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How Did Taiwan Replace Silicon Valley as the Chip Manufacturing Capital?

photorandy2023

I have written several articles on postings related to Big Tech, Social Media and Corporations. A list of links have been provided at bottom of this article for your convenience. This article will, however address different aspects on these Industries.

In case you did not know Taiwan, officially the Republic of China (ROC), is a country in East Asia, at the junction of the East and South China Seas in the northwestern Pacific … is currently kicking our asses in chip production. To be honest I did not know this, so now I understand why our government is going to spend so much money in Silicon Valley on semiconductor production. We can not allow this to continue, especially with our mortal enemy China trying to take over this country. I am writing a companion article on what would happen to the US if China does take over Taiwan. In the mean time, lets see how we dropped the ball. If we know what we did wrong maybe we can correct the problem and stop it from happening again in the future. In order to figure out the US lost its place as chip making king we first need to discuss Silicon Valley.

Silicon Valley is a region in Northern California that serves as a global center for high technology and innovation. Located in the southern part of the San Francisco Bay Area, it corresponds roughly to the geographical areas San Mateo County, Santa Clara County and Alameda County. San Jose is Silicon Valley’s largest city, the third-largest in California, and the tenth-largest in the United States; other major Silicon Valley cities include Sunnyvale, Santa Clara, Redwood City, Mountain View, Palo Alto, Menlo Park, Cupertino and Fremont. The San Jose Metropolitan Area has the third-highest GDP per capita in the world (after Zurich, Switzerland and Oslo, Norway), according to the Brookings Institution,[4] and, as of June 2021, has the highest percentage of homes valued at $1 million or more in the United States.

Silicon Valley is home to many of the world’s largest high-tech corporations, including the headquarters of more than 30 businesses in the Fortune 1000, and thousands of startup companies. Silicon Valley also accounts for one-third of all of the venture capital investment in the United States, which has helped it to become a leading hub and startup ecosystem for high-tech innovation. It was in Silicon Valley that the silicon-based integrated circuit, the microprocessor, and the microcomputer, among other technologies, were developed. As of 2021, the region employed about a half million information technology workers.

As more high-tech companies were established across San Jose and the Santa Clara Valley, and then north towards the Bay Area’s two other major cities, San Francisco and Oakland, the term “Silicon Valley” came to have two definitions: a narrower geographic one, referring to Santa Clara County and southeastern San Mateo County, and a metonymical definition referring to high-tech businesses in the entire Bay Area. The term Silicon Valley is often used as a synecdoche for the American high-technology economic sector. The name also became a global synonym for leading high-tech research and enterprises, and thus inspired similarly named locations, as well as research parks and technology centers with comparable structures all around the world. Many headquarters of tech companies in Silicon Valley have become hotspots for tourism. More recently, intensifying droughts in California have further strained the Silicon Valley region’s water security.

Etymology

Silicon Valley derives its name from the silicon used in transistors and computer chips, pioneered in the region in the 20th century.

The word “silicon” in the name originally referred to the large number of innovators and manufacturers in the region specializing in silicon-based transistors and integrated circuit chips.

The popularization of the name is credited to Don Hoefler. He first used it in the article “Silicon Valley USA”, which appeared in the January 11, 1971 issue of the weekly trade newspaper Electronic News. However, the term did not gain widespread use until the early 1980s, at the time of the introduction of the IBM PC and numerous related hardware and software products to the consumer market.

History

Silicon Valley was born through the intersection of several contributing factors including a skilled science research base housed in area universities, plentiful venture capital, and steady U.S. Department of Defense spending. Stanford University leadership was especially important in the valley’s early development. Together these elements formed the basis of its growth and success.

Early military origins

he Bay Area had long been a major site of United States Navy research and technology. In 1909, Charles Herrold started the first radio station in the United States with regularly scheduled programming in San Jose. Later that year, Stanford University graduate Cyril Elwell purchased the U.S. patents for Poulsen arc radio transmission technology and founded the Federal Telegraph Corporation (FTC) in Palo Alto. Over the next decade, the FTC created the world’s first global radio communication system, and signed a contract with the Navy in 1912.

In 1933, Air Base Sunnyvale, California, was commissioned by the United States Government for use as a Naval Air Station (NAS) to house the airship USS Macon in Hangar One. The station was renamed NAS Moffett Field, and between 1933 and 1947, U.S. Navy blimps were based there.

A number of technology firms had set up shop in the area around Moffett Field to serve the Navy. When the Navy gave up its airship ambitions and moved most of its west coast operations to San Diego, the National Advisory Committee for Aeronautics (NACA, forerunner of NASA) took over portions of Moffett Field for aeronautics research. Many of the original companies stayed, while new ones moved in. The immediate area was soon filled with aerospace firms, such as Lockheed, which was Silicon Valley’s largest employer from the 1950s into 1980s.

Role of Stanford University

Stanford University, its affiliates, and graduates have played a major role in the development of this area. A very powerful sense of regional solidarity accompanied the rise of Silicon Valley. From the 1890s, Stanford University’s leaders saw its mission as service to the (American) West and shaped the school accordingly. At the same time, the perceived exploitation of the West at the hands of eastern interests fueled booster-like attempts to build self-sufficient local industry. Thus regionalism helped align Stanford’s interests with those of the area’s high-tech firms for the first fifty years of Silicon Valley’s development.

Frederick Terman, as Stanford University’s dean of the school of engineering from 1946, encouraged faculty and graduates to start their own companies. In 1951 Terman spearheaded the formation of Stanford Industrial Park (now Stanford Research Park, an area surrounding Page Mill Road, south west of El Camino Real and extending beyond Foothill Expressway to Arastradero Road), where the university leased portions of its land to high-tech firms. Terman is credited with nurturing companies like Hewlett-Packard, Varian Associates, Eastman Kodak, General Electric, Lockheed Corporation, and other high-tech firms, until what would become Silicon Valley grew up around the Stanford University campus.

After World War II, universities experienced enormous demand due to returning students. In 1951, to address the financial demands of Stanford’s growth requirements, and to provide local employment-opportunities for graduating students, Frederick Terman proposed leasing Stanford’s lands for use as an office park named the Stanford Industrial Park (later Stanford Research Park). Leases were limited to high-technology companies. The first tenant was Varian Associates, founded by Stanford alumni in the 1930s to build military-radar components. Terman also found venture capital for civilian-technology start-ups. Hewlett-Packard became one of the major success-stories. Founded in 1939 in Packard’s garage by Stanford graduates Bill Hewlett and David Packard, Hewlett-Packard moved its offices into the Stanford Research Park shortly after 1953. In 1954 Stanford originated the Honors Cooperative Program to allow full-time employees of the companies to pursue graduate degrees from the university on a part-time basis. The initial companies signed five-year agreements in which they would pay double the tuition for each student in order to cover the costs. Hewlett-Packard has become the largest personal-computer manufacturer in the world, and transformed the home-printing market when it released the first thermal drop-on-demand ink-jet printer in 1984. Other early tenants included Eastman Kodak, General Electric, and Lockheed.

Rise of Silicon

In 1956, William Shockley, the co-inventor of the first working transistor (with John Bardeen and Walter Houser Brattain), moved from New Jersey to Mountain View, California, to start Shockley Semiconductor Laboratory to live closer to his ailing mother in Palo Alto. Shockley’s work served as the basis for many electronic developments for decades. Both Frederick Terman and William Shockley are often called “the father of Silicon Valley”. In 1953, William Shockley left Bell Labs in a disagreement over the handling of the invention of the bipolar transistor. After returning to California Institute of Technology for a short while, Shockley moved to Mountain View, California, in 1956, and founded Shockley Semiconductor Laboratory. Unlike many other researchers who used germanium as the semiconductor material, Shockley believed that silicon was the better material for making transistors. Shockley intended to replace the current transistor with a new three-element design (today known as the Shockley diode), but the design was considerably more difficult to build than the “simple” transistor. In 1957, Shockley decided to end research on the silicon transistor. As a result of Shockley’s abusive management style, eight engineers left the company to form Fairchild Semiconductor; Shockley referred to them as the “traitorous eight“. Two of the original employees of Fairchild Semiconductor, Robert Noyce and Gordon Moore, would go on to found Intel.

In 1957, Mohamed Atalla at Bell Labs developed the process of silicon surface passivation by thermal oxidation, which electrically stabilized silicon surface and reduced the concentration of electronic states at the surface. This enabled silicon to surpass the conductivity and performance of germanium, leading to silicon replacing germanium as the dominant semiconductor material, and paving the way for the mass-production of silicon semiconductor devices. This led to Atalla inventing the MOSFET (metal-oxide-silicon field-effect transistor), also known as the MOS transistor, with his colleague Dawon Kahng in 1959. It was the first truly compact transistor that could be miniaturised and mass-produced for a wide range of uses, and is credited with starting the silicon revolution.

The MOSFET was initially overlooked and ignored by Bell Labs in favour of bipolar transistors, which led to Atalla resigning from Bell Labs and joining Hewlett-Packard in 1961.[36] However, the MOSFET generated significant interest at RCA and Fairchild Semiconductor. In late 1960, Karl Zaininger and Charles Meuller fabricated a MOSFET at RCA, and Chih-Tang Sah built an MOS-controlled tetrode at Fairchild. MOS devices were later commercialized by General Microelectronics and Fairchild in 1964. The development of MOS technology became the focus of startup companies in California, such as Fairchild and Intel, fuelling the technological and economic growth of what would later be called Silicon Valley.

Following the 1959 inventions of the monolithic integrated circuit (IC) chip by Robert Noyce at Fairchild, and the MOSFET (MOS transistor) by Mohamed Atalla and Dawon Kahng at Bell Labs, Atalla first proposed the concept of the MOS integrated circuit (MOS IC) chip in 1960, and then the first commercial MOS IC was introduced by General Microelectronics in 1964. The development of the MOS IC led to the invention of the microprocessor, incorporating the functions of a computer‘s central processing unit (CPU) on a single integrated circuit. The first single-chip microprocessor was the Intel 4004, designed and realized by Federico Faggin along with Ted Hoff, Masatoshi Shima and Stanley Mazor at Intel in 1971. In April 1974, Intel released the Intel 8080, a “computer on a chip”, “the first truly usable microprocessor”.

Origins of the Internet

On April 23, 1963, J. C. R. Licklider, the first director of the Information Processing Techniques Office (IPTO) at The Pentagon‘s ARPA issued an office memorandum addressed to Members and Affiliates of the Intergalactic Computer Network. It rescheduled a meeting in Palo Alto regarding his vision of a computer network, which he imagined as an electronic commons open to all, the main and essential medium of informational interaction for governments, institutions, corporations, and individuals. As head of IPTO from 1962 to 1964, “Licklider initiated three of the most important developments in information technology: the creation of computer science departments at several major universities, time-sharing, and networking.” In 1969, the Stanford Research Institute (now SRI International), operated one of the four original nodes that comprised ARPANET, predecessor to the Internet.

Emergence of venture capital

By the early 1970s, there were many semiconductor companies in the area, computer firms using their devices, and programming and service companies serving both. Industrial space was plentiful and housing was still inexpensive. Growth during this era was fueled by the emergence of venture capital on Sand Hill Road, beginning with Kleiner Perkins and Sequoia Capital in 1972; the availability of venture capital exploded after the successful $1.3 billion IPO of Apple Computer in December 1980. Since the 1980s, Silicon Valley has been home to the largest concentration of venture capital firms in the world.

In 1971, Don Hoefler traced the origins of Silicon Valley firms, including via investments from Fairchild‘s eight co-founders. The key investors in Kleiner Perkins and Sequoia Capital were from the same group, directly leading to Tech Crunch 2014 estimate of 92 public firms of 130 related listed firms then worth over US$2.1 Trillion with over 2,000 firms traced back to them.

Rise of computer culture

The Homebrew Computer Club was an informal group of electronic enthusiasts and technically minded hobbyists who gathered to trade parts, circuits, and information pertaining to DIY construction of computing devices. It was started by Gordon French and Fred Moore who met at the Community Computer Center in Menlo Park. They both were interested in maintaining a regular, open forum for people to get together to work on making computers more accessible to everyone.

The first meeting was held as of March 1975 at French’s garage in Menlo Park, San Mateo County, California; which was on occasion of the arrival of the MITS Altair microcomputer, the first unit sent to the area for review by People’s Computer Company. Steve Wozniak and Steve Jobs credit that first meeting with inspiring them to design the original Apple I and (successor) Apple II computers. As a result, the first preview of the Apple I was given at the Homebrew Computer Club. Subsequent meetings were held at an auditorium at the Stanford Linear Accelerator Center.

Advent of software

Although semiconductors are still a major component of the area’s economy, Silicon Valley has been most famous in recent years for innovations in software and Internet services. Silicon Valley has significantly influenced computer operating systems, software, and user interfaces.

Using money from NASA, the US Air Force, and ARPA, Douglas Engelbart invented the mouse and hypertext-based collaboration tools in the mid-1960s and 1970s while at Stanford Research Institute (now SRI International), first publicly demonstrated in 1968 in what is now known as The Mother of All Demos. Engelbart’s Augmentation Research Center at SRI was also involved in launching the ARPANET (precursor to the Internet) and starting the Network Information enter (now InterNIC). Xerox hired some of Engelbart’s best researchers beginning in the early 1970s. In turn, in the 1970s and 1980s, Xerox’s Palo Alto Research Center (PARC) played a pivotal role in object-oriented programming, graphical user interfaces (GUIs), Ethernet, PostScript, and laser printers.

While Xerox marketed equipment using its technologies, for the most part its technologies flourished elsewhere. The diaspora of Xerox inventions led directly to 3Com and Adobe Systems, and indirectly to Cisco, Apple Computer, and Microsoft. Apple’s Macintosh GUI was largely a result of Steve Jobs‘ visit to PARC and the subsequent hiring of key personnel. Cisco’s impetus stemmed from the need to route a variety of protocols over Stanford University‘s Ethernet campus network.

Internet age

Commercial use of the Internet became practical and grew slowly throughout the early 1990s. In 1995, commercial use of the Internet grew substantially and the initial wave of internet startups, Amazon.com, eBay, and the predecessor to Craigslist began operations.

Silicon Valley is generally considered to have been the center of the dot-com bubble, which started in the mid-1990s and collapsed after the NASDAQ stock market began to decline dramatically in April 2000. During the bubble era, real estate prices reached unprecedented levels. For a brief time, Sand Hill Road was home to the most expensive commercial real estate in the world, and the booming economy resulted in severe traffic congestion.

The PayPal Mafia is sometimes credited with inspiring the re-emergence of consumer-focused Internet companies after the dot-com bust of 2001. After the dot-com crash, Silicon Valley continues to maintain its status as one of the top research and development centers in the world. A 2006 The Wall Street Journal story found that 12 of the 20 most inventive towns in America were in California, and 10 of those were in Silicon Valley. San Jose led the list with 3,867 utility patents filed in 2005, and number two was Sunnyvale, at 1,881 utility patents. Silicon Valley is also home to a significant number of “Unicorn” ventures, referring to startup companies whose valuation has exceeded $1 billion dollars.

Economy

The San Francisco Bay Area has the largest concentration of high-tech companies in the United States, at 387,000 high-tech jobs, of which Silicon Valley accounts for 225,300 high-tech jobs. Silicon Valley has the highest concentration of high-tech workers of any metropolitan area, with 285.9 out of every 1,000 private-sector workers. Silicon Valley has the highest average high-tech salary in the United States at $144,800. Largely a result of the high technology sector, the San Jose-Sunnyvale-Santa Clara, CA Metropolitan Statistical Area has the most millionaires and the most billionaires in the United States per capita.

The region is the biggest high-tech manufacturing center in the United States. The unemployment rate of the region was 9.4% in January 2009 and has decreased to a record low of 2.7% as of August 2019. Silicon Valley received 41% of all U.S. venture investment in 2011, and 46% in 2012. More traditional industries also recognize the potential of high-tech development, and several car manufacturers have opened offices in Silicon Valley to capitalize on its entrepreneurial ecosystem.

Manufacture of transistors is, or was, the core industry in Silicon Valley. The production workforce was for the most part composed of Asian and Latino immigrants who were paid low wages and worked in hazardous conditions due to the chemicals used in the manufacture of integrated circuits. Technical, engineering, design, and administrative staffs were in large part well compensated.

Housing

Silicon Valley has a severe housing shortage, caused by the market imbalance between jobs created and housing units built: from 2010 to 2015, many more jobs have been created than housing units built. (400,000 jobs, 60,000 housing units) This shortage has driven home prices extremely high, far out of the range of production workers. As of 2016 a two-bedroom apartment rented for about $2,500 while the median home price was about $1 million. The Financial Post called Silicon Valley the most expensive U.S. housing region. Homelessness is a problem with housing beyond the reach of middle-income residents; there is little shelter space other than in San Jose which, as of 2015, was making an effort to develop shelters by renovating old hotels.

The Economist also attributes the high cost of living to the success of the industries in this region. Although, this rift between high and low salaries is driving many residents out who can no longer afford to live there. In the Bay Area, the number of residents planning to leave within the next several years has had an increase of 35% since 2016, from 34% to 46%.

Notable companies

Thousands of high technology companies are headquartered in Silicon Valley. Among those, the following are in the Fortune 1000:

Additional notable companies headquartered in Silicon Valley (some of which are defunct, subsumed, or relocated) include:

Demographics

Depending on what geographic regions are included in the meaning of the term, the population of Silicon Valley is between 3.5 and 4 million. A 1999 study by AnnaLee Saxenian for the Public Policy Institute of California reported that a third of Silicon Valley scientists and engineers were immigrants and that nearly a quarter of Silicon Valley’s high-technology firms since 1980 were run by Chinese (17 percent) or Indian descent CEOs (7 percent). There is a stratum of well-compensated technical employees and managers, including 10s of thousands of “single-digit millionaires”. This income and range of assets will support a middle-class lifestyle in Silicon Valley.

Diversity

In November 2006, the University of California, Davis released a report analyzing business leadership by women within the state. The report showed that although 103 of the 400 largest public companies headquartered in California were located in Santa Clara County (the most of all counties), only 8.8% of Silicon Valley companies had women CEOs.  This was the lowest percentage in the state. (San Francisco County had 19.2% and Marin County had 18.5%.)

Silicon Valley tech leadership positions are occupied almost exclusively by men. This is also represented in the number of new companies founded by women as well as the number of women-lead startups that receive venture capital funding. Wadhwa said he believes that a contributing factor is a lack of parental encouragement to study science and engineering. He also cited a lack of women role models and noted that most famous tech leaders—like Bill Gates, Steve Jobs, and Mark Zuckerberg—are men.

In 2014, tech companies Google, Yahoo!, Facebook, Apple, and others, released corporate transparency reports that offered detailed employee breakdowns. In May, Google said 17% of its tech employees worldwide were women, and, in the U.S., 1% of its tech workers were black and 2% were Hispanic. June 2014 brought reports from Yahoo! and Facebook. Yahoo! said that 15% of its tech jobs were held by women, 2% of its tech employees were black and 4% Hispanic. Facebook reported that 15% of its tech workforce was female, and 3% was Hispanic and 1% was black. In August, Apple reported that 80% of its global tech staff was male and that, in the U.S., 54% of its tech jobs were staffed by Caucasians and 23% by Asians. Soon after, USA Today published an article about Silicon Valley’s lack of tech-industry diversity, pointing out that it is largely white or Asian, and male. “Blacks and Hispanics are largely absent,” it reported, “and women are underrepresented in Silicon Valley—from giant companies to start-ups to venture capital firms.” Civil rights activist Jesse Jackson said of improving diversity in the tech industry, “This is the next step in the civil rights movement” while T. J. Rodgers has argued against Jackson’s assertions.

As of October 2014, some high-profile Silicon Valley firms were working actively to prepare and recruit women. Bloomberg reported that Apple, Facebook, Google, and Microsoft attended the 20th annual Grace Hopper Celebration of Women in Computing conference to actively recruit and potentially hire female engineers and technology experts. The same month, the second annual Platform Summit was held to discuss increasing racial and gender diversity in tech. As of April 2015 experienced women were engaged in creation of venture capital firms which leveraged women’s perspectives in funding of startups.

After UC Davis published its Study of California Women Business Leaders in November 2006, some San Jose Mercury News readers dismissed the possibility that sexism contributed in making Silicon Valley’s leadership gender gap the highest in the state. A January 2015 issue of Newsweek magazine featured an article detailing reports of sexism and misogyny in Silicon Valley. The article’s author, Nina Burleigh, asked, “Where were all these offended people when women like Heidi Roizen published accounts of having a venture capitalist stick her hand in his pants under a table while a deal was being discussed?”

Silicon Valley firms’ board of directors are composed of 15.7% women compared with 20.9% in the S&P 100.

The 2012 lawsuit Pao v. Kleiner Perkins was filed in San Francisco County Superior Court by executive Ellen Pao for gender discrimination against her employer, Kleiner Perkins. The case went to trial in February 2015. On March 27, 2015, the jury found in favor of Kleiner Perkins on all counts. Nevertheless, the case, which had wide press coverage, resulted in major advances in consciousness of gender discrimination on the part of venture capital and technology firms and their women employees. Two other cases have been filed against Facebook and Twitter.

Municipalities

The following Santa Clara County cities are traditionally considered to be in Silicon Valley (in alphabetical order):

The geographical boundaries of Silicon Valley have changed over the years. Historically, the term Silicon Valley was treated as synonymous with Santa Clara Valley, and then its meaning later evolved to refer to Santa Clara County plus adjacent regions in southern San Mateo County and southern Alameda County. However, over the years this geographical area has been expanded to include San Francisco County, Contra Costa County, and the northern parts of Alameda County and San Mateo County, this shift has occurred due to the expansion in the local economy and the development of new technologies.

The United States Department of Labor‘s Quarterly Census of Employment and Wages program defined Silicon Valley as the counties of Alameda, Contra Costa, San Francisco, San Mateo, Santa Clara, and Santa Cruz.

In 2015, MIT researchers developed a novel method for measuring which towns are home to startups with higher growth potential and this defines Silicon Valley to center on the municipalities of Menlo Park, Mountain View, Palo Alto, and Sunnyvale.

Education

Funding for public schools in upscale Silicon Valley communities such as Woodside is often supplemented by grants from private foundations set up for that purpose and funded by local residents. Schools in less affluent areas such as East Palo Alto must depend on state funding.

Colleges and universities

The Origins of Silicon Valley: Why and How It Happened

Silicon Valley is known to be unique, with its wealth of technology companies and different style of management. Why did Silicon Valley come into being? According to Paul Wesling, the story goes back to local Hams (amateur radio operators) trying to break RCA’s tube patents, early Stanford engineers, the sinking of the Titanic, Naval ship communications requirements, early “angel” investments, Fred Terman and Stanford University, local invention of high-power tubes (gammatron, klystron), WWII and radar, new approaches to running companies, and the San Francisco Bay Area infrastructure. These factors pretty much determined that the semiconductor and integrated circuit industries would be located in the Santa Clara Valley.

As we explore this exciting history of device technology development and innovation from 1909 through 1960, you will “meet” some of the colorful characters–Cyril Elwell, Lee DeForest, Bill Eitel, Charles Litton, Fred Terman, David Packard, Bill Hewlett and others–who set leadership patterns for the worldwide electronics industries through their inventions, process development, and allied management techniques. You will also learn about some current local organizations and movements, including Maker Faire and MeetUps, that keep alive the spirit of the radio Hams and the Homebrew Computer Club, where geeks gather to start new companies that invent the future.

Why Fewer Chips Say ‘Made in the U.S.A.’

More semiconductors are now manufactured in Asia than anywhere else. A chart-filled look at how that happened and what it means

In 1990, the U.S. and Europe produced more than three-quarters of the world’s semiconductors. Now, they produce less than a quarter. Japan, South Korea, Taiwan and China have risen to squeeze out the U.S. and Europe. And China is on pace to become the world’s largest chip producer by 2030.

The epicenter of chip production shifted partly because governments outside the U.S. offered often hefty financial incentives for factory construction to build up domestic industries. Chip companies also have been attracted by growing networks of suppliers outside of the U.S., and an expanding workforce of skilled engineers capable of operating expensive manufacturing machinery.

While manufacturing has left the U.S. in recent decades, many of the world’s largest chip companies are still U.S.-based. Intel Corp., INTC 1.42%▲ the largest American chip company by sales, does much of its manufacturing in the U.S., although it too has opened factories in places like Ireland, Israel and China. Other big U.S. chip companies, though, contract out all their manufacturing to Asian producers such as Taiwan Semiconductor Manufacturing Co. TSM 0.53%▲ Nvidia Corp., NVDA 1.98%▲ for example, which is based in Santa Clara, Calif., and is America’s biggest semiconductor company by market value, has its chips made largely outside the U.S. As of 2019, the share of semiconductor sales by U.S.-based companies was around 47%.

The growth of contract manufacturers like TSMC, the largest and most advanced of its kind, have helped speed the shift of chip-making outside the U.S. South Korea’s Samsung Electronics Co. SSNHZ 0.00%▲ is another big player in the contract chip-making business, and most of its factories aren’t in the U.S. The raw materials that go into chip-making, including industrial chemicals and silicon crystals, also largely come from outside the U.S.

The U.S. has kept a larger slice of the industrial pie in some other fields of chip-making—especially in ubiquitous software tools used to design the layout of chip circuitry.

The flight of high-tech manufacturing from the U.S. has been a theme for decades as supply chains and factories in Asia developed, taking advantage not just of government handouts but cheaper labor and less regulation. That exodus is particularly pronounced in computing hardware and consumer electronics, compared with other high-profile manufacturing sectors.

If things continue on their current trajectory, the U.S.’s share of chip-making is expected to shrink further in coming years, in part because China’s capacity is increasing quickly.

This trend has caused concern in Washington as the U.S.’s technological rivalry with Beijing heats up. China is pouring tens of billions of dollars into its chip industry, hoping to eventually match or surpass other countries.

Chips are increasingly being viewed across the globe as a national-security priority because of the powerful role they play not only in consumer technology but in militaries and cyberwarfare. The U.S. has placed new restrictions on China’s industry in recent years, including blacklisting Chinese telecom giant Huawei Technologies Co. and preventing some Chinese chip-makers from buying American manufacturing equipment without a license.

The coronavirus pandemic has given further impetus to a U.S. push to bring more of the chip-making industry back to American soil. Factory shutdowns because of the health crisis disrupted supply chains in Asia, fueling concern that the industry’s concentration there could impact U.S. access to a critical technology during times of crisis.

Analysts say U.S. government incentives could help to reverse that trend. A top chip-making factory—the kind that makes central processing units that go into computers—can easily cost more than $30 billion to build and operate for 10 years, analysts estimate. So financial assistance to defray some of those costs can change the calculus on whether to invest or not.

The U.S. historically hasn’t offered federal incentives to chip-making, although states do provide a variety of enticements for factory-building, including subsidized land and tax breaks. In Asia, by contrast, countries typically offer free or cheap land, and give more help with purchasing manufacturing equipment that accounts for most of the cost of chip-making.

Why America Will Lose Semiconductors

Tangible bi-partisan solutions for solving a national security crisis.

The US has always been the world leader in semiconductors: design, manufacturing, and the tools to produce them. Semiconductors are the base of all technological innovation in computing and information technology. Without them, companies such as Amazon, Google, Microsoft, Meta, Apple, and Tesla would not exist. The US has slowly been losing its dominance over the semiconductor industry over the last couple of decades. In recent years, the rate of loss has been accelerating. If it is lost, then the foundational building block of modern technology is lost, and the US will cede its overarching technology advantage. In this article we will discuss the major causes of this problem and offer solutions which should be bipartisan in nature.

Before we get into the problem, let’s talk about the current state of the US’s semiconductor dominance. Most of the largest semiconductor equipment, design, and software companies are based in the US or have critical engineering in the US. In the equipment space, Lam Research, Applied Materials, and KLA are based out of the US. ASML, the widely known leader in lithography, does much of their critical engineering for the EUV Source and EUV Collector out of San Diego. These technology assets and teams come from the acquisition of San Diego based Cymer. ASML pays royalties to the EUV-LLC whose membership includes multiple US national labs. Without these tools, it is impossible to manufacture chips.

The critical software needed to be used to design chips is called EDA and it all comes from the US. Cadence, Synopsys, and Mentor Graphics (now owned by Siemens) are located in the US. Without this software, it is impossible to design modern chips.

American companies like Texas Instruments and Intel hold leading market shares in their respective fields while manufacturing their own chips. The 4 largest companies that design chips for external sale and use contract manufacturers are also American. They are Qualcomm, Broadcom, Nvidia, and AMD.

But that dominance is shifting away to countries that pose as geopolitical risks. US share of chip manufacturing is at an all-time low. The US will lose the semiconductor industry unless immediate action is taken. This is a national security crisis.

The US has been the hallmark of innovation through entrepreneurship, education, and making large investments. All three of these tenets are eroding, partially due to the private market’s attitude and partially because the government’s policies incentivize certain behaviors. The shift is occurring in favor of countries that have favorable government policies, regulatory support, focus on STEM higher education, and a general cultural recognition of the importance of semiconductor manufacturing.

Entrepreneurialism in Semiconductors

Entrepreneurialism is what innovated and semiconductors in the first place. Ever since the invention of the transistor at Bell Labs, startups in Silicon Valley created and defined the modern semiconductor industry. Unfortunately, entrepreneurism in the semiconductor industry is falling away.

SemiEngineering.com, one of the leading publications in the semiconductor industry, tracks monthly semiconductor and semiconductor adjacent industry startup fundraising by company headquarters location. Their data is compiled in the table below for May, but other months look very similar. This trend is terrifying for prospects of American hardware dominance. Not only is most of the assembly done in China, but the most well-funded startups in the semiconductor field and the most IPOs in the semiconductor field are occurring there well.

While startups and IPOs don’t necessarily indicate innovation, they are one of the corner stones of it. Not all startups will succeed, and it’s very likely the stricter funding models of US based startups will mean they are more likely to succeed, but the disparity is a big issue. America isn’t the land of entrepreneurship anymore, despite continuing to dominate other areas of the world such as Europe. It’s China.

Why are there so few semiconductor startups in the US?

The US private market of venture capital and angel investing is completely off its rockers investing in software platform based “tech” companies. While this type of investing is fine, these same venture capital and angel investors have completely ignored the semiconductor and hardware space. We here at SemiAnalysis have seen it firsthand as we have helped a few firms in the semiconductor industry raise money. It’s extremely difficult to convince venture capitalists to invest in startups, even if they have promising technology and exceptional track records.

The private market has a strong prejudice against hardware startups. Semiconductors in general have higher startup costs, and the market potential is limited in comparison to a platform-based tech company. US based venture and angel investors that require them tend to think in terms of tens or hundreds of billions of dollars addressable markets. They want software platforms that can have a few dozen employees with the potential to scale to billions in revenue. There can only be so many Instagram’s, Uber’s, Shopify’s and Airbnb’s though. Hardware entrepreneurship is needed even if it doesn’t meet the wild dreams that US based venture and angel investors have. A friend of SemiAnalysis, Jay Goldberg has written about this phenomenon on his newsletter in posts titled Hard or Soft, and Hard or Soft with Math.

Semiconductor investments are a tragedy of the commons style of situation. No private entity will invest in basic infrastructure since no single entity will reap all possible rewards. Semiconductor manufacturing and design capacity are modern day infrastructure for technology and software, with the similar requirement that these kind of infrastructure projects require government incentives and regulatory support to thrive. The US government must assist the semiconductor startup industry by offering incubators and accelerators through the National Science Foundation.

Investment Crisis in Semiconductors

Startups are not the only place where investment is lacking. This problem exists at the largest firms as well. As such, US share of semiconductor R&D has dropped drastically and domestic chip production has fallen from 40% to below 15%. Investment is not encouraged by our financial markets or our government policies. We will showcase the plights of US policies, which incentivizes buybacks and dividends over investment, with a few examples.

First let’s discuss the crux of the issue. The chart below shows total semiconductor wafer fabrication equipment spending by region. It shows that China by far is building the most fabs, which is driven by their favorable tax and regulatory policies as well as massive subsidies. The US is a tiny share of worldwide spending. If the current rate of spending holds, then in a decade, the US will be fabricating less than 10% of the world’s semiconductors and China will be fabricating nearly 30% of them.

The US national, state, and local governments have created tax and regulatory policy that makes investing in new manufacturing capacity for semiconductors incredibly difficult. It takes mountains of money and many years to even get through the process of permitting and approval to being a project in the US. Furthermore, while these policies intend to protect the environment, they actually don’t. They simply slow down the process and increase costs.

This contrasts with other nations who offer tax credits and outsized deductions for investments in semiconductor tools. They offer streamlined processes for permitting and approval of the fabrication facility. They protect the environment with proactive punitive actions for polluting companies. They allow entire developments of new apartments, homes, and businesses to quickly crop up around semiconductor facilities, so workers do not have to spend huge portions of their paycheck on living expenses, which in turn lowers costs for companies and increases the standard of living for the entire community.

The US must make it more advantageous to a company’s stakeholders to invest heavily in new capacity instead of paying dividends and performing stock buybacks. One solution is by offering a permanent option for a 100% deduction of chip manufacturing equipment, tools, and other associated capital expenditures in the 1st year of purchase. Other industrial equipment such as trucks serve as precedent for such a policy.

To be clear, such a policy would only make one part of a multifaceted incentive package targeted at equalizing policy with other nations. China has gone as far as offering tax holiday for up to 10 years to domestic semiconductor companies. While such a drastic measure is unrealistic in the US, it should serve to underscore the criticality of policy changes needed when our biggest geopolitical rival is willing to take such a measure.

This gap in policy is what has caused Micron, the largest US based memory manufacturer, to offshore manufacturing out of the US. Micron now produces the majority of their memory chips in Singapore and Taiwan, despite their R&D hub and original manufacturing facilities being located in the United States. The two largest memory manufacturers in the world, SK Hynix and Samsung, are headquartered in South Korea. Although they are generally considered equal or behind Micron in technology, SK Hynix and Samsung hold larger market share. This is partially the byproduct of various South Korean semiconductor policies which incentivize larger investments in fabrication capacity. South Korea is only accelerating on their incentives in the semiconductor industry with their K-Belt initiative. This policy is a geographic ring-fenced low-tax and pro-R&D area with tool and R&D tax reimbursements.

Furthermore, a tax credit must be applied to R&D expenditures. Currently, US tax policy does not have one that matches many Asian nations. Instead, it incentivizes minimizing R&D as much as possible to fund stock buybacks, dividends, and financially engineered acquisitions.

Broadcom is an example of the broken US tax policy incentivizing the wrong behavior for the semiconductor industry. Although Broadcom has been a stellar stock to invest in and they still lead in some areas of technology, their innovation strategy has been very negative for the industry as a whole. Broadcom generally keeps a very tight lid on all expenses, including R&D growth. Meanwhile, they have increased prices for chips and software where they enjoy a near monopoly status. Lastly, they use these profits they generate to acquire more innovative leading companies with products and technologies that they can apply this formula to. The policy is colloquially known by those in the semiconductor industry and investors as the “Hock Tan Flywheel,” named after their CEO who engineered this strategy. We won’t even get into that time where they moved their headquarters to Singapore for a number of years for tax optimization, but it was also a result of poor US policy.

Another example of poor investment related policy is that of Intel in the prior decade. They were on top of the world in terms of semiconductors. Instead of innovating in new areas of semiconductors design and manufacturing, they focused on lowering capital expenditures and total spending as percentage of revenue. They used their profits to buy back shares and pay larger dividends. Shareholder elected board members who cheered on and specifically encouraged this behavior. There is certainly a lot more to the story of Intel’s downfall including technological missteps and a toxic corporate culture, but the flaws in US tax policy and financial markets were certainly a big contributor. Nowadays, Intel has realized their mistakes and cut stock buybacks to 0. They are investing every dollar they can, but they simply cannot hold a candle to the sheer scale of fab spending these other countries hero’s such as TSMC and Samsung.

An example of good targeted policy is with Wolfspeed and the state of New York. New York assisted Wolfspeed via tax reimbursements and other subsidies in order to build the world’s largest Silicon Carbide semiconductor fabrication facility. New York as a result is a world leader in a type of chip that is used heavily in electric vehicles, there were thousands of high paying jobs created, and the State University of New York has a full fledged program for research and education that prepares people for continued innovation in this field.

Education in Semiconductors

Even if the startups and production facilities were in the US, there is now a severe shortage of skilled workers in the field. By 2025, this shortage is projected to be as high as 300,000 workers. Educated and skilled personnel is a cornerstone of innovation, and without them, the job cannot be done.

Most Americans who pursue a higher education do so in a non-STEM field. While not a negative in and of itself, this is a huge concern when viewed in light of the expected growing shortage of skilled workers in the semiconductor industry. Over 5 million people were granted degrees/certificates at postsecondary institutions in the US, yet not even 1/5th were in STEM according to the chart below from Statista.

2/3 of STEM PHD students in the US are foreigners. They were able to get student visas for their education, yet many of them have a very difficult time immigrating after their education despite hoping to do so. China has nearly 5 million people graduating with STEM degrees annually, population size differences make the gap between China and the US impossible to fill with domestic population alone.

The US must make it easier for educated people around the world to immigrate. It was much easier at other points in US history, which was part of the recipe for the US outpacing the rest of the world in innovation. The concept of brain drain is very real, and the best and most qualified in the world must be allowed to move to the US.

China doesn’t just allow semiconductor workers to immigrate, they explicitly find people they want and go after it. There are multiple state owned enterprises which offer a highly specific and prestigious quality of life to engineers moving from Taiwan. They provide spacious accommodation near semiconductor hubs and personal tax advantages alongside the targeted immigration. Many of these amazing engineers from Taiwan would come to the US if they had the opportunity, even without the state sponsored lifestyle.

Furthermore, of the pool of US STEM graduates, the number specifically going to fields related to semiconductors, manufacturing or design, is a tiny fraction of the total. These semiconductor related STEM programs are vastly underfunded. The federal and state governments have not promoted them in any way. Meanwhile, competing nations have subsidized these programs to a massive degree. This in turn increases the total number of available minds dedicated to their respective semiconductor industry which then allows more innovations.

The US post-secondary education system subsidizes all degrees and certificates by generally the same amount even though there are some professions with large shortages of skilled workers. Our education system needs to account for the effective skill allocation based on industry gap in labor demand when subsidizing education costs or promoting certain fields.

The public and media perception of the field does not help with this matter either. Being a chip architect, process integration engineer, or board designer are not the career most children and young adults aspire to have. It’s just not sexy. Meanwhile China idolizes the semiconductor industry, going so far as to create a glorifying TV show.

Part of the lack of interest in semiconductors is due to the culture of repairing and tinkering with computing devices. Many in the semiconductor industry fell in love with the industry when they first opened up a computer. For example, my story of obsession with the semiconductor industry started when I got an Xbox 360 for Christmas. A few months later, it broke due to a defect known as the “Red Ring of Death”. After doing research online, I came across a home repair known as the “Penny Trick” which involves opening the device. This sparked my love for the industry. Unfortunately, the culture of repairing computers, game consoles, and smartphones, is dying in the western world due to a variety of legislative and company specific roadblocks.

In Taiwan and China, this culture flourishes. It is very easy to get parts for devices, whether it be displays, batteries, memory, or even entire mainboards. People can go the Guanghua market in Taipei City, Taiwan, Huaqiangbei in Shenzen, China, or numerous other markets across these countries and purchase any component or tools associated with repairing common consumer electronic devices.

Implementing right to repair policies would bring the US on par with these nations and should have bipartisan support. It is good for the consumer’s because they have more freedom of control over the devices they purchased and allows their devices to last longer. It is good for the environment because less electronic waste is produced. It is good for the semiconductor industry because it makes more people become interested in opening computers and becoming interested in how they work. Taiwan and China can do this because their governments allow the right to repair movement to flourish, and the US needs to match them if we want members of our youth to fall in love with this industry as well.

Actions Congress Must Take To Save The Semiconductor Industry

Congress must immediately pass multiple bi-partisan legislative efforts if it wants to bring the US semiconductor industry back to the forefront of the world.

Congress must immediately pass the CHIPS Act which was first introduced over 2 years ago. They should also add guardrail provisions that restrict any recipient of CHIPS act funds from reaching companies that are expanding in China. The $52B here is still a drop in the bucket compared to the over $250B of subsidies that SemiAnalysis has tallied up from the Chinese government in the form of tax policy, direct + indirect grants, local joint ventures, and subsidized loans, but it is a start.

Congress must immediately fix the US tax code to bring it on par with other nations whose companies currently have an unfair advantage. This can be achieved by implementing an optional 100% bonus depreciation for chip manufacturing equipment, tools to make wafer fabrication equipment, and other associated capital expenditures related to the design or production of semiconductors in the year of purchase. Congress must also implement a permanent tax credit for these groups of investments to match that of other east Asian countries.

Congress must immediately fix the US permitting and regulatory lock which severely lengthens the amount of time and increases costs for creating semiconductor manufacturing facilities.

Congress must immediately fix the R&D spending gap by adding a tax credit for R&D related to semiconductors.

Congress must immediately fix the startup crisis by directing the National Science Foundation to create a startup incubator and accelerator targeted to the semiconductor industry.

Congress must immediately fix the education disparity by funding semiconductor and semiconductor adjacent post-secondary education programs.

Congress must immediately fund and create a US based semiconductor research facility similar to Europe’s IMEC.

Congress must immediately fix the skilled semiconductor worker shortage by allowing skilled semiconductor workers to immigrate to the US.

Congress must immediately pass right to repair laws to increase interest in the hardware industry thereby increasing consumer freedom and protecting the environment.

Congress must immediately pass legislation to protect against state sponsored corporate espionage, forced IP transfers, and hacks in the semiconductor industry.

If these actions are taken, we are confident that the ingenuity and innovation of America can be unleashed, and the US can stay at the apex of the semiconductor industry. If these actions are not taken, we are confident that the US will further erode its leadership in an industry with ever increasing importance to national security.

How a small Taiwanese city transformed the global chip industry

HSINCHU, Taiwan — When Hsieh Chi-chia returned from the U.S. nearly 40 years ago to start a satellite parts company in the northern Taiwanese city of Hsinchu, he wondered at first if he had made a mistake.

The government had recently established the Hsinchu Science Park as a special industrial zone to attract high-tech industry and create a “Silicon Valley of Taiwan.” But there were problems.

“Can you imagine? You could see snakes in the dormitories of the science park and if you tried to shoot a film here, the only thing you could see were flies,” said Hsieh, the co-founder and now honorary chairman of Microelectronics Technology. “The school here could not find enough students. Really, no one wanted to live here when I got here.”

It was a rocky start for such a vital government project, but Hsieh, like others, now looks back on the past four decades with pride.

“My peers and I once wondered and doubted if we were right to come back from the U.S. to start companies here, and if it was going to work,” Hsieh said. “But now we are very proud to be part of the technology development.”

On Tuesday, Taiwan’s tech industry came together to share that sense of pride at an event marking the 40th anniversary of Hsinchu Science Park.

The special high-tech zone was established by government officials to lure world-class talent to what was then a poor tropical island. At the time, many engineers with Taiwanese connections were living and working in the U.S., and when the government called on them to help build up the domestic industry, they came.

The most prominent was Morris Chang, who, after a long career in the U.S. chip industry, came to Taiwan in 1985. Two years later, he founded Taiwan Semiconductor Manufacturing Co., now the world’s most valuable chip company.

At a recent event, Chang hailed Hsinchu Science Park as “one of the most important elements and ingredients to the great success of Taiwan’s tech and chip industry. If it were not for the science parks that offer all the infrastructure and land, a lot of tech companies may not be possible today.”

The industrial park in Hsinchu — pronounced Chu Ker in Chinese — has become synonymous with Taiwan’s flagship semiconductor industry, which ranks second only to the U.S. by revenue and serves almost all of the world’s tech giants, including Apple, Google, Qualcomm and Nvidia. The chip industry is even widely credited as the key reason the island’s economy has outperformed those of Japan, South Korea and Singapore during the coronavirus pandemic.

According to Wayne Wang, director-general of the science ministry’s Hsinchu Science Park Bureau, the special zone is on track to generate some 1.2 trillion New Taiwan dollars ($42.63 billion) this year, the highest in its history.

Such a forecast is perhaps not surprising considering how many tech giants Taiwan can lay claim to.

In addition to TSMC, Hsinchu is also home to MediaTek, the world’s second-largest mobile chip developer, and United Microelectronics Corp., Taiwan’s first homegrown chip producer and the world’s third-largest contract chipmaker. Computer maker Acer also set up a factory in Hsinchu, once a town renowned for its tea farms, in 1981. 

The strong performance of its tech sector also highlights Taiwan’s strategic position in the U.S.-China tech war. As Washington and Beijing attempt to untangle their supply chains, the island is becoming increasingly important as an alternative production base.

TSMC Chairman Mark Liu, speaking at Tuesday’s event, said: “Taiwan’s importance is really highlighted and elevated during these radical changes. … The world is seeing Taiwan’s significance as we have proven to the world that many Taiwanese companies are really the indispensable part of the global supply chain.”

In addition to driving Taiwan’s transformation into a global tech powerhouse, Hsinchu has also fueled the island’s economic growth. Companies registered in the Hsinchu Science Park generated a combined 1.091 trillion New Taiwan dollars in 2019, around 6% of Taiwan’s total gross domestic product and nearly 12% of the trade-reliant island’s exports. About 152,250 people worked in Hsinchu Science Park — less than 1% of the Taiwanese population — in 2019.

Taiwan’s gross domestic product surged more than 13 times to $612.1 billion in 2019 from $42.29 billion in 1980. Per capita gross national income jumped more than tenfold over the same period.

Two other science parks in the central and southern cities of Taichung and Tainan hope to replicate Hsinchu’s success. The three high-tech parks, which serve Taiwan’s flagship chip and display industries, generated a total NT$2.632 trillion in 2019 and contributed around 14% of Taiwan’s GDP. Of that, 65% was from semiconductors.

In Hsinchu, meanwhile, the success of Taiwan’s tech sector has transformed the city itself.

“Many of Taiwan’s richest villages and neighborhoods with highest average incomes surround Hsinchu Science Park. The most competitive high school is also inside the high-tech zone, a place where four decades ago no one wanted to live and no one expected it to succeed,” United Microelectronics honorary Vice Chairman John Hsuan said at an event on Monday.

Not bad for a place once known more for more snakes than semiconductors.

Geopolitics and the push for ‘made in the USA’ semiconductors

US and Taiwanese semiconductor powerhouses Intel and TSMC have both recently announced plans to build giant semiconductor plants in Arizona. The ‘reshoring’ of semiconductor chip production from Taiwan to the United States will change this essential industry and the geopolitics surrounding it.

Taiwan is the linchpin of the world’s supply of chips. In 2020, Taiwan’s TSMC constituted nearly 90 per cent of the market for advanced chips. Semiconductors power modern technology, including smartphones, cars, computers and a growing range of ‘smart’ devices. Both China and the United States, as well as others, are reliant on Taiwan’s manufacturing of semiconductors. In recent years, the Taiwanese semiconductor industry has attracted attention in light of US–China trade tensions and Taiwanese manufactures have sought to engage with both countries so as not to lose out on access to either of these massive markets.

In an effort to ease concerns about overdependence on Taiwan-based production, TSMC announced its commitment in May 2020 to build a US$12 billion semiconductor fabrication plant (known as fabs or foundries) in the south-western US state of Arizona. TSMC’s decision has also been made in an effort to shore up its access to the US market and in response to explicit US political pressure. Even with a transition to the Biden administration, as of yet, there are no signs of US–China tensions abating.

Since 2020, both the US and Taiwanese governments have spoken publicly about the war for technology supremacy and growing national security concerns over semiconductor supply chains. For instance, when German car makers — like their US counterparts — pressed Taiwanese chipmakers for semiconductors through diplomatic channels, some Taiwanese government officials hinted at trading chips in exchange for COVID-19 vaccines. For their part, the US and Japanese governments are cooperating to secure a supply chain for strategic technology components, including semiconductors, in an attempt to revolutionise supply and push for geopolitical balance.

The role of semiconductors in national politics in Taiwan has grown since President Tsai Ing-wen first took office in 2016. In her first term, key industry advocates lamented that the industry received minimal government support. The government’s flagship industrial plan, the 5+2 Innovative Industries Plan launched in 2017, did not specify support for semiconductors. But in President Tsai’s inaugural address in her second term in May 2020, she stressed that ‘we will take advantage of Taiwan’s strengths in the semiconductor and ICT industries to secure a central role in global supply chains’. Subsequently, the semiconductor industry has been included as one of her administration’s Six Core Strategic Industries.

Like TSMC, Intel has also expressed concerns about exposure to geopolitical disruptions and growing competition for high-tech talent. Earlier this year, Intel CEO Pat Gelsinger remarked that ‘having 80 per cent of all supply in Asia simply isn’t a palatable manner for the world to have its view of the most critical technology’. For Intel, moving its supply chain closer to home is increasingly essential. In this way, the launch of Intel’s IDM 2.0 (Integrated Device Manufacturer 2.0) strategy for a new era of manufacturing for the company was no surprise. The chip-making giant will invest US$20 billion in Arizona to build new fabs. The fabs are expected to begin production in 2024 and create 3000 new jobs.

Yet analysts have been increasingly sceptical about Intel re-entering the foundry business after an initial entry in 2010 and exit in 2018. Since these factories will begin operating only in 2024, the current shortage of semiconductors might already have been eliminated. Analysts also question Intel’s ability to compete, having already encountered several delays with its 10-nanometre process and having said to have lost its technology leadership position to both TSMC and Samsung.

Intel’s future is not strictly American. Overseas, Intel will continue to engage with external partners, including Taiwan’s TSMC and UMC, as well as South Korea’s Samsung and US multinational GlobalFoundries, to optimise its roadmap in terms of cost, performance, schedule and supply.

Arizona will also not necessarily host state-of-the-art manufacturing. TSMC’s forthcoming Arizona factory is planned to mainly operate 5-nanometre technology, while it will produce cutting-edge 3-nanometre chips domestically. Semiconductor industry talent and capabilities will be a boon to Arizona in relative terms, but will not immediately bring the state to the world’s technological frontier. For TSMC, that will likely remain in Taiwan. IBM’s 6 May watershed announcement that it has designed the world’s first 2-nanometre chip stands to bring more of the cutting-edge back to the United States; but this does not suggest a boost for Arizona as the IBM facility is across the country, in Albany, New York.

The big Intel and TSMC announcements around production facilities in Arizona will mean an outflow of high-tech talent from Taiwan to the United States. The Arizona plant announcements will accentuate worries around the threat of technology theft and intensify a global war for technology professionals that has already been regarded as a national security issue by Taiwan. In response, President Tsai’s government has been working on developing a regulatory framework to tackle these issues. At the firm level, at least in the short run, the relationship between Intel and Taiwanese chipmakers such as TSMC is set to take the shape of an awkward waltz of cooperation across continents.

Arizona is arguably on course to become a burgeoning industrial park on par with Taiwan’s Hsinchu Science Park, which includes the headquarters of TSMC, given the co-location of massive foundries in the coming years, proximity to an excellent university and talent willing to relocate from the high cost of living Silicon Valley. But the big unanswered question for the US government and firms is whether knowledge transfer will flow within and across firms so that the region can become a vibrant cluster of innovation.

Resources

en.wikipedia.org, ” Silicon Valley.” by Wikipedia Editiors; historicalsociety.stanford.edu, “The Origins of Silicon Valley: Why and How It Happened.” By Paul Wesling; wsj.com, “Why Fewer Chips Say ‘Made in the U.S.A.’ More semiconductors are now manufactured in Asia than anywhere else. A chart-filled look at how that happened and what it means.” By Asa Fitch and Luis Santiago; semianalysis.substack.com, “Why America Will Lose Semiconductors: Tangible bi-partisan solutions for solving a national security crisis.” By Dylan Patel; jacobin.com, “The Processor Chip Industry Is Another Ugly Capitalist Oligopoly.” BY ROB LARSON; asia.nikkei.com, “How a small Taiwanese city transformed the global chip industry.” By ChenTing-Fang; eastasiaforum.org, “Geopolitics and the push for ‘made in the USA’ semiconductors.” By Robyn Klingler-Vidra, KCL and Yu-Ching Kuo, Kaohsiung; latimes.com, “The most important company you’ve never heard of is being dragged into the U.S.-China rivalry.” BY DAVID PIERSON, MICHELLE YUN;

Addendum

The Processor Chip Industry Is Another Ugly Capitalist Oligopoly

Processing chips have become central to our lives, running smartphones and TVs alike. But disruptions in the chip industry are driving up inflation — and exposing the industry for the ugly capitalist oligopoly that it is.

When Intel announced plans to build a new $20 billion semiconductor plant in Ohio last month, President Joe Biden hailed it as a step toward reducing the United States’ dependence on imports for the complex chips that run our phones, TVs, and cars. Pandemic-related disruptions in chip manufacturing have fueled inflation — a shortage of even the relatively simple legacy chips used in car and truck manufacturing has forced plants to close down, in turn driving up the prices of used cars a whopping 37 percent in 2021.

The Intel plant, however, would not start production until 2025. So, in the meantime, why is there such a dearth of silicon chips? Is it simply COVID-19 factory shutdowns, or something more?

Fabsolute Advantage

Name-brand US chip companies like Intel, Nvidia, and Advanced Micro Devices (AMD) conduct research for and design the chips that most US consumers ultimately use. But the actual production of computer chips has been outsourced overseas, with the United States producing just 12 percent of chips globally — down from 37 percent in 1990. The companies hired to make the chips in their fabrication (“fab”) facilities are incredibly few in number, with just one making nearly all the fanciest microprocessor chips: the Taiwan Semiconductor Manufacturing Company (TSMC).

TSMC is the eleventh-most-valuable company on the planet, worth around $550 billion. And if you believe the business press, it’s unlikely to lose its title as chip manufacturing king any time soon. The Wall Street Journal reports that TSMC’s

technology is so advanced . . . that it now makes around 92% of the world’s most sophisticated chips, which have transistors that are less than one-thousandth the width of a human hair. . . . Most of the roughly 1.4 billion smartphone processors world-wide are made by TSMC.

So complete is the company’s dominance that observers have noted Taiwan’s “silicon shield,” thought to deter military action by China lest it disrupt the chip supply.

The reason for TSMC’s near-monopoly is that semiconductors, the Journal explains, have become “so complex and capital-intensive that once a producer falls behind, it’s hard to catch up. Companies can spend billions of dollars and years trying, only to see the technological horizon recede further.” The economies of scale have reached truly stunning proportions in the chip industry: a modern semiconductor factory now costs up to $20 billion to build. That stratospheric price tag keeps out everyone but the already-biggest players, even as the gigantic volumes of chips produced drag their per-unit cost below what competitors can match.

None of this is the result of the “invisible hand”: the Taiwanese government, putting the East Asian state-led development model into practice, poured subsidies into the industry for decades, footing the bill for over half its initial funding investment. (Notably, the other oligopolist of the fanciest chips is Samsung, with a similar record of heavy support from the Korean state.)

Efforts by chip designers like Intel to catch up with their own fabs are expected to only bear fruit many years and billions of dollars from now. Even companies making far less sophisticated analog chips, which do simpler tasks like managing phone displays or battery chargers, are struggling to manage the surging demand. Texas Instruments, the market leader for these workaday processors, has a yearlong backlog and is building three new plants in Texas. Apple, one of the world’s largest consumers of chips great and small, can’t keep up either. The Journal reports that

Apple has used its might to invest billions of dollars into suppliers to guarantee space on their assembly lines so that the iPhone has the parts it needs. . . . But even with those steps, there is only so much that can be done.

Bargaining Chips

Products as technical as modern smartphones and electric cars rely on more than semiconductors. But the whole sector of related commodities and industries is still shaped by the power of the giant chip companies downstream. Consider the shortage of substrates, the relatively simple materials made of copper wire compressed into industrial resin, which are essential because the “ultrathin” wiring emerging from microscopic chips can’t handle direct connection to the soldered wiring on the circuit boards that hold the chips in place.

The business press reports that, much as chip fabs like TSMC and Samsung are thriving because chip designers like Intel outsourced fabrication, “chip companies have largely outsourced substrate production to focus on improving chip performance rather than low-cost items with relatively meager returns.” Further, “chip companies have long pressured substrate suppliers to keep prices low. . . . Those dynamics have limited investments in adding substrate production capacity.”

Many substrate makers also got burned in the move to mobile in the last decade after anticipating continued PC market growth. Now, the chip makers are placing orders far earlier and paying in advance, “so that substrate companies have ample cash to build more factories. Some are committing to buying the entire supply of new production lines to give their suppliers confidence to invest.” Despite substrates being far simpler to produce than the chips they hold in place, substrate plants still cost $1 to 2 billion to put up. The business press reports that the small oligopoly of Pacific Rim firms producing them is “in a rare position of strength,” with prices rising.

Even related ancillary industries are seeing similar tightness, partly due to the pandemic but also due to years of industry concentration. Take multilayer ceramic capacitors (MLCCs), which store tiny amounts of energy so chips and other components have it in precisely the right places. Some analysts call MLCCs the “rice” of the electronics industry, due to their staple role as tiny essentials — 5G phones have over a thousand of them. While far easier to manufacture and thus not subject to the dizzying levels of concentration seen in semiconductors, a small enough number of East Asian firms dominate the industry that COVID shutdowns in certain major plants have already tightened this industry too.

Fabricating Consent

In the United States, a bipartisan group of lawmakers have proposed a bill to plow a quarter-trillion dollars into subsidizing domestic chipmaking, advanced research, AI, and quantum computing. The measure’s fate is unclear, but much as with Taiwan’s support for its own chip industry, the New York Times relates that “whether Congress approves billions of dollars in new funding . . . appears likely to determine whether an investment like Intel’s is a one-time occurrence or a trend.” So much for the innovations of the private marketplace.

In the meantime, Samsung and GlobalFoundries have announced new factories in the United States (although as with Foxconn’s heavily subsidized LCD plant in Wisconsin, nice words don’t guarantee investments).

More domestic fabrication could be a boon for US workers if they’re able to organize — particularly in logistically crucial plants, since chips have become as pivotal to the circulation of capital as ports and warehouses.

But sourcing chips domestically instead of from Taiwan or Korea won’t change capitalism’s profit-hungry hunt for scale and efficiencies that leave one or two private companies completely in charge of one of the world’s most important industries. Time for the world’s working class to cash in their chips.

The most important company you’ve never heard of is being dragged into the U.S.-China rivalry

HSINCHU, Taiwan — 

It’s been called Taiwan’s Silicon Shield, and without it much of modern life would cease.

Taiwan Semiconductor Manufacturing Co., or TSMC, makes more than half the world’s contracted semiconductor chipsand lies at the center of the technology supply chain, churning out circuitry found in iPhones, Amazon cloud computers, graphics processors that power popular video games and even military drones and fighter jets like Lockheed Martin’s F-35.

But TSMC is confronting problems it had never anticipated when a Taiwanese American engineer, who spent 25 years at Texas Instruments and is revered here like a hometown Bill Gates, founded it in the late 1980s. The company has been drawn into an increasingly bitter — and at times dangerous — rivalry between the U.S. and China that is forcing nations and corporations to choose sides in an era that is redefining the global order.

The competition for technology and geopolitical sway between the two superpowers is a threat to TSMC and this self-ruled island democracy of 24 million, which Beijing considers part of China and has hinted it might invade to reclaim. The company has encountered cyberattackers and had its engineers wooed away in a strategy by China to accelerate its own technological growth.

“There is a saying that if China attacks [Taiwan], TSMC is the safest place to be since what they do is so valuable,” said Kenny Yang, a former engineer at the company.

TSMC’s technical prowess is virtually unrivaled. It specializes in manufacturing the industry’s smallest chips — transistors with parts measuring 5 nanometers, the equivalent of two strands of human DNA. Work has already begun on 2-nanometer chips, which also require one of the most complex feats in engineering, an interplay of lasers, molten tin plasma and mirrors known as extreme ultraviolet lithography that a TSMC executive described as “close to black magic.”

Once viewed benignly as an electronic commodity, semiconductors are now vital national security assets in the global race for tech supremacy. Last month, TSMC’s board approved a plan to open a $12-billion foundry in Arizona by 2024, a move seen as a way to placate Trump administration and Pentagon officials who grew uneasy over TSMC’s trade relationship with China.

By clashing over something as ubiquitous as chips, China and the U.S. risk sparking a conflict that could end-up being far more disruptive than the one that erupted last year over China’s 5G ambitions. U.S. restrictions on exports shattered Chinese-owned Huawei’s plans to roll out 5G networks worldwide and hobbled its once-thriving smartphone business.

Whoever wins access to the leading semiconductors gains a critical advantage in technologies that will define the coming age including A.I., quantum computing and the “internet of things.” These will affect everything from missiles toautonomous vehicles to cybersecurity to the development of new drugs.

“Semiconductors underpin all the ‘must win’ technologies of the 21st century,” said Ashley Feng, a China and Taiwan expert formerly at the Center for a New American Security. “To both the United States and China, being able to dominate in the semiconductor space is crucial to winning the next generation of technology.”

TSMC is entangled in this escalating struggle at a time when China, propelled by rising nationalism at home, regards the U.S. and other Western nations as in decline. The Trump administration has seized on semiconductors as a choke point to slow China’s progress. This year, it announced licenses would be required to export chips that contain American intellectual property, which most silicon wafers do, to Huawei and China’s top chipmaker, Semiconductor Manufacturing International Corp.

Washington this month blacklisted Semiconductor Manufacturing International Corp., accusing it of being a front for the Chinese military and cutting it off from American equipment and investment. That raises the specter of Chinese retaliation against an American company such as Apple, which would in turn hurt TSMC.

Beijing’s suggestion that it might invade Taiwan and return it to Chinese dominion could further imperil TSMC’s freedom. China has long yearned for a company as advanced as TSMC. It has invested billions of dollars and poached hundreds of Taiwanese engineers in a national Manhattan Project-like bid to catch up to Taiwan, South Korea and the U.S. Despite those efforts, China remains years behind and must import all but 15% of its semiconductors, spending more on the technology than on foreign crude oil each year.

The U.S. and other countries are working to keep China at a disadvantage. Washington forced TSMC to cut exports to Huawei’s chip design subsidiary, HiSilicon Technologies, which was its second-biggest customer after Apple, analysts said. And the Trump administration reportedly pressured Taipei to curtail TSMC’s business in China, which accounts for a fifth of the company’s revenue and where it maintains a small foundry.

TSMC is caught in between two superpowers. It needs China for future growth and the U.S. for its technology and its biggest customers today.

— Dan Wang, analyst at GaveKal Dragonomics in Beijing

TSMC and the office of Taiwanese President Tsai Ing-wen have denied facing pressure from the White House.

Founded in 1987 by Morris Chang, a Harvard- and MIT-educated engineer, TSMC has thrived by trying to be the neutral chip foundry of the world. But national interests and global economic pressures have rattled the $412-billion chip industry, which was born out of Silicon Valley in the 1950s and is now dominated by a few deep-pocketed giants such as TSMC, Samsung and Intel, which are able to spend billions each year on research and development to compete.

Those budgets are required to keep pace with what’s known as Moore’s law: the general industry rule that the amount of transistors on a chip doubles every two years, allowing producers to pack more processing power into less space. It’s why the iPhone 12 is 50% faster than the iPhone 11.

If relations between Washington and Beijing remain sour — as they’re expected to under the Biden administration given the bipartisan appeal of a hard-line China policy — experts say an intricate network of chip designers, software programmers, equipment builders and chip assemblers will begin to unravel under mounting pressure to choose between U.S. and Chinese supply chains.

“TSMC is caught in between two superpowers,” said Dan Wang, an analyst at Gavekal Dragonomics in Beijing. “It needs China for future growth and the U.S. for its technology and its biggest customers today.”

The company acknowledges trade tensions have made things harder but remains confident it can come out ahead. By continuing to make advanced chips at a scale no other company except Samsung can replicate, TSMC believes its business can thrive regardless of the geopolitical troubles.

“At the end of the day, you want to be working with the best companies,” said Rick Cassidy, a senior vice president at TSMC. “Nothing in the geopolitical[arena] has any impact on what we’re doing.”

Others don’t share that view. The threat of losing the Chinese market is filling the boardrooms of semiconductor firms with dread, said a U.S.-based executive who spoke on condition of anonymity because he wasn’t authorized to speak to the media.

“It’s very hard for companies to say I’m going to pick a side. Some are hoping they can pick both sides and remain in the middle,” he said. “But in order for us to be commercially competitive, we need access to the China market.”

Nowhere will a chip war be felt more acutely than in Taiwan, where the semiconductor industry accounts for 15% of the economy and the threat of a Chinese invasion looms. The island, which is roughly the size of Maryland and about 100 miles off the coast of China, was occupied by the mainland’s fleeing Nationalist government in 1949 after it was defeated by Mao Zedong’s communist army.

Beijing’s economic and diplomatic muscle has compelled all but a few small nations to shun Taiwan and abide by the one-China policy. The U.S. recognizes that policy in theory, but tensions have soared this year as the Trump administration’s adversarial relationship with Beijing has drawn Taipei and Washington closer.

The U.S. has sold weapons to Taiwan, and Health and Human Services Secretary Alex Azar this year became the highest-ranking U.S. official to visit Taipei since 1979.

TSMC has tried to be the Switzerland of the chip industry, but those days are over.

— Craig Addison, author

China’s military has expanded training for a possible assault and flown increasing numbers of warplanes across the Taiwan Strait to exhaust the island’s air defenses. Beijing’s recent crackdown on freedoms in Hong Kong has also eroded what little support remained in Taiwan for unification with the mainland.

TSMC sits on this volatile fault line. Tensions could be further exacerbated if the U.S. maintains pressure on the firm to starve Chinese companies of its valuable chips. If China ever succeeded in uniting with Taiwan — whether peacefully or by force — it could place a stranglehold on Apple and U.S. chipmakers such as Nvidia, Qualcomm, Xilinx and AMD that rely on TSMC’s fabrication plants, or fabs, to produce their designs.

“China could use the disabling of TSMC’s wafer fabs on Taiwan to inflict a heavy blow on the U.S. tech economy, given that all of the U.S. fabless chipmakers, as well as major tech brands like Apple, rely on TSMC for advanced wafer fabrication,” said Craig Addison, author of “Silicon Shield: Taiwan’s Protection Against Chinese Attack.” “TSMC has tried to be the Switzerland of the chip industry, but those days are over.”

If we were not around, billions of people around the world would live differently than they do now.

— Morris Chang, TSMC’s founder

Chang, TSMC’s founder, is accustomed to conflict. Born in Ningbo, China, in 1931, he lived through the Sino-Japanese war, World War II and the Chinese civil war before fleeing for British-controlled Hong Kong and eventually attending college in the U.S. when he turned 18.

After a long career in the U.S. semiconductor industry working for Sylvania and Texas Instruments, where he headed the company’s chip business, he was recruited by the Taiwanese government to run its Industrial Technology Research Institute in 1985.

Taiwan was about to emerge from decades of martial law and needed to innovate its economy. Chang was tasked with upgrading its semiconductor industry. He envisioned a company specializing solely in building chips instead of also designing them under one roof like other firms at the time.

“It was thought that every company needed manufacturing … and that was the most capital-intensive part of a semiconductor company,” Chang said in a 2007 interview with SEMI, a chip industry association. “So I thought that maybe TSMC, a pure-play foundry, could remedy that.”

In doing so, Chang created the world’s first dedicated semiconductor foundry, where American companies could outsource chip production and forgo the heavy cost of building manufacturing facilities. Cassidy, the TSMC North America president, said he knew Chang had something special when he was a customer of the Taiwanese upstart in the 1990s trying to take an American semiconductor fabless.

“I could buy a wafer from TSMC at a price lower than my internal cost,” said Cassidy, a West Point graduate who joined TSMC in 1997. “It included quality, reliability, delivery and service and no charge for process R&D. When I thought about that, it was profound.”

TSMC would lead Taiwan’s emergence as a powerhouse in technology hardware. Chang, who retired in 2018, is regarded in Taiwan as a Steve Jobs- or Bill Gates-type figure and often asked to step in as a statesman on economic affairs. His presence at a banquet for Keith Krach, U.S. undersecretary of State for economic growth, hosted by the Taiwanese president in September underscored the company’s significance.

“If we were not around,” Chang once said of his company, “billions of people around the world would live differently than they do now.”

The tumult in the industry has not hurt TSMC’s bottom line. The company quickly recouped its lost business in China, and its stock price has more than doubled since March. The firm has even embarked on an unprecedented recruitment drive, aiming to make around 8,000 new hires to add to its 50,000-strong workforce.

“They’re the leader in the semiconductor industry and critical to so many big tech firms,” said Charlie Yeh, 22, a student at National Tsing Hua University who attended a recent recruitment drive.“They have the most advanced process in the world. Apple can make the iPhone 12 because of TSMC.”

Whether that success will fall victim to China’s designs remains to be seen. But Chang seemed to have a sense of unease when he delivered a speech at TSMC’s annual employee sports day in November 2019. He warned his former charges that the company could soon be dragged into a contest between major powers.

“When the world is not at peace,” he said, “TSMC will become a key battleground.”

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