To regain the edge in the global semiconductor industry, the USA has come up with a $52 billion rescue package. Despite being a major human capital supplier, India has a $10 billion incentive package for alluring multinationals to enter this ever-expanding industry. But after inventing and attaining the global leadership position, why has Intel led America’s Silicon Valley lost the edge? Besides, how did Japan become the global leader, and why did it lose its position to the USA? Furthermore, how has a tiny Island, Taiwan, reached high-income status by riding over the semiconductor industry? More importantly, without having a treaty, making huge upfront R&D investments, offering incentives, or having a large domestic market, how has Taiwan’s TSMC become the global best performer in silicon processing? All these data and questions are inspirations to investigate the evolution of the semiconductor industry and detect reoccurring timeless patterns.
- Inventions of Transistor—Giving Birth to the Semiconductor Industry
- Lukewarm Response of American Industry
- Military and Telephone Applications Seeded Semiconductor Industry in the USA—the first wave
- Reinvention Journey Made Japan Global Leader in the Semiconductor Industry—2nd wave
- Rise of Japan due to the 2nd wave of the Semiconductor Industry
- Third-wave–PC Wave led to the Rise of Intel and America
- Fourth wave due to smartphones and the rise of Twain as a high-income economy
- Rising Monopoly in the Globally Distributed Value Chain
- Desperate Attempts of Regaining Edge, Making an Entry, and Establishing Supremacy
Inventions of Transistor—Giving Birth to the Semiconductor Industry
In the late 1930s, American Telephone and Telegraph Company (AT&T) was experiencing exponential growth in subscription demand. But the reliability and cost of maintenance of electromechanical switches were among the significant barriers to keep expanding the network. Hence, its R&D wing, Bell Labs, embarked on finding an alternative—moving parts-free telephone switch. This endeavor led to the invention of the Transistor—the technology core of the semiconductor industry. Subsequently, three scientists, including Dr. Shockley, were awarded the Nobel prize in Physics. However, before the invention of the Transistor at Bell labs, notable development took place. For example, Julius Edgar Lilienfeld, on October 22, 1925, filed the first patent for the field-effect transistor principle in Canada. Subsequently, in 1934, Dr. Oskar Heil patented another field-effect transistor in Germany.
Lukewarm Response of American Industry
Before the invention of the Transistor, controlling the flow of electrons was the primary means of signal amplification and switching. In those days, this principle was behind the dominant electronic device–vacuum tube. Radio, Television, Wireless communication, Radar, and other electronic product makers used vacuum tubes. For signal amplification, filtering, modulation, demodulation, multiplexing, mixing, and many more vacuum tubes became dominant. On the other hand, computer makers were after the binary switch. For example, ENIAC, invented in 1945, contained 18,000 vacuum tubes.
Due to the ability to handle analog signals and work as a binary switch, the Transistor became the target technology to replace vacuum tubes. Target application areas spanned from Telephone exchanges and computers to consumer electronic products like Radio and Television. Although within five years of its invention, the application of the Transistor started in the telephone, consumer electronic product makers like RCA and Texas Instruments, among others, were showing a tepid response. For example, Texas Instruments did not vigorously pursue it upon being the first to demonstrate a Transistor radio receiver. Similarly, upon receiving the license for Transistor, RCA did not aggressively embark on it. The underlying cause had been that transistors had many limitations. High noise, low power, and poor reliability were notable ones. Hence, they remained pretty busy exploiting the mature technology core—vacuum tube.
Military and Telephone Applications Seeded Semiconductor Industry in the USA—the first wave
The first wave of the semiconductor industry started with its application in processing telephone signals and making the switching operation. Hence, the first wave of the semiconductor industry began to form around the Bell Labs and Western Electric. However, Dr. Shockley’s move led to the migration of the embryonic epicenter of the transistor from the USA’s east coast to the west.
Soon after winning the Nobel Prize in 1956, Dr. Shockley embarked on the journey of exploitation of commercial possibilities of Transistor. Hence, he moved back to his hometown and set up Shockley Semiconductor lab in nearby Mountain View. However, the departure of the ‘treacherous eight’ led to the formation of Fairchild Semiconductor and the subsequent chain reaction forming the Silicon Valley. In the beginning, target applications of costly, $150 apiece, were for the military applications. Transistor was preferred due to their smaller size and less energy footprint than vacuum tubes. Hence, military aircraft makers, for onboard computers and signal processing, found it a far better alternative. Hence, America’s fledgling semiconductor industry got a boost from military applications.
But unfortunately, companies like RCA and GE serving the civilian electronic product market kept shying away. On the other hand, despite the initial role, the military market could not be a strong driving force due to weak competition, poor scalability, and small size.
Reinvention Journey made Japan Global Leader in the Semiconductor Industry—2nd wave
In 1952, Bell Labs licensed Transistor to 40 companies at $25,000 patent fees. Among the titans like RCA and GE, there was a small Japanese company—Sony. In those days, 12 people Sony used to repair radio and other electronic products in a war-ravaged shopping center.
However, like American companies, Sony didn’t have access to the military market—due to the WWII settlement. Hence, Sony focused on the consumer electronics market. Sony’s journey began with the reinvention of the radio receiver. It embarked on changing the mature vacuum tube electronic core with poor performing and expensive transistor. In the midst of the vacuum-tube-based radio boom, with the dominance of American and European firms like RCA, in 1955, Sony unfolded the commercial journey of reinvention of radio—transistor radio.
However, the reinvention wave started as far inferior alternative as the transistor was poor. Hence, Sony embarked on improving the design of transistors and the production process, leading to the joining of other Japanese companies. Some of them got involved in reinventing consumer electronics by changing vacuum tubes with transistors, and others focused on process innovation and the production of transistors. As a result, new firms like Tokyo Electron were formed in addition to the expansion of business of existing firms like Nikon or Hitachi.
Consequentially, it created a new wave in the semiconductor industry out of the agenda of reinventing consumer electronics. Hence, Japan started gaining traction in the design, process, and fabrication of transistors and their usages in the reinvention of radio, TV, hearing aid, and many more. Consequentially, in 1959, by producing 86 million transistors, Japan surpassed the USA’s number one position in volume. This wave continued till the 1980s. In 1986, the top three semiconductor manufacturers were NEC, Toshiba, and Hitachi, and six out of the top ten were Japanese manufacturers.
Rise of Japan due to the 2nd Wave of Semiconductor Industry
After WWII, Japan’s economy grew rapidly, resulting in a per capita GDP rise from $2,000 in 1950 to $4,000 in 1960 and $10,000 in 1970. Subsequently, Japan joined the ranks of the advanced nations. What is the underlying reason for Japan’s dramatic rise? There have been many contributors. But, perhaps, Japan’s success in leading the reinvention of consumer electronics and incremental advancement of other products out of transistor is a significant cause. Hence, Japan’s leadership role in forming the 2nd wave of the semiconductor industry appears to be the underlying cause of the rise of Japan.
Japan’s success in being a global leader in a few major industries like Television, digital cameras, display, computer storage, LED lighting, and many more is because of the migration of innovation epicenter. It happened due to the reinvention of them out of semiconductors.
Furthermore, Japan outperformed competitors in the incremental innovation race of significant products. For example, Japan ahead of the USA started developing integrated circuits for automobiles. As a result, Japanese automobile makers started outperforming American producers in gradual advancements like in-car entertainment, control of wipers, automation in the dashboard, and electronic engine control for higher efficiency. Hence, the second wave of the semiconductor industry played a vital role in rising Japan from the ash of WWII.
However, Japan started losing its dominant position in the semiconductor industry due to America’s punitive tariff and the rise of the 3rd wave. The 3rd wave is about the increase in personal computers (PC) and the use of Intel processors in it. Ironically, Japan’s calculator maker Busicom empowered Intel to give birth to the microprocessor.
Third-wave–PC Wave led to the Rise of Intel and America
For sure SEMATECH and the USA’s slapping of tariffs on semiconductor imports from japan under section 301 played a role. But the PC wave played a vital role in the rise of the USA’s semiconductor industry. PC wave grew due to the availability of increasingly appealing software. The appetite for graphical user interfaces and computationally complex software kept growing. Hence, there was a growing need to increase computational power, memory, and storage. Therefore, Intel and a family of US-based semiconductor companies got a boost. Furthermore, Motorola got a boost as Apple chose its processor for powering the graphical user interface of Macintosh. Hence, along with the rise of PC, Intel and many other American companies rose at the top—forming the 3rd wave of the semiconductor industry.
Furthermore, as Japanese companies were not in the dominant position during the 3rd wave and mainly focused on incremental innovation, Japan’s economy also slowed down. But despite it, a few Japanese companies kept showing remarkable performance out of reinvention by leveraging semiconductors. For example, Toshiba has emerged as the global leader in storage due to the reinvention of the hard disk as an SSD. On the other hand, a small Nichia has appeared as a leader in global lighting by reinventing incandescent and CFL light bulbs with semiconductors. Furthermore, due to the development of certain core competence in silicon processing during the second wave of the semiconductor industry, Japan has been maintaining a solid position, virtual monopoly in some instances, chemicals, process equipment, and wafer.
Fourth Wave due to Smartphones and Rise of Taiwan as a High-income Economy
In the middle of the 1970s, Taiwan was on a silicon processing technology assimilation mission. Hence, they recruited American RCA to set up a small fab and train their engineers to operate it. But unlike many other technology recipient actors, Taiwan’s ITRI focused on assimilating for advancement. As a result, within a few years, RCA set up fab in Taiwan was running at a higher yield than RCA’s fab operating in the USA. Hence, from the beginning, Taiwan focused on learning and turning into process innovation, resulting in a growing yield.
To tap into the growing demand for silicon processing services of fabless IC designing companies that IDMs like Intel were reluctant to serve, Taiwan’s ITRI spun off its learning fab as UMC in 1980. Subsequently, Taiwan gave birth to TSMC in 1987. TSMC led Taiwan to start forming the fourth wave of the semiconductor industry—offering foundry services for fabless companies. The growing demand for increasingly complex processors to power smartphones kept fueling the 4th wave.
In addition to silicon processing, a cluster of firms offers complimentary services like testing, bonding, and packaging chips, designing and innovating next-generation chips, and designing, fabricating and populating boards, and assembling final products. Consequentially, in driving this 4th wave of the semiconductor industry, Taiwan’s TSMC has become the leader in processing high-end chips. Furthermore, like Japan, Taiwan has attained a high-income status by fueling and leveraging the 4th wave of the semiconductor industry.
Globally Distributed Value Chain and Rising Monopoly
Over the four waves, the semiconductor industry has got globally distributed. For example, during the first wave, the nucleus of the semiconductor industry was in the USA. The USA also escalated a few nodes in South Korea and Malaysia, among others, for souring labor inventive chip testing and bonding services. During the 2nd wave, Japan developed a strong base in every value chain segment, from wafer and silicon processing to chip innovation. Subsequently, during the 3rd wave, America’s Silicon Valley consolidated its position as the global leader.
Although Silicon Valley’s edge was apparently unbeatable, Taiwan snatched it away by leading the fourth wave. During the fourth wave, a cluster of semiconductor nodes has grown in Taiwan. Furthermore, South Korea has gained traction during both the 3rd and 4th waves. A vital node around photolithography has grown in the Netherlands during the process, forming ASML’s monopoly.
In four major waves over the last 75 years, the semiconductor industry value chain got globally distributed, giving birth to many firms. These waves have also played a vital role in giving rise to firms and nations. They have also contributed to falling, too, as epicenters kept migrating. During the process, the race in specialization out of the flow of ideas and leveraging of scale, scope, and externalities have intensified. As a result, monopoly has formed in every major layer of the value chain.
Desperate Attempts of Regaining Edge, Making an Entry, and Establishing Supremacy
Due to the rise of the fourth wave of the semiconductor industry, America’s Intel and Silicon Valley have lost the silicon edge to Taiwan’s TSMC. Hence, the USA has become desperate to regain it. Unfortunately, instead of looking for the next wave, the US Government has been after massive subsidies. It is offering cash incentives to encourage investment in fabs on US soil. Besides, R&D investment does not appear to be targeted for creating and fueling new waves.
To attain supremacy, China has been importing technologies to scale up local production to meet domestic consumption. India has been after a similar model. Hence, India has been offering $10 billion in subsidies and protection for accessing growing domestic consumption, which is expected to rise from $27 billion in 2021 to $64 billion in 2026, for alluring MNCs to set up fabs in India. However, due to rapid change of technology and low-value addition during operation, such subsidy and protection-driven approaches are not feasible in building a globally competitive semiconductor industry.
Past waves of the semiconductor industry made significant contributions to the rise of firms and even economies like Japan, South Korea, and Taiwan. Perhaps, this is not the end. Additional waves of the semiconductor industry will likely unfold. Consequentially, it will be creating both rising and falling effects—at both firms and national levels. Hence, such waves should be detected and leveraged. Such an act is vital to uplift firms and nations out of the unfolding possibilities of the semiconductor industry.
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