"Key success factors in the semiconductor industry: Comparative

analysis of the US, European and Chinese semiconductor industries"

Boquet, Morgane

ABSTRACT

In 2019, the global semiconductor industry represented US$412.1 bn of sales (SIA, 2020a) and was
dominated by a few firms located in different leading countries in the sector such as the United States,
South Korea, Japan, and the European Union (Statista, 2020g). Through a comparative analysis of the
US, European, and Chinese semiconductor industries, this research highlights key characteristics that are
relevant to the development of semiconductor companies in their market. After having summarized several
features of the three different semiconductor industries, four characteristics can be pointed out: the level
of investments made from semiconductor companies, the protection tools provided by national or regional
governments and institutions to their companies, the access to the Chinese semiconductor market and
the level of cooperation and coordination of economic units. Taking into account this comparative analysis
and the current environments in which semiconductor companies evolve, recommendations to improve
the semiconductor markets of the three economic entities are provided.

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European and Chinese semiconductor industries. Louvain School of Management, Université catholique
de Louvain, 2021. Prom. : Defraigne, Jean-Christophe ; Lejeune, Christophe. http://hdl.handle.net/2078.1/
thesis:28300

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 Louvain School of Management

Key success factors in the semiconductor

industry:
Comparative analysis of the US, European
and Chinese semiconductor industries

Author : Morgane Boquet

Supervisor : Jean-Christophe Defraigne
Co-Supervisor: Christophe Lejeune

Academic year: 2020-2021

 During the process of writing my thesis, I was lucky to be surrounded by inspiring people.
This allowed me to be more confident with the knowledge I’ve gained, but also to be proud
of the work I’ve accomplished.

I would like first to thank my thesis supervisor, M. Jean-Christophe Defraigne, who believed
in me since the beginning. For two years, he has guided me and given me helpful suggestions
and advice, and has dedicated much of his time to support me. He challenged me and
pushed to always do better.
I am also grateful to my co-supervisor, M. Christophe Lejeune, who offered precious support
during our IB experiences and helped me believe in my dreams and discover the world.

Thank you to M. Konstantinos Glinos for sharing with me his knowledge and
recommendations. His insightful thoughts inspired me and helped me realize that I was in
the right direction for my research.

Thank you also to my readers, Manuela Moutafian, Harald Van Outryve, Colombine de Vivar,
and my father Luc Boquet. They contributed by sharing their thoughts, but also by
challenging me until the end.

Last but not least, I would like to express my most profound gratitude to my parents who
supported me throughout this research and during the past five years of my studies. You
encouraged me during difficult times, you helped me overcome stressful situations, and
most importantly, you always believe in me.
 III.

Table of Contents
Acronyms and Abbreviations ............................................................................................ V
Introduction ...................................................................................................................... 1
PART 1 : The semiconductor industry ................................................................................. 4
1. The global semiconductor market ..................................................................................... 4
1.1. The semiconductor demand ............................................................................................................. 6
1.2. Emerging technologies ..................................................................................................................... 7
1.3. Complex global value chain .............................................................................................................. 8
2. Historical background of the semiconductor industry ...................................................... 10
2.1. The US precursors........................................................................................................................... 10
2.2. European and Japanese prime movers .......................................................................................... 11
2.3. The rising of the Asian market ........................................................................................................ 13
2.4. The catch-up strategy of China ....................................................................................................... 14
2.5. Current key players of the industry ................................................................................................ 18
2.6. Acquisitions of technology and knowledge protection .................................................................. 20

PART 2: Analysis of key success and failure factors of the semiconductor industry ............ 24
1. The supremacy of the United States in the semiconductor industry ................................. 24
1.1. The demand from US military and space industries ...................................................................... 24
1.2. Access to economies of scale ......................................................................................................... 25
1.3. R&D expenditures ........................................................................................................................... 26
1.4. Workforce ....................................................................................................................................... 27
1.5. The role of the federal government ............................................................................................... 28
2. The semiconductor industry in Europe ............................................................................ 29
2.1. Investments from semiconductor companies ................................................................................ 29
2.2. Aids and incentives from European Institutions and national governments ................................. 31
2.3. The fragmentation level in the European market .......................................................................... 33
2.4. Niche markets in Europe ................................................................................................................ 34
3. The semiconductor industry in China .............................................................................. 35
3.1. Governmental aids and policies ..................................................................................................... 36
3.2. Investment strategies from semiconductor companies ................................................................ 37
3.3. Protection tools from the Chinese government............................................................................. 38
3.4. The importance of the Chinese market .......................................................................................... 39
4. Comparative table .......................................................................................................... 41
5. Analysis of the comparative table ................................................................................... 45
5.1. Demand coming from the defense and space industries............................................................... 45
5.2. Network effects and innovation cycle ............................................................................................ 46
5.3. Investments in R&D and manufacturing equipment...................................................................... 47
5.4. Governmental aids ......................................................................................................................... 49
5.5. The cooperation and collaboration inside an economic entity...................................................... 51
5.6. The dependency level on foreign countries ................................................................................... 52
5.7. The level of control and restrictions to foreign competitors ......................................................... 54
5.8. The level of universities and workforce ......................................................................................... 55
5.9. The access to the Chinese market .................................................................................................. 56
5.10. Conclusion on the effectiveness and relevance of each factor ...................................................... 57

PART 3: Recommendations to US, European and Chinese semiconductor industries .......... 61

1. The need to increase governmental aids to US semiconductor companies ....................... 61
 IV.

2. The need for more cooperation and collaboration among the European Union ................ 62
3. The need to increase market share in emerging technologies .......................................... 64
Conclusion ...................................................................................................................... 66
Limits and further researches ................................................................................................. 69
Bibliography ................................................................................................................... 71
Appendices ..................................................................................................................... 84
Appendix 1: Ranking of industries by overall R&D intensity for the EU, US and Japanese
companies in 2010.................................................................................................................. 84
Appendix 2: The worldwide semiconductor sales from 1987 until 2021 in US$ bn. ................... 85
Appendix 3: Net global trade of Integrated Circuits in 2018. .................................................... 86
Appendix 4: Net global trade of Integrated Circuits in 2010 ..................................................... 87
Appendix 5: China and US sales balance of the eight largest semiconductor suppliers in the
world ..................................................................................................................................... 88
Appendix 6: Interview with Konstantinos Glinos ..................................................................... 89
 V.

Acronyms and Abbreviations

ADAS Advanced Driver-Assistance System

AI Artificial Intelligence
AR/VR Augmented Reality & Virtual Reality
ATP Assemble, Test and Packaging
Bn Billion
CAGR Compound Annual Growth Rate
DARPA Defense Advanced Research Projects Agency
DOE Department of Energy
DRAM Dynamic Random-Access Memory
ELG Electronics Leaders Group
ERSO Electronic Research Service Organization
ESIA European Semiconductor Industry Association
EU European Union
FDI Foreign Direct Investment
FYP Five Year Plan
GCTI Global Talent Competitiveness Index
GDP Growth Domestic Product
GDPR General Data Protection Regulation
ICs Integrated Circuits
ICT Information and Communication Technology
IDM Integrated Device Manufacturer
IP Intellectual Property
IPCEI Important Project of Common European Interest
IT Information Technology
M&A Merger and Acquisition
MCU Microcontroller
MOFCOM Ministry of Commerce
NAFTA North American Free Trade Agreement
NIST National Institute of Standards and Technology
 VI.

OSCCA The Office of State Commercial Cryptography Administration

R&D Research and Development
RTO Research and Technology Organization
SAE Smart Anything Everywhere
SEI Strategic Emerging Industries
SEM Single European Market
SIA Semiconductor Industry Association
SME Small and Medium Enterprise
SMIC Semiconductor Manufacturing International Corporation
TI Texas Instrument
US United States
USMCA United States – Mexico – Canada Agreement
WSTS World Semiconductor Trade Statistics
WTO World Trade Organization
WWII World War II
 1.

Introduction

International trade has increased over the years. Since 2000, world merchandising trade has
risen by 1400% from US$1.35 trillion to US$19.051 trillion in 2019 (World Trade Organization,
2020). This high growth rate led to an intensification in international interactions between
people all around the world sharing their knowledge, research and ideas. Nowadays, we can
reach a multitude of nationalities and countries which, in return, fosters the creation of most
products and innovations.

Across the years, the world progressively became interdependent. The global semiconductor
industry is an excellent example to illustrate the rise of this phenomenon. Indeed, an average
of 35 different countries oversee the manufacture of a semiconductor product, as it requires
various set of skills and knowledge. It is safe to say that the semiconductor industry represents
a global ecosystem. Moreover, the final product reaches the end consumer after crossing
international borders approximately 70 times (Accenture, 2020).
With the increasing number of multinational companies in the sector, competition is fierce,
and innovation has no limit (SIA, 2020a). The race to maximize profit and increase market
share is greater than ever before which, consequently, makes the global value chain of
semiconductor products more vulnerable (McKinsey, 2020). As seen with the covid-19 crisis,
some electronic manufacturing firms located in China were idle during a period of time,
further involving shortage problems for suppliers and end-consumers all around the world
(Deloitte, 2020).

Given this context, I decided to focus my master’s thesis on the semiconductor industry and
try to define key characteristics a market should have that benefit the development of
semiconductor companies. Indeed, semiconductor firms evolve in different environments
linked to their home country or countries they operate. They face thus different industrial
policies and governmental aids such as subsidies, national or regional programs aiming to
develop the semiconductor industry, and incentives helping semiconductor companies.
National and regional governments and institutions provide also distinct levels of protection
for their semiconductor industry. Moreover, markets where semiconductor companies are
 2.

evolving are heterogenous. Therefore, semiconductor firms face different demands from
countries or regions, levels of skilled workforce, and labour costs.
In order to point out and develop the most efficient success factors that benefit a
semiconductor company, I will proceed to a comparative analysis of three different economic
units. Therefore, I focus my master’s thesis on the semiconductor industries of the United
States, the European Union and China. I decided to include those three regions in my research
because I wanted to provide an analysis of semiconductor markets that are at different
development stages. Indeed, the US semiconductor industry represents, since the start of the
industry’s history, the biggest market share in the world (Statista, 2020f). Top semiconductor
leaders come mostly from the US and despite the increasing competition, they are constantly
innovating (SIA, 2020a). Then, the EU semiconductor industry had a promising future, but
European companies failed to become worldwide leaders. Nevertheless, they are now trying
to catch up the level of top players in the industry (ESIA, 2019). Finally, Chinese companies
arrived later in the global semiconductor market, but that will not stop them to gain market
shares. In the beginning of the 21st, the Chinese government decided to develop ruthless
strategies aiming to outweigh international companies in the worldwide semiconductor
industry (Sauvage, 2019).
Within the framework of my master’s thesis, I decided not to study other countries such as
Taiwan, South Korea and Japan even if they are in the top 5 of leading countries in the
semiconductor industry in terms of market shares (Statista, 2020f). Indeed, in order to provide
a comprehensive analysis, I had to restrict the number of different economic regions and
choose to take the most opposed in terms of positions in the worldwide semiconductor
industry, cultural values and business environments. However, it would be very interesting to
analyze it in future research.

As the semiconductor industry is one of the most disputed points in the current geopolitical
tensions between the United States and China, this subject is prone to many distorted and
subjective information. Having this in mind, I made a deep literature review on the subject
and tried to find information written by authors coming from different countries in order to
confront them. Also, throughout my research, I related heavily on macroeconomics indicators
and factual data. This allowed me to avoid biases as much as possible and to not base my
thesis on personal opinions or judgements. This type of data is quite sensitive to governments
 3.

which increases the difficulty to find reliable information. I had thus to build a proper
argumentation based on available data.

This master’s thesis is composed of three parts. In the first one, based on literature review, I
will provide a state of affairs of the global semiconductor industry and its international supply
chain. Also, I added a historical background of the industry in order to better understand the
worldwide context where semiconductor companies coming from the United States, the
European Union and China have born and evolved. Following this, I will provide a summary of
the current key players in the industry and to which degree they are impacted by the
increasing geopolitical tensions between the US and China.

In the second part, I will develop some key characteristics for the semiconductor industry of
the chosen regions and check whether they benefit or not the companies. I will try to be as
complete as possible while also focusing only on the most relevant aspects. Further, I will
provide a comparative analysis on the importance and effectiveness of each factor for the
development of the semiconductor industry in the three regions.

In the last part, I will provide key recommendations that are most appropriate to the three
regions environment and needs. Those recommendations aim at improving the current
position of each semiconductor industry.
Finally, the conclusion of my master’s thesis will highlight the most efficient characteristics
business environments should have in order for semiconductor companies to grow and thrive
in their market. I will also provide limits of my research and ideas for further analysis.
 4.

PART 1 : The semiconductor industry

1. The global semiconductor market

Semiconductors are defined as:

An essential component of electronic devices, enabling advances in communications,

computing, healthcare, military systems, transportation, clean energy, and countless other
applications. Semiconductors, sometimes referred to as integrated circuits (ICs) or microchips,
are made from pure elements, typically silicon or germanium, or compounds such as gallium
arsenide (SIA, 2020d).

Semiconductor products have an important place in our life as they are used in daily objects
such as smartphones, radios, TVs, computers, video games or even advanced medical
diagnostic equipment (SIA, 2020d).

The semiconductor industry has been well implemented in the market for several years. The
market of traditional products such as Integrated Circuits (ICs) is mature and most segments
are dominated by a few large and international firms. Due to economies of scale sought out
from those firms, competition is fierce and barriers to entry are high (VerWey, 2019).
However, the semiconductor market will continue to grow as new emerging sectors such as
Artificial Intelligence (AI), 5G and the automobile industry are being developed.
These new sectors will increase competition for market share between semiconductor firms
while startups and new entrants from emerging economies will also enter the market.
Companies in the semiconductor industry will have to diversify their operations in order to
capture the most value across the value chain (SIA, 2020a).

The semiconductor industry is globally shared among 6 countries. In 2019, the United States
dominated the market with about 47% of market share. Followed by South Korea (19%), Japan
(10%), the European Union (10%), Taiwan (6%) and China (5%) (Figure 1) (Statista, 2020f).
 5.

Figure 1: The market share in percent of the global semiconductor industry per country in 2018 and
2019 (Statista, 2020f).

After recorded sales of US$468.8 bn in 2018, global sales suffered from a sharp decrease of
12% to US$412.1 bn in 2019 due to the cyclicality of the memory market1 (Figure 2). The World
Semiconductor Trade Statistics (WSTS) organization forecasted an increase of global sales to
US$426 bn for 2020. In 2021, WSTS forecasts global sales to reach US$452 bn (SIA, 2020a).

1The cyclicality of the memory market is due to fluctuations in capacity and in capital spending from
semiconductor companies. This leads to a weaker demand and a fall of prices of memory products. With its
US$99.4 bn in revenue in 2018, the worldwide DRAM market is the largest single product category in the
semiconductor industry followed by NAND flash with US$59.4 bn. (Jorgensen, 2019).
 6.

Figure 2: Global semiconductor sales in US$ bn (vertical axis) from 1999 until 2019 (SIA, 2020a).

1.1. The semiconductor demand

Semiconductor chips are used in a wide range of products and technologies, such as
smartphones, computers, cars, industrial equipment but also AI, wireless technology,
cybersecurity, edge computing, sensors and power management. Those innovations need to
transfer, store and analyze a big amount of data which is possible through the use of
semiconductor products (European Commission, 2018).
The semiconductor industry is a market in which products continuously improve. By
consequence, it also increases the quality of the end-user products using those
semiconductors. As semiconductor products become essential in the production chain, the
demand increases, and so does the price. This increase in revenue allows companies to make
larger R&D investments and develop more advanced semiconductors. This is known as the
innovation cycle which allows the digital economy to grow (SIA, 2020a).
Globally, semiconductor components for automotive and industrial electronics are the most
demanding and are thus growing at the highest rate (Figure 3). This is due to the electrification
and automation of vehicles, digitalization of industry and electrical power grids (SIA, 2018).
 7.

Figure 3: Forecasted compound annual growth rate (CAGR) by semiconductor industry segment from
2017 until 2022 (European Commission, 2018).

1.2. Emerging technologies

As previously said, new technologies are being developed and will require a high level of
semiconductor products.

Regarding the automotive sector, the recent adoption of safety-related electronics systems
induces the use of various semiconductor devices, such as microcontrollers, sensors and
memories that are used to make state of the art cars. Advanced driver-assistance systems
(ADAS) will have the highest growth further inducing an increase in the demand for ICs
(Integrated circuits), MCUs (Microcontroller units) and sensors (Chen & al., 2019). Currently,
semiconductor products required per vehicle are five times higher for a full automation
system than a hybrid one (Pwc, 2019).

AI technology is prospering in various sectors and increasing the demand for AI semiconductor
devices, especially at the ICs level. According to a McKinsey survey (2020), the demand for AI-
related chips will account for 20% of the semiconductor demand while generating US$67 bn
in revenue before 2025.
The cloud is especially the biggest market in the AI sector as it represents the data centers
enhancing the efficiency and reducing operational cost of companies (Chen & al., 2019).
 8.

The introduction of 5G will maintain a 2.2% growth rate in the communication market which
accounts for 80% of the demand for semiconductor products (Pwc, 2019). As the 5G is
entering our market, 5G semiconductor revenue is forecasted to increase from nearly zero in
2018 until US$31.5 bn in 2023. The increasing volume of global data will lead to an
increasing demand for ICs.

1.3. Complex global value chain

As the global semiconductor industry reaches the limits of Moore’s Law2, the total expenses
associated with manufacturing chips can only be borne by the largest firms in the world
(VerWey, 2019). Those expenses are represented by R&D investments required to upgrade
semiconductor products but also to cover the cost of building leading-edge fabs and to
develop state-of-the-art process technologies. According to a Global Innovation 1000 Study
made by Chwalik, Goehle and Jaruzelski (2018), R&D investments made in 2018 from
worldwide semiconductor companies in percentage of their revenue was about 20.9%,
representing US$97.97 bn, compared to 5.7% in the automobiles and components industry.
This percentage has increased throughout the years due to the rise of new technologies on
the market and the fixed costs linked to it. Already in 2012, only Intel, Samsung, and Texas
Instrument, the three global leading firms in the semiconductor industry, were able to afford
the cost of manufacturing 22 nanometers nodes (McKinsey, 2011).

The increasing cost in this industry since the past few years has forced most companies to stop
manufacturing the whole product from the beginning until the end in order to specialize in
only one or few segments of the value chain. This process is called the “fab-lite” strategy which
implies the decision of companies to outsource a large part of their chip production (Design &
Reuse, 2014). By narrowing their strategic product focus, companies don’t require expensive
fabs or wafer processes anymore. This led to a net decrease of capital expenditure from 27%
to 20% of revenue in ten-year time (Figure 4) (McKinsey, 2011).

2 The Moore’s Law refers to the observation of Gordon Moore in 1965 saying that the number of transistors on
a microchip doubles every two years while the cost of computers halves. This means that the speed and
capability of our computers will increase while we are paying less. However, today the doubling of installed
transistors on silicon chips is faster than every two years (Investopedia, 2020).
 9.

Figure 4: The percentage of capital expenditure to companies’ revenue in the semiconductor industry
from 1995 until 2015 (forecasted from 2010) (McKinsey, 2011).

The high specialization degree in the industry implies that semiconductor companies and
other related businesses have a high level of interdependence. Most firms that choose to not
produce everything at home, source several components from all around the world. This
implies a complex global value chain that is vulnerable to many disruptions (McKinsey, 2020).

Semiconductor firms are mostly organized around three activities which are the main stages
of semiconductor production: Design, Manufacturing, and Assembly, Test and Packaging
(ATP). Companies focused on the design are called “fabless” firms and those focused on the
manufacturing part are referred to as “foundries”. Firms that are not specialized in any kind
of activities and produce everything internally are called Integrated Device Manufacturers
(IDMs) (Figure 5) (SIA, 2020a).
However, even with the fab-lite strategy, foundries still have capital-intensive requirements.
Companies need to reach large production volumes and high production yields in order to
spread their large capital expenditure and obtain economies of scale (Sauvage, 2019). This
induces a high level of consolidation among semiconductor companies. In 2017, the world’s
top five semiconductor suppliers accounted for 43% of total chip sales (Rhines, 2019).
 10.

Figure 5: Operations models in the semiconductor industry and its leading firms (VerWey, 2019).

The semiconductor industry is a global ecosystem requiring materials, manufacturing

processes and talented people from all around the world. According to research made by
Accenture (2020), 25 countries are involved in the manufacturing of a semiconductor product.
Before it gets to the end consumer, the product could approximately cross international
borders 70 times.

2. Historical background of the semiconductor industry

2.1. The US precursors

The semiconductor industry began in 1952 with the presentation of an electronic transistor
created by AT&T, a US company. This was led by an increasing US demand for semiconductor
products for military purposes (Chandler, 2005).
In the late 60s, the market was shared amongst three US companies: Texas Instrument,
Fairchild and Motorola. As they began to produce products for commercial purposes, they
increased their sales and together they maintained 70% of the market.
Texas Instrument was the most powerful of the three companies. During the 60s, TI made
large investments in production and manufacturing facilities at home which allowed it to
expand by building plants and increasing its international network. In 1965, TI was already
operating fifteen plants in ten different countries. Some in Europe in order to be closer from
customers and others in Asia and Latin America to benefit from cheap labour. In 1968, TI was
one of the largest producers of semiconductors in Britain, France and Germany. Those
international expansions were made generally through direct investments by wholly owned
subsidiaries (Chandler, 2005).
 11.

Motorola had a similar strategy but slower and less aggressive compared to TI. By 1970,
Motorola was also present in several countries in Europe, Latin America and Asia. In 1972,
Motorola was the second world leader in the semiconductor industry, just after TI (Chandler,
2005).
During the 70s Intel made its place in the sector by commercializing the first microprocessor.
However due to the large economies of scale acquired by TI and Motorola already in place,
both companies quickly surpassed Intel in terms of market share for the production of
microprocessors (Chandler, 2005).
Through the increasing global demand for microprocessors and personal computers, the
semiconductor industry in the U.S. developed very well. In the late 70s, US firms represented
60% of the global semiconductor market share and the worldwide sales in the sector rose
from US$ 4.4 bn to US$141 bn from 1975 until 1995. The five major competitors in the US
industry were TI, Motorola, Intel, Advanced Micro Devices and National Semiconductor
(National Research Council, 2002).

2.2. European and Japanese prime movers

The European semiconductor industry began to develop after WWII with the Dutch company
Philips, which was the main consumer electronics learning base in Europe. The German
company Siemens arrived on the market a few years later when it received the AT&T’s
Western Electric license in 1952. Because they were only two on the European market, Philips
concentrated on the new electronic technology in the consumer market and Siemens focused
on the market for telecommunication, industrial products, and new data processing
computers. Several years later, Thomson-Brandt, a French semiconductor company joined the
market. However, due to insufficient R&D investments, the company was forced to stop its
activities in 1995. By 1960, Philips accounted for half of the semiconductor sales in England,
France and Germany. Through several acquisitions, Philips has gained a global market share
of 10% in 1983 (Chandler, 2005).
German semiconductor companies have always adopted a different approach from its
neighbors in the Netherlands or France. Siemens, the leading company in the country,
followed a “follower-imitator” strategy and developed its technological capabilities by
working with leading companies in the market.
 12.

In the beginning of the 80s, Japanese firms such as NEC, Toshiba, and Hitachi entered the
semiconductor market as well. They developed themselves until the beginning of the 90s and
dominated the market alongside with US firms. Six Japanese companies were among the top
ten semiconductor leaders, the four others were from the US (Chandler, 2005).

US, Japanese and German firms were the first movers, followed by several other European
companies such as Swedish and Swiss businesses (Chandler, 2005). At that time the market
was vertically integrated, and companies were large. The emerging fabless-foundry model led
to an increase in the number of small and mid-sized chip firms. Since then, the high cost of
competition in the market has induced an increasing level of consolidations between firms
(McGrath, 2018).

This caused huge losses to European semiconductor companies and especially to Siemens that
had no choice than to enter in joint venture with Fujitsu, a Japanese company (Chandler,
2005).
The number of manufacturing facilities located in Europe in the 90s reduced radically. Old fabs
closed and replaced by new ones in other locations where labour costs were lower. The mid-
term consequences of offshoring and outsourcing induced losses of human resources,
industrial know-how, and key equipment which were needed to build new factories. This
weakened the European semiconductor industry during the years. It placed the European
market in a weaker position in regard to other producing countries (Coulon, Olliver, Dubois,
Saint-Martin & Vodovar, 2020).

During the 90s, the number of Japanese companies present in the market also decreased,
from a total of six companies in the top ten of the worldwide semiconductor companies in
1990 to only three by 2000. This decrease was caused by some wrong decisions made by the
Japanese government and companies. At that time, Japanese companies focused on the
consumer electronics segment that had boomed in the late 90s. However, the US had already
a leader position in this section and Intel was the market leader.
 13.

Also, the emergence of the foundry-fabless model at the end of the 20th century induced many
disruptions in the market already in place. As most of Japanese companies in the sector were
IDMs, they were highly affected by this increasing cost of production.
However, today Japan is the leader in the segment of semiconductor equipment and
materials. An estimation of Semiconductor Equipment and Materials International confirmed
that Japanese companies supply about 50% of the materials and 35% of the new equipment
used globally (Tayal, 2015). In 2019, only two Japanese chipmakers have remained in the top
15 semiconductor firms worldwide: Kioxia (formerly Toshiba) and Sony (Congressional
Research Service, 2020).

2.3. The rising of the Asian market

In the years between 1980 and 2000, Asian countries began to develop their own
semiconductor industry as well. The main strategy of Asian countries in order to catch up with
global leaders was to make a wide range of M&As and joint ventures. Being precursors among
Asian countries, the Japanese firms have utilized this technique with US companies and forced
them to enter joint ventures to access the Japanese market.

South Korea, while entering the market in the 80s, have used their large homegrown
conglomerates to develop its semiconductor industry. Using their access to capital markets,
South Korean companies have found a place in the dynamic random-access memory (DRAM)
market. The heavy R&D investments strategy and the licensing of the US technology enabled
Korean firms, such as Samsung and SK Hynix to rapidly catch up with large global
semiconductor companies (Sauvage, 2019).

Taiwan also entered the market at the same time. As most of Asian companies, Taiwanese
companies used foreign technologies already developed by the US, European and Japanese
firms to reach the international technological level of the semiconductor industry. The current
position of large Taiwanese firms such as TSMC, UMC and Vanguard International
Semiconductor is largely due to the public research institute ERSO (Electronic Research Service
Organization) and its efforts to acquire foreign companies and develop R&D investments. Also,
 14.

the foundry model developed by TSMC allowed it to increase its international exposure and
rapidly catch up with foreign companies (Sauvage, 2019).

Although those two countries had approximately the same strategy and arrived on the market
during the same period, the Taiwanese market is differentiating itself from the Korean one as
Taiwanese firms were able to develop different partnerships with foreign companies. It fosters
Taiwanese entrepreneurs to build their own companies and become major actors in the
semiconductor industry. Taiwanese semiconductor industry represents thus an
interdependent network of specialized firms. By contrast, South Korean large conglomerates
have taken the role of IDMs in the semiconductor industry throughout the years (Sauvage,
2019).

2.4. The catch-up strategy of China

Although the first Chinese semiconductor firm started to make its first transistor in 1956, the
Chinese semiconductor industry truly developed between the late 90s and the beginning of
this century. Before that, the Chinese government tried to implement several plans and
strategies, such as the implementation of the “Computer and Large Scale IC Group” to foster
the industry. However, China didn’t have the required resources to develop in the sector. Also,
the Chinese semiconductor industry was split into two categories: The R&D part on one side
and the manufacturing part on the other side. Those two sub-sections were rarely co-located
which made technological development more difficult (VerWey, 2019).

Throughout the 90s, while most fabs located in North America and Europe were closing and
new ones were being built in Asia, the Chinese government implemented a joint venture
strategy with foreign high-tech companies. Few Chinese firms succeeded to partner with NEC
(Japan), Nortel (Canada), Philips (the Netherlands) and ITT (Belgium). It allowed the Chinese
semiconductor companies to focus on DRAM chips and enter into production processes
(VerWey, 2019).

By joining the WTO in December 2001, trade taxes between China and other countries were
lowered. As the semiconductors and electronic components were among the fast-growing
 15.

sectors in terms of shipment of goods, mostly between the US and China, leading international
firms found it attractive and easier to establish local operators in China (Blustein, 2019).

In the beginning of the 2000s, the Chinese semiconductor market grew rapidly. The Chinese
consumption of semiconductor products in 2005 was 31% more than the previous year.
However, most of the Chinese demand for semiconductor products were coming from foreign
semiconductor companies located in China. Indeed, at that time, no Chinese-owned
companies in the semiconductor industry were in the top 70 chip suppliers. Chinese
companies already existent didn’t have a sufficient growth rate in order to compete with
international firms (Pausa, 2007).

The Chinese government understood the growing importance of the semiconductor industry
and the benefits that it could have on its economy. Therefore it decided to target the sector
as one of its key industries in the 10th, 11th and 12th Five Year Plan from 2001 until 2015. The
government put a focus on improving R&D capabilities for advanced technology and advanced
capacity. It also increased governmental support for firms in the sector such as tax incentive
policies, tariff exemptions and loans from state-owned banks (Chai, 2011). The Chinese
government decided to spend about US$360 bn (CNY ¥.4 trillion) for science and technology
over the 2006-2012 period which was planned by the “Medium and Long-term Plan for science
and technology 2006-2020”. This plan fostered 16 Chinese sectors including “core electronic
components” and “advanced IC manufacturing”. A second round of R&D funding into the
Chinese semiconductor industry was also made in 2010 from the government as being part of
the “Strategic Emerging Industries (SEI)” initiatives (Sauvage, 2019). Through the means of
Chinese governmental aids, Semiconductor Manufacturing International Corporation (SMIC),
also known as the biggest Chinese semiconductor company, was able to develop by partnering
with foreign firms and acquiring talented engineers (VerWey, 2019).

The semiconductor sales of Chinese companies grew by 29.5% between 2001 and 2011.
Furthermore, the market share grew from 1.9% in 2001, to 9.8% in 2011. However, the
domestic production from Chinese-owned companies was still insufficient to balance the
demand and the amount of imports of semiconductor products remained high. At that time
 16.

the top 10 semiconductor suppliers of the Chinese market were all foreign firms such as Intel,
Samsung, Toshiba, TI, SK Hynix, … (Kong, Ramu & Zhang, 2015).
In order to improve the position of its semiconductor companies, the Chinese government
elaborated three strategic programs as part of the 13th Five Year Plan in 2015. They cover goals
and guidelines for the Chinese semiconductor industry: “The Guidelines to Promote a National
Integrated Circuit Industry”, “Made in China 2025” and “The Made in China 2025 Technical
Area Roadmap”.
The objective of those plans is to gradually replace foreign technology that Chinese companies
are currently dependent on with local technology (Figure 6). In order to achieve this, Chinese
investors have planned to increase the mergers and acquisitions of international firms in the
sector. Those investments aim at gaining foreign cutting-edge technologies and permit large-
scale technology transfers from foreign companies. As Chinese companies want to gain
control over most profitable segments of the global semiconductor supply chain in the long
term, the government uses several mechanisms to facilitate the transfer of technology. For
example, technology spillovers from inward-direct investment from foreign companies into
China, cooperation with foreign enterprises, the foreign recruitment of the R&D and
technology staff and the construction of R&D centers in leading countries (Conrad, Ives,
Meissner, Wubbeke & Zenglein, 2016).
 17.

Figure 6: The targeted plan of “Made in China 2025”: The percentage of the domestic market share of
various Chinese smart manufacturing products forecasted for 2020, 2025 and 2030 (Conrad & al.,
2016).

In this prospect, a National Integrated Circuit Investment Fund (National IC Fund) was
established and endowed with US$150 billion from the central and provincial governments
(Verwey, 2019).
Through those plans, the Chinese government focused mostly on the construction of large
fabs and the performance of a few firms such as SMIC, HiSilicon and Tsinghua Unigroup. In
2018, the Chinese government spent more than half of the worldwide semiconductor
construction spending (Sauvage, 2019).

Although the Chinese government elaborated the “Made in China 2025” plan, Chinese
companies remain very dependent on foreign semiconductor top leading companies and
technologies. In 2020, Chinese firms could only produce 30% of its domestic demand for chips.
(Craig, 2020). In fact, more than 70% of chips made in China are actually made from foreign
companies on Chinese land (van Hezewijk, 2019).
Among the Chinese top semiconductor companies, the largest chip maker is SMIC with an
annual revenue of US$3.12 bn (¥20.17 bn) in 2019 (Statista, 2020c).
 18.

2.5. Current key players of the industry

Nowadays, as previously mentioned, the semiconductor market is dominated by a limited

number of firms (Table 1 and 2).

Table 1: The top 10 largest semiconductor companies in the world by revenue for the year 2019 (Bizvibe,
2020).
Rank Company Revenue (USD Headquarters Operating
billions) Model
1 Intel 71.9 USA IDM
2 Semiconductor 52.19 (Statista, South Korea IDM
division of 2020d)
Samsung3
3 SK Hynix 35.27 South Korea IDM
4 TSMC 35 Taiwan Foundry
5 Micron 30.9 USA IDM
Technology
6 Qualcomm 24.3 USA Fabless
7 Broadcom 20.85 USA Fabless
8 Texas 14.38 USA IDM
Instruments
9 Toshiba 12.3 Japan IDM
10 Nvidia 11.72 USA Fabless

3 Samsung Electronics is a leading South Korean company in semiconductors, telecommunications and digital
media technologies. In order to have an accurate comparison of the position of Samsung in the semiconductor
industry, only the sales revenue of the semiconductor division of Samsung is mentioned. (Otherwise the total
revenue of Samsung Electronics is about US$208.5bn)
 19.

Table 2: The top 10 largest semiconductor companies in the world by market value for the year 2019
(Value today, 2020).
Rank Company Market Value (USD Headquarters
billions)
1 Samsung 320.014 South Korea
2 TSMC 293.32 Taiwan
3 Intel 263.81 USA
4 Nvidia 145.97 USA
5 ASML 127.54 Netherlands
6 Broadcom 127.20 USA
7 Texas Instruments 126.27 USA
8 Qualcomm 102.71 USA
9 SoftBank 93.51 Japan
10 Micron Technology 61.70 USA

Even though the US semiconductor industry is the global leader in the market, US companies
are not leaders in every subsection of the industry. For example, the memory market is led by
Korean firms and the discrete semiconductor devices market is governed by European firms
such as Infineon and STMicroelectronics (42%) (Figure 7).

4This number represents the market value of Samsung Electronics in 2019. As Samsung Electronics is a
conglomerate of different companies in different sectors (one of them being the semiconductor sector), the
market value of the semiconductor sector of Samsung Electronics is obviously lower. This justifies its position in
the table. (See note 3)
 20.

Figure 7: Semiconductor market share by subproducts and countries in percentage (SIA, 2020c).

Due to the rising cost of manufacturing and innovation, and the increasing level of competition
in the industry, the US’s advance position has decreased in the last few years. In 2010, the US
semiconductor industry was two years ahead of its closest competitors, which were South
Korea and Taiwan. In 2019, the three countries reached the same level (SIA, 2020c).
This could partially be explained by the fact that the US manufacturing output has remained
stable throughout the years while the overall production of new competitors on the market
grew at a higher pace. This decreased the US share of the global manufacturing capacity (SIA,
2020c).

2.6. Acquisitions of technology and knowledge protection

Mergers and Acquisitions are still the most used tools for companies that are willing to grow
and catch up with leaders in the semiconductor industry (McGrath, 2018).
Japanese and South Korean semiconductor companies are seeking acquisitions in the US and
Europe, and also cooperating with China in order to foster their industries. China is also trying
to increase outbound investments in high-tech companies in the US and seize global M&As.
 21.

From 2014 to 2018, China’s semiconductor industry increased its M&A’s volume from 48% of
the global M&A’s volume to 72% with a CAGR of 18% (Chen & al., 2019).
To illustrate this, the table below (Table 3) shows the most important M&As that happened in
2018. As we can see, China and other Asian countries are the most important bidders and
their motivations are mostly to extend their market share and their industry supply chain or
to strengthen their market position (Chen & al., 2019).

Table 3: Most important global Mergers and Acquisitions in the semiconductor industry in 2018 (Chen
& al., 2019).

* The 6th column named “Value” is express in US$ bn.

In 2016, M&As accounted for US$120 bn but it has remained stable since then due to
tightened regulatory standards issued by European institutions and the US government (Chen
& al., 2019).

Indeed, the US government has for several years investigated on the potential theft of US
intellectual property and the practice of forcing technology transfers to foreign companies,
 22.

especially Chinese companies. On the basis of national security threats, the US government
has added sanctions to importations and exportations of products from and to China. Those
sanctions aim at protecting the know-how acquired throughout the years by US researchers,
companies and laboratories. The strategy behind those restrictions is the willingness of the
US government to decrease their dependency towards China and to slowly decouple from the
Chinese market. The US government wants the production processes that are located in
foreign countries, mostly in China, return back home (Nouveau, 2020).

Representing a big threat for the US high-tech industry, the US government has mostly
targeted Chinese high-tech companies such as the big telecom group Huawei, known as the
Chinese leading firm of the industry. The US government is currently banning all suppliers to
ship to this company. It believes that through Chinese companies, the Communist Party is
spying on other companies in order to steal commercial secrets and technologies. In this
prospect, the US government introduced a U.S. export blacklist, better known as the Entity
List that represents a “list of companies, research institutions, governments, individuals or
other types of legal persons that are subject to specific license requirements for the export,
reexport and transfer of specified items” (Bureau of Industry and Security, U.S. Department
of Commerce, 2020). Companies included in this list must apply for a special license given by
the US government in order to ship some US products from and to China (Fildes, Hille & Liu,
2020).

As a consequence of the pressure from the Trump administration, US-owned companies

located in China such as Apple, Qualcomm and Nvidia have had to remove their factories from
China. Relying heavily on the Chinese market and their growing demands for semiconductor
products, those companies will have to find solutions in order to keep providing this market
while being align with the new US standards (Ioannou, 2020). However, as it is a topical subject
inclined to rapid changes, it is still too soon to make an analysis on the impact from the US
government’s imposed restrictions as well as the strategy posed by US targeted firms.

The Chinese government has released the 14th Five Year Plan this October to respond to the
possibly damaging outcomes of the US government’s restrictions. The new plan mainly
focuses on the pursuit of self-reliance of key Chinese technologies and the growth of scientific
 23.

and technological innovation in order for China to be the world’s most advanced country by
2035. The plan advances a “dual-circulation” strategy based on the promotion of domestic
market circulation and the need to balance Chinese innovative capacity with the domestic
demand in the high-tech sector (Ho, 2020). Premier Li Keqiang explained that the national
growth target will be at least 6.53% during the next five years in order for the government to
meet their goals (South China Morning Post, 2020).
Moreover, as part of the 14th FYP, the Chinese government has passed a law to increase
control on exports. It mostly targets countries or regions that abuse export control measures
and represent a threat to China’s national security and interests (Bicheno, 2020).

Also, the Chinese government introduced a Chinese version of the US entity list called the
“Unreliable Entity List”. This list represents any foreign companies that have unfair practices
against Chinese companies, according to the Chinese government’s judgement (Li & Ting-Tan,
2020).

Obviously, the restrictions imposed by the US and Chinese governments impact companies
located in both countries. However, the burden will also fall on European and other Asian
companies such as TSMC, SK Hynix and NXP because of the partnership they have with both
Chinese and US companies (Fildes & al., 2020).
The global supply chain will endorse many disruptions as companies located everywhere in
the world will have to put in place a new ecosystem with new suppliers. With this in mind,
Chinese companies are already making some changes in their supply chain such as Huawei
and Xiaomi that have begun to develop vertically integrated models to make their own chips
(Lucas, 2018).
 24.

PART 2: Analysis of key success and failure factors of the semiconductor industry

In this part, I will develop and analyze key characteristics of the US, European and Chinese
semiconductor industries. Afterwards, I will provide a comparative analysis of the three
regions regarding the factors I chose. I will then be able to discuss the effectiveness and the
importance of those factors on the development of a country’s semiconductor industry.

1. The supremacy of the United States in the semiconductor industry

Nowadays, US firms still dominate the world digital market due to the digital strategy they’ve
developed throughout the years. The US semiconductor industry has about 47% of global
market share (Statista, 2020f) which represents an annual revenue of US$193,68bn in 2019
(SIA,2020a). The leading position of the US industry is due to several factors.

1.1. The demand from US military and space industries

During the World War II, the US government had to develop a strategy to combat their enemy,
the German. In order to meet wartime needs such as weapons and aeronautics tools,
laboratories, companies and the US government have pooled their strengths and collaborated
to develop technological innovations (Best, 2018).
To this end, massive R&D investments were made from the US government. Indeed, national
laboratories were built in order for engineers and scientists to accumulate R&D resources and
technological capabilities. The establishment of national scientific and technological
infrastructures benefited the economic development of technological hardware and high-tech
products (Best, 2018).
The increasing demand for massive investments from the US government to sustain US
defense and space industries continued throughout the cold war. The US semiconductor
sector could emerge and self-develop at a higher speed than any other country in the world
(Chandler, 2005). After a while, with an increasing demand of integrated circuits coming from
NASA, companies such as Texas Instrument, Motorola and Fairchild Semiconductor entered
the market (Sauvage, 2019). As an example, Fairchild produced its first IC for the US space
industry because they were facing problems with the Apollo program. Texas Instrument also
 25.

used military funding in order to develop its manufacturing techniques, improve the products
and then market it (Dennis, 2017).
During the years between 1950 and 1964, US$50M was injected in the US semiconductor
industry by the military department of the US government (Creager, n.d.).

1.2. Access to economies of scale

US firms were early innovators in the semiconductor industry. As first movers, they were the
ones to invent and use this technology. They continuously improved their technics in order to
stay leaders of the industry. US companies increased their market share rapidly in their home
country and expanded internationally which gave them the advantage to quickly access
economies of scale. As they incurred lower cost of production, their products were more
affordable than any other competitor. With the increasing number of users comes a greater
market power along with a stronger network effect5 (Nouveau, 2020).
In the same framework, Alexis Wichowski, a professor at Columbia University, called the US
tech giants “net states” which describes their ability to be digital non-state actors unrestrained
by borders which, in some cases, have more influence than major governments (Chazan &
McGee, 2020). This allowed them to have access to natural monopoly rents and to enjoy a
pole position in the digital industry.

The global leading position of the US semiconductor industry allows companies to benefit
from an innovation cycle. Being leaders in the market, their revenue increase. They are able
to invest more in R&D and to improve their products. As consequence, they continuously
increase their sales of leading-edge technology products. As long as US semiconductor
companies keep their leading position, they will benefit from this innovation cycle (Nouveau,
2020).

5The network effect occurs when an increased number of users improves the value of a good or service
(Banton, 2020). In this case, as users of semiconductor products increased, US companies earned more and had
thus the ability to invest more in R&D and improve their own products.
 26.

1.3. R&D expenditures

The R&D expenditure of the US semiconductor industry has always grown during the years at
a CAGR of approximately 6.6% from 1999 to 2019 to reach US$40bn in 2019 (Figure 8) (SIA,
2020a). This reflects the growing importance of R&D investments in the global semiconductor
industry in order for companies to continuously innovate.

Figure 8: R&D expenditures of the US semiconductor industry in US$ bn from 1999 until 2019 (SIA,
2020a).

While foreign R&D investments are also growing in order to compete with top semiconductor
leaders, US firms are trying to keep investments level high and maintain their technological
advancements. In 2019, the US R&D expenditures in the semiconductor industry reached
about 16.4% of total US semiconductor products sales, which was the highest rate amongst
top leading countries in the sector (Figure 9).
 27.

Figure 9: R&D expenditures as a percentage of total sales in the semiconductor industry per
country/region in 2019 (SIA, 2020a).

1.4. Workforce

As previously mentioned, the US government tried to develop state-of-the-art production

capability and technological diffusion processes during World War time in order to combat
the enemy. This was only feasible through the help of the best scientists and engineers with a
high level of skills at the operational as well as at the advanced engineering levels. Therefore,
the US government has developed a university-industry-government collaboration and has
invested in building high-level national universities in order to develop a competent workforce
(Best, 2018).
Those universities have maintained their reputation throughout the years which allowed the
US government and big companies to attract talented people from all over the world.
Through these collaborations, high-tech companies in the semiconductor industry have access
to a highly educated workforce. This increases the competitiveness and the growth rate of US
companies in order to remain as leaders in the sector (SIA, 2020a).
 28.

1.5. The role of the federal government

The US government has taken decisions, over the past few years, to prioritize the
development of industry research, workforce, trade and intellectual property in the
semiconductor industry.
In this framework, it has provided several grants and incentives to research agencies,
laboratories and companies. Approximately US$1.5 bn to US$5 bn are invested annually by
the federal government in the research of semiconductors across different national scientific
agencies (SIA, 2020c). For instance, The Department of Energy (DOE), the Defense Advanced
Research Projects Agency (DARPA), and the National Institute of Standard and Technology
(NIST) each received US$2 bn in 2019 in order to stimulate their research in the semiconductor
industry (Lewis, 2020).
Also, in the framework of the CHIPS for America Act, the US government established a new
manufacturing grant program in order to construct new onshore advanced semiconductor
manufacturing facilities in the US. The government also provides tax incentives for
semiconductor manufacturing facilities.

In terms of trade, the USMCA (United State-Mexico-Canada Agreement), was approved on the
1st July 2020. This agreement is an update of the already existing NAFTA. One of its goals is to
foster the semiconductor industry in the three countries by protecting companies from IP and
technology thefts and assuring the free and open flow of data inside North America (EPS,
2020). Currently, the US government is also enforcing laws to prevent semiconductor
intellectual property theft, as mentioned earlier (SIA, 2020b).

Moreover, US semiconductor firms have benefited from aids in R&D coming from foreign
agencies and governments. For example, the US firm Intel has received US$10 million in 2017
from the Irish Industrial Development Authority and has also garnered R&D support from
Israeli authorities in order to expand foundries in the country.
Unfortunately, this kind of information is mostly confidential. This is why it is complicated to
determine the right amount of aids firms receive in order to develop themselves (Sauvage,
2019).
 29.

2. The semiconductor industry in Europe

The semiconductor industry in Europe accounted for 10% of worldwide market share in 2019
(Statista, 2020f) and the total sales amounted to approximately US$41.2 bn (SIA, 2020a) which
is a 12.1% increase of 2018. However, this percentage is below the 13.7% world average
growth of the semiconductor industry (ESIA, 2019).
European semiconductor companies are struggling to compete with international leading
companies. Indeed, only one company, ASML (from the Netherlands) is still in the top 10 of
the worldwide semiconductor companies in terms of market value (Value Today, 2020).
However, European companies seem to be leaders in niche markets. This is due to several
decisions made by companies, national governments and European institutions.

2.1. Investments from semiconductor companies

European countries are spending on average 15.3% of their total semiconductor sales in R&D
investments which is a little bit less than the 16.4% from the US but more than Asian countries
(SIA, 2020a). Also, as we can see on the figure below (Figure 10), European companies,
altogether, are spending globally more than 2% of the total GDP in R&D investment which is
less than the US spending of approximately 2.7% of its GDP. However, the percentages have
increased throughout the years at approximately the same pace. Looking more into China, we
can see on the graph that the percentage of R&D investment to its GDP grew at a faster pace
and exceeded the European Union (Nouveau 2020).
 30.

Figure 10: R&D expenditures as a percentage of GDP of the US, EU and China from 2000 until 2017
(Nouveau, 2020).

According to a report made from the ESIA (2020a), in 2009 the European semiconductor
industry ranked at the top for R&D investment intensity with a record of 21.8% of annual R&D
expenditure over annual sales, followed by the US with 19.1%. At that time, the worldwide
R&D intensity in the semiconductor industry was about 16.8%. (Appendix 1) Those European
R&D investments in the semiconductor industry were mostly used for the automotive
industry, medical devices, and smart cards (ESIA, 2020a).

However, since then there has been a rising global technological growth rate and stronger
geopolitical tensions. This led US and Chinese companies to sharply increase their R&D
investments in Information and Communication Technology (ICT) by 10.3% and 26.7%
respectively while European companies have only increased their R&D investment by 4.7%.
This has changed the position of the European semiconductor industry in the top intensive
R&D investments (Amoroso & al., 2019).

In general, Germany, the UK and France are the three countries in Europe that spend the most
in R&D and account for 68.4% of the total EU R&D in 2019. Most of the R&D spending in
 31.

Europe are for the automotive industry which was also the case in 2011. In comparison, the
high-tech sector has the most R&D growth rate in China and in the US (Amoroso & al., 2019).

It is known that semiconductors require a lot of R&D investments but also faces great
expenses for the manufacturing equipment in order to build fabs and implement
manufacturing processes. The cost to build a new fab is about US$18 bn to US$27 bn. (SIA,
2020c) EU companies, together, invested US$3,26 bn for manufacturing equipment and
facilities in 2019. This number ranked the European Union at the lowest place compared with
other countries in the sector. The country that spend the most in manufacturing expenditures
is Taiwan with US$15.8 bn followed by China with US$12.91bn (Statista, 2020b).

2.2. Aids and incentives from European Institutions and national governments

Since several years, European institutions have tried to promote the European semiconductor
industry through the establishment of standards and programs for European companies.

In 2013, the European Commission put in place an EU-wide strategy for micro- and nano-
electronic components and systems with the objective to reverse the declining European
share of the world market. In order to sustain this plan, governments and companies should
invest at least US$121.45 bn (€100bn) by 2025 (Ezell, 2020). To this end, the Electronics
Leaders Group (ELG) was built and given the task to set up a roadmap to implement the
strategy. Since then, the Research & Technology Organizations6 (RTOs) have established a
deep cooperation strategy with the European Commission, the Member States, regions, and
European companies throughout the value chain. Two plans were launched in 2014 at a
European level in order to sustain this strategy: The ECSEL Joint Undertaking and the IPCEI
Instrument (Important Project of Common European Interest). The first one aims at providing
a model for public-private collaboration in the digital arena. This collaboration could improve
the semiconductor value chain by shortening the vertical chain and extending the horizontal
chain. The second plan provides a framework for investing in the European semiconductor
industry which will enable European companies to compete with foreign leaders.

6Research & Technology Organizations are a group of non-profit organizations that cooperate with companies
and public actors in order to improve technologies in a wide range of scientific fields. (EARTO, 2020)
 32.

The goal was to encourage private and public investments in R&D&I within the semiconductor
supply chain (European Commission, 2018). Since the launch of the program in 2014 until
2020, US$3.1 bn have been invested in ECSEL projects (Ezell, 2020). However, data about how
much was already spent for this EU-wide strategy has not been released.

In 2015, the European Commission launched the “Smart Anything Everywhere” (SAE) initiative
which provides SMEs an easier access to RTOs and supports them to use digital technologies
in order to innovate their products. As there are many SMEs in the European market, the SAE
was created to improve their ability to afford the high cost that the global semiconductor
industry requires.
EUREKA clusters, funded by Member States, are also playing an important role to promote
R&D investments of semiconductor companies. Indeed, their aim is to facilitate the funding
of R&D in new technologies (Eureka Network, 2020). In 2018, US$3.2 bn (€2.6 bn) have been
invested in 51 projects and involved more than 1,600 research, development and end-user
organizations (European Commission, 2018).

Nowadays, the European Commission is working on the next framework called Horizon Europe
which will be the successor of the Horizon 2020 framework. The agreement has still to be
formally approved by the European parliament and the Council of the EU.
This framework will sustain EU research and innovation programs with a budget of US$115.67
bn (95.5bn€) from 2021 until 2027 representing on average US$19.27 bn per year. This is a
30% increase from the current program. According to Mariya Gabriel, the European
commissioner for Innovation, Research, Culture, Education, and Youth, the Horizon Europe
program will strengthen the scientific and technological base to drive digital transformation.
However, the budget that will be dedicated to the development of the high-tech sector and
more specifically to the semiconductor industry hasn’t been released yet. Moreover, given the
current challenges, the European Commission will prioritize the health sector and the
environmental issues more than the ICT sector (European Commission, 2020a).

The European Commission has also announced a new “Sustainable and Smart Mobility
Strategy” as part of the 2020 European Green Deal. This strategy aims at creating energy
efficient means of transportation. The technologies to develop such strategies require a lot of
 33.

semiconductor components. On the condition that European automotive manufacturing

companies will seek European semiconductor products, this will foster even more the current
global position of European suppliers of advanced automotive semiconductor products (ESIA,
2020c).

2.3. The fragmentation level in the European market

One problem Europe is facing, as opposed to other countries in the industry, is the high level
of fragmentation in the European market. Indeed, the European Union is constituted by 28
Member States that all have their national government, standards, and regulations. Every
country inside the EU is acting following its own interest. By consequence, the level of
cooperation and coordination among EU countries is weak. Compared with the US or China,
the European Union is highly fragmented. As an example, the European decision-making
process is slower than in China or in the US as it requires a second level of approval above the
national level (European Commission, 2018).

Although the European Union is seen as a Single European Market7 (SEM) for European
companies, they do not benefit from a large unified home market as the US or Chinese
companies do in their home country (Kearney, 2020). This is due to diversities and divergences
among regulations and standards of the different countries. Semiconductor companies willing
to do business in several European countries have to comply with each jurisdiction.

Also, to this day, there are no single semiconductor markets among Member States that can
bear the cost of R&D&I and keep up with the speed of technological advancements. To
illustrate, based on the revenue of three large European semiconductor companies that are
headquartered in three different countries such as ASML in the Netherlands, Infineon in
Germany and STMicroelectronics in Switzerland, we can observe that without cooperation
between countries and a pooling of investments from companies, the level of R&D
investments for each companies is low. Moreover, there are chances that investments will be

7The Single European market (SEM) is based in the four freedoms of movement: freedom of movement of
people, goods, services and capital. It aims at stimulating competition and trade, improving efficiency of
companies, raising quality and helping to decrease prices. (European Commission, 2020e)
 34.

used to develop the same technology or innovation which will turn companies into
competitors for that technology. However, if those companies are pooling their investments
together, they are able to invest US$5.04 bn into one common project which will make the
investment more efficient.

Table 4: Revenue of ASML, Infineon and STMicroelectronics in 2019 and their R&D investment
in semiconductor.8
Revenue of semiconductor R&D investments (=15.3%
products in 2019 of revenue)
ASML (The Netherlands) US$13.54 bn (€11 bn) (ASML, US$2.07 bn
2020)
Infineon (Germany) US$9.881 bn (€8.029 bn) US$1.51 bn
(Infineon, 2020)
STMicroelectronics US$9.56bn US$1.46 bn
(Switzerland) (GlobeNewswire, 2020)
Total US$5.04 bn

2.4. Niche markets in Europe

European countries have mostly invested in traditional sectors such as the automotive,
mobility, security and healthcare industry (Nouveau, 2020). Those segments have a high
demand for semiconductor products which allowed European companies that specialize in
those segments to grow and increase their global position. Bosch (Germany), NXP (The
Netherlands) and Infineon (Germany) are the most important suppliers in the market. There
are also market leaders for security chips for passports, IDs, and smartphones (NXP, Infineon
and ST Microelectronics). In terms of investment, EU companies in the semiconductor industry
target US$25,13 bn (€21 billion) for manufacturing and US$34,7bn (€29bn) in R&D&I from
2018 to 2025 (Coulon & al., 2020).

8The third column of table 4 (R&D investments) is calculated on the basis of the revenue of each company (the
second column of table 4) multiplied by 15.3% which is the R&D expenditures of European semiconductor
companies as a percentage of their total revenue (SIA, 2020a).
 35.

By contrast, some European semiconductor companies have lost their position on other
markets where semiconductor products are used, giving the lead to US or Asian companies.
For example, if we look at the manufacturing of chips, Taiwan, which is a smaller country
compared to the Europe Union, produces 20% of all semiconductors, South Korea about 15%,
and Singapore for 7%. Furthermore, the most advanced plants for manufacturing
semiconductors are now located in Taiwan and South Korea (Ott, 2018). To illustrate this, we
can see on figure 11 that the Asian pacific region produces around 60% of the overall
semiconductor products while European companies only produce 10% and kept decreasing
over the years (Coulon & al., 2020).

Figure 11: The semiconductor outputs per countries as a percentage of the global semiconductor
outputs from 1997 until 2017 (Coulon & al., 2020).

3. The semiconductor industry in China

The Chinese semiconductor industry is the world’s fastest growing industry. According to the
Nasdaq-style Shanghai STAR Market, China’s leading semiconductor firms have increased
their sales by 16% from 2019 (Shenshen, 2020), despite the coronavirus pandemic while the
global semiconductor sales increased by only 5.8% (SIA, 2020b).
 36.

Among Chinese top semiconductor companies, the largest chip maker is SMIC with a revenue
of US$3.12 bn in 2019 (Statista, 2020b). By comparison, the worldwide leading firm in the
industry, Intel reached US$71.97 bn in revenue in 2019 (Statista, 2020a).

3.1. Governmental aids and policies

As previously explained, the Chinese government has planned to decrease its dependency
towards foreign semiconductor products. To this end, Chinese semiconductor companies
should first expand acquisitions and invest in foreign leading firms to increase technology
transfers and reduce the technological gap.
In this regard, since 2001, the Chinese government has revealed several Five Year Plans
targeting the high-tech sector and more specifically the semiconductor industry.
As Part of the 10th, 11th, and 12th FYP, the Chinese government decided to invest US$260 bn
for the establishment of “the Medium and Long-Term Plan for Science and Technology”
(Sauvage, 2019).
In 2015, in the 13th FYP framework, the Chinese government released following strategic plans
that cover the goals and guidelines of the Chinese semiconductor industry: “The Guidelines to
Promote a National Integrated Circuit Industry”, “Made in China 2025”, and “The Made in
China 2025 Technical Area Roadmap”. Those plans allowed the establishment of national
funds such as the National Integrated Circuit Investment Fund (National IC Fund) by which
US$150 bn was invested in the Chinese IC sector from central and provincial governments.
The Fund aims at fostering inbound and outbound FDI (VerWey, 2019). In 2017, the SIA
estimated that US$80 bn out of the US$150bn was already raised.

in October 2020, the Chinese State of Council released the 14th FYP clearly targeting the self-
reliance of the Chinese semiconductor industry. This has clearly been the results of the
increasing tensions between the US and China in the high-tech sector. The Chinese
government has noticed the importance of being technologically less dependent on other
countries (Ho, 2020).

Since 2011, the Chinese government has provided several aids such as regional, provincial and
national funds, investment vehicles, equity investment, favorable loans, tax breaks, and
 37.

policies aiming at reducing capital expenditures of Chinese companies in the sector. The goal
is to prompt Chinese enterprises to increase their R&D investments in the semiconductor
industry by decreasing their manufacturing cost of building new fabs (Deloitte, 2020). The
Chinese government has planned to invest US$100bn in subsidies to support its national
semiconductor industry (SIA, 2020b).

However, it is difficult to provide a deep analysis of all funds and investments made by the
Chinese State Council for the Chinese semiconductor industry as it counts around 1,600
government-guided investment funds involved for the “Made in China 2025” strategy plan.
The National IC Fund is one of them. Those funds represent a capital of US$584.8 bn and new
funds are created every month in order to finance governmental strategies (Huang, 2019).

3.2. Investment strategies from semiconductor companies

With the help of grants and subsidies received by the Chinese government, Chinese companies
in the semiconductor industry are able to increase the number of M&As and joint ventures
with foreign firms. As previously seen (Table 3), in 2018 most of them were made from Chinese
enterprises. From 2014 until 2018, the Chinese M&A’s volume increased from 48% of the
global M&A’s volume to 72% with a CAGR of 18%. Chinese companies have made the most
outbound semiconductor deals during the past five years, amounting to 49 deals, followed by
Japan with 13 deals. (Chen & al., 2019) Those investments targeted companies throughout
the whole semiconductor supply chain process from upstream equipment manufacturers to
companies specialized in ATP (VerWey, 2019).
However, the number of M&As and joint ventures with European and the US companies has
stabilized since a few years as both regions are willing to protect their market from
technological transfer (Congressional Research Service, 2020).

In terms of investment for manufacturing equipment and building fabs, Chinese companies
have been massively investing since a few years. In 2019, Chinese firms have invested
US$12.91 bn which made them the second country to spend the most for semiconductor
infrastructures, following Taiwan with US$15,.58 bn (Statista, 2020b).
 38.

Through the analysis of the Chinese companies’ investments, we noticed the importance of
the state’s role behind those so-called “private investments”. Indeed, most companies in
China are strongly supported and guided by the Chinese government. The investments made
by companies are mostly managed by Chinese funds which are created by the Chinese
government for the development of its semiconductor industry. Those funds, such as the
National IC Funds, were created at first to subsidize Chinese enterprises. However, they are
now increasingly used for overseas investments (Conrad & al., 2016).

3.3. Protection tools from the Chinese government

Align with the willingness to make its semiconductor market grow, the Chinese government
wants to protect its market from competitors. It, thus, implemented a high level of control
and a wide range of restrictions on foreign semiconductor-related firms. This aims at
restricting access to those companies and providing the space that Chinese semiconductor
enterprises need to develop.

In most industries using the internet, foreign companies are submitted to data and cyber
control from the Chinese government. In 2017, the Chinese government has introduced a new
Cybersecurity Law targeting every firm dealing with digital data and importing foreign IT in
China (Lewis, 2020). Those companies are obliged to conform with the Cybersecurity Law and
the sharing of sensitive information. This information has to be stored beyond Chinese
borders and thus increases the risk of information leaks. Concerning the importation of foreign
technologies, the “Administrative Rules for the Commercial Use of Encryption” allows foreign
companies to only introduce technologies in China that are approved by the Office of State
Commercial Cryptography Administration (OSCCA) (Alsabah, 2017).
In addition, in May 2018, the Personal Information Security Specification, an extension of the
2017 Cybersecurity Law, was established to regulate the use and storage of personal data. The
updated version forces even more foreign companies located in China to comply with
investigative measures and to disclose any information required by the Chinese government
(Lewis, 2020).
However, these cyber regulations are vague and lack precision on the investigation process
and the companies that are targeted.
 39.

Moreover, the Chinese government has introduced the certification of trustworthy products
that strongly affects international tech firms. This certification is given by the Social Credit
System which rates companies on criteria such as the economic and social trustworthiness. It
aims to regulate the access to the Chinese market (Conrad et al., 2016).

Also, to respond to the US Entity List, China’s Ministry of Commerce (MOFCOM) introduced
the so-called “Unreliable Entity List” in September 2020. This list represents any foreign
companies that have unfair practices against Chinese companies, according to the Chinese
government’s judgement (Li & Ting-Tan, 2020). The MOFCOM announced that the final
provision is based on the Foreign Trade Law, the National Security Law, and “other relevant
laws” (Zhang, 2020).

As we can see, whenever foreign high-tech companies enter the Chinese market, they have
to comply with those Chinese regulations and accept the costs of adaptation. If foreign
companies want to provide products to China, they have to undergo their production process
following special Chinese standards and pay some royalty fees. The aim of the Chinese
government is to increase the cost endorsed by foreign companies (Conrad et al., 2016).

3.4. The importance of the Chinese market

China is the world’s largest purchaser and importer of chips due to the increasing presence of
semiconductor companies inside Chinese borders. Nowadays, every big company in the sector
is present in China ranging from R&D centers to fabrication facilities. In 2019, 90% of global
smartphones, 65% of personal computers, and 67% of smart televisions were made in
factories located in China. As an example, the U.S. Census Department’s related Party Trade
database shows that about 60% of all U.S. imports of semiconductors from China actually
come from a subsidiary of a U.S. headquarter located in China. (VerWey, 2019).
A reason for this high percentage is due to lower labour cost. According to trading economics,
the labour cost index9 illustrating the hourly labour cost incurred by employers in nominal

9The Labour Cost Index is calculated by dividing the labour cost in national currency by the number of hours
worked. The total labour costs (TOT) comprise wages and non-wage costs less subsidies. (Trading economics,
2020)
 40.

terms, is at 81.4 in China, 107 in the European Union and 116 in the United States (Trading
Economics, 2020).

Moreover, China has a large demand for chips that keeps growing. As the figure 12 shows,
China is the only market in which the demand for semiconductor grew this much in the past
few years. In 2016, the consumption of semiconductor products in China was about 57% of
the worldwide semiconductor products representing a total of US$365.60 bn. Hence, it is
interesting for foreign companies to be located as close as possible from their main clients
(Pwc, 2019).

Figure 12: Worldwide semiconductor consumption market by region in US$ bn (left) and percentage of
worldwide consumption (right), from 2003 to 2016 (Pwc, 2019).
Note: ROW = Rest of The World
 41.

4. Comparative table

United States Europe China

The role of the Defense General comments Introduces the US No single entity defense Growing spending of
and Space industry10 semiconductor industry system military expenditures

Military expenditures in US$732 bn US$365 bn US$261 bn

2019
Military expenditures as a 9,7% 2,7% 5,4%
percentage of general
government’s
expenditures in 2019
Military expenditures as 3,4% 1,2% 1,9%
percentage of the national
GDP in 2019
Network effects and Yes, precursors in the Yes, prime movers with No, Chinese companies
innovation cycle semiconductor industry Japanese and US firms entered the international
market in the beginning of
the 21st century
Investments by companies R&D investments in 2019 US$40 bn US$5.9 bn US$9.27 bn
in the semiconductor
industry11 R&D investments in 16,4% 15,30% 8,30%
percentage of country’s
semiconductor sales

10 Sources for this table line: (SIPRI, 2020)

11 Sources for this table line: (SIA,2020a), (Statista, 2020c), (European Commission, 2020c)
 42.

R&D investments as a 2.7% 2% 2.1%

percentage of the national
GDP in 2019
Growth rate of 10.3% 4.7% 26.7%
investments in ICT in 2019

R&D investments in ICT as 52% 20% 47.11%

percentage of the overall
national R&D investments
in 2019
Investments in building US$7.78 bn for North US$3.26 bn US$12.91 bn
fabs in 2019 by America
semiconductor companies
Governmental aids12 - Investments and - EU-wide strategy for - The 10th, 11th, 12th FYP
- Financial incentives subsidies to US micro- and and the establishment
- Policy and standards research department: nanoelectronics of “the medium and
- Programs 5bn/year in researches, components and long term plan for
US$4bn to DOE, DARPA systems and Science & Technology”:
& NIST implementation of ELG US$260 bn
- CHIPS for America Act and RTOs : US$121.45 - The 13th FYP : Made in
- Law enforcement bn China 2025, Guidelines
against IP theft: “Entity - SAE program and to promote a National
List” Eureka Clusters IC Industry and
- USMCA - Horizon Europe: technical roadmap :
US$114.67 bn from US$150 bn
2021 until 2027 - Since 2011: US$100 bn
- Sustainable & Smart in subsidies for
Mobility Strategy

12Source for this table line: (Lewis, 2020), (Ioannou, 2020), (SIA, 2020c), (Ezell, 2020), (European Commission, 2020c), (European Commission, 2018), (ESIA, 2020a),
(ESIA,2020b), (Sauvage, 2019), (Verwey, 2019)
 43.

manufacturing
equipment
Cooperation and Yes, one single country High level of fragmentation Yes, one single country
collaboration with one decision-making among Member States with on decision-making
system system
+ Government implication
in investment strategies
Dependency on foreign Imports of Integrated US$26.1 bn US$58.7 bn US$133 bn
country13 Circuits in 2018
Exports of Integrated US$37.1 bn US$50.9 bn US$90.9 bn
Circuits in 2018

Number of granted patents IBM with 37,304 granted Siemens with 25,320 Huawei with 12,315
of the first national ICT patents granted patents granted patents
firm in the IFI ranking in
2020
Level of protection of the - Entity List - EU Cybersecurity Act - Unreliable Entity List
semiconductor market - Increasing trade tariffs - Data and Cybersecurity
Laws
- Certification of
Trustworthy products

Level of universities, Number of national 8 8 2

education and workforce14 universities among the top
25 best Engineering and
Technology universities in
the world in 2020

13 Source for this table line: (OEC, 2020); (IFI,2020)

14 Source for this table line: (QS, 2020), (Withers, 2020), (OECD, 2020)
 44.

GCTI ranking 3rd 11 European countries in Not present in the ranking

the top 20

Number of Graduate 940,000 298,930 Data not found

students in Engineering
and Science in 2018

Access to the Chinese Take over the market Infineon & NXP have their Facilitate technology and
market share between the Chinese biggest revenue share knowledge transfers
production and demand from China
+ Lower labour cost + Lower labour cost
 45.

5. Analysis of the comparative table

The table above shows a comparative analysis on key factors for the three semiconductor
industries. Below, I will discuss each of these factors regarding the tree regions. I have the
intention to figure out which factor is effective and relevant in the development of a country’s
competitiveness in the semiconductor industry.

5.1. Demand coming from the defense and space industries

As already mentioned, the demand for innovative products from the military sector during the
World War II introduced the US semiconductor industry. Afterwards, US companies have
developed and innovated more semiconductor products in order to comply with the
increasing demand from US defense and space industries.

In terms of global military expenditures, the US government spent more than any other
country in the world, amounting at US$732 bn in 2019. The second largest spender in the
sector is the European Union with US$365 bn. The Chinese government spent US$261 bn
(SIPRI, 2020).
The US government decreased its military expenditures by 17% from the past decades while
China has consistently increased its military expenditures by 83%. However, since 2018, US
expenditures have grown by 5.3% which represents an increase of US$36.6 bn. This equals the
total German military expenditures in 2019 (European Commission, 2020f). European
expenditures have remained mostly stable during that period, with a noticeable slight
decrease in percentage of GDP and government expenditures. Since 2018, the European
Union also increased its military expenditures (SIPRI, 2020).

An important aspect to highlight when analyzing the numbers is the lack of one single defense
system in Europe. Indeed, Member States have their own defense system meaning that the
total amount of EU military expenditures in the comparative table represents the sum of the
Member States’ military expenditures. The level of the three different defense expenditures
are thus not comparable. If the European Union wants to compete with the US or China, a
 46.

single European defense system should be implemented with one decision-making process
and common investments from all EU Member States.

Although we obtain data for general defense and military expenditures, the amount that is
assigned to R&D and the high-tech industry isn’t mentioned. Therefore, we cannot conclude
that the more a country spends for its military sector, the more its semiconductor industry is
growing.

5.2. Network effects and innovation cycle

Companies can benefit from the network effects and innovation cycle only if there is a
sufficient number of users and sales volume in the market. As illustrated in the graph in
Appendix 2, we can observe that sales of semiconductor products have continuously grown
from 1987 until 2000 (Statista, 2020e). As the number of competitors on the market at that
time were low, the market share of semiconductor companies, mostly Texas Instrument,
Motorola, Fairchild, Siemens and Philips were high. This means that an increase in the number
of sales had a direct positive impact on their revenue. Consequently, companies can invest
more in R&D to provide better technologies and products. At that time, US and European
companies benefited from network effects and the innovation cycle.
To illustrate, although Germany doesn’t have any company in the top 10 of the world largest
semiconductor companies, the German semiconductor industry reaches the highest amount
of sales in the European semiconductor industry with US$15,78 bn (12.88bn€) in 2018. It
represents 40,63% of the European market share which makes Germany the first country in
the European semiconductor industry in term of revenue (Statista, 2020f).

As previously mentioned, the emerging fabless-foundries model in the late 90s increased the
number of competitors on the market. In addition, the offshoring of companies in the
beginning of the 21st century to Asia because of lower labour cost destabilized European
semiconductor companies. They lost great market shares in the sector. The US companies
were able to stay competitive on the market (Value today, 2020) because they kept high level
of R&D investments and developed aggressive strategies (SIA, 2020a).
 47.

In the start of the semiconductor industry, China wasn’t able to develop its semiconductor
industry because of a lack of resources and efficient strategies. While Chinese companies were
entering the international market, there were already several well-established companies in
the global semiconductor industry. Chinese companies couldn’t benefit from the innovation
cycle and network effects.
However, new emerging technologies are entering the market such as AI and 5G. The number
of competitors specializing in these technologies is currently low and the market is not mature
yet. This represents a great opportunity for companies willing to improve their position on the
semiconductor market.

5.3. Investments in R&D and manufacturing equipment

The semiconductor industry requires large amounts of R&D investments to continuously

improve the technology and the end-user products.

US semiconductor companies are spending a total of US$40 bn in R&D in 2019 while European
companies spent US$5.9 bn and Chinese companies spent US$9.27 bn. However, R&D
investments in the semiconductor industry in terms of percentage of GDP for each country
and region are quite similar (respectively, 2.7%; 2% and 2.1%) (Nouveau, 2020). The
percentage of R&D investments in proportion of sales is lower for Chinese companies but the
growth rate of investments in ICT throughout the year is the highest with 26.7% (Amoroso &
al., 2019).

Furthermore, we can observe that Chinese and US companies are mostly investing in ICT with
47.7% and 52% of their total R&D investments respectively. European companies however are
only investing 20% of their R&D investments in ICT. European companies active in traditional
sectors such as the automotive, healthcare, and smart cards industry, are investing the most
in R&D. Also, Germany, France, and the UK have the highest R&D investment rates, reaching
68.4% of the European R&D investments (European Commission, 2019).

Investments in manufacturing equipment is important in the semiconductor industry because

of the constant need for state-of-the-art products. As we already mentioned, the cost of
 48.

building a new fab is about US$18bn to US$27bn. Chinese companies invested US$12.71bn in
equipment for the building of fabs in 2019 while European companies only invested
US$3.26bn. US and Canada spent together US$7.79bn (Statista,2020b). Chinese companies
represent the second biggest spender in fab capex after Taiwan. In general, Asian countries in
the semiconductor industry spend the most in equipment and, as a matter of fact, 80% of chip
manufacturing currently occurs in Asia.
Also, the advancements in technologies increase the cost of building adequate fabs. As a
report from McKinsey (2020) explained, the cost of building a facility with 5nm 15 production
lines is three times more expensive than fabs with 10nm production lines. This implies that
companies that are willing to produce state-of-the-art technologies should invest a higher
amount of fab capex.

A good indicator for the level of R&D investments of a company is the number of granted
patents it has. Patents are granted to a company for innovative discoveries and developments.
It allows the company to produce unique products, use unique manufacturing processes or
even license their use to others for compensations. Patents are mostly protected by
Intellectual Property Rights. In January 2020, semiconductor companies such as Samsung
Electronics, IBM, Siemens, Intel and Qualcomm were among the biggest patent holders in the
world (IFI, 2020).
Indeed, most of the semiconductor companies that hold patents are from the US and Europe.
The first Chinese company in the ranking of world’s largest active patent holders in 2020 is
Huawei in the 29th place. This highlights the innovation gap between Chinese and US firms and
to a lesser extent, European companies (IFI, 2020).

As seen in the comparative table, European companies are the lowest semiconductor
investors compared to Chinese and US companies. However, as stated by a study from Applied
Materials in 2018, many foreign top semiconductor companies are either investing in and
establishing partnerships with European research centers and laboratories or setting up new
R&D centers in Europe. Indeed, Europe counts several laboratories and research centers such
as Leti in France, IMEC in Belgium and the Fraunhofer Institute in Germany. In fact, in the last

15The 5nm production lines are made to manufacture 5 nanometer transistors which is an upgrade version of
the 7nm transistors and the 10nm transistors (McKinsey, 2020).
 49.

five years, Huawei, Sony, Apple and Samsung have mostly invested in R&D centers in
Germany, UK and France in order to develop their knowledge in the AR/VR sector and the
automotive industry (Hars, 2018).

5.4. Governmental aids

Governmental aid represents financial incentives, implementations of programs and settings

new standards and policies to enhance the national market. Evidently, these incentives are
fundamental to the development of the semiconductor industry in a country. Governments
provide help to national companies in order to decrease their cost and increase their ability
to innovate and compete in the international market.

The US government has provided several subsidies to US research departments such as the
DOE and DARPA (Lewis, 2020). It also introduces the “Chips for America Act” providing basic
standards for US semiconductor companies. The US government also collaborated with
Mexico and Canada to create an upgraded version of the NAFTA, called USMCA. This
agreement emphasizes the importance of protecting the national intellectual property and
technology (SIA, 2020b).
In the context of the trade tensions between the US and China, the US government wants to
see a relocation of its high-tech firms back to the US. This will generate higher cost for US
companies. First of all, the cost of building new fabs in the US varies between US$18 bn and
US$27 bn, depending on the technology used by the company (Statista, 2020b). Second of all,
enterprises will have to employ US workers which will increase the cost of labour by 142%
compared to China (Trading Economics, 2020). In other words, unless a sufficient amount of
incentives is provided by the US government, companies could be discouraged by the high
costs they will have to endure from relocating to their home country.

The European Commission has also implemented several programs and standards to foster its
semiconductor industry. In 2013, it launched an EU-wide strategy from micro- and
nanoelectronics components and system where the ECSEL and IPCEI programs were
introduced and ELG and RTOs were established. Nowadays, the European Union and Member
States are working on the Horizon Europe Program promoting research and innovation with a
 50.

budget of US$115.67 bn (European Commission, 2018). They also released the “Sustainable &
Smart Mobility Strategy” to help stimulate the automotive industry in Europe, which will
positively impact the semiconductor industry as the demand for semiconductor products will
increase (European Commission, 2020b).

The focus on European investments and standards are mostly for traditional sectors, such as
the automotive industry. European companies are key players in this industry. Those
investments will give them the opportunity to progress developing advanced technologies and
keep their international position. However, as the level of investments for other sectors in the
semiconductor industry by European institutions, governments and companies is low,
European companies in those sectors are not able to develop an international competitive
position.

Also, due to disparities among Member States, standards established by the European
Commission have a lower efficiency. First, the requirement of a second level of approval from
the European Commission above the national level slows down the decision-making process.
Furthermore, Member States don’t have the same resources in order to apply standards in
their home country (Kearney, 2020).

Throughout Five-Year Plans, the Chinese government has emphasized on the importance of
the high-tech sector and the Chinese semiconductor industry. It implemented several plans,
guidelines and strategies such as “the medium- and long-term plan for Science and
Technology”, the “Made in China 2025” and the “Guidelines to promote a national IC
industry”. Since 2011, the Chinese government has also been providing financial incentives,
amounting at US$100 bn, in order to push semiconductor companies to increase their
manufacturing expenditures.

Nevertheless, while making the analysis on governmental aids and incentives and comparing
them, I realized that there is a lack of transparency and clearness. All governments are
providing aids to their companies through different ways, making it difficult to conduct an
accurate comparison. Based on this observation, it is difficult for me to provide a conclusion
about the effectiveness of the different governmental aids.
 51.

5.5. The cooperation and collaboration inside an economic entity

The cooperation and collaboration level inside an economic entity is needed to the efficient
development of an industry. Indeed, people, companies and national institutions will work
together for common goals.

The United States is one single country with one market entity and one decision-making
power, hence, the level of cooperation and collaboration is high. The same applies even more
so for China as the Chinese government has a strong influence on private investments and
provides a strong support to its companies (Conrad & al., 2016).

On the other hands, despites its institutions, the European Union is highly fragmented with
several decision-making units represented by each national government and European
institutions. Indeed, the decision process is slowed down by the requirement of the second
level of approval from all the different governments. Also, European companies making
business in Europe face different national regulations and standards in order to enter in
another Member State’s market. This can be compared with Chinese or US companies doing
business in their home country; they benefit from one big single market without having to
comply with different regulations.
Also, as mentioned in the defense industry, European countries don’t always gather their
investments in order to work on common projects. Indeed, Member States sometimes invest
separately in the same projects. Consequently, European companies end up competing with
each other instead of working together and be more efficient in order to be as stronger as the
US and Chinese companies.
To illustrate this, table 4 shows the GDP of several countries, representing the resources of
the different countries. Germany’s GDP, which is the highest in Europe, represents only
18,16% of the US GDP and 25% of the Chinese GDP. Interestingly though, the European GDP
which is the sum of all European Member Sates GDP, is bigger than the one in China and closed
to the US GDP (IMF, 2020).
 52.

Table 5: the GDP per country in 2020 (IMF, 2020)

Countries GDP in US$ bn in 2020
The United States US$20,810 bn
China US$14,800 bn
Germany US$3,780 bn
UK US$2,640 bn
France US$2,550 bn
Europe US$20,440 bn

5.6. The dependency level on foreign countries

The worldwide semiconductor industry represents a global ecosystem. During the production
process of a semiconductor product, several countries are involved making them
interdependent. However, some countries are more dependent than others.

A good indicator of the dependency level of one country against another is the level of
exportations and importations. If a country is importing a great quantity of one product, it
shows that the country is dependent towards this product. In the opposite way, if a country is
massively exporting one product, it means that it is independent from others for this product.

According to the OEC statistics (2020), the US was a net exporter of Integrated Circuits16 in
2018 (Appendix 3) exporting US$37.1 bn while importing US$26.1 bn, representing a trade
surplus of US$1.1 bn. China and Europe were net importers with trade deficit of US$42.1 bn
and US$7.8 bn respectively.
If we compare with the situation in 2010 (Appendix 4), the US trade surplus was about US$18.4
bn while China and Europe were still net importers in the sector. However the Chinese trade
deficit was bigger amounting at US$60.7 bn. The European trade deficit remained almost the
same during the years as it amounted at US$8.8 bn in 2010. (OEC, 2020)

16
Integrated Circuits comprises all products with the HSN code 8542 which means Integrated Circuits and
microassemblies (OEC, 2020)
 53.

Those figures show that, in 2018, the Chinese ICs industry was the most dependent one among
the three as it had the highest trade deficit. However, as the Chinese trade deficit decreased
during the years, China also reduced its dependency on other countries in the sector. On the
contrary, the US ICs industry decreased its trade surplus by US$17.3 bn.

Nevertheless, it is not mentioned if the imports and exports coming from and to China
represent products from Chinese headquartered firms or all firms located in China. As we
know that 70% of chips manufactured in China are made from foreign companies (van
Hezewijk, 2019), the numbers could have intrinsically different meanings.
Moreover, those numbers were gathered in 2018. As trade tensions in the semiconductor
industry have risen during the past two years, it could be interesting to have a look at the
same numbers for 2020 and analyze them. Unfortunately, it appears to be difficult to find
export and import data, especially for the comparison between different countries, as they do
not always involve the same range of products.

Another indicator to measure the dependency level of one country to another in the
semiconductor industry is the number of patents acquired by companies. As explained earlier,
a patent is granted by a patent office (mostly national) in order to protect an invention
developed by a company. If other companies want to use this invention or technology, they
must pay for a license to the patent holder. Companies that have a high number of patents
are less dependent. In the opposite way, companies that don’t hold any patent have to pay
for the permission to use technologies of other companies, which by definition makes them
more dependent.

As I developed earlier, semiconductor companies that own patents are mostly from the US.
IBM, Intel and Qualcomm are among the top 20 patent holders in 2020 (IFI,2020). In
comparison, Chinese semiconductor companies do not have a high number of patents. To
illustrate this, Huawei, who is the first Chinese company in the ranking, has 14,315 patents
while IBM has 37,304.
This shows that Chinese companies are more dependent on the US technology. In Europe,
Siemens is ranked number one of European semiconductor firms and 9th in the worldwide
ranking. It owns 25,320 patents (IFI, 2020).
 54.

Finally, as part of the Chinese “Made in China 2025” strategy aiming to become self-sufficient
in the semiconductor industry in next several years, Chinese companies have increased their
M&As from 2014 to 2018 by 18% per year (Chen & al., 2019). This increase in M&As targeted
technological transfers mostly from US and European companies. This shows that the growth
of the Chinese semiconductor industry is, to a certain extent, dependent on foreign companies
and their technologies. Nevertheless, US and European firms undergoing M&As and joint
ventures with Chinese companies can also benefit from an easier access to the Chinese market
(VerWey, 2019). This will be discussed further in the report.
However, due to the increasing concern of the European Commission and the US government
for Intellectual Property theft, the number of M&As from China has stabilized since 2018
(Congressional Research Service, 2020). Furthermore, the value of Chinese FDI transactions in
the semiconductor industry has decreased by 33% between 2018 and 2019 (Arcesati,
Hanemann, Huotari & Kratz, 2020).

5.7. The level of control and restrictions to foreign competitors

Controls and restrictions put in place by federal or regional institutions are there to protect
the national or regional market from aggressive foreign competitors.

Due to the rise of geopolitical tensions between the US and China, both governments have
increased their controls and regulations in order to protect their market. The US have
established the Entity List and has been continuously increasing trade tariffs against several
foreign products.
In response, the Chinese government has also released an Unreliable Entity List and tightened
controls on exportations (Bicheno, 2020). It also established a new Cybersecurity Law that
foreign companies must comply to before making business in China (Lewis, 2020). However,
this new regulation lacks transparency and clearness allowing space for self-interpretation.

In 2018, the European Commission also started to keep an eye on M&As coming from Asian
countries and had also put in place several standards to protect its market. The Cybersecurity
Act in force since June 2019 is one of them. This regulation has established, among others, an
 55.

EU certification framework for ICT digital products, services and processes. It is based on
specific European requirements such as comprehensive set of rules, technical requirements,
standards and procedures (European Commission, 2020d). The aim of this certification is to
enhance the cyber resilience of ICT products in EU and thus foster the EU Digital Single Market
(Demircan & Kysela, 2019). As consequence, every foreign companies willing to sell ICT
products, services or processes within the EU have to obtain this certification first (Arampatzis,
2020).

However, the application of the standards is slowed down by the fragmented levels in the
European Union, making it somewhat inefficient. Indeed, most of the time, the European
Commission provides a general framework and Member States are responsible to implement
the standards in their country. However, European governments don’t dispose the same
resources and infrastructures to apply those standards which means the overall
implementation is slower (Eddy, 2020).

5.8. The level of universities and workforce

The semiconductor industry is a knowledge-intensive industry as it continuously requires

researchers to sustain a high innovation level. Companies with a high level of skilled and
talented workforce will develop a competitive advantage against others.

The level of skills and knowledge of the semiconductor workforce of a country can be analyzed
through the level of national engineering and technology universities. Looking at the top 25
universities of engineering and technology in the world rated by QS (2020), there are the same
amount of US and European universities which is about eight. The two first universities are
MIT and Stanford University, both located in the US, followed by the University of Cambridge
in the UK. Most of the European universities in the top 25 ranking come from the UK,
Switzerland and the Netherlands. Only two Chinese universities are in the top 25, namely the
Tsunghua University and the Peking University.

Another factor that could impact the level of skills of employees is by looking at the
international movements of workforce. Through the Global Talent Competitiveness Index
 56.

(GCTI)17, we can analyze which country is able to attract the most talents. According to an
analysis of KDM Engineering on the GTCI’s 2019 report, the UK is the third country in the talent
attraction ranking, followed by the US. The top 20 regroups, eleven European countries such
as the Netherlands, Belgium, Germany and France (Withers, 2020).

Moreover, the number of graduate students is currently the highest in the US. According to
OECD, among those students, the US counts more than 940,000 students enrolled in a
master’s in Engineering or Science program. In Europe, the country with the highest number
of students in the same field is France with 298,930 students followed by Germany (OECD,
2020).

We couldn’t find available data on the talent attraction capability of China which makes the
analysis about the level of skills of Chinese workforce in the Chinese semiconductor industry
difficult. However, an analysis in several years will be interesting as the OECD forecasts an
increase of 300% of Chinese graduated students by 2030. 60% of STEM graduates will be from
China and India, 8% will be European and 4% from the United States (OECD, 2020).

5.9. The access to the Chinese market

The Chinese market represents 60% of the global demand of semiconductor products in 2020
(Craig, 2020). Currently 20% of this demand is fulfilled by Chinese headquartered companies
and 80% by foreign firms having at least one subsidiary in China.
According to an analysis from van Hezewijk (2019), the eight largest semiconductor suppliers
in the world (which are mostly US companies) are selling more on the Chinese market than on
the US market (Appendix 5).

This gap between the Chinese production and demand benefits foreign companies that can
take over this market share. For example, 67% of Qualcomm’s revenue come from China, such
as Micro Electronics with 57% and Broadcom with 49% (van Hezewijk, 2019).

17 The GCTI ranks countries based on their ability to grow, attract and retain talents in their country. Launched
in 2014, it is based on 70 indicators and include 132 countries (GTCI Study, 2020)
 57.

However, with the geopolitical tensions between China and the US, it is possible that US firms
will have to cut their business relations with Chinese companies. This could cause a decrease
in the revenue of US semiconductor firms. However, it is currently too soon to make any
conclusion.

Having some lack of technological knowledge, this situation also benefits Chinese companies.
Indeed, foreign companies that enter the Chinese market, must comply with Chinese
standards and regulations. This eases, to a certain extent, the technological transfer from
foreign companies to Chinese ones. Also, as foreign companies employ Chinese workforce,
Chinese employees can benefit of knowledge transfers.

While looking at European companies, NXP Semiconductors also sells more to China than to
the US, representing 44% and 14% of its revenue, respectively (van Hezewijk, 2019). Most of
Infineon’s revenue comes from China, which represents 35% of its total revenue and increased
by 7% between 2018 and 2019 (Infineon, 2019).
Also, as many foreign firms are located in China, European companies can benefit from high-
tech industrial clusters and the presence of other foreign high-tech companies (Arcesati & al.,
2020).

5.10. Conclusion on the effectiveness and relevance of each factor

After covering the different factors and the way they are carried out in a country, we can
conclude on each factor’s effectiveness and importance in the development of the
semiconductor industry of one country.

Firstly, the demand from the defense and military department is undeniably a good way to
foster the semiconductor industry and push for more R&D investments. However, it is not a
prerequisite in the development of a company in the semiconductor industry. Semiconductor
firms can find other incentives in order to expand their R&D investments.

Network effects and the innovation cycle are factors that positively impact semiconductor
companies. Indeed, European and US companies have had their revenues increase. However,
the semiconductor industry is continuously improving, and emerging technologies are
 58.

entering the market. This means that there will be new opportunities to take advantage of
network effects and innovation cycles.

It appears that internal R&D investments by companies are highly effective for maintaining a
fast-paced innovation level required by the semiconductor industry. Companies investing
sufficient amounts in R&D are able to stay competitive on the semiconductor market. Also,
investments in manufacturing equipment are also important in order to increase the number
of fabs in the country and be able to produce state-of-the-art semiconductor products.
Accordingly, Chinese companies have the highest growth rate and invest the most for building
new fabs compared to the two other regions. Nevertheless, US companies have been present
on the market for longer than Chinese companies and have been able to collect a large
number of patents due to their early investments.
The European investment levels in both R&D and for the manufacturing equipment are too
low regarding the expenses required in order to stay competitive in the semiconductor
market. However, the European environment provides sufficient laboratories and research
centers to develop innovative semiconductor products.

As the semiconductor industry requires increasing expenses from companies in order to

sustain the growth rate of innovation and the building of new fabs producing the latest
advanced technologies, aids from governments and regional institutions are necessary. They
alleviate the financial burden of those companies, protect the national market from foreign
competitors and offer a beneficial environment for the development of semiconductor
companies. Those aids are made throughout several ways; financial incentives from public
administrations to semiconductor companies and national research departments in the
semiconductor industry as well as implementations of programs, standards and regulations.
Although the aims of those aids and incentives are the same among the three regions, the
amounts and the ways are verry different from one country to another. Moreover,
semiconductor companies across the different regions face different needs and challenges. As
consequence, we can conclude that aids and incentives from governments and institutions
are beneficial to the development of their semiconductor companies however it is
complicated to affirm which way is the most efficient.
 59.

The high level of collaboration and cooperation inside an economic entity is highly important
to achieve effective strategies, standards and regulations implemented by decision-makers.
Decision-making processes are faster, and companies face a single home market which
facilitate their development. With this in mind, the European Union is lacking collaboration
and cooperation among Member States. Semiconductor companies have thus to comply with
different national jurisdictions inside the European Union which increases their costs. Also,
facing different national markets among the European Union increases the competition
among European semiconductor companies. Member States should on the contrary gather
their resources in the semiconductor industry together in order to properly compete with
China or the US.

In addition, when a country is dependent on other countries, it could easily put the country in
a disadvantageous position on the market. As the figures showed, European semiconductor
companies are mostly dependent on the Chinese and US companies and technologies. China
decreases its dependency on other countries in the semiconductor industry over time thanks
to technological and knowledge transfers from foreign leading firms in the sector. As
consequence, we cannot affirm that the development of semiconductor companies will be
slowed down by their dependency level on foreign firms. However, as the dependency level
of one country to another could be explained by several factors, the present figures are not
sufficient in order to provide a conclusive analysis.

With growing trade tensions between the US and China, controls and restrictions imposed on
foreign companies seem to be effective in order to protect a market. However, we will be able
to analyze the consequences of this factor after a few years. Although, we can still point out
that European Commission has some difficulties protecting its semiconductor market. Indeed,
the standards provided by the European policy makers are not as effective as they should be
for each Member States.

If we look at the influence of a skilled workforce, we see that although the US and Europe have
good universities in Engineering and Science, China is growing in this sector. However with the
current high level of international migration and a lack of precise data, we cannot prove that
 60.

there is a direct link between the level of education and the number of skilled engineers in the
semiconductor industry of one country.

Finally, the access to the Chinese market appears to benefit both foreign and Chinese
companies. Indeed, Chinese semiconductor companies are currently not able to supply the
increasing Chinese demand for semiconductor products. As consequence, foreign companies
take this opportunity to fulfil this demand and increase thus their market share in the
semiconductor industry. With an increasing number of foreign semiconductor firms located
in China, technology and knowledge transfers to Chinese semiconductor companies are
easier.
 61.

PART 3: Recommendations to US, European and Chinese semiconductor industries

In this part, I give some recommendations that could help the United States, China and the
European Union improve their semiconductor industry. I propose relevant advice for the three
regions on the basis of the comparative table and the conclusion I made on the most relevant
characteristics of a semiconductor industry. I also take into consideration the current
environment where companies are growing, and their future expectations.

1. The need to increase governmental aids to US semiconductor companies

In the framework of the ‘America First’ policy from the Trump administration, the US
government highlights its willingness to relocate US semiconductor companies that are
currently located in China (BDI, 2020). This objective implies high cost for US semiconductor
companies. First, as most of semiconductor manufacturing facilities are located in Asia, there
is a need to build new fabs in the US. Also, US semiconductor companies will have to endorse
the increasing labour cost compared to China. In this way, the US government has to establish
a national manufacturing plan for its semiconductor industry (Ferry, 2020).

Therefore, the US government should increase their incentives and aids directed at
companies. Nowadays, according to the data I collected, the US government provides merely
US$5 bn per year to semiconductor companies. A higher level of financial aids could decrease
the overall cost that US semiconductor companies will have to bear to change location. It will
also provide relevant incentives for US companies to relocate instead of depending on
revenues generated by the Chinese market.
Reducing the financial burden of US companies will encourage them to increase their
investment in building new factories in the US in order to manufacture their products there.
Currently, the level of investments in building manufacturing from US companies is too low
compared to China.
 62.

According to a report made by SIA, federal incentives valued at US$50 bn in 2020 will have the
possibility to create 19 major semiconductor manufacturing facilities which could cover the
demand of semiconductor products from the US defense and aerospace industries (Goodrich,
Varadarajan, Varas & Yinug, 2020). Also, these incentives will create 70 000 high-paying jobs
in the US over the next 10 years which will increase the number of US semiconductor skilled
workers. (Ioannou, 2020).

However, as the initiative to support the relocation process of companies is quite new, it could
be interesting to examine the situation in a few years from now. We will be able to provide a
more objective analysis on the outcomes of the governmental decisions made nowadays and
provide more adapted advice.

2. The need for more cooperation and collaboration among the European Union

Illustrated by the fragmentation of European standards and the low decision-making process,
the effectiveness of the Single Market in the European Union is weak. This implies disparities
and divergences within European industries and Member States. This is mainly due to a low
level of cooperation and coordination among EU Member States. A higher level will give the
opportunity to Member States to pool their resources together such as their financial
strength, skills and knowledge. In this way, European research centers and laboratories could
closely work together instead of competing against each other. Building one single entity
could give the European Commission more consistency when establishing international trade
agreements with other countries. It could also give European semiconductor companies the
ability to be stronger when facing worldwide top leaders in this industry.

In fact, a well-integrated Single European Market (SEM) where European companies are
pooling their knowledge and resources together in order to work on common projects will
increase the productivity of companies in this industry. Companies will be able to improve
their investments level (Micossi, 2016). Those investments will have more weight, more
impact and they will be more efficient and effective. The current level of investments in R&D
and in manufacturing equipment from European semiconductor companies is low, compared
with the Chinese and US levels and hampers the development of the European semiconductor
 63.

industry. An increase in those types of investments could be beneficial for the European
semiconductor companies as it will increase their technology capabilities and decrease the
European technological dependence on other countries.

In terms of standards, the implementation of legislation is uneven across countries because

Member States don’t dispose of the same resources and tools useful to an efficient application
of European regulations. Also, some standards are not adequate to all Member States and
tend to increase regulatory fragmentation among the Single European Market. This hampers
European business to expand in Europe.
A common set of standards applied to every Member State will also faster and easier decision-
making process from European institutions and Member States. Consequently, the European
Commission will be more able to protect its market from non-European competitors.
Increasing controls and restrictions to foreign semiconductor companies when doing business
in Europe will offer more opportunities to European businesses to develop and grow.
European semiconductor firms are currently leaders in their niche markets. If the European
market is more protected against foreign enterprises, European companies could keep their
leading positions in those markets. In addition, they might be able to attract a significant
market share for the emerging technologies such as AI and 5G.

This high level of fragmentation in the European Union is mainly due to disparities among
Member States. First, cultural differences and linguistic barriers hamper the collaboration and
cooperation among European policy makers (Kearney, 2020). Also, no sufficient support is
provided by Member States to the establishment of the Single European Market. Indeed,
some national policies and regulations hamper the integration of the SEM (Micossi, 2016).

However, as European semiconductor companies suffer from trade tensions between the US
and China, it is safe to say that Member States will increase their collaboration and
cooperation among the European Union regarding their semiconductor industries. Indeed, the
US restrictions imposed to Chinese high-tech companies induce that European semiconductor
suppliers have also to apply for the US license in order to chip products to China. In the car
industry more specifically, European companies rely on US technology for the manufacturing
of new smart and autonomous cars while the biggest demand for those products is in China.
 64.

If European companies are obliged to only partner with one of the two countries, they will
lose market share in this sector. As European semiconductor companies feel insecure in this
bilateral confrontation, European governments have stated that they want to decrease their
dependency on foreign semiconductor products and technologies (Yang, 2020). Therefore, in
December 2020, 18 European countries have signed a commitment to invest up to US$177 bn
(€145bn) in the next two or three years to boost the European semiconductor industry. Taking
part of the IPCEI framework, this joint initiative aims to improve cooperation among Member
States and increase investments in the European semiconductor industry (European
Commission, 2020b).
Future analysis will tell us the efficiency of this joint commitment in the development of the
European semiconductor industry.

3. The need to increase market share in emerging technologies

Regarding the comparative analysis and the conclusions I made on the effectiveness of key
characteristics of a semiconductor industry, the Chinese semiconductor industry appears to
be in a good position.
Since the beginning of the century, the Chinese government has established aggressive
strategies to catch up with top leaders in the semiconductor industry. Most importantly, they
have longer term plans to become self-sufficient in this industry. To this day, those strategies
appear to be effective as the Chinese semiconductor industry shows a high growth rate and a
good perspective for the future.
In term of investments, the Chinese R&D investments level in the semiconductor industry
don’t equal the level of the US. However, it shows the highest growth rate compared to the
US or the European Union. This future increase in R&D investment will enhance the ability for
Chinese semiconductor firms to grant more patents and develop their own innovative
products. Furthermore, Chinese companies invest the most in equipment manufacturing and
rely heavily in M&As in order to increase technology transfer.
The emergence of new technologies offers the opportunity to Chinese semiconductor
companies to increase their market share and thus benefit from economies of scale through
network effects and innovation cycles. As such, the Chinese semiconductor industry will keep
its growth rate and Chinese companies will be able to decrease their dependency towards
 65.

more advanced countries in the sector. In the long-term run, Chinese headquartered
semiconductor firms should be able to satisfy the national semiconductor demand which is
one of the goals of the 14th Five Year Plan released in October 2020. Indeed, the Chinese
government wants to promote a “dual-circulation strategy” to stimulate domestic market
circulations (Bicheno, 2020). Having this in mind, Huawei and Xiaomi already begun to
produce their own chips (Lucas, 2019).

Current trade tensions with the US have pushed the Chinese government to take aggressive
measures in order to protect and foster its semiconductor industry. Since a few years, more
controls and restrictions have been added to foreign semiconductor companies willing to
make business in China. Also, new strategies supporting the increase of self-sufficiency of
Chinese companies towards foreign technologies have been established. As some
consequences of those measures and actions will still appear in the following years, they
should be analyzed in the future in order to provide a more comprehensive and objective
conclusion on their efficiency.
 66.

Conclusion

In this thesis, I tried to figure out what are the key characteristics an environment should have
that benefit companies in the semiconductor industry. I chose to make a comparative analysis
on three economic units that are relevant in the semiconductor industry: the United States,
the European Union and China.

In order to realize this analysis, based on literature review and factual data, I started by
describing key characteristics found in every region, whether they were beneficial or not for
semiconductor companies. It allows me to conclude that wherever a company is located,
national governments or regional institutions are providing aids and incentives to their
semiconductor firms in order to support their development and to help companies bear some
of their cost. However, each government has their own way of operation; with different
amounts and different methods. Moreover, investments made by semiconductor companies
either in R&D or for the building of new fabs appear to be an inherent characteristic to the
worldwide semiconductor industry but, each company deals with different amounts and for
different purposes.

Regarding the US semiconductor industry, we can notice that they started their activities in
the semiconductor industry thanks to the US defense and military industry and its need for
innovative products. This allows US semiconductor companies to benefit from economies of
scale in the sector. Furthermore, thanks to high level of US education since several years, the
US semiconductor companies benefit from high skilled engineers and scientists to develop
their products.
In the European Union, semiconductor companies are enduring a high level of fragmentation
inside the region implying that companies don’t benefit from the resources a large unified
market could offer and have to comply with different national jurisdictions. Nevertheless,
some European companies were able to secure a leading position in some niche sectors of the
semiconductor market such as the automotive, security and healthcare industry.
The Chinese semiconductor market represents strong advantages due to its low labour cost
and its ever-increasing demand for semiconductor products. Indeed, 57% of the worldwide
 67.

consumption of semiconductor products happens in China (Pwc, 2019). The Chinese

government also imposes strong controls and restrictions to foreign companies in order to
protect its market.

Afterwards, I compare the three chosen regions based on every characteristic developed
earlier. I could then conclude on the most effective ones that allow semiconductor companies
to grow and thrive in the market. We can count four characteristics that are undeniably
relevant for the development of semiconductor companies in their markets: investments
made from semiconductor companies themselves, protection tools provided by national or
regional governments, the access to the Chinese semiconductor market, and a high level of
cooperation and coordination inside the national or regional semiconductor market. I will
develop those in the next paragraph.
Two other factors: the demand for semiconductor products coming from the military and
space industries, and the access to economies of scale through network effects and innovation
cycle are also benefiting the development of semiconductor companies. However, they do not
seem to be prerequisites. Indeed, there exist other ways to foster the demand for
semiconductor products and semiconductor companies can still reach sufficient economies of
scale by targeting emerging technologies. Regarding the last factors present in the
comparative table such as aids and incentives from government to the semiconductor
industry, the level of dependency of one country to another, and the level of talented
workforce, I can’t make any conclusion as data lack transparency and clearness, aren’t reliable
or the appropriate data were not found.

The investments from companies in either R&D or manufacturing equipment are important
factors. Indeed, they have shown to be effective in the development of the companies in the
semiconductor industry. US companies have the highest R&D spending and the most granted
patents. Although Chinese companies have the lowest percentage of R&D investments among
the three regions, they also have the highest investment growth rate in ICT. However,
European companies have the lowest level of investment, but the European Union fosters a
good environment for R&D as it counts several research centers and laboratories.
 68.

In term of investment in manufacturing equipment, Chinese companies have invested the

most in the recent years compared with the two other regions. Consequently, the production
of semiconductor products has increased drastically.

The second factor that appears as effective for the development of a semiconductor company
in its market is the protection tools put in place by the government. Indeed, controls and
restrictions imposed to foreign companies provide more space to national semiconductor
companies to grow in their market. It is particularly true for Chinese semiconductor companies
as the Chinese market is highly attractive for foreign companies. However, regulations
imposed by the US, China or even the European Union increase since the past few years with
the rising of geopolitical tensions between the US and China. As consequences, it should be
interesting to analyze in the near future the actual effectiveness of those new restrictions.

Regarding the access to the Chinese semiconductor market, data are showing the importance
to have a free access to this growing market. The demand for semiconductor product in China
represents 60% of the worldwide demand (Craig, 2020) and Chinese companies are currently
only providing 20% of this demand. This represents a great opportunity to fulfill for foreign
companies. Also, Chinese companies are benefiting of the presence of foreign companies in
their country as it facilitates technology transfers.

Looking at the level of fragmentation of the European market that companies have to face,
we can conclude that the lack of cooperation and coordination is a real obstacle to European
companies in their development inside the European semiconductor market but also
internationally. The absence of a unified market with one single decision-making unit implies
a slower responsiveness in the market. Also, the absence of shared resources makes them
ineffective while competing with international semiconductor leaders.

Afterwards, I develop some recommendations for the three regions in order to improve their
semiconductor industry. I based those recommendations on three factors: the conclusion
made on the effectiveness of key characteristics present in an environment for the
development of semiconductor industry, the current environment where semiconductor
 69.

companies are evolving and the future expectations of each region for their semiconductor
industry.

Regarding the position of the US semiconductor industry and the willingness of the US
government to relocate its semiconductor companies in its country, the US government
should increase aids and incentives provided to US semiconductor companies. This will
decrease the financial burden of companies and encourage higher investment in the building
of new fabs in the US.

The greatest obstacle in the development of the EU semiconductor industry is the lack of
efficiency of the Single European Market. This could be fixed with a greater level of
cooperation and collaboration among Members States, which is even more needed due to the
increasing tensions between the US and China. Companies will be able to gather their
investments in order to facilitate the competition with international semiconductor leaders.
Also, it will simplify the establishment of common European standards and regulations in the
sectors which could increase the protection of the European semiconductor market against
foreign competitors.

The Chinese semiconductor market sustains a high growth rate thanks to strong strategies
coming from the Chinese government and the increasing level of investments made from
Chinese semiconductor companies. This improves technology transfers and decrease the
dependency of the Chinese semiconductor industry towards foreign ones which is the target
of the latest FYP. Chinese companies have to cease the opportunity to increase semiconductor
market share while emerging technologies arrive on the market. As such, they will benefit of
economies of scale in this sector. This will secure the Chinese growth rate in the
semiconductor industry in order to catch up with more advance semiconductor industries.

Limits and further researches

The scope of this report only targets a comparison between semiconductor industries of the
United States, China and the European Union. Adding more countries that are active in the
sector, such as South Korea, Taiwan, and Japan could have been interesting for the
 70.

comparative analysis. As their companies have succeeded and some of them are among top
leaders in the industry, it could help detect additional factors to the analysis.

Also, this report is mostly based on information and data provided on the internet or in books.
This information sometimes lacks clearness or is simply undisclosed, such as the investments
made from governments to their semiconductor industry. Furthermore, data regarding the
targets, the amount and the impacts that such investments have on the industry are difficult
to find and most of the time are not comparable between the three regions. An easier access
to data could have brought more insight to the analysis.
Moreover, after having done a personal interview with M. Glinos (Appendix 6) in which I asked
several open questions, I realized it wasn’t the kind of information I needed to conduct my
research. Indeed, I wanted to base my results on factual data and figures which wasn’t what I
collected through the interview. Therefore, I chose not to collect information through
personal interviews. However, if sufficient amount of data were collected from experts in the
field, it could have brought a deeper understanding of the semiconductor industry and the
way it is organized.
Nevertheless, the interview allowed me to understand I was in the right direction and it helped
me develop recommendations that I included in the last part of my thesis.

As we are at the core of the trade tensions between the US and China, the semiconductor
industry will be prone to many changes in the way business is done as well as in the way value
chain is organized. The covid-19 pandemic will certainly have an impact on the
interdependence of countries (Custer, 2020). Companies will have to reinvent their business
model and figure out new ways of competing internationally. Moreover, the European
Commission has finally reached an agreement with the UK concerning the Brexit that will also
affect business’ organizations inside the European Union. For that, it could be interesting to
make further researches in the near future to analyze the consequences.
 71.

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