For increasing dependence on the import of semiconductors, the USA finds it a security issue. Hence, the USA signed the Chips act, triggering Chip War. This act has set aside $52 billion to subsidize chip production plants and offer funding for R&D and human resource development. Apart from that, the financial package has $24 billion worth of tax credits for chip production. The winning chip war agenda also includes measures preventing China from accessing the latest process node technologies. Besides, human resource development focuses on expanding STEM education and easing the immigration of foreign STEM graduates. But are these measures good enough for winning the chip war? Perhaps, NO.
The winning chip war depends not only on the state-of-the-art chips’ local production capacity for meeting domestic demand. It significantly depends on maintaining a gap between the technology (notably process nodes) capabilities of the USA and the rest of the world, notably China. For it, is export restriction good enough? The USA must be at the forefront in driving reinventions of major products out of semiconductor edge.
Historically, this is not the first time that the USA has fallen behind in semiconductor edge, and it primarily relies on imports to meet domestic demand. This is also not the first time the USA has been threatened to lose an Innovation edge in significant products due to weak edge in semiconductors. In retrospect, soon after the invention of the Transistor in 1947 by Bell Labs, the USA started losing its semiconductor edge and leadership position in significant electronics products to Japan. And it happened due to a failure to understand semiconductor economics, fueling Reinvention waves. Consequentially, despite having an invention and human resource edge, the USA started losing due to failure to detect latent potentials buried in unfolding dynamics and make intelligent decisions.
Historical lessons for winning chip war
Despite having the capability of unleashing a transformational effect, the transistor invention emerged in primitive form. Hence, even after making radio receivers out of Transistor, RCA, Texas instruments, and many others failed to detect latent potential. Hence, not surprisingly, they decided not to pursue it. Consequentially, they left the billion-dollar radio electronics business for the Japanese to take over.
Within five years of taking a license from Bell laboratories in 1952, Japan emerged as the largest global producer of semiconductor devices in 1957. And Americans happily started importing them due to a growing love affair with Sony’s transistor pocket radio to enjoy rock and roll. Subsequently, Sony and other Japanese companies started repeating the radio reinvention success in TVs, music players, and other consumer electronics. As a result, within 20 years of the Transistor invention, America ended up losing its highly successful radio, Television, and other consumer electronics business to Japan. America suffered from this massive loss due to the failure to detect latent signals buried in semiconductor economics and making intelligent decisions.
The 2nd significant loss of America came from failing to detect latent signals in the electronic image sensor, LCD, flash memory, and LED technologies. Despite inventing and gaining early leads in these critical semiconductor technologies, the USA failed to make intelligent decisions. Upon getting the patent for a 100×100 pixel digital camera, Kodak management could not detect its latent potential and consequential effects. Hence, it left it to Sony to push it toward bankruptcy—creating Kodak moment. Similarly, despite having early lead in LED and LCD, US firms left them to Japan to fuel Creative waves of destruction and unleash Disruptive innovation effects.
America got its semiconductor edge back due to IBM’s decision
Still 1986, Japanese firms maintained their superiority in semiconductors. Fortunately, America got back semiconductor edge in the 1990s. And it’s not due to subsidies through SEMATECH and punitive measures taken against Japanese firms in the 1980s. Instead, it happened due to IBM’s decision to use Intel’s processor 8088 to make Personal Computer(PC). Ironically, due to such a decision, IBM suffered from the burn of PC’s disruptive innovation effect.
Initially, the PC emerged in primitive form. But due to semiconductor economics (powered by Moore’s law), Intel and others kept delivering increasingly more powerful processors at decreasing costs. As a result, PC started to experience exponential diffusion, increasing the demand for Intel’s processors. Consequentially, Intel emerged as the largest chip maker in the world.
America lost the edge due to Intel’s failure to detect latent potential
Unfortunately, America lost the much-hailed edge due to Intel’s failure to detect the latent potential of the smartphone wave. In the early 2010s, while Intel kept busy enjoying as high as 60% gross profit in making chips for PC, the smartphone wave was growing. Consequentially, Intel ended up rejecting Apple’s appeal to produce chips for iPhone 1. As Intel management failed to detect the latent potential of the smartphone wave, cited reasons for rejection were low volume and margin. In those days, TSMC was far behind Intel. Even Samsung’s process node was two generations behind Intel. Hence, Apple ended up getting its iPhone processor processed by Samsung’s 90nm node, while Intel was churning out its PC processor using a 65nm process.
As customers started showing a strong affinity towards iPhone’s software-based multitouch user interfaces, competitors quickly adopted Android. As a result, the demand for increasingly computationally complex and less energy-consuming processors started growing. Hence, process-making fabless companies started asking TSMC to increase fab sophistication. It created profitable opportunities for TSMC to increase R&D investment for process optimization, upgrading fab equipment, and moving to the next process nodes faster than competitors. Consequentially, due to the natural monopoly tendency of the underlying semiconductor economics, TSMC emerged as the global leader, keeping Intel far behind in process nodes.
In retrospect, Intel lost the silicon edge to TSMC, not due to a lack of STEM competence or capital to invest in upgrading process nodes or chip designs. Instead, Intel lost it due to the failure to detect the latent potential of the smartphone’s wave and deciding not to pursue it. Therefore, winning the chip war agenda must take a lesson from this reality.
America lost its innovation edge due to the failure of making decisions in leveraging semiconductor economics
Yes, Silicon Valley is a testimony of America’s great success in semiconductors. It has attained a monopoly edge in a few layers of the value chain. But through the uprising of semiconductors, America lost the edge in many products it invented. It happened due to a lack of understanding of dynamics and failure to make decisions to reinvent products in which America had global leadership. For example, the loss of the epicenter of innovations of cameras, light bulbs, TVs, and many more has been due to the uprising of reinvention waves out of the semiconductor technology core. Despite inventing transistors and having a strong position in the semiconductor industry, America kept losing them. Through the process, America also lost its semiconductor edge.
Semiconductor economics offer lessons
Semiconductor economics nurture the Natural tendency of monopoly due to the fact of pursuing the opportunity of increasing quality and reducing cost simultaneously. It happens due to four primary reasons: (i) unfolding inventions of transistors, (ii) improvement in chip designs, (iii) advancement of process technologies, and (iv) fueling of reinvention waves. Although the semiconductor industry started with the invention of the point-contact transistor, it was soon taken over by the bipolar junction transistors. Since 1947, more or less, 24 significant types of transistors have been invented. Notable ones are BJT, MOSFET, FinFET, vertical 3D NAND, gate-all-around (GAA) transistor, and complementary FET. Leveraging any of these inventions demands continued refinement, even over decades. Furthermore, there is a need for suitable process technology to produce them so that cost keeps falling and quality keeps rising.
The next one is about chip design. Over the decades, economics has suggested expanding each building block’s capability and adding a growing number of blocks on the same wafer. Some recent additions to the CPU building block are GPU, Neural Engine, and Machine learning controllers. Furthermore, there has been an increasing role in software. As a result, the complexity and cost of chip design have been increasing to realize higher performance and improved Economies of Scale. In failing to cope with the growing complexity of integrating an increasing number of modules on the same die, Intel and others have been after Chiplet to get back the glory. Is chiplet strong enough to fuel major reinvention waves?
The 3rd area is process node sophistication. The central building block is the lithography machine. It took more than ten years for ASML to exploit the latent potential of EUV to make it possible for sub-10nm dimension. The advancement in process nodes is vital to keep semiconductor economics alive.
Fueling reinvention waves—key for winning chip war
Although the process nodes, chip design, and foundry operation capability surface the discourse of winning chip war agenda, the critical missing element is the role of reinvention wave in sharpening semiconductor edge. In the absence of a suitable reinvention wave, the semiconductor edge does not keep improving due to a lack of profitable opportunities for monetizing R&D and plant investment.
For example, despite having a weaker base in STEM competence compared to the USA in the 1950s, Japan attained a semiconductor edge due to leveraging of unfolding profit-making opportunities in nurturing reinvention waves of Radio, TV, and other consumer electronics products. The chance of profiting from reinvention waves in sharpening semiconductors led to Japan’s attaining global supremacy and winning the Nobel prize in Transistor in 1974. Similarly, the underlying force behind the rise of Intel and Silicon Valley regaining the American semiconductor edge was the uprising of the PC wave. On the other hand, despite benefiting from subsidies and trade restrictions, American lithography companies could not survive in the 1980s.
The underlying reasons for the rise of TSMC are not due to Taiwan’s superior STEM competence or the massive subsidies the Taiwanese government provided. Instead, the success of TSMC and Taiwan’s semiconductor cluster has emerged due to creating flywheel or snowball effect. TSMC created it out of the software-centric smartphone wave—originating from the reinvention of feature phones or keyboard-centric design of the smartphone.
What does it take to win the chip war?
Yes, you need money to allure state-of-the-art fabrication plants. You also need money to fund R&D and develop human resources for running those fabrication plants. But most importantly, you need demand; you need demand out of reinvention in creating profitable returns on your investment in R&D, fabrication plant, and human resource development. As history says, demand for increasingly sophisticated chips is at the core of gaining or losing the semiconductor edge. And such demand emerges from reinvention waves of major products.
Although reinvention waves are critical for increasing demand for developing semiconductor edges, they emerge in primitive form. As a result, they are often misleading. Due to it, RCA and Kodak left consumer electronics and camera reinvention waves to the Japanese to leverage. On the other hand, IBM left the PC wave to Microsoft and Intel to fuel their rise from tiny Startups to a mega corporations. Similarly, Xerox gave away graphical user interface-based PC reinvention to Apple.
But all reinvention waves do not grow as Creative Destruction forces in playing the role of tailwind. For example, to make an entry in the mobile processors, Intel pursued WiMax to make it a creative destruction force. But it measurably failed to gain momentum, resulting in a loss of money and time for Intel. Similarly, Mobileye’s lackluster valuation and IPO raises questions about Intel’s investment of $15.2 billion in Mobileye’s acquisition in 2015 for being the leader in the autonomous vehicle chipsets market.
Lesson
Historical lessons indicate that subsidies, R&D, human resource development, and restrictions will not lead to winning chip war. The underlying cause is the semiconductor economics and the pivotal role of reinvention waves in leveraging it. Hence, winning the chip war demands understanding dynamics, detecting latent signals, and making intelligent decisions in profitably sharpening semiconductor edge—turn by turn. Hence, obvious issue to ponder: how far America is on the path of winning the chip war.
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