Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast.
Speaker 1: I'm Joe Wisn'tal And I'm Tracy all Away. Tracy, remember
Speaker 1: when I said a few weeks ago that I thought
Speaker 1: we should do a semiconductor Odd Lots spinoff series. No whole,
Speaker 1: not a whole, not a series, like a whole new show.
Speaker 1: The idea, a whole new show on the subject. No,
Speaker 1: that's not what you said. You said you wanted to
Speaker 1: transform All Thoughts into a semiconductor podcast. So this is
Speaker 1: the latest step in your plan to do that, I assume. Yeah,
Speaker 1: so we're not going to do that, And realistically, I
Speaker 1: don't think we're going to have a new spinoff Odd
Speaker 1: Lots branded uh semi conductor show, but I do think
Speaker 1: but we are going to do some more episodes on
Speaker 1: the topic because it really does just intersect with a
Speaker 1: lot of different themes. There's sort of the pure tech
Speaker 1: question of their role in the economy, why different companies
Speaker 1: are rising and falling, but there's it also intersects with
Speaker 1: um things like national security and sort of economic strength
Speaker 1: and some of the questions we've seen during the COVID
Speaker 1: crisis about say domestic manufacturing and reliance on manufacturing in
Speaker 1: other countries, So it's a it's a rich load to mine. Yeah, well,
Speaker 1: I mean you could go even further. So it kind
Speaker 1: of gets to, I guess, the heart of a large
Speaker 1: body of economic thought, right, how do you balance domestic
Speaker 1: interests with market forces? So when the entire market is
Speaker 1: telling you to outsource manufacturing to a cheaper place and
Speaker 1: they can do it more efficiently, is that the way
Speaker 1: to go for something as important as a sensitive technology
Speaker 1: like a semiconductor. And I think we're seeing those tensions
Speaker 1: over and over. I think we see them reflected in
Speaker 1: a lot of US politics and the way people feel
Speaker 1: at the moment. But of course we also see that
Speaker 1: reflected in the U. S. China trade war, and technology
Speaker 1: is really ground zero of that. And within technology, semiconductors
Speaker 1: are the epicenter of the ground zero. I'm mixing my metaphors,
Speaker 1: but I think you get it. The epicenter of the
Speaker 1: ground zero. No, I get it, And I think you're
Speaker 1: absolutely right. Like it's kind of a it's a business topic,
Speaker 1: but it intersects with a lot of our favorite macro
Speaker 1: themes that we discuss all the time. And I think
Speaker 1: another sort of macro theme is you know, we talked
Speaker 1: about it a lot in but the sort of rethinking
Speaker 1: the role of the public sector and rethinking the role
Speaker 1: of government spending, rethinking the role of government investment, and
Speaker 1: I think that's also I mean, that's a that's a
Speaker 1: big topic for us, it's a big topic nationally. I mean,
Speaker 1: I think you know, if you look at one of
Speaker 1: the successes that we've had in this crisis, most people
Speaker 1: would say the speed with which we were able to
Speaker 1: develop a X seeing for covid um was in part
Speaker 1: due to the government investment and operation warp speed, and
Speaker 1: of course the longstanding investment in pharma. So there's all
Speaker 1: kinds of reasons to sort of use this moment as
Speaker 1: a chance to reconceptualize what is the role of the
Speaker 1: public sector. How can the public sector spur more innovation,
Speaker 1: manufacturing production. So it's a it's a great topic because
Speaker 1: it hits a lot of odd themes. I would say, yeah,
Speaker 1: that's right, And I think we have seen a proposal
Speaker 1: in Washington about how to boost domestic semiconductor capabilities, So yes,
Speaker 1: it hits all the sweet spots. It's something that's happening
Speaker 1: right now as well. And I think it's going to
Speaker 1: be an interesting conversation. Yeah, I'm really excited about this.
Speaker 1: Um our guest today is um Professor of Management Practice
Speaker 1: at Harvard Business School, Willie She. He writes a lot
Speaker 1: about the topic about semiconductors, about manufacturing, US manufacturing, and
Speaker 1: particular what it takes to make it work. So we're
Speaker 1: going to dive into all of these questions with him.
Speaker 1: Professor She, thank you so much for joining us. Well,
Speaker 1: thank you for having me, Joe. So I'm trying to
Speaker 1: think like where the best place to start is. But
Speaker 1: you know, obviously, uh, we're talking about Intel, and for
Speaker 1: a long time, Uh, Intel is not just the leader
Speaker 1: in semiconductors, but the sort of like the vanguard of
Speaker 1: US tech and tech manufacturing capability. And of course the
Speaker 1: story over the last couple of years has been the
Speaker 1: problems they've run into in manufacturing. Also business model questions.
Speaker 1: But to start, why is it important for a country
Speaker 1: like the US or a country like China for that matter,
Speaker 1: But why is it an important for country like the
Speaker 1: US to have this capability at scale to produce high
Speaker 1: tech goods such as semi conductors. Well, I think the
Speaker 1: reason semiconductors have attracted so much focus in this regard
Speaker 1: is because they are a building block for so much
Speaker 1: modern technology. In fact, if you look at and it's
Speaker 1: been really highlighted by the pandemic kind of the role
Speaker 1: of electronics and technology communications technology, whether it is conducting
Speaker 1: classes and meetings and business on Zoom or it's ordering online,
Speaker 1: underpinning all this sort of the the core building block
Speaker 1: are semiconductors. When you start to look at the numbers
Speaker 1: on what percentage of the manufacturing happens in the US
Speaker 1: and how that has declined over the years, it's only
Speaker 1: about twelve for the microelectronics that we're talking about, for
Speaker 1: things like Intel microprocessors or the chips that go into smartphones.
Speaker 1: And you look at how much of the dependence is
Speaker 1: in Asia, and combine that with the rhetoric around you know,
Speaker 1: dependency on China or areas that China claims like Taiwan.
Speaker 1: I think that has really brought attention to a concern
Speaker 1: that I would say has been around in some circles
Speaker 1: for the past twenty years. Mhm. So, I think there
Speaker 1: is a recognition that semiconductors are strategically important for the
Speaker 1: reasons that you just laid out. But we've we've discussed
Speaker 1: this in some previous episodes. It's an incredibly competitive industry
Speaker 1: and it has huge startup costs. How difficult is it
Speaker 1: to actually um set up and create a semiconductor manufacturing capability?
Speaker 1: And what are the business decisions that kind of go
Speaker 1: into that. Well, there are a couple of things that
Speaker 1: I think have evolved as you get to the more
Speaker 1: advanced technologies. The cost of setting up kind of a
Speaker 1: minimum efficient ale manufacturing facility. It used to be, you know,
Speaker 1: back thirty years ago, you could do this for a
Speaker 1: few hundred million dollars, okay, or at the beginning it
Speaker 1: was a few million dollars. Now to set up the
Speaker 1: most advanced, leading edge fab will probably cost about twenty
Speaker 1: billion dollars, right, And that's a substantial capital cost That
Speaker 1: really strikes fear in the hearts of many uh CFOs
Speaker 1: as they look at the level investment. And and when
Speaker 1: you make that level investment, you have to make it
Speaker 1: successful in order to earn a return. That means you
Speaker 1: have to be able to learn all those processed technologies.
Speaker 1: You have to be able to manufacturer to high yield, okay,
Speaker 1: because if you don't have high yield, then you're throwing
Speaker 1: out half of your output and then your cost just
Speaker 1: you know, you don't have anything to absorb your costs.
Speaker 1: So it's a technological challenge in this the financial challenge
Speaker 1: as well. So, uh, you know we're talking about Intel.
Speaker 1: You're the co author of a book Producing Prosperity, why
Speaker 1: American needs a manufacturing renaissance. So when when thinking about
Speaker 1: this question, it seems like there's kind of two parts
Speaker 1: to it. One is, Okay, something is going on at Intel,
Speaker 1: they're having tech problems, they're having business model problems as well,
Speaker 1: But there's also a sort of broader US manufacturing malaise
Speaker 1: or you know, a reason that there's less and less
Speaker 1: of it happening here. How do you sort of disentangle
Speaker 1: the two things? How much of it is sort of
Speaker 1: macro factors about something that's going on in the US
Speaker 1: that's causing this decline in high tech manufacturing capability and
Speaker 1: know how versus specific micro things going on at a
Speaker 1: company that happens to be stumbling. Well, so let me
Speaker 1: start with the macro thing, because I think in essence,
Speaker 1: the financial risk and the technological challenge a are linked.
Speaker 1: Because what we saw, we've seen this type of crisis before.
Speaker 1: It was actually in the nineteen eighties, and at the
Speaker 1: time it wasn't China. It was a Japanese who were
Speaker 1: manufacturing memory chips so called d rans dynamic random access memories.
Speaker 1: And in the nineteen eighties, the Japanese had invested in
Speaker 1: manufacturing and they were actually much better at it than
Speaker 1: American companies, even like Intel. Right, Intel was founded as
Speaker 1: a memory company. Many people forget that, right, but Intel
Speaker 1: Texas Instruments was a big player in memories, moss tech
Speaker 1: companies like that, and the Japanese out executed American manufacturers
Speaker 1: because they were delivering higher yields. Right, So if you
Speaker 1: think out, I'm going to sink all this money into
Speaker 1: a factory. If I have higher yields, that means my
Speaker 1: cost is lower. And uh, Intel really was pushed the
Speaker 1: wall on memories and they decided to get out of
Speaker 1: memory manufacturing and focused on microprocessor manufacturing. At the time,
Speaker 1: you know, IBM had picked UH their microprocessor for the
Speaker 1: IBM PC. There were early comments in Intel where they
Speaker 1: weren't sure if you know, this PC thing was going
Speaker 1: to be big, Okay, But in some sense they were
Speaker 1: smart and they were lucky in moving two microprocessors, okay,
Speaker 1: and then they were able to escape this problem of
Speaker 1: being the best manufacturer. Okay. Now, at the same time,
Speaker 1: what we saw in American industry was this separation of
Speaker 1: design from manufacturing, which was really enabled by a lot
Speaker 1: of these computer aided design tools, right, which you know,
Speaker 1: separated out the manufacturing process. And then we saw the
Speaker 1: rise of some Asian companies, in particular in Taiwan, but
Speaker 1: also Korea and in Japan at the time, who said, well,
Speaker 1: we're very happy to do the manufacturing because we're not
Speaker 1: the experts of the design, right. So we saw that
Speaker 1: bifurcation okay. And now as that has developed, what we've
Speaker 1: seen is as you go to the more advanced manufacturing processes,
Speaker 1: there were very few companies who could kind of keep
Speaker 1: in that game. Intel has historically been one of them, right,
Speaker 1: because after they left the memory business, they invested a
Speaker 1: lot in manufacturing to give their microprocessor business a lead, right,
Speaker 1: And historically Intel lead with manufacturing in that regard, okay,
Speaker 1: and they were able to beat competitors like a m
Speaker 1: D because their manufacturing processes were a generation or two ahead, okay,
Speaker 1: So it didn't matter if you had a design that
Speaker 1: might have not been quite as efficient. Okay. Now a
Speaker 1: m D also had their own manufacturing, but then they
Speaker 1: spun it off a decade ago into Global Foundaries. And
Speaker 1: once a m D separated their manufacturing from their design
Speaker 1: and uh, you know, they left Global Foundaries and they
Speaker 1: shifted over to Taiwan Semiconductor. Okay. Once am D now
Speaker 1: had access to a more advanced process than Intel did,
Speaker 1: they have been able to take a lot of market
Speaker 1: share from Intel. Right. So you know this this problem
Speaker 1: has been a long time in developing. But the roots
Speaker 1: of it are the manufacturing part is capital intensive and
Speaker 1: it's hard, it takes a lot of discipline, Okay, and
Speaker 1: you can make more money on the design side, right.
Speaker 1: So hey, if somebody else wants to do the manufacturing,
Speaker 1: let them do it. I'll be more profitable. And a
Speaker 1: lot of people have said, well, the U S. Semi
Speaker 1: can actor industry had a renaissance in the nineteen nineties
Speaker 1: because a lot of those companies let go of the
Speaker 1: manufacturing part. Not everybody did, but a lot of them did,
Speaker 1: and they've been able to be very successful. Companies like
Speaker 1: Qualcom and in Video in particular. Uh, and now am
Speaker 1: d by letting go of manufacturing. So this is the
Speaker 1: I think it's called idem model, where you design and
Speaker 1: manufacture chips like what Intel has been doing, versus the
Speaker 1: fabulous foundry model like in Video and Qualcom. We got
Speaker 1: into this a little bit with um Well in the
Speaker 1: episode with Stacy raskin the semiconductor analysts over at Bernstein.
Speaker 1: I'm curious, like the consensus in the industry right now
Speaker 1: seems to be if you move to the fabulous foundry model,
Speaker 1: where you sort of outsource your manufacturing to a foundry
Speaker 1: like t SMC, that that's the way to go. But
Speaker 1: your argue that there are some hidden costs or some
Speaker 1: synergies that a company might lose in that model, Is
Speaker 1: that right? Well, yes, I think so. And here I
Speaker 1: would argue that more broadly speaking, there's a set of
Speaker 1: capabilities that comes with your manufacturing which can feedback into
Speaker 1: design as well. Now, I think in the chip industry
Speaker 1: what we have seen is manufacturers have continued to work
Speaker 1: very closely with the foundaries. Uh. And you know a
Speaker 1: lot of that capability is transmitted through like software, design
Speaker 1: tools and so on. Right, So that chip industry has
Speaker 1: been able to the fabulous companies have been able to
Speaker 1: leverage those manufacturing processes by working closely with their foundry partners. Okay.
Speaker 1: I think the question in Semiconnectors is really what would
Speaker 1: it be like for the US if it was unable
Speaker 1: to manufacture anything domestically okay. And I think here the
Speaker 1: COVID pandemic has really shined a light on that because
Speaker 1: on a lot simpler commodities, things like personal protective equipment okay,
Speaker 1: or ninety masks and things like that, you know, we
Speaker 1: didn't have the manufacturing capability. Uh. And the question would
Speaker 1: be what if Asian manufacturing capability was suddenly turned off?
Speaker 1: You know. I'll point out that an awful lot of
Speaker 1: the semiconductor manufacturing capability is in three science parks in Taiwan,
Speaker 1: which is a seismically active region okay, And there have
Speaker 1: been minor disruptions over the last few decades in terms
Speaker 1: of ta typhoons and earthquakes and so on. But you know,
Speaker 1: there's also the risk of geopolitical disruptions. Okay. So I
Speaker 1: think that has heightened the sensitivity about having manufacturing concentrated
Speaker 1: in such a small geographic area. It's a little different,
Speaker 1: I would say than the the know how from manufacturing
Speaker 1: in a lot of other processes, but you do see
Speaker 1: it in semiconductors. In terms of the tool manufacturers okay,
Speaker 1: and here American companies have a large presence and tool
Speaker 1: manufacturing okay, and being close to the actual manufacturing facility
Speaker 1: is very important, and you see a lot of those
Speaker 1: toolmakers moving their development activities and manufacturing activities closer to
Speaker 1: the market, be at Singapore or Taiwan, or Korea or
Speaker 1: or even China. Can you explain in a little more
Speaker 1: detail the mechanism by which learning by doing actual know
Speaker 1: how in the manufacturing feeds through back to innovation, because
Speaker 1: you know, it sounds good this idea that like, okay,
Speaker 1: if you're actually in the process of sort of building chips,
Speaker 1: if you're not outsourcing it, that also helps the technological innovation.
Speaker 1: And that this idea, this dream of okay, you can
Speaker 1: just separate the design and the manufacturing and still be
Speaker 1: a world leader. That it's problematic. How does that work
Speaker 1: in practice? Walk us through a little bit why that
Speaker 1: link is important? So I think the key idea here
Speaker 1: is tacit knowledge okay, And tacit knowledge is that which
Speaker 1: you know but you maybe haven't written down or haven't
Speaker 1: really explained to people. Right, So there is a lot
Speaker 1: of know how on the shop floor that comes from
Speaker 1: kind of learning as I produce more product, then the
Speaker 1: question is how is that knowledge captured and how is
Speaker 1: it uh communicated? Okay? Oftentimes you will see there's this
Speaker 1: concept called design for manufacture. In other words, I was
Speaker 1: in one factory once where the people assembling this piece
Speaker 1: of equipment and said, you know, the guys who design this,
Speaker 1: they haven't thought about you know, assembly sequence for example.
Speaker 1: It's like, you know, you can't put that part there
Speaker 1: because I can't I can't install it. But there's a
Speaker 1: lot of those kind of tricks of the trade that
Speaker 1: come from practice and manufacturing, which then feeds back into
Speaker 1: design that says, okay, when you design it, recognize that
Speaker 1: we have to do these things in manufacturing, and how
Speaker 1: that change your design? Right? So tacit knowledge is really
Speaker 1: the main concept you know that which I know, which
Speaker 1: I cannot have not or cannot explained necessarily. So we've
Speaker 1: sort of laid out the scene here and laid out
Speaker 1: the differences between the two business models and why semiconductors
Speaker 1: are important, and also why the industry is different to
Speaker 1: a lot of other types of manufacturing and design. What
Speaker 1: can actually be done about this? If if we agree
Speaker 1: that Intel is falling behind on semiconductors, that the U
Speaker 1: S should do more to boost its domestic capacity in
Speaker 1: order to have a more resilient supply chain and you know,
Speaker 1: be able to withstand unexpected disruptions like the pandemic, what's
Speaker 1: the first step towards actually achieving that? Well, Tracy, I
Speaker 1: think this is a tough question, uh, And a lot
Speaker 1: of people I've talked to agree on the problem, but
Speaker 1: you know, I think there's really a searching for what
Speaker 1: kinds of steps would help. Now, what some people say
Speaker 1: is Intel needs to establish a foundry operation. Okay, I
Speaker 1: think I agree with that because in manufacturing, and especially
Speaker 1: in manufacturing semiconductors, you need to have value, right because
Speaker 1: through manufacturing lots of volumes, that's where you get your
Speaker 1: process learning, that's where you get your process improvement, that's
Speaker 1: where you improve your yields, okay, and find out what
Speaker 1: works and what doesn't work. Okay. As Intel's microprocessor volumes
Speaker 1: come under competitive assault from other designs, where people go
Speaker 1: to say t SMC or a foundry to manufacture it,
Speaker 1: Intel needs to keep its volumes up. One way it
Speaker 1: could do that is it could establish a foundry operation
Speaker 1: that would make both its own chips and chips for
Speaker 1: other customers. That has its challenges, though, because Intel has
Speaker 1: its own way of doing things which have served its
Speaker 1: own needs historically, and so what it needs to do
Speaker 1: then it needs to learn how to be a service
Speaker 1: business that will service the needs of other customers, including
Speaker 1: its competitors. Okay. And and that's that's kind of a
Speaker 1: tough transition because that means it has to give priority
Speaker 1: to its uh customer slash competitor needs okay, and it's
Speaker 1: competitors who might use it as a foundry then will
Speaker 1: ask the question of why do I want to help
Speaker 1: Intel because they've been a tough competitor over time, and
Speaker 1: if I give business to this foundry and my helping Intel, okay.
Speaker 1: And the other question as a potential US foundary customer
Speaker 1: I'm gonna ask is like, are you going to give
Speaker 1: me the same level of technology and process capability that
Speaker 1: I can reliably get in Taiwan today? So there there
Speaker 1: are a lot of barriers to making a foundry business
Speaker 1: like that work. But I would argue that Intel needs
Speaker 1: to do something like that in order to keep its
Speaker 1: manufacturing volumes up. You know why Intel wow? Because Intel
Speaker 1: is probably the last best chance for the US to
Speaker 1: have a leader into this technology. Let me just actually
Speaker 1: back up here because I'm still sort of struggling with
Speaker 1: a key question, which is when we talk about the
Speaker 1: stumbles at Intel or the decline. I mean, here is
Speaker 1: a company that has been integrated, it's uh connected, you
Speaker 1: know sort of, it has this lots of tacit knowledge
Speaker 1: and having manufactured its own chips for so long, unlike
Speaker 1: some of its competitors. What is your core diagnosis for
Speaker 1: what's wrong with the company? And also, um, you know, recently,
Speaker 1: I think it was the hedge fund Third Point came
Speaker 1: out with some proposals the activist firm to try to
Speaker 1: revive the company. But a, um, how would you sort
Speaker 1: of summarize your diagnosis of what went wrong there? And
Speaker 1: then what do you make of some of the suggestions
Speaker 1: by them? Well, I think uh, Intel needs to invest
Speaker 1: heavily on process leadership. Ten years ago, they were two
Speaker 1: generations ahead of the SMC. Now ten years later there
Speaker 1: behind t SMC. Right, so they they need to invest
Speaker 1: heavily on that. I think Intel historically has tried to
Speaker 1: be very self sufficient in terms of using a lot
Speaker 1: of their own tools and a lot of their own methods. Okay,
Speaker 1: I mean I think one thing that would be helpful
Speaker 1: would be to work more with others in the industry
Speaker 1: in broadening the funnel of ideas that come to them. Okay,
Speaker 1: because in some sense, trying to do it all yourself
Speaker 1: in this very challenging technological era may not be the
Speaker 1: most competitive path. If you look at companies like t SMC,
Speaker 1: they have heavily leveraged partnerships with a SML who's the
Speaker 1: lithography leader for DPUV. They have heavily leveraged organizations like
Speaker 1: im EC in Europe, which is kind of a shared
Speaker 1: research collaborative. Okay. And t SMC is very good about
Speaker 1: working with a broad range of parties, and I think
Speaker 1: that would help Intel, right, And that that means they
Speaker 1: have to kind of set aside some of their established
Speaker 1: ways of doing things and open themselves up to maybe
Speaker 1: broader approaches to the competitiveness. Okay. Now on the third
Speaker 1: point question, Okay, I think I agree with the need
Speaker 1: for Intel to really establish a foundry business because, as
Speaker 1: I said earlier, I think volume is very important for them.
Speaker 1: But just the simplistic idea of separating their design business,
Speaker 1: which is designing microprocessors, and manufacturing, which is manufacturing semiconductors,
Speaker 1: taking them down the path that am Be went down
Speaker 1: before and many other companies went down before, that will
Speaker 1: create value for shareholders. Okay, but then you have to
Speaker 1: ask how likely is that foundry going to be absent
Speaker 1: some other moves to ensure that it has customers and
Speaker 1: ensure that it is competitive. Right, So at a simple level,
Speaker 1: I could see how it would create a lot of
Speaker 1: shareholder value, but is that the right answer for the
Speaker 1: United States? So one thing I'm wondering is, you know,
Speaker 1: we're having this conversation now, and uh, there is a
Speaker 1: proposal in Washington, as I mentioned, to do some of this,
Speaker 1: and we can talk about that in some more detail
Speaker 1: in just a bit. But why hasn't this been done before,
Speaker 1: or why hasn't there been more of a concerted effort
Speaker 1: to boost America's you know, strategic capability when it comes
Speaker 1: to a technology that people agree is increasingly important. I
Speaker 1: think we have h in some sense been looking at
Speaker 1: a rosy picture of the semiconductor industry, reflected by the
Speaker 1: success of fabulous companies like Nvidia, like Broadcom, like Qualcom,
Speaker 1: like Apple by the way, uh, and we're seeing it
Speaker 1: as well in companies like Amazon and Google who say
Speaker 1: I don't need the manufacturing, but you see the valuations
Speaker 1: of these companies and you see the financial success. As
Speaker 1: long as you know, Asia represents a secure manufacturing supply
Speaker 1: based one could argue if they want to subsidize that,
Speaker 1: or they want to do lower value work, then we
Speaker 1: should let them. And there are people in Silicon Valley
Speaker 1: I've talked to who said, you know, there's a strong
Speaker 1: argument for Hey, if Asian countries want to subsidize manufacturing,
Speaker 1: we should let them. We should take advantage of that.
Speaker 1: And then the only question is what happens if you
Speaker 1: get cut off from that supply. Now, I think we
Speaker 1: tend to believe in the US that people wouldn't cut
Speaker 1: us off from supply. Okay. In the last couple of years,
Speaker 1: the US has really weaponized supply chains against other countries,
Speaker 1: notably against companies like Huawei or z t E or
Speaker 1: you know a lot more recently. Okay, So then the
Speaker 1: question is do we open ourselves to that kind of
Speaker 1: quid quid pro quo behavior. So let's talk a little
Speaker 1: bit more about national policy and you talk about the
Speaker 1: case for why it should be a DC priority. Now,
Speaker 1: just two for my recollection or knowledge. In the later Uh,
Speaker 1: there's the Foundry Act, which I sought to encourage more
Speaker 1: domestic investment. Has that been passed? Now? Well, there was
Speaker 1: the American Foundries Act, Okay, and then uh there was
Speaker 1: another act. Those got merged into the National Defense Authorization Act,
Speaker 1: which was passed, but the funding still has to be
Speaker 1: worked out. Okay. And if you and if you read
Speaker 1: the language in the n d A A uh, I
Speaker 1: forgot exactly how many pages it was, but it was
Speaker 1: around sev hundred something. And uh, you know, so I
Speaker 1: went to and found all the language on the semi
Speaker 1: conductor stuff, and I would describe it as aspirational, right
Speaker 1: understanding that we're gonna we're gonna direct Commerce Department to
Speaker 1: do these things. We're going to direct all these people
Speaker 1: to report and all that. The challenge right now, I mean,
Speaker 1: I think Congressional staff have good intense here, right but
Speaker 1: the challenge right now is this micro electronics leadership in
Speaker 1: this segment. You know that intel is in. There is
Speaker 1: a dearth of what I would describe as good ideas,
Speaker 1: good strategic moves on how to handle this. I've been
Speaker 1: racking my brain on this recently, but I think it's
Speaker 1: a very tough problem that has been decades in the making.
Speaker 1: I hope people, you know, don't kind of get dissolution
Speaker 1: of these things. It's like my mother always told me,
Speaker 1: problems that we're a long time in the making are
Speaker 1: a long time in solving. Right. This is not a
Speaker 1: problem that gets solved in three years or five years. Right.
Speaker 1: If you look at t SMC, which was found in
Speaker 1: the nineteen eighties, Okay, they've been working very, very hard
Speaker 1: for decades to get to where they are, all right,
Speaker 1: and they're not about to lose this either. So what
Speaker 1: is I mean you say there's this dearth of ideas.
Speaker 1: But obviously, and we talked about this on the previous episode,
Speaker 1: there's sort of a limit to how much you can
Speaker 1: achieve just by throwing money at the problem. But of
Speaker 1: course money it has to be part of it. Um
Speaker 1: So in your view, what would be the sort of
Speaker 1: basics of the beginning of rebuilding that capability domestically, both
Speaker 1: in terms of how much investment would need from d C,
Speaker 1: but also investment trained in the right way such that
Speaker 1: it really fostered a sort of self sustaining and more,
Speaker 1: you know, robust capabilities. So one of the ideas, Joe,
Speaker 1: that I have been floating is they're an awful lot
Speaker 1: of proposals that focus on the supply side, like let's
Speaker 1: get people to build fabs in the US, you know,
Speaker 1: let's get bowl to do more R and D in
Speaker 1: the U s Okay, And that's all well and good.
Speaker 1: But you know, if you build a new foundry in
Speaker 1: the US and nobody shops there, it's not sustainable, right.
Speaker 1: So what I've been saying is instead of only focusing
Speaker 1: on the supply side, we should also think about the
Speaker 1: demand side, okay. And the reason I highlight that is
Speaker 1: if you go back to the nineteen sixties and I'm
Speaker 1: I'm dating myself now, but you know, if you go
Speaker 1: back to the nineteen sixties, at the birth of the
Speaker 1: integrated circuit and the birth of the semiconductor industry in
Speaker 1: the United States, d D and NASA bought of all
Speaker 1: the integrated circuits that were made in the world, Okay,
Speaker 1: And that was something that helped companies like Texas Instruments,
Speaker 1: who was one of the pioneers okay, and and Fairchild
Speaker 1: which gave birth to Intel and others. Okay, But it
Speaker 1: was that demand that really helped foster the growth of
Speaker 1: the industry. It was a customer for kind of those
Speaker 1: early products who worked with the suppliers to improve. Okay.
Speaker 1: So I've been saying, it's like, let's focus on demand
Speaker 1: as well. Now, one of the things that we do
Speaker 1: have in the United States is we do have demand
Speaker 1: for a lot of high and semi conductors. If you
Speaker 1: look at all these hyper scaled data centers along the
Speaker 1: Columbia River or around the DC area, or spaced across
Speaker 1: the country. Let's take some of these big hyper scale
Speaker 1: data centers from you know, Google or Microsoft or Amazon
Speaker 1: along the Columbia River. Well, where did those zon microprocessors
Speaker 1: come from? Well, probably Hillsboro, Oregon, where Intel has a fab.
Speaker 1: You know, that's one of their leading fabs in the US.
Speaker 1: And then what happened as well, Well, those chips then
Speaker 1: went to the finished wafers with the chips on them
Speaker 1: that were then sent to either end China or Vietnam
Speaker 1: or Malaysia where they were tested and cut apart into
Speaker 1: individual die and then they were put into packages, and
Speaker 1: then they would go to a distribution center somewhere in
Speaker 1: Asia and then go to a serverboard manufacturer in China probably,
Speaker 1: and then they ship them back to the Columbia River Valley,
Speaker 1: you know, a hundred miles away from where the chips originated.
Speaker 1: And it's like, now, why do they take that round trip? Well,
Speaker 1: they take that round trip because in the early days
Speaker 1: of the chip industry, when you had to cut these
Speaker 1: chips apart with the diamond saw and then put them
Speaker 1: into little packages, you would have rows and rows of
Speaker 1: workers looking through microscopes. Why are bonding those die into packages? Okay?
Speaker 1: And it was very labor intensive. And semi conector chips,
Speaker 1: you know, they have a very high value density. So
Speaker 1: it's no problem to air air fraight them over to Asia.
Speaker 1: Haven't packaging and haven't come back. Okay. These days, all
Speaker 1: that stuff is automated, so there's no reason for it
Speaker 1: to go to Asia except over the last four or
Speaker 1: five decades, Asia has developed the capability for chip packaging
Speaker 1: and automation and so on. So one of the things
Speaker 1: I would focus on is I would focus on let's
Speaker 1: bring kind of chip packaging back to the US. We
Speaker 1: still have companies in the US like am Corps who
Speaker 1: are leaders in that technology, you know, and let's help
Speaker 1: them to do packaging in the US and just kind
Speaker 1: of move a key part of that value chain where
Speaker 1: we have some of that demand. You know. The other
Speaker 1: reason I think packaging is important is we're seeing the
Speaker 1: end of Moore's law where it is becoming harder and
Speaker 1: harder to push the frontier and these advanced processes okay,
Speaker 1: but an awful lot of the horsepower you need in
Speaker 1: these chips come from lots of different processes and maybe
Speaker 1: some not so advanced, and you can get a lot
Speaker 1: of the benefit by going to what people call three
Speaker 1: D packaging, where I'm going to put multiple chips into
Speaker 1: a single package and then kind of bond them together
Speaker 1: with what are called vas or you know. Basically, I'm
Speaker 1: going to use multiple chips in one package because if
Speaker 1: i can cut the distance between them and pack them
Speaker 1: more densely, I'm going to get a lot of the
Speaker 1: benefits from Moore's law without having to go to the
Speaker 1: most advanced processes. Right. So, by focusing on parts of
Speaker 1: the value chain that we can win over the shorter
Speaker 1: term or get some some of that manufacturing capability back
Speaker 1: while you are working to restore process leadership, particularly looking
Speaker 1: at next generation, like what comes after all the technologies
Speaker 1: that we know will take us to three nimeter today
Speaker 1: with Moore's Law that has gotten very expensive. Investing in
Speaker 1: new process technologies, new technologies that will take US and
Speaker 1: global semiconductor production to kind of the next era that
Speaker 1: would be a good investment as well. Right, So, I mean,
Speaker 1: I think there are things that we can do that
Speaker 1: will take investment, okay, but those also play to some
Speaker 1: of the strengths of this country. Has I want to
Speaker 1: go back to something said earlier about the idea that
Speaker 1: the US has been weaponizing supply chains, particularly in China
Speaker 1: and with its actions against Huawei UM. We've seen Huawei
Speaker 1: not necessarily struggle to source semiconductors, but they've had to
Speaker 1: stockpile a bunch of them UM and they're sort of
Speaker 1: starting to run through their supply because they can't get
Speaker 1: them in the way that they used to. There's a
Speaker 1: perception within China, or at least there's one strand of
Speaker 1: thinking within China that this isn't necessarily the worst thing
Speaker 1: for the country because it's going to end up accelerating
Speaker 1: their own domestic manufacturing ability. So they're going to sort
Speaker 1: of rush through development UM and the US has in
Speaker 1: some ways done them a favor by sort of sparking
Speaker 1: a big fire under them to get this done. Is
Speaker 1: that a credible argument in your view? Or I guess
Speaker 1: in your view, what are the dawn sites and the
Speaker 1: benefits to targeting um external manufacturing or targeting China in
Speaker 1: this way? Well, in in some sense what China is
Speaker 1: doing is uh there you know, on an imports substitution
Speaker 1: drive now in response to this weaponization. Okay, A lot
Speaker 1: of economies have used import substitution very successfully to kind
Speaker 1: of bootstrap themselves up. Taiwan notably one of them, right, Korea, Japan,
Speaker 1: a lot of Asian nations have used that. Okay, will
Speaker 1: China be able to get there? Right? You will hear
Speaker 1: a lot of skeptics who say, well, China won't be
Speaker 1: able to get there fast because they still need technology
Speaker 1: from the West. Okay, and it may take them a while.
Speaker 1: But you know, I have friends in China who said,
Speaker 1: you know, you guys in the US, you're a young country,
Speaker 1: free your less than years old. That's like, you know,
Speaker 1: one dynasty, right, and it's like they have a very
Speaker 1: different scale on time. Okay. And I would point out
Speaker 1: that the Europeans in the late sixties and early seventies,
Speaker 1: we're looking at the commercial hygenemy in commercial aircraft in
Speaker 1: the US, and they were concerned about it. They put
Speaker 1: together air Bus as a consortium. Right Now, air Bus
Speaker 1: had lots of political issues early on, okay, But here
Speaker 1: fifty years later, air Bus arguably is the global leader. Right.
Speaker 1: Is fifty years a long time for China? Well, it
Speaker 1: is in the context of their five year plans, okay,
Speaker 1: but I wouldn't underestimate, you know, their ability to get there. Now.
Speaker 1: I personally don't think that's a good idea, right because
Speaker 1: I still believe that the world is better off if
Speaker 1: we trade with each other. But that also requires, uh,
Speaker 1: some notion of balance, right. I mean what you're hearing
Speaker 1: out of China analysis so called dual circulation strategy, right,
Speaker 1: which is they're going to be self sufficient as much
Speaker 1: as possible, but they still want to be a source
Speaker 1: of manufacturers for the world. Right. That's something I would
Speaker 1: question because if you don't want to buy from anybody
Speaker 1: else and you want them to buy from you. I
Speaker 1: don't see how that's going to play very well over
Speaker 1: the long term, right, So I don't think you can
Speaker 1: have it both ways. But I wouldn't underestimate China's ability
Speaker 1: to get there. There are still some people, I think,
Speaker 1: who believe all China is just about copycats and so on.
Speaker 1: There are some very innovative people in China. They're very
Speaker 1: some very innovative companies. So I would not underestimate there
Speaker 1: are capabilities over the long term. Might they spend much
Speaker 1: more money getting to you know, parody and semiconductors than
Speaker 1: they would have if they took a more global approach.
Speaker 1: Probably does that matter to them? Maybe not? I want
Speaker 1: no asking a slightly shift the conversation just slightly to
Speaker 1: another sort of timely topic, but it's related to this.
Speaker 1: So we're talking about these sort of global hubs of technology,
Speaker 1: know how. Obviously Taiwan is a q on. Also Singapore
Speaker 1: Silicon Valley has silicon right in its name, the home
Speaker 1: of the home of this industry and lately and this
Speaker 1: is sort of maybe more software outside of technology, but
Speaker 1: we here Heart especially like it really is accelerating the
Speaker 1: last several months people talking about moving to new tech
Speaker 1: hubs or creating tech hubs. So maybe people are annoyed
Speaker 1: with politics or the government in California and they're like,
Speaker 1: you know, we're all gonna let's move to Austin, Texas,
Speaker 1: or let's move to Miami and we'll just sort of
Speaker 1: set up a new a new tech hub in this area,
Speaker 1: get away from California regulation or whatever it is. What
Speaker 1: does history say about sort of what will make a
Speaker 1: tech hub succeed or not? And is this the kind
Speaker 1: of thing that can sort of be done if you know,
Speaker 1: have a few venture capital leaders say we're all moving
Speaker 1: to Miami, We're gonna set up the next Silicon Valley here.
Speaker 1: Does it work that way or does it sort of
Speaker 1: need to be more emergent and organic. Well, I think
Speaker 1: one of the benefits of physical proximity has always been
Speaker 1: the movement of people. And this goes back to what
Speaker 1: we were talking about earlier in terms of testent knowledge.
Speaker 1: If you think about how testent knowledge moves, it generally
Speaker 1: moves into the head of heads of people. I worked
Speaker 1: for IBM for fourteen years, okay, and every disk drive
Speaker 1: startup in Silicon Valley was started by people who came
Speaker 1: out of the IBM research operations in San Jose, California,
Speaker 1: where they did descrive development every single one. Right, So
Speaker 1: what happened is they had different ideas or they wanted
Speaker 1: to pursue different ideas, you know, Phineas Connor, Allan Sugar,
Speaker 1: all those guys. And so that's one of the things
Speaker 1: that makes hubs productive, right, which is the spreading of ideas,
Speaker 1: this movement of ideas, movement of people. Now the phenomena
Speaker 1: you describe, I mean, I lived in Austin, Texas for
Speaker 1: a while, and you know, I like the no income
Speaker 1: tax and the much lower cost of living there compared
Speaker 1: to California. I lived in California as for a while.
Speaker 1: Those movements, I would argue, are really about being able
Speaker 1: to attract talent and lifestyle when you're unconstrained by having
Speaker 1: to be in a physical office. I don't know if
Speaker 1: zoom and uh Microsoft teams or virtual whatever, what the
Speaker 1: impact will be that movement of tested knowledge between organizations.
Speaker 1: And if if what we have as a new era
Speaker 1: of that kind of movement, maybe we'll see some more dispersion. Okay,
Speaker 1: But I would argue one of the things that really
Speaker 1: has help Silicon Valley over time has been the people
Speaker 1: movement between jobs to the extent that they're willing to
Speaker 1: geographically relocate, which is something that has historically been very
Speaker 1: strong in the US but has diminished over the last decade.
Speaker 1: It could work, right, but we'll see on that, Professor
Speaker 1: she this is a great conversation before you go. I
Speaker 1: wanna sort of I was reading one of your articles
Speaker 1: and I thought this was super interesting and maybe super
Speaker 1: helpful for listeners. And that is the brutal math the
Speaker 1: brutal mathematics of UM yields, and we've talked about it
Speaker 1: on a few a couple of previous episodes. But this
Speaker 1: idea you sort of enter do this process. As you mentioned,
Speaker 1: a fab could cost twenty billion dollars here, making this
Speaker 1: huge investment extraordinarily complex. And then to hit your margins
Speaker 1: and to actually make a return, you need to guarantee
Speaker 1: that if you produce that on the way to creating
Speaker 1: a finished product UM, that it actually works, or that
Speaker 1: most of them actually work, so that you're not throwing
Speaker 1: away a bunch or whatever, and that even if you
Speaker 1: have say like effectiveness on various steps, that that might
Speaker 1: not be enough. Can you talk us through how yields
Speaker 1: are calculated and why the requirements for excellence are so demanding? Yes, okay,
Speaker 1: so in semiconductors. Uh. The thing that makes this one
Speaker 1: of the most challenging manufacturing processes is that it has
Speaker 1: so many steps. Okay. And if you just do the
Speaker 1: math of saying, let's say I had seven steps, okay,
Speaker 1: and let's say I have yield for the first step. Okay.
Speaker 1: If I have yield for the first step and then
Speaker 1: for the second, for the third, after each step, I'm
Speaker 1: getting fewer and fewer, Okay, By the time I get
Speaker 1: to seven steps, I will get no good output. Okay. Therefore,
Speaker 1: what that means is I actually have to have my
Speaker 1: yields way up there. That means I have to have
Speaker 1: point nine nine more than that. Right. If I have
Speaker 1: yield at each step, and most of us think, oh,
Speaker 1: that's pretty good, right, ninety nine times seven steps will
Speaker 1: give me fifty yield out the other end. Okay. Now,
Speaker 1: let's think about the economics of a twenty billion dollar
Speaker 1: fab that might produce let's say wafers a month. Okay,
Speaker 1: And on those twenty thou wafers, if I have to
Speaker 1: throw out half of them. You can see the economic
Speaker 1: cost of that is unbelievable. Right, So when you have
Speaker 1: an expensive fab you need everything coming out of it
Speaker 1: to be good, okay, and when you have a lot
Speaker 1: of steps, that means you've got to be almost flawless
Speaker 1: on every single step. And that's why this process, this
Speaker 1: manufacturing process is so hard. I love that. That's a
Speaker 1: great place to, uh to stop and I think I
Speaker 1: sort of perfectly clear explanation of how this industry is
Speaker 1: just so brutal. Professor she thank you so much for
Speaker 1: coming on. Well, thank you for having you. Thank you.
Speaker 1: I really like that conversation. You know, obviously, that last
Speaker 1: answer that he gave about yield math, to me, it's
Speaker 1: sort of like what I really liked about his perspective overall.
Speaker 1: I mean, obviously that was super interesting. Is this sort
Speaker 1: of way business and technological demands sort of intersect, And
Speaker 1: I feel like you just had like super clear and
Speaker 1: also like concrete examples of how that really works. Because
Speaker 1: we could talk to sort of like vague ideas about oh,
Speaker 1: it's important to have technological know how or it's important
Speaker 1: to uh, you know, be able to trade with advanced partners,
Speaker 1: but professor she really had a very concrete way of
Speaker 1: describing what's actually going on. Yeah, was a good example. Um.
Speaker 1: The other thing that really comes through in those discussions,
Speaker 1: I mean it's coming through in every episode that we're
Speaker 1: doing on semiconductors, but it's sort of the uniqueness of
Speaker 1: the industry, right, It's sort of like an exceptional industry
Speaker 1: in many ways. And again that yields problem that professor
Speaker 1: she just described, as well as the startup costs for
Speaker 1: creating a foundry, the idea that you used to be
Speaker 1: able to do it for a few million dollars like
Speaker 1: back in the seventies or eighties maybe, and now it
Speaker 1: costs upwards of twenty billion. Uh. That kind of goes
Speaker 1: to show just how complex and advance the technology has become.
Speaker 1: But it also like as it advances, of course, it
Speaker 1: becomes harder and harder to get in that game. And
Speaker 1: that's where the question of public support comes in. Yeah,
Speaker 1: because it's interesting, Like so obviously, um, there are companies
Speaker 1: in the US, and you mentioned some of them, you know,
Speaker 1: like a M D or in video they've just done
Speaker 1: like phenomenally well that don't have their own fabs, So
Speaker 1: you don't have to have that integration to work, and
Speaker 1: from a pure shareholder perspective, those companies have like shout
Speaker 1: the lights out, which then raises this question like for
Speaker 1: the government, it's like, okay, well, maybe you could just
Speaker 1: have this sort of total separation and some people in
Speaker 1: a design shop somewhere in the US or California, Austin, Texas,
Speaker 1: and then you ship the design to somewhere in Taiwan
Speaker 1: and then they produce it. And maybe that model is
Speaker 1: really great for shareholders, but it does raise the question
Speaker 1: of a how does that serve sort of strategic public needs?
Speaker 1: But then be is that sustainable the sort of the
Speaker 1: long term separation of designing and building, because big part
Speaker 1: of his whole core thesis is that the two really
Speaker 1: do go together, right, It's the short term goals of
Speaker 1: of shareholders who are interested in returns versus the long
Speaker 1: term value of having a strategic industry that's competitive globally.
Speaker 1: I guess yeah, another big macro theme to add to
Speaker 1: this conversation. You know another thing that um and again
Speaker 1: it's it's sort of thinking about how this fits in
Speaker 1: our other themes. His whole um the whole discussion of
Speaker 1: like demand side policy for tech. I thought it's super
Speaker 1: interesting because you know, I think the clear you're just like,
Speaker 1: all right, what do we need to do to create
Speaker 1: a more robust manufacturing sector here for high tech? And
Speaker 1: I think a lot of people would say, well, invest
Speaker 1: in R and D, create tax credits for building foundries
Speaker 1: here and so forth. But this idea that there is
Speaker 1: also an important demand side component, and of course go
Speaker 1: back to the history of Silicon Valley. The idea that
Speaker 1: the Department of Defense and NASA as being NASA is
Speaker 1: being customers of last resort or first resort for a
Speaker 1: lot of these things was a big part of it.
Speaker 1: It's also interesting, you know, bringing into the vaccine discussion,
Speaker 1: a lot of what has allowed the fast pace of
Speaker 1: vaccine development has been this sort of guaranteed buyer at
Speaker 1: the end that the government pre committed to buy all
Speaker 1: these shots from visor Maderia Johnson and Johnson if they
Speaker 1: were successful, and the ability of the government on the
Speaker 1: government alone to de risk the process by promising to
Speaker 1: buy the end output. That's uh. I thought a super
Speaker 1: interesting point, right, And I mean we've talked about the
Speaker 1: history of Silicon Valley before, and I think there's still
Speaker 1: a tendency to think about tech is this very entrepreneurial,
Speaker 1: uh industry that you know, people started in their garage
Speaker 1: and they're smart, and they sort of get lucky and
Speaker 1: they're able to do it. And one of the things
Speaker 1: people don't really realize is the degree to which having
Speaker 1: that government backstop has actually helped the tech industry. I
Speaker 1: do wonder, based off the experience of the vaccine development,
Speaker 1: whether that starts to change. And again, as we've been
Speaker 1: discussing for most of whether there is going to be
Speaker 1: a larger recognized role for the government in a sparking book,
Speaker 1: Demand and Supply. Yeah, one of our previous guests, actually
Speaker 1: I think we've had them on a couple of times,
Speaker 1: although maybe you weren't there for one of them, but uh,
Speaker 1: Bill Janeway, the venture capitalist. He talks a lot about
Speaker 1: exactly this point and the idea of like government underwriting
Speaker 1: guaranteed government demand and how important that is for the
Speaker 1: commercialization of innovation, and also like you know, with an
Speaker 1: eye towards like puncturing a little bit of Silicon Valley's
Speaker 1: own myth making that if the government just left tech alone,
Speaker 1: that they would do all these great things and so forth,
Speaker 1: and that how much of that all all the industries
Speaker 1: that really take off, I'd say green technology or clean
Speaker 1: technology is another area in which the government has had
Speaker 1: a big role or could play a big role, both
Speaker 1: in terms of the supply side investing in R and D,
Speaker 1: but also the demand side in being a customer for
Speaker 1: ventures that take a lot of risk, take a lot
Speaker 1: of money, and therefore high rid Yeah. Well, it seems
Speaker 1: like we might have a new example in the form
Speaker 1: of a u S Semiconductor is not not too far
Speaker 1: from now. Maybe to add to that pod, we'll see, Okay,
Speaker 1: shall we leave it there? Yeah, let's leave it there.
Speaker 1: This has been another episode of the All Thoughts Podcast.
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 1: Tracy Alloway and I'm Joe Why Isn't Though. You can
Speaker 1: follow me on Twitter at the Stalwart. Follow our guest
Speaker 1: professor Willie she He's on Twitter at Willie she Underscore
Speaker 1: at HBS. Follow our producer Laura Carlson. She's at Laura M. Carlson.
Speaker 1: Follow the Bloomberg head of podcast, Francesco Levi at Francisco Today,
Speaker 1: and check out all of our podcasts under the handle
Speaker 1: at podcast. Thanks for listening to