Brief thoughts on today’s silicon globalization talk at ITIF

Today I had the pleasure of attending a seminar on the globalization of the semiconductor industry hosted by the technology policy think tank, the Information Technology and Innovation Foundation (ITIF). Professor Doug Fuller of Zhejiang University compared the industrial policy of China and India as it related to integrated circuits — the computer chips that make possible essentially all of our modern devices. This was followed by comments from the panel: David Isaacs, a representative for the semiconductor industry, and two policy analysts Jimmy Goodrich (ITIC) and Rob Atkinson (ITIF).

The IC industry was invented in the U.S. in the 1950s in Silicon Valley. By the ’80s, several Japanese companies ranked in the top 10 in IC sales, and in the late ’90s Samsung brought South Korea into the picture. In 2013, just one Taiwanese company ranks in the top 20, and none from mainland China. The sales picture doesn’t tell the story of the many production facilities in China, or the active community of IC chip designers in India.

As professor Fuller describes it, both countries are now defining policy to completely revamp their domestic IC industry. India with its long history of a “design service” model — which held the advantage of low required investment, but offered limited opportunities for capturing value — is hoping to transform into a full-fledged manufacturing system by investing in its manufacturing base and building an electronics infrastructure. China, which has plenty of semiconductor factories owned by or producing for foreign companies, is targeting $20 billion towards expansion through its IC industry investment fund.

The panelists offered their own takes on the viability of these policies. Jimmy Goodrich questioned whether China’s “Indigenous Innovation Policy” (State Council Document 4) and its associated “forced localization” may have hurt the industry. David Isaacs of SIA took the pragmatic approach, stating that “no single country can go it alone and be successful.” Rob Atkinson was more blunt, insisting that these policies, especially China’s, are “not good for global innovation in the semiconductor industry” and are simply “not good economic policy.”

Atkinson brought the discussion back to U.S. policy and highlighted a “two-prong strategy”: 1) reduce distortionary policies and 2) avoid commoditization. He also mentioned that the U.S. has the 27th worst R&D tax incentive policy in the world, and that 5 times the current R&D investment is needed to remain competitive. Fuller compared the trend that IC is following to the steel industry. The U.S. is one of the only big economies whose steel production is lower than consumption, he says. He warned of the “danger for the U.S. to continue to look short-range” at off-shoring production. One such danger is that because the new generation of IC employees are being hired primarily in India, in 20 years the U.S. won’t have the managers and designers it needs to remain competitive.

Isaacs may have summarized the concerns best: “In other industries, we’ve seen this movie before, and we know how the story ends.”