IV
RESEARCH PAPERS



The National Academies | 500 Fifth St. N.W. | Washington, D.C. 20001
Copyright © National Academy of Sciences. All rights reserved.
Terms of Use and Privacy Statement



Below are the first 10 and last 10 pages of uncorrected machine-read text (when available) of this chapter, followed by the top 30 algorithmically extracted key phrases from the chapter as a whole.
Intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text on the opening pages of each chapter. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

Do not use for reproduction, copying, pasting, or reading; exclusively for search engines.

OCR for page 187
IV RESEARCH PAPERS

OCR for page 187
This page in the original is blank.

OCR for page 187
Competing Programs: Government Support for Microelectronics Thomas R. Howell* Partner, Dewey Ballantine LLP, Washington, D.C. EXECUTIVE SUMMARY Government promotional policies have played an important role in the development of the semiconductor industry in every country in which such an industry has emerged.† In the United States, the proper relationship between government and industry has long been controversial, and the measures taken by the U.S. government in microelectronics have proven no exception. However, the collaborative government-industry-university programs that have been implemented in the U.S. semiconductor sector since the 1980s—of which the SEMATECH consortium is emblematic—are widely admired abroad and are being emulated on a large scale in Japan and the European Union. *   Thomas R. Howell is a partner with Dewey Ballatine LLP in Washington, D.C. During the course of his law practice in the field of international trade, Mr. Howell has devoted 20 years to the study of foreign industrial trade policies and is the author of numerous studies, sectoral analyses, and books examining policy measures and business practices in countries such as Japan, Korea, Taiwan, and Russia, as well as the European Union and Eastern Europe. He has served as a counsel to U.S. semiconductor producers at intervals since 1982. Mr. Howell is a graduate of Harvard College and Boston University Law School. The views expressed in this paper are his own and should not be construed as representing the views or positions of any semiconductor producer or group of producers. The author acknowledges the contributions made to the research and field interviews underlying this article by his colleagues Maki Hishikawa, Brent L. Bartlett, Hui Yu, Melissa E. Murphy, Gregory I. Hume, and Lawrence E. Rothenberg. †   For an update of the program developments in this industry, particularly the emergence of China as a semiconductor manufacturing site, see the Postscript.

OCR for page 187
At a moment when U.S. government support for the semiconductor industry is significantly reduced, the level and scope of government involvement in the industry outside the United States is increasing substantially, with various elements of the U.S. economic system and industry-government relationship frequently cited as models for foreign promotional programs. The divergence between U.S. and foreign government policies toward the semiconductor industry occurs at a time when the U.S. industry enjoys a position of undisputed world leadership but also as it confronts unprecedented technological challenges with “no known solutions” and no clear plan for mustering the resources needed to surmount those challenges. Foreign government measures to support the semiconductor industry are larger in scale and broader in scope than anything currently under way in the United States. In Japan and the European Union, as in the United States, the principal form of government support for microelectronics is the provision of funding and infrastructure for industry-government research and development projects. However, the Japanese and European programs are funded at a much higher level and place a greater emphasis on R&D with immediate commercial applications, in contrast to U.S. programs, which are normally limited to pre-competitive R&D. In addition, in the European Union substantial funding is being provided by national and regional governments to individual companies for investment in semiconductor manufacturing facilities, and in both the European Union and Japan, direct government funding is being used to stimulate new “venture” businesses in the microelectronics field. In the growing number of newly industrializing countries promoting an indigenous capability in microelectronics—Taiwan, Korea, Singapore, China, and Malaysia—government policies emphasize the acquisition and diffusion of advanced semiconductor technology from the industrialized countries rather than pursuit of leading-edge R&D. The principal forms of government support in these countries are direct provision of capital to domestic firms (including funding of small- and medium-size venture companies); funding of research institutes that assist in technology diffusion; technology acquisition and transfer to industry; tax holidays; programs to train personnel and attract scientists and engineers from other countries; establishment of industrial zones with incentives for firms locating in these zones; and outright creation of new semiconductor enterprises. While it is difficult to predict the precise effects that the various government programs in this sector will have over the long run, government measures are clearly contributing to several of the most significant observable trends in this industry. Japan is pursuing a national revival of its competitive position in microelectronics, driven by an array of large new government-sponsored R&D projects. The European Union has reversed its declining position in the semiconductor sector and improved its relative competitive standing, a development sub

OCR for page 187
stantially attributed to European Union- and national government-supported R&D projects, most notably JESSI and MEDEA. Both Japan and the European Union are now pursuing comprehensive strategies designed to challenge U.S. leadership in microelectronics by leveraging their present and anticipated advantages in mobile communications and digital home appliances. Taiwan has emerged as a major production base for semiconductors and— reflecting a sustained government promotional effort and with initial capitalization from the government—has pioneered a business model, the dedicated foundry, that many believe will revolutionize the industry. China is emerging as a potentially significant competitor, reflecting its government’s efforts to attract inward foreign investment and foreign technology and measures to promote indigenous producers. The dramatic ongoing movement of Taiwanese information technology manufacturing functions to Mainland China—encouraged for differing reasons by governments on both sides of the Fujian Straits—will almost certainly accelerate the maturation of the Chinese semiconductor industry. U.S. economic thinking places a high value on independent entrepreneurship and emphasizes the need to circumscribe carefully the government’s role in the market. While U.S. federal, state, and local governments have frequently worked in close collaboration with the private sector in a diverse array of industries— agriculture, aerospace, biotechnology, and others—government intervention in specific sectors or on behalf of individual enterprises is controversial and therefore usually limited. The United States, however, has generally not proven successful in dissuading other governments from intervening heavily on behalf of strategic sectors like semiconductors, where governments often have the explicit objective of promoting the commercial success of individual indigenous firms. Reflecting that fact, since the early 1980s the U.S. government has been drawn into a series of limited market interventions to counter the adverse effects of foreign government measures on the U.S. semiconductor industry, most notably the Semiconductor Trade Agreement and federal funding of the SEMATECH consortium. These and other, similar measures were improvisations devised by the U.S. government and industry working together in response to challenges that arose out of foreign industrial policies. These measures, while sometimes the subject of criticism, did not represent a fundamental departure from U.S. economic values and succeeded in addressing the problems that made the measures necessary in the first place. Given the challenges confronting the U.S. industry in the coming decade, which reflect both difficult technological obstacles and dramatic increases in foreign government support measures, it is likely that additional industry-government improvisations—and continued cooperation—will be required if the U.S. industry is to sustain its current position of leadership.

OCR for page 187
INTRODUCTION This paper surveys government policy measures that are influencing the international competitive environment in the semiconductor industry. The role that governments should play in this industry has always been controversial, and the impact that current programs will ultimately have is difficult to predict with much precision. Looking back it is clear that government policies have played a major role in the evolution of the global semiconductor industry. Indeed, to date no country in the world, including the United States, has established and sustained a world-class semiconductor industry in the absence of a very substantial government promotional effort.1 Many of the most significant developments of the past 15 years in this industry are substantially attributable to government policy actions; these include the rebound of the U.S. semiconductor industry from the crisis of the mid-1980s; the erosion of Japanese leadership by new competitors arising in Taiwan and Korea; the resurrection of the European position in microelectronics; and the advent of China as a potentially significant competitor. Government programs to support the semiconductor industry have shaped the competitive environment and will continue to do so for the foreseeable future. The most striking aspect of the current pattern of government support for microelectronics worldwide is the level at which such support is declining in the United States while increasing substantially in the key semiconductor-producing regions outside the United States. Ironically, at the moment the United States appears to be curtailing direct government support for this industry, promotional programs abroad are attempting to replicate what is seen as a highly successful example of government-industry collaboration in the United States. Some argue that U.S. industry leads the world today precisely because market-based competition has shaped its evolution to a far greater degree than has been the case anywhere else, and that the steep decline in U.S. government financial support and other forms of involvement is therefore a positive trend. But, U.S. leadership in microelectronics reflects the success of a system of innovation based not only on the activities of private firms but on government institutions, universities, and research associations and consortia in which the government plays a role. Significantly, during the next 10 years this system will confront fundamental technological challenges that simply have no precedent and 1   “The semiconductor industry has never been free of the visible hand of government intervention…[T]he semiconductor industry, wherever it has developed, has been an explicit target of industrial policy—whether in the guise of military policy in the United States or in the guise of commercial policy elsewhere in the world.” (Original emphasis) Laura D’Andrea Tyson, Who’s Bashing Whom? Trade Conflict on High Technology Industries, Washington, D.C.: Institute for International Economics, 1992, p. 85.

OCR for page 187
will require a level of human, financial, and infrastructural resources that the industry, standing by itself, will be hard pressed to achieve. At present the U.S. semiconductor industry stands at the pinnacle of success. It holds by far the largest share of the world market and is the undisputed world leader in many key areas of semiconductor technology.2 It has fought off a major competitive challenge from Japan and has seen its Japanese rivals’ market share progressively decline for a decade. Its productivity has consistently grown at a rate that far outstrips most other sectors of the U.S. economy.3 Its methods and business culture are widely studied in academia and increasingly emulated abroad. It continues to attract extraordinarily talented people from every part of the world.4 Its revolutionary contributions to the economy and to the society as a whole are universally acknowledged and acclaimed. Challenges Facing the U.S. Semiconductor Industry The present sanguine state of the U.S. semiconductor industry masks trends that could jeopardize the U.S. position in the coming decade. These challenges are both structural and technological in nature. Structural and Technical Challenges Despite continued high rates of growth in long-term demand the industry remains sharply cyclical—a dynamic that results in erratic levels of funding for R&D. The industry faces a growing shortage of trained scientists and engineers, reflecting such trends as a decline in U.S. graduate electronic engineering degrees and an increase in the number of foreign students who return home after graduat 2   In 1998 producers based in North America accounted for 53 percent of all semiconductor revenues earned worldwide. Japan-based producers held a 26 percent share and all other producers held 21 percent. Technecon Analytic Research, Inc., 1999 Annual Databook: Review of Global and U.S. Semiconductor Competitive Trends 1978-1998. (Semiconductor Industry Association, 1999). 3   The average productivity of the U.S. merchant semiconductor industry, measured in terms of sales revenues per employee, more than doubled between 1990 and 1998, from $93,000/employee to $245,000. Semiconductor Industry Association. 4   A 1997 Israeli perspective on Silicon Valley made the following observations: “Silicon Valley swarms not only with Israeli engineers, but also with no few Indian and Oriental (mainly Chinese) engineers and designers: Altogether, the Valley seems to attract émigrés, with engineers and programmers and entrepreneurs from all parts of the world populating its every nook and cranny. Migrants have played an important role in the Valley’s florescence. Intel President Andrew Grove, for example, emigrated from Hungary, and his contribution to the sector is inscribed in the Hall of Fame and on every computer. Other less well-known emigrants took part in the set up of high-tech corporations such as Sun Microsystems, Cirrus Logic, and many others.” U.S. Foreign Broadcast Information Service (“FBIS”), May 9, 1997, reprint of Nir Nathan, “We’ve Taken Silicon Valley,” Tel Aviv Globes, May 6, 1997 (FTS19970509000829).

OCR for page 187
ing from U.S. universities. The capital investments required for semiconductor manufacturing have become so large that a significant and growing proportion of U.S. production is outsourced to “foundries,” by far the most advanced of which are operated by foreign companies based in East Asia. The U.S. industry also confronts a formidable array of technological hurdles as it pushes miniaturization to the molecular and atomic level—in the next 5 years it will encounter problems “for which there are no known solutions.”5 These physical limits may herald the end of further miniaturization using known silicon-based technology and require a radical leap to some other form of technology to achieve further advances; but research and development on the scale necessary to develop such a replacement technology is not taking place. Competition for New Markets: PCs to Wireless Finally, the U.S. industry faces competition from abroad, a factor that has receded as a perceived challenge but which now should be receiving heightened attention. The U.S. industry’s present dominant position is based in significant part on its success in developing products for PCs and PC equipment. European and Japanese industry leaders believe that they can dominate what they see as the main semiconductor growth markets of twenty-first century—wireless and wired telecommunications and digital home appliances.6 The Japanese semiconductor industry, with an unprecedented level of government backing, is embarking on an intensive series of leading-edge R&D projects with the objective of recapturing world leadership in microelectronics from the United States, based on improved capability with respect to systems-on-a-chip. A Japanese semiconductor analyst recently commented on this effort as follows: The 21st century will be the end of the PC era, and the arena of competition will change. Instead of the PC, cell phones and digital consumer equipment, two areas in which Japan is dominant, will pull semiconductor technology forward. A favorable wind is blowing for Japan, which was defeated in the PC era.7 Technological Parity? Similarly, the European industry is building on European strengths in key, rapidly growing end-use markets—most notably telecommunications—to carve 5   Semiconductor Industry Association, International Technology Roadmap for Semiconductors, 1999, p. 1. 6   FBIS, January 2, 2001, translation of “From Stagnation to Growth, the Push to Strengthen Design,” Nikkei Microdevices, pp. 106-124 (JPP20010125000012) and FBIS, January 2, 2001, translation of “Continuing with Large Investment Similar to 2000,” Nikkei Microdevices, pp. 88-93 (JPP20010131000003). 7   Ibid.

OCR for page 187
out a significant market segment based on the design and production of specialized devices for these markets, which are growing rapidly as a proportion of the total end-market for semiconductors. The principal European and Japanese R&D programs are major, sustained, long-term efforts of five or more years’ duration that are often succeeded by follow-on efforts of comparable or greater length.8 Industries in Taiwan, Korea, and Singapore are seeking to achieve and sustain technological near parity with U.S. producers by acquiring technology through foundry relationships and other collaborative arrangements. These arrangements involve the cession by U.S. firms of key segments of the manufacturing process that they once performed entirely by themselves. China, while not a major factor today, is aggressively pursuing acquisition of foreign technology and know-how, and in the view of many will emerge as a major U.S. competitor within 10 years. Increasingly, all of these countries are competing with the United States for the same limited pool of human resources and, to the extent that this rivalry remains a zero-sum exercise, it will inevitably intensify. These developments abroad are not necessarily negatives for the U.S. industry, and in some cases they will actually enhance competitive opportunities for U.S. firms. The emergence of government-supported semiconductor foundries in Taiwan and Singapore, for example, may well work to the competitive advantage of U.S. producers, and U.S. firms have been beneficiaries of foreign government subsidy programs.9 But, in assessing the prospect that the U.S. semiconductor industry will surmount the challenges it will confront in the new century, the government-driven competitive strategies that are being implemented abroad and their potential effects on the U.S. industry must be taken into account. The intensity and scale of these national efforts are changing rapidly, generally in the direction of a larger government commitment. The first segment of this report surveys U.S. government programs in microelectronics. The remainder examines programs outside the United States, reviewing national strategies in Asia and Europe. 8   The European Union’s flagship R&D project, JESSI, began in 1988, ran through 1996, and was succeeded by MEDEA, a four-year project ending in 2000; the latter was succeeded by MEDEAPlus, which will run through 2009. Japan’s new Asuka sub-0.10-micron project will run for 7 years beginning in 2001. 9   In the mid-1990s the U.S. firm Advanced Micro Devices established a manufacturing and development center for microprocessors in Saxony, a state in the former East Germany. The German federal government and the state government of Saxony reportedly provided this project with DM 500 million in investment subsidies (“standard assistance for the East”), DM 200 million in tax breaks, and DM 100 million to set up a research facility. In addition, a loan guarantee of DM 1 billion was provided, 40 percent borne by the state government and 60 percent by the federal government. See FBIS, February 26, 1996, translation of Casper Busse, “Billions in Support Smooth Tough Road,” Handelsblatt, January 2, 1996 (FTS19960226000662) and FBIS, January 12, 1996, translation of “Dresden Becomes Capital of Microelectronics – Biederkopf’s Dreams,” Markt und Technik, January 12, 1996, pp. 1-3 (FTS19960112000528).

OCR for page 187
GOVERNMENT AND INDUSTRY IN THE UNITED STATES The success of the U.S. semiconductor industry—with its now legendary tradition of dynamic and colorful entrepreneurial initiative, ferocious competition, and dramatic technological breakthroughs—is sometimes held up as the very embodiment of the virtues of the market-driven U.S. economic system. The reality, however, is more nuanced. U.S. government policies have played an important role in the evolution and survival of the semiconductor industry, and the industry’s current success is at least partially attributable to a close cooperative working relationship that has grown up between the industry, universities, and the U.S. government. As a result foreign countries seeking to create their own indigenous versions of the U.S. semiconductor industry are trying to replicate not only the best features of Silicon Valley and the U.S. venture capital system but also the U.S. industry-university-government research triad. The chairman of the Nippon Electric Company, one of Japan’s largest semiconductor makers, has commented on how the U.S. industry recaptured world leadership from Japan after the mid-1980s—in a manner that he now urges Japan to emulate: In the U.S. there have been various [government] measures that recognize the importance of the semiconductor industry, which is the basis of defense and all industries; a semiconductor revival resulting from those measures; the activation of private-sector investments, along with that; and ideal cooperation between industry and universities that supports the semiconductor industry...[T]he U.S. activated cooperative semiconductor-related efforts such as SEMATECH that involved industry, government and universities from the viewpoint of the importance of semiconductors as a key technology for all industries. In order to win in the 21st century, we must, at all cost, rework the strategy we have lost.10 The Legacy of Government Support The U.S. semiconductor industry was given its initial impetus from U.S. government funding of research and development and procurement for military and space exploration programs.11 While the creation of a thriving commercial semiconductor industry was a byproduct rather than an objective of these early government programs, the U.S. defense community grew to recognize the in 10   See FBIS, October 31, 1995, translation of Emi Yokata, “Japanese Manufacturers to Launch Joint Research on New Chip Technology to Counterattack U.S. Manufacturers,” Ekonomisuto, October 31, 1995, p. 42 (FTS19951031000245). 11   The initial impetus for the growth of the semiconductor industry in the United States came from the Apollo and Minuteman programs, which featured government procurement of integrated circuits in large volume at high prices. Government procurement enabled U.S. firms to improve yield and efficiency through volume production and encouraged wider application of integrated circuit technology, first in military and then in commercial technologies. National Bureau of Standards, The Influence of Defense Procurement and Sponsorship of Research and Development on the Development of the Civilian Electronics Industry, June 30, 1977.

OCR for page 187
creasingly central importance of the commercial industry to national defense, and in subsequent decades took major steps to preserve and enhance the competitiveness of that industry. The most significant initiative was the Defense Department’s sponsorship of SEMATECH, a research and development consortium established to ensure U.S. leadership in semiconductor-manufacturing technology. This initiative and many others in the microelectronics field benefited from support from the Defense Advanced Research Projects Agency, a small Defense Department agency that supports long-term R&D with commercial as well as military value.12 During the 1980s the U.S. Congress enacted legislation extending copyright protection to semiconductor designs, relaxing antitrust rules for joint research, and providing tax credits for research and development, all of which substantially benefited the U.S. industry. In 1986 the U.S. government negotiated a bilateral agreement with Japan, the U.S.-Japan Semiconductor Arrangement, with the objective of ending Japanese dumping and improving market access for U.S. semiconductor producers in Japan.13 In addition to these individual government actions a system of ongoing collaboration between the industry, the government, and U.S. universities has evolved with respect to long-term research and development. In 1982 the Semiconductor Research Corporation was formed by U.S. semiconductor device firms to undertake silicon-based R&D in U.S. universities.14 While U.S. companies contributed most of the Semiconductor Research Corporation’s funding, four U.S. government organizations participate in and contribute to its funding, and a number of its key leaders have backgrounds in Department of Defense microelectronics R&D programs.15 12   Created in 1958, DARPA has an impressive record of technological achievement. Its budget in FY 2000 was about $2 billion. 13   For a review of the problem of dumping in high-technology markets and specifically the Semiconductor Trade Agreement, see National Research Council, Conflict and Cooperation in National Competition for High-Technology Industry. Washington, D.C.: National Academy Press, 1996. The trade agreement is summarized (p. 111) and a discussion of Japanese-American competition in semiconductors and the agreement is included in Supplement A, pp. 131-141. For an historical view of the problem of dumping see “Dumping: Still a Problem in International Trade” in National Research Council, International Friction and Cooperation in High-Technology Development and Trade. Washington, D.C.: National Academy Press, 1997, pp. 325-377. 14   As of early 2000 the Semiconductor Research Corporation (SRC) had channeled approximately $520 million into semiconductor research at over 60 universities. SRC’s annual revenues in 1999 were $36.7 million from all sources. Custom research funded by individual customers accounted for 10 to 14 percent of SRC’s R&D. The remainder is core R&D funding from the general pool of member funds. 15   The four government participants are the Defense Advanced Research Projects Agency, the National Science Foundation, the National Institute of Standards and Technology, and the U.S. Army Research Office. Larry Summey, who has headed the Semiconductor Research Corporation since 1982 was previously the head of the Department of Defense’s Very High Speed Integrated Circuit Program, the largest U.S. defense-related microelectronics program of the 1970s.

OCR for page 187
New Area of Shanghai. Most of these new enterprises are being created in partnership with foreign firms. U.S. Export Control Policy U.S. policy toward China at present is to deny approval for export licenses for semiconductor-manufacturing equipment capable of producing devices using design rules less than 0.35 microns. This policy has impeded the development of China’s semiconductor industry.188 However, governments in Japan and Europe are becoming less restrictive, with the result that Chinese fabs are procuring from vendors in those countries equipment that cannot be obtained from U.S. sources.189 NEC, for example, is supplying DRAM manufacturing technology to Shanghai’s Hua Hong NEC Electronics Co., which will use 0.25-micron design rules, more advanced than permitted under the U.S. export control regime.190 Taiwan in China Just as Taiwan has transformed the global competitive picture during the past five years, Taiwanese initiatives may accelerate China’s emergence as a first-rank global competitor. At present, encouraged by both the Chinese and Taiwanese governments and driven by a growing workforce shortage in Taiwan, the Taiwanese information industry is relocating much of its manufacturing operations to the mainland.191 Taiwanese Minister of Economic Affairs Lin Hsin-yi said in November 2000 that Taiwanese firms controlled 50 to 60 percent of China’s total production of information technology hardware.192 The Taiwanese semiconductor industry is widely expected to relocate most of its low-end (200-mm wafer, 0.25 micron and above) operations to China by 2005. Taiwan’s desktop computers are now largely produced in Taiwanese-owned facilities on the mainland, as well as 56 percent of Taiwan’s motherboards, 88 percent of its scanners, 74 percent of its CD drives, and 58 percent of its monitors.193 188   The United States, Japan, Korea, and the European Union participate in the Wassenaar Arrangement, a multilateral export control regime that obligates participants to administer export control licensing requirements for advanced semiconductor manufacturing equipment to all locations. 189   “Compared with the United States, both Japan and Europe have greater freedom to approve the export of advanced semiconductor equipment [to China].” Pecht et al., op. cit., p. 41. 190   See FBIS, February 2, 2001, translation of “Japan’s NEC to Expand Semiconductor Production in China,” Kagaku Kogyo Nippo (Nikkei Telecom Database), January 12, 2001, p. 9 (JPP2001020 2000013). 191   “Taiwan Electronics Industry Migrates to China,” Taiwan Central News Agency, August 24, 2000. 192   See FBIS, November 30, 2000 “Taiwan’s High-Tech Advantage over China Eroding,” Taipei Times (Internet version), November 30, 2000, (CPP20001130000168). 193   “Taiwan’s Electronics Industry Migrates to Mainland China,” Taiwan Central News Agency, Wire Service Report, August 24, 2000.

OCR for page 187
The Chinese government, “which has carefully observed how Taiwan succeeds in the LSI industry, hopes to as far as possible put into practice measures that were successful in Taiwan.”194 It is putting in place special incentives to lure Taiwanese semiconductor investment. Meanwhile, the government of Taiwan— although officially banning direct investment in China—is encouraging, through its tax policy, domestic semiconductor producers to relocate their less sophisticated operations to the mainland.195 Some significant moves are already in progress: Chang Ju-ching, former president of Taiwan’s Winbond Semiconductor Manufacturing Company (SMC), has announced plans to use Toshiba’s technology to build two 200-mm wafer fabs in Shanghai, one of which will use 0.25-micron design rules.196 Winston Wang, son of Formosa Group Chairman Wang Yung-Chang, has formed a joint venture—the Hongli Semiconductor Company—with Jiang Mianheng, son of China’s President Jiang Zemin. The venture is to build six fabs in Shanghai, three of which will eventually utilize 300-mm wafer technology. Japan’s Oki Electric will reportedly provide technical assistance, and the Chinese government has reportedly provided preferential financing and a tax holiday.197 Wang reportedly will invest $1.63 billion in this enterprise. Ground was broken on the first 8-inch fab on November 18, 2000, with the startup of mass production (50,000 wafers/month) set for the second quarter of 2002. Wang reportedly stated at the ceremony that “as long as the market needs, Hongli can start to produce chips of 0.18 microns instead of chips of 0.2 microns as it is currently planned.”198 194   See FBIS, March 7, 2001, translation of M. Kimura, “Industry, Government and Universities United in Enthusiasm and Talent for LSIs,” Nikkei Microdevices, March 2001, p. 62 (JPP20010307 000001). 195   “Investment in Mainland China by Taiwan Enterprises: Present Status, Problems and ROC Government Assistance,” Taiwan Industrial Development and Investment Center, internal memorandum; “Beijing Welcomes Taiwan Semiconductor Firm,” Taiwan Economic News,” June 28, 2000, at <http://www.taiwanheadlines.com>. 196   “Since it is a joint venture between the most powerful young master and the richest one across the Taiwan Strait, government officials on the Mainland naturally give all the green lights. The Shanghai Municipal Government guarantees full support. And the state-owned bank on the Mainland has agreed a generous loan of 2.5 billion US dollars. Moreover, the government will provide the most favored treatment to this special project, including tax exemption for five years, etc.” See FBIS, May 11, 2000, reprint of Wen-Hung Fung, “Taiwan’s IT Production Continues Moving Into China,” Taipei Central News Agency, May 11, 2000, (CPP20000511000146) and FBIS, December 5, 2000, translation of Xia Wensi, “The Eldest Young Master Jiang Sailing Smoothly Through Business World – China’s Telecom King Jiang Mianheng,” Kai Fang, December 5, 2000, No. 168, pp. 11-13 (CPP200012113000040). 197   See FBIS, May 11, 2000, reprint of “Jiang Zemin’s Son, Taiwan Company Team Up on Chip Venture,” Taipei Times (Internet Version) May 11, 2000, no page citation (CPP20000511000120). 198   FBIS, November 20, 2000, translation of Pai Te-hua, Wang Chung-ning and Wang Shih-Chi, “Construction of Taiwan-Funded Microchip Plant Begins in Shanghai,” Chung-Kuo Shih-Puo

OCR for page 187
Taiwan’s Advance Device Technology has already built a 6-inch wafer fab in southeastern China.199 In October 2000 it was reported that Taiwan’s Wafer Works Corporation would set up a foundry in connection with China’s Beijing Oriental Electronics Group, using second-hand equipment.200 In December 2000 TSMC Chairman Morris Chang announced plans to visit Beijing, where he was to meet with several delegations organized by the Chinese government—fueling speculation that TSMC was planning to build a foundry on the mainland. A company spokeswoman said the real purpose of his trip was to participate in a bridge tournament. “Our chairman is an avid bridge player,” she said.201 Chinese engineers and specialists will staff the Taiwanese plants in China and may also help to operate semiconductor facilities in Taiwan, where multiple institutional structures exist to diffuse advanced technology.202 Although the Taiwanese are determined never to surrender “the high end” to China, it is unclear how they can prevent diffusion of advanced technology to China—their own as well as that absorbed from their foreign partners and customers. This diffusion occurs through the mobility of personnel, particularly as the boundaries between the two industries become increasingly blurred. One U.S. Taipei-based semiconductor executive notes that a decade ago, many Taiwanese managers were working for U.S. companies. Many have since migrated to Taiwan to pursue their own business opportunities. The results of this are by now well known. In a similar manner Chinese engineers working for Taiwanese and other foreign-invested firms on the mainland or for Taiwanese firms in Taiwan will migrate just like the Taiwanese managers. The PRC government is trying to accelerate this process. Taiwan has always prohibited direct trade and investment with the mainland, and its stated policy toward the relaxation of restrictions on direct investment in     (Internet Version), November 20, 2000, p. 1 (CPP2000112000035). In January 2001 rumors were circulating in Taiwan that this enterprise was encountering financial difficulties and that “further preparation of the site has stalled,” with the result that Taiwanese mid-level executives who had been lured away from TSMC to work on the project were returning to Taiwan. See FBIS, January 13, 2001, “China-Taiwan Princelings Joint Venture Stalled,” Taipei Times (Internet Version), January 13, 2001 (CPP20010116000160). 199   “Taiwan’s IC Makers Eye China—May Contract Low Cost Plants There, but the Island’s Government is Balking,” CMP Media Inc. at <http://www.ebonline.com>. 200   See FBIS, October 3, 2000, “Taiwan Company to Set Up 6-Inch Chip Foundry in China,” Taipei Times (Internet Version), October 3, 2000, no page citation (CPP20001003000135) 201   See FBIS, December 11, 2000, reprint of “Taiwan Semiconductor Chair Going to China for ‘Bridge Tournament,’” Taipei Times, December 9, 2000, no page citation (CPP20001211000132). 202   “Taiwan Legislator Warns of High Tech Exodus,” South China Morning Post, July 6, 2000, online report, <Nikkei BP AsiaBizTech http://www.nikkeibp.asiabiztech.com/archive/onnet/200007onnet.html>.

OCR for page 187
the mainland remains one summarized by the slogan “no haste, be patient.”203 However, despite official prohibitions the government has supported domestic firms’ investments in China on a controlled basis, providing legal advice and tax benefits to firms making desired investments, but imposing fines and other penalties on firms making “undesirable” investments. Divisions exist within the government and the Taiwanese information technology sector over the appropriate scale and pace of future Taiwanese investments on the mainland.204 Despite these constraints the migration of Taiwanese information technology manufacturing, including the semiconductor industry, to the mainland may already be unstoppable regardless of the policy Taiwan’s government chooses to adopt. The fact is the new government is powerless to stop a new wave of hi-tech firms investing on the mainland...about 30,000 Taiwan firms have invested more than US$40 billion on the mainland in the past decade, the vast majority of them routed through Hong Kong [and third countries] to skirt a ban on direct investment.205 DIRECTIONS FOR U.S. POLICY Government intervention in the global semiconductor industry poses complex challenges for the United States. U.S. economic doctrine opposes government intervention intended to produce specific commercial outcomes, but with a few exceptions during the past several decades the United States has not been able to persuade other countries of the wisdom of leaving the evolution of strategic industries like semiconductors to the vagaries of the market. Instead, beginning in the mid-1980s the U.S. government was drawn into a series of limited market interventions to counter the adverse effects of foreign government measures. In semiconductors these include the Semiconductor Trade Agreement (STA),206 the formation of SEMATECH, and the development of the 203   Because of the prohibition on direct investment, all Taiwanese mainland investments are indirect, utilizing offshore corporations to preserve the legal fiction that Taiwanese investments are not being made in China. 204   In January 2001 the chairman of Acer, Inc., Taiwan’s largest PC manufacturer, published an opinion piece blasting Taiwan’s restrictions on high-tech investment on the mainland. But the same month Morris Chang, the chairman of TSMC, said that his firm would not invest in China for at least three years, citing cronyism, corruption, and U.S. export control regulations. See FBIS, January 18, 2001, PRC: Taiwan Computer Firm CEO Cited on Importance of Mainland Expansion,” China Daily, (Hong Kong Edition, Internet Version), January 18, 2001 (CAP20010118000038); See also FBIS, January 13, 2001, “Taiwan Business Leader’s Advice on High Tech (Hong Kong Edition, Internet Version), Investment in China: ‘Donts’” Taipei Times (Internet Version), January 13, 2001, (CPP20010116000158). 205   See FBIS, January 18, 2001, “PRC: Taiwan Computer Firm CEO Cited On Importance of Mainland Expansion,” China Daily (Hong Kong Edition, Internet Version), January 18, 2001, (CAP20010118000038) 206   The objective and the effect of the STA were to open the Japanese semiconductor market and to

OCR for page 187
long-range industry-government-academia partnership embodied in the Semiconductor Roadmap. Ironically, as these and other manifestations of government support for the U.S. industry are being phased out, foreign countries are emulating them. These countries see the enhanced role of government as an important element in a strategy to challenge U.S. leadership in information technology in general and microelectronics in particular. Should We or Shouldn’t We? It is not within the scope of this paper to address the question of whether the U.S. government should provide support to the U.S. commercial semiconductor industry—such as through financing for capital investment or support for applied research aimed at producing a specific products. Any major-scale proposal of such an initiative would be so controversial that it is unclear whether it could be implemented. Rather—in light of the major technical challenges facing the industry and the scale and increases in interventions in this industry by governments abroad—a more practical question relates to what positive role, if any, the U.S. government can play. Such a role might be a part of a broader U.S. response— one that does not contravene conventional U.S. views about the appropriate place of government in the economy. The role of the state in the economy is perhaps a less controversial subject today than it was in the era of Hamilton and Jefferson, but it is not a settled question. A rough consensus has emerged over the past century—articulated first by Theodore Roosevelt and reiterated by successive generations of U.S. leaders—that in economic affairs the government should serve as a sort of neutral referee. As such, it would act where necessary to ensure that competition is “fair” and that the public is not victimized by unscrupulous commercial practices. At the same time, this consensus holds that the government should not intervene to promote or protect the interests of individual competitors or sectors.207     halt Japanese dumping. The STA was criticized for allegedly causing Japanese DRAM producers to form a cartel, which limited DRAM supply and raised DRAM prices. However, the historical record demonstrates that the Japanese DRAM producers were jointly restraining output for market stabiliza-tion purposes a year before the STA was implemented. See Kenneth Flamm, Mismanaged Trade?Strategic Policy and the Semiconductor Industry. Washington, D.C.: Brookings Institution Press, 1996), pp. 168-69, and Tyson, op. cit., pp. 117-22. Collective output restraints for price stabilization purposes are common in Japanese industry and are generally a response to domestic price erosion, not pressure from the United States. In 1996 and 1997, for example, Japanese and Korean DRAM makers reportedly reached an agreement to curtail their output of 16M DRAMs, a move that led to the dou-bling of prices for this product in early 1997. See FBIS, June 14, 1997, “Media Report ROK, Japanese Strategy to Control DRAM Prices,” summarizing articles in Digital Choson Ilbo, January 29, 1997; Choson Ilbo, April 17, 1997; Chugang Maegyong, April 30, 1997; and Maeil Kjongje Sinmun, April 8, 1997, (FTS1997062Y002280). 207   While Roosevelt was the first major U.S. leader to express the concept of the state as neutral

OCR for page 187
In addition, it is widely accepted that the government should take certain affirmative steps to promote general economic welfare, such as: the sponsorship of roads, bridges, and other elements of the transportation and communications infrastructure; promotion of scientific advances; and measures to improve the quality and availability of education and training.208 In the latter half of the twentieth century it also became generally accepted that the government must take certain steps necessary to ensure that industries essential to the national defense exist and remain strong enough to meet the needs of U.S. military forces. But beyond these limited areas in which a role for the state is generally acknowledged, the consensus unravels. While beleaguered U.S. companies and industries sometimes succeed in securing government assistance in the form of bailouts, import protection, special tax relief, and the like, such measures are almost always controversial and for that reason frequently short lived. An imperative of the global economy, however, is that U.S. preferences and practices be measured against the policies and practices of major and emerging competitors, not necessarily for emulation but for a careful assessment of impact and value. Meeting Challenges Arguably, the most serious challenges confronting the U.S. semiconductor industry today are in areas where the government can play an important and positive role without contravening generally accepted U.S. notions of the proper limits on the intrusion of the state in the economy. The brick wall confronting the     arbiter, the idea itself had already gained widespread acceptance in U.S. society. Advocated by influ-ential economic thinkers during the nineteenth century, it was “reinforced by the frontier process and eventually became embedded in U.S. folklore. Economists taught it to their students; politicians paid homage to it; businessmen gave it lip service when they engaged in oratory for public consump-tion….” Ellis W. Hawley, The New Deal and the Problem of Monopoly. Princeton: Princeton Uni-versity Press, 1966, p. 47. While Herbert Hoover will never enjoy stature among his countrymen for his achievements in the economic realm, he was able to articulate these widely shared U.S. values succinctly in a speech delivered during the election campaign of 1928: “It is as if we set a race. We, through free and universal education, provide the training for the runners; we give to them an equal start; we provide in the government the umpire of the fairness of the race. The winner is he who shows the most conscientious training, the greatest ability, and the greatest character.” See Richard Hofstadter, The American Political Tradition, New York: A.A. Knopf, 1948. 208   In the nineteenth century the federal and state governments substantially underwrote construction of railroads and in the twentieth century the construction of airports, highways, canals, and ports. Federal funding of research and development has led to such advances as atomic energy, the Internet, the Global Positioning System, lasers, solar-electric cells, storm windows, Teflon, communications satellites, jet aircraft, microwave ovens, genetic medicine, and a wide array of advanced materials and composites. Office of Science and Technology Policy, Fact Sheet on How Federal R&D Investments Drive the U.S. Economy, June 15, 2000, at <http://www-es.ucsd.edu/stpp/whouse(rp).htm.

OCR for page 187
industry is the type of large technological hurdle that the U.S. government has previously helped industry surmount through support for basic science and pre-competitive R&D. An increase in the volume of federal funding of programs such as MARCO and the Nanotechnology Initiative—basic research initiatives that have enjoyed strong bipartisan support—would be an important first step in attacking emerging challenges in microelectronics. Ensuring the availability of a trained, educated workforce is a core government responsibility. The workforce shortage confronting the industry can be partially addressed by providing additional resources to U.S. universities and incentives for students and faculty to enter and remain active in fields that are critical to the challenges confronting this industry—electrical engineering, physics, and chemistry. The post-Cold War changes in defense and other research budgets must be clarified and redressed. Without the necessary additional funds the students will not be trained, and in any event, cannot be trained quickly. Consequently, even in the face of reduced retention rates, U.S. immigration policy should be administered in a manner that facilitates the attraction of foreign talent to the United States. The potential problems posed by foreign industrial policies are more complex. The United States possesses an array of trade remedies that can be invoked against certain defined “unfair” trade practices, but these tools have frequently proven crude and/or ineffective in the complex realm of global competition in technology-intensive industries. However, a very substantial proportion—perhaps most—of the foreign programs summarized in this survey do not constitute “unfair” trade practices as defined by U.S. law and are not proscribed by any existing multilateral rules. They simply exceed abiding U.S. notions of the appropriate role of the state in the economy. Learning From Past Success The success of the U.S. semiconductor industry during the past 15 years reflects, in substantial part, a series of improvisations by the government and the industry working together to hammer out solutions to challenges arising out of foreign industrial policies without a fundamental departure from U.S. economic values. The Semiconductor Trade Agreement, while controversial and in some respects unique, was nevertheless consistent with a long line of comparable limited actions by the U.S. government designed to open markets and promote competition—and it was phased out when market-based competition in the industry was restored.

OCR for page 187
SEMATECH was created to address specific national defense-related concerns arising out of the growing dependency of U.S. weapons systems on critical components for which a secure domestic production base was regarded as essential. The flowering of the joint industry-government-university effort, reflected in the Semiconductor Roadmap, was in part a response to the strategic promotional efforts under way in Japan and Europe. More broadly they reflected a recognition that a cooperative approach is required to sustain the tremendous benefits offered by this rapidly evolving industry. More improvisation and greater cooperation will be required in the coming decade. POSTSCRIPT Since this paper was written in early 2001, a number of developments have occurred which deserve to be noted here. Most dramatically, China is beginning to emerge rapidly as a major production base for semiconductors. A massive influx of foreign investment and skilled manpower, predominantly Taiwanese, is resulting in the establishment of new semiconductor foundries in the Yangtze Delta region and in Beijing. At this writing (at the end of 2002) two of these new foundries are operational, six more are under construction or will enter the construction phase by early 2003, and at least 11 more are planned.209 This expansion reflects a new Chinese government promotional effort designed to replicate Taiwan’s success in microelectronics on a much larger scale in China, drawing heavily on Taiwanese and other foreign capital, management and technology.210 China’s new policy measures closely resemble those utilized by Taiwan, 209   In September 2002, Shanghai-based Semiconductor Manufacturing Corp. (SMIC) had two fabs operational and planned at least two more, and Grace Semiconductor Manufacturing International, also based in Shanghai, had two fabs under construction and two more planned (interviews with senior executives at SMIC and Grace, Shanghai Zhangjiung Science & Technology Park, September 2002). In Suzhou, He Jian Technology Corporation, widely reported to be affiliated with Taiwan’s UMC, had one fab under construction and five more planned (interview with officials of the Suzhou Industrial Park, Suzhou, September 2002). Taiwan’s TSMC had announced plans to build at least one fab in Songjiang and has acquired sufficient land for additional facilities (interview with official of Shanghai Songjiang Industrial Zone, September 2002). In Beijing, the Beijing Semiconductor Manufacturing Corp. had two fabs in the early stages of construction and at least three more planned (interview with officials of the Beijing Economic Development Area, September 2002). 210   The principal Chinese policies are spelled out in the Tenth Five Year Plan (2001-2005) — Information Industry, http://www.trp.hku.hk/infofile/china/2002/10-5-yr-plan.pdf, and Circular 18 of June 24, 2000, Several Policies for Encouraging the Development of Software Industry and Integrated Circuit Industry, published in Beijing Xinhua Domestic Service, 04:49 GMT, July 1, 2000. The

OCR for page 187
including the establishment of science-based industrial parks, tax-free treatment of semiconductor enterprises, passive government equity investments in majority privately held semiconductor companies, and preferential financing by government banks. In addition, China is providing a protected market for semiconductors manufactured domestically, levying an effective value-added tax of 3 percent for locally made semiconductors versus 17 percent for imported devices.211 The abrupt rise of China as a significant site for semiconductor manufacturing reflects the erosion of several longstanding impediments to China’s development in this sector. With the end of the Cold War, the export control regime administered by Western countries restricting the flow of semiconductor manufacturing equipment and technology to China has loosened substantially, and the new mainland foundries have experienced little difficulty in acquiring equipment and process technology to produce 8-inch wafers using 0.18- to 0.25-micron design rules.212 Taiwan’s legal constraints on investment and technology transfer to the mainland have been relaxed, and many Taiwanese are circumventing such restrictions in any case.213 Finally, in the wake of its entry into the WTO, the Chinese government has abandoned or is phasing out a number of longstanding policies which have deterred inward foreign investment in microelectronics, such     municipal governments of Shanghai and Beijing have issued their own circulars articulating promo-tional policies to be implemented within their jurisdictions to augment the national-level measures. These are, respectively, Shanghai Circular 54 of December 1, 2000, Some Policy Guidelines of ThisMunicipality for Encouraging the Development of the Software Industry and the Integrated CircuitIndustry, Shanghai Gazette, January 2001; and Beijing Circular 2001-4, Measures for Implementing‘Policies for Encouraging the Development of Software and Integrated Circuit Industries’ Issued bythe State Council, Jing Zhen Fa No. 2001-4 (February 6, 2001). 211   Pursuant to State Council Circular 18, qualifying integrated circuit (IC) manufacturing enterprises are eligible for rebates of the VAT on indigenously manufactured ICs which result in an effective VAT rate of 6 percent. Qualifying IC design firms are eligible for rebates which result in an effective VAT rate of 3 percent (Circular 18, Article 52). The effective VAT rate for domestically manufactured ICs has reportedly been lowered to 3 percent. Investors currently establishing semiconductor manufacturing facilities in China are operating on the assumption that the eventual effective VAT rate will be 14 percent. FBIS, February 15, 2002, translation of “Interview with SMIC President Richard Chang,” Nikkei Microdevices (February 2002), pp. 16-17 (JPP20020215000003); FBIS, March 28, 2002, Interview with Tsuyoshi Kanawishi, outside director of SMIC, Nikkei Telecom (02:02 GMT, March 28, 2002) (JPP20020328000017). 212   See generally General Accounting Office, Export Controls: Rapid Advances in China’s Semiconductor Industry Underscore Need for Fundamental U.S. Policy Review (April 2002) GAO-02-620; “China Finds Way to Beat Chip Limits,” New York Times (May 6, 2002), p. 4. 213   FBIS, March 7, 2002, translation of Hsu Yu-chun, “Tsai Ying-wen Says Punishment Will Be Meted Out to Enterprises Which Have Moved to the Mainland,” Ching-Chi Jih-Pao (March 2, 2002), p. 1 (CPP20020307000018); FBIS, August 9, 2002, “MOEA Announces Regulations on Wafer Fab Transfers to Mainland China,” Taipei Central News Agency (08:55 GMT, August 9, 2002) (CPP20020809000092).

OCR for page 187
as the general prohibition on 100 percent foreign-owned enterprises and stringent restrictions on “trading rights.”214 Taiwan’s government planners are seeking to adjust to the growing migration of the island’s semiconductor manufacturing operations to China by implementing a new “roots in Taiwan” strategy in microelectronics. This approach accepts the loss of much of Taiwan’s commodity manufacturing functions and production-line jobs to China but attempts to retain in Taiwan the most advanced manufacturing, design, and distribution functions.215 Specifically, the government hopes to sustain a high concentration of 12-inch wafer fabs on the island, to enhance Taiwan’s capabilities with respect to systems-on-a-chip, and to improve Taiwan’s position in upstream (materials and semiconductor manufacturing equipment) and downstream (assembly, test, packaging) functions. Reflecting this new emphasis, government promotional initiatives are curtailing (although not eliminating) financing for wafer fabs and increasing aid for IC design and upstream and downstream microelectronics functions. Revised tax incentives place greater emphasis on R&D, training, and maintaining “operational headquarters” in Taiwan. Japan has launched a number of government-supported industry-government R&D projects in 2001-2002. The Millennium Research for Advanced Information Technology (MIRAI) was initiated by METI in 2001 to develop next-generation semiconductor materials and process technologies, such as measuring and mask technology for 50 nm-generation devices.216 In 2002, METI launched a 5-year industry-government R&D project to develop extreme-ultraviolet (EUV) lithography for 50-nm device manufacturing in conjunction with an association of 10 Japanese device and lithography equipment purchasers.217 In July 2000, 11 Japanese semiconductor manufacturers established a new R&D company, Ad 214   World Trade Organization, Accession of the People’s Republic of China (Decision of November 2001), WT/L/432 (November 23, 2001), Parts I.5, I.7. 215   Taiwan Ministry of Economic Affairs, Promotional Strategies and Measures (2002); Government Information Office Release, Liberalization of Mainland-Bound Investment of Silicon Wafer Plants (2002). 216   Government funding for this seven-year project was set at 3.8 billion yen for the first year. The project is being operated jointly by ASET and METI’s new semiconductor R&D organization, Advanced Semiconductor Research Center (“ASRC”) in the Tsukuba Super Clean Room. MIRAI website, <http://unit.asit.go.jp/asrc/mirai/index.htm>; Handotai Kojo Handobukku (December 5, 2001), pp. 4-5. 217   The producers have formed the Extreme Ultraviolet Lithography System Development Association (“EUVA”) to undertake the project. First-year government funding was set at 1.09 billion yen. Japan Patent Office General Affairs Department Technology Research Division, Handotai Rokogijutsu Ni Kansaru Shutsugan Gijutsu Douko Chosa (May 10, 2001), p. 17; METI, Heisei Yonnendo Jisshi Hoshin (March 8k, 2002), p. 1; Handotai Sangyo Shimbun (January 16, 2002), p. 3.

OCR for page 187
vanced SoC Platform Corporation (“ASPLA”) to standardize design and process technologies for systems-on-a-chip utilizing 90-nm design rules. METI reportedly will provide 31.5 billion yen for this effort, which will feature partnership with STARC and Selete. METI’s motivation for supporting this project is to create an “All Japan Foundry”—a standardized production line that can be used by all of Japan’s device makers.218 METI is prodding Japanese device makers — with some success—to consolidate their manufacturing divisions and specialize in design.219 218   ASPLA website, <http://www.aspla.com/jp>; Ekonomisuto (July 2, 2002), p. 20. 219   “Next Generation Semiconductor Project — METI Tells Firms to Discard Own Plants,” Nikkei Sangyo Shimbun (June 12, 2002); FBIS, November 1, 2002, “Final Phase of LSI Industry Restructuring, Some Non-Winning Scenarios,” Nikkei Microdevices (November 2002) (JPP2002112000009).