US Semiconductor Leadership – Can we correct years of missteps?

Spike Narayan-

Spike Narayan

Spike Narayan is a seasoned hi-tech executive managing exploratory research in science and technology at IBM.

On July 26 the United States Senate voted to advance a bill to subsidize U.S.-made semiconductor chips. This past week (July 19, 2022) the U.S. Senate held a procedural vote to advance a new version of Chips for America Act in an attempt to correct years of neglect by the Executive and Legislative branches of our government. Before we get into exactly what this Act is all about and what it means for us, let us take a trip back in time.

In 1985 the U.S. had a dominant position in semiconductor research and manufacturing. The leadership spanned all facets of semiconductors including memory chips (DRAM – Dynamic Random Access Memory) and microprocessors. All flavors of semiconductor chips were experiencing rapid growth and hardware start-ups were in vogue and were able to attract venture funding. In parallel, Moore’s Law was aggressively driving down the cost of manufacturing chips helping fuel exponential growth in the number of chips sold. The number of transistors, the basic unit of computation, was basically doubling every 18 months or so and consequently the computational capability was seeing a similar exponential increase. Even though the costs of semiconductor chips were decreasing due to Moore’s law, the cost of building a factory was very steep. This argued for economies of scale where very large factories could amortize costs by manufacturing chips for dozens of customers. This resulted in a smaller number of factories, and unfortunately many were no longer in the U.S.

According to the Semiconductor Industry Association (SIA) The U.S. share of global semiconductor manufacturing capacity was approaching 40% in the late 1980s but it eroded from 37% in 1990 to 12% today. Since the cost of building a semiconductor fab was excessive many of the hardware start-ups turned to third party foundries for manufacturing their chips. To make matters worse the industry transitioned from 200mm wafers to 300mm wafers in the early 2000s which dramatically increased the cost of building a fab which drove even more companies to outsource their manufacturing. The pure-play foundries were springing up in Asia mostly because their countries’ governments invested ambitiously in chip manufacturing incentives and the U.S. government did not. In fact, three-quarters of the world’s chip manufacturing capacity is now concentrated in East Asia, with China projected to command the largest share of global production by 2030, due to its government’s massive investments in this sector. According to IC Insights in Dec 2020, Taiwan led the world with over 21% of the semiconductor wafer capacity with Korea coming in a close second with just over 20%. Japan and China came in 3rd and 4th with about 15% each. North America rounded out the top 5 with about 12%. This trend of semiconductor manufacturing moving overseas did not create enough of a red flag, in the U.S., to warrant any concrete actions by our government. There appeared to be a sense of comfort with globalization in many industry segments and semiconductors were no exception.

Fast forward to the year 2020. Chip shortages hit multiple industries all at the same time with little to no warning signals it seems. While the industry had already been broadcasting supply issues the average public did not feel the effects until they could no longer walk into a car dealership and buy a car of their choice. The same was true of buying appliances and laptops that were back ordered due to chip shortages. According to an SIA 2020 report if you look at chip demand by industry segments it might surprise the reader that the chip demand in the communications, consumer, industrial automation, and automotive sectors together is twice the demand for computer products! One telling comparison is the computer chip market in 2020 was ~$140B and the automotive market alone was $50B. How surprising is that? What this told us was that our dependence on foreign-made semiconductor chips was alarming and scary.

The disturbing shortages nationwide finally was a wake-up call for our politicians who awoke from decades-long slumber to address our chip dependencies by passing the USICA bill in the Senate on June 8, 2021.

According to a press release from SIA – Senate passage of USICA is a pivotal step toward strengthening U.S. semiconductor production and innovation and an indication of the strong, bipartisan support in Washington for ensuring sustained American leadership in science and technology,” said John Neuffer, SIA president and CEO. “We applaud Sens. Schumer, Cornyn, Warner, Young, Kelly, Cotton, and others for their leadership in promoting federal investments in U.S. semiconductor manufacturing, research, and design and commend today’s Senate approval of these provisions in USICA. We call on the House to swiftly pass needed federal investments in domestic chip technology and send legislation to the President’s desk to be signed into law. Enactment of these investments would help strengthen America’s economy, national security, technology leadership, and global competitiveness for years to come.”

Twenty days later on Jun 28, 2021 the house passed the National Science Foundation for the Future Act to regain U.S. leadership in science and technology research. One of the points made in the Act clearly states,As countries around the world increase investments in research and STEM education, United States global leadership in science and engineering is eroding, posing significant risks to economic competitiveness, national security, and public well-being.”. It took nearly a year after that for the congress and the senate to agree on a starter version called Chips for America Act which can start releasing funding to address this shortage for the longer term. The SIA issued a press release on July 19, 2022 when the senate finally passed this act. Two other geopolitical events accelerated our sense of urgency to reduce foreign dependence. The first was the Ukraine war which highlighted the global energy interdependence and showed how the equation can change overnight while the other is the geopolitical tension in the Taiwan Strait which can have a devastating effect on the global semiconductor chip supply chain. Remember a fifth of the world’s chips come from Taiwan.

What this initial funding will do is target $52B to address both researches in and manufacturing of semiconductor chips in the U.S. While nearly $40B will be earmarked for manufacturing in the U.S. nearly $12B will go to advance our national research agenda in this field. In response to this funding, two activities are likely to happen. One, American companies will use the money to build domestic fabs and two, foreign companies will get in on the act by standing up factories in the U.S. In both cases, huge employment opportunities will present itself to us. For example, Intel is gearing up to build new chip fabs in Ohio while TSMC (a Taiwanese chip manufacturer) is working towards a state of the art US factory.

In summary, the executive and legislative branches of our government have finally understood the urgency of dramatically reducing our semiconductor chip supply dependence on foreign manufacturers as it has an impact on nearly all industry segments let alone national security. It is my hope that this is not too little too late but can jump-start the shift of manufacturing capacity to North America in the very near future.