On its way out the door the Obama Administration put together a proposed response to China’s plans to invest $150 billion in the semiconductor market over the next five years. It seems that US semiconductor industry views China’s investment as a threat to its position in the market.
Last week the President’s Council of Advisors on Science and Technology (PCAST) delivered a 25-page Report to the President entitled: “Ensuring Long-Term U.S. Leadership in Semiconductors.”
You might ask: “Who is PCAST?” The organization states its mission in this paragraph: “The President’s Council of Advisors on Science and Technology (PCAST) is an advisory group of the Nation’s leading scientists and engineers, appointed by the President to augment the science and technology advice available to him from inside the White House and from cabinet departments and other Federal agencies. PCAST is consulted about, and often makes policy recommendations concerning, the full range of issues where understandings from the domains of science, technology, and innovation bear potentially on the policy choices before the President.”
PCAST has a small Semiconductors Working Group whose elite members include former Intel CEO Paul Otellini, former Freescale CEO Richard Beyer, former GlobalFoundries CEO Ajit Manocha, former Applied Materials CEO Mike Splinter, Qualcomm Executive Chairman Paul Jacobs, Stanford University President Emeritus John Hennessy, and others. These are the contributors who wrote the report.
So what did the report say? In a nutshell it’s the PCAST Semiconductor Working Group’s recommendation for what the US Government should do to help US companies compete against significant upcoming investments in China. According to the report: “We found that Chinese policies are distorting markets in ways that undermine innovation, subtract from U.S. market share, and put U.S. national security at risk.” To underscore this statement the report explains that: “the pervasiveness of semiconductors makes their integrity important to mitigating cybersecurity risk. U.S. semiconductor innovation, competitiveness, and integrity face major challenges.”
Unfortunately, the meaning of the word “integrity” varies through the report. In some instances it appears to indicate that the chips themselves may lend themselves to poor data security (perhaps through backdoors designed into the chip) but in other parts of the report “integrity” refers to the supply chain, indicating that sources of important product may dry up if the US becomes over-dependent on non-US suppliers.
PCAST’s core finding is that: “the United States will only succeed in mitigating the dangers posed by Chinese industrial policy if it innovates faster. The only way to retain leadership is to outpace the competition.”
How to do this? The report recommends and elaborates on a three-pillar strategy:
- Push back against innovation-inhibiting Chinese industrial policy
- Improve the business environment for U.S.-based semiconductor producers
- Sponsor “Moonshots” to help catalyze transformative semiconductor innovation over the next decade
The last point is the most interesting. Although number one involves policy and diplomacy, and number two is largely a request for tax breaks, the third suggestion is to set challenging goals, partly funded by the government, to encourage research & development efforts that will continue to keep the US in a leadership position. This is likened to President John Kennedy’s 1961 goal of placing a man on the moon and returning him safely by the end of the 1960s, thus the term “Moonshot”.
The report provides four possible examples of Moonshots:
- Bioelectronics for sensory replacement and implantable neuro-stimulation for control of chronic conditions
- Threat detection network
- Distributed electric grid
- Global weather forecasting
What The Memory Guy finds interesting is the differences in approaches between China and the US. China’s government plans to spend its way into an important role in the chip market. The US, if it follows PCAST’s suggestions, will foster innovation. This is a less direct approach to the problem, but one that is very forward looking. It could provide benefits for the country for several years after the program ends.
It’s not easy to tell whose plan is better, or whether or not they even compete. It will take a long time before we even know. The two plans, though, take advantage of the two countries’ individual strengths: Today China has a lot of cash and a very large domestic chip market that could be encouraged to purchase domestically-produced products rather than those made by foreign firms. The US has always been very strong at innovation, and has been able to use this characteristic to maintain leadership in many markets.
One important consideration is the funding that goes into semiconductor development. As the PCAST report explains: “While total U.S. government spending on all non-defense R&D was $65.9 billion in 2015, the semiconductor industry alone nearly matched this level of R&D spending at $55.4 billion.” Clearly the US government is unlikely to want to bring its semiconductor R&D spending any near as high as $55.4 billion, but PCAST recommends for the government to orchestrate pre-competitive research efforts between US chip companies and their domestic suppliers that would be funded through private sources to achieve a common end.
If you find China’s chip ambitions as fascinating as I do, and if you would like to learn what the country’s doing, and how the market is likely to respond, then please note that Objective Analysis is currently researching a report to be published in February covering China’s impact on the memory chip market. Send us an e-mail to be notified when this report is released.