U.S. semiconductor industry is in trouble, says National Academy of Sciences panel.

The United States semiconductor industry is facing "unprecedented" challenges from abroad and the U.S. risks losing a good portion of its most important manufacturing industry, a panel assembled from the National Academies of Sciences told congressional aides on Capitol Hill on May 8. Foreign

governments are feverishly working with local and overseas semiconductor companies, local economic development organizations and academic institutions to create the infrastructure and train the manpower necessary to support the construction of the next generation of semiconductor fabs. The United States can no longer take a "passive" role and must formulate a comprehensive response, said the panel participants.

"Technology and R&D challenges are escalating," Randy Isaac, vice president of strategic alliances for IBM's Technology Group told the gathering of approximately 75 people. "Manufacturing investment requirements are escalating--becoming out of reach and unaffordable--while long-term market growth is slowing. The result is the semiconductor industry in the U.S. as it is currently structured is at risk. We're going to see a lot of consolidation, liquidation, partnerships and fewer players who can afford the increasing R&D costs and manufacturing investment."

Policymakers in the United States should not adhere to the mistaken idea that the United States can afford to lose its manufacturing base so long as it maintains its leading-edge capabilities in design services and R&D, said the speakers at the gathering organized by the Senate Manufacturing Task Force. R&D and design capabilities migrate with manufacturing, which is occurring more in Taiwan and China. "It all goes together," said Isaac. "You can't do effective R&D if you don't have the manufacturing base to ensure that the research is actually relevant. The two must be coupled. If the United States loses its manufacturing lead it will lose everything else with it."

Market forces are propelling a radical change in the business, and the cycle that has kept the U.S. industry healthy is beginning to unravel. Productivity of chips and chipmaking has improved by 100x over the past 10 years, but revenues have not keep pace. "The problem is markets are very difficult to grow at double digit rates and without the growth in revenue we no longer have the fuel to really fund the development and the manufacturing," says Isaac. "The technology advances are increasingly being funneled back into a very significant productivity enhancement to the overall economy, but not into the semiconductor industry. There is less funding available to sustain the technology--that is really the important message here." Total industry revenues in 2002 equaled those in 1995.

The U.S. accounts for 20 to 25 percent of world semiconductor production, a number that is declining. "We need this to turn around and get into the 30 percent range," said Isaac, at the introduction of the new Academy report "Securing the Future: Regional and National Programs to Support the Semiconductor Industry." "IBM is committed to staying, but one company does not an industry make and one company cannot be an island. We cannot continue here unless the industry is thriving. We cannot survive alone."

Governments throughout the world are engaged in a ferocious pursuit of developing their semiconductor industries. The only countries in the world with a semiconductor industry are those that have active government programs promoting the industry, said Thomas Howell of the Washington office of Dewey Ballantine, a noted expert on foreign semiconductor programs. "If there are no government promotional programs, there is no industry and that includes the United States," he said.

The programs being implemented in Asia in particular, are a replica of those that have worked so successfully in the United States. While there is not much discussion in the U.S. about how the U.S. industry has gained dominance, there is overseas. Foreign companies, universities and governments describe such U.S. programs as Sematech, partnerships involving university, government and industry researchers and the creation of industrial clusters like Silicon Valley as being "ideal" and "perfect," says Howell. "They are trying to replicate that around the world."

The countries that have realized they can be "close followers" are the ones showing the greatest amount of success. China, Taiwan, Singapore, Malaysia, Thailand and Israel are seeking foreign investment and view the United States as a collaborator, a source of technology, training and capital. As they capture manufacturing, design teams begin to follow and they become a magnet for talent and technology, the key ingredients for a successful industry. "This is the big challenge over the next 10 years," says Howell. "They are drawing the manufacturing function to these countries, capital investment and a rush of people to Asia."

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