Computers and Semiconductors

addition, licensing and developing chip clones are common
industry practices. Manufacturing standards, in terms of semi-
conductor equipment and procedures, also contribute to tech-
nology diffusion. Although technology diffusion is a prereq-
uisite for high-tech employment diffusion, it does not ensure
it. A foreign location may be economically attractive in terms
of overall production costs, but these advantages are not likely
to be sustainable without a well-trained labor force.

U.S. employment and trade

Employment data for the U. S. semiconductor industry, col-
lected since 1972, are available from the Bureau of Labor

Statistics Current Employment Statisics program. (See chart
3.) Employment boomed between 1975 and 1985 in response
to the creation of the first microprocessor in the early 1970s
and the production of the first IBM PC in 1981. Advances in IC
technology and computer design spurred the birth of new
firms, increased production, and nurtured employment
growth. (See the box, below.)

The all-time high of almost 300,000 semiconductor work-
ers in January 1985 was reached amid a robust economy. How-
ever, this level of capacity and employment was unsustainable
through subsequent cycles. Employment levels declined from
1985 to 1993, in spite of a brief uptick in 1988. U. S. sales of
semiconductor products totaled $46.9 billion in 1995, up 40

The emergence of the semiconductor industry can be traced
to the commercial launch of the transistor in 1951. These
early semiconductors substituted for vacuum tubes in many
electrical functions. Three types of firms initiated the indus-
try in the early 1950s: vacuum tube producers such as RCA
and Sylvania; divisions of large electronic firms such as IBM
and Western Electric; and new firms such as Texas Instru-
ments. (See J.E. Tilton, International diffusion of technol-
ogy: the case of semiconductors (Washington, D.C. The
Brookings Institution, 1971.)

Early telephone exchanges and computers used vacuum
tubes as the main functional component. The transistor is
more efficient than vacuum tubes in that it uses less power,
generates less heat, and is smaller. This allowed smaller,
more reliable electronic circuits that, in turn, boosted the
production of many electronic products and made smaller
computers possible. The integrated circuit (1c) is the latest
major step in the drive toward smaller size, improved reli-
ability, and an increased number of computing functions,
The ic was invented by Robert Noyce of Fairchild and Jack
Kilby of Texas Instruments in 1958, and put into commer-
cial production in 1961. Today, computers and many elec-
tronic products are based on IC technology.

Key scientists and other technical personnel who moved

Genesis of a tiny giant

on to exploit a new product have always been an important
factor in the semiconductor industry. For example, the in-
ventor of the transistor, William Shockley, established a
small research firm after leaving Bell Laboratories in 1954.
Fairchild Semiconductor, one of the birthplaces of the IC,
spun off Shockley’s firm in 1957. And in 1968, Robert
Noyce left Fairchild and founded Intel, one of today’s in-
dustry leaders. (See Tilton, International diffusion.)

In 1971, Intel created the first microprocessor chip, the
Intel 4004, which contained more than 2,000 transistors.
The 4004 was a 4-bit microprocessor, that is, it could pro-
cess four bits of information at a time. The 8-bit 8008 and
8080 microprocessors were introduced in 1972 and 1974,
respectively. The first microcomputers, offered for sale in
1975, used the 8080 microprocessor, and 1Bm’s first personal
computer used an Intel 8088 processor in 1981. (See Les
Freed, The history of computers, Emeryville, CA, Ziff-Davis
Press, 1995.) Besides Intel’s Pentium and Pentium Pro,
current chips include IBM’s Power PC chip, and the Ultra
Sparc chips (Sun Microsystems) and the Alpha chips (Digi-
tal Equipment Corporation) for the workstation market.

The evolution of the microprocessor, the result of an in-
tense research and manufacturing agenda, is summarized
below.

Evolution of the microprocessor
Centro Mitton of
Yeor processing Transistors Instructions Word ste Paice at ‘Application at introduction
fant (PUP qhousands) | Per second On bits) rvoduction
4004 23 0.06 4 $200 Basic calculator
8080 6 ‘64 8 360 intelligent terminals
2096 2 cA 16 260 MS-DOS, CPM PC's
80288 134 268 16 360 Multitasking, mutiuser
80388 275 8 32 208 Multitasking, multiuser
20496 1,200 20 22 950 High-end mutitask
Pentium 3,100 100 22 965 High-end mutttask
Pentium Pro 5/500 250 4 1,200 Workstations, server machines

‘Sources: Freed, The history of computers; Intel Co. Archives at www.ntel.com; and The Wall Street Joumal.

10 Monthly Labor Review August 1996



down considerably. (See chart 6.) Attempts to increase mar-
ket share and to prevent entry of competitors are two other
factors driving the decline of computer chip prices.

Increases in productivity have not only decreased unit costs
and prices but have also sustained above-average worker com-
pensation. Within the United States, average hourly earnings
for production workers in the semiconductor industry were
$14.59 in 1995, 18 percent above the average for all manu-
facturing.” This reflects, in part, higher skill and value added
associated with the capital-intensive processing steps and R&D
activities performed by U. S. semiconductor workers.

Furthermore, according to the Semiconductor Industry As-
sociation, 50.6 percent of worldwide employment of U. S.-
based merchant semiconductor firms was located in North
America in 1994, but 70.6 percent of their worldwide labor
expense was incurred there. This implies that more of the
industry’s high value added functions took place in the United
States.

Outlook

The major factors affecting employment in semiconductors
have been cyclical downturns in the industry, technology
breakthroughs, and secular demand growth. The balance be-
tween technology and costs, and how the industry responds

to cyclical change and long-term demand will determine em-
ployment growth in semiconductors for years to come.

Recent history. From late 1995 through early 1996, the
semiconductor industry found itself in a softening market.
Slower orders stemming from increased chip inventories in
the personal computer end-use market prompted semiconduc-
tor companies and stock analysts to reduce revenue expecta-
tions for 1996. This sparked cost containment efforts—from
reduced capital spending plans to hiring freezes. In fact, the
semiconductor book-to-bill ratio (new orders divided by bill-
ings or shipments) declined to its lowest levels since the mid-
eighties in the first quarter of 1996. Historically, employment
growth in the industry cannot be sustained with a ratio below
one, where it has been since the beginning of the year. This
suggests that semiconductor employment growth is likely to
plateau in the short run until the effects of this slowdown
work itself out. Some firms already have announced lay-
offs affecting worldwide operations."

The long view. Current problems facing the semiconductor
industry—stemming from slow chip orders from PC makers—
are likely to be temporary, and mostly confined to the memory
chip segment of the industry. Semiconductors now have a
substantial presence in new high-margin applications such as

the communications market with ad-

USES Semiconductor prices, 1982-95

Index
(June 1981 = 100)

120

vanced chips for high-speed modems
for fax and Internet access. Further-
more, the domestic slowdown is buff-
ered by exports and global production

sites.

Worldwide semiconductor sales are
expected to grow at rates of 6 percent
to 19 percent annually through the end
of the century.?? This growth is ex-
pected to be pulled by two technology-
related factors: first, increased demand
for DRAMs and microprocessors for
personal computers and telecommuni-
cations equipment, including multime-
dia applications. Factors behind this
growth include the transition from ana-
log to digital electronic applications,
and the trend from wired to wireless
communications. The second factor is

NOTE: Memory chip index is for MOS memory.
SOURCE: Producer Price Index program, Bureau of Labor Statistics.

40 |-
. the increase in the percentage of semi-
Memory chips “eenseeneseeronenee conductor content in a host of house-
hold electronic products, automobile
20 U : : : ; ; 1 electronic gear, and industrial and
41982 1984 1986 1988 1990 1992 1994 medical devices.

Continued advances in chip manu-
facturing and the global nature of semi-

conductor production and trade posit

Monthly Labor Review August 1996 15



Computers and Semiconductors

Employment and production Indexes for semiconductor manufacturing, 1972-95

Employment Production
[1972 = 109] [1987 = 100]
260 300
Employment .
240 |- — /f
\ Production ? 4 250
meee é
220 |- NN f
200 }- -| 200
180 |- -
+ 150
160 |- .
140 |- aw -| 100
120 |-
Ler 486 chip 4 50
100 cece
go ! 1 1 1 L 1 1 1 1 0
1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994
SOURCES: BLS; Federal Reserve Board; and text references.
U.S. semiconductor trade, 1984-95
Exports, Trade
imports (in bilions of current U.S. dollars) balance
50.0 20
Exports Imports Trade balance
co = _ + 1.0
40.0)
30.0
20.0
7 ‘| | [ | | |

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
‘SOURCE: Electronic Industries Association, based on data from the U.S. Department of Commerce.

12 Monthly Labor Review August 1996



Percent

Regional semiconductor market shares, 1982-95.

had a 65-percent share of their home
market, Japanese firms hold 78 percent
of the Japanese market.

By 1990, the United States had a

50
United States

10

Aan

L 1

a

trade surplus, but this lasted only 3
years. In 1995, after 2 years of deficits
below the billion dollar mark, the in-
dustry showed a trade deficit of $4.74
billion. Last year’s deficit can be attrib-
uted more to capacity shortages and
record chip demand by firms doing
business in the United States than to
trade woes: a solid 35-percent increase
in exports just could not offset a 50-
percent increase in imports. Japan,
Canada, and several Southeast Asian
newly industrialized countries are the
major trading partners of the U.S. semi-
conductor industry. Canada is the larg-
est export market with 16 percent of
shipments, followed by Malaysia, Ja-
pan, Singapore, and Taiwan. Japan rep-
resented 27 percent of imports, or $10.7
billion, in 1995. Another 50 percent of

1

0 n 1
1982 1984 1986 1988 1990

SOURCE: Based on sales data from the Semiconductor Industry Association.

imports comes from South Korea, Ma-
laysia, Singapore, Taiwan, and the Phil-
ippines. (Recall, though, that some
imports are products assembled from
American-made parts by U. S. subsid-

1992 1994

percent from 1994. Production jumped by 27 percent over the
same period. Data Resources Inc. (DRI) projects that real
U.S. semiconductor output will grow by 7.9 percent annually
between 1993 and 2005, the highest growth rate among all
industrial and consumer products in the DRI model.'3

With the exception of 1990-91, the industry experienced
either large trade deficits or declining trade surpluses from
the mid-1980s to early 1990s. This was also a period when
semiconductor employment declined. The continued techno-
logical prowess of U. S. firms, aided, perhaps, by the Semi-
conductor Trade Agreement of 1986, reversed these trade
deficits gradually. (See chart 4.) However, this did not trans-
late immediately into job growth. Most of these deficits were
related to the emergence of Japan as a global semiconductor
exporter and by difficulties that firms had in entering the Japa-
nese market. The trade agreement established conditions to
open the Japanese semiconductor market to foreign makers.'4
‘The market share of U. S.-based merchant semiconductor firms
in Japan’s market increased from approximately 10 percent
in 1990 to more than 17 percent in 1994, even as that mar-
ket increased from $19.6. billion to $29.4 billion, Still, in 1994
the American share was below the 23 percent held by Japa-
nese firms in the U. S. market. In addition, while U. S. firms

iaries or contract manufacturers.)

Trade deficits notwithstanding, exports of semiconductors
have increased steadily since 1985. In fact, by 1995, exports
more than doubled from 1992 levels.'’ Not surprisingly, ex-
ports generate a significant number of jobs in this industry. A
study by the Commerce Department estimated that U. S. em-
ployment in semiconductor manufacturing that was supported
by exports grew 25 percent from 1983 to 1992.'° The study
also found that 120,000 semiconductors jobs, or about half of
all U. S. semiconductor jobs, were supported by exports in
1992.

Jobs in the semiconductor industry have increased more
than 20 percent since its latest trough in June 1993—although
manufacturing as a whole has been losing workers. To ex-
plain this strength and the likelihood of its duration, the next
section analyzes how advances in semiconductor technology
have shaped U. S. production into capital and R&D intensive
activities that demand highly skilled workers.

How chips are made”’

Manufacturing an integrated circuit starts with a blank silicon
wafer. These wafers are either produced in-house or bought
from a supplier. The major steps of wafer processing are film

Monthly Labor Review August 1996 11



Computers and Semiconductors

Cost structure of the U.S. semiconductor industry, 1980 and 1994

Percent Share of total annua! expenditures Percent
50 50
1980 1994
+ 40
4 30

4 20

410

Manufacturing
labor

SOURCE: Semiconductor industry Association.

Manufacturing
nonlabor

Depreciation

(0)
Research

and development

cians and engineers who perform both production and research
tasks.

Current Employment Statistics data show that semicon-
ductor production workers have fluctuated in a narrow range
between 40 percent and 50 percent of total employment since
1972. Production positions include manufacturing operators
and maintenance technicians. Many of these positions are
high-skilled, given the degree of development of semicon-
ductor manufacturing techniques. This has brought local short-
ages of skilled semiconductor labor, especially entry-level po-
sitions. The situation has prompted the training departments
of some chip firms to team with local community colleges to
develop specialized semiconductor programs for production
jobs.

Costs and earnings

Even though semiconductor employment increased 5 percent
from 1980 to 1995, the share of labor-related manufacturing
costs actually decreased over the same period,” due to the
combined effect of increases in productivity and increases in
capital expenditures relative to total expenditures. In fact,
nonlabor manufacturing costs have increased significantly.
(See chart 5.) The increase in these production costs and de-
preciation expenses is associated with investing in expensive,

14 Monthly Labor Review August 1996

complex equipment with high operating and maintenance
costs. In 1994, the industry spent $9 billion in new property,
plant, and equipment. Between 15 and 20 percent of sales
revenue is spent annually by U. S. semiconductor firms on
capital expenditures. Two-thirds of these expenditures go to
wafer fabrication equipment. .

R&D costs have averaged an annual growth rate of 16 per-
cent since 1978. Increasing R&D costs is necessary because
of the rapid rate of technological change. SemiconductorR&D
expenditure was $4.7 billion or 10.6 percent of sales in 1994,
Research expenses for semiconductor firms are higher ,as a
share of revenues than those for overall manufacturing, com-
puter communications, computer manufacturing, general
electronics, pharmaceuticals—in fact, higher than any indus-
try except software services.

Although soral costs are high, capital expenditures and R&D
outlays aimed at higher chip densities have paid off in terms
of lower unit costs, lower labor manufacturing costs, and
higher sales per employee.” This, in turn, has afforded lower
prices. Semiconductor unit production costs decline as pro-
duction experience, measured by cumulative output, in-
creases. According to one estimate,” unit production costs
in this industry fall by 20 percent every time cumulative out-
put doubles. Correspondingly, prices of integrated circuits,
including microprocessors and memory chips, have come



Computers and Semiconductors

Francisco A. Moris

Francisco A. Moris is an
economist In the
Division of Monthly
Industry Employment
Statistics, Bureau of
Labor Statistics.

Semiconductors: the building blocks
of the information revolution

Driven by advances in technology

and an ever-growing demand, job growth
and earnings in the semiconductor industry
are above those of manufacturing as a whole

1 U. S. semiconductor industry is re-

I nowned for its record of technological

breakthroughs. These advances have in-
creased the speed and capabilities of computer
chips and led to employment growth in the in-
dustry that runs against the grain of recent U. S.
manufacturing history. On the demand side, this
feat has been sustained by an apparently insa-
tiable worldwide demand for what is the enabling
technology of computers, telecommunications
equipment, and consumer electronic products. In-
deed, semiconductor companies produce the very
building blocks of the information revolution.

Semiconductor producers are also engaged in
a costly, worldwide race of technology develop-
ment evident in the continuous flow of advanced
products, high research and development (R&D)
expenditures, and expensive fabrication facilities.
This has required a growing, highly trained work
force, with hourly earnings substantially above
the average in manufacturing. In 1995, the in-
dustry employed 236,000 workers, 10 percent
more than in 1993,

Interaction between technology and employ-
ment in semiconductor manufacturing affect
worker productivity, offshore employment, tech-
nology diffusion, and R&D employment. Follow-
ing a background section, the discussion covers
three major topics: the organization of the indus-
try (including a geographic profile of production
and employment), employment and trade, and
manufacturing technology and labor (including
the economics of chip assembly and the cost
Structure of the industry). The final section con-

6 Monthly Labor Review August 1996

trasts a recent slowdown in the semiconductor
market with the positive long-term outlook based
on industry expansion plans.

What are semiconductors?

Semiconductor devices are the basic functional
components of computers and other electronic
products. They are based on materials, such as
silicon, that conduct electricity with less facility
than perfect conductors; small changes in their
physical structure often induce significant
changes in their electrical properties. This makes
these materials extremely versatile because their
electrical properties can then be customized to
create new applications or improve performance.
The industry’s products include discrete semi-
conductors and integrated circuits. Discrete semi-
conductors are semiconductors with a single com-
ponent like a transistor. These products are used
as components in electronic circuits.’ Integrated
circuits (IC), or computer chips, are pieces of sili-
con wafers that incorporate complex electronic
circuits. They can contain millions of transistors
and other components. In terms of shipments, the
major products are IC’s, including microproces-
sors and memory chips. These products are avail-
able at several levels of integration: from chip
sets to computer motherboards and modules.
Microprocessors function as the central pro-
cessing unit of a computer. They vary in speed
and the ability to do a variety of logical and math-
ematical functions. These features are determined
primarily by the number of transistors per chip.



conductor and related products was 276.3 in 1995 (1987=100). This index
includes production in all four-digit sic codes under 367, except 3671. Pro-
duction estimates from U. S. Markets Review: Industry Focus, Fall-Winter
1994-95 (Lexington, MA, DRV/McGraw-Hill, November 1994.)

\ For a historical perspective, see Issues confronting the semiconductor
industry, Hearings before the Subcommittee on Technology and the Law, Com-
mittee on the Judiciary, U. S. Senate, 101st Congress, 1987. These hearings
considered amendments to the 1984 Semiconductor Chip Protection Act. See
also A Strategic Industry at Risk. (National Advisory Committee on Semicon-
ductors, 1990). The trade agreement is up for renewal in July 1996, but Japa-
nese chip firms want to end the accord. The Japanese argument is summarized
in Mission accomplished (February 1996), Electronics I Association
of Japan (www.eiaj.org). See also The Wall Street Journal, Nov. 3, 1995, p.
Al0; and Investor's Business Daily, November 3, 1995, p. A34.

'S Electronic Industries Association, based on U.S. Department of Com-
merce data.

SL, Davis, U. S. jobs supported by goods and services exports, 1983-92.
(U.S. Department of Commerce, Economics and Statistics Administration,
Office of the Chief Economist, May 1995.) Data are in full-time equiva-
Tents,

"Sources: McGraw Hill Encyclopedia of Science and Technology, Les
Freed, The history of computers (Emeryville, CA , Ziff-Davis Press, 1995),
The U. S. semiconductor wafer processing equipment market (U.S. Depart-
ment of Commerce, Intemational Trade Administration, 1992), and Global
Competitiveness of U. S. Advanced Technology Manufacturing Industries:
Semiconductor Manufacturing and Testing Equipment (U.S. International
Trade Commission, September 1991.)

“ A micron is a millionth of a meter, The diameter of the human hair is
about 200 microns.

'° For a background on the future integrated chip plant see National Tech-
nology Roadmap (San Jose, ca, Semiconductor Industry Association, 1994.)

® See footnote 2.

TM See reference in footnote 19.

® For employment generated by the home computer market, see Laura
Freeman, “Job creation and the emerging home computer market,” pp. 46—
‘56, in this issue.

> “Ls Logic unveils process to increase transistors on semiconductor
chips,” The Wall Street Journal, Sept. 18, 1995, p. B9; “intel puts chip under
Pentium brand, meaning some won't reap its benefits,” The Wall Street Jour-
nal, Sept. 20, 1995, p. B8; “Intel to trot out next chip generation; high speed

and low price are surprise,” The Wall Street Journal, Nov. 1, 1995, p. B6;
“Sun Microsystems Inc. to unveil computers based on new chip,” The Wall
Street Journal, Nov. 7, 1995, p. B2.

TM See reference in footnote 5.

5 Semiconductors and microelectronics also support employment in RAD
and engineering services related to these manufacturing activities. For era-
ployment in engineering services, see William C. Goodman, “The software
and engineering industries: threatened by technological change?” pp. 37—
45, in this issue.

% Solid State Technology newsletter, Headlines, 4-18-96, http://
www.solid-state.com,

® Based on Semiconductor Industry Association data, which exclude for-
eign-based U. S. plants.

2 Sales per employee have more than tripled, from $38,000 per employee
to $147,000 per employee between 1978-93 (based on BLS and Bureau of
the Census data), There are no productivity data for sic 3674 published by
BLS.

® D. A. Irwin and P. J. Klenow, “Learning-by-doing spillovers in the
semiconductor industry,” Journal of Political Economy, Vol. 102, No. 6, De-
cember 1994,

% The average hourly earnings data are from the Current Employment
Statistics program and cover all plants located in the United States, includ-
ing foreign-owned establishments.

TM Company press releases: National Semiconductor (4-2-96); and Cir-
rus Logic (3-19-96).

TM 1996 Spring Forecast, World Semiconductor Trade Statistics (San
Jose, ca, Semiconductor Industry Association, 1996)

% “Running wafer-thin,” Business Week, Mar, 25, 1996; and public com-
pany reports,

TM Some of these companies are: Analog Devices, visi Technology, ist
Logic Corp., Motorola, 1em/Toshiba, Intel, Texas Instruments/Hitachi,
Hyundai Electronics, Samsung Semiconductor, Mitsubishi Semiconductor
America Inc., and Sumitomo Sitix Corp. See “In the hot world of chips,
tradition melts,” The Wall Street Journal, Oct. 30, 1995, p. B4; “IBM, Toshiba
Corp. plan $1.2 billion plant for computer chips in Manassas, va," The Wall
Street Journal, Aug. 8, 1995, pp. A2, A14; “Motorola to build a chip plant in
(Richmond) Virginia,” The New York Times, Sept. 8, 1995, p. D2; “Texas
Instruments hikes 1995 growth forecast,” Electronic News, June 26, 1995;
“Hyundai Electronics’ semiconductor fabrication plant in Eugene, Oregon,”
Electronic News, May 29, 1995; and “More capacity expansions slated.”
Electronic News, May 22, 1995.

Monthly Labor Review August 1996 17



Computers and Semiconductors.

several scenarios for human resources needs. Even if the rate
of periodic technology advances slows at some point early in
the next century—after physical limits of miniaturization of
chips become harder and more expensive to overcome—there
will be long-term labor implications.

As technology advances, U. S. semiconductor workers in-
creasingly are performing knowledge-based tasks, whether
R&D, chip design, or production. Automated assembly pro-
cesses and the integrated semiconductor factory could change
the economics of offshore chip assembly. Nevertheless, the
share of offshore employment has changed little in the last 15
years, in spite of a host of technology developments (includ-
ing automated processes), trade deficits, and higher domestic
labor costs.

On the other hand, the high cost of semiconductor manu-
facturing facilities makes small manufacturers more vulner-
able to the overall decline in chip prices. Firms unable to in-
vest continually to either develop advanced chips or to set up
efficient manufacturing for high-volume production are likely
to either consolidate or exit the business altogether. So far,
this has not been a widespread event.

Semiconductor companies faced difficulties in meeting the
surge in demand for memory chips and microprocessors dur-
ing 1995, spurring plans to increase chip capacity and caus-
ing shortages of silicon wafers still affecting the market.
Expansion plans to overseas markets include new plants in
Southeast Asia and China. In the United States alone, more
than 10 major companies are building or planning new fabri-

Footnotes

cation plants and chip design centers over the next 2 years.*
This bodes well for continued job growth. However, the cur-
rent slowdown has prompted delays (but no cancellations, as
of mid-1996) of some firm’s expansion plans.

Even new foreign locations are not likely to come at the
expense of U. S. semiconductor workers. The size of the
emerging semiconductor markets is likely to call for a larger
global labor pool, in the long term, as opposed to a mere shift
of production sites. In addition, new generation chips are
likely to be developed and market-tested in advanced mar-
kets, especially the United States.

The balance of these factors points to softer job growth
during 1996, with a brighter outlook over the long term. From
the technology or product supply side, the development of
faster and more versatile computer chips is likely to demand
high-skill U. S. labor, even if advances in semiconductor
manufacturing techniques and automation continue to in-
crease labor productivity. In addition, growth in demand for
memory chips and microprocessors, the largest semiconduc-
tor segments, is going to be pulled by a projected long-term
increase in the use of desktop and laptop computers, and elec-
tronic communications products worldwide. Foreign semi-
conductor firms, for their part, are being lured here by the
fact that the United States sports the largest advanced con-
sumer market and a sophisticated labor force. The conver-
gence of these factors are likely to sustain U. S. semiconduc-
tor job growth and above-average worker earnings well into
the next century. Qo

1 An electronic circuit is a closed path of devices that produce and man-
age electricity (a current of electrons). It has three basic components. Ac-
tive components (such as transistors and diodes) produce and transfer elec-
tricity. Passive components (such as capacitors, resistors, and inductors)
direct, transform, or store electricity, Finally, a printed circuit board is the
physical structure where all the components are mounted and where the elec-
trical interconnection of the components is established.

2A bit or binary digit can take a value of either 0 or 1, representing on/off
electrical switches. Memory capacity is measured in kilobits (2'°=1,024 bits),
megabits (2” bits, or about a million bits), and gigabits (2 bits, or about a
billion bits).

3 Memory chips—read-only memory (rom) and random access memory
(Ram) chips—contain the internal memory of a computer. Rom is permanent
memory whereas aM is temporary. DRAM’s are Dynamic Random Access
Memory chips.

+ For an analysis of employment in the computer industry, see Jacqueline
Warnke, “Computer manufacturing: change and competition, ” pages 18-29,
this issue.

5 1995 Annual Databook (San Jose, ca, Semiconductor Industry Associa-
tion, 1995. See also www-semichips.org). Data for the North American mar-
ket exclude foreign-owned companies. Most of the plants included are in the
United States, with a few plants in Canada and Mexico.

* Southeast Asia is specially strong in chip foundries.

7 Advanced Micro Devices, for example, acquired NextGen Inc. in early
1996. The companies expect to better compete against Intel, a leader in Pcs
microprocessors.

16 Monthly Labor Review August 1996

" In fact, Samsung Electronics Co., of South Korea is the world largest
pram maker in terms of 1994 sales, followed by Hitachi, nec, and Toshiba of
Japan. Texas Instruments, 1M, and Micron Technology Inc. are the largest
U.S. firms in this market. See “Micron Technology survives and then some,”
The New York Times, Sept. 5, 1995, p. D1, “Bad times are just a memory for
pram makers,” The Wall Street Journal, Aug. 28, 1995, p. B4, and “Chips,”
Business Week, Aug. 28, 1995.

9 Products in the communications market include telephone equipment,
radio paging and wireless data systems, land mobile products, and cellular
and personal communications systems. ‘The industrial sector includes con-
trol and measuring equipment and energy storage products. Consumer prod-
ucts include pocket calculators, audio, video, and other home appliances.

1° Employment and Wages, Annual Averages, 1994, Bulletin 2467 (Bu-
reau of Labor Statistics, October 1995.)

'\ See “Silicon forest,” The Wall Street Journal, Aug. 4, 1995, pp. Al,
AS. Virginia could become a regional center for semiconductor production
and employment if recent plant building announcements materialize in the
next few years. See “A dream of silicon Virginia.” The Washington Post,
Aug. 14, 1995.

“As computer titans focus on design, smaller firms undertake actual
output,” The Wall Street Journal, Sept, 11, 1995, p. BSA; “Silicon Valley
manufacturers are seen as beneficiaries of the dollar's rise,” The Wall Street
Journal, Sept. 12, 1995, p. A2.

"3 Sales data from Semiconductor Industry Association. The Federal Re-
serve Board's Industrial Production Index (seasonally adjusted) for semi-



formation, impurity doping, lithography, and etching.

Processing starts with a film over the surface of the wafer
to protect it from contaminants in the atmosphere. Next, the
wafer is coated with a photosensitive material on which a
pattern is drawn using lithographic techniques. Chemical
etching transfers the pattern to the underlying silicon surface;
certain impurities can be introduced selectively to achieve
desired electrical properties. A complete integrated circuit
contains many circuit layers, so that a wafer may require many
cycles through these processing steps.

Lithography techniques and shrinkage of chip geometry.
Lithography represents more than 35 percent of chip manu-
facturing costs. Optical lithography, the standard technique,
draws circuit lines only half of a micron apart.'* Such short
distances between circuit lines allow chip designers to pack
more components onto a single silicon crystal.

Larger wafers and chips with higher densities decrease unit
costs and afford economies of scales by making possible more
transistors per chip and per manufacturing step. In addition,
higher densities allow more information processing per unit
of time, thus yielding faster microprocessors and decreasing
costs per function. These factors underlie productivity increases
and the downward trend in prices of integrated circuits.

Testing, assembly, and packaging. The various circuits in
the wafer need to be mechanically and electrically tested. In
the assembly stage, the wafers are split into chips and each
chip is fastened to a lead frame using a bonder. Molding and
sealing equipment encapsulates the chips in ceramic or plas-
tic packages.

Integrated factory versus offshore production. Currently,
testing and packaging are labor-intensive activities relative
to other processing steps. As mentioned earlier, this has fa-
vored low-cost chip assembly plants offshore, independent
of wafer processing plants and R&D centers. However, the
technical demands of manufacturing ever-smaller chips is
leading to complex assembly and packaging steps amenable
to further automation. This would reduce labor intensity and
increase the proportion of higher-skilled labor in this part of
the production process. In addition, submicron chips require
more coordination both between research and production, and
among the different manufacturing steps. This means that—
at least for some segments of the industry—decentralized glo-
bal production of a given batch of chips may not best use the
expensive human and capital resources brought forth by these
new requirements.

Over the long term, this could favor integrated plants" with
high-skill workers involved in a continuum of tasks, from
modeling and simulation, to processing and assembly. This is
likely to diminish the leverage of offshore contract manufac-

turers using low-skill, low-cost labor. Under this scenario,
automation and advanced manufacturing would benefit U. S.
semiconductor employment by transforming its jobs into ones
less likely to be shifted elsewhere. Until now, this possibility
has received little attention by most industry observers.

This is not to say that outsourcing arrangements are likely
to disappear, given that contract manufacturing has a flexibil-
ity element useful in the presence of sudden changes in the
market. In addition, the strategic importance of offshore plants
as stepping stones into emerging markets, such as China and
Eastern Europe, is not likely to diminish.

Research developments

The objectives of current research are faster microprocessors
without increased power consumption, and memory chips
with higher capacities. The two basic research strategies are
miniaturization of the chip with higher transistor densities (as
detailed above) and the use of new electronic materials. The
latter include compound semiconductors such as silicon-ger-
manium and gallium-arsenide chips. Either research strategy
requires complementary development of labor skills.

Current memory chip technology has a capacity of 16
megabits (16 million bits).” A 64-megabit chip is set for pro-
duction by an international joint venture. Researchers are well
along the way to developing a 256-megabit chip and the semi-
conductor industry’s National Technology Road-map” has set
ambitious targets for the next generation of IC’s. This agenda
calls for DRAM’s with circuit lines less than a tenth of a mi-
cron apart and 64 gigabits per chip (64 billion bits) to be in
production by the year 2010.

Higher component densities not only increase the amount
of information a chip can hold, they also facilitate the inte-
gration of additional circuits for new features, such as multi-
media capabilities. Multimedia chips, able to work with data,
audio, sound, and images for 3D graphics and video applica-
tions, are becoming available for the home PC market. For
example, chips with graphics circuitry have already been pro-
duced for video-game machines. There are also plans to put
digital cellular telephone functions in a custom chip and de-
velop a computer workstation based on a chip with built-in
video compression and networking capabilities.”

Product development projects at private companies, to-
gether with research universities and major Federal R&D agen-
cies serve as skill-development sources. Semiconductor In-
dustry Association data show that U. S. firms employ 60 per-
cent of semiconductor workers in manufacturing activities
and about 20 percent in R&D tasks.* Public company reports
show R&D employment to be as high as 30 percent of world-
wide operations employment. Smaller high-tech companies
that aim at niche IC markets are likely to have an even larger
proportion of employees in R&D functions, including techni-

Monthly Labor Review August 1996 13



FREER semiconductor markets, by percent end use, United States and Japan, 1994

Computer

United States

‘SOURCE: Based on data from the Semiconductor Industry Association.

Computer

Military
(0.1 percent)

Consumer

Japan

Alto corridor in California. In fact, California is the Nation’s
largest semiconductor producer and employer. There are
more than 1,100 semiconductor establishments nationwide,
but almost half of the industry’s 1994 employment is concen-
trated in three states: California, Texas, and Oregon.!°
Suppliers of materials, computer makers, and other elec-
tronic firms often locate in a given region to take advantage
of pools of highly skilled labor-like electronic engineers and
computer programmers. Others go to low cost areas, and meet
employment needs with local and out-of-State college gradu-
ates and workers. This has generated competition among
States for semiconductor companies, given that a single chip
plant can create several thousand jobs and attract related high
tech firms. ‘Silicon Forest’ in Oregon is emerging as an area
with a high concentration of semiconductor companies, with
more than $13 billion in high-tech construction either planned
or underway between Portland and Eugene. A State econo-
mist predicts that at least 25,000 chip-related jobs will be
added to Oregon’s payrolls by the end of the decade. "'

Worldwide markets. The spread of technology and differ-
ences in overall costs of production have shaped the world-
wide semiconductor market into four regions with two major
tiers. (See chart 2.) The first tier—composed of the United
States and Japan—are about equal in semiconductor market

share (about 30 percent each). They exchanged leadership
roles in 1982 and 1994. The second tier is composed of the
Asia/Pacific countries and Western Europe, which share
equally the remaining 40 percent of the market. European
market shares have been mostly flat since 1982. The market
share of Asia/Pacific countries increased steadily between
1982 and 1994, to about a fifth of the market.

U. S-based firms employ about half of their work force in
facilities abroad, according to the Semiconductor Industry
Association. Many U. S. firms compete on a worldwide basis
and have production and marketing facilities in all four re-
gions mentioned above. The production process of an IC en-
tails tradeoffs among different capital and labor intensities.
U.S. semiconductor firms perform research and development,
product design, and wafer fabrication mostly in U. S. facili-
ties. On the other hand, a good share of product assembly and
testing is done in offshore facilities, especially in Southeast
Asia.” The finished products are either imported back to the
United States, where they are subject to import duties only on
value added abroad or exported to a third country. In addi-
tion, some U, S. semiconductor firms have plants in low-cost
European countries such as Ireland, and in Israel.

There are several factors behind technological diffusion in
the semiconductor industry. Global research and production
activities, often on a joint-venture basis, are major factors. In

Monthly Labor Review August 1996 9



Computers and Semiconductors

hires. Overseas joint ventures provide an additional venue
for U. S. semiconductor jobs.

In technology agreements, such as licensing of technolo-
gies or products, firms share key personnel to develop a manu-
facturing technique or a product. Sometimes these agreements
involve participation in stock ownership and are preludes to
acquisitions or mergers. Both provide a competitive edge by
complementing manufacturing and technology strengths,’
sometimes accompanied by job transfers or layoffs. However,
Mergers have not been a significant source of employment
change in semiconductors recently.

The many relationships among semiconductor firms have
different employment impacts. For example, contract manu-
facturing increases efficiencies at the industry level between
research powerhouses and volume producers. (See section on
costs below.) This practice affects U. S. semiconductor em-
ployment whenever the chip foundry is located offshore. How-
ever, as discussed later in this article, advances in technology
may alter the economics of offshore chip manufacturing.

End markets

The United States and Japan are the largest semiconductor
markets with 32.9 percent and 28.9 percent, respectively, of

worldwide consumption. The computer market is the larg-
est semiconductor user in both the United States and Japan.
(See chart 1.) The high-end sector of the computer industry
is one end user willing to pay for the latest generation of
integrated circuits and other semiconductor products. There-
fore, any country dominating semiconductor R&D is likely
to dominate the computer sector of the semiconductor mar-
ket. The United States has maintained its leading position
in sophisticated microprocessors, while largely leaving the
commodity DRAM market.®

Reflecting the size of the Japanese consumer electronics
manufacturing industry, the consumer segment is the sec-
ond largest end user of semiconductors in Japan, whereas it
is a distant fifth in the United States. As can be seen in chart
1, end-use market shares are more evenly distributed in Ja-
pan, compared with the United States.” This is an advan-
tage when it comes to weathering demand slumps in certain
sectors of the market.

Geographic profile

United States. Silicon Valley has become a household
name since the early 1970s, when the chipmakers and com-
puter designers gave fame and fortune to the San Jose-Palo

Structure of the U.S. semiconductor Industry, with examples of major companies

Telecommunications

R&D start-ups
Semiconductor firms

LSI Logie

Joint ventures
Contract manufactunng
Technology agreements
Equity investments.

ee ar _ —

Applied Materials
Semiconductor materials
and equipment firms

Micron Technology

8 Monthly Labor Review August 1996



‘Transistors in an IC translate information into bits or on/off
switches.” This allows the computer to write and manipulate
data by simply controlling a flow of electric signals. Memory
chips’ store information and can be characterized by capacity
(bits/chip) and speed.

Semiconductors and computers are interdependent in the
marketplace as well as in the design lab. Computer demand
is driven by the desire for higher speed and increased func-
tionality.‘ This in turn, is determined by the system design
and the underlying capabilities of its components. At the same
time, the semiconductor industry is driven by the competitive
pressure created by computer design cycles of 6 to 12 months.
In turn, this translates into the demand for ever-faster and
more versatile chips, resulting in more jobs in semiconductor
R&D and production.

The industry

The electronics industry (electronic and other electrical equip-
ment, SIC 36) , with 1.62 million employees in 1995, is one of
only seven manufacturing industries employing more than a
million workers. Electronic components manufacturing (SIC
367) is the largest employer in the electronics industry and
semiconductor plants (SIC 3674) employ more than 40 per-
cent of electronic components workers. Semiconductor jobs
have more than doubled since 1972, the starting date of the
employment series for this industry. (See table 1.)

The semiconductor industry is composed of firms that de-
sign, manufacture, and market semiconductor devices for
original equipment manufacturers and for personal computer
(PC) users. Semiconductors control and amplify electrical sig-
nals in many electronic products. These include computers;
TV’s, VCR's, and other home appliances; telecommunications
equipment; industrial machinery; aircraft; and military equip-
ment. Computers and telecommunication products consume
more than three-fourths of U. S.-made chips.

U. S. semiconductor companies are major players in the
electronics industry and the global economy. According to

Employment in electronic equipment, electronic
components, and semiconductors, 1972 and
1995 annual averages
[Numbers in thousands)
Percent ot
si SIC 36
rember | Industry | 1972 | 1905 Percent
1972 | 1995 |9own
36 Electronic
equipment [1,535.0 |1,624.7|  ... » | 58
367 Electronic
components | 345.1| 5a1.7| 225 | 358 | 686
3674 | Semiconductors | 115.2| 236.0] 7.5 | 145 | 1049
——

the Semiconductor Industry Association, in 1994, they held
50 percent of the European semiconductor market, 40 per-
cent of the Asia/Pacific market, and 17 percent of the Japa-
nese market. The Association's data show that the worldwide
semiconductor market was valued at $144.4 billion in 1995.
The North American market consumed $46.9 billion, or 32.5
percent.’ As an indication of how rapidly the industry is ex-
panding, the Association estimates the 1996 worldwide and
North American markets at more than $154.0 and $50.6 bil-
lion, respectively, The industry exhibits a continuous flow of
new products, rapid erosion of prices, short product cycles,
and cyclical demand.

The organizational structures of U. S. semiconductor firms
vary according to size and degree of specialization. Some of
the larger semiconductor manufacturing firms have chip de-
sign facilities and large R&D departments; many of these have
technology centers that provide customer support. So-called
chip foundries are semiconductor manufacturers that do not
have in-house chip design capabilities. They manufacture
under contract for other chip companies with small or no manu-
facturing facilities—a practice known as contract manufac-
turing. It involves mostly commodity chips (low-cost, high
volume IC’s such as DRAM’s).° Some firms, often start-ups,
specialize in research and product development and have
a small staff. Integrated circuit engineering firms are mostly
small service firms that perform design work for chip manu-
facturers. Foreign firms in the United States, including Japa-
nese, South Korean, and European firms, have production
or chip design facilities on their own or jointly with U. S.
partners.

Semiconductor firms, whether they are integrated firms,
R&D start-ups, or chip foundries, can have different positions
in the industry structure. (See exhibit, page 8.) Some firms
manufacture almost exclusively semiconductor products.
Semiconductor divisions of large computer, electronics, and
aerospace companies manufacture both semiconductor de-
vices and complete electronics products and systems. Other
companies show backward integration—they manufacture
not only computer chips, but also silicon wafers, the starting
material of chips, for both internal use and the merchant
market. .

Firms that manufacture complete computer systems, stor-
age devices (such as hard disks and CD-ROM’s), and periph-
eral computer equipment have a close relationship with semni-
conductor firms. Increasingly, the high demand for chips from
these firms requires unwieldy arrays of chip suppliers and
delivery schedules. Some eventually establish joint manufac-
turing ventures with their semiconductor suppliers. These
joint ventures enable chips to be made with the latest technol-
ogy at lower cost and with direct control over product quality
and delivery schedules. Typically, the staff is a combination
of loaned keyworkers from the parent companies and new

Monthly Labor Review August 1996 7