Chapter 12 Chips With Everything The Semiconductor Industry Overview Brief History Production Chain Global Shifts in the Industry and the Dynamics of the Market Production Sequence and.
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Chapter 12 Chips With Everything The Semiconductor Industry Overview Brief History Production Chain Global Shifts in the Industry and the Dynamics of the Market Production Sequence and Labour Case Studies (Government Policy) Corporate Strategies Pretty Much the Best Game You’ll Play……… Ever History The semiconductor industry is now know as the industry of industries, but that always wasn’t the case. Step 1- 1947, Transistor replaces vacuum tube and makes possible micro-electronics Step 2- Late 1950’s, Invention of the integrated circuit Step 3- Early 1970’s, The advent of the Microprocessor Step 4- 1980’s on, Increased miniaturization and diversification (Zach Morris to Derrick Zoolander) History Zach Morris, Was it really worth it? History Derrick Zoolander is thankful for the R&D that has taken place in the semiconductor industry History First industry to which the label “Global Factory” could be applied • Offshore assembly • Spatial hierarchy of production Geographical separation The Production Chain Varieties of semiconductors • Memory Chips (DRAMs) • Microprocessors Manufacturing is a very capital intensive undertaking • TNC’s Production Chain Production Chain Rapid Expansion since the 1980’s • An increase of 2000% • Concentration of growth in USA and Japan Production Chain 1950’s-Production dominated by USA 1980’s-Shift to domination of Japanese • By 1989 US production down from 60% of industry to 37% • But in 1994 US retook the biggest market share, why? US Shift from DRAM’s to Microprocessors Japanese attempt to achieve leadership in DRAM technology Problem, DRAM’s are now a commodity Dynamics of the Market Semiconductors have a derived demand • Depends on growth of products and processes in which they are used. Growth in USA thanks to Aerospace/Defense Japan and Europe growth due to home electronics 1990’S, 60% of revenues from computer manufacturers (Thanks to increasingly powerful chips) By 2000 the market share was down to 40%(Thanks to diversification of DRAM use) Industry growth due to decline in selling price • DRAM price per megabyte $25 $1 Dynamics of the Market Market fluctuation • Supply gluts • Severe shortages Main problem is massive amounts of fixed costs and a strongly segmented character of demand Geographically, demand is in three regions • USA, East Asia and Western Europe • But watch out for China! Production Costs To keep the semi conductor industry competitive the manufacturers must try to keep down production costs any way they can. There is Two Basic Parameters for Production • Reliability of the product: The factories must be kept very clean to keep batch’s from contamination and lower costs of replacing faulty chips. • To Pack as many Circuits onto one chip: Manufacturers try to fit as many circuits onto one chip to cut down costs to them • Unfortunately due to the two requirements to both increase the yield and the number of circuits per chip that accounts for the steep increase in the cost of setting up a new semiconductor plant. For example in 1960 it was $2 million and in the new millennium it is now roughly $2 billion New Developments There are many new developments in the semiconductor industry. Especially most recently the Wafer. The semiconductor production sequence Labour Force There are two very separate labour forces working in the semi conductor industry • There are the highly trained workers who work mostly in the developed world. • And there are the low skill workers who work in the developing world. The most surprising fact of the labour force is that women fill most roles either in the highly trained side or the low skilled work. This occurs the world over. There is also two types of wages • There are the well paid jobs with excellent work conditions. (In every area expect mass production) • Then there are the low paid and long hour shifts in old factories. The Role of the State The State plays an important role. • To avoid being left behind in this intense market. Country’s use 3 ways to keep up. By building and indigenous production capacity based upon domestically owned firms. By attracting foreign semiconductor firms to establish production units. By purchasing semiconductors on the open market and concentrating on developing the end uses. But there is problems !!!!!! The US Governmental Policies Originally the dominant forces included National defense and Aero-space • Not as important but still have influence 1980’s, production decreases • Problem, threat to national economic and military dominance • This led to the development of two new policies The first dealt with trade policy, The US-Japan Semiconductor Trade Agreement in 1986 • This gave US producers access to highly restricted Japanese market The second policy dealt with facilitating inter-firm collaboration • 1987 SEMATECH was formed The US Governmental Policies SEMATECH • Founded by 14 US semiconductor manufacturers • Funded by the federal Government and the private sector • Most funding defense related • After the Cold War, the R&D has helped the private sector The Role of the State in East Asia The state has not had as large as a hands on role as was present in America Japan • Has been called the “rice of industry” • Have concentrated mostly on DRAM’s Japan As stated before the government has had a watchful eye over the industry The first goal of the industry was to take some market share away from America • Advert to technological dominance • Restriction of FDI • Restriction of foreign companies ability to achieve market access South Korea How have things fared in a NIC/NIE? • South Korean government has control over the telecommunications industry • This can foster the growth and entry into markets for South Korean How has the evolution of the industry in South Korea taken place? South Korea Taiwan “Taiwan’s semiconductor industry is flourishing market driven industry. It has no nationalized firms within it: all are privately owned and managed. It is strongly export oriented. It has never imposed any protective tariffs on its semiconductor products. There are no government handouts to any of the firms involved in the industry for any of their current activities. And yet its creation, its nurturing and its guidance have been entirely the product of government and public sector institutions” J.A. Mathews, “A Silicon Island of the East” 1999 Taiwan Initial development in the 1960’s • US firms relocate some assembly plants Taiwanese government builds the worlds first export processing zone (EPZ) Government also set up the Industrial Technology Research Institute (ITRI) in in early 1970’s • Promotion of technological leverage • Later renamed Electronics Research Service Organization (ERSO) Taiwan No internal firms were entering the market at this time • Solution, a public firm was created United Microelectronics Organization (UMO) Private companies soon followed • Today UMO is no longer publicly owned The State in Europe The semiconductor industry is one which lags behind the ones established in America and East Asia • Production capacity and technology European governments have openly courted international firms to invest in the industry There has been an evolution with three stages • Stage one- 1960’s, Mostly defense related • Stage two- Mid 1970’s- Focus on the computer industry • Stage three- Onwards, Information technologies and communications Europe Since the 1980’s government has been involved in collaborative ventures in information technology • The JESSI Program (Joint European Submicron Silicon Initiative) Develop microchip technology • Pressure from government to locate more than assembly plants in Europe Would like to see R&D, as well as fabrication plants Europe Problem with this idea • French industry- “National Champions” Public Companies Should outside TNC’s be allowed to take part in collaborations with these firms? Somewhat protective • 1990, Signed an agreement with Japan to set a minimum on the price of semiconductors Safeguard against dumping • Later South Korea was added Corporate Strategies Small companies are having trouble competing with large transnational corporations (TNC’s) and have either closed or moved into a niche in the market. The USA: During the 60’s to 70’s the USA lend the way in the market with up to 30 percent of global semiconductor sales. Unfortunately in the 80’s this dropped to 18 percent with fewer top firms coming to the states. Now they own a 20% share but actually have less companies in the top 10 manufactures. Global Connections To compete in the global market semiconductor firms have increasingly interconnected themselves with other firms in processes such as acquisitions, mergers and strategic alliances. By the 1980’s only 36 US post WWII companies where still independent. And the figures for Europe where the same. Recently the Eastern Asian companies have had to merge with each other to compete. Such as LG and Hyundai in 1999. But even more noticeable are the strategic alliances companies are making. These happen for many reasons but the main ones are the massive cost of R & D, and the incredibly rapid pace of technological change. Strategic Alliances All three major regions in this alliance Variations in Strategies Semiconductor firms can be classified into five broad types: • Vertically integrated producers: They manufacture semiconductors entirely for their own in-house use. • Merchant Producers: They manufacture semiconductors for sale to other firms. • Vertically integrated captive- merchant producers: They manufacture semiconductors partly for their own use and partly for sale to others. • “Fabless” semiconductor firms: They Design semiconductors but do not manufacture them. • Foundry Companies: They manufacture semiconductors to specifications of customers but do not design them. Strategies of US semiconductor firms Semiconductor firms in the United States lend the industry from 1950 up to 1980 until the Japanese took over the market. This left the US firms to make a move away from DRAMS into the more sophisticated semiconductor devices. This Strategy is know as “Wintelism”. The basis of this approach was to increase the use of merchant producers. This meant they could specialize in developing and selling semiconductor devices to a wide variety of end users. Because of the diversification in the market the US firms moved into inventing new ideas. On of these ideas was the PC. And now you can see what “Wintelism” is it is Windows and Intel. The US started building new plants in Boston in the newly developed Route 128 corridor and in Santa Clara or Silicon Valley. Later these firms look for offshore assembly plants where costs were cheaper. These were established in regions and countries like Hong Kong and Taiwan. This kept costs down they also used advantage of the EU to locate into Europe. They now could build there chips in Scotland and ship them throughout the EU for less than shipping from the US. Strategies of US semiconductor firms Strategies of Japanese semiconductor firms The Reasons why the Japanese semiconductor firms dominated the global market during the 1980’s and 1990’s was because of 3 basic elements • State Involvement. • Concentration on the memory chip (DRAM) Market • The fact that most Japanese Semiconductor production was for in house use that is , within the large and diversified electronics business groups. The Japanese have had some problems with only producing there chips inside Japan to compete the Japanese are using three different ways to compete. • The First is to Diversify away from DRAM into flash memory e.g. for mobile phones. • The next is to outsource manufacturing of there products such as DRAM. • The final way they are competing is Dropping DRAM completely and moving their industry into newer technology. Strategies of European Semiconductor firms. Unlike the USA and Japan. The Europeans don’t really have to much production of semiconductors within Europe. The main 3 companies chose to outsource there manufacturing to Asia. And both US and Japanese companies use Europe to build there components. Why the Far East is the preferred location for semiconductors. There are three main stages why the development of such an intricate production network form in Eastern Asia • Stage 1 (60’s to 70s): Low cost production locations were sought by US firms, these firms established Asian affiliates as part of their transnational production network aimed at selling in advanced country markets outside Asia. • Stage 2 (80’s to 85): The move from just manufacturing chips to testing chips in Asia took off. • Stage 3 (85 to 90’s): The Asian affiliates took more roles with production and research and moved the US companies forward. The Semiconductor Industry Bye-Bye The Semiconductor Industry It’s time to see what you’ve learned today. Get ready for some test action!!!!!! Discussion Questions 1. 2. 3. At what point, if any, do you see the semi conductor industry slowing down (R&D)? At present “smart” appliances are being sold to the public. We have seen government involvement in the semiconductor industry at a few different capacities. Which in your opinion has seemed to work out the best? Which corporate strategies do you feel are more helpful to national industry? Those in the USA or those from Japan?