The US electronics and semiconductors industry has historically been the largest and the most powerful in terms of technological advancements and market size. However, with China and other countries in the Asia Pacific region emerging as powerful contenders in the global semiconductors industry, the leadership of the United States is under threat. In such a situation, the support extended by the US government in terms of policy and other incentives is considered inadequate.

The recent shift in the semiconductors value chain to China and other Asian countries has been due to increased government support in those countries. More than the availability of cheap labour, it was the tax incentives, which caused the shift of production to China . To combat this growing dominance of the Chinese semiconductors industry, the United States needs to formulate competitive regulations and policies, which foster the growth of a robust domestic industry.

Emergence of Nanotechnology

Semiconductors technology is expected to reach its physical, technological, and economic limits by 2020. This is likely to result in a transition to nanoscale semiconductor devices. Whoever leads in this field is expected to become the leader in the semiconductors industry. The Asian region now spends as much on nanotechnology research as the United States and the race for the leadership in the semiconductors industry has intensified.

Semiconductors technology is considered to be vital to the US economy as many information technology-related industries grew directly as a result of the country's historic dominance in this field. Vital issues such as the standard of living, productivity growth as well as national security are linked to the country's leadership in the industry.

The ability of the United States to compete in this industry is expected to now depend upon the investments in research and development, the ability to innovate, attracting topnotch technological talent, and a competitive business environment. Businesses and policymakers in the United States have to keep themselves updated of technological changes and the strategies of competitor countries while going all out to promote innovation in their country.

Outsourcing is an important trend affecting the U.S. semiconductors industry. It began with the outsourcing of labor-intensive manufacturing operations in the 1960s, followed by the outsourcing of more complex operations in the 1970s and 1980s, including wafer fabrication, research and development (R&D), and design work. Currently, companies in the U.S. semiconductors industry have foreign operations in several countries, notably in Taiwan and China .

Lower labour costs were the main reason to outsource initially. However, other factors such as technological advancements, availability of skilled workers, and the attractive policies of foreign governments have started contributing to the increased outsourcing trend. The nature of outsourcing by US semiconductor firms to Taiwan , China , and India has become more complex over time. This trend is expected to continue in the next five years because of the attractive incentives offered by these countries.

The ability of the United States to compete depends not only on factors such as investment in research and development and a competitive business environment but also on the trends in outsourcing. In a fiercely competitive global environment, it is very much important for both the industry and the US government to keep pace with the developments in the semiconductors industry in other countries, especially in the Asian region. As these countries continue to offer more benefits, other than just low cost, it is likely to cause a major upheaval in the industry in the United States .

Figure 1 presents a snapshot of the US semiconductors industry in 2005.

Source: Semiconductor Industry Association (SIA) and Frost & Sullivan

Trends in Research and Development (R & D) Investment

The key to continued US domination in the global automation and electronics industry lies in its ability to invest in and lead in the area of research and development. The world-class higher education system and research institutes in the country were its competitive advantages in the area of technology. The continued dominance of the country in cutting-edge technology has never been more under threat as it is now. In absolute terms, the United States is the largest spender on research and development in the world. However, the following trends are a cause for concern.

•  Federal funding for basic research as a percent of gross domestic product (GDP) has been in long term decline and has been almost reduced by 50 per cent over the past 20 years even as other countries are increasing their spending on research and development.

•  Government investment in research and development is increasing rapidly in the Asian nations. Both China and South Korea are increasing government research spending by 10 per cent or more annually.

•  If the current trends continue, more than 90 per cent of all scientists and engineers in the world are likely be living in Asia by 2010.

•  The number of engineering degrees awarded in the United States has declined sharply by 20 per cent from 1985 to present.

•  The country's share of global expenditure on semiconductors research, development and manufacturing capacity has declined from a high of 45 per cent in 1998 to less than 30 per cent in 2005.

•  Even as the country is not producing enough engineers and scientists to meet the industry's needs, the constant changes in visa and immigration criteria hamper the number of foreign students coming to the United States for study, research and work in area of high-tech.

The decline in science and technology related talent and investment does not augur well for the US automation and electronics industry, which is heavily dependent on both.

Chart 1 shows the federal spending on R&D as a percent of GDP in the United States for the period 2000-2006.

Chart 1

Source: Frost & Sullivan

This three-part series on the United States Automation and Electronics Industry is part of the Country Industry Forecast research of Frost & Sullivan that provides a unique service - a bird's-eye view of the country in focus with unique perspectives of various industries. The valuable country-industry linkage provides in-depth analysis and forecasts of macroeconomic trends and key industry parameters as well as identification of growth opportunities. Frost & Sullivan, a global growth consulting company, has been partnering with clients to support the development of innovative strategies for more than 40 years. The company's industry expertise integrates growth consulting, growth partnership services, and corporate management training to identify and develop opportunities.

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