|Author Name||Willem THORBECKE (Senior Fellow, RIETI)|
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This Non Technical Summary does not constitute part of the above-captioned Discussion Paper but has been prepared for the purpose of providing a bold outline of the paper, based on findings from the analysis for the paper and focusing primarily on their implications for policy. For details of the analysis, read the captioned Discussion Paper. Views expressed in this Non Technical Summary are solely those of the individual author(s), and do not necessarily represent the views of the Research Institute of Economy, Trade and Industry (RIETI).
In 2017 President Trump launched a trade war against the Chinese semiconductor industry. The Trump Administration initiated an unfair trade investigation into opaque subsidies to Chinese semiconductor firms. It then tightened the screws for national security reasons, forbidding sales by U.S. firms to Huawei, Semiconductor Manufacturing International Corporation, and other Chinese firms. It also restricted the sale of U.S. technology to firms abroad that supplied semiconductors to these entities.
As Trump's actions were sewing uncertainty in the semiconductor industry, the COVID-19 pandemic whipsawed the sector. When coronavirus news hit the world stage in February 2020, the bleak macroeconomic outlook caused semiconductor stock prices to fall by 30 percent in Taiwan and by more in South Korea and Japan. Automakers facing lockdowns canceled orders for chips. As individuals began working from home, spending on information and communications technology soared. This increased the demand for chips. When demand for automobiles recovered later in 2020, semiconductor manufacturers lacked devices to sell to automakers. The shortage of these devices that might cost only 2 dollars forced car plants to shutter production.
This paper presents a history of the semiconductor industry from its origins in the U.S. to its development in Japan and then its migration to South Korea and Taiwan. It also considers why Malaysia failed to advance to higher value-added production and how the trade war impacted the industry in China.
It then considers how the COVID-19 crisis has affected the industry. It does this by investigating how stock returns have been affected. Finance theory teaches that stock prices equal the expected present value of future cash flows. Black (1987, p. 113) observed that, "The sector-by-sector behavior of stocks is useful in predicting sector-by-sector changes in output, profits, or investment. When stocks in a given sector go up, more often than not that sector will show a rise in sales, earnings, and out-lays for plant and equipment." The response of stock prices should thus provide information about how sectors are being affected.
The coronavirus shock began causing stock prices around the world to fall on 19 February 2020. An equation is thus estimated explaining stock returns until 18 February 2020, and then actual values of the explanatory variables are used to predict stock prices during the crisis period. The difference between actual stock prices and predicted stock prices can shed light on how the crisis is affecting the sector.
The performance of the Taiwanese semiconductor sector is investigated, since Taiwan is the most technologically advanced semiconductor maker. The performance of two key downstream sectors, consumer electronics and automobiles, is also investigated.
To explain stock returns, the returns on the countries' aggregate stock markets, the return on the world stock market, the price of oil, the nominal exchange rate relative to the U.S. dollar, and a measure of interest rates are included. The paper presents evidence that consumer electronics and automobile stocks fell much more than forecasted based on the macroeconomic variables. Then starting in the summer of 2020, they soared, and by January 2021 they were 40 percent above their forecasted values.
Bown (2020) noted that 75 percent of semiconductor devices flow to electronics products and the other 25 percent go to automobiles and other applications. With the outlook for electronics and automobiles improving, one would expect the semiconductor industry to also benefit. Figure 1 indicates that this is true. Actual returns on the Taiwanese semiconductor sector fell about 30 percent with the advent of the crisis. Actual returns remained close to predicted returns until the beginning of July 2020. Actual returns then far outpaced predicted returns and by 19 January 2020 were almost 70 percent above pre-crisis values and almost 30 percent above forecasted values. The semiconductor industry is thus profiting during the pandemic.
The paper concludes with several policy lessons. Semiconductors are vital for the world economy. Though they were invented in the U.S., their manufacturing has migrated to South Korea, Taiwan, and other Asian countries. The U.S. and its Western allies now perceive the risks of having so much production centered so far away. Earthquakes, fires, or wars could cut off producers in the West from these vital inputs. The U.S. and Europe are thus seeking to nurture domestic semiconductor manufacturing. However, they are unlikely to succeed only by throwing money at the problem.
The successes of Japanese, Korean, and Taiwanese firms offer some lessons. First, receiving lucrative government contracts is less likely to produce a strong industry than competing in world markets. U.S. electronics firms after World War II developed transistors, complementary metal–oxide–semiconductors, liquid-crystal display, and countless other technological breakthroughs. These firms were often coddled by defense contracts, however, and faced little pressure to convert these technologies into marketable products. Asian firms, on the other hand, focused on exporting and competing in consumer goods markets. This discipline forced them to choose technologies carefully and adapt them to make profitable products.
A second lesson is that entrepreneurs are essential. Tadashi Sasaki at Sharp had the vision to use integrated circuits to miniaturize calculators. This led to hundreds of millions of calculators being sold. Byung-Chull Lee at Samsung took risks to produce dynamic random-access memory chips. His success in this area helped make Samsung a company in 2021 that has a market capitalization of almost $12 trillion.
A third lesson is that industrial policy is more likely to succeed when citizens view their national survival to be at risk and when they thus unite for the national good. This may have been the case for South Korea and Taiwan facing the threat of invasion from neighboring countries. Economic development was viewed as imperative, and workers, entrepreneurs, government officials, and outside advisors worked together to achieve it. When, as in the case of Malaysia, redistribution rather than maximizing output is a primary goal of government, industrial policy can lead to rent-seeking waste and not produce a competitive industry.
A fourth lesson is the importance of education and technology transfer. Tadashi Sasaki was well educated and quickly sensed the technologies that his firm should invest in. Engineers in Korea and Taiwan were relatively well educated and absorbed knowhow from their counterparts in America. This bridged the knowledge gap until they acquired the requisite manufacturing experience.
A fifth lesson is the necessity of providing firms with incentives. Malaysia often did not let Bumiputera firms (i.e., firms owned by indigenous Malaysians) fail even when their performance was poor. On the other hand, the Korean government stopped providing benefits to firms that did not succeed at exporting. Proper incentives can help industrial policy to achieve its target.
A sixth lesson is that protectionism can be counter-productive. Japan's refusal to let firms like Autonetics continue selling semiconductors to Japan and America's actions against chip firms in Japan ultimately weakened the semiconductor industries in both countries.
A seventh lesson is that cooperation between academia, industry, and government research institutes can be valuable. Not only did the Technical Advisory Committee in Taiwan contain leading professors, but Taiwanese science parks enabled fertile interactions between universities, businesses, and the government.
Building a vibrant semiconductor manufacturing sector in the West will thus require careful thought and planning. Simply saying that the Korean and Taiwanese governments invested money in semiconductors and that Western governments should follow suit will fail.
- Black, Fischer 1987: Business Cycles and Equilibrium. New York: Basil Blackwell.
- Bown, Chad 2020: How the United States Marched the Semiconductor Industry into Its Trade War with China. Peterson Institute for International Economics Working Paper No. 20-16, Washington, DC.