Innovation — A Vital Constant in a Changing Industry

The global semiconductor industry — a $248B industry in 2006 — is undergoing subtle yet profound changes. The industry's major metamorphosis will be evident within the next five years, or perhaps sooner. Once we have a 20/20 perspective, we will be astounded at the scope of changes now underway.
 
Consider some of the major forces that are currently reshaping the global microchip industry:

• The migration of electronics manufacturing to China that, in turn, has made China the world's largest country market for semiconductors.
• The shift to consumer electronics as the largest driver of chip sales.
• The emergence of new and important consumer markets, especially in China and India (which together have 40% of the world's population), and the emergence of new consumer markets in other regions.
• The growing complexity and cost of the transition to each new technology node.
• Rapidly escalating costs of technology development, facilities and equipment, masks and semiconductor design.
• Mergers, acquisitions and leveraged buyouts that reflect an ongoing trend toward consolidation of the industry, even as we see a trend toward "disaggregation," as electronics manufacturers spin off their semiconductor operations and IDMs spin off their memory businesses.
• Evolution of new business models that do not precisely fit into any of the traditional models — IDMs, fabless or fab-lite — and the consequent growing importance of foundries.
• Greatly increased emphasis on design for manufacturing (DFM) and the implications for the way companies structure product and technology development and manufacturing.
• The approaching limits of CMOS scaling and the global race to find solutions to the major challenges of the nanoelectronics era — new device structures, materials and manufacturing techniques.

Even as the global microchip industry is confronting these and other fundamental changes, competition has intensified. Record sales of semiconductors no longer automatically translate to better margins and improved profitability.

Some of the factors that are not expected to change in the immediate future:

• The pervasiveness of semiconductors will continue to increase, and the semiconductor content of electronic products will continue to grow.
• The global microchip industry will continue to grow, albeit at a slower compound annual growth rate (8-10%), on a much larger base.
• Moore's Law will survive, continuing to be the benchmark of industry progress.
• CMOS technology is a mainstream process.
• Leadership in semiconductors will continue to be of strategic importance as a primary contributor to economic growth, improving productivity, higher living standards and national security (especially for the United States).
• Innovation will continue to be the most critical competitive success factor.

As the premier organization representing the U.S. semiconductor industry, the SIA is committed to enhancing the climate for innovation throughout the world. Competition is the most effective driver of progress, and the benefits of competition for leadership in technology are felt throughout the world.

The SIA has a public policy agenda based on what we describe as the "Three Pillars of Innovation:"

1. Increasing funding for basic research at universities, with an emphasis on the physical sciences.
2. Maintaining a world-class workforce by improving our K-12 education and enacting immigration reforms to enable the best and the brightest from around the world to live and work in America.
3. Ensuring a competitive climate for investment in facilities for R&D and manufacturing.

The Three Pillars of Innovation are applicable in any country aspiring to compete in the technology sector, but are especially important in the United States. For nearly six decades, leadership in technology has driven America's world-leading economic growth, the high productivity and consequent prosperity of the American worker, the continuous improvement of standard of living, advances in health sciences and environmental protection, and ensuring national security. Indeed, the United States' lead in technology has been so enduring that we tend to assume our leadership is simply the natural order of things. Intensifying global competition has destroyed this myth.

Our national leaders — Republicans and Democrats — have recognized the strategic importance of enhancing our innovative capabilities and global competitiveness. Our policy agenda has bipartisan support. To date, that bipartisan support has not been translated into action. For more information on the SIA public policy agenda, log onto www.choosetocompete.org.

We know what must be done, and we know that 2007 is the time to act. We have consensus. The challenge now is to make it happen!