The Rise and Fall of the American Chip Industry

The semiconductor chip is at the core of what wesupplier for a particular process step, but all fabs
think us as technology. Computers, cell phones, iPods,have equipment from many different companies.
medical equipment, avionics, etc. have only beenA few years ago, a major "Wall Street Analyst" cut
possible because of the chip. The American chiphis forecast of Applied Materials' business prospects
industry has been damaged by the recent economicbased on the growth of the Taiwan semiconductor
slowdown like most industries, but more importantly,industry. The flaw in this logic is that a Taiwanese
the chip business in the United States has been in afactory uses U.S. equipment at about the same rate
slow fall for 30 years.as a United States based company. U.S. companies
In January global chip sales dropped by almost a thirdalso commonly use equipment manufactured from
from the previous year, to $15.3 billionoutside the U.S, especially from Japan.
(Semiconductor Industry Association).Since the chip equipment industry is so globalized, if
Overinvestment in chip factories has resulted in steepSematech makes an advance, U.S. companies gain
losses of over the last 2 years. The chip business haslittle, if any, advantage. Chip manufacturing has
been compared to farming. If too many farmersbecome highly homogeneous, from company to
plant cotton, then the price of cotton will dropcompany, and from country to country. Because the
(supply and demand).equipment companies now controlled the process
The American chip industry, outside of Intel, is antechnology, it became much easier for countries like
endangered species. AT&T, Hewlett-Packard,South Korea, Taiwan, and China to enter the market.
and others are already gone from the field. Others,If a company had the money, the technology was
like Texas Instruments, have set a path for thefor sale.
eventual elimination of manufacturing. TheseThe result of the work done by the industry,
companies have gone "fabless", meaning they willespecially by Sematech and its Japanese counterpart,
continue designing applications, but leave the processTohoku University, was that the process of
technology and manufacturing to someone elsemanufacturing chips became less of an art, and more
(most often to companies in Asia).of a science. Chip manufacturing became "paint by
The microprocessor market has been the exception,the numbers". Once the industry reached this level of
especially Intel. The microprocessor market has beenmaturity, the price of capital, and the price of labor,
controlled by Intel. It has been a kind of monopoly.became the dominant factors in the choice of
But Intel, when operating outside the microprocessormanufacturing location.
arena (i.e. DRAM or Flash memory), has followed theA state of the art fab requires an investment of
general model.$3-4 billion. Chip manufacture is now a commodity
Intel has recently closed 3 factories (the industry callsbusiness involving huge production volumes and low
them "Fabs", short for fabrication): one in Colorado,profit margins. A recent count of the last 40 chip
one in Oregon, and one in California. But Intel isfactories built showed that 35 were in Asia, 3 were in
building microprocessor fabs at the same time,the United States, and 2 were in Europe.
currently building a factory in Phoenix and one inThe memory market, including the products DRAM
Israel. Intel is doing OK. Intel had over $12 billion ofand Flash Memory, is the most competitive chip
cash on hand at the end of 2008.arena. South Korean companies currently dominate
In 1980, one of the pivotal events in the history ofthe memory market. Samsung is the leader, with
the chip industry, was IBM's selection of Intel to buildmore than 30 per cent market share, and Hynix is
the microprocessors for the IBM personal computers.second, with more than 18 per cent market share.
IBM chose Intel over Motorola and Zilog (Zilog wasElpida (Taiwan) with 15 percent, Micron (U.S.) with 11
founded by ex-Intel engineer Frederico Faggin, whopercent, and Qimonda (formerly Siemens/Infineon,
invented the MOS process while at Fairchild).Germany, currently in bankruptcy) with 8 percent,
IBM insisted that Intel facilitate second sources forare the other significant market share holders.
the microprocessors by allowing companies like AMDThe Emergence of the Chip Foundry
to alternatively manufacture the chips. Intel's wealthChip manufacturing technology continues to become
has been almost fully acquired because of theirmore of a commodity. Companies that once
control of the personal computer. IBM ceded controldesigned, manufactured, and marketed chips, now
of the personal computer away with this agreement,hire a third party for the manufacture step. This is
or more accurately, their failure to execute thiswhat is meant by a "fabless" company. The company
agreement.that performs the manufacturing step is the
The Rise of the American Chip Industry"foundry". The design is accomplished via collaboration
The Chip Industry has its roots firmly in the Unitedbetween the foundry and the fabless company.
States. Scientists at AT&T Bell Labs inventedA modern foundry provides software tools so that
the transistor in 1947. The chip, or integrated circuit,the fabless company can accomplish their objective
was invented by Jack Kilby of Texas Instrumentsusing standard process cells, technology that is
and Robert Noyce of Fairchild (later Intel) in 1958.owned by the foundry. One of the world's first chip
There were many interim steps between these twofoundries was created in Taiwan by Texas
seminal events, most accomplished by the teamsInstruments in 1989 to manufacture DRAM. The
from Fairchild and RCA.company was called TI-Acer.
In 1975, the U.S. had more than 70% of the world'sTaiwan Semiconductor (TSMC), with $30 billion
market share for chips. The chip industry titans duringmarket capitalization, is the current leader in the
the development years were IBM, AT&T,foundry chip industry, and currently boasts more than
Texas Instruments, Motorola, and Hewlett-Packard.44 per cent of the world market share of chip
These were established technology companies thatfoundry business. TSMC was founded in 1987 as a
had success in the emerging field.joint venture of Philips (Netherlands), the government
Silicon Valley, in California, was largely the result ofof Taiwan, and private investors. Morris Chang is the
startup companies with ties to Fairchild, who wasfounder of TSMC, and continues to serve as the
located in the area. Fairchild was a technologyChairman. Mr. Chang's resume includes 25 years at
pioneer, but most of the success came from FairchildTexas Instruments, leaving as a group vice president
alumni, what became known as the "Fairchildren".in charge of the company's worldwide semiconductor
Alumni from Fairchild founded Intel, AMD, Nationalbusiness. TI-Acer merged with TSMC in 1999.
Semiconductor, LSI Logic, Altera, Xilinx and manyThe world's second largest foundry is also in Taiwan.
others. One notable Fairchild alumni was EugeneUMC claims more than 14% of the foundry business
Kleiner, who would later found Kleiner Perkins, aworldwide. Taiwan, a country about the size of
venture capital firm that would help Amazon, GoogleVancouver, Canada, has the highest concentration of
and Sun Microsystems become billion-dollar companies.semiconductor manufacturing in the world.
The Fall of the American Chip IndustryIt is interesting to note that two of the executives
Since the U.S. had such a commanding market shareinstrumental in recent events in the semiconductor
in the 1970's, it was natural that this position wouldindustry are on the TSMC board of directors: Carly
be difficult to maintain. The first challenger was Japan,Fiorina and Thomas Engibous.
who was very successful at capturing the DRAMCarly Fiorina is now best known as John McCain's
market, at the time the most important chip market.Economic Advisor during the last election. She is the
By the mid 1980s, 80 percent of the DRAM marketformer CEO of Hewlett Packard where she oversaw
belonged to Japan.HP's exit from the chip manufacturing business. In
Many outside of Asia fail to give proper credit to theaddition, Ms. Fiorina spent nearly 20 years at
emergence of Japan in the chip industry. TheAT&T and Lucent Technologies Inc. where she
common perception is that the sole reason forserved as Executive Vice President, Computer
Japan's success was low labor costs. In fact, theOperations for Lucent and oversaw the exit of
primary reason for Japan's ability to manufacture atAT&T from chip manufacturing.
lower cost was a superior technical strategy.Thomas J. Engibous (former Texas Instruments
American DRAM manufacturers switched to aChairman, former president and CEO 1996 -2004),
lithography technology called "steppers" a generationwas the department manager of TI's semiconductor
before the Japanese. The Japanese continued togroup when TI established TI-Acer. Texas
utilize the previous generation lithography technologyInstruments has eliminated their R&D operation,
called "scanners". The American companies falselyand plans to be fabless for most of their production.
believed that scanner technology would beTI was one of TSMC's first customers. Much of the
inadequate for the newest memory devices.foundry model has roots from within Texas
Scanners are significantly faster and less expensiveInstruments.
to operate than steppers. Because the lithographyThe Future of the American Chip Industry
step is so important to the overall process, theIntel will continue to dominate the Personal Computer
Japanese had a significant advantage, and used thatmicroprocessor business for the foreseeable future.
advantage to capture the DRAM market.There are threats. AMD does everything well except
In 1987 the United States started a researchmake money. A Taiwan company called "Via" may be
consortium called Sematech to combat the loss ofthe more significant long-term threat. Via designs the
market share. The plan called for the chip companieschips and manufactures them at the local foundries.
to share research costs, with a government subsidy.Via's core designs originated with Cyrix
Member companies contributed $124 million toSemiconductor, a company started by ex-Texas
Sematech's 1990 budget and $100 million wasInstrument engineers. Cyrix was sold to Via in 1999.
contributed by the government through the DefenseVia's processors are competing well against the Intel
Advanced Research Projects Agency (DARPA)."Atom" microprocessor, in less expensive laptop
Japan's market share did drop in the early 1990's, butcomputers.
this was probably more as a result of problems in theAMD recently completed an agreement with a
Japanese economy than with developments in thecompany from ATIC (Advanced Technology
U.S. chip industry. The Japanese stock marketInvestment Company) funded by the Government
"bubble" burst, much like the dot-com market burst inof Dubai, that should enable them to continue to
the United States. Japan's market share of total chipcompete with Intel. AMD plans to build (with their
sales peaked in 1988 at about 49%. Today, Japan'spartner), a chip manufacturing facility in Saratoga
world market share of the chip business is aboutCounty, New York. AMD currently manufactures all of
25%.its microprocessors in Dresden, Germany.
Sematech had a positive impact on the U.S. chipAMD has a technology exchange agreement with
companies' circuit reliability. Statistical process controlIBM. IBM continues to do well. IBM's strategy is to
(SPC) techniques were led by Sematech and resultedparticipate in higher margin products and avoid
in dramatic improvements. Motorola, a Sematechcommodity markets like DRAM. IBM remains a world
member, was the first winner of the Malcolm Baldrigeleader of chip technology.
Quality Award. The progress in reliability enabled chipForeign companies continue to invest in U.S. fabs, but
customers to forego incoming inspection of chips, aat a reduced rate. Samsung is doing well with its
huge cost savings.DRAM factories in Round Rock, Texas, a few miles
Sematech was very active helping an immature U.S.north of Austin. Samsung operates two fabs; the
equipment industry improve their tools. Sematechnewest fab opened in 2007 and is considered
effectively moved the technology center ofstate-of-the-art.
semiconductor industry from chip manufacturers toThere are also success stories at the lower end of
the chip equipment companies like Applied Materialsthe technology scale. X-Fab, a German company,
and KLA. Before Sematech, the customers were theoperates a fab in Lubbock that is a bright star on a
process experts, but now the process toolbleak landscape. X-Fab excels by thinking
companies included process expertise with the"out-of-the-box", something exceedingly rare in the
equipment. This was very good for the luckychip industry today, ironic considering its history. It
equipment companies, but Sematech was verywould be impossible for X-Fab to compete in a high
selective. Many tool vendors were shut out byvolume, low margin business like DRAM, but they do
Sematech.very well with custom analog chip production. The
Those outside the chip community sometimes fail tofacility was originally built by Texas Instruments.
understand the degree to which the chip equipmentMore than half of the chip fabs in the United States
industry is internationalized. A fab requires hundredsin in operation at the beginning of the decade are
of different process tools for the many differentnow closed. Outside of Intel, there has been little to
process steps (some chips require more than 500cheer about. There is little mystery about what the
process steps). Many of the tools cost more $1future holds. Our actions today determine our
million. Most fabs will attempt to standardize on a toolconsequences tomorrow.