U.S. Chips: A Race Against Monopoly?

Tough Things First

The Chips and Science Act is supposed to lower silicon chip manufacturing costs, create jobs, and strengthen supply chains. It all started three years ago, but as Ray Zinn explores in this Tough Things First Podcast, China’s head start caught many by surprise.

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Rob Artigo: Hi, Ray. I was reading about this fresh influx of about $8.5 billion in…

Ray Zinn: No, $85 billion, $85 billion.

Rob Artigo: $85 billion? Well, in this particular story that I was reading deals with Intel and it said $8.5 billion so you’re saying…

Ray Zinn: That’s just to Intel.

Rob Artigo: Yeah, just to Intel. In this Intel thing, $8.5 billion in CHIPS and Science Act funding to help Intel build its semiconductor plant and upgrading an existing plant in Chandler, Arizona and downtown Phoenix. It’s expected to bring in thousands of high-paying jobs and that sort of thing. But I really wanted to just use that as a bouncing board to say, “Where’s the industry right now? The chip industry.”

Ray Zinn: And I might have my numbers wrong, maybe it’s $58 billion, not $85 billion, but it might be 50. I don’t remember the exact amount. But what happened was is back in the late seventies, early eighties, the industry began moving offshore some of their manufacturing because it was less expensive and mainly the less expensive and more they offloaded upsourced or sent out the higher labor-intensive parts of the manufacturing, such as assembly and test of the semiconductors.

Ray Zinn Cont: And they did this primarily in Asia, and in Asia Pacific. And that began the beginning of the end as you would, as you open up that door cracked and then it swings wider as time goes on.

And as a consequence of them moving that assembly and test offshore, first it was assembly, then it became assembly and test, that gave these other countries an opportunity to see what you’re doing. And they gained a foothold in semiconductors. In the late nineties, they really opened the door up for China. This is the Y2K thing, the changing of the centuries. And they opened the door up to allow manufacturing in China with semiconductor wafer fabrication. Wafer fabrication is the process technology that’s used to create these wafers with the chips on them, the circuitry on the wafer itself.

And they sold a lot of the used equipment that we had. They bought, I should say, we sold, they bought a lot of used equipment, and they began manufacturing wafers themselves. Mainly older technology, 10, 15, 20-year-old technology they were using in China primarily. In Japan that began in the eighties with memory chips. They opened the door up to let Japan have access to our technology. And Japan then became the world’s largest supplier of semiconductor memory. Then they opened up the door for South Korea in manufacturing processors, which is the heart of a computer, step by step, piece by piece, the industry began to give up its crown jewels to these other countries.

Now, of course, Europe has always had our semiconductor technology, but then it got into Russia and the communist countries vis-a-vis they began to… As you would steal our secrets and our patents. And I want to start out by saying that the gross national product of the world, or worlds, as you would, the world GDP, really is formed from what we call non discretionary… From discretionary products like TVs, radios, computers, all kinds of electronic technology. So goes the electronics industry, so goes what we call world GDP, which is what call discretionary technology.

Non-discretionary courses is what you have to have every day to eat, rinse, food, energy, and that sort of thing. That’s called non-discretionary. But discretionary is electronics. And the heart of electronics, and it’s always been the heart of electronics, has been semiconductors, at least in the last hundred years. And so semiconductors are extremely important in the manufacturing of almost all products now, whether it be refrigerators, washing machines, cars, things that before didn’t have much electronics in them, your kitchen now is almost 100% electronics. And that semiconductor technology became crucial to electronics.

Some of the biggest electronics suppliers now are non-US companies like LG and Samsung, and some of you should recognize some of those names. And they’re in everything, primarily in our homes. It became very prevalent going into the 2000’s, the technology spread like wildfire. Well, of course China wanted to build up their GDP as you would. And really semiconductor technology is at the heart of China’s growth. Huawei, and ZTE, and some of those other companies that are big companies in China that produce large electronic systems are hungry for semiconductor technology.

Well, in 2005, China made a goal, published goal that they wanted to produce 95% of all their own chips by 2025. And we, I guess frowned or we didn’t think much of it. We didn’t ho-hum, “Oh, they really can’t do that.” Well, they have surprises because they have been able to do it and because of environmental concerns here, the green and environmental and whatever, the semiconductor industry has really been shut down in the United States because of environmental issues, because there are a lot of environmental issues associated with the manufacturer of semiconductors. Of course, the environmental issues are more government funded or affected than anything else. The government, to a large extent has brought about this demise of semiconductor technology in the U.S.

Rob Artigo: And China doesn’t care about that stuff.

Ray Zinn: No, no. China is careless about environmental issues. They’re more than happy to welcome semiconductor technology.

Well, as it turns out, the U.S used to be 75% of all semiconductors were produced in the U.S, or at least the processing of wafers was done in the US. Now that’s shrunk to under 30% worldwide are produced here in the US. The government is finding out finally, after 50 years, they have finally figured out that semiconductor technology is extremely important to GDP, gross national product. If we’re going to continue to grow and not give up as you would our growth potential, especially in what we call discretionary products, we got to get that technology back into the U.S.

Now, here’s something that’s interesting and why I think there’s still hope is that the technology changes about every five years. One thing we have to our advantage is that 90% of all semiconductor equipment, production equipment is still produced in the US and Europe, and these European countries are favorable to the US and there are partners.

We do control the technology by virtue of the advancement and manufacturing of semiconductor manufacturing equipment. We do have the ability to stay ahead if we don’t give up our equipment technology, as you would, we will still be able to stay ahead. But the government has finally realized that we need to get back to producing things here in the US and not just become a service and financial GDP, as you would, that we do need electronics. And so therefore the US is, I think is, I don’t remember now, but I think it’s $58 billion or something like that. They got approved to introduce or to get back manufacturing in the US, and Intel was a recipient of a large portion of it. And that’s in creating those new fabs in Channel, Arizona.

Rob Artigo: Yeah, the number that I was looking at was 50… Looks like $50 billion, at least in the US Department of Commerce website says $50 billion, and that’s a lot of money. And we’ll see where that takes us. The only thing I would ask you to finish this off is to say, or to ask, are we really divesting from China in doing so or are we in some ways benefiting China with CHIPS Act funding?

Ray Zinn: Well, we are trying to divest ourselves from manufacturing semiconductors in China. I do see that happening and China sees it happening, and we’re also preventing China from selling some of their high-end technology back into the US like from Huawei. The US is trying. Things move slowly in government, but they are recognizing the need to get this technology back into the US so that the trade seekers don’t keep getting spread out throughout the world.

Rob Artigo: Because it’s a leaky environment out there. I think it’s not a ill intent kind of thing. It’s just about it being competitive and wanting to make sure that we’re taking care of ourselves. And for many years, China benefited from our openness and we want to be able to recognize the fact that China hasn’t been a fair dealer in that respect.

Ray Zinn: It’s one of the reasons why China wants to take Taiwan is because of the semiconductor technology. See, Taiwan produces 15 to 20% of all semiconductors worldwide. And China would love to have access to that Taiwanese semiconductor business. And that’s one of the concerns of course the US has is they don’t want China to get access to that technology.

Rob Artigo: Well, Ray, as always, our listeners here at Tough Things First can reach out to you with their questions at Toughthingsfirst.com. They can continue their education and the conversation with all of the podcasts, blogs, links to Ray’s books, Tough Things First, the Zen of Zen one, two, and three. And in general, you can get to the social media as well and keep following up on what’s happening here at Tough Things First. Thanks, Ray.

Ray Zinn: Hey, Rob, if they want to hear more about semiconductor and semiconductor businesses and issues, send us a note. Tell us what you want to hear, and if you want to hear more of these or if you want to hear less or whatever, let us know because we certainly can talk more about semiconductor technology going forward if you want to hear more about that.

Rob Artigo: I’m sure there’ll be a lot of opportunities too, particularly with this CHIP Act because we have so many different aspects of a semiconductor that will be coming up and we’ll see how effective things are. Thanks, Ray.