1

About Boston Consulting Group (BCG)
Boston Consulting Group (BCG) is a leading global management consulting
firm, with offices in over 50 countries. BCG partners with leaders in businessand society to tackle their most important challenges and capture their greatest
opportunities. BCG was the pioneer in business strategy when it was founded in
1963. Today, we help clients with total transformation—inspiring complex change,
enabling organizations to grow, building competitive advantage, and drivingbottom-line impact.
About the Semiconductor Industry Association (SIA)
The Semiconductor Industry Association (SIA) is the voice of the semiconductor
industry in the US, one of America’s top export industries and a key driver ofAmerica’s economic strength, national security, and global competitiveness. The
semiconductor industry directly employs nearly a quarter of a million workers in
the United States, and US semiconductor company sales totaled $208 billion in
2020. SIA represents 98 percent of the US semiconductor industry by revenue
and nearly two-thirds of non-US chip firms. Through this coalition, SIA seeks tostrengthen leadership of semiconductor manufacturing, design, and research byworking with Congress, the Administration, and key industry stakeholders aroundthe world to encourage policies that fuel innovation, propel business, and driveinternational competition.
About the Authors
Antonio Varas is a Senior Partner and Managing Director in the Silicon Valley
office of Boston Consulting Group and is a core member of its Technology,
Media & Telecommunications practice. You may contact him by email atvaras.antonio@bcg.com.
Raj Varadarajan is a Senior Partner and Managing Director in the Dallas officeof Boston Consulting Group and leads its Global Advantage practice in North
America. You may contact him by email at varadarajan.raj@bcg.com.
Jimmy Goodrich is the Vice President, Global Policy at the Semiconductor
Industry Association. You may contact him at jgoodrich@semiconductors.org.
Falan Yinug is the Director, Industry Statistics and Economic Policy at the
Semiconductor Industry Association. You may contact him at fyinug@
semiconductors.org.
Acknowledgments
This report would not have been possible without the contributions of our BCG
colleagues Ramiro Palma, Anoop Shah, Zhenyu Bo, Kaitlyn Alsup, Sohini Kar,
Yeonsoo Lee, Ian Kleinman, and our SIA colleague Devi Keller.

2

Contents

4

Executive Summary

7

Introduction

9

Overview of the
Semiconductor Supply Chain

27

A Global Integrated Structure basedon Geographic Specialization

39

Emerging Risks in the New Context

51

Strengthening the Supply Chain
for the Next Decade of Innovation

3

Executive SummaryT

he widespread shortage of semiconductorsthat began in late 2020 highlighted how
indispensable these specialized components
are in today’s economy. Semiconductors
are used to power a vast array of electronic
devices—everything from smartphones and cloudservers to modern cars, industrial automation,and critical infrastructure and defense systems.
The global structure of the semiconductor supply
chain, developed over the past three decades,
has enabled the industry to deliver continual leaps
in cost savings and performance enhancementsthat ultimately made possible the explosion in
information technology and digital services. In thepast few years, however, several new factors haveemerged that could put the successful continuationof this global model at risk. Addressing thesevulnerabilities requires a combination of carefully
designed actions from policymakers, including
targeted incentives to encourage domestic
production in order to address strategic gaps.

An Integrated Global Supply Chain
Semiconductors are highly complex products todesign and manufacture. No other industry has thesame high level of investment in both R&D (22%of annual semiconductor sales to electronic device
makers) and capital expenditure (26%).
The need for deep technical know-how and scale
has resulted in a highly specialized global supply
chain, in which regions perform different roles
according to their comparative advantages. (SeeExhibit 1.) The US leads in the most R&D-intensive
activities—electronic design automation (EDA),
core intellectual property (IP), chip design, andadvanced manufacturing equipment—owing to its
world-class universities, vast pool of engineering
talent and market-driven innovation ecosystem.
East Asia is at the forefront in wafer fabrication,
which requires massive capital investments
supported by government incentives as well as
access to robust infrastructure and skilled workforce.
China is a leader in assembly, packaging and testing,which is relatively less skill- and capital-intensive,
and is investing aggressively to expand throughout
the value chain.
All countries are interdependent in this integrated
global supply chain, relying on free trade to movematerials, equipment, IP, and products around theworld to the optimal location for performing eachactivity. In fact, semiconductors are the world’s
fourth-most-traded product after only crude oil,refined oil, and cars.
This global structure delivers enormous value.
A hypothetical alternative with parallel, fully “selfsufficient” local supply chains in each region to meetits current levels of semiconductor consumption
would have required at least $1 trillion in incremental
upfront investment, resulting in a 35% to 65% overall
increase in semiconductor prices and ultimately
higher costs of electronic devices for end users.

4

EXHIBIT 1

The global semiconductor supply chain based on geographic specialization has delivered enormous value for the industry
Semiconductor Supply Chain
Precompetitive Research

Share by region (% of worldwide total, 2019)
US

China1

DesignCore IP• Logic• DAO• Memory

Europe74%

EDA and Core IP
EDA

East Asia 2

20%
15% 8%

67%

Logic
DAO

37%

Memory

29%

7%

Other

33%

19%

70%

Cost savings vs.
fully localized“self-sufficient”
supply chains:$0.9-1.2T
avoided upfront
investment$45-125B
annual cost
efficiencies

Equipment

Manufacturing

Materials• Wafer fabrication• A ssembly,
packagingand testing41%

Equipment
Materials

11%

Wafer fabrication

12%

Assembly, packaging
and testing

36%

18%

57%

12%

35-65%

16%

56%

9%

enabled reduction
in semiconductor
prices

38%

43%

13%

12%

Source: BCG analysis
Note: DAO = discrete, analog, and other (including optoelectronics and sensors); EDA = electronic design automation; OSAT = outsourced
assembly and test
1. Mainland China 2. East Asia includes South Korea, Japan, and Taiwan

Risks and Vulnerabilities
Over the next ten years, the industry will needto invest about $3 trillion in R&D and capital
expenditure globally across the value chain in order
to meet the increasing demand for semiconductors.
Industry participants and governments must
collaborate to continue facilitating worldwide accessto markets, technologies, capital, and talent, andmake the supply chain more resilient.
While geographic specialization has served theindustry well, it also creates vulnerabilities that eachregion needs to assess in a manner specific to its
own economic and security considerations. There
are more than 50 points across the supply chain
where one region holds more than 65% of the global

market share, although the level of risk associatedwith each of these varies. Manufacturing emerges asa major focal point when it comes to the resilience ofthe global semiconductor supply chain. About 75%
of semiconductor manufacturing capacity, as wellas many suppliers of key materials—such as siliconwafers, photoresist, and other specialty chemicals—
are concentrated in China and East Asia, a region
significantly exposed to high seismic activity andgeopolitical tensions. Furthermore, all of the world’s
most advanced semiconductor manufacturing
capacity—in nodes below 10 nanometers—iscurrently located in South Korea (8%) and Taiwan(92%). These are single points of failure that could
be disrupted by natural disasters, infrastructure
shutdowns, or international conflicts, and may cause
severe interruptions in the supply of chips.

5Besides the risks associated with concentrationin certain geographic locations, geopoliticaltensions may result in export controls that
impair access to critical providers of essential
technology, tools, and products that are clusteredin certain countries. Such controls could also
restrict access to important end markets,
potentially resulting in a significant loss of scaleand compromising the industry’s ability to sustain
the current levels of R&D and capital intensity.
The solution to these challenges is not the
pursuit of complete self-sufficiency throughlarge-scale national industrial policies with astaggering cost and questionable execution
feasibility. Instead, the semiconductor industry
needs nuanced targeted policies that strengthen
supply chain resilience and expand open trade,while balancing the needs of national security.
To address the risk of major global supply
disruptions, governments should enact marketdriven incentive programs to achieve a morediversified geographical footprint, which should
include building additional manufacturing capacity
in the US, as well as expanding the production sites
and sources of supply for some critical materials. In
our previous report “Government Incentives and US
Competitiveness in Semiconductor Manufacturing,”
we found that a $50 billion incentive program
would establish the US as an attractive location for
semiconductor manufacturing. Our analysis showsthat such a program could enable the constructionof 19 advanced fabs for logic, memory, and analog
semiconductors over the next ten years, doubling
the number expected if no action is taken.

with onshore capacity—would require over$400 billion in government incentives and costmore than one trillion dollars over ten years.
In setting policies to promote supply chain resilience,
governments must guarantee a level global playing
field for domestic and foreign firms alike, as well
as strong protection of IP rights. They must also
take steps to further promote global trade andinternational collaboration on R&D and technology
standards. In parallel, policymakers need to stepup efforts to stimulate basic research and address
the shortage of talent threatening to constrain theindustry’s ability to maintain its innovation pace.
To that end, further public investment in scienceand engineering education is needed, as well as
immigration policies that enable leading global
semiconductor clusters to attract world-class talent.
In addition, governments with significant national
security concerns should establish a clear
and stable framework for targeted controls on
semiconductor trade that avoid broad unilateral
restrictions on technologies and vendors.
Such well-modulated policy interventions would
preserve the benefits of scale and specialization in
today’s global supply chain structure. This would
ensure that the industry can extend its ability todeliver the continual improvements in semiconductor
performance and cost that will make the promise oftransformative technologies such as AI, 5G, IoT, andautonomous electric vehicles a reality in this decade.

This new capacity would be instrumental toaddress major vulnerabilities in the supply chain.
For example, it would allow the US to maintaina minimum viable manufacturing capacity in theleading nodes to meet domestic demand for theadvanced logic chips used in national security
systems, aerospace, and critical infrastructure.
In contrast, we estimate that a goal of complete
manufacturing self-sufficiency—seeking tocover the total US semiconductor consumption

6

IntroductionToday’s mobile phone users likely do
not put much thought into the complex
cross-border collaboration in research,development, design, and manufacturing
amongst hundreds of firms that enable themto access their favorite content over a highspeed wireless network. Consumers, however,benefit from the global coordination throughout
the deep and complex electronics industry in
the form of accelerated innovation cycles thatdeliver new technology features at lower prices.
The backbone of this globally integrated digital
economy is the semiconductor supply chain.
Over the past three decades the semiconductor
industry has experienced rapid growth anddelivered enormous economic impact. The
semiconductor market grew at a 7.5% compound
annual growth rate from 1990 to 2020, outpacing
the 5% growth of global GDP during that time.
The performance and cost improvements deliveredby the semiconductor industry made possible
the evolution from mainframes to PCs in the
1990s, the client-server architecture underpinning
the Web and online services in the 2000s,
and then the advent of the smartphone as thecomputer in everyone’s pocket in the 2010s.
These innovations have created tremendous
economic growth: an estimated additional $3
trillion in global GDP from 1995 to 2015 has been
directly linked with semiconductor innovation, withan incremental $11 trillion in indirect impact1. Goingforward, further advancements in semiconductor
technology will be essential to enable a new waveof transformative technologies, including Artificial
Intelligence (AI), 5G, autonomous electric vehicles
or Internet of Things (IoT) solutions deployed atscale with a myriad of smart connected devices.
This economic impact has been made possible
by relentless accelerated improvement insemiconductor technology. Since the invention of
the integrated circuit back in 1958, the number oftransistors per wafer for a logic chip has increased
by a factor of about 10 million, yielding a 100,000fold gain in processor speed and a cost reductionof more than 45% per year for comparable
performance. Coupled with engineering innovations
such as advanced packaging and materials
technology, this has allowed electronic device

1. IHS report “Moore’s Law Impact”, May 2015.

7

makers to create devices with exponentially morecomputational power in increasingly smaller form
factors. As an illustration, today’s smartphones havemore computer power than the mainframe computersthat NASA used to send Apollo 11 to the moonin 1969. Today’s smartphones also contain morememory for storage than a data center server in2010. Similarly, advances in analog semiconductors
have also made possible dramatic improvements
in quality and speed of wireless communications
under successive generations of cellular technology,
leading to the recently introduced 5G.

The semiconductor supply
chain is the backbone ofthe digital economy
Semiconductors are highly complex products
fabricated from highly advanced manufacturing
processes. Improvements often require
breakthroughs in hard science that take many
years to achieve. The fast pace of innovationin the semiconductor industry is the result ofenormous investments and a sophisticatedglobal value chain and research infrastructure
integrated by highly specialized companies andinstitutions distributed across the world.
Specialization across the supply chain allows thedeep focus required to innovate, often pushing theboundaries of science. There are more than 30 typesof semiconductor product categories, each optimized
for a particular function in an electronic subsystem.
Developing a modern chip requires deep technicalexpertise in both hardware and software, and relies
on advanced design tools and intellectual property(IP) provided by specialized firms. Fabrication
then typically requires as many as 300 different
inputs, including raw wafers, commodity chemicals,
specialty chemicals, and bulk gases. These inputs
are processed by more than 50 classes of highly
engineered precision equipment. Most of thisequipment, such as lithography and metrology tools,
incorporates hundreds of technology subsystems
such as modules, lasers, mechatronics, control
chips, and optics. The highly specialized suppliers
involved in semiconductor design and fabrication
are often based in different countries. Chips thenzigzag across the world in a global journey.
This report seeks to provide an understanding of thecomplex global semiconductor supply chain, how
it supports the industry’s continuous technology
innovation, and how it ultimately benefits consumers
and enables our economy through better technology
at lower prices. We also identify a number of risks
that could affect the industry’s ability to continue
delivering exponential performance and cost
improvements and discuss ways to address them.

8

Overview of the
Semiconductor Supply Chain
Understanding semiconductors:
what they are and what they are used for

2

These are semiconductors used for storing
information necessary to perform any
computation. Computers process information
stored in their memory, which consists ofvarious data storage or memory devices.
Two most commonly used semiconductor
memories in use today are Dynamic RandomAccess Memory (DRAM) and NAND memory:

Semiconductors are highly specialized componentsthat provide the essential functionality for electronic
devices to process, store and transmit data.
Most of today’s semiconductors are integrated
circuits, also referred to as “chips”. A chip is aset of miniaturized electronic circuits composedof active discrete devices (transistors, diodes),passive devices (capacitors, resistors) andthe interconnections between them, layeredon a thin wafer of semiconductor material,
typically silicon. Modern chips are tiny, packing
billions of electronic components in an area
as small as only a few square millimeters.

DRAM is used to store the data or program codeneeded by a computer processor to function.
It is typically found in personal computers(PCs) and servers. Smartphones are also
growing the DRAM content they require, andthere is also increasing need for DRAM in
automobile electronics applications such asadvanced driver-assistance systems (ADAS).

While industry taxonomies typically describe morethan 30 types of product categories, semiconductors
can be classified into three broad categories:
1

NAND is the most common type of flash memory.
Unlike DRAM, it does not need power to retain
data, so it is used for permanent storage.
Typical applications include solid state drives(SSDs) used as laptop hard drives or secure
digital (SD) cards used in portable devices.

Logic (42% of industry revenues)
These are integrated circuits functioning
on binary codes (0 and 1) that serveas the fundamental building blocks
or “brains” of computing:Microprocessors are logic products such as
central processing units (CPUs), graphics
processing units (GPUs) and application
processors (APs) that process fixed instructions
stored on memory devices to execute complex
computing operations. Applications include
processors for mobile phones, personal computers,
servers, AI systems, and supercomputers.
General purpose logic products such as Field
Programmable Gate Arrays (FPGAs) do notcontain any pre-fixed instructions, allowing auser to program custom logic operations.
Microcontrollers (MCUs) are small computerson a single chip. A microcontroller contains one
or more processor cores along with memory
and programmable input/output peripherals.
MCUs perform basic computing tasks in myriads
of electronic products such as cars, industrial
automation equipment or consumer appliances.
Connectivity products, such as cellular modems,
WiFi or Bluetooth chips or Ethernet controllers,
allow electronic devices to connect to a wirelessor wired network to transmit or receive data.

Memory (26% of industry revenues)

3 iscrete, Analog, and Other (DAO)
D(32% of the industry revenues)
These are semiconductors that transmit,
receive, and transform information dealing with
continuous parameters such as temperatureand voltage:
Discrete products include diodes andtransistors that are designed to performa single electrical function.
Analog products include voltage regulatorsand data converters that translate analog
signals from sources such as voice into digital
signals. This category also includes power
management integrated circuits found in any
type of electronic device, and radio frequency(RF) semiconductors that enable smartphones
to receive and process the radio signals comingfrom the base stations of cellular networks.
Other products include optoelectronics,
such as optical sensors to sense light usedin cameras, as well as a wide variety of nonoptical sensors and actuators that can be foundin all sorts of Internet of Things devices.
9Semiconductors are used in all types of electronic
devices across multiple applications spanning the
major sectors of the economy (Exhibit 2). Each ofthese application markets requires semiconductors
from all three broad categories described above.
For example, mobile phones have practically as
much DAO content (essential for features such acellular connectivity, camera and power consumption
management) as logic content (which includes the
microprocessors that provide increasing computing
power with every new phone generation) andmemory (for storage of digital content on the device).
Approximately 65% of global semiconductor
revenues are from general-purpose componentsthat are used across multiple applications.

EXHIBIT 2

All types of semiconductors are indispensable in today’s economy, powering all sorts of electronic devices
Global semiconductor sales by application market, 2019 (%)

DAO1

33%

32%

18%

17%

48%
Logic

28%

Memory

39%

% of
total

46%

Overall
63%

59%

32%

28%

35%

42%

10%

6%

26%

64%

36%
22%

18%

MobilePhonesConsumerElectronics

PCs

ICT
Infrastructure2

Industrial

Auto

26%

10%

19%

24%

12%

10%

100%
$412B

1. Discrete, analog and optoelectronics and sensors
2. Information and Communications Technology infrastructure, including data centers and communication networks
Sources: SIA WSTS, Gartner

GLOBAL2019 SALES

Demand for semiconductors is highly global. The share of the global semiconductor demand thatcomes from each region is different depending on how the point of origin of demand is defined. While
semiconductors are typically sourced by the electronic device makers to build their products, ultimately
semiconductor demand is driven by the end users who purchase those devices. This is why, from ageographic standpoint, there are three different ways of measuring the origin of semiconductor demand,with reference to alternative points in the global electronics supply chain:

10

A

semiconductors need to be physically shipped to. For
example, with this approach the chips going into asmartphone designed by a US company but actually
manufactured by a Taiwanese contractor in a plant
located in mainland China, would be computed as
Chinese demand.



Location of the headquarters of the electronic
device makers. These firms are the customersof the chip companies, purchasing thesemiconductors that go into their devices.
Electronic device makers – commonly referred
to by the term original equipment manufacturers(OEMs) – typically design their products and decide
which components to use from which vendor. For
example, under this approach the semiconductorsthat go into a smartphone developed by a company
headquartered in the US would be computed as
US demand, even though the product may bephysically built in another country.
BC

Location of the end users that purchase theelectronic devices. Given that semiconductors arecomponents, semiconductor demand is ultimately
driven by sales of electronic devices to end users,
both consumers and businesses. In our example,
the value of the chips contained in smartphones
designed by a US company but assembled in China
would be distributed across all the countries in
the world where these smartphones are sold toconsumers.



Location where the device is manufactured/assembled: OEMs often do not manufacture
their devices in the same country where their
headquarters are located or where the engineering
team that designed the device is based. Instead,the devices are typically assembled in a
manufacturing plant located in a different or manydifferent countries, often by other firms commonlyreferred to as original device manufacturers(ODMs) or electronic manufacturing services(EMS). This is the location where the finishedExhibit 3 shows the geographic breakdown of the
global semiconductor demand using these threealternative lenses: the shares of countries or regions
are quite different depending on the criteria. But
none of the three potential approaches is deemed tobe the “correct” answer – they just reflect the diverseroles that countries/regions play in the broader
electronics industry.

EXHIBIT 3

Alternative views of geographic origin of semiconductor demand
Global semiconductor sales by geographic area, 2019 (%)
CriteriaA

Headquarters of theelectronic device maker

B

Where the device ismanufactured/assembled

33%

US

19%

26%

China1

25%
24%

35%

Taiwan9%

S. Korea

11%

Japan

10%

9%

Europe

10%

10%

Other

Location of the end usersthat purchase the devices

C

15%
12%

1%
2%
6%
20%
22%

1. Mainland China
Sources: BCG analysis with data from SIA WSTS, Gartner, IDC

11

Considering the location of the electronic
device makers (criterion A in the exhibit),the US still drives 33% of the total global
semiconductor demand, the highest participation
across all regions.

The US and China are thelargest semiconductor markets,
each accounting for 25%
of global consumption
In 2019 US-based firms collectively accounted
for about 45% market share in the large PCs andinformation and communications infrastructure(which includes data centers and network
equipment) application markets, and a 30% market
share in smartphones and industrial equipment.
China has emerged as the clear second region, after
tripling its participation in the past 10 years. The
rise of China as a large source of semiconductor
demand has been driven by the strength of its
local firms in smartphones, PCs and consumer
electronics: companies such as Huawei, Lenovo,
Xiaomi and Oppo/Vivo not only sell their products
for the domestic Chinese market, but also are major
competitors in other markets.

this intermediate step are not ultimately consumed
as products bought by Chinese end users, andinstead are re-shipped overseas as components ofmade-in-China devices exported to other countries.
Focusing on where the devices are effectively soldto end users (criterion C in the exhibit) shows where
semiconductor demand is ultimately coming from.
Based on available market data for the different
types of applications, we estimate that the value ofthe semiconductor content included in the devices
bought by Chinese consumers and businesses
represented approximately 24% of the global
semiconductor revenues in 2019, practically at parwith the US (25%) and a few percentage points
above Europe (20%). However, the China’s share of
global semiconductor consumption is expected tocontinue to increase in the next 5 years, as analysts
forecast that the growth of the Chinese domestic
market will outperform the rest of the world by anaverage of 4-5 percentage points in most electronic
device categories.

China is the top region under the end electronics
device manufacturing/assembly location criteria(criterion B in the exhibit), reflecting its strength inelectronics manufacturing, particularly smartphones
and consumer electronics products. As the world’s
main manufacturing hub, China was the destination
for approximately 35% of total global chips sales in
2019. But many of the chips that enter China through

12The structure of the semiconductor value chain
The industry value chain involved in the creation andproduction of any semiconductor is extraordinarily
complex and globalized. At a high level, it consistsof four broad steps, supported by a specialized
ecosystem of materials, equipment and software
design tools and core IP suppliers (Exhibit 4):

EXHIBIT 4

The semiconductor value chain includes seven differentiated activities
1 . Pre-competitive research(15 to 20% of total industry R&D)

2. Design

Manufacturing

4. Back End
Assembly, packaging& testing% of industry total, 2019

3. F ront End
Wafer fabrication

R&D

CAPEX

VALUE
ADD

R&D

CAPEX

VALUE
ADD

R&D

CAPEX

VALUE
ADD

53%

13%

50%

13%

64% 24%

3%

13%

6%

$412B

GLOBAL2019 SALESElectronic
Devices

R&D
$92B
CAPEX
$108B

5. EDA &Core IP6. Equipment& Tools

7. Materials

R&D

CAPEX

VALUE
ADD

R&D

CAPEX

VALUE
ADD

R&D

CAPEX

VALUE
ADD

3%

<1%

4%

9%

3%

11%

1%

6%

5%

VALUE
ADD

$290B

Sources: BCG analysis using data from Capital IQ (company financial reports) and Gartner (total market sizes)

13Pre-competitive research

15-20% of overall industry R&D

Pre-competitive research is aimed at identifying
the fundamental materials and chemical processes
to seed the innovations in design architecturesand manufacturing technology that will enable thenext commercial leaps in computing power andefficiency. It is typically basic research in scienceand engineering, the results of which ordinarily are
published and shared broadly within the scientificcommunity, as distinguished from proprietary
research and from industrial development, design
and production. Pre-competitive basic research
is qualitatively different from industry R&D: bothtypes are complementary, not redundant2. In
fact, pre-competitive research has been found to
stimulate and attract industry R&D3.
The average length of time between when a newtechnological approach is introduced in a research
paper and when it hits widescale commercial
manufacturing is estimated to be about 10-15 years,
but it could be much longer than that for scientificbreakthroughs that enable the current leading edge
technologies. For example, Extreme Ultra-Violet(EUV) technology that is fundamental for the mostadvanced semiconductor manufacturing nodes
took almost four decades from the early concept
demos to its commercial implementation in fabs.
While there is no available data for thesemiconductor industry, basic research typicallyaccounts for 15-20% of the overall R&D investment
in most leading countries. For example, in the US
it has remained stable over time at 16-19% of thetotal R&D. Basic research is performed by a global
network of scientists from private corporations,
universities, government-sponsored national labs
and other independent research institutions thatcollaborate in joint research efforts.
In particular, governments have a very significant
role in advancing basic research. A prior studyof federal R&D by the Semiconductor Industry
Association (SIA) identified 8 major semiconductor
technology breakthroughs that emerged out ofgovernment-sponsored research programs4. For
example, the gallium arsenide (GaAs) transistors
that enable smartphones to establish a wirelesscommunication link to cellular towers was createdin the Microwave and Millimeter Wave Integrated
2. For a good illustration of the differentiated role of pre-competitive
research and industry R&D, see the report by the United States
Government Accountability Office on Nanomanufacturing, January
2014. 3. For more information on the positive relationship between
federal and industry R&D and how increased federal R&D funding“crowds in” industry R&D spending, see the supplemental materialsof the report by the Semiconductor Industry Association, Sparking
Innovation, June 2020. 4. See Appendix C in Semiconductor Industry
Association, Sparking Innovation, June 2020.

Circuit (MIMIC) program of the Department of
Defense in the late 1980s.
The analysis of the total R&D investment in the US
across all sectors provides some insights on themagnitude and distinct profile of pre-competitive
research. Based on data compiled by the National
Science Foundation, the US federal government is themain contributor to basic research with 42% of theinvestment in 2018. An additional 30% was funded bystate governments, universities and other non-profit
research institutions, and the remaining 28% camefrom companies. In contrast, the share of privatecompanies in applied research and development –which typically follow after breakthroughs in basic
research – was close to 80%
EXHIBIT 5

US illustrates the critical role of governments in basic research,
although contribution to semiconductor sector seems trailing behind
Total US R&D investment across all sectors, 2018
TOTAL R&D
(100%)
13%

Development(63% of total)

22%

2%
34%

29%

Applied research(20% of total)

$580B

54%

Basic research(17% of total)

42%
8%

29%
11%

70%

Business

85%-

Federal government
Universities and other non-profit
Comparison of US federal government
share in total R&D investment, 201822%

Across all sectors

Semiconductors

Sources: BCG analysis with US National
Science Foundation and OECD data, SIA

13%

-9pp

14

Funding for semiconductor basic research in the
US seems to be trailing well behind the growth inapplied research and development. The SIA study
mentioned above found that the overall US federal
government investment in semiconductor-related
R&D – including basic research, applied researchand development – accounted for just 13% of
the total US semiconductor R&D in 2018. This
percentage is significantly below the 22% shareof federal government funding in the total US R&D
spend across all sectors. In fact, while US private
investment in semiconductor R&D as a percentage
of GDP has increased nearly 10-fold over the last 40
years, federal investment has remained flat. Given
the leading role that the US currently has in the mostR&D-intensive activities across the semiconductor
value chain, the impact of this gap in the fundingof basic research may go beyond the relativecompetitiveness of US firms and create a risk forthe overall industry’s ability to maintain its historicalpace of innovation.
In contrast, China is committing large sums to precompetitive research as part of its effort to build
a strong domestic semiconductor industry. In thelast 20 years China has been closing the gap with
the US on overall R&D spending. According to datafrom the Organization for Economic Cooperation
and Development (OECD), in 2018 China was theworld’s second biggest spender on R&D in absoluteterms: its total R&D investment was just 5% below
the US in Purchasing Power Parity terms. However,just about 5-6% of Chinese R&D spend currently
goes to basic research, significantly below all othercountries with high investment levels in R&D.
China’s new five-year plan for 2021-25 announced
in March clearly establishes boosting basic research
as a critical priority. Central government spending on
basic research will increase 11% in 2021, well above
the 7% planned for the overall R&D investment andthe 6% target for GDP growth. Semiconductors has
been designated as one of
the seven areas that will
be given priority in termsof funding and resources.

Chip design

53% of industry R&D
13% of industry capex
50% of the value added

Firms involved in design develop the nanometerscale integrated circuits which perform the criticaltasks that make electronic devices work, suchas computing, storage, connectivity to networks,
and power management. Design relies on highly
advanced electronic design automation (EDA)
software and reusable architectural building blocks(“IP cores”), and in some cases also outsourced
chip design services provided by specialized
technology suppliers.

Semiconductors are highly
complex products todesign and manufacture
Design activity is largely knowledge- and skillintensive: it accounts for 65% of the total industry
R&D and 53% of the value added. Indeed, firms
focusing on semiconductor design typically invest
12 to 20% of their annual revenues in R&D.
Development of modern complex chips, such as
the “system-on-chip” (SoC) processors that power
today’s smartphones, requires several years of effort
by a large team of hundreds of engineers, sometimes
leveraging external IP and design support services.
Development costs have been rising rapidly as
chips have become increasingly complex. The total
development cost of a new state-of-the-art systemon-chip for a flagship smartphone, including thespecialized blocks required to process audio, video orprovide high-speed wireless connectivity, could wellexceed $1 billion. Derivatives that reuse a significant
portion of a prior design or new simpler chips thatcan be manufactured in mature nodes would costjust $20 million to $200 million to develop.

15

Wafer fabrication(front end manufacturing)
13% of industry R&D
64% of industry capex
24% of the value added

Highly specialized semiconductor manufacturing
facilities, typically called “fabs”, print the nanometerscale integrated circuits from the chip design into
silicon wafers. Each wafer contains multiple chipsof the same design. The actual number of chips perwafer depends on the size of the specific chip: it
could vary between a hundred of the large, complex
processors that power computers or smartphones, tohundreds of thousands for small chips intended
to perform a simple function.
The fabrication process is intricate and requires
highly specialized inputs and equipment to achieve
the needed precision at miniature scale. Integrated
circuits are built in cleanrooms, designed to maintainsterile conditions to prevent contamination by
particles in the air that could alter the properties ofthe materials that form the electronic circuits. For
comparison, the ambient outdoor air in a typicalurban area contains 35,000,000 particles of 0.5
micron or bigger in size for each cubic meter, whilea semiconductor manufacturing cleanroom permits
absolutely zero particles of that size.
Depending on the specific product, there are 400
to 1,400 steps in the overall manufacturing process
semiconductor wafers. The average time to fabricate
finished semiconductor wafers, known as the cycle
time, is about 12 weeks, but it can take up to 14-20
weeks to complete for advanced processes. It utilizes
hundreds of different inputs, including raw wafers,
commodity chemicals, specialty chemicals as wellas many different types of processing and testing
equipment and tools, across a number of stages(Exhibit 6). These steps are often repeated many
hundreds of times, depending on the complexity ofthe desired set of electronic circuits.

16

EXHIBIT 6

Overview of the wafer fabrication process

Photoresist

Projected UV
lightPreparedsilicon wafer

Ions shower theetched areas,
doping them

Photomask

Silicon substrate

Lens

Patterns are projected
repeatedly onto wafer

Silicon wafer
The siliconwafers startout blank andpure in a nonconductive
state

Similar cycle is repeatedto lay down the metal link
between transistors

Unprotectedareas areremoved

DopingregionMetalconnector

1

2

3

4

5

Oxidationand coating

Lithography

Etching

DopingMetaldeposition& etching

The integrated circuit
patterns specified in
the design are mapped
onto a glass plate
called a photomask.
An ultraviolet (UV)light is applied totransfer the patterns
to the photoresist
material coating on
the wafer surface.
The photoresist thatwas exposed to thelight can now be
chemically removed

Areas of thesilicon wafer
unprotectedby photoresist
are removed
and cleaned
by gases or
chemicals

The wafer isshowered withionic gasesthat modify theproperties of
the new layer byadding a known
quantity of
impurities, suchas boronand arsenic.
Subsequentannealing will
diffuse these
impurities to amore uniform
densityLayers of insulating
and conducting
materials areapplied on a siliconwafer. The wafer
is then coveredby a uniform coatof photoresist

A similar
process isused to lay
down the metal
links between
transistors

Completedwafer
Each completed
wafer contains
hundred ofidentical
integrated
circuits. The
wafers are sent
to the back-end
manufacturing
processes(assembly,
packaging& testing)

Steps 1-4 are repeated hundreds of times with different chemicals tocreate more layers, depending on the desired circuit features

Advances in manufacturing process technology are
typically described by referring to “nodes”. The term
“node” is meant to refer to the size in nanometersof the transistor gates in the electronic circuits,
although over time it has lost its original meaningand has become an umbrella term to designate
both smaller features and also different circuitarchitectures and manufacturing technologies.
Generally, the smaller the node size, the more
powerful the chip, as more transistors can beplaced on an area of the same size. This is theprinciple behind “Moore’s Law”, a key observationand projection in the semiconductor industry thatstates that the number of transistors on a logic chip
doubles every 18 to 24 months. Moore’s Law has
underpinned the relentless pace of simultaneous
improvement in performance and cost for processors
since 1965. Today’s advanced processors foundin smartphones, computers, gaming consoles
and data center servers are manufactured on
5 to 10-nanometer nodes. Commercial chip
manufacturing using 3-nanometer process
technology is expected to begin around 2023.

17

While logic and memory chips used for digital applications greatly benefit from the scaling in transistor
size associated with smaller nodes, other types of semiconductors – particularly those in the DAO group
described above—do not achieve the same degree of performance and cost benefits by migrating toever smaller nodes, or simply use different types of circuits or architectures that would not work at moreminiaturized scales. As a result, today wafer manufacturing still takes place across a wide range of nodes
from the current “leading node” at 5 nanometers used for advanced logic to the legacy nodes above 180
nanometers used for discrete, optoelectronics, sensors, and analog semiconductors. In fact, only 2% of
the global capacity is currently on nodes below 10 nanometers (Exhibit 7).

EXHIBIT 7

Semiconductor manufacturing utilizes capacity across a wide range of nodes
Global manufacturing capacity by node and semiconductor type, 2019(% of 8” equivalent wafers per month)

21%

7%

Overall
33%

40%

DAO1
29%
76%

68%
79%
62%

Logic
39%
60%

24%

24%

Memory32%

5%(% of < 10 nm
total) (2%)

10-22 nm(37%)

28-45 nm
(13%)

55-90 nm(9%)

100-180 nm(19%)> 180 nm
(19%)

100%

1. Discrete, analog and optoelectronics and sensors
Sources: BCG analysis based on SEMI data

Front-end manufacturing is highly capital intensive
due to the scale and complex equipment needed
to produce semiconductors. A state-of-the-art
semiconductor fab of standard capacity requires
roughly $5 billion (for advanced analog fabs) to$20 billion (for advanced logic and memory fabs)
of capital expenditure, including land, building, andequipment. This is significantly higher than, forexample, the estimated cost of a next-generation
aircraft carrier ($13 billion) or a new nuclear power

plant ($4 billion to $8 billion)5. Capital expenditureof firms focusing on semiconductor manufacturing
typically amounts to 30 to 40% of their annual
revenues. As a result, wafer fabrication accounts
for approximately 65% of the total industry capital
expenditure and 25% of the value added. It isconcentrated primarily in East Asia (Taiwan, South
Korea and Japan) and mainland China.

5. SIA and BCG report “Government Incentives and US Competitiveness in Semiconductor Manufacturing”, September 202018

Assembly, packaging& testing(back end manufacturing)
3% of industry R&D
13% of industry capex
6% of the value added

This stage involves converting the siliconwafers produced by the fabs into finishedchips that are ready to be assembled into
electronic devices. Firms involved at thisstage first slice silicon wafers into individual
chips. Chips are then packaged into
protective frames and encased in a resin
shell. Chips are further rigorously tested
before being shipped to electronic device
manufacturers.
The back-end stage of the supply chain
still requires significant investments inspecialized facilities. Firms specializing inassembly, packaging and testing typicallyinvest over 15% of their annual revenues
in facilities and equipment. Although it isrelatively less capital-intensive and employs
more labor than the front-end fabrication
stage, new innovations in advanced
packaging are changing this dynamic.
Overall, this activity accounts for 13% of
the total industry capital expenditure andcontributed 6% of the total value addedby the industry in 2019. It is concentrated
primarily in Taiwan and mainland China,
with new facilities also being built recently
in Southeast Asia (Malaysia, Vietnam, and
the Philippines).
A highly specialized support ecosystem
Companies focused on semiconductor
design and production activities aresupported by an upstream ecosystemof specialized suppliers.

Electronic design
automation (EDA)

3% of industry R&D<1% of industry capex
4% of the value added

At the design stage, electronic design
automation (EDA) companies provide
sophisticated software and services to support
designing semiconductors, including outsourced
design of specialized application specificintegrated circuits (ASICs). With billions oftransistors in a single chip, state-of-the-art EDA
tools are indispensable to design competitive
modern semiconductors.
Core IP suppliers license reusable components
designs – commonly called “IP blocks” or “IPs”– with a defined interface and functionality
to design firms to incorporate into their chiplayouts. These also include foundation physicalIPs associated with each manufacturing process
nodes, as well as many interface IPs. EDA andcore IP vendors invest heavily in R&D – about
30 to 40% of their revenues – and accounted
for approximately 4% of the value added of theindustry in 2019.
Wafer processing andtesting equipment

9% of industry R&D
3% of industry capex
11% of the value added

Semiconductor manufacturing uses morethan 50 different types of sophisticated wafer
processing and testing equipment provided
by specialist vendors for each step in the
fabrication process. (Exhibit 8).

19

EXHIBIT 8

Semiconductor production involves more than 50 types of sophisticated specialized equipment
Breakdown of market size of semiconductor manufacturing equipment by major families, 2019 ($ Billion)
Front End

Back End
6
6

16

12
12

3

3

$64B

2

1

2

1

Lithography

Deposition
RTP 1 andoxidationdiffusionMaterial
removal andcleaning
Photoresist
processing

Process control
Other wafer
Assembly(metrology andfabricationequipment
inspection)equipment
DopingManufacturing
Test and related
equipment
automationequipment

Total# Equipment types
12

4

6

1

12

4

16

2

2+

3

5

50+

1. Rapid thermal processing
Sources: Gartner

Lithography tools represent one of the largest
capital expenditures for fabrication players anddetermine how advanced of a chip a fab can
produce. Advanced lithography equipment,
specifically those that harness Extreme
Ultra-Violet (EUV) technology are required to
manufacture chips at 7 nanometers and below.
A single EUV machine can cost $150 million.
Metrology and inspection equipment isalso critical for the management of thesemiconductor manufacturing process.
Because the process involves hundreds ofsteps over one to two months, if any defects
occur early in the process, all the work
undertaken in the subsequent time-consuming
steps will be wasted. Strict metrology andinspection processes using specialized
equipment are therefore established at criticalpoints of the semiconductor manufacturing
process to ensure that a certain yield can be
confirmed and maintained.

Modern fabs also have advanced
automation and process control systems for
direct equipment control, automated materialtransportation and real-time lot dispatching,with many of the newest facilities almost
entirely automated.
Semiconductor manufacturing equipment also
incorporates many subsystems and components
with specific functionality, such as optical or
vacuum subsystems, gas and fluid management,
thermal management or wafer handling. Thesesubsystems are provided by hundreds ofspecialized suppliers.
Developing and fabricating such advanced,
high-precision manufacturing equipment
also requires large investments in R&D.
Semiconductor manufacturing equipment
companies typically invest 10 to 15% of theirrevenues in R&D. Overall semiconductor
equipment manufacturers suppliers accounted
for 9% of the R&D and 11% of the value
added of the industry in 2019.
20

also require advanced technology to produce.
For example, the polysilicon employed to makethe silicon ingot that is subsequently sliced into
wafers is required to have a purity level that is
1,000 times higher than the level required for solar
energy panels, and is provided primarily by just four
companies, with a combined global market shareabove 90%. Exhibit 9 shows the breakdown of
the global sales of semiconductor manufacturing
materials in 2019 across the key families used in
front-end and back-end manufacturing.

Materials
1% of industry R&D
6% of industry capex
5% of the value added
Finally, firms involved in semiconductor
manufacturing also rely on specialized suppliersof materials. Semiconductor manufacturing uses
as many as 300 different inputs, many of which

EXHIBIT 9

Semiconductor production uses hundreds of unique materials and specialty chemicals
Breakdown of market size of semiconductor manufacturing materials, 2019 (% of $ Billion)
Front End (wafer fabrication)

7%

2%

Back End (assembly, packaging & testing)

7%

3%

3%

15%
15%

7%
16%

$33B
36%

13%

$19B

10%

Front End
Materials

12%

Back End
Materials

6%48%

Silicon wafers

Leadgrames

Photomask

Organic substrates

Photoresist and ancillary chemicals

Ceramic packages

Gases

Encapsulation resins

Wet chemicals

Bonding wire

CMP slurries and pads

Die attach materials

Sputtering target

Others1

Others1. Chemical-mechanichal planarization
Sources: BCG analysis based on data from SEMI, IHS and HSBC

21

The main front-end materials include:
Polysilicon: is a metallurgical grade silicon in
ultra-refined purity levels, suitable for use in
semiconductor wafer production.
Silicon wafers: Polysilicon is melted, formed into
single crystal ingots which are then sliced into wafers,
cleaned, polished, and oxidized in preparation forcircuit imprinting within fabrication facilities.
Photomask: A plate covered with patterns used in thelithography process. The patterns consist of opaqueand clear areas that prevent or allow light through.
Photoresist: A special material that undergoes achemical reaction upon exposure to light. Silicon wafers
are covered with a photoresist layer, which is imprinted
with the patterns contained in the photomask during
the lithography process.
Wet processing chemicals: Used in the etching andcleaning steps of the semiconductor manufacturing
process, and include solvents, acids, etchants,
strippers and other products.
Gases: Used to protect wafers from atmosphericexposure. Other gases are used in the semiconductor
manufacturing process as dopants, dry etchants, andin chemical vapor deposition (CVD).
Chemical Mechanical Planarization (CMP) slurries:
Materials used for polishing the surface of the wafer
after the film deposition step to provide a flat surface.

The unique simultaneous high R&D and high capitalintensity of semiconductors
Semiconductors are very complex products to design
and manufacture. As a result, the semiconductor
industry presents both high R&D and high capitalintensity. Overall, we estimate that in 2019 the industry
invested about $90 billion in R&D and $110 billion incapital expenditure globally across all the activities inthe value chain. These two figures combined represent
almost 50% of the $419 billion in global semiconductor
sales in the same year.
As Exhibit 4 above showed, while 65% of the totalindustry R&D investment (excluding pre-competitive
research) is made in the design layer of the value chain,
there is also significant R&D activity in EDA and coreIP, semiconductor equipment and wafer manufacturing.
Similarly, 65% of the total industry capital expenditureis incurred for wafer manufacturing, but assembly andtest, materials and even design also require significant
investments in advanced facilities and equipment.
Considering the investments made by firms acrossthe entire global value chain, no other industry has
the same high level of intensity in both R&D (22% ofannual final chip revenues, ahead of pharmaceuticals)
and capital expenditure (26% of final chip revenues,
ahead of utilities). (See Exhibit 10.) This extremely highlevel of investment intensity creates the need for large
global scale and specialization.

Back-end materials include leadframes, organic
substrates, ceramic packages, encapsulation
resins, bonding wires and die-attach materials. They
typically have relatively lower technical barriers to
produce compared to the wafer fabrication materials
described above.
Production of these highly specialized materials
is done in large plants, which also
require high investments. Annual
capital expenditure by the leading
global suppliers of silicon wafers,
photoresistors or gases typicallyranges between 13 and 20% of theirrevenues. Overall, materials suppliers
contributed 6% of the total capital
expenditure and accounted for 5% of
the value added of the industry in 2019.

22

EXHIBIT 10

The semiconductor industry ranks high simultaneously in both R&D and capital intensity
R&D as % of Revenues, 201922%
Rest ofvalue chain1

4%

Manufacturing2

6%

Rest ofvalue chain1

21%

Design

26%

25%

2%

21%

3%

19%

17%

14%
Manufacturing2 20%

9%DesignCapital Expenditure as % of Revenues, 2019

7%

12%

Semiconductors

Software andComputer Services

Pharmaceuticals
and Biotech

Technology
Hardware andEquipment

Media

Semiconductors
Utilities

Power
Generation

Trucking

Broadcasting andinfo. services

1. Includes EDA and Core IP, Equipment and Materials
2. Includes Wafer Fabrication and Assembly, Packaging & Testing
Sources: BCG analysis based on Capital IQ data

Semiconductor business models
Since the inception of the semiconductor industry
in the 1960s, its structure has evolved from its
original form of only vertically integrated firms doing
all stages of production. The dramatic increasein technology complexity and need for scale toafford massive investments to keep the pace ofinnovation in both design (in the form of R&D) andmanufacturing (in the form of capital expenditure)favored the emergence of specialized players.
Today semiconductor companies may focus on
one layer of the supply chain or integrate vertically
across several layers. No company or even entire
nation is vertically integrated across all. There are
four types of semiconductor companies, dependingon their level of integration and business model(Exhibit 11): integrated device manufacturers (IDMs),
fabless design firms, foundries and outsourced
assembly and test companies (OSATs).

23

EXHIBIT 11

Technology complexity and need for scale have led to emergenceof business models focused on a specific layer of the value chain
Design% O F TOTA L
INDUSTRY

Manufacturing
Front End
Wafer fabrication

Back End
Assembly & testing

Capacity(2019)

Sales(2019)

Logic

21%

53%

Memory

98%

98%

DAO1

94%

75%

Overall

67%

71%

Logic

79%

47%

Memory

2%

2%

DAO1

6%

25%

Overall

33%

29%

Company names are illustrative (not exhaustive)

Integrated Device
Manufacturers (IDMs)

IDMs rely on
foundries for a
portion of their
manufacturingneeds

Layer Specialization

Fabless design

Foundries

IDMs rely
on OSATs
for a portion of
their assembly,
packaging &testing needs

Outsourced
Assembly &Testing (OSATs)
1. Discrete, analog and optoelectronics and sensors
Sources: BCG analysis with data from SIA WSTS, Gartner

IDMs
Segment economics(% of annual revenue, 2016-2019)• Gross Margin: 			
52%• R&D: 				• Capex: 			
• Operating Cash Flow:

14%
20%
17%

IDMs are vertically integrated across multiple partsof the value chain, performing design; fabrication;
and assembly, packaging and test activities inhouse. In practice, some IDMs have hybrid “fablite” models where they outsource some of theirproduction and assembly.
In the early decades of the industry, the IDM model
was predominant, but the rapidly increasing size ofthe investments in both R&D and capital expenditure
created the simultaneous need for both scale andspecialization, which led to the emergenceof the fabless-foundry model.

Currently the IDM model is more common for firms
focused on memory and DAO products, which arelargely general-purpose components and morescalable. IDMs accounted for approximately 70% of
the global semiconductor sales in 2019.
Fabless
Segment economics(% of annual revenue, 2016-2019)• Gross Margin:			50%• R&D: 				
20%• Capex: 			
4%• Operating Cash Flow: 		20%
Fabless firms choose to focus on design andoutsource fabrication as well as assembly,
packaging, and testing. Fabless firms typicallyoutsource fabrication to pure-play foundries and
OSATs. The fabless model has grown along with thedemand for semiconductors since the 1990s as thepace of innovation made it increasingly difficult for
many firms to manage both the capital intensity of24manufacturing and the high levels of R&D spendingfor design. As technical difficulty and upfront
investment soared with the migration to smaller
manufacturing nodes, total semiconductor sales
accounted for by fabless firms increased from lessthan 10% in 2000 to almost 30% in 2019.
Logic chips are fundamentally the realm of fablessfirms with the notable exception of Intel and, more
recently and at a lower scale, Samsung. This
dynamic is due to the pace at which the market
demands improved power and performancecapabilities in order to support the quick cycles
of smartphones and emerging leading-edge
applications in AI and high-performance computing.
Foundries
Segment economics(% of annual revenue, 2016-2019)40%• Gross Margin: 			
• R&D: 				
9%• Capex: 			
34%• Operating Cash Flow: 		
15%
Foundries address the fabrication needs of fablessfirms and IDMs alike, as most IDMs do not havesufficient installed manufacturing capacity in-houseto cover all their needs. This business model enables
foundries to diversify the risk associated with thelarge upfront capital expenditure required to build
modern fabs across a larger customer footprint ofdesign firms and IDMs. Most foundries are focused
purely on manufacturing for third parties, althoughsome IDMs with strong manufacturing capabilities
may also choose to make chips for others in addition
to their own.
Leaving memory aside, foundries have added 60%of the incremental capacity in the industry for
DAO and logic products during the past five years.
Currently foundries account for 35% of the totalindustry manufacturing capacity, or 50% if memory
is excluded. Their share rises to 78% in advanced(14 nanometers or below) and trailing nodes (20to 60 nanometers) using the more advanced12”/300mm wafer size. Furthermore, the only twocompanies that can currently manufacture at theleading 5 nanometer node are foundries.

OSATs
Segment economics(% of annual revenue, 2016-2019)• Gross Margin: 			
17%• R&D: 				
4%• Capex: 			
16%• Operating Cash Flow: 		2%

OSATs provide assembly, packaging and test
services under contract to both IDMs and fablesscompanies. This part of the supply chain was first
offshored by some US IDMs starting back in the
1960s because of its lower capital intensity and theneed for lower-skilled labor. The fabless-foundrymodel then also led to the emergence of specialized
OSAT companies.

25

A need for massive global scale
The economics described above, together withthe deep expertise in the complex technology
required to produce semiconductors, create
natural barriers to entry across the core activities
in the supply chain, leading to a relatively
concentrated supplier base in each activity.
In manufacturing, the sheer size of the upfront
investment required to build new capacity
acts as a major barrier. As an illustration, theaggregated annual capital expenditure of the top
5 foundries between 2015 and 2019 amounted
to approximately $75 billion, or an averageof $3 billion per firm per year, equivalent tomore than 35% of their annual revenues.
While semiconductor design does not requirelarge amounts of capital expenditure, its highR&D intensity also creates significant scaleadvantages and acts as a barrier to entry. For
example, the top 5 fabless firms invested $68
billion in R&D in the 5 years between 2015 and2019, or an average of $2.8 billion per firm peryear, equivalent to 22% of their revenues.
Achieving a satisfactory return on these massive
investments is possible only for firms with verylarge scale. This is the reason why, acrossthe different activities in the semiconductor
supply chain, the top 3 players globally
generally account for between 50% and 90%of their respective segment revenues.

26

A Global Integrated Structure
Based on Geographic SpecializationThe semiconductor supply chain is truly global: six major
regions (US, South Korea, Japan, mainland China,
Taiwan and Europe) each contribute 8% or more to thetotal value added by the semiconductor industry in 2019.
As Exhibit 12 shows, the typical journey of a semiconductor
involves most if not all of these geographic areas at different
stages during the design and manufacturing process.

EXHIBIT 12
DesignThe semiconductor value
chain is truly global andrelies on the specialized
capabilities of different
geographic areas

2

1
5

Equipment

3

5

4

12 6

5
11

Commercialization

9
10

8

7
Materials

Manufacturing

Illustrative: The global journey of asmartphone application processor

DesignCommercialization
1

2

3

A European
firm licenses IP
on application
processor
architecture

A US EDA firm
provides highlysophisticated software
for chip design

A US
fabless firm
designs (andcommercializes)
the chip4

The chip is selected(“designed in”) by a US
smartphone OEM to
power its new device

11

The chip is shippedto the smartphone
OEM’s assembly
partner in China,
who incorporates it
into a circuit board
inside the phone

12

The smartphone
is sold to a
consumer in the US

Materials

Equipment

Manufacturing
59Highly advanced manufacturing
equipment is developed bycompanies in the US, Japanand Europe, leveraging
decades of global R&D efforts

10
A foundry in
TaiwanImprints the wafers
with an array ofintegrated circuits;“patterned” wafers
are stacked andinterconnected

6

7

8

Silicon dioxide
is minedin the US andrefined into
metallurgicalgrade silicon

The silicon is melted andre-crystallized to form alarge single crystal called
an ingot by a polysilicon
manufacturer in Japan

The ingot is sliced
into several wafers
in South Korea,
which are thenpolished and shipped
to a fabrication plant

Physical flows

Individual chips
are separated
and packaged
by an OSAT in
Malaysia

Intangible flows (software, IP)

27and institutions to collaborate and pool resources.
Together, they undertake pre-commercial research
to pursue scientific breakthroughs that lead to major
leaps in semiconductor technology.
• Geographic specialization. Regions are focused
primarily on different activities within thesemiconductor supply chain. This regional
division of tasks has been driven by comparativeadvantage developed over the past decades of
the industry’s history.
•T rade liberalization. Global trade policies enable
participants in the semiconductor industry to movegoods, equipment, capital, IP and talent acrossborders, effectively supporting the geographic
specialization across the semiconductor supply chain.

To some extent, this highly distributed structure of
the semiconductor supply chain follows the global
geographic footprint of the electronics industry thatthe semiconductor industry serves. Proximity to
the leading firms that develop these devices may
be important for semiconductor design companies.
Different regions have strength in certain types ofend electronics devices or applications:• The US is the global leader in the design of electronic
devices. As shown on Exhibit 2, US consumer
electronics, information technology, automotive andindustrial firms source 35% of the semiconductors
used in the world, with particular strength in advanced
chips for PCs and data centers.
• Greater China (including Taiwan) is the largest
manufacturing global hub for electronic devices.
Together, local original equipment manufacturers(OEMs) and contract manufacturers that assemble
devices designed by other companies based
elsewhere are responsible for more than 60% of
the world’s production of consumer electronics,
smartphones, and PCs. Proximity to these companies
that are the ultimate destination of the components
to be assembled into devices may be important for
semiconductor manufacturing companies.
• Europe is the global leader in automotive andindustrial automation equipment; Japan is strong inthese two sectors and also consumer electronics;
South Korea is a global force in smartphones andother consumer electronics, too.

While proximity to customers is clearly a significant
driver of the global, interdependent structure of
the semiconductor supply chain, there are three
additional key factors:• Global R&D networks. International collaboration
has allowed multinational companies, universities

Need for deep technical know
how and massive scale havecreated a highly specialized
global supply chain
We now look at these three factors in more detail.

Global R&D networks
A significant portion of the R&D investment by thesemiconductor industry is in fundamental research
into science breakthroughs, invested many years
ahead of a potential commercial application.
Semiconductor firms and institutions such asuniversities and government-funded advanced
science labs typically collaborate on this precompetitive research to share the costs of research
and avoid duplication of efforts.
China and the US are the top two countries inscientific publications related to semiconductors
filed in the past 10 years6. However, our analysis
of scientific publications shows that fundamental
semiconductor research often involves collaboration
across borders:• 36% of the scientific publications related to
semiconductors published by Chinese institutions
were co-authored with institutions from othercountries – in fact, the US was the largest research
partner for Chinese institutions.
• In the case of publications from US institutions,
60% were co-authored with institutions from othercountries, with China as the largest partner followedby Germany and South Korea.

6. According to BCG analysis of ~150,000 scientific publications related to semiconductors published between
January 2010 and December 2020, based on data sourced from Derwent Innovation and LexisNexis PatentSight

28

In addition, the semiconductor industry has
created or is a core contributor to a numberof organizations that bring together global
companies, universities and research institutions
to support international collaboration in R&D,
such as IMEC, CEA-Leti and A*STAR(see sidebar).

Select examples of leading global
semiconductor research institutions• The Interuniversity MicroElectronics Centre(IMEC) was established in Belgium in 1984 asa non-profit organization. Today, IMEC is aninternational innovation hub in nanoelectronics,
semiconductors and other digital technologies.
It has research labs in seven countries acrossEurope, Asia and North America, with more than
4,000 researchers from about 100 different
nationalities. IMEC has a vast global networkof over 600 partners, including governments
and governmental agencies, universities
and corporations.
• CEA-Leti was established in France in 1967
as a non-profit research branch of the French
Alternative Energies and Atomic Energy
Commission (CEA). Today it is one of the world’s
largest research institutes for applied researchin microelectronics and nanotechnology, helping
companies to bridge the gap between basic
research and manufacturing. CEA-Leti has
1,900 researchers (about 40% of whom areforeign nationals) and 250 active industrial
partners including multiple leading global
semiconductor firms.
• Singapore’s Agency for Science, Technology andResearch (A*STAR) was established in 1991 tofoster R&D that is aligned to areas of competitive
advantage and national needs for Singapore,
currently spanning four technology domains set
by the nation’s five-year R&D plan. It collaborates
with leading global companies through joint
research programs hosted in its advanced R&D
lab facilities. In semiconductors A*STAR ispioneering joint research with industry partners
in areas such as beyond 5G radio frequency(RF) technologies, power electronics, advanced
packaging, microelectromechanical systems(MEMS), and artificial intelligence hardware within-memory computing.
• Semiconductor Research Corporation (SRC) wasestablished in the US in 1982. It brings together
over 100 universities, 20 leading semiconductor
companies and 3 government agencies withthe objective of accelerating pre-competitive
academic research in microelectronics. SRC
pools industry and government funds to create
larger and more effective research programs inbreakthrough semiconductor technology areasthat are undertaken by its network of over 2,000
SRC-sponsored university researchers.

In fact, some of the most critical recent
advancements in semiconductor technology
were the result of several decades of global
R&D collaboration. Fin field-effect transistor(FinFET) technology enabled manufacturing
at 22 nanometers and is the dominanttransistor design for today’s leadingedge chips at 5 nanometers. While the US
pioneered the development of the FinFET
technology and is the source of 48% of therelated patents, the rest of the world also
contributed heavily to applied R&D leading tocommercialization. Specifically, Taiwan, whichhosts several of the world’s leading foundries,
has contributed 20% of the FinFET patents.
In the case of EUV, the technology that
underpins the equipment utilized to
manufacture semiconductors on the 7and 5-nanometer nodes and below, its
development started in the 1980s with
fundamental research done in the US andJapan on the use of soft X-rays, leading to
the first demonstration of the technology in1986. In the 1990s and early 2000s, NTT in
Japan, Bell Labs and Lawrence Livermore
National Laboratory in the US and the
University of Twente in the Netherlands
further pushed the research in thistechnology. ASML, a company based in the
Netherlands, then sought to further develop
and commercialize EUV in partnership withinstitutions like IMEC and corporations
including Intel (headquartered in the US),
Samsung (South Korea), and TSMC (Taiwan).
Together, ASML and its global partners
funded R&D during the pre-commercial stageof the technology, and subsequently ASML
invested $8 billion to put the technology inproduction in modern fabs beginning in 2018.
In addition to the global collaboration in thedevelopment of the underlying technology,
EUV also relies on a global supply chain: as
Exhibit 13 shows, today the EUV lithographyequipment developed by ASML contains
about 100,000 parts provided by over 5,000
suppliers spread across the globe.

29

EXHIBIT 13
1

EUV equipment integrates
components from a global
network of more than 5,000
specialized suppliers

27%

North America

2

2

32%

Netherlands

3
5

14%
EMEA1

4

6

27%
Asia

Sample EUV key components

5
Stage(Rear faceelectrostaticadsorption)

3

MirrorPhotoresist
Silicon wafer

1

UK

Vacuum system
Edwards: Keeps system
in vacuum to minimize
EUV absorption by air

1
Photomask

2
EUV light

4

Share of total
number of
suppliers

Stage

2

US

EUV light source
Cymer2 : System uses
CO2 laser to vaporize
50k molten tin dropletsto generate EUV
light (13.5nm wavelength)
Note: ¾ of light source
costs are from Europe

2 Germany

3 Germany

Laser & power source
Trumpf: CO2 laser
supported by 1MW power
supply and advanced
cooling system

Optical system
Zeiss3 : Precise mirrorsthat project light onwafer for patterning

Other tool parts
Mechatronics/electronics,
ultra low thermal expansion
glass for optics

4 Germany

5 Netherlands

6 Japan

Wafer chuck
Berliner Glass2:
Electrostatic chuckused to clamp wafer
during litho process

VesselVDL: Modular housing
for EUV light source

Other tool parts
Structural
ceramics,
photoresist andphotomask

1. EMEA excluding Netherlands 2. Subsidiary of ASML 3. ASML owns minority interest
Source: ASML; expert interview; BCG research and analysis

30

Geographic specialization
As mentioned above, six major regions have a significant participation in the total global output of thesemiconductor industry. But each region plays a different role in the global semiconductor supply chain:broadly speaking, the US leads in the activities that are most intensive in R&D: EDA and core IP, chip design
and manufacturing equipment. Raw materials and manufacturing (both wafer fabrication as well as assembly,
packaging and testing), which are more capital intensive, are largely concentrated in Asia (Exhibit 14).

EXHIBIT 14

Regions specialize in different activities of the value chain:
US leads in R&D intensive activities; Asia leads in manufacturing
Semiconductor industry value added by activity and region, 2019 (%)

R&D
intensive

EDA &Core IP
3%

74%

Logic
30%

37%

Memory
9%

29%

CapEx
intensive

Manufacturing
equipment
12%

CapEx andlabor intensive

5% 7% 3% 5%

67%

DAO
17%

7% 3% 6%

41%

4%

16%

22%

Wafer
fabrication
19%

12%

16%

20%

2%

China1

16%

19%

25%

Taiwan

9%

9%

24%

S. KoreaJapan

Europe

5%

8%

3%

19%

12%

17%

9%

11%

16%

6%

4%

18%

27%

38%

Semiconductor
consumption

19%

32%

38%

Overallvalue chain
100%

8%

59%

11%

Assembly,
packaging& testing
6%

24%

4%

Materials
5%

US

20%

14%

20%

5% 4%

3%

6%

13%

10%

4%

22%

Other2

1. Mainland China 2. Other includes Israel, Singapore and the rest of the worldNotes on regional breakdown: EDA, design, manufacturing equipment and raw materials based on company revenues and company headquarters location.
Wafer fabrication and Assembly & testing based on installed capacity and geographic location of the facilities
Sources: BCG analysis with data from company financials, Capital IQ, Gartner, SEMI, IHS Markit

31

Specialization based on comparative advantage underpins this differentiated regional focus across thesemiconductor supply chain.
Despite the stagnation in government support for basic research in the last decades described ealier, theUS is the global leader in semiconductor R&D. It is home to some of the world’s most prominent clusters oftechnical universities and semiconductor companies, which has resulted in a virtuous cycle of education,
research, entrepreneurship, and access to capital to fuel innovation. While China has been investing
aggressively in semiconductor R&D and currently files the largest total number of semiconductor academic
research papers and patents annually, the US is still the source of the most relevant innovation in theindustry: together with Europe, it has the highest conversion from patents filed into triadic patents – typicallyregarded as a marker of high-quality innovation with global commercial potential – in semiconductors, andthe average number of citations per US semiconductor patent is between three and six times higher than forpatents from any other country in the world (Exhibit 15).
EXHIBIT 15

The US is the world leader in high-quality semiconductor innovation
Total number ofsemiconductors
patents filed

Semiconductor patent activity in 2010-19 by region of invention
Average number of citations per semiconductor patent
10

8

US

6

4

S. Korea
Taiwan

Japan

2
China

Europe

0
0%

10%

20%

30%

40%

Conversion into triadic patents1
1. Triadic patents are those filed in the world’s largest markets (US, EU and Japan) and are typically considered to cover higher-value inventions.
Conversion ratio calculated as total number of semiconductor triadic patents per OECD database in 2010-16 divided by the total numbers ofsemiconductor patents filed in home patent office and at least one other major patent office (US, Europe, Japan, China or South Korea) in 1999-2015
Source: OECD Patent Database, Derwent Innovation, LexisNexis PatentSight, BCG Center for Growth & Innovation Analytics (GIA)

In chip design, where US companies – including
both fabless firms and IDMs—have a combined
share of almost 50% of global semiconductor sales,
the critical success factors are access to highly
skilled engineering talent and a thriving innovation
ecosystem, especially leading universities. 10 of the
top 20 semiconductor design companies (including

both fabless and IDMs), as well as 4 of the top 5
EDA and core IP companies by 2019 revenue, areheadquartered in the US. US design companies
invest more heavily in R&D than their peers:
according to their financial statements, on average
US companies involved in semiconductor design
spent 18% of their 2019 revenues on R&D.

7. Triadic patents are a series of corresponding patents filed at the European Patent Office (EPO), the United States Patent
and Trademark Office (USPTO) and the Japan Patent Office (JPO), for the same invention, by the same applicant or inventor

32

Security and Emerging Technology (CSET)9. This islinked to the large pipeline of global talent comingfrom US technical universities: international students
comprise around two-thirds of graduate students inelectrical engineering and computer science, andmore than 80% stay in the country after completing
their degrees.
In fabrication, which is extremely capital intensive,
the availability of attractive investment conditions– particularly government incentives – andaccess to robust infrastructure (power and watersupply, transportation and logistics) and a skilled
manufacturing workforce at competitive rates
have traditionally been the key success factors. As
shown in our prior report focused on semiconductor
manufacturing economics, government incentives
may account for up to 30-40% of the 10-year total
cost of ownership (TCO) of a new state-of-the-art
fab, which is estimated to amount to $10-15 billion
for an advanced analog fab and $30-40 billion foradvanced logic or memory.

A look into workforce location also highlights the US
leadership position in semiconductor design:
about 50% of the engineers employed by the top
global semiconductor companies involved in design
are located in the US8. This figure includes engineersfrom both US and non-US firms. In parallel, design
companies increasingly rely on access to global
engineering talent pools, particularly in India, where
we estimate that 20% of the world’s semiconductor
design engineers sit today.
Foreign talent contributes decisively to the US
leadership in semiconductor innovation. Looking
back in history, some of the most fundamental
semiconductor technology breakthroughs that are
still used in most modern semiconductors – suchas the metal–oxide–semiconductor field-effect(MOSFET) transistor and the complementary
metal–oxide–semiconductor (CMOS) fabrication
process -- were developed by immigrants to the
US. At present about 40% of the high-skilled
semiconductor workers in the US were born abroad,according to a recent study by the Center for

US leads in R&D intensive
activities, supported by
its “talent magnet”, Asia
leads in capital intensive
activities, supported bygovernment incentives
The East Asia region (including Japan, South
Korea and Taiwan) and mainland China currently
concentrate about 75% of the world’s total
semiconductor manufacturing capacity– including
all the leading edge capacity at 7 nanometers andbelow currently in operation– and under current market
conditions its share is
expected to continue risingover the next decade.
According to our analysis
summarized in Exhibit 16, theTCO of a new fab locatedin the US is approximately
25-50% higher than in Asia, and 40-70% of thatdifference is attributable directly to government
incentives, which are currently much lower in the US
than in alternative locations.

8. The total number of design related positions has been estimated based on publicly available profiles on Linkedin for the top 10
fabless and IDM players. The number may be underestimated for certain regions such as China due to the availability of public data.
9. Center for Security and Emerging Technology (CSET), The Chipmakers. U.S. Strengths and Priorities for the High-End
Semiconductor Workforce, September 2020

33

EXHIBIT 16

Manufacturing economics are significantly more favorable in Asia,with government incentives driving most of the cost advantage
Estimated 10-year Total Cost of Ownership (TCO 1) of reference fabs by location (US indexed to 100)
Advanced Logic

Advanced Memory

Advanced Analog

100

US

100
+29%

Asia other 2

78

79

n.a.

+23%

China3

100
+27%
+47%

+20%

63

66

68

What drives the higher TCO of US-based fabs
% of incremental TCO for US-based fabs

Government incentives

16%

12%

2%

Construction

Labor

16%

Utilities

3%

70%

7%
12%
57%

44%

24%
36%

1. TCO includes capital expenditure (upfront land, construction and equipment) + 10 years of operating expenses (labor, utilities, materials, taxes) 2. Refers
to Taiwan and South Korea for logic, South Korea and Singapore for memory 3. With technology sharing agreements that give access to additional incentives
such as equipment lease back with advantageous terms
Source: BCG analysis

In particular, Taiwan has been investing in thedevelopment of its domestic semiconductor
manufacturing industry since 1974, when thegovernment selected semiconductors as a key focus
industry to expand the economy beyond agriculture.
Policies pursued by the government included both
direct support in the form of setting up R&D labs
and industrial parks and providing incentives forthe construction of new fabs such as generous
tax-credits that could cover as much as 35% of
their capital expenses and 13% of their equipment
purchases, as well as indirect incentives such asreform of the financial sector and capital markets
to facilitate access to funding. While several of the
incentive programs were reduced after 2009-2010,
we estimate that Taiwan still provides incentives for
new fabs worth 25-30% of their overall total costof ownership over a 10-year period. This is in linewith other Asian locations such as South Korea andSingapore, but currently well below mainland China.
In contrast, the incentives to new fab construction
currently available in the US and Europe are
estimated to reach just 10-15% of the total costof ownership10.

10. For further discussion of government incentives for semiconductor manufacturing, see our prior report“Government Incentives and US Competitiveness in Semiconductor Manufacturing”, September 2020.

34

In the late 1980s and 1990s Taiwanese firms pioneered the foundry model, specializing in manufacturing thechips designed by firms from other regions. Today Taiwan is home to 2 of the 5 largest foundries globallyand hosts 20% of the total global capacity. Along with Intel (US) and Samsung (South Korea), TSMC is oneof three firms that can produce logic chips in advanced nodes (10 nanometers or below), which are requiredfor compute-intensive devices such as data center/AI servers, PCs, and smartphones. In fact, almost all of
the world’s capacity in the leading nodes (5 and 7 nanometers) is located in Taiwan (Exhibit 17).
EXHIBIT 17

East Asia + China concentrate about 75% of the wafer fabrication capacity;in particular, all advanced logic capacity < 10nm is currently located in Taiwan and South Korea% OF
GLOBALCA PAC I T Y

Breakdown of the global wafer fabrication capacity by region, 2019 (%)

5%

Memory

14%

11%

44%

20%

4%
8%

2%

9%

8%

13%

9%

13%

6% 7%

22%

22%

7%

26%

7%

100%

92%

< 10 nm43%10-22 nm

3%

28%

33%

5%

12%

Logic
28-45 nm6%

> 45 nm

9%

19%

47%

23%

DAO1

19%

17%

Total

13%

16%

US

China

6% 5% 4%

31%
5%

10%
27%

20%

Taiwan19%

S. Korea

Japan

17%

Europe8%

Other2

1. Discretes, analog and optoelectronics and sensors
2. Other includes Israel, Singapore and the rest of the world
Sources: BCG analysis with data from SEMI fab database

In comparison, assembly, packaging and testing ismuch less capital intensive. While the annual capital
expenditure of foundry companies is typically around
35% of their revenues, for leading firms specializingin outsourced semiconductor assembly and testing(OSATs) capital expenditure typically runs at lessthan half of that level, at approximately 15% of theirrevenues. Given the lower capital intensity, the costof labor is a key competitive factor for OSAT firms.
According to data from the Conference Board11,
the average manufacturing wages for skilled laborin mainland China, Taiwan and Southeast Asian

countries such as Singapore and Malaysia are up
to 80% below US levels. Today 9 of the 10 largest
OSAT firms by revenue are headquartered inmainland China, Taiwan and Singapore. In termsof capacity location, mainland China and Taiwan
account for more than 60% of the world’s assembly,
packaging and testing capacity. Recently OSAT
firms have also started to diversify their own global
footprint, building new capacity in other locations
with low labor costs such as Malaysia. However, with
the increasing level of technology innovation in thefield of advanced packaging, labor cost may becomeless of a decisive factor going forward.

11. The Conference Board: International Comparisons of Hourly Compensation Costs in Manufacturing, 201835

Trade liberalization
The geographic specialization described abovemeans that firms focused on a particular layer of thesemiconductor supply chain need to interact andcollaborate with other firms upstream or downstream
in the chain that are typically located in othercountries. Furthermore, given that semiconductors
are used in all types of electronics products,
ultimately the semiconductor components need to
be shipped to where the manufacturing of end
devices occurs.
For example, as shown earlier in this report, while
we estimate that US-based electronic device makers
are responsible for sourcing 33% of the total global
semiconductor demand, in many cases their devices
are actually manufactured outside the US. Less
than 20% of total semiconductors sales are actuallyshipped to the US to be integrated into a product.
Instead China is the destination of approximately
35% of the shipments of semiconductors as manyof the world’s leading electronic device makers havetheir products assembled there—an activity further
downstream in the electronics supply chain that ismore labor intensive and with lower valued add.

Indeed, the global nature of the supply chain andthe interdependencies between countries are wellillustrated by the magnitude and composition of
the semiconductor trade flows (Exhibit 18). In 2019,global semiconductor trade reached $1.7 trillion intrade value13 . This is more than four times the valueof 2019 global semiconductor sales, indicating
the large magnitude of cross-border transactions
involved in the development and manufacturing ofsemiconductors. In fact, semiconductors are theworld’s 4th most traded product, only after crude oil,motor vehicles and parts and refined oil.
According to our analysis, more than 120 different
countries (over 60% of the countries in theworld) were involved as an exporter or importerof semiconductor products, signifying the scopeand reach that the semiconductor industry has
in the world. And even though China’s share ofsemiconductor design or manufacturing is still
relatively low, the country’s preeminent positionin the manufacturing and assembly of electronic
devices has allowed it to emerge as a central hub
for semiconductor trade.

Semiconductors are the world’s
fourth most traded product
These two factors create the need to movematerials, tools/equipment, products and IP acrossborders, which has been enabled by international
trade agreements that eliminated tariffs and tradebarriers for semiconductor products and reinforced
the protection of intellectual property. Integrated
circuits are one of the products subject to thelowest tariffs in global trade12. In particular, theWorld Trade Organization’s Information Technology
Agreement (ITA) effective since 1997 and further
expanded in 2015, has been instrumental for thestrong growth in international trade of semiconductor
related products. Our analysis shows that the trade
in semiconductor-related goods included in theoriginal 1997 ITA grew at 10.5% CAGR over a 20year period, outpacing the rest of the semiconductor
products not covered in the agreement by 3 points ofannual growth and generating a 20% increase in thevalue of global semiconductor-related trade.

12. According to data compiled by the Observatory of Economic Complexity (OEC), integrated circuits (HS code 8542) ranks in the position
1236 out of 1259 products in terms of tariffs applied across the world.
13. Includes exports + imports classified in HS codes 8542 (integrated circuits) and 8541 (semiconductor discrete devices), minus HS 854140(Photosensitive, photovoltaic, LED semiconductor devices). Does not include semiconductor equipment or materials

36

EXHIBIT 18

A large web of global trade flows supports the geographic
specialization in the semiconductor value chain
Major semiconductor trade corridors1 (2019, Billions)

4
6

8

US

8

17
5

30

~$1.7T

GLOBAL TRADE
OF SEMIS
IN 2019

3
2

6

South
Korea

81
China

19

Japan

24

(mainland)

0.2

117

17

47
India

Hong
Kong

6

Taiwan

17

4
EU

2
32

8
1

90

ASEAN

18

Width of arrow represents
size of trade flows in 2019

Color of arrow represents
2014-2019 CAGR in trade
<0%

0-5%

5-10%

>10%

1. HS codes 8541, 8542, minus HS 854140, excludes semiconductor equipment
2. Includes both exports and imports. Note: Significant disparities in reported data by each country. Importer data used where possible;
Source: IHS Global Trade Atlas, UN Comtrade; BCG analysis

Implication of this global structure:mutual interdependence
The global structure of the semiconductor supply
chain, with geographic specialization across layers,means that companies interact and collaborate
across borders, in relationships of mutual
dependency.
For example, while the US is the clear global leader
in several layers of the supply chain (EDA and coreIP, design, manufacturing equipment) characterizedby high R&D intensity, and has a share of global
semiconductor sales (45-50%) well above its shareof the global consumption of electronic devices by
end users (25%), it still depends on other countries
for many activities, mainly in semiconductor
manufacturing: materials, wafer fabrication,assembly, packaging and testing services, andeven some key advanced equipment required for
manufacturing in the leading nodes such as
EUV lithography.

37

This mutual dependency resulting from specialization
based on comparative advantage brings tremendous
benefits for the semiconductor industry, andultimately for the makers of electronics devices that
rely on continuous improvements in the performanceand cost of semiconductors to drive advances indigital services.
As an illustration of the benefits from this global
structure, we consider a hypothetical scenario
where US semiconductor firms had to have all
their products manufactured onshore. Since
US companies accounted for 49% of the global
semiconductor sales in 2019, this means thatin this hypothetical scenario the US would have
49% of the global semiconductor manufacturing
capacity onshore, instead of the current 12%.
Without adequate government incentives, thesefabs located in the US would have comparatively
higher operating costs (labor, electricity, as well as
the incremental annual depreciation due to higher
upfront capital expenditure including the differencein government incentives across regions) than theexisting ones located in South Korea, Taiwan ormainland China. Using the fab economics modelfrom our September 2020 report, we estimate thatin this hypothetical scenario the cost of production
for US semiconductor companies would increaseby about 15%. In turn, this would undermine thecompetitiveness of US-based semiconductor firms
and reduce their ability to sustain the current R&D
investment levels. Given the global leadership of US
firms in chip design, it could ultimately slow down
innovation and ultimately result in higher costs forelectronic device makers across the world.

38

Emerging Risks in the
New Global ContextT

he global structure of the semiconductor
supply chain, developed over the courseof the past three decades, has served
the industry well. Ultimately, it hasenabled the explosion in innovation and end user
adoption of information technology, which has
benefited consumers and businesses immensely.
However, in the last few years several new factors
have emerged that could put the successful
continuation of this global model at risk.

Over the last three decades, the benefits ofgeographic specialization based on comparativeadvantage have resulted in the emergenceof a more concentrated and interdependent
global semiconductor supply chain. While notexhaustive, our analysis shows that there are
more than 50 points across the overall supply
chain where a single region accounts for 65%
or more of the total global supply (Exhibit 19).

EXHIBIT 19

Multiple points of high geographical concentration across the current semiconductor value chain
Value chain activities where one single region accounts for ~65% or more of global share1

DesignManufacturing

Front End
Wafer fabrication

Logic: advanced
nodes (< 10nm)

Advanced processors (CPU,GPU, FPGA) and DSP
RFFE and cellular basebands
Data converter, switchers,
multiplexers and other analog

+

DRAM

+

EDA &
Core IP

Back End
Assembly, packaging & testing++

Logic: mature
nodes (<= 10nm)+

Outsourced
Assembly and
Test (OSAT)

MemoryEquipment& Tools

Material
Select examples(not exhaustive):

EDA

23 equipment types,
i.e. doping, process control

Photoresist

IP (Arm architecture)

12 equipment types,
i.e. photoresist processing+

3 equipment types,
i.e. EUV lithography

Specialty gases (in aggregate)

US

China2

TaiwanSouth Korea

Japan

Silicon wafers,
packaging substrates

Europe1. For Design, EDA & Core IP, Equipment & Tools and Raw Materials: global share measured as % of revenues, based on company headquarter location.
For Manufacturing (both Front End and Back End) measured as % of installed capacity, based on location of the facility 2. Mainland China
Sources: BCG analysis with data from Gartner, SEMI, UBS; SPEEDA

39

While geographic specialization has served
the industry well, the observed high degree ofgeographic concentration in certain activities
also creates two types of vulnerabilities:•

Single points of failure due to high geographic
concentration of some activities that could
result in large-scale supply interruptions•

Geopolitical tensions that may impair
global access to suppliers or customers

Single points of failure that create riskof large-scale supply interruptions

Historical examples of disruption tosemiconductor supply•

The impact of the explosion of a
Sumitomo Chemical factory in Japan
in 1993 is often cited to illustrate themagnitude of this risk. It impacted
60% of the global supply of epoxy
resin, and spot prices for DRAM
memory chips in the US market
spiked from an average of $30/
megabyte to around $80/megabyte.

•

A strong earthquake in the center of
Taiwan in September 1999 causeda six-day shutdown of the Hsinchu
Science Park due to power outages.
As a result, memory-chip prices tripled
and shares of electronics companies
around the world tanked, with IBM,
Hewlett Packard, Intel, and Xerox, allpart of the Fortune 100 at the time,losing 18 to 40% of their value inthe month after the earthquake.

•

In 2011 a major earthquake struck
Japan, followed by a tsunami andnuclear power-plant melt down. 25%of the global production of siliconwafers and 75% of the global supply
of hydrogen peroxide was affectedby the disaster. Several fabs wereshut down for several months.

•

In 2019, geopolitical tensions between
Japan and South Korea rose sharply.
Japan imposed export controls on
semiconductor materials to Korea,
impacting approximately $7 billion insemiconductor exports per month.

•

In December 2020, a power outage
affected a memory fab located in
Taiwan for just one hour, impacting
10% of global DRAM supply.

•

Two fires at a package substrate
plant in Taiwan in October 2020 and
February 2021 aggravated the global
capacity shortage for assembly,
packaging and testing services, which
was already experiencing difficulties
to meet the surge in semiconductor
demand in the last few months of 2020.

•

Widespread power failures following
a polar vortex in Texas, and a firein a Renesas fab in Japan in early2021 further exacerbated the global
chip supply shortage, especiallyfor the automotive market.

Excessive geographic concentration in
manufacturing exposes the industry to single
points of failure which may be disrupted by natural
disasters, infrastructure failures, cyberattacks
or geopolitical frictions – from tariffs and export
controls to even supply blockage resulting
from broad embargoes or armed conflicts.
Numerous examples of such disruptions, albeit
contained in scale and duration to date, can befound in the last thirty years (see sidebar).
Manufacturing is clearly a major point of concern
for the resilience of the global semiconductor
supply chain. Currently almost 75% of the global
installed capacity is concentrated in East Asia
(Japan, South Korea and Taiwan) and mainland
China, a region significantly exposed to highseismic activity and geopolitical tensions. The
number is even higher for advanced technologies:
currently 100% of the global capacity in the leading
7- and 5-nanometer nodes is currently in East Asia.

High geographic concentrationof manufacturing capacity
has emerged as a concern
for the resilience of thesemiconductor supply chain
In particular, as shown before in Exhibit 17, Taiwan
has 40% of the world’s logic chip production
capacity and leads in the most advanced nodes
at 10 nanometers or below that are required to
manufacture chips such as application processors,
CPUs, GPUs and FPGAs for smartphones, PCs,
data center servers, and autonomous vehicles.
In an extreme hypothetical scenario of complete
disruption for one year, Taiwanese foundries would
lose their current cumulative $42 billion in revenues,
14. Based on the estimated share of device applications that are supplied by chips
produced by Taiwanese fabs, including PC/laptop/tablet, servers, smartphone,
automotive electronics, and industrial cameras.

40but that could also cause a $490 billion drop inrevenue, or 12 times more negative impact, forelectronic device makers across different application
markets14. The global electronics supply chain
would come to a halt, creating significant global
economic disruptions. If such hypothetical complete
disruption were to be become permanent, it could
take a minimum of three years and $350 billion of
investment in what would be an unprecedented
effort to build enough capacity in the rest of theworld to replace the Taiwanese foundries.
A high degree of geographic concentration of
supply also exists in some materials, such as
silicon wafers, photoresist, some chemicals suchas packaging substrates, or specialty gases.
While each specialty material accounts for only
a tiny portion of the industry’s total value added,
semiconductors cannot be fabricated without them.
As an example, C4F6 is a critical process gas used
to make 3D NAND memory and some advanced
logic chips. It is essential for the etching processduring chip fabrication, allowing etching to becompleted 30% faster than the nearest alternative.
Furthermore, once a manufacturing plant iscalibrated to use C4F6, it cannot be substituted.
Sales of C4F6 were approximately $250 million in
2019, with the top three suppliers located in Japan(40% of global supply), Russia (25%), and South
Korea (23%). If any of these top three producers
were severely disrupted, the loss of $60-100 million
in C4F6 supplies, could lead to about $10 to $18
billion of lost revenue for NAND alone downstream in
the semiconductor chain – almost 175 times higher
than the direct impact. If such disruption in a portionof C4F6 supply were to become permanent, NAND
production levels would potentially be constrainedfor 2-3 years until alternative locations could
introduce new capacity ready for mass production.

Geopolitical tensions that may impair global
access to suppliers or customers
While not exposing the industry to the risk of
immediate halt of manufacturing activity leading tocomponent shortages for electronic device makers,
geographic concentration of the ownership ofthe leading global suppliers – measured in termsof company headquarters location as a proxyfor where the technology is actually developed –also exists in other points of the semiconductor
value supply chain (see Exhibit 19 above).

•

In semiconductor manufacturing equipment,
US firms collectively account for more than 50%
share of the global market in 5 of the major
manufacturing process equipment categories(deposition tool, dry/wet etch and cleaning,
doping equipment, process control, and testers).
Likewise, Japan has over a 90% share of thephotoresist processing market, vital equipment
to the lithography process. In addition, ASML
– a European company – has practicallya 100% global market share in the EUV
lithography machines essential to manufacture
on advanced nodes below 7 nanometers.

•

US-headquartered firms collectively accountfor more than 90% share in advanced logic
products such as CPUs, GPUs or FPGAs
that power PCs, data center servers, AI
analytics and automotive ADAS systems –although manufacturing of these products
is largely done in Asian foundries.

•

Likewise, three US-based firms – of which
one now has a European parent company have a combined 85% share in EDA softwaretools essential to design semiconductors•

In the core IP layer, Arm - a company
headquartered in the UK, but with R&D
operations in multiple locations including the
US – licenses the architecture and processor
core designs that currently run practicallyevery smartphone and an increasing portionof the embedded computing systems
used in IoT applications in Consumer
Electronics, Industrial and Automotive.

Under normal market conditions this may notpresent immediate supply issues. In somecases potential substitutes may exist in othercountries, and these activities are typically easierto scale than wafer manufacturing. However,they could also be subject to disruptions in
scenarios of trade or geopolitical conflict that
introduce restrictions to access to suppliers or
technology originated in certain countries.
Overall, geopolitical tensions have been rising
globally in the last 10 years: the index measuring
global geopolitical risk is back at the levels of
the Gulf War in 1990-1991. Ongoing geopoliticaltensions in key semiconductor trade corridors
in Asia and between the US and China present
a rising risk to the industry supply chain.

41

Japan-South Korea tensions
The origin of the dispute is South Korea’s
continued push for restitution for Japan’sWorld War II era transgressions – claims
that Japan contends were settled in a 1965
treaty. Following a series of Korean court
rulings against Japanese companies on
this matter, Japan imposed restrictions onexports to South Korea in July 2019.
Among the more than 1,000 products
potentially exposed to Japanese export
controls, three chemicals key to semiconductor
manufacturing were of particular concern toSouth Korea: hydrogen fluoride (Japanesevendors account for 70% of the global supply),
fluorinated polyimide and photoresists (inboth cases Japanese vendors account for
90% of the global supply). While the valueof South Korean imports of these three
inputs from Japan is relatively small—only
about $400 million annually—South Korea
exports $80 billion worth of semiconductors
each year that depend on those chemicals,
250 times greater than the revenue lossof Japan’s chemical manufacturers.
Given South Korea’s preeminent positionin the global semiconductor supply chain— it is the second largest semiconductor
manufacturer in the world, with a 44%
share of the global market in memory – theimpact from this conflict could go beyond thesemiconductor industry and disrupt the entire
global electronics supply chain downstream.
While it appears that tensions cooled down
somewhat during 2020, and Japan has been
approving export license requests for the threechemicals in question, the situation remains
sensitive. So long as the underlying bilateralissue remains unsettled, the risk to the global
semiconductor supply chain continues.
US-China frictions
Semiconductors occupy a prominent positionin the ongoing tensions between the US andChina that have escalated significantly since
2018. While semiconductors have been largely
excluded from tariffs that both countries
enacted on a range of imports from the otherside, in 2019 and 2020 the US government
imposed a series of export controls that
restrict access to semiconductors containing
US technology for Huawei and other Chinese
entities that it regards as acting contrary to US
national security or foreign policy interests.

As of March 2021, some of these export
controls encompass the entire semiconductor
supply chain, including EDA and manufacturing
equipment that incorporates technology
developed in the US. Given that US companies
are currently the only viable suppliers of EDA
and critical equipment such as doping or
metrology (see Exhibit 17), these controls for now
effectively block the impacted Chinese entities
from sourcing semiconductors, even from nonUS suppliers. These rules have encouraged
China to develop and seek alternatives, andalthough it may take some time to do so, thetrend towards reduction of dependence on US
semiconductor suppliers and indigenization of
the supply chain is beginning to take shape.
As described in the prior section, China
accounts for approximately 24% of the
global semiconductor consumption (“criteria
C” in Exhibit 3), which makes it the second
largest market in the world almost at par with
the US. Its position as the world’s largest
manufacturing hub for electronic devices– for both Chinese and foreign companies– also makes China the top destination forexports of finished chips. In addition, China
is investing aggressively in semiconductor
manufacturing: it accounted for 15% of theworld’s total capacity in 2020 and is forecasted
to build 40% of the incremental capacity thatwill be added globally in the next decade.

Geopolitical tensions
could lead to the loss ofglobal scale required tofund massive investments
in innovation
Continuation of these bilateral tensions could
have profound negative consequences for thesemiconductor industry. Both US semiconductor
companies, and also foreign vendors that
rely on technology developed in the US,
may be blocked from selling to at least somesignificant Chinese customers, if not to any
Chinese company at all. As discussed in ourMarch 2020 report on this topic, this could
lead to a significant reduction in revenue forleading US semiconductor companies acrossthe supply chain as well as global non-US
42

companies with a significant R&D footprint in theUS, compromising their ability to sustain theircurrent investment levels in R&D and therefore
slowing the pace of innovation across the industry.
Perpetuation of the conflict may also trigger
retaliation from China in areas that could directly or
indirectly impact the semiconductor supply chain,such as rare earth materials and ten other critical
inputs such as germanium, lithium or tungsten.
Rare earths are a set of 17 metallic elements withelectronic and magnetic properties needed inelectronic products. Although these materials accountfor only a small portion of overall production costs,
they are the building blocks of key components
in cars, computers, and many other high-value
products—and are an often-overlooked vulnerability
in global supply chains. Our analysis indicatesthat China leads in the extraction of 9 of the 17
critical raw-material inputs and in the refining of 14
of them. As rare earths are traded in commodity
markets, restrictions on exports from China would
be felt by the entire supply chain and could disrupt
the global production of electronic devices andtherefore depress demand for semiconductors.
Finally, the US-China frictions are also fueling adesire to develop self-sufficiency in semiconductors.
For China, this is mainly an amplification andacceleration of its longstanding efforts todevelop a strong domestic semiconductor sector
that gained further urgency with the “Madein China 2025” plan introduced in 2015.
In the case of the US, the escalating strategiccompetition with China has recently exposed therisks associated with the high concentration ofsemiconductor manufacturing capacity in East
Asia (and Taiwan in particular), sparking somepublic debates about the desirability of selfsufficiency in semiconductor manufacturing, too.
In other areas of the world such as Europe,
Japan and South Korea, the central positionof semiconductors in the US-China conflict
together with the impact of the recent widespreadsemiconductor shortage on the automotive industry,has brought attention to the critical importanceof semiconductors for the economy. Furthermore,their own companies with global leading positions
in some segments of the semiconductor industry
have found themselves restricted from selling
to Chinese entities by US export controls due totheir reliance on US-developed technology further
upstream or downstream in the value chain.

Addressing these risks: complete self sufficiency
is not the answer
Semiconductors are of strategic importance forboth economic growth and national security. The
semiconductor supply chain has become a criticalarea whose operational resilience and continuity
must be enhanced, as well as a heated field ofgeopolitical competition for the 21st century.

In view of the two risks described above,
governments across the world are looking to act.
The concepts of semiconductor “self-sufficiency”,
or technology “independence” or “sovereignty”,
are being discussed as potential desirable national
policy goals – often with a focus on semiconductor
manufacturing. It is helpful to understand whatlevel of investment would be needed if mostcountries or regions were to re-shore or nearshore
production capacity to reduce exposure to theserisks and protect their national interests. We
look at two scenarios – one where each region
pursues complete semiconductor self-sufficiency
compared to more nimble, targeted investments
aimed at filling strategic high-risk gaps to improve
resilience in the overall global supply chain.
For illustration purposes, Exhibit 20 presents ahypothetical extreme scenario, where each major
region in the world looks to build up semiconductor“self-sufficiency” in a strict sense, across all layersof the supply chain. This would mean having
domestic firms in EDA and IP cores, chip design,
raw materials, manufacturing equipment, wafer
fabrication, and assembly, packaging and testing,with enough capacity to meet 100% of the domestic
semiconductor consumption across all applications.
Aside from any considerations of execution feasibility,
we estimate that at a global level such extreme
scenario of regional autarchy would require a
staggering $900 to 1,225 billion in upfront investment
to cover each region’s 2019 consumption levels –any future growth in domestic consumption would

43

require further investments in additional capacity
by each region. This amount is equivalent to about
6 times the combined R&D investment and capital
expenditure of the total semiconductor value chain
in 2019. In addition, even if we were to assume that
semiconductor companies across the supply chain
could maintain their current cost structure despite
the loss of global scale, we estimate that the industry
would incur $45 to $125 billion in incremental
recurrent annual operational costs (Exhibit 20)15.

EXHIBIT 20

The staggering cost of hypothetical semiconductor self-sufficiency
Incremental cost to cover 2019 demand with fully “self-sufficient” localized semiconductor supply chains
Upfront investment ($ Billion)

EDA &Core IP
DesignIncremental annual cost ($ Billion)

10-30

3-10

30-95

10-35

Equipment

90-27520-60

Materials

15-40

5-10

Manufacturing1

755-785

7-10

Total

900-1,225

45-125

DesignManufacturing

1. Including both wafer fabrication and assembly, packaging and testing
Note: Range defined primarily by number of local companies assumed to be required to meet the local needs in each activity of the value chain:from just 1 player to supply the entire local market to 3 players typically found in the current global market structure
Sources: BCG analysis

15. Range defined primarily by number of local companies assumed to be required to meet the local needs in each activity of the value
chain: from just 1 player to supply the entire local market to 3 players typically found in the current global market structure

44

Manufacturing capacity accounts for a majority ofthe estimated upfront investment. In total, the newcapacity that would have to be built in this extreme
scenario is equivalent to 40% of the total existing
global capacity – which suggests that the industry
would face a situation of massive global overcapacity
if such scenario were to be implemented. We
estimate that over $800 billion in capital expenditure
would be required to build the local raw material
production, wafer fabrication and assembly,
packaging and testing capacity needed for eachregion to meet its own domestic semiconductor
consumption. Obviously, in addition to securing
the funding for these massive investments,
countries or regions would also have to actually
make it happen: fabs are very complex specialized
facilities that typically take 2-4 years to buildand put into commercial production, and require
3,000 to 6,000 staff to operate, mostly skilled
technicians that need to be recruited and trained.
On top of this upfront investment in new capacity,each country or region would incur the costs tooperate the fabs. Even assuming that over the longterm the industry is able to eventually reestablish
the supply-demand balance and avoid a continued
state of global overcapacity, the total global
manufacturing operating costs would significantly
exceed the levels of the current global supply chain
structure with geographic specialization based oncomparative advantages. As discussed in the priorsection on the benefits of a globalized value chain,in this hypothetical scenario of manufacturing
self-sufficiency, there will be capacity located incountries with factor costs (such as land, laborand electricity) significantly higher than thoseavailable in other geographic areas. We estimatethat the overall excess manufacturing cost could
amount to $7-10 billion per year globally – notincluding the effect of potential differencesin government incentives and taxation, or the
depreciation of the upfront capital investments.
However, self-sufficiency in manufacturing would
not totally eliminate the exposure to the two risk
factors described above, which also affect theother layers upstream and downstream in thesemiconductor supply chain. If self-sufficiency
were to be achieved in semiconductor design, eachregion would need to replicate its own competitivedomestic supplier for each of the over 30 typesof semiconductors described earlier in this report.
Furthermore, each region would need to replicate
domestically its own EDA and core IP, as well as its
own manufacturing equipment. We estimate that
this will add $130-400 billion of upfront investment
to cover between 5 and 15 years of start-up period
R&D to develop the local technology prior tocommercialization. These figures do not take into
account any potential failed investments, suchas companies that start R&D but do not succeed
in developing a commercially viable product. In
addition, the new local firms involved in these
activities would face $33-105 billion in incremental
annual operating costs – mainly in recurrent R&D.

Fully “self-sufficient”
localized supply chains
would create substantial
incremental costs and leadto a 35-65% increase in
semiconductor prices

45

Exhibit 21 provides the breakdown of the estimated cost of hypothetical semiconductor self-sufficiency
by geographic area. The US, despite its current leadership position in several layers of the supply chain,would still need to make an upfront investment of $350-420 billion, primarily in manufacturing capacity.
Even considering its lower factor costs, China would require $175-250 billion of upfront investment
and $10-30 billion of additional incremental annual operating costs in this hypothetical state.

EXHIBIT 21

All regions benefit from the efficiencies of the global semiconductor supply chain
Incremental cost to cover 2019 demand with fully “self-sufficient” localized semiconductor supply chains% of global
semiconductor
consumption1

Upfront investment ($ Billion)

32%2

US

24%

China3

20%

Rest of
APAC

25%4

Europe100%

Incremental annual cost ($ Billion)

350-420

5-15

175-250

10-30

25-80

26

5-20

240-330

Manufacturing

Design25-60

Manufacturing

Design$860-1,100B + $40-125B = $900-1,225B $32-80B + $13-45B = $45-125B

1. Calculated as the estimated semiconductor content in electronic devices sold to end users in each geography in 2019 2. Includes Canada,
Latin America 3. Mainland China 4. Includes Middle East and Africa
Note: Range defined primarily by number of local companies assumed to be required to meet the local needs in each activity of the value chain:from just 1 player to supply the entire local market to 3 players typically found in the current global market structure
Sources: BCG analysis

This total estimated $900-1,225 billion in upfront
investment and $45-125 billion in incremental
annual operating cost – not including depreciationof the new upfront investments - to build a seriesof fully domestic supply across each major region
would all but wipe out the profits of the industry,
which amounted to $126 billion across the entire
value chain in 2019. Therefore at least a portion of
the incremental costs would necessarily have to bepassed on to device makers in the form of higher
prices for the semiconductors they purchase. If fully

charged to customers, it would amount to an averageincrease of 35-65% in the price of semiconductors.
This may result in higher prices of the electronic
devices for end users. Furthermore, it is also likelythat siloed domestic industries shielded from foreigncompetition and deprived of global scale would lose
in efficiency and ability to innovate. Ultimately, it
would reverse the decades-long trend of making
increasingly powerful and more affordable electronic
devices accessible for consumers around the world.

46

world. As discussed earlier, the key factor
behind this trend is economics: the total
ten-year cost of ownership of of a new
fab located in the US is approximately 2550% higher than in Asia, and 40-70% ofthat difference is attributable directly togovernment incentives (see Exhibit 16).

In conclusion, complete autarchy or fullsemiconductor self-sufficiency appears to
be more a theoretical concept rather than an
attainable policy goal. However, countries canreaffirm their position within the global supply
chain by ensuring they contribute to technology
development with research and intellectual
property. This ensures mutual dependency andprovides each nation with a position of strength.

An alternative, market driven approach
focused on critical strategic risks
Countries with serious economic andnational security concerns may take a more
focused approach, building some advanced
semiconductor manufacturing capacity
domestically in order to address their mostsensitive needs in critical application areas.
In our previous report titled “Government
Incentives and US Competitiveness in
Semiconductor Manufacturing,” we found that
the US share of semiconductor manufacturing
capacity has dropped from 37% in 1990
to 12% in 2020. Moreover, only 6% of the
new global capacity in development will belocated in the US if current trends continue.
In contrast, it is projected that during thenext decade China will add about 40% of
the new capacity and become the largest
semiconductor manufacturing location in the

According to our prior analysis a $20
billion to $50 billion federal government
program of additional grants and tax
incentives for new state-of-the-art fabs
built in the next decade would be effective
in beginning to reverse the declining
trend in US semiconductor manufacturingof the last 30 years. For example, weestimate that a $50 billion incentive
program would enable the construction of
19 fabs in the US over the next ten years,
doubling the number expected if no action
is taken. In contrast, a goal of complete
self-sufficiency to cover the total US
semiconductor consumption by 2030 withonshore capacity would require more than$400 billion in government incentives.
Exhibit 22 describes how this market-driven,targeted $20-50 billion government incentive
package would, for example, enable the US
to maintain “minimum viable capacity” 16 foradvanced logic chips, essential for national
security and supply chain resilience. While
all types of semiconductors from memory,
logic, to analog are indispensable, eachperforming a different function to makeelectronic devices work, advanced logic
chips – including CPUs, GPUs, FPGAs, AI
accelerators and ASICs – have attracted
particular focus. Advanced logic chips rely
on manufacturing on the leading nodes
to maximize performance. As shown in
Exhibit 17 earlier, currently all the world’s
capacity below 10 nanometers is locatedin South Korea (8%) and Taiwan (92%).
Given the importance of advanced logic
chips for technology leadership in highperformance computing and AI, the US
has recently identified it as a vulnerability
in the microelectronics supply chain thatposes a potential national security risk17.
Advanced logic chips account for
about 34% of US total semiconductor
consumption. A significant portion of thatfigure actually comes from consumer-

16. This concept was introduced by the White Paper #4 from the US Cyberspace Solarium Commission published in October 2020.
17. See for example the 2021 final report of the National Security Commission on Artificial Intelligence (NSCAI)

47

driven applications, such as smartphones, PCs,consumer electronics and automotive. However,about a quarter of the US consumption ofadvanced logic chips is associated with criticalinfrastructure applications, including aerospaceand defense systems, core telecommunications
networks, supercomputers and data centers foressential sectors such as government, energy,transportation, healthcare and financial services. A
hypothetical disruption in the supply of these chips
could have a severe impact on the economy andnational security, so maintaining some minimum
viable manufacturing capacity located onshore
could significantly enhance the resilience of the
US electronics supply chain. Covering just 9% of
the total US semiconductor consumption, suchtargeted intervention is far removed from a largescale industrial policy aimed at building a selfsufficient local semiconductor supply chain.
We estimate that covering the expected domestic
consumption of advanced logic chips for criticalinfrastructure applications by 2030 would requirebuilding just 2-3 new state-of-the-art fabs in the
US – assuming new fabs with capacity between

20,000 and 35,000 wafers per month. This capacity
addition is well aligned with market needs. In fact,
this new capacity is less than 5% of the newadvanced logic capacity that needs to be added
globally to keep up with the expected demand
growth in the next ten years. The presence in the US
of existing advanced manufacturing infrastructure
and most of the world’s leaders in design ofadvanced logic chips, which account for a large
share of foundry revenues, is also a relevant factor
that contributes to the viability of such investment.
The new $20-50 billion government incentive
program mentioned above would be criticalto make the economics of such new advanced
logic fabs in the US competitive with alternative
available locations in Asia. We estimate that thesefabs would require a $40-45 billion of private sector
investment to build and operate over a 10-year
period, together with $15-20 billion of government
incentives—of which $9-10 billion would need tocome from the new federal incentive program. The
remaining new federal incentives would be applied
to spur investment in new US capacity in otherimportant areas besides advanced logic, including
memories, analog and advanced packaging.

EXHIBIT 22

Example: How the US could establish a minimum viable capacity to address its criticalstrategic risk in advanced logic manufacturing
US ANALYSIS: Breakdown of total US semiconductor consumption, 2019

Includes:• D efense &Aerospace% of US consumption

28%

Advanced
Logic2

Memory34%• Telecom networks

24%• Energy, security andmedical equipment

Other Infra.

$107B

23%

DAO1

25% of global
semiconductor
sales

15%

• D ata centersof Government
and essential
sectors (telecoms,
energy & utilities,
healthcare andfinancial services)

Consumer

34%

9%Other Logic% US Capacity / Consumption
10-year investment in new fabs
for onshore coverage in 2030 ($B)
(Private sector + Government incentives)4

Total USadvanced logic
consumption

49%

0%3

980+420

140+60

Other
applications

Criticalinfrastructure

0%3

45+18 2-3 new fabs of
20-35 kwpm

1. Discrete, Analog and other (optoelectronics and sensors) 2. Advanced logic includes CPUs, GPUs, Application Processors, FPGAs, mobile
basebands, some ASICs 3. Considering only leading node capacity (< 10nm) 4. Total Cost of Ownership – includes capex and 10 years of opex,
before government incentives
Sources: BCG analysis

48

Altogether, these considerations – critical strategicarea for technology leadership and national security,
geographic proximity of foundries to their large USbased advanced logic customers, moderate sizeof the investment – make this an attainable policy
goal. In fact, according to media reports the threecompanies in the world that are currently capable ofmanufacturing at 10 nanometers or below (TSMC,
Samsung, and Intel) are showing interest in building
some of their planned additional advanced logic
capacity in the US, provided that there is a package ofgovernment incentives that make the economics work.
In setting policies aimed at advancing the domestic
semiconductor sector to address supply chain
vulnerabilities and national security concerns,
governments should ensure that they take a marketdriven approach. Government policies and incentives
must also be in compliance with the norms ofinternational trade. The OECD report18 on market
distortions in the semiconductor supply chain from2014 to 2018 was already drawing attention to somegovernment support practices – particularly from
China – that could be considered anti-competitive,
or lead to inferior economic outcomes. Government
support to the build-up of the domestic semiconductor
manufacturing sector should also take into accountthe expected global needs for new capacity tomeet the expected growth in worldwide demand to
avoid creating situations of massive overcapacity.

The talent constraint
Access to high-skilled talent is also critical for an
R&D-intensive industry like semiconductors. Unlike
the other two risks described above, a shortageof talent may not pose an immediate threat oflarge-scale disruption for the industry day-today operations. Nonetheless, it can significantly
impair its ability to continue its rapid, relentlesspace of innovation in the upcoming years, andthe diversification of the global geographic
footprint in some activities of the supply chain.

Indeed, talent has become a major concern for theindustry. A 2017 survey of semiconductor executives
across the supply chain showed that about 80%
of companies were facing significant shortages ofcandidates for technical roles19. In another 2018
survey 64% of respondents named talent as oneof the top 3 risks threatening their ability to grow,the highest identified risk factor20. Salary statistics
also point to talent supply constraints: wages in the
US semiconductor industry have been growing an
average of 4.4% since 2001, significantly faster than
the growth in wages for the economy as a whole21.
Considering that the percentage of R&D investment
over revenues tends to be quite stable over the
medium term for many semiconductor companies,
growth in industry revenues may be a good proxy
to set a baseline for the increasing demand fortalent. Global semiconductor industry sales are
expected to increase at a 4-5% average annual ratein this decade. On top of this growth, the industry
is also facing the challenge of an aging workforce,with a significant number of current employees intechnical positions likely to retire in the next 1015 years. Furthermore, the industry also needs toattract talent with different skill sets, particularly insoftware development and artificial intelligence.

The industry faces a riskof talent shortage that
could constrain the pace ofinnovation in upcoming years
The historical growth in the total global talent pool ofscience and engineering graduates looks insufficient
to meet the industry demand for talent (Exhibit 23).

18. OECD, “Measuring distortions in international markets: The semiconductor value chain”, OECD Trade Policy Papers, No. 234, OECD
Publishing, Paris, 2019.
19. Deloitte-SEMI Workforce Development Survey, 2017.
20. KPMG-GSA, Global Semiconductor Industry Outlook 2019.
21. Semiconductor Industry Association, SIA Workforce Roundtable Summary Report, March 201849

Our analysis of the global data compiled by the
US National Center for Science and Engineering
Statistics (NCSES) shows that the aggregate
number of students with a first university degreein science and engineering in the leading regionsin the semiconductor supply chain - US, mainland
China, Taiwan, Japan, South Korea and Europe- grew at 4.5% annually between 2000 and2015 (most recent year with complete data). The
number of doctorates in science and engineering
showed a very similar growth rate. This growth
was also quite different across regions: while
China’s talent pool grew above 10% per year,
in the US the growth rate was below 3%.
There is also fierce competition for this global
talent pool. In particular, the explosion in thenumber of software and consumer technology
companies, including global giants with wellknown brand names, adds to the industry
challenges in attracting and retaining the highskilled technical talent it needs to maintain thecurrent trajectory in innovation and growth.

EXHIBIT 23

The historical growth rate of the total global talent pool is likely insufficient to meet the industry demand for talentAnnual graduates in Science and Engineering (millions)First university degrees

Doctoral degrees

4

0.15
CAGR
+5%

3

Europe2+3%

Japan
S. Korea
Taiwan+2%+5%China1

+11%

US

+3%

CAGR
+4%

Europe2+4%

Japan
S. Korea
Taiwan+0%China1

+10%

US

+3%

-4%

0.10

2
0.05

+5%
+6%

1

2000

2005

2010

2015

2000

2005

1. Mainland China
2. Top 5 countries
Surces: BCG analysis with data from US National Center for Science and Engineering Statistics (NCSES)

2010

2015

50

Strengthening the Global Supply Chain
for the Next Decade of InnovationThe global nature of the semiconductor supply
chain provides specialized firms in eachlayer with access to customers across all
markets, which brings the scale needed tofund the large investments in R&D or manufacturing
capacity to design and produce semiconductors.
It has also enabled geographic specialization
based on the comparative advantages of different
countries or regions: the US is the leader in themost R&D-intensive parts of the value chain suchas chip design and manufacturing equipment, while
Asian countries with access to higher government
investment incentives and lower factor costs lead in
manufacturing. Within this global supply chain, firms
collaborate and trade semiconductor-related goods
and services across borders, and countries aremutually interdependent.

high degree of geographic concentration of somecritical parts of the supply chain such as wafer
fabrication, as well as the potential disruptions fromgeopolitical frictions must be addressed to make thesemiconductor global chain more resilient.
The solution to these challenges is not to pursue
blanket self-sufficiency through large-scale national
industrial policies that come with a staggering costand questionable execution feasibility. Instead, we
believe that well-modulated policy interventionsin these areas would simultaneously preserve
the benefits of scale and specialization in today’s
global supply chain structure, strengthen its
resilience, and also address the national security
concerns associated with the strategic nature ofsemiconductors.

In addition to policies that
foster trade, basic researchand expand the talent pipeline,
governments need to enact
targeted incentives to support
investments that diversify
the global manufacturing
On the manufacturing side, as the global shortageof semiconductors of late 2020 is highlighting, afootprint and the sources ofsubstantial amount of new capacity needs to be built
globally in the coming years. In fact, the industry will supply for key materials
Looking ahead, over the next ten years the industry
will need to invest about $3 trillion in R&D andcapital expenditure across the value chain to meetthe fast-growing demand for semiconductors fromall sectors of the global economy. Semiconductor
companies will need to keep investing over $90
billion in R&D annually, equivalent to about 20%of the global semiconductor sales, to develop
increasingly sophisticated chips to powertransformative applications such as AI, IoT or
autonomous vehicles.

have to almost double its capacity by 2030 to keep
up with the expected 4% to 5% average annual
growth in semiconductor demand.

To that end, policies that expand market accessand promote open trade while also balancing
the needs of national security are fundamental
Simultaneously, the industry must innovate in
to allow the complex semiconductor industry
materials, architectures and manufacturing
ecosystem to continue to thrive in the next decade.
technology if the rate of improvement in performance First, governments must guarantee a level global
and cost of the past few decades is to be maintained playing field with market access in fair terms forin years to come. This requires investing heavily indomestic and foreign firms alike, as well as strong
pre-competitive basic research.
protection for IP rights. In fact, such policies could
further encourage foreign investment in R&D
A strong global supply chain that continues bringing
activity, favoring inflows of know-how and talentworld-class firms together to collaborate onthat ultimately help upgrade the capabilities of theinnovation in materials, design and manufacturing
domestic industry and stimulate healthy competition
across borders is vital to make this possible. At
in innovation and quality.
the same time, the identified risks related to the51Second, governments should seek to develop
policies to preserve and expand the global trade
in semiconductor-related goods and services that
underpins the geographic specialization basedon comparative advantage in the semiconductor
supply chain. The explosion in trade enabled by theWorld Trade Organization’s Information Technology
Agreement (ITA) in the last two decades enabled theemergence of the global supply chain and fuelled theindustry’s growth, so its expansion is a clear positive
development for the industry.
While safeguarding national security interests is ofcourse critical, policy mechanisms require carefulconsideration if they are to avoid permanently
harming the specialization model that has enabled
the semiconductor industry’s success. Our prior
March 2020 report focused on the potential
implications of the US-China frictions for thesemiconductor industry showed that broad unilateral
restrictions on access to markets, technologies andresources may backfire and risk endangering thethe long-standing global leadership of the US insemiconductors, with a detrimental impact on theindustry’s innovation, too.
Instead, governments with significant national
security concerns related to control oversemiconductor technology should establish a stable
framework for restrictions on semiconductor tradethat defines with clarity:a) the policy goals pursued (control over sensitive
military technology, reciprocal fair trade, strategiccompetition in certain technology areas, retaliatory
sanctions related to other conflict areas);b) which types of entities and specific technologies
are restricted;

programs, together with partnerships between
government agencies, academic institutions
and the industry to set up programs that canaccelerate training in specific technical areas. In
parallel, immigration pathways that attract worldclass technical talent to leading global clusters ofsemiconductor innovation should be maintained
and reinforced.
As shown in this report, these policy directions
should be complemented with targeted, marketdriven government incentives programs inthree areas:• Pre-competitive research, which is often channelled
through global institutes that foster collaboration
between scientists from different organizations
and countries• Building part of the additional manufacturing capacitythat the industry needs to meet demand in the next
decade in the US and Europe, in order to create amore diversified global footprint that is less vulnerable
to disruption by natural disasters, infrastructure
failures, cyberattacks or geopolitical frictions.
• D eveloping alternatives – domestic or from third
countries—in critical areas threatened by export
controls or potential disruptions to global trade fromother countries

In our view, carefully designed policy initiatives inthese areas are essential to enable the industry tosustain its high levels of investment in both R&D
and capital expenditure to meet the fast-growing
demand for higher quantities of more advanced
semiconductors that the global economy needs tomake the promise of transformative technologies
such as AI, 5G, IoT, and autonomous electricvehicles real in the upcoming years.

c) t he expected second-order impacts on industry
players, both domestic and from third countries, andwhat measures to put in place to mitigate them.

Finally, policy makers must significantly step up
the efforts to address the looming shortage ofhigh-skilled talent that threatens to constrain thesemiconductor industry’s ability to keep the current
pace of innovation and growth. Governments should
invest further in expanding science and engineering
education across an array of disciplines including
electrical and mechanical engineering, computerscience and software engineering,and physics, materials science andchemical engineering, as well as
industrial engineering. Investment isalso needed to foster the creation of
more semiconductor-related graduate
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