doc_semiconductor_policy_lit_review

Government Policies for the

Global Semiconductor

Industry

Amy Turner

July 29, 2016

IntroductionIn 2014, the Chinese government released their new policy regarding the

semiconductor industry. The policy illustrated a market-based approach which would offer

greater autonomy to private entities by allowing them to distribute their government

funding. While this may be an innovative semiconductor policy to the Chinese, it is not

unique in the global community.

In the late 70s and early 80s, Germany maintained a semiconductor strategy almost

identical to the 2014 Chinese policy. The German strategy featured government

investment in a finite number of companies, such that the private enterprise officials were

at liberty to allocate the funds at their own discretion. Despite the risk presented by such

an arrangement, it was under this policy that Germany rose to the top of Europe’s

semiconductor industry. Therefore, it would appear strategic for China to pursue a similar

tactic.

Beyond Germany, similarities to China’s current policy can be found in Korea’s focus

on the elevation of national champions and the European Union’s drive to stimulate

investment through government spending. On the whole, however, most countries merely

offer assistance to industry Research & Development, provided they have any

semiconductor policy at all.

Data has also been included in this review which would suggest that a number of

foreign governments include programs similar to the Committee on Foreign Investment in

the United States. The aim of such programs is to monitor Foreign Direct Investment in

industries where national security could be threatened by a foreign entity gaining control.

The semiconductor industry is, of course, one of these sectors worth monitoring.

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People’s Republic of China

Semiconductor Policy

According to Gordon Orr and Christopher Thomas’ 2014 piece in McKinsey &

Company, China is the world’s largest consumer of semiconductors, with 90% of their

consumption reliant upon imported integrated circuits. 50% of the global market for

Android phones was designed in China, and 30-40% of embedded systems contain content

designed in China. Five years ago, Chinese designs for Android phones were negligible,

but the industry is clearly growing rapidly.

Previous Chinese semiconductor policies were more concerned with research and

academia, but the new 2014 policy allows for a market-based investment approach. The

policy’s framework sets the goal of a 20% compound annual growth rate in the

semiconductor industry between 2014 and 2020. Over the next five to ten years, $170

billion of government financial support has been allotted to the industry. Investments will

be made by the National Industry Investment Fund and provincial-level entities via project

finance, domestic and foreign acquisitions, traditional research, development subsidies,

and tax credit. The Chinese government is choosing to invest almost exclusively in select

companies leading in each critical segment of the semiconductor market, typically within a

few select provinces. In doing so, China hopes to raise up “national champions” to lead the

global semiconductor industry, as well as generate industry clusters within a few choice

provinces.

One significant downside of the new policy is that emerging Chinese companies in

the industry will find it extremely difficult to compete with the government-supported

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national champion firms. Likely, smaller firms will either merge with the larger companies

or fail in the industry.

Breaking it down, there are three notable differences between the former and

current semiconductor policies. First, government investment in the semiconductor

industry is now forty times higher than previously, reserving $170 billion to be invested

over the next five years. Secondly, the primary focus is now to provide government aid to

specific companies, rather than the national industry as a whole. Finally, private-equity

firms now decide where public funds ought to be allocated based upon the markets, which

can either be seen as a risk or a demonstration of trust on the part of the Chinese

government.

Sources:

Ernst, Dieter. From Catching up to Forging Ahead: China’s Policies for Semiconductors.

Honolulu, HI. East-West Center, 2015. Print.

Orr, Gordon, and Christopher Thomas. “Semiconductors in China: Brave New World or

Same Old Story?” McKinsey&Company (June 2014). Web.

Thomas, Christopher. “A New World under Construction: China and Semiconductors.”

McKinsey&Company. McKinsey&Company, Nov. 2015. Web.

Republic of Korea


Korea is America’s number one competitor in the semiconductor industry, with two

companies in the world’s top ten semiconductor producers (the U.S. holds five spots, with

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Intel as number one). Korea had previously been a fast follower in the semiconductor

industry, but in the 1990s and 2000s the government sought to increase the capacity and

funding for its Research and Development sector, as well as basic science. The result was

greater intensity for R&D, more patents and publications, and more high technology

exports, moving Korea into the semiconductor spotlight.

It would appear that the Republic of Korea does not have an explicit semiconductor

industry policy. Over the past two decades, Korea has built up a globally-savvy brain trust

mainly by sending their students to American universities. Korean R&D has grown

substantially since 2000, but the only similarity between their policy and that of China

seems to be their focus on raising up national champions in the industry, such that now

small and medium firms struggle to acquire funding and grow, as it is predicted will

happen in China.

Sources:

Gupta, Nayanee, David M. Healey, Aliza M. Stein, and Stephanie S. Shipp. “Innovation

Policies of South Korea.” Institute for Defense Analysis (August 2013). Web.

United States. U.S. Department of Commerce. International Trade Administration. 2016

Top Markets Report Semiconductors and Semiconductor Manufacturing Equipment

Country Case Study. Washington DC. 2016. Web.

Japan


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Also a leader in the semiconductor industry, Japan’s standing in the global markets

for semiconductors has fallen somewhat significantly since it directed the industry in 1990.

The cause of their decline is a combination of their slow adaptation to emerging markets

and the country’s various economic crises during the past two decades. The government

does not seem to have a specific policy laid out for the semiconductor industry at the

moment, but expects GDP growth to stimulate the industry’s continued development.

Sources:

“Seven Facts about Japan Semiconductor Manufacturing Supply Chain.” SEMI.ORG. SEMI,

04 Nov. 2014. Web. 21 July 2016.

Tanner, Paige. “Growth to Revive in Japan’s Semiconductor Industry.” Market Realist.

Market Realist, Inc. 24 Dec. 2015. Web. 21 July 2016.

Tanner, Paige. “Why Did Japan’s Semiconductor Industry Fall?” Market Realist. Market

Realist, Inc. 10 Sept. 2015. Web. 21 July 2016.

Taiwan


Taiwan is a close follower of the leaders in the semiconductor industry. The

government’s 2002 policy took a seemingly contradictory stance as they furthered

international interactions with advanced countries while also encouraging domestic

innovation and development of local technology. The Taiwanese government established

their companies to be “strategic suppliers” of international companies by focusing on

meeting the demands of large MNCs and gleaning technological and informational

spillover along the way. Taiwanese companies also utilized multiple technological channels

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and tolerated the presence of foreign multinational firms in the domestic economy. All of

this interaction with foreign industry players has provided low-cost research and

competency building, such that Taiwan has kept themselves apprised of the leaders’ new

technology and maintained their position as third or fourth in the industry.

One pitfall of the Taiwanese strategy is their tendency toward full-setism. This is the

idea that a nation should produce every kind of component in a given sector, ultimately

causing inefficiencies when companies do not absorb the economic benefits of outsourcing

or engaging with comparative advantage.

Sources:

Fuller, Douglas B. “Globalization for Nation Building: Industrial Policy for High-Technology

Products in Taiwan.” MIT Japan Program. Massachusetts Institute of Technology, 10

Jan. 2002. Web.

Wang, Jyun-Cheng. “Upgrading the Economy: Industrial Policy and Taiwan’s

Semiconductor Industry.” Social Science Research Network. National Tsing Hua

University, 14 Dec. 2010. Web. 20 July 2016.

Shih, Willy C, and Jyun-Cheng Wang. “Upgrading the Economy: Industrial Policy and

Taiwan’s Semiconductor Industry.” Harvard Business School Case 609-089, Feb,

2009. (Revised Dec. 2010). Web.

Tanner, Paige. “Factors Driving the Semiconductor Industry in Taiwan.” Market Realist.

Market Realist, Inc. 10 Sept. 2015. Web. 21 July 2016.

The European Union

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In 2013, the European Commission launched its 10|100|20 semiconductor industry

strategy to reverse Europe’s decline in the market. During the 1990s, Europe held a 15%

share of semiconductor production, but this has fallen to below 10% in the last decade.

The premise of the 2013 strategy is that the EC will provide $10 billion of public or private

funding to generate $100 billion of industry spending, ultimately increasing Europe’s

control of the global semiconductor industry to 20% by 2020. The EC credits the decline of

Europe’s semiconductor industry to a drop in investment, construction of new fabs in Asia

as electronics manufacturing shifts to that region, and the inclination of semiconductor

companies to adopt a fab-light business model. Thus, heightened spending is expected to

stimulate investment and improve Europe’s standing in the semiconductor industry.

Sources:

Georgoutsakou, Rania, comp. “Single European Semiconductor Strategy for Europe.” Semi

Europe (2012): 1-5. Semi. Web.

Tanner, Paige. “Germany to Drive Growth in European Semiconductor Industry.” Market

Realist. Market Realist, Inc. 24 Dec. 2015. Web. 22 July 2016.

“EU 10-100-20.” Semi.org. SEMI. Web.

India


India’s 2013 semiconductor policy was merely an incentives package to attract

investment in the industry. There are two options of SEZ (Special Economic Zone) or non-

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SEZ for each type of unit, being Fab or Eco-system. The only significant difference

amongst the four types is the threshold NPV of investments in 2500 crore (about 371.4

million usd) for Fab units versus 1000 crore (about 148.6 million usd) for Eco-system units.

There are no notable similarities between the Indian and Chinese semiconductor policies.

Sources:

“Semiconductor Industry in India.” India Brand Equity Foundation. Ministry of Commerce &

Industry, Government of India, Jan. 2016. Web. 20 July 2016.

“Semiconductor Policy.” India Electronics & Semiconductor Association. Briskon

Consulting, 2013. Web. 26 July 2016.

Canada


In 2007, Canada released their R&D Strategy, not specific to semiconductors. The

three main objectives of the strategy were to galvanize Canada’s private sector to turn

knowledge into products, expand Canada’s technological knowledge base, and transform

Canada into a magnet for trade. The strategy gave Canada the lowest tax rate on new

business investment in G-7 and improved government aid to R&D by establishing the

Networks of Centres of Excellence Program and improving the R&D assistance program,

orienting research towards areas of national interest (such as environmental sciences and

technology, natural resources and energy, health and related life sciences, information

and communication technology), developing hands-on research internships for students,

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and conducting a periodic review of the industry’s research priorities. The policy also

lowered personal income tax within the sector so as to attract skilled labor.

The main focus of most articles regarding Canada’s semiconductor industry was

that productivity had diminished as of late, but invigorated R&D is expected to breathe

new life into the industry. There are very few similarities between Canada and China’s

industry policies, especially since Canada’s policy is not specific to semiconductors.

Sources:

Canada. Mobilizing Science and Technology to Canada’s Advantage. Ottawa, 2007. Web.

Canada. Mobilizing Science and Technology to Canada’s Advantage: Progress Report 2009.

Ottawa: 9-11, 45, 2009. Web.

“About the Networks of Centres of Excellence.” Networks of Centres of Excellence of

Canada. Government of Canada, 11 July 2016. Web. 22 July 2016.

Italy


The Italian government has apparently never had a policy specific to

semiconductors, but offers the industry R&D subsidies and funding. One could argue that

they also chose a market driven strategy, but ultimately the Italian government has

merely been uninvolved. Italy’s semiconductor industry falls under the European

Commission’s 2013 policy, as described on page 3.

Sources:

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Malerba, Franco. “5.4 Italy.” The Semiconductor Business: The Economics of Rapid Growth

and Decline. Madison: U of Wisconsin, 1985. 198-200. Web.

Germany


Germany is the beating heart of the European semiconductor industry. In the 70s

and 80s, the German government chose to implement a market driven policy which

allowed firms to pursue whatever research and development avenues they saw fit,

however risky or unproductive they may initially appear. Policymakers gave funding to a

limited number of industry leaders (namely Siemens, AEG-Telefunken, Valvo, and

Intermetall), creating a finite number of market-dominating companies. Their progress was

monitored by a handful of independent experts, and the policy has resulted in expansive

productivity for Germany’s semiconductor sector.

There are numerous similarities between Germany’s policy of the 70s and 80s and

that of the Chinese government now, which is not surprising if one can imagine that China

chose to formulate a policy similar to that of the European semiconductor industry leader.

Both policies choose to finance a few specific companies to develop industry leaders

(national champions) rather than primarily fund the sector as a whole. Likewise, both plans

allow private businessmen to allocate public funds, allowing the companies to focus on

what the market prioritizes rather than what the government considers most useful. This

includes an element of risk on the part of the government, but has historically paid off.

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Currently, the German semiconductor industry has plans to abandon nuclear energy

in 2022 and solely pursue renewable energy sources. This will require vast research and

investment efforts, such that Europe and Germany are expected to drive the market

demands for power semiconductors in the coming years, despite North America’s market

maturity. Germany will also fall under the European Commission’s semiconductor policy,

as described on page 3.

Sources:

Malerba, Franco. “5.1 West Germany.” The Semiconductor Business: The Economics of

Rapid Growth and Decline. Madison: U of Wisconsin, 1985. 189-192. Web.

“Semiconductor Industry in Germany.” Germany Trade & Invest. Federal Republic of

Germany, October 2012. Web.

France


Historically, the strength of the French public bureaucracy allowed consumers and

government policymakers to direct technological production within the semiconductor

industry. Government officials encouraged acquisitions between domestic firms and joint

ventures with foreign firms. After 1978, the French government established specific

programs to support the domestic technology industry, such as VI Plan, VII Plan, and Plan

Calcul. Private businessmen have had very little autonomy in the French semiconductor

industry, directly contrasting the current Chinese policy. France was a leader in the

semiconductor industry for some time, but was never particularly competitive since they

lacked a coherent semiconductor strategy. Thus, French companies will merely fall under

the European Commission’s policy, described on page 3.

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Sources:

Botelho, Antonio José J. “The Industrial Policy That Never Was: French Semiconductor

Policy, 1945-1966.” Taylor & Francis Online. Taylor & Francis Group, 30 June 2008.

Web. 21 July 2016.

Malerba, Franco. “5.2 France.” The Semiconductor Business: The Economics of Rapid

Growth and Decline. Madison: U of Wisconsin, 1985. 193-194. Web.

The Netherlands


Chinese and Dutch semiconductor companies began collaborating in 2015. The

semiconductor industry is vital, yet proportionally small, in both countries’ economies, and

this offered a common point of interest between the two nations. The Holland Innovation

Network hosted a seminar between Chinese and Dutch companies during the 2015

Semicon China at the Consolate-General in Shanghai. The seminar allowed time for

company heads to network and mingle, building relationships between the two nations.

Business Cluster Semiconductors Netherlands and Suzhou IC Industry Association later

signed a Memorandum of Understanding at the Semicon China exhibition, agreeing to

strengthen the international scope of their members’ portfolios, as well as to support and

facilitate further collaboration amongst their members.

Sources:

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Hezewijk, Bart van. “Opportunities for Dutch Semiconductor Equipment Companies in

China.” Netherlands Enterprise Agency, 22 Mar. 2016. Web. 25 July 2016.

United States. US Department of Commerce. International Trade Administration. 2016 Top

Markets Report: Semiconductors and Related Equipment. By Dorothea Blouin.

Washington, DC: 31-34, July 2016. Web.

The United Kingdom


Previously, the UK fell under the European Commission’s semiconductor policy, but

due to Brexit that relationship will likely be terminated. The only other notable policy was

the BIS 2011 Strategy for Success within the Power Electronics sector. This policy laid out

five challenges to UK competitiveness and five approaches to resolve each of them. Most

of the challenges would be resolved by the National Forum for Power Electronics, which

would monitor the industry’s progress, identify experts in each sector to maintain the

Smart Grid, and promote Power Electronics education at every stage of UK schooling. This

strategy was not specific to the semiconductor industry, and the UK will likely need to

rethink their semiconductor policy separate from the EU in the aftermath of Brexit.

Sources:

United Kingdom. Department for Business, Innovation and Skills. Power Electronics: A

Strategy for Success. London: Crown, 2011. Web.

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Israel


Israel continues to be a competitor in the semiconductor industry, with the second

or third highest concentration of design houses and semiconductors accounting for 22% of

their exports in 2010. However, the Israeli government does not have an explicit

semiconductor policy of note.

Sources:

Getz, Daphne, and Itzhak Goldberg. “Best Practices and Lessons Learned in ICT Sector

Innovation: A Case Study of Israel.” Comp. Eliezer Shein, Bahina Eidelman, and Ella

Barzani. Digital Dividends (2016). World Development Report 2016. Web. 25 July

2016.

Gradman, Sol. “An Overview of the Israeli Semiconductor Industry.” TapeOut Magazine.

Oct. 2011. Web.

Singapore


As of 2002, the semiconductor industry accounted for 28% of Singapore’s

electronics industry output. The sector’s recent growth was largely attributed to an

increased market demand and expansion in the manufacturing operations of wafer fabs,

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assembly, and testing. Singapore prides itself on having a wide range of government

programs to facilitate semiconductor industry development which offer incentives for

locally conducted R&D and support for infrastructure and human resources development.

The government’s main objective is to train highly-skilled workers to continue

strengthening the industry, but they do not appear to have a current semiconductor

industry policy available for evaluation.

Sources:

Thai, Leong Keng. “Infocomm 21L Singapore’s Vision of the Digital Future.” IDA Singapore.

Singapore Government, 05 June 2000. Web. 25 July 2016.

“Singapore Semiconductor Industry Report.” Singapore Ic Report. Meta. Web. 25 July

2016.

*Notable semiconductor-related policies could not be found for Sweden,

Liechtenstein, Finland, Austria, Belgium, or Switzerland—however, all of

these except Liechtenstein and Switzerland fall under the EU’s policy on

page 7.

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