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Some lessons learned from East Asia Semiconductor

Latest update time：2021-10-15

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Semiconductors are essential for smartphones, computers, cars, artificial intelligence, quantum computing, cybersecurity, and other applications. An economy without access to semiconductors will stagnate. Semiconductor manufacturing is concentrated in East Asia. As a result, many countries have had difficulty obtaining semiconductors during the COVID-19 pandemic, and they are now looking to move production closer to their home countries.

How did Asia gain a comparative advantage in this field, and are there lessons for countries seeking to boost domestic semiconductor manufacturing?

Protectionism and the Japanese and Korean Semiconductor Industries

John Bardeen and Walter Brattain invented the transistor in New Jersey in 1947. Tadashi Sasaki was in New Jersey at the time, working with Stanford professor Karl Spangenberg on the precursor to the transistor. Sasaki envisioned adding transistors to integrated circuits to make pocket calculators for his company, Sharp. His engineers studied calculator technology at Osaka University. Sasaki sought complementary metal oxide semiconductor (CMOS) chips to save power. Japanese companies refused to supply them, so Sasaki convinced the American company Autonetics to make them. Autonetics had lucrative military contracts, and the profit margins on making chips for calculators were low. Sasaki told Autonetics that they would learn by doing and make more money.

Then, Sharp and other Japanese companies produced millions of calculators with American microchips. Japanese semiconductor companies that had previously refused to supply Sharp began to complain. After that, the Japanese government banned Japanese companies from buying American chips. Autonetics was no longer able to produce for Sharp or other Japanese companies after being promised the benefits of the learning curve.

Japanese companies then mastered the CMOS technology developed in the United States. Many American companies missed out on the benefits of CMOS for consumer products and built PMOS (positive-MOS) and NMOS (negative-MOS) chips for military applications. When CMOS's potential to save power and promote miniaturization became apparent, Japanese companies took the lead. Three of the four leading semiconductor companies in 1980 were American, while three of the top four in 1990 were Japanese. In 1986, Japanese companies increased their share of the dynamic random access memory (DRAM) market from less than 30% in 1978 to more than 75% in 1986.

American companies responded to the Japanese giants by demanding protectionism. They complained that the Japanese government excluded American companies such as Autonetics from the Japanese market. American plaintiffs filed anti-dumping and Section 301 cases against Japan. In 1986, the United States and Japan reached an agreement that implied that 20% of the Japanese semiconductor market would go to American companies, and Japanese companies would raise prices and restrict exports. Determining market share by government decree represented a sea change in U.S. trade policy.

The U.S.-Japan semiconductor agreement focused on DRAM, providing an opportunity for South Korea. South Korea faced the danger of invasion from the North and prioritized economic development to counter this threat. The government allocated bank loans to businesses for export and continued to provide loans only to successful exporters. Pecht et al. observed that Korean workers who recognized the imperative for development were hardworking and patriotic.

In the 1980s, Samsung Chairman Byung-Chull Lee identified DRAM chips as a promising export industry. Thanks to government loan guarantees, Samsung could meet the large investment requirements for semiconductor manufacturing. Samsung acquired DRAM technology from the United States in 1983, and Samsung engineers worked day and night on the technology. As Samsung grew in power, Japanese companies had to sell at higher prices and in limited quantities. Samsung could sell at these higher prices without restriction. It used these revenues for R&D and capital formation. By the early 1990s, Samsung became the leading DRAM producer and remains so in 2021.

Taiwan and Malaysia's semiconductor industry

While South Korea dominated in manufacturing memory chips such as DRAM, Taiwan took the lead in producing logic chips such as central processing units and graphics processing units. Taiwan's inflation rate also rose to 22.9% in 1973 and 40.6% in 1974, and Taiwan lost access to Japanese capital goods in 1974. Faced with multiple crises, Taiwan prioritized economic development in order to survive. Many overseas Chinese expressed their willingness to help Taiwan free of charge. For example, Pan Wenyuan, head of the famous David Sarnoff Laboratories, chaired a Technical Advisory Committee (TAC) composed of leading overseas Chinese researchers.

TAC suggested that Taiwan develop a semiconductor industry. Taiwan established the Industrial Technology Research Institute (ITRI) to oversee its development and purchased semiconductor technology from RCA. ITRI recruited 40 engineers, some with American doctorates, who worked hard on the technology. ITRI spun off United Microelectronics in 1979 and TSMC in 1987. TSMC does not design integrated circuits, but manufactures them according to customer specifications. It is now the world's third largest semiconductor company. Many related companies have sprung up in Taiwan.

Asian economies have another advantage. The semiconductor industry requires large and sustained investments in R&D and capital formation. East Asian economies have high private savings rates and strict fiscal policies. High national savings promote investment, allowing chipmakers to remain competitive.

Inspired by the success of South Korea and Taiwan, Malaysia also used industrial policy to pursue a cutting-edge semiconductor industry. However, unlike South Korea and Taiwan, Malaysia did not face an existential threat. To parallel ITRI, Malaysia established the Malaysian Institute of Microelectronic Systems (MIMOS) in 1985. MIMOS was spun off from semiconductor company Silterra in 2000. However, as reported, Malaysia did not select the most qualified candidates to lead Silterra and other institutions. The government’s affirmative action initiatives favored Bumiputera citizens) over Indian or Chinese Malaysians. Rasiah noted that Malaysia did not choose Loh Kin Wah, managing director of German company Qimonda, to lead Silterra. The government also refused to provide subsidies to viable electronics companies that were not led by Bumiputeras and continued to support local companies even when they were underperforming. Malaysia’s emphasis on redistribution resulted in rent-seeking losses. Its semiconductor industry never evolved into higher value-added activities such as design, R&D, and manufacturing.

Policy Lessons

For countries seeking to foster domestic semiconductor manufacturing, the East Asian experience holds several policy lessons.

First, government largesse outweighs competition. While American researchers invented the transistor, CMOS chips, LCD displays, and other breakthrough technologies, Asian companies often profited from them. American electronics companies were swamped by defense contracts and lacked the motivation to turn new technologies into marketable products. Asian companies, competing in demanding consumer markets, must carefully select technologies and use them to produce desirable products.

Second, entrepreneurs are essential. Sasaki’s vision of miniaturizing calculators using CMOS integrated circuits led to millions of calculators being sold. Byung-Chull Lee saw promise in DRAM chips. Samsung’s subsequent success in memory chips contributed to its market value exceeding $10 trillion in 2021;

Third, industrial policy works better when the polity unites to respond to a threat. When a country’s survival is at stake, the single-actor model in which agents work together for a common good can explain the results, experts note. On the other hand, the interest group model in which pressure groups pursue rents at the expense of others better explains democratic outcomes in peacetime. Government officials, entrepreneurs, workers, and others in South Korea and Taiwan see economic development as the key to survival and unite to achieve it. Malaysia, however, lacks an existential threat and focuses on redistribution. In Malaysia, industrial policy has led to rent-seeking waste and has not improved efficiency;

Fourth, education and technology transfer are critical. Asia invests in education. Sasaki was well-trained and quickly recognized the technologies his company should invest in. Korean and Taiwanese engineers were capable and absorbed technology from American companies. A well-educated workforce is better able to absorb foreign expertise;

Fifth, protectionism can backfire. Japan’s refusal to allow companies like Autonetics to continue selling semiconductors to Japan and U.S. actions against Japanese chip companies ultimately weakened the semiconductor industries of both countries.

Sixth, high national savings rates promote the large investments needed to stay ahead. Countries with large budget deficits may crowd out necessary investments;

Seventh, it is important to take advantage of incentives. Experts point out that South Korea stopped providing loans to companies that failed to export. Malaysia, on the other hand, continues to support poorly performing Bumiputera companies;

As Eric Schmidt has observed, countries seeking to strengthen their technology sectors are unlikely to succeed by throwing money at the problem. Instead, they should align incentives, encourage entrepreneurs, educate their workforces, and adopt industrial policy judiciously.

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