Semiconductor

HBP# TN0625
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Andrew Inkpen
Te Global Semiconductor Industry

In November 2020, Apple introduced three new Mac computers powered by Apple’s M1 processor, ending Intel’s
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15 years as an Apple supplier. Apple’s processors were based on Arm technology, as opposed to the x86 architecture
used by Intel chips. Te M1 processors were manufactured by Taiwan Semiconductor Manufacturing (TSMC).
With Apple’s switch to TSMC, questions were being raised about the global semiconductor industry. Was Intel
falling behind TSMC in the race to make ever-more-powerful processors? Would more large-tech frms decide
to design their own chips? Was the fabless model based on contract manufacturing superior to Intel’s model of
designing and making its own branded chips? Would Chinese semiconductor companies be able to close the
technology gap with Intel, Samsung, and TSMC? Or would Chinese manufacturers remain reliant on U.S.,
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Taiwan, Korea, and other countries for access to state-of-the art semiconductor technology?
Semiconductors
Semiconductors, sometimes referred to as integrated circuits (ICs), microprocessors, microchips, or just chips,
are the brains of modern electronics. Tey are used in medical devices, communications, computing, defense,
transportation, energy, and technologies of the future such as artifcial intelligence (AI), quantum computing,
industrial internet of things, and advanced wireless networks.1 Without semiconductors, there would be no
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smartphones, modern TVs, computers, video games, advanced medical diagnostic equipment, and products like
automobiles and appliances would be much less advanced. Semiconductors connect the physical world to the
digital world, and many products and applications we take for granted would not be possible without them.2
Competition is intense in the semiconductor industry due to rapid technological changes, frequent new
product introductions that incorporate semiconductors, and new semiconductor competitors with products that
outperform existing products. Demand is volatile, especially for chips that supply the fast-moving communications
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and consumer electronics sectors. Innovative new end products and product upgrades like the latest iPhone can
drive up semiconductor demand, whereas economic downturns, product obsolescence, and trade actions like
sanctions or tarifs can depress demand.
Global semiconductor sales in 2020 were greater than $500 billion and projected to keep growing. U.S.-
based companies accounted for about half of sales, of which more than 80% were sold to non-U.S. customers.
Te computing and data processing sector was the largest customer market segment for semiconductors with
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34% of sales, followed by communication electronics (30%), industrial electronics (13%), automotive (12%),
and consumer electronics (9%).3
Industry Background
In the 1940s, transistors were invented by Bell Labs. Transistors became an integral component in the manufacture
of radios, televisions, and other consumer electronics products, as well as many industrial and military applications.
In the 1950s, companies such as Texas Instruments and Fairchild Semiconductor became leaders in producing
silicon transistors, leading to the invention of integrated circuits. An integrated circuit is a thin chip, usually
silicon, consisting of at least two interconnected semiconductor devices, mainly transistors. Te integrated circuit
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allowed for powerful, lightweight, miniaturized applications by integrating components onto one chip of material.
From these early integrated circuits, the modern semiconductor industry was born.
Copyright © 2021 Tunderbird School of Global Management, a unit of the Arizona State University Knowledge Enterprise.
Tis case was written by Professor Andrew Inkpen for the sole purpose of providing material for class discussion. It is not intended
to illustrate either efective or inefective handling of a managerial situation. Any reproduction, in any form, of the material in
this case is prohibited unless permission is obtained from the copyright holder.
This document is authorized for educator review use only by Badri Munir Sukoco, Other (University not listed) until Aug 2023. Copying or posting is an infringement of copyright.
[email protected] or 617.783.7860
Gordon Moore, one of the founders of Intel and formerly with Fairchild Semiconductor, coined Moore’s
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Law, which states that the number of transistors on a chip doubles about every two years. Te frst Intel
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microprocessor, the 4004, was released in November 1971 and contained 2,300 transistors. Te 1979 Intel
8088, used in the frst IBM PC, contained 29,000 transistors. Modern chips in 2020 have billions of transistors.
Although the physical limits to Moore’s Law have slowed semiconductor advancement, the industry continues
to innovate and create higher-performing chips. IBM’s Power10 chip, announced in 2020, was half the size of
its predecessor and contained 18 billion transistors in a device about the size of a postage stamp. Te chip was
manufactured by Samsung.
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Semiconductors can be classifed based on functionality and type of integrated circuit. Te four main
categories of semiconductors based on functionality are memory chips, microprocessors, standard chips, and
complex systems-on-a-chip (SoCs). Memory chips are an integrated circuit made out of millions of capacitors
and transistors that can store data. Tey can be volatile(e.g., dynamic random-access memory, or DRAM, used in
personal computers) or nonvolatile(e.g., NAND fash memory, used in USB drives and solid-state hard drives).4
Te memory chip industry was very cyclical, with prices rising and falling like a commodity market.
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A microprocessor is an integrated circuit that contains a major processing unit of a computer on a single
chip, such as the central processor or the graphics processor. Te largest companies in the microprocessor segment
were Intel, AMD, NVIDIA, and Samsung. Standard chips, also known as commodity ICs, are simple chips used
for performing repetitive processing routines. An SoC is an integrated circuit that takes a single platform and
integrates an entire electronic or computer system onto the IC. SoCs are used in portable tech products such
as smartphones, cameras, tablets, and video game consoles. Samsung, Qualcomm, and Apple were major SoC
designers.
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Based on integrated circuitry, semiconductors were broadly classifed as either analog or logic devices. Analog
semiconductors condition and regulate functions such as temperature, speed, sound, and electrical current.
Te automotive sector was one of the largest markets for analog chips. Digital semiconductors process binary
information, such as that used by advanced processors, graphics, and AI chips. Mixed-signal devices incorporate
both analog and digital functions into a single chip and provide the ability for digital electronics to interface
with the outside world.5 In 2010, the United States was about two years ahead of its closest competitors, Korea and
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Taiwan, in logic process technology. Te three countries were close to each other in technology development, and China
was investing heavily to catch up.
Industry Structure
A simplifed view of the industry structure shows two main activities: design and manufacturing. Companies that
focus on design are referred to as fabless frms (i.e., they do no manufacturing or fabricating), while companies
that focus only on manufacturing are called foundries. Semiconductor frms that design, manufacture, and sell
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semiconductors are called integrated device manufacturers, or IDMs. Exhibit 1 shows a more detailed view of
the industry structure, along with some of the leading frms in each industry segment.
Exhibit 1. Semiconductor Industry Segments

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Source: Adapted from “McKinsey on Semiconductors,” McKinsey & Company, Number 7, October 2019.
For the frst few decades of the computer and semiconductor industries, major companies such as IBM and
AT&T were vertically integrated. Tey engaged in R&D, designed and manufactured their own components,
manufactured the equipment used to make the components, and used the components in internally produced
products that were then sold or leased to customers.6 In the 1950s, merchant semiconductor frms appeared in
the United States, and in the 1960s, specialized producers of semiconductor manufacturing equipment were
formed. Over the subsequent decades, vertical specialization grew as the industry became more complex and global.
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Various forces support specialization as opposed to vertical integration within a single frm. Te expansion
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of markets for semiconductors over the past few decades enabled vertically specialized semiconductor design and
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production frms to exploit economies of scale and specialization.7 Te capital requirements for manufacturing
are enormous. For example, Intel’s newest Arizona plant, Fab 42, opened in 2020 and cost more than $7 billion.
After construction, retooling was required every two to three years. Design cycles for new semiconductors have
become shorter and product lifecycles more uncertain, increasing the risks of investing in manufacturing. Each
of the stages in the industry value chain requires very specialized skills, making it unlikely that a single company
could possess them all.
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Global Value Chain
Few industries, if any, have a value chain as complex and geographically dispersed as the semiconductor industry.
Making a semiconductor chip requires thousands of people with specialized knowledge spanning many industries,
countries, and regions. A study by Accenture and the Global Semiconductor Alliance described the industry as a
global ecosystem. Tey found that “each segment of the semiconductor value chain has, on average, 25 countries
involved in the direct supply chain and 23 countries involved in supporting market functions. A semiconductor
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product could cross international borders 70 or more times before fnally making it to the end customer.”8
No country had complete end-to-end capabilities for semiconductor design and manufacturing. At the
national level, there were evolving specializations. “Canada, European countries, and the United States tend to
specialize in semiconductor design, along with high-end manufacturing. Japan, the United States, and some
European countries specialize in supplying equipment and raw materials. China, Taiwan, Malaysia, and other Asian
countries tend to specialize in manufacturing, assembling, testing, and packaging. Canada, China, Germany, India,
Israel, Singapore, South Korea, the United Kingdom, and the United States are all major hubs for semiconductor
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R&D. Major semiconductor companies have located facilities in countries as far fung as Costa Rica, Latvia,
Mexico, South Africa, and Vietnam.”9 Since 2010, the average rate of chip manufacturing output has grown fve times
faster outside the United States than in the United States.10 Exhibit 2 shows manufacturing capacity by country.
Exhibit 2. Semiconductor Fabrication Capacity

300mm Equivalent Wafer Capacity by
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Country/Region, 2015 and 2019

Country/Region 2015 2019
South Korea 26% 28%
Taiwan 24% 22%
Japan 18% 16%
China 8% 12%
North America 13% 11%
Europe 3% 3%
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Rest of World (ROW) 9% 7%

Source: IC Insights, Global Wafer Capacity, 2020-2024.
Several reasons accounted for the global value chain: (1) the comparative advantages of the various countries
involved. For example, assembly and testing is more labor-intensive than design and is done in countries with
lower labor costs; (2) trade-facilitating conditions such as low transportation costs for semiconductor components;
(3) increasing demand for electronic products in emerging markets and, in particular, in Asia; and (4) the high
value-to-weight ratio of semiconductors allows low-cost transportation during the various stages of production.
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Many materials are required to make a semiconductor chip—including, silicon, photoresist, and rare
metals—and numerous subsegment technologies are required to turn the materials into fnished chips. Te
semiconductor value chain starts with chip design and then moves through a series of activities, including wafer
manufacturing, packaging, testing, and OEM assembly. R&D is critical for the industry with over 30% of revenue
invested in R&D, one of the highest proportions of any industry.11
Exhibit 3 shows the basic activities in the industry value chain. Starting with R&D, the industry then moves
through design, manufacturing, assembly, testing, and packaging (assembling the semiconductors into durable
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chips), and to end consumers. Each of the basic activities could be expanded to show a much more detailed set of
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activities. For example, for manufacturing there are raw materials suppliers and specialized equipment and tools.
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Exhibit 3. Basic Elements of the Semiconductor Value Chain
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Technology
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Various technology areas were important for the industry. One was feature size, which described the size of the
transistor gate length as measured in billionths of a meter, or nanometers (nm). Feature size was used to identify
the technology generation of a chip. Advances in chip processing power resulted mainly by reducing the size of
the features that could be printed on a chip. Te smaller the feature size, the more powerful the chip, as more
transistors could be placed on an area of the same size. Te result was increased processing power for a given
investment. Many semiconductors manufactured in 2020 were produced at the 14nm and 10nm nodes. Some
manufacturers were producing at 7nm and 5nm nodes, with eforts underway to manufacture at 2nm and 1nm.12
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As chips get smaller, the design cost goes up. Designing a 10nm chip costs about $175 million to go from
validation to IP qualifcation. A 7nm chip costs $300 million, and $450 million is required for a 7nm chip.13
Despite the increasing costs, chip design has changed over the past few decades, lowering the barriers to entry
and allowing frms such as Apple and other notraditional chip designers to enter the market. Chips are designed
using hardware description languages, which means the design process is somewhat similar to software design.
A second technology area was wafer size, which referred to the diameter of a wafer measured in millimeters
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(mm). Wafers used in semiconductor fabrication were usually made from thin slices of pure silicon, which served
as the substrate on which semiconductors were manufactured. Te diameter of a wafer determined its surface
area, which in turn determined how many chips could be made on it. A larger wafer diameter resulted in a lower
cost per chip. Te performance of a semiconductor is independent of wafer size. Since 2002, the largest wafers
in full production have been 300 millimeters in diameter.
A third area was power consumption. In the early days of the semiconductor industry, the technology focus
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was primarily on speed. Electricity consumption was a relatively low priority. As chips for mobile phones became
an industry mainstay, greater attention was placed on chips that used power efciently.
Major Companies in the Semiconductor Industry

Exhibit 4 shows a list of the largest semiconductor frms by sales. Several of the frms are discussed below.
Intel
Intel was the largest semiconductor frm by revenue. In 1968, Robert Noyce and Gordon Moore left Fairchild
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Semiconductor and founded Intel. Intel initially focused on memory chips, but with market share falling in
the 1980s, the company made a major strategic decision—exiting the DRAM (memory) sector. Te memory
business had become commoditized, and competitors in Japan and South Korea were winning the battle. Intel
shifted its focus to microprocessors for the growing personal computer (PC) industry.14
Te microprocessor sector involved diferent skills than memory, with more focus on product design and
less emphasis on cost and manufacturing productivity. Te microprocessor sector became Intel’s core business,
generating consistent operating margins of around 37%. Intel was the dominant supplier of chips to the PC
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Exhibit 4. Largest Semiconductor Firms
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1 Intel United States IDM $69.8 Microprocessors, logic, non-volatile memory, and FPGAs
for computers, servers, and other electronic equipment
2 Samsung South Korea IDM $55.6 Memory and logic
3 TSMC Taiwan Foundry $34.5 Contract foundry
4 SK Hynix South Korea IDM $22.9 Memory mainly
5 Micron United States IDM $19.9 Memory and logic
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6 Broadcom United States Fabless $17.7 Integrated circuits
7 Qualcomm United States Fabless $14.3 Chips for wireless modems and other phone-related devices
mainly
8 Texas Instruments United States IDM $13.5 Analog and logic devices for the automotive industry and
other industrial applications
9 Kioxia (formerly Toshiba) Japan IDM $11.3 Memory mainly
10 NVIDIA United States Fabless $10.5 GPUs and SoCs
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11 Sony Japan IDM $9.6 Integrated circuits
12 STMicro-electronics Europe IDM $9.5 Analog and logic devices for the automotive industry and
13 Infneon Europe IDM $8.9 Analog and logic devices for the automotive industry and
14 NXP Europe IDM $8.3 Analog and logic devices for the automotive industry and
15 MediaTek Taiwan Fabless $7.9 SoCs for wireless devices
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Source: Congressional Research Services, Semiconductors: U.S. Industry, Global Competition, and Federal Policy, October 2020, and IC Insights.
industry and had a 64% market share in 2020. AMD, although a distant second, had increased its share of PC
chip sales to more than 17%, from about 8% three years earlier. AMD was an IDM until 2009, when the frm
spun of its foundry business into a new company called Global Foundries. In 2020, AMD announced that it
would acquire chip maker Xilinx for $35 billion.
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Intel was expanding in various areas, including advanced graphics, AI, 5G networking, and autonomous
driving. Te company had nine manufacturing sites—six wafer fabrication and three assembly/test facilities—in
the United States, China, Ireland, Israel, Malaysia, and Vietnam. In 2019, Intel allocated $16 billion to capital
expenditures and $13 billion to R&D. Intel was unique in the semiconductor industry because it created brand
equity comparable to the level of a consumer goods company. With the advertising slogan “Intel Inside,” Intel’s
marketing strategy was based on the message that the world’s best computers used Intel’s chips.
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For a half century, Intel had built its success around its IDM strategy. Intel defended its integrated business
model:
We are an IDM. Unlike many other semiconductor companies, we primarily design and manufacture
our products in our own manufacturing facilities, and we see our in-house manufacturing as an
important advantage. We continue to develop new generations of manufacturing process technology
as we seek to realize the benefits from Moore’s Law. Realizing Moore’s Law results in economic
benefits as we are able to either reduce a chip’s cost as we shrink its size, or increase functionality
and performance of a chip while maintaining the same cost with higher density. This makes possible
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the innovation of new products with higher performance, while balancing power efficiency, cost,
and size to meet customers’ needs. Our ability to optimize and apply our manufacturing expertise to
deliver more advanced, differentiated products is foundational to our current and future success.15
Except for longstanding relationships with AMD and Via Technologies of Taiwan, Intel did not license its
chip designs to other companies.16 In 2020, Intel sold most of its remaining memory chip business to SK Hynix
of South Korea for $9 billion. Recently, Intel’s CEO raised the possibility that the company would consider
outsourcing the manufacturing of some of its most advanced chips. Intel had used outsourcing in the past but
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never for state-of-the-art microprocessors. Intel’s challenge was that it was behind schedule in its development of
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10 and 7nm chips. In 2018, the industry started moving towards 10 and 7nm chips, but Intel ran into various
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development and manufacturing problems, leaving the company at least a year behind its original plan.17 In
2020, Intel competitors Samsung Foundry and TSMC began volume production of 5nm chips (the equivalent
of 7nm at Intel) for companies such as Apple, Marvell, Huawei, and Qualcomm.
NVIDIA
NVIDIA, a fabless frm, overtook Intel in 2020 as the largest U.S. chip company by market value. NVIDIA
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was founded in 1993 to make graphics-processing chips and launched its frst product two years later. In 1999,
NVIDIA went public and invented the graphics processing unit (GPU), which the company described as “a
single-chip processor with integrated transform, lighting, triangle setup/clipping, and rendering engines that is
capable of processing a minimum of 10 million polygons per second.”18 Modern GPUs process more than seven
billion polygons per second.
Over the past several decades, NVIDIA introduced a variety of new products and transformed from a
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niche player in graphics chips to a major force in three of the fastest growing semiconductor areas: AI, gaming,
and data-science computing. Most of the world’s top supercomputers used NVIDIA chips. Te NVIDIA A100
data center GPU was the world’s largest processor. NVIDIA DGX™ was a system for leading-edge AI and data
science. Te DGX A100 sold for $199,000. NVIDIA was a leading company in the gaming industry, and its
platforms could transform everyday PCs into powerful gaming machines.
In 2020, NVIDIA announced that it would acquire Arm Holdings for $40 billion. Arm, a subsidiary of
the Japanese technology conglomerate Softbank, designed microprocessors that powered most of the world’s
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smartphones. Arm was based in the U.K. and had more than 500 licensees for its technology. Te licensees could
then choose from the company’s instruction-set architectures. According to NVIDIA:
Uniting NVIDIA’s AI computing capabilities with the vast ecosystem of Arm’s CPU, we can advance
computing from the cloud, smartphones, PCs, self-driving cars, and robotics, to edge IoT, and
expand AI computing to every corner of the globe. This combination has tremendous benefits
for both companies, our customers, and the industry. For Arm’s ecosystem, the combination will
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turbocharge Arm’s R&D capacity and expand its IP portfolio with NVIDIA’s world-leading GPU
and AI technology.19
Te Arm deal was under United States regulatory review and was raising some concerns in the
smartphone industry. It was also not clear how Chinese smartphone companies would view Arm becoming
American-owned.
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Samsung Semiconductor
Samsung Semiconductor was a subsidiary of Samsung Electronics, which was part of the Samsung Group, the
largest chaebol in South Korea. Besides the electronics and semiconductor businesses, the Samsung Group included
Samsung Heavy Industries (the second largest shipbuilder), Samsung Engineering, Samsung Life Insurance, Cheil
Worldwide (one of the world’s largest advertising agencies), and many other businesses.
Samsung Semiconductor was the second largest semiconductor frm in sales. Samsung entered the
semiconductor business in 1974 with an acquisition and quickly grew in the memory sector. Samsung became
the world leader in DRAM memory in 1993 and continued to occupy that position, followed by SK Hynix and
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Micron. Samsung was also the leader in NAND memory with a 30% share. NAND memory chips were used
in storage for smartphones, computers, and other products. Te next three frms in NAND market share were
Kioxia (formerly Toshiba), Western Digital, and SK Hynix (before the deal to buy Intel’s memory business).
Samsung was a major competitor in image sensors and several other product lines.
With the goal of increasing sales in sectors beyond memory chips, Samsung was planning to add about
15,000 new jobs in research and development over the next decade. Tis would position the company to become
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“a true IDM business…Samsung will take the lead in fostering the country’s competitiveness in the non-memory
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market by actively supporting small fabless and design-house businesses.”20
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To compete with TSMC and other foundries, Samsung Foundry was spun of from Samsung Semiconductor
in 2017 as a separate subsidiary under Samsung Electronics. Samsung Foundry and TSMC were considered the
most advanced semiconductor manufacturers in the world, having surpassed Intel.
TSMC
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Taiwan was the world’s leading location for semiconductor foundry manufacturing. Taiwan’s foundry industry
was dominated by two contract manufacturers: TSMC and United Microelectronics Company (UMC). After
spending 25 years with Texas Instruments, a government initiative lured Morris Chang to Taiwan where he
founded TSMC in 1987. According to Chang, “Te only possible strength that Taiwan had, and even that was
a potential one, not an obvious one, was semiconductor manufacturing, wafer manufacturing. And so, what
kind of company would you create to ft that strength and avoid all the other weaknesses? Te [answer] was a
pure-play foundry.”21
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TSMC was the world’s largest and most important foundry. With 21 fabs (18 in Taiwan, two in China,
one in the United States) and an annual capex budget of about $15 billion, TSMC reshaped the semiconductor
industry. As a foundry, TSMC operated on a contract basis and did not sell devices of its own design. Te frm
accounted for more than half of the $42 billion foundry segment of the semiconductor industry. A TSMC
spokesperson stated, “Te foundry business model has enabled the emergence of the fabless industry by eliminating
the fnancial burden associated with semiconductor manufacturing. It allows efcient vertical specialization and
democratizes the innovation process, resulting in greater product diversity and faster innovation, at lower cost.”22
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TSMC supplied chips to Apple, Qualcomm, NVIDIA, and many other frms. Apple was TSMC’s largest
client, accounting for one-ffth of revenue. Huawei was TSMC’s second-largest customer until the U.S. government
placed Huawei on its Entity List, barring U.S. and foreign companies from shipping chips to Huawei without
a U.S. government license. TSMC’s relationship with Huawei looked to be in jeopardy unless the company
obtained an export license that allowed it to circumvent export restrictions that took efect in September 2020.
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In 2020, TSMC announced that it would spend US$12 billion to build a fab in Arizona; land was acquired
in late 2020. TSMC also started mass production of 5nm chips in 2020. Samsung was the only other frm that
could produce 5nm chips.
ASML
Although not a semiconductor producer, ASML was one of the specialized frms that played a major role in the
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industry. ASML was also one of the most valuable frms in the industry, with a market cap greater than Intel.
In 1984, the Dutch electronics frm Philips and chip-machine manufacturer Advanced Semiconductor
Materials International created a new company to develop lithography systems for semiconductor manufacturing
called ASM Lithography (ASML). Lithography uses light to print tiny patterns on silicon and is a fundamental
step in mass-producing computer chips. A lithography projects light through a blueprint of the pattern that will
be printed. Te blueprint is four times larger than the intended pattern on the chip. With the pattern encoded
in the light, the system’s optics shrink and focus the pattern onto a photosensitive silicon wafer. After the pattern
is printed, the system moves the wafer slightly and makes another copy on it.
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In 1995, ASML became independent and was listed on the Amsterdam and New York stock exchanges.
Over the next several decades, the company continued to improve its technology. In 2010, ASML shipped the
frst prototype Extreme Ultraviolet (EUV) lithography system to an Asian chipmaker, and ten years later EUV
lithography was becoming well established in the market. An article described the machine:
An extreme ultraviolet lithography machine is a technological marvel. A generator ejects 50,000

tiny droplets of molten tin per second. A high-powered laser blasts each droplet twice. The first
shapes the tiny tin, so the second can vaporize it into plasma. The plasma emits extreme ultraviolet
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(EUV) radiation that is focused into a beam and bounced through a series of mirrors. The mirrors
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are so smooth that if expanded to the size of Germany, they would not have a bump higher than a
millimeter. Finally, the EUV beam hits a silicon wafer—itself a marvel of materials science—with a
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precision equivalent to shooting an arrow from Earth to hit an apple placed on the moon. This allows
the EUV machine to draw transistors into the wafer with features measuring only five nanometers—
approximately the length your fingernail grows in five seconds. This wafer with billions or trillions
of transistors is eventually made into computer chips.23
ASML was the world’s only manufacturer of lithography machines using EUV technologies that were used
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to produce the most advanced chips. An EUV system had more than 100,000 parts, cost approximately $120
million, and was shipped in 40 freight containers. In 2020, ASML expected to ship about 35 systems, which
would make up about half of the company’s sales. Once installed, ASML provided after-market service.
China
In recent years, semiconductor sales in China grew at a double-digit rate. Sales to companies in China represented
about 60% of the global semiconductor market, and almost all of the sales were by foreign companies.24 Te
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majority of the chips purchased by Chinese frms were then exported as components in electronic products
like phones and tablets. Te percentage of products exported was falling as Chinese consumers increased their
consumption. China’s self-sufciency rate (chips made by Chinese companies and sold in China) was less than
20%.25 On a global basis, sales by Chinese-headquartered companies were about 5% of the market. In 2019, 24
of the 126 300mm wafer fabrication plants in operation worldwide were located in China.26
In 2014, the Chinese government published an ambitious plan, Guidelines to Promote National Integrated
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Circuit Industry Development, with the goal of establishing a world-leading semiconductor industry in all areas of
the integrated circuit supply chain by 2030.27 In 2015, China announced its “Made in China 2025” industrial
plan, described as:
Made in China 2025 (MIC 2025)—a broad umbrella industrial plan of China—seeks to boost
China’s economic competitiveness by advancing China’s position in the global manufacturing value
chain, leapfrogging into emerging technologies, and reducing reliance on foreign firms. MIC 2025
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emphasizes technology advancement and innovation as drivers of growth and productivity, although
the strategy looks to obtain foreign expertise to fill key technology gaps. The plan promotes diverse
forms of state ownership and control and allows Chinese firms flexibility to access global markets,
potentially obscuring the full extent of the role of the state.28
Te Chinese government’s 2015 goal for semiconductors was the production of 40% of domestic needs
within China by 2020 (actual was less than 20%), 70% by 2025, and parity with international leading-edge
technology in all segments of the industry by 2030. Most analysts doubted that China could meet the 70%
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target. China had various initiatives to spur investment and innovation in semiconductors. One was the China
National Integrated Circuit Industry Investment Fund, known as the Big Fund, set up in 2014 by the central
government. Te fund was set up to invest in chip manufacturing, boost industrial production, and promote
mergers and acquisitions. Te fund raised 138.7 billion yuan (US$21.8 billion) in its frst fnancing round29 and
had a target of $150 billion. In 2019, China announced a second fund.
In August 2020, the Chinese government updated its semiconductor policy. According to the Ofce of the
United States Trade Representative, “China’s strategy calls for creating a closed-loop semiconductor manufacturing
ecosystem with self-sufciency at every stage of the manufacturing process—from IC design and manufacturing
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to packaging and testing, and the production of related materials and equipment.”30 In order to implement the
strategy, China needed access to foreign intellectual property, including fabrication equipment. Te Organisation
for Economic Cooperation and Development (OECD) concluded that the Chinese state role is more pervasive
in China’s semiconductor industry than formal ownership because of the opaque nature of shareholdings and
funding.31
Over the past few years, the United States took various trade actions to counter the industry’s concerns about
China’s semiconductor policies and investments. Several proposed Chinese company acquisitions of American
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semiconductor frms were blocked by the U.S. government. In 2020, TSMC suspended processing new orders
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from Huawei to comply with U.S. export regulations. In 2019, the Dutch government prevented ASML from
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shipping an EUV machine to China.
Looking to the Future

Since its founding in the last century, the semiconductor industry has been constantly changing and evolving. Consumer
and industrial demand for electronic products with more and better capabilities, features, reliability, and speed
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was relentless, forcing semiconductor companies to push the frontiers of technology, globalize their value chains,
and constantly search for new opportunities for innovation.
Various trends had the potential to reshape the semiconductor industry. One was the continued rise of in-
house chip design at some of the big tech companies. Amazon did its own development for chips that supported
cloud computing.32 Facebook, Google, and Microsoft were developing AI chips. A second trend was the growth
in AI, with some predictions that growth could hit a 50% annual rate for innovative applications. AI could also
lead to advances in how semiconductors are manufactured.33 A third trend was the growing importance of data
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science and the need for technologies that supported scale and speed.
Finally, trade issues that impacted the global semiconductor value chain were likely to continue. For example,
in 2019, Japan restricted exports to Korea of hydrogen fuoride, fuorinated polyimide, and photoresists. Tese
three products were crucial for the production of semiconductors, and Japan was the world leader in producing
them. Two of the products—photoresists and hydrogen fuoride—were produced in Japan with Chinese rare
earth metals. In 2020, the U.S. government announced that U.S. exporters would be required to apply for a
license to sell to SMIC, China’s largest chipmaker.
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Given the critical role that semiconductors played in the global economy, it was likely that the industry
would continue to be subject to the winds of geopolitics.
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Endnotes
1
https://www.semiconductors.org/wp-content/uploads/2020/03/2020_SIA_Industry-Facts_5-14-2020.pdf.
os
2
Global Semiconductor Alliance and Accenture, 2020. Globality and Complexity of the Semiconductor Ecosystem.
3
Deloitte, 2019. Semiconductors—the Next Wave: Opportunities and winning strategies for semiconductor companies.
4
Semiconductor Industry Association, 2016. Beyond Borders: Te Global Semiconductor Value Chain.
5
https://materials.proxyvote.com/Approved/816850/20120427/AR_127902/PDF/semtech-ar2012_0017.pdf?utm_
source=morning_brew#:~:text=the%20Semiconductor%20Industry-,Te%20semiconductor%20industry%20is%20
broadly%20divided%20into%20analog%20and%20digital,as%20that%20used%20by%20computers.
rP
6
J. T. Macher, D. C. Mowery, & T.S. Simcoe, 2002. E-Business and the Semiconductor Industry Value Chain: Implications
for Vertical Specialization and Integrated Manufacturers. Industry and innovation, 9, No. 2 (August).
7
J. T. Macher & D. C. Mowery, 2004. Vertical Specialization and Industry Structure in High Technology Industries, Business
Strategy Over the Industry Lifecycle. Advances in Strategic Management, 21, 331–332.
8
Global Semiconductor Alliance and Accenture, 2020.
9
Semiconductor Industry Association, 2016.
10
Semiconductor Industry Association, 2020.
11
Semiconductor Industry Association, 2020 Factbook.
12
Congressional Research Services, Semiconductors: U.S. Industry, Global Competition, and Federal Policy, October 2020.
yo
13
https://www.mckinsey.com/industries/advanced-electronics/our-insights/semiconductor-design-and-manufacturing-
achieving-leading-edge-capabilities.
14
R. A. Burgelman, 1994. Fading Memories: A Process Teory of Strategic Business Exit in Dynamic Environments.
Administrative Science Quarterly. Vol. 39, No. 1 (Mar. 1994), pp. 24-56.
15
Intel Annual Report, 2020.
16
C. Mims. Intel Inside? Not so Much Anymore. Wall Street Journal, Dec. 12, 2020, B2.
17
https://www.wsj.com/articles/intel-chips-cpu-factory-outsourcing-semiconductor-manufacturing-11604605618?page=1.
18
https://www. NVIDIA.com/en-us/about- NVIDIA/corporate-timeline/.
19
https://nvidianews.nvidia.com/news/nvidia-to-acquire-arm-for-40-billion-creating-worlds-premier-computing-company-
op
for-the-age-of-ai/.
20
http://www.koreaherald.com/view.php?ud=20190424000561.
21
https://restofworld.org/2020/taiwan-chipmaker-guide-to-tsmc/.
22
https://restofworld.org/2020/taiwan-chipmaker-guide-to-tsmc/.
23
https://www.brookings.edu/techstream/the-chip-making-machine-at-the-center-of-chinese-dual-use-
concerns/#:~:text=An%20EUV%20machine%20is%20made,shipped%20in%2040%20freight%20containers.
24
Te Asia-Pacifc Market Was 62% of the Total Market; Semiconductor Industry Association, 2020 Factbook.
25
Deloitte, 2019.
tC
26
Semiconductor Equipment and Materials International, 2020. Count of Facilities in Operation.
27
International Trade Administration (ITA), 2015 Top Markets Report: Semiconductors and Semiconductor Manufacturing
Equipment, A Market Assessment Tool for U.S. Exporters, July 2015, p. 13, at https://legacy.trade.gov/topmarkets/
semiconductors.asp.
28
https://fas.org/sgp/crs/row/IF10964.pdf.
29
https://www.scmp.com/tech/enterprises/article/2145422/how-chinas-big-fund-helping-country-catch-global-
semiconductor-race.
30
Ofce of the United States Trade Representative (USTR), Section 301 Report, March 22, 2018, p. 113.
No
31
OECD, 2019. “Measuring Distortions in International Markets: Te Semiconductor Value Chain,” OECD Trade Policy
Papers, No. 234, OECD Publishing, Paris.
32
https://www.gizchina.com/2018/11/29/amazon-releases-machine-learning-chips-namely-inferentia-and-graviton/.
33
https://www.analyticsinsight.net/a-brief-insight-on-the-role-of-semiconductors-in-ai-industry-and-vice-versa/.
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Te Global Semiconductor Industry

Exhibit 1. Semiconductor Industry Segments

Exhibit 2. Semiconductor Fabrication Capacity

Country/Region, 2015 and 2019

Rest of World (ROW) 9% 7%

Major Companies in the Semiconductor Industry

An extreme ultraviolet lithography machine is a technological marvel. A generator ejects 50,000

Looking to the Future

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