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Investors eye U.S. chip startups while feds put pressure on Taiwan

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OAKLAND, Calif. — Silicon Valley venture capitalists, long focused on software and internet companies, are again pouring money into the semiconductor industry, lured by the promise of a new generation of artificial-intelligence chips that could challenge incumbents like Intel and Nvidia.

The new wave of semiconductor innovation will do little to address the shortage of chips based on older technology that is currently plaguing the auto industry and others. The shortage stems from a confluence of factors as carmakers, which shut plants during the COVID-19 pandemic last year, compete against the sprawling consumer electronics industry for chip supplies.

The enthusiasm for chip startups is mostly a result of the need, by companies using AI software, for special-purpose processors that can efficiently run machine-learning algorithms requiring huge troves of data – the heart of the booming artificial-intelligence business.

Upstart chip-makers including SambaNova Systems, Groq, and Cerebras Systems all say they are making chips that can perform AI tasks better than processors from Nvidia, whose multipurpose graphics chip sets — originally made for video games — now dominate the AI market.

“How can a car be good at being fun to drive and good to take the kids and soccer balls to soccer practice and carry freight and bricks and garbage? The answer is it can’t,” said Andrew Feldman, co-founder and CEO of Cerebras Systems, arguing that AI algorithms need specific chips rather than chips that can serve multiple purposes.

Cerebras’ innovation is a very large chip, 56 times the size of a postage stamp, that packs 2.6 trillion transistors.

Gartner analyst Alan Priestley has counted over 50 firms now developing chips specifically for AI applications, and said there may be more. He expects the market to be worth over $70 billion by 2025, up from $23 billion in 2020.

Venture funding for U.S. chip startups reached $1.8 billion last year, the highest level in at least two decades, according to data firm PitchBook. Another $1.4 billion has already been invested this year.

In April alone, SambaNova said it raised $676 million for its reconfigurable AI chips. Groq, which boasts of a super-powerful single-core design that is fast and easy to program, announced it had raised $300 million. The CEOs of both companies told Reuters the funding rounds were bigger than planned due to strong investor interest.

All this activity is coming as the U.S. government finalizes new subsidy programs to support the domestic chip industry. Andy Rappaport, a new board member of Groq who has invested in chips for decades, believes the geopolitical instability and competition between the United States and China could even drive venture capital firms to invest not just in chip design companies but even manufacturing. “If the federal government wants to goose my returns and underwrite my risk, then you could see a credible scenario where a new manufacturing player could emerge,” he said.

That, in turn, could trigger even more bets on chip-design firms. “If I knew manufacturing was no longer an issue, it makes it easier for me to invest in the IC companies,” said venture capitalist Hany Nada of ACME Capital, referring to integrated circuit, or chip, suppliers.

Ironically, with AI chips it is getting easier for AI algorithms to improve chip manufacturing, bring costs down, and open up manufacturing again to startups, said Matthew Putman, who started Nanotronics in 2011 to do exactly that, and had an early investment from Peter Thiel’s Founders Fund.

By 2019, Nanotronics had raised about $90 million. And Putnam is no longer worried about where funding will come from.

“In 2013 or 2014 when I would go in and literally if you didn’t have an app or any kind of enterprise SaaS software, you wouldn’t even get past the receptionist,” he said, adding that was even after Founders Fund had invested. “That has changed, a lot.”

Meanwhile, the U.S. Commerce Department is pressing Taiwan Semiconductor Manufacturing Co Ltd and other Taiwanese firms to prioritize the needs of U.S. automakers to ease chip shortages in the near term, Commerce Secretary Gina Raimondo said.

Raimondo told a Council of the Americas event on Tuesday that longer term, increased investment was needed to produce more semiconductors in the United States and that other critical supply chains needed re-shoring, including to allied countries.

“We’re working hard to see if we can get the Taiwanese and TSMC, which is a big company there, to, you know, prioritize the needs of our auto companies since there’s so many American jobs on the line,” Raimondo said in response to a question from a General Motors Co executive.

“As I said, there’s not a day goes by that we don’t push on that,” she said, adding the medium- and long-term solution would be “simply making more chips in America.”

On Wednesday, TSMC said that tackling the shortage remained its top priority.

“TSMC has been working with all parties to alleviate the automotive chip supply shortage, we understand it is a shared concern of the worldwide automotive industry,” it said in a statement to Reuters.

Last month, Chief Executive C C Wei said TSMC had worked with customers since January to reallocate more capacity to support the auto industry, but the shortage worsened due to a snowstorm in Texas and a fab manufacturing disruption in Japan.

Wei expected the chip shortage for the firm’s auto clients to be greatly reduced from the next quarter.

Taiwan Economy Minister Wang Mei-hua told lawmakers in Taipei that many countries had sought help from the government and TSMC.

“However, TSMC has a commercial mechanism and must comply with commercial norms,” she said on Wednesday, without elaborating.

The Commerce Department plans a meeting with automakers next week on the chip shortage issue, said officials briefed on the matter. A Commerce Department spokesman declined to comment.

United Auto Workers Legislative Director Josh Nassar said in written testimony for a U.S. House hearing on Wednesday that the chip shortage had brought layoffs of “tens of thousands of workers.”

He added, “Clearly, we need to bolster domestic production of automotive-quality semiconductors.”

Last week, Ford warned the chip shortage might slash second-quarter production by half, costing it about $2.5 billion and about 1.1 million units of lost production in 2021.

On Friday, GM said it would extend production halts at several North American factories because of the shortage.

On April 12, President Joe Biden convened semiconductor and auto industry executives to discuss solutions to the crisis. He backs $50 billion to support U.S. chip making and research.

(Reporting by David Lawder and David Shepardson in Washington, Jane Lanhee Lee in Oakland, Calif.; Additional reporting by Ben Blanchard, Yimou Lee and Jeanny Kao in Taipei; Editing by Stephen Coates, Clarence Fernandez, Jonathan Weber and Matthew Lewis)

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