Two bits of recent news has excited people in the semiconductor manufacturing space. First TSMC (bit.ly/384joVr) announced their intention to invest $12 B dollars in a Fab in Arizona. Then came the Corona-driven bipartisan proposed $23B federal government investment in semiconductor manufacturing (nyti.ms/2YZzFqnl). The question is what is the potential impact of this and can it meaningfully change the semiconductor fab landscape?
A very brief History of Semiconductor Manufacturing
The US was the birthplace of the semiconductor from the invention of the transistor by Shockly in 1940s giving rise to the early leaders like Fairchild Semiconductor which in turn spawned legendary companies like Intel. In the days when every semiconductor company made their own devices and fabs cost a few million dollars, manufacturing sites mushroomed giving Silicon Valley its name.
In the 80s, Japan started investing heavily in fabs and the US started to lose their leadership in the industry. Japanese applies their quality and manufacturing prowess to dominate segments like memory chips, pushing Intel to move from memory chips to microprocessors in the mid 80s. However, the bigger shift happened in the 90s through the advent of foundries and fabless design companies. Led by companies like TSMC and UMC they caused many of the smaller scale fabs to be no longer cost effective. At the same time Korean Chaebols like Samsung started investing heavily in manufacturing and now two Korean companies Samsung and Hynix dominate the memory chip market. US now manufactures less than 12% of the world’s IC chips.
In 2014 China decided that Semiconductor manufacturing is a matter of national security and began implementing an ambitious “Big Fund” $20B+ initiative to move China from a minor player with less than 10% market share to a global giant taking on the Koreans, Taiwanese and Americans. In 2019 they announced a “Big Fund II” that was double the size of the previous fund. On top of that local government entities invested their own funds in local projects and state-owned banks make cheap capital available. Chinas IC output is now around the same as the US at around 12% of global production.
Chip Manufacturing in America Today
After a wave of consolidations and outsourcing most American companies have exited the manufacturing race. There are only three major companies left: Intel, Micron and Global Foundries (GF). GF is not even a truly American company being privately owned by Mubadala, the sovereign wealth fund of the UAE. Each has its own niche and do not compete with each other. Intel is an IDM (Integrate Device Manufacturer) and produces microprocessors for PCs and Servers. Micron produce memory chips (NAND and DRAM) and Global Foundries, as its name suggests, is a contract manufacturer for fabless chip companies. But semiconductor manufacturing is a global business and all the three companies operate global fabs. Intel routinely rotates new fabs between the US, Ireland and Israel. Microns operates fabs in Japan and Taiwan and latest large investment was in Singapore. GF has plants in Germany and Singapore as well.
Let’s take a look at the key elements involved in setting a state-of-the-art Semiconductor Fab.
1. Sustained Capital Investment: A state of the art fab now costs north of $10B. The total Capex of Semiconductor manufacturers in 2019 totaled $102B. And in order to stay relevant to Moore’s Law, companies must bring to market new technology nodes every 2 years. In this scale a one-time boost of $23B doesn’t change the game for the US. There is also a question of how the subsidies are structured. In the past, for example in the Solar industry, the US model has been some kind of complicated structure using the tax code via credits, tax breaks etc. This is an inefficient way to deploy capital.
2. Engineering Talent: US Universities produce a large number of engineering graduates and the US remains a desirable destination for world talent (not withstanding recent moves by the administration to change that). Staffing new fabs should not be an issue.
3. Infrastructure: Land, A stable power grid, water supply, transportation infrastructure are all essential. From this perspective the US being a developed country is not lacking.
4. Supply Chain: The supply chain for Semiconductors is as global as the end product. It is very difficult if not impossible for a country to be fully self-sufficient in manufacturing. The US is well placed for some key building blocks like production equipment with the largest suppliers AMAT, LAM and KLA being US companies. But even there the Dutch company ASML holds a monopoly on the critical photo lithography steps. On the materials side it’s even more difficult as the manufacturing process uses hundreds of chemicals and gases, many of which have to be sourced from Asia. So true end to end self-sufficiency for any country is pipe dream.
Who will build the new Fabs in the US?
Intel has historically continued aggressive technology development and fab builds. With some additional incentives it is likely they would choose US sites rather than Ireland or Israel for future investments. Not surprisingly Intel has been lobbying strongly for the US government support of the industry. However even Intel has in the past tried the foundry model and not made any progress. And in recent announcements citing more delays in their 7nm process, even indicated their willingness to use outside partners for manufacturing (bit.ly/2DHVzrq)
Micron has been growing more via acquisition of Japanese and Taiwanese companies and expanding in Singapore. Memory chips are a commodity product and highly costs sensitive. It is unlikely Micron would build another large-scale US fab any time soon.
Global Foundries has exited the race for the latest process nodes and is focusing on some more niche technologies and applications like FDSOI. It is also in financial trouble and only being kept afloat by the Mubadala group. It is very unlikely to see a new leading edge fab by them anywhere in the world in the next few years.
Global Players: The other top global players (leaving aside Chinese companies) are TSMC, Samsung and Hynix. Samsung operates two fabs in Austin and it is conceivable that they would expand there if there were sufficient incentive to do so. Hynix has no history of operating in the US (they do operate a large fab in China) and is unlikely to start now.
TSMC has dabbled with the idea of a US fab for a while but has never pulled the trigger. TSMC also is greatly favored by the Taiwan government as a national jewel and is given plenty of reasons to continue expanding in Taiwan. Taiwan is small island and TSMC can effectively rotate their key people between sites very easily. In spite of the recent announcement of the Arizona investment the advantages for TSMC of a fab in the US are hard to see, other than political. Much like the ballyhooed Foxconn plant in Wisconsin that didn’t happen, it could be a political hedge against future tariffs. It could be a nod to Apple to move their supply chain to the US as well. But from a pure operational and financial basis, there is no seeming advantage to the move.
Can the US learn from the China model?
Compared to that China typically funnels money via direct equity investments or loans through state banks which greatly accelerates the speed of putting up the new Fabs. Chinese companies also take a long view of an industry and are willing to operate at losses for several years. For example, they completely dominate Solar manufacturing (90% of solar cells are made in China) and have become a major player in display manufacturing stealing share from the Koreans and Japanese.
The US must show similar long-term commitment to Federal and State support. But this is very difficult in our political system. Again, taking Solar as an example, various combinations of Federal tax credits and State incentives were used to jump start the industry. And this worked on the installation front where cost/watt kept dropping. But the US is a minor player in the manufacturing of the solar cells and modules themselves.
And finally, since only the top 5 IC makers have the wherewithal to make leading generation fabs, any policy must be aligned with the strategic objectives of these companies. Some of that could be done through punitive measures like tariffs and trade actions but this is rarely a sustainable in the global economy.
In the end it probably makes more sense to focus on a small subset of critical chips that have true national security implications and continue to fund them as necessary. But a large scale shift of IC manufacturing back to the US doesn’t seem a likely scenario.
What do you think? Comments, debate and discussion welcome!
Anish Tolia, Ph.D
Global Marketing Executive/Consultant