Aug 2, 2020,11:29am EDT
Intel, Nvidia, Et Al., And American Semiconductor Hegemony
Founder & Director of the Quantitative Finance Program and Hanlon Financial Systems Center at the Stevens Institute of Technology (New Jersey) and Advisory Board Member at Hanlon Investment Management
One thread in the fabric of alarmist political/economic commentary on American Decline has to do with the state of the semiconductor industry. Supposedly the U.S. is losing/could lose/has already lost leadership in this “critical” field of technology, the understructure of the digital economy, a loss which puts at risk practically everything we might care about – life (“Semiconductors are essential to modern life”), liberty (“American leadership in semiconductors also is vital to the technological superiority of the U.S. military”), and presumably happiness as well (Facebook, Youtube, Instagram and Netflix NFLX -2.8% all run on silicon)…
Politicians, journalists and think tank analysts have been pushing this dire story year after year, decade after decade, administration after administration.
The threat is (of course) China. According to The Boston Consulting Group, the game is probably already over…
American Semiconductor Hegemony (more or less)
The story is all wrong. It is based on a crude misunderstanding of the structure of the industry. In fact, the U.S. is in firm control of the high ground in the semiconductor business, which dominates the rest of the industry (with one quasi-exception).
The Fabless vs. Foundry contrast
The difference between the Fabless and Foundry models is based on the economics of IC fabrication, which are staggering. A new IC fab plant can cost up to $20 Bn – about twice the cost of a Nimitz class aircraft carrier, three times the cost of a nuclear power plant – and an IC fab may have a useful lifetime of just a few years before it becomes technologically obsolete. The implications of this are significant, and mostly negative from a strategic standpoint. It is a scale-based business (as all heavy-capex industries are) and it is dominated today by one firm: Taiwan Semiconductor Manufacturing Company (TSMC).
The Fabless model is “asset-lite.” They do not need to buy a new aircraft carrier every year, so to speak. Instead, they can invest in design talent and functional innovation.
IDMs like Intel still do both. But the capital expenditure demands weigh heavily. Over time, a number of IDMs have surrendered to the economic logic and have split themselves into two pieces – a Fabless design firm and a foundry – to go their separate ways…
The confusion of these business models under the non-discriminating category “semiconductor companies” is surprisingly common.
The first flag that the “Decline thesis” is invalid is the fact that 10 of the 14 firms listed here are American. One is Taiwanese, two are Korean. Only Hi-Silicon – a Fabless IC designer – is based in mainland China. HiSilicon is a fully owned subsidiary of Huawei, which puts them in the middle of the risky geopolitical chess game I have discussed elsewhere. Huawei takes about 90% of HiSilicon’s output – “output” which HiSilicon does not and cannot manufacture, but outsources to Taiwan’s TSMC (and perhaps others now).
All in all, the American position, even by this crude tabulation, is strong.
In short, the U.S. controls the semiconductor world, and controls the direction of technological innovation. China is starting at the bottom, and it will be tough hill to climb. In the 21st-century economy, value accrues to companies that control the “intangible” assets like design, brand, human capital (talent), loyal customers, and intellectual property. Traditional 19th-century style “assets” like factories, machinery, inventories, accounts receivable, and even excess accumulations of cash begin to seem more like, well, liabilities. U.S. companies – in many segments of the economy, not just semiconductors — have figured this out. Except for Huawei – troubled Huawei – China is mostly still stuck in the industrial age.