Brookings Trade Forum 2005 (2005) 279-322
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Offshoring in the Semiconductor Industry:
A Historical Perspective
[Comment and Discussion]
Semiconductor design is a frequently cited example of the new wave of offshoring of service sector jobs.1 It is certainly a concern to U.S. design engineers themselves.2
The semiconductor industry already has rich experience with the offshoring of manufacturing activity. Semiconductor (or chip) companies were among the first to invest in offshore facilities to manufacture goods for import back to the United States. A review of these earlier manufacturing experiences and their impact on the fortunes of the domestic industry and its workers can help to illuminate the current debate over the offshoring of services.
Because meaningful data about the impact of the offshoring of chip design (and even of manufacturing) are limited, we rely on a more qualitative analysis [End Page 279] for our key points. We have conducted dozens of interviews with engineers and managers at semiconductor and related companies in the United States, Asia, and Europe over the past twelve years. Our research also incorporates the rich store of publicly available information in trade journals and company reports.
Before addressing semiconductor design directly, we begin by analyzing the impact on the U.S. semiconductor industry of the offshoring of semiconductor assembly and fabrication. We argue that the initial concern about losing domestic jobs in both stages turned out to be unfounded as the industry used the situation to its competitive advantage by becoming cost-competitive (through assembly offshoring) and by developing the fabless sector (through foreign outsourcing of chip fabrication or manufacturing). We then analyze the ongoing offshoring of design jobs and compare this stage to the two that came before in order to explore the possible impact on domestic jobs and the U.S. semiconductor industry.
The paper begins with a brief description of the stages of semiconductor production and our analytical framework. The following sections look at the offshoring of assembly jobs, analyze the offshoring of manufacturing, and explore the offshoring of design jobs. We conclude with a discussion of what this means for the United States.
The Industry and an Analytical Framework
We begin by describing the stages of production in the semiconductor industry, which will help illuminate the industry's offshoring activities. The most important type of semiconductor, and the one on which this study focuses, is the integrated circuit, or "chip," which is a network of tiny wires fabricated on a surface connecting transistors that switch on and off for processing data in binary code.3 The development and manufacturing of chips involves three primary activities in the value chain: design, fabrication, and test and assembly. The semiconductor industry has successively offshored each of these activities—first assembly, then fabrication, and now design.
During design, the desired electronic circuits progress through a series of abstract representations of increasing detail. During fabrication, the circuits of [End Page 280] the chips are built up on the surface of a flat, round silicon wafer in successive layers. Assembly is, typically, the process of cutting the wafer into individual chips (or die), which can number in the thousands depending on die size, and packaging the delicate chip in a protective shell that includes connections to other components.
The economic characteristics of each step of the process differ significantly. Design is skill-intensive and requires expensive EDA (electronic design automation) software. Fabrication requires a huge fixed investment (currently on the order of $2 billion) to build a plant (called a fab) that holds a wide variety of expensive equipment and that meets extreme requirements of cleanliness. Assembly also requires expensive equipment, but the overall costs of plant and equipment for assembly are much lower than for the fab, as are the average skill requirements. Worker skill requirements go down along the value chain (that is, design is more skill-intensive than manufacturing, which is more skill-intensive than assembly).
However, equipment costs dominate labor costs, especially for fabrication, and this has limited the...