Asia Dominates Microchip Making–NOT due to subsidies and low-cost labor

Is the argument that Asia dominates microchip-making due to subsidy and low-cost labor wrong? Yes, Asia did not invent it. Despite this, why Asia dominates microchip making is intriguing indeed.

US Bell Labs invented Transistors in 1947. Subsequently, US firms Texas Instruments and Fairchild Semiconductors invented the microchip, integrated circuits (ICs), in 1959. Despite its growing importance and America’s success in building Silicon Valley out of it, Asia dominates microchip-making now. Such reality has raised a vital question—what is the underlying cause? Why has America lost its invention edge? Instead of making, why does the USA import high-end all chips from Asia to sharpen its commercial and military edges?

“Semiconductors were invented in the US, but over time Asia emerged as a manufacturing hub, largely because of government incentives, including subsidies” — is this a wrong thesis?  Based on this false thesis, are countries and economies making ineffective policy moves? For example, the USA has started to fork out as much as $76 billion in subsidizing wafer processing plants to regain market share. Similarly, the European Union and India have allocated $48 billion and $10 billion to allure global chip makers to set up plants on their respective soils. On the other hand, China has arguably been providing $150 billion to acquire foreign microchip-making plants and establish domestic production facilities. China has been importing foreign chip-making equipment with this massive pot of subsidies to set up foundries for making logic to memory chips.

Have Asian success stories like Taiwan, Japan, and South Korea attained their global position due to subsidies only? Furthermore, does it mean that the US, EU, China, and India will achieve their semiconductor independence dreams through their respective subsidy programs?

The invention creates but does not sustain dominance

Irrespective of greatness, all inventions emerge in primitive form. Like living things, they are infants at the beginning of their life cycles; they are not born with sufficient capacity to perform meaningful jobs. Like all other great inventions, transistors also emerged in primitive form. Hence, Bell Labs struggled to create commercial interest to monetize the invention. Subsequently, it licensed the invention at a meager fee of $25,000 to generate some revenue. Therefore, the invention of semiconductors alone did not bring fortune.  

Upon making the Transistor radio, Texas Instruments gave up the idea of commercialization—because it was neither better nor cheaper than alternatives. Similarly, RCA and many other prominent electronics firms also shied away from commercial exploitation. Due to weight advantage, although the US Air Force was willing to pay $150 apiece for Fairchild’s transistor for making onboard computers, it was far more expensive than RCA’s $1 apiece vacuum tubes.

However, the potential of the transistor in making microchips was latent. The exploitation of the latent potential demanded systematic R&D and deriving of economic value out of the commercialization of the intellectual outputs. It demanded the integration of R&D outputs in product and process features to win the global Innovation race. Hence, invention alone does not create dominance. Besides, a bit of dominance created at the beginning runs the risk of eroding due to the superior performance of licensees in improving the inventions at a faster rate than the inventor.

Furthermore, subsidies and low-cost labor in producing primitive inventions neither generate fortune nor create dominance. For example, what could have been the market for producing primitive transistors in 1952 by giving subsidies? Similarly, in 2022, what could have been the market of microchips made through a 1-micrometer process node? Would subsidies and low-cost labor bring any economic benefit for producing microchips using relatively older process nodes?

Inventions alone are not of any use

In retrospect, many great inventions show up as good for nothing. Even inventors are willing to give them away at little or no price. For example, Xerox discarded the graphical user interface as junk.   

Asia’s dominance of microchip making began with Japan

Japan’s journey of attaining semiconductor dominance started with Sony’s license of Transistor from Bell labs in 1952. Unlike American Fairchild or Texas Instruments, Sony did not have the scope of selling Transistor at $100+ apiece to the Airforce for making onboard computers for fighter jets. Hence, Sony looked at the consumer electronics market and found portable radio to be a window of opportunity for monetizing Transistors. Ironically, American RCA, Texas Instruments, and many others discarded the possibility of profiting from Transistor radio.

In 1952, Western Electric engineers made a four-transistor wrist radio. Soon after, Sony pursued Transistor radio making to monetize the $25,000 fees it paid to Bell Labs. However, civilian customers were not willing to pay a high price for the weight advantage, like the way the US Air Force was willing to pay for onboard transistor-based computers. Besides, the sound quality of Sony’s Transistor radio was far inferior to RCA’a vacuum tube-based radios. Consequently, Sony made an inferior and costly alternative out of Bell Labs’ Transistor invention. Hence, the subsidy was not a solution for Sony’s success out of Transistor.

Instead of seeking subsidies, Sony began refining the Transistor’s design and fabrication process. Consequentially, Sony kept improving the quality and reducing the cost of transistor making, resulting in making a fortune from Transistor radio. Sony led Japan pursued the refinement of transistor making and its usage in reinventing and incrementally improving consumer electronics. This journey led to the winning Nobel Prize by one of Sony’s Engineers in 1974 and the establishment of microchip dominance in Japan. For microchip dominance, Japan also attained supremacy in silicon wafers, chemicals, and process equipment like lithography. Hence, Japan’s dominance from 1956 to 1986 was not due to subsidies. Instead, Japan turned the primitive transistor invention into an economic miracle due to refinement and innovation out of R&D and Reinvention strategy.  

South Korea and Taiwan supplemented weakening role of Japan in Asia’s microchip making  

In the 1980s, Samsung started dominating the DRAM business. Upon licensing technologies from American firms, Samsung began to establish its footprints. However, very soon, Samsung followed the path of Japanese companies in refining licensed technologies. Consequentially, Samsung attained the edge of DRAM innovation through proprietary ideas. By following the path of Samsung, SK group has emerged as the world’s second-largest memory chipmaker and third-largest semiconductor company.

In addition to producing memory chips, Samsung also focused on producing logic and power ICs for Incremental innovation of its consumer products, from washing machines and TVs to mobile handsets. Samsung also started offering foundry service to fabless companies, becoming a fab service provider for Apple A-series chips.

Like Japan and Korea, Taiwan also started the semiconductor journey through technology transfer from America. In 1976, through a $4 million contract, RCA set up a fab in Taiwan with one generation older technology and gave training to Taiwanese engineers to operate it. Instead of operating an older plant and providing subsidies in selling services, Taiwan focused on learning and conducting R&D to improve it. This improvement journey was cemented by Morris Chang’s Endeavor of building TSMC. In addition to enhancing fab performance through R&D, Taiwan also focused on developing a cluster for deriving complementary roles from Fabless IC companies and OSAT ones. Consequentially, Taiwan has attained a dominant position in the global semiconductor industry. But is it due to subsidies or low-cost labor?

Older process node keeps losing market share—no amount of subsidy can maintain the edge

Research finds that TSMC’s N3 (3nm) revenue will reach around $4b in 2023, while N7 (7nm) will see a sharp decline in 2023. N5 will see around 18% growth. Apple will primarily drive N3 revenue. Hence, TSMC’s success has been due to updating process nodes faster than others like Intel or Global Foundry. Will any amount of subsidy entice Apple to get N7 foundry service for its following generation chips? Hence, it’s unfair or untrue to state that Asia dominates microchip-making due to subsidies.  

Malaysia, Philippines, and Vietnam in semiconductor—leveraging low-cost labor advantage  

Unlike Japan, South Korea, and Taiwan, the Semiconductor industry in Malaysia, the Philippines, and Vietnam has been dominated by multinational companies (MNCs). MNCs like Intel, AMD, and many others have established assembling, bonding, testing, and packaging facilities in these countries. Yes, low-cost labor and government incentives are the underlying reasons that MNCs set up facilities in these countries. However, these countries are not in a position to dominate the global value chain of semiconductors. Instead, American, European, and Japanese firms dominate labor-centric semiconductor industries in these countries. Hence, we should not create confusion by mixing the semiconductor industry of Malaysia, the Philippines, and Vietnam with that of Taiwan, South Korea, and Japan.

Instead of offering low-cost labor to MNCs, domestic firms in these later countries established their dominance by winning the global innovation race. Such dominance in Asia has surfaced due to the failure of American firms. Hence, a lesson should be drawn to regain, gain, and sustain dominance. Otherwise, the subsidy-based approach may end up failing.

India’s failure due to focus on operating imported technologies

India is a typical example of a developing country that is attempting to develop technology-centric industries like semiconductors. By targeting import substitution, India pursued the strategy of importing capital machinery and focusing on operating as per the imported operating procedure. Despite giving total subsidies in importing the plant, India could not make the output domestically competitive—let alone attain global dominance. Due to the rapid progression of semiconductor technology, India’s ability to produce microchips kept becoming obsolete before the end of the plant’s operating life. Hence, any amount of subsidy, domestic market, and low-cost labor could not succeed in building the semiconductor industry in India. Therefore, a lesson from India suggests that subsidies and low-cost labor cannot develop the semiconductor industry even to serve the domestic market—let alone establish global dominance.

China has yet to establish dominance in the global semiconductor industry

China has started channeling public funds to import equipment to develop the semiconductor industry. So far, China’s success has been in importing, installing, and operating production facilities, whether for producing logic circuits or memory chips. Notable facilities are SMIC and YMTC. Will they face the fate of TSMC or Samsung or India’s SCL?

So far, China has succeeded in importing equipment and expertise to set up and operate production facilities. If China keeps focusing on it, it’s unlikely that it will establish global dominance. To attain success similar to TSMC or Samsung, China has to graduate from operating to conducting R&D and commercializing R&D outputs as product and process features.

Moore’s law makes subsidies and low-cost labor irrelevant in establishing dominance

Unlike many other industries, the semiconductor industry benefits from a long-runway of dynamic efficiency. The semiconductor industry’s success has not been to keep operating the same technology and selling output. No amount of subsidy and low-cost labor advantage create a market for the services or products produced by the older technology.

As we know, the semiconductor industry has been successfully doubling chip density every 24 months, as stated by Moore’s law. As a result, the cost has been falling, and performance has been improving simultaneously. Consequentially, Moore’s law makes subsidy and low-cost labor irrelevant for profiting from the semiconductor business. Hence, winning the race of doubling chip density and yield through systematic R&D is at the core of establishing dominance.      

Semiconductor’s Natural tendency of monopoly—the underpinning of Asia’s Dominance in microchip making

Due to the amenability of semiconductors to keep getting better and cheaper, there has been a race among the competitors. It’s the race to produce and integrate ideas into products and processes. As a result, upfront investment in R&D, product development, and plant cost have exponentially grown. Consequentially, Economies of Scale and scope advantages have also been increasing. As a result, bigger is better and cheaper has become a reality. Hence, the winner has been succeeding in offering the highest quality at the lowest cost, gaining market power. Therefore, the semiconductor industry has a natural tendency of monopoly. It happens that Asian firms, notably TSMC, have won this race. Consequentially, we have been facing the reality that Asia dominates microchip-making. Hence, this success has been due to the superior performance of Asian firms in quality advancements and cost reduction through a Flow of Ideas or IP strategy.

Consequently, American firms have lost their edge due to their inferior performance. Such reality demands analysis to figure out the root causes and work on them instead of intensifying the subsidy race.

Asia dominates microchip making due to winning the race of Moore’s law

The core message of Moore’s law has been that semiconductor devices are amenable to advancement in a profitable manner. Hence, the race has been to keep improving them by increasing microchip density. As explained, this race offers the scope of producing higher quality chips at decreasing cost. However, it also keeps increasing capital expenditure and advantages in economies of scale and scope. In retrospect, Asian firms have outperformed American firms in this race of offering higher quality at less cost through a flow of smart ideas. Hence, superior performance has created the reality that Asia dominates microchip making.   

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