New Challenges for U.S. Semiconductor Industry
Spencer, William J., Issues in Science and Technology
The United States faces a growing threat to its leadership of the world semiconductor industry. A combination of market forces and foreign industrial policies is creating powerful incentives to shift new chip production offshore. If this trend continues, the U.S. lead in chip manufacturing, equipment, and design may well erode, with important and unpleasant consequences for U.S. productivity growth and, ultimately, the country's economic and military security. To address this challenge, U.S. industry and the government need to cooperate to determine their response.
As challenges tied to the industry's move toward ever-smaller dimensions have intensified, governments in Asia and Europe have moved vigorously to coordinate and fund research in both product and process technologies. The scale of these efforts is unprecedented. A recent U.S. National Research Council report, Securing the Future, identified 16 major government-sponsored initiatives at the national and regional [i.e., European Union (EU)] level, a number of them receiving more than $100 million annually in support. Some have been inspired by the success of SEMATECH, the formerly U.S.-only consortium of semiconductor device makers widely credited with helping to pull the U.S. industry out of its tailspin in the late 1980s. What is odd is that although governments abroad have embraced consortia modeled on SEMATECH as a means of supporting national and regional industries, today the United States has no comparable publicly supported effort, even as the technological hurdles faced by this enabling industry continue to grow.
Compounding the heightened competition in research has been the dramatic increase in the cost of new fabrication facilities (fabs) that has accompanied growth in the sophistication and scale of manufacturing. The evolving economics of production have also spawned a new business model, the foundry, which may test even the most agile of the vertically integrated U.S. chip makers. Turning out integrated circuits under contract for firms that work exclusively in device design, including leading U.S. firms, foundries provide relatively low-cost products for "fabless" companies that need high-performance fabrication but are unable or unwilling to invest the $2 billion-plus it now takes to build a new plant.
Until recently, most foundries were operating or planned for construction in Taiwan, where the government has aided the industry with a variety of measures that include generous tax breaks. Just in the past few years, however, China has stepped forward, matching Taiwan's incentives and trumping them with a rebate of most of the value-added tax (VAT) on chips designed or manufactured in China. In a major shift, the Chinese semiconductor industry is now drawing massively on Taiwanese capital and skilled management, as well as attracting investments from the United States and elsewhere.
Key among the policy tools put to work by China, in cooperation with regional authorities in Shanghai and elsewhere, is highly favorable tax treatment for plants, equipment, and skilled personnel. Yet it is the rebate of the VAT for Chinese products that seems to be having the strongest effect on this capital-intensive industry. This measure may ultimately be declared in contravention of World Trade Organization rules, but for now construction of chip-fabrication capacity in China is projected to boom. Of paramount importance for the future of the U.S. semiconductor industry is the extent to which Chinese government policy will determine the location of the industry, and its supply base, before there is a U.S. response.
Why does the industry matter?
Some may ask whether it matters if the U.S. economy has a robust and growing semiconductor industry. The short answer is that it does. The semiconductor's powerful impact on productivity growth in the U.S. economy, through improved information technologies and the industry's own productivity gains, is now generally acknowledged. …