external demands.

Figure 3: Capabilities to Unlock and Optimize Capital Allocations

Deloitte assists semiconductor companies in designing and implementing end-to-end solutions to optimize deployed capital, unlock capacity and improve cash flow.

Contact us today for help transforming your capital capabilities into a world class competitive advantage and maximize the value of your capital.

ⁱ U.S. Semiconductor Renaissance: All the Upcoming Fabs | Tom's Hardware (tomshardware.com) 

ⁱⁱ Tooling up the CHIPS Act | Deloitte US 

ⁱⁱⁱ Equipment includes lithography, etching, deposition, implantation and metrology. 

^iv Semiconductor industry capital expenditure 2023 | Statista 

^v FACT SHEET: CHIPS and Science Act Will Lower Costs, Create Jobs, Strengthen Supply Chains, and Counter China | The White House 

^vi Europe's semiconductor chip shortage | Deloitte Insights 

^vii Based on Deloitte analysis