Sam Altman’s vision to remake the chip industry needs more than money

OpenAI CEO Sam Altman has in recent weeks met the US commerce secretary and other officials to discuss his ambitions.
OpenAI CEO Sam Altman has in recent weeks met the US commerce secretary and other officials to discuss his ambitions.

Summary

Obstacles include staffing, a cyclical market and a lack of viable chip makers.

OpenAI Chief Executive Sam Altman’s plan to reshape the global semiconductor industry envisions pouring vast sums into a challenge that is far more complicated than money.

Manufacturing chips is enormously capital intensive. It is also one of the most intricately complex industries in the world with a history of sharp cyclical swings that have made companies wary of radical expansion.

It took decades for the world’s most advanced chip makers to reach their current heights. Some chip companies faltered during one of the industry’s notorious downturns, like in the early and middle 2010s. Others stopped developing cutting-edge chips along the way, wary of high costs and the high risk of failure.

There are now only three companies in the world capable of making the most cutting-edge chips—including the processors used to power AI systems—in large volumes: Taiwan Semiconductor Manufacturing Co., Samsung Electronics and Intel.

Altman has held discussions with chip makers about joining with them and using trillions of dollars to build and operate new factories, along with investments in energy and other AI infrastructure. Many of the world’s largest chip companies, including Nvidia, design their chips but outsource their production to companies such as TSMC.

Building a cutting-edge chip factory typically costs at least $10 billion. But even with that, the scale Altman is discussing is extreme: Stacy Rasgon, an analyst at Bernstein Research, estimates that a little more than $1 trillion had been spent on chip-manufacturing equipment in the entire history of the industry.

Money, however, isn’t the only ingredient needed to succeed in one of the most complex forms of manufacturing in existence.

There are uncertainties about finding the engineers to operate a rash of new factories, obtaining the machinery to fill the plants and securing enough orders to justify them, industry executives say. China’s government poured capital for decades into building a chip industry, but its progress was hindered by some of those other factors.

“The semiconductor industry doesn’t lack funding," said Jimmy Goodrich, a semiconductor-industry expert and senior adviser to Rand Corp. “Look at China—they’ve thrown over $150 billion at their industry, and it hasn’t worked. The fundamental challenge is that this technology is incredibly hard."

Even if a large number of new chip factories were built, it wouldn’t necessarily solve Altman’s nearer-term problem—a shortage of AI chips needed to produce systems such as OpenAI’s ChatGPT. The biggest bottleneck in the production of Nvidia’s AI chips has been in packaging, a manufacturing step that comes after the circuits are imprinted on silicon.

Altman has also complained about the cost of Nvidia’s chips—another problem Raymond James analyst Srini Pajjuri said more chip factories might not solve.

“For AI chip prices to come down, we need more competition to Nvidia," he said.

More factories are under construction. All of the biggest chip makers are spending tens of billions of dollars on them, pacing their expansions with expectations that global chip sales will surpass $1 trillion by 2030. TSMC has ramped up from about 10 million silicon wafers a year in 2016 to 16 million last year.

If Altman’s plan were successful, chip insiders say it would likely oversupply the market, driving prices down and leading companies to run factories significantly under their manufacturing capacity, a financial death knell in the industry because of its high fixed costs.

“Now they are investing, and as it comes online demand goes away," said Bernstein’s Rasgon, explaining how the industry grows in spurts. “It always happens because quite often it turns out the demand you are building for wasn’t real in the first place. Hence the endless cycle."

The industry’s current spurt is being aided by governments across the globe that are pitching in, recognizing the importance of chips to their technological, economic and military supremacy. The U.S. is plowing $39 billion of grants into new plants following the passage of the Chips Act two years ago, seeking to rebuild an industry that decamped for Asia in recent decades.

The scale of funding Altman is contemplating would dwarf the incentives being put forth in the U.S. and elsewhere, including in China, Taiwan, South Korea and Japan.

Altman has met in recent weeks with U.S. Commerce Secretary Gina Raimondo and other U.S. officials to discuss his ambitions, according to people familiar with the discussions. Raimondo is overseeing the distribution of grants under the Chips Act.

After a flurry of recent interactions with chip companies, Altman is set to appear at an event later this month for Intel’s contract chip-making business. Intel is expected to be a major recipient of Chips Act grant money to be awarded in the coming weeks.

It is unclear how Altman would find the talent to staff dozens of new factories. The Semiconductor Industry Association expects 115,000 jobs to be created by the end of the decade, 58% of which risk going unfilled. And it is uncertain that he could source enough manufacturing equipment in a reasonable time frame. Lead times on some chip-making equipment are around two years.

Making chips presents different challenges than Altman has faced in his earlier ventures, industry insiders say, many of which have involved computers and software.

“In software, anything is possible—it really just is a money and coding problem," Goodrich said. “However, in the world of hard tech, you actually have to deal with the laws of physics. You have to think about the real world and engineering challenges, and this stuff is hard to do."

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