The Waxing and Waning of the American Semiconductor Industry

By Kenneth Rapoza, CPA Industry Analyst

US chip makers have a commanding lead when it comes to sales worldwide of the chips in our X Box controllers, laptops, and — increasingly — our cars. But mostly all of it is made in Asia. The recent chip shortage has executives from Intel, AMD and elsewhere asking President Biden to provide incentives and grants to help the sector. It starts with building new foundries that make the chips, most of them all in Taiwan and South Korea.

We are importing more semiconductors and exporting less. We design the chips and the equipment that makes them, but we increasingly make them all in Asia. In a world of booming demand, now is the time to invest in the domestic semiconductor supply chain. Industry executives are on board. Is the White House willing to give them what their asking for?

For the most part, the US semiconductor industry has been happy designing the world’s microchips and living off the profits. They were manufactured elsewhere. But there seems to be a change in tune now. Recent supply constraints in the automotive industry, which caused GM to close four automotive lines worldwide, including one in the US this month, has industry executives asking for incentives and grants to build leading edge chip foundries here.

Intel, AMD and Qualcomm sent a letter to President Joe Biden on February 11 urging him to include funding for semiconductor manufacturing and research in his administration’s plans for economic recovery post-pandemic. Some may see this as a free-money boondoggle. We see this as keeping with an industrial strategy that maintains US primacy in new chip design and regains some capacity at the foundry level.

A semiconductor fabrication plant — known as a foundry, or a fab — is basically a factory where integrated circuits and microchips get made. A business that operates for the purpose of fabricating the designs of other companies, such as fabless semiconductor companies, is known as a semiconductor foundry. If a foundry does not produce its own designs, then it is known as a “pure-play” foundry in industry lingo. 

In the letter, signed by 21 CEOs, the focus was on making more of those chips here. Overall incentives from Germany to Israel, Taiwan to China were way better.  “The US is uncompetitive in attracting investments in new fab construction and our technology leadership is at risk in the race for preeminence in the technologies of the future, including artificial intelligence, 5G/6G, and quantum computing,” they wrote.

“(Semiconductors) enable the technologies needed to realize your Build Back Better goals, including smarter and safer transportation, greater broadband access, cleaner energy, and a more efficient energy grid, while also providing high-paying jobs for Americans and strengthening our advanced manufacturing base,” the group said in the letter.

Key to their letter was the “national security” angle they highlighted.

White House press secretary Jen Psaki told reporters that the administration is working to address the chip shortage by “identifying potential choke points” in the supply chain, but said they were working with stakeholders in industry and “with our trading partners to do more now.” Which means Taiwan and South Korea, for the most part.

China is also heavily investing in the space. Its Greater Bay Area project is aiming to be China’s hub for nascent semiconductor technologies, designed and made in China, not only for them, but for all of Asia.

For sales, China is 5% of the discrete chip market share, tied with Korea, and is 9% of sales for logic semiconductors, which is now equal to Taiwan and Europe, and bigger than Japan and Korea.

The US dominates with over 61% on the sales side for both logic and analog chips. The biggest problem is domestic supply concerns. That can be solved at the foundry level over time. It will need China or German-style support to make that happen.

US Semiconductor Manufacturing Down Three-Fold.

US firms like AMD, Intel, Analog Devices, and Nvidia lead the world in designing the best chips to run smartphones, the servers that host Internet traffic, and intelligent automobile subsystems like anti-lock brakes or efficient engine gasoline consumption. In all these critical applications, US chipmakers are the industry leaders.

US companies are also the leaders in the software used to design chips.

But the US share of semiconductor manufacturing capacity, which was 37% in 1990, is now 12%. You can’t make a single chip without a foundry to manufacture it in. 

The US is the global manufacturing leader in specific segments such as compound semiconductors and radio frequency and bulk acoustic wave filters, but that status too is being challenged by new investments in Asia. The US share is much lower in memory (4%) and logic (12%)— which are the fastest-growing segments of the chip market, forecast to drive 90% of the industry’s growth in the next 10 years, based on research from Boston Consulting Group, published in September. We lead in design and commercialization, but not in making.

BCG said that the current 12% market share is also below what the US has in other strategic industries, such as aerospace (49% of global manufacturing performed in the US), medical equipment and pharmaceuticals (about 25%), and petrochemicals (around 20%). Among the industries relying on advanced manufacturing, semiconductor manufacturing is a standout as being fabricated elsewhere.

Manufacturing capacity in the US grew by around 7% over the last 30 years, but it has not kept up with Asia. Taiwan (21%), Korea (19%), and China (24%) are investing and expanding.

In China, 75% of capacity currently located on the mainland is owned by multinationals from the US and elsewhere. But Chinese domestic firms are expected to install 60% or more of new future capacity to make chips.

What happened?

Over time, US firms adopted the “fabless” business model, which allowed them to focus on design, IP and sales. Foreign foundries made the chips for them. These foundries are able to expand because they have access to lower costs (think: free land in China and Germany) and more attractive government incentives. Foundries account for 38% of global manufacturing capacity, of which somewhere between 7% and 10% are located here.

Manufacturing accounts for 45% of the value added and about 20% to 25% of the total R&D investment of the global semiconductor industry.

Semiconductor manufacturers employ around 180,000 workers domestically and operate fabs in 18 states, according to the Semiconductor Industry Association. (See the SIA produced graphic below showing where these companies are based.)

SIA is advocating for government incentives, seeing how it is impossible for the US to compete with foreign government subsidies. Taxes and free land is another issue.

China subsidizes labor costs to the tune of 33%, which includes benefits paid. Asia on average is 7%. The US incentives on labor and benefits amounts to around 5% of expenditures, which is less than Germany at 7%, based on BCG data.

“The global chip industry has become an inverted pyramid where dozens of chip design firms subcontract the chip manufacturing to a handful of firms, mostly in Taiwan and South Korea. This leads to capacity crunches such as the one the auto industry is experiencing today. It’s also a national security weakness, because today everything from the refrigerator in your home to your car to the Pentagon’s fighter jets depend on chips,” says Jeff Ferry, chief economist for the Coalition for a Prosperous America. Prior to joining CPA, Ferry worked in the technology industry, including six years at chipmaker Infinera, one of the very few startup chipmakers to have built a greenfield chip foundry in the US.

“Not only are the big foundries all very far away, but several of them are located in Taiwan, an island 100 miles away from China and one in which China would like to consider just another province one day,” Ferry says. “Finally, the knowledge and skill at how to manufacture chips—which involve putting billions of transistors on a piece of silicon less than an inch square—is knowledge that can only be gained by doing it, 7 days a week, 24 hours a day.”

The US share of global manufacturing capacity is expected to decline. Current data regarding planned fab construction indicates that only 6% of the new capacity already in development and expected to start operations in the next five years will be located in the US, according to BCG. This is below the capacity the US added between 2010 and 2020, which was around 10%.

If we are only designing and selling, and not making these chips, then we risk facing shortages like we witnessed in the auto sector. We can be facing supply constraints for everything from chips used in national defense, electric power generation, or even medicines.

The US government should consider matching German or China incentives on land and corporate taxation with the idea that some of the high-end foundries will be producing chips for use in next generation communications equipment and computing, especially for the defense and medical industries. In this sense, a secure supply of certain types of new chips is critical, with companies contracting a local foundry instead of one in Asia.

Semiconductors 2020: A Year in Trade

Last year, the US exported $55.2 billion worth of semiconductors, up from $49.8 billion in 2019. We imported $58.5 billion, up from $54.3 billion in 2019.

Semiconductors, as a separate item, are a top 10 item we import into the country. But considering it is also part of some of our other top 10 imports – namely telecommunications equipment, computers, computer accessories like hard drives, and cell phones – chips constitute a bigger part of what we import than oil and pharmaceuticals combined in both 2019 and 2020. You’d have to add car parts imports for 2020, which was depressed due to the pandemic, before you come close to the amount of imports loaded with microchips.

On the export side of the equation, 2020 was a good year for semiconductors only because all other exports did so poorly. Semiconductors were our third biggest export when it is usually in the bottom half of the top 10, behind oil and gas, pharmaceuticals, cars and airplanes.

Last year, only pharmaceuticals and industrial machine exports beat semiconductors.  It is an import sector not only because of its weight on our industrial strategy and economic security, but in taking a bite out of the trade deficit. The trade gap remains a headwind to reindustrialization post-pandemic. The more we import, the less we are making at home. 

We should be making more semiconductors at home, not just designing them. Looking at SIA’s map of where the semiconductor designers and manufacturers already are, it is not too much of a stretch to imagine foundries built near hubs in Washington state, or in much lower cost areas in need of new manufacturing labor, such as Oklahoma or West Virginia.

“The US is losing the knowledge of how to make semiconductors at the foundry level because chipmaking has largely been outsourced,” Ferry says. “China is gaining that knowledge with its huge venture capital investment in building chipmaking facilities in its Greater Bay Area project,” Ferry says. “Clearly, this is one of the most critical challenges facing the US today.”