PCBs, Global Innovation Policy & the CHIPS Act – OnTrack Podcast

PCBs, Global Innovation Policy & the CHIPS Act – OnTrack Podcast

– And this is funny because you just brought up something which I sometimes hear on CNBC and Bloomberg that so many big name companies are trying to break into the Chinese market, and that could be a real new source of revenue if they can do that.

And I think it’s just kind of assumed that they can just go over to China and sell their products. And really, the Chinese government doesn’t want that. They want to be more self-sufficient, especially in terms of technology. – When we created the World Trade Organization

After World War II, we did so on Ricardian Theory of Comparative Advantage, right? Nations specialized at what they produce best and trade with other countries and other companies they’re from, in a way that maximizes global economic output, right? Well, in our view, China fundamentally rejects that vision. – Hello, everyone, and welcome to the All TM OnTrack Podcast. I’m your host, Zach Peterson. Today, we’re talking with Stephen Ezell, Vice President of Global Innovation Policy at the Information Technology and Innovation Foundation. ITIF has done considerable work on the CHIPS Act and is an advocate for information technology

And innovation, specifically in the electronics industry and related industries. And we’re very happy to have him on the show. Stephen, thank you so much for joining us today. – Thank you, Zach. Pleasure to be here. – So, ITIF is probably not a four-letter acronym

That most folks in the electronics industry are aware of. There are other industry advocacy groups that I think are much more familiar. So if you could, please tell us about ITIF and what the organization does. – We’re a Washington DC based science, technology, and economic policy think tank, a 501c3 nonprofit educational foundation.

And our mission, broadly, is to advocate for public policies, laws and regulations that drive innovation-based economic growth in the United States and other states and countries around the world. We have teams inside our foundation who focus on various facets of innovation across vertical sectors of the economy,

From biotechnology to clean energy to telecommunications. It’s like a center for data innovation. I personally lead the work we do in advanced manufacturing, advanced technology industries such as semiconductors, quantum computing, high-performance computing, and life sciences. But broadly, we try and communicate with policy makers, with members of the administration, with the press

And the public to advance a positive view of innovation for the benefit of Americans and humankind. – So I think the next natural question to ask is how did ITIF recently come to be involved in policy issues relating to the electronics industry, especially in the United States?

– Well, maybe to tell the story even further back, we’re located here in Washington where we co-locate with the Information Technology Industry Council, ITIC. It’s kinda the lobbying organization for the US ICT industry. But around 20 years ago, the founder of ITIC wanted the kind of seed formation of a think tank

That would elevate the discourse on the importance of information technology to the economy and to society to a higher level. And so, they, and a few companies, the very beginning got together and helped ITIF get off the ground. So working on electronics and ICT policy has been core

And foundational to our work ever since. And, you know, semiconductors, print and circuit boards, these are foundational to the entire digital enterprise. They are the brains that literally and figuratively power every single electronic device and every downstream application of ICT from big data to AI. So we have been deeply embedded

In this field for a long time. And I should also add that I lead voice global innovation policy. So I do our global work on these issues and obviously, that enrolls a lot of discussions around these technology areas and in China, the rest of Asia, Europe, et cetera.

So kind of this link between global competition for leadership and advanced technology industries has been very important to us. – Now in your backstory of ITIF, you mentioned something important which is, of course, a recognition that electronics really is the backbone of all of this other stuff that we enjoy every day.

But one of the things that I’ve highlighted quite a few times, at least in terms of the the consumer level or the popular view of the word tech, is that most people totally gloss over the hardware side of it, and they just look at Facebook and Google, and those kinds of companies,

And they just think, oh, software, that’s tech. Is that the same perception that you see when you talk to policymakers? – Yeah, historically, certainly up until the pandemic. – [Zach] Okay. – You know, if you take TSMC, right, the Taiwanese Semiconductor Manufacturing Company, right? It’s the most important company

In the world no one knows about, right? But you know, it goes to, I think, what Arthur C. Clarke said, right? That “Any sufficiently advanced technology is indistinguishable from magic,” right? In a way, it’s a good thing that these technological systems have evolved, so that you can rely on your cell phone,

Or you can rely on your autonomous vehicle, or what have you. But it does mean that, I think a lot of times, people just assume electricity or the plumbing shows up at their house without really kind of understanding all the technology that goes into a building and sustaining it.

– I mean, I think that’s understandable. It’s kind of invisible in the background, unless you’re a tinkerer, you’ve probably never pulled open an old cell phone and realized, oh, yeah, there’s a bunch of chips and a circuit board in there. – And I know another aspect of this,

Which you may wanna get into is the reality that our education system produces fewer and fewer electrical engineers and computer scientists every year. In the last year, more students in high school in California took pottery than took computer science. So I think one of the challenges we have is

If we’re not educating our citizenry, I’m not saying everybody’s gotta go and become an AI programmer or a chip designer, but there’s got to be among our public, some basic understanding of engineering and these technologies, I think, for people to kind of more appropriately understand and evaluate and value them.

– I totally agree with you and I think this can put us in a position where we get issues like we had during the pandemic. And then, the fortunate outshoot of that was of course, the CHIPS and Science Act. You guys, as I understand it, were champions of the CHIPS and Science Act.

Could you tell us the work that you did on that and whether it was working directly with policymakers or some of the advocacy work? – Yeah, and it’s important to understand that we are kind of upstream in the idea value chain in Washington DC, right? So we don’t write legislation ourselves.

We don’t go into congressional offices and lobby for a specific piece of legislation. What we’ll do is we’ll go in and say, you know, countries like Germany or Taiwan have these applied industrial research institutes like a Fraunhofer Center, and they bring universities and industry together to develop and diffuse technologies around the industry.

US has to have a mechanism like this. So we should create something like the National Network for Manufacturing Innovation, right? So we’re looking out in the world and seeing what policy ideas are driving tech and innovation, and then being a source of ideas for policy makers in Washington DC.

So, with the CHIPS and Science Act, and your listeners probably know, just be clear that what that is is literally the merging together of two different pieces of legislation. The CHIPS Act was being developed under one route through folks like Senator Cornyn. And of course, that’s the $52 billion we have now

To support the US semiconductor sector, $39 billion for incentives and $11 billion for R&D. But separately, it was coming the Science Act, this ultimately was $200 billion of authorized funding. And to tell the backstory there, I’d actually gone to Georgetown University in Washington DC and a guy named George Shambaugh

Was the Chief Economic Policy Advisor for Senator Todd Young of Indiana. And reached out to me and said, “Ah, do you know if the senator would like to work with some senators on their side of the aisle to develop competitive legislation for the United States?” I said, “Well, you know,

I know the team in Schumer’s office. You should just talk to them.” So they actually put the Senator Young and Senator Taman together, and they sat down originally and wrote this a hundred-billion-dollar Endless Frontiers Act. That was the original piece of legislation that through various machinations between legislative texts passed by House

And Congress became the Bipartisan Elimination Act, and ultimately what was all brought together last August and this CHIPS and Science Act. But ITIF was at the ground work of laying the congressional groundwork for this. Also, there’s a number of specific elements within the legislation that we specifically ID’d and championed.

For instance, there’s was authorized $10 billion to build a regional technology hubs across the United States. So, you know, looking at, if you will, second-tier tech cities, Nashville, Rochester, Salt Lake, right? You know, we know we have the anchors in Silicon Valley, and Seattle, and San Diego, and New York,

But how do we get more inclusive opportunity in the innovation economy across our society? By the way, just briefly why that matters, we did a study, we looked at where our innovation jobs down in the US economy, we define those as being jobs in companies that invest in certain the share

Of their revenue each year in R&D, so their R&D intensity, and then the number of STEM workers. Essentially what we found was that one third of US innovation jobs are found in just 14 US counties and half in just 40 US counties. So that suggests there’s a real, you know, inequality

Of innovation opportunity, if you will, in the United States. So that was an important piece of legislation to kind of, to more broadly diffuse the tech capacity and ecosystem across the United States. Yeah, no, so we were involved in with a lot of the specific programmatic elements that came out with legislation,

And then of course, we did a number of events ourselves and reports and papers, and testifying to Congress about the importance of this type of legislation. So, we were, I think, an important champion to help it cross the finish line. – So one expression I’ve heard about legislation is

That sometimes it’s like sausage, you don’t wanna know how it’s made or you don’t wanna watch it made, but maybe you’ll like the outcome. One thing I’m wondering here about the kind of foundations of this, and you know, how it all evolved, is how does the CHIPS Act compare

To industrial policy of other nations? I bring this up because in a, I think last year, or probably the year before, I was speaking with General Rob Spalding and I brought this up to him that he had mentioned that company or countries like Germany and Japan, they have a national industrial policy,

And I think for a long time, we didn’t really have an industrial policy at the same level or the same robustness that these other nations have. So I’m wondering if the CHIPS Act was a originally intended as a way for us to maybe get on par with those nations

Or catch up with those nations, or mimic what they’re doing? – Yeah, I think there are a couple elements to that answer. You know, first, one key point for your listeners to understand, in congress, there’s a difference between authorization and appropriation. So even though Congress has authorized this $200 billion

Over five years for the science part of it, and if you look at that regional tech hub which I mentioned Congress authorized $10 billion for it, but so far has only appropriated a billion dollars for it. So even already, we’re seeing a significant gap between the authorizations and the appropriations.

Policymakers like to throw out big, huge numbers, but then some money really getting delivered. We’ll see in budget cycles going forward. But one reason on the science side that was important is because federal investment in R&D as a share of GDP has recently declined to lower than it was in 1953 before Sputnik.

So yes, of course, the US does still invest the most in the world for the federal government in R&D, but when you look at the real intensity level of that, right, R&D is a share of GDP in countries like Israel or Korea or Finland, it’s gonna be four or 5%.

And the US is, you know, around 2.8%. So we’re in ninth among OSCD nations in R&D, so that’s why it’s important that we invest more, ’cause we need that relative to the size of our economy. Now, coming to your question about industrial policy, right? And of course, this is a very fraught question,

What is industrial policy? You know, if you roll the tape back, and if you remember this firm called Quaero, but Quaero was a firm which was started by the French government from the ground up, funded by the French to go out and quote, “Be the European Google killer.”

It was gonna be Europe’s answer to Google, right? It was like when France created a Groupe Bull. It was a mainframe company in the 1960s to compete against IBM. I dunno, to us at ITIF, industrial policy is one country is anoint specific national champions in certain industries,

Like electronics or steel, or ship building, or cars. A good example of this, and it’s important to understand, let’s take China. China has created, from the ground up, a company called YMTC, Yangtze Memory Technology Corporation. It’s a dRAM, a memory chip manufacturer. This is a company started with $25 billion

Of Chinese government money from the ground up go compete in global semiconductor memory chip markets. That’s really industrial policy. To us, innovation policy is when we’re saying how can we collaboratively build public-private partnerships like we do with Semitech for the semiconductor sector in the 1980s. That’s an important part

Of this National Semiconductor Technology consortium that’s gonna come out of now the CHIPS Act. How do we build platforms for collaborative public-private sector, R&D, that’s very much what the German system with their Fraunhofer is modeled after. So, but whatever language you wanna use to parse this, the broadly the answer is yes,

That DOS has not had even a European-style of intentional public support for the competitiveness of certain sectors of the economy. Now, we did have it, of course, with semiconductors, with Semitech in the 1980s. Now, the great irony of course, of US semiconductor policy over the past four decades

Is of course, we invented the semiconductor that had 50% in the global market share. In the 1970s, Japanese competition comes in the 80s, almost crushes our industry. So we respond effectively with like this semiconductor, the Semitech Research Consortium, and it actually works. And it actually restores US leadership

In the sector during the 1990s. And then it gets, wow, we feel good, you know, we don’t need this anymore. So, we let Semitech go by the wayside, kind of, at least on the manufacturing side. Now, the business models needs to change. We can talk about that, but ultimately,

The point for your listeners is that in 1990, the US accounted for 37% of global semiconductor manufacturing, and that share has followed a 12% today. That’s a 70% decline in our share of semiconductor manufacturing. Now, what happened, of course, when you look at the broader economics of the semiconductor industry,

US-based companies still command 47% of market value in the global semiconductor industry. And that’s because we have very strong design firms, like NVIDIA, AMD, Apple, Qualcomm, and there’s tremendous value added from designing the chip. But in terms of the manufacturer of it, that’s largely gone offshore. And today, 92%,

The world’s most sophisticated semiconductors, those at that sub-seven, sub-five nanometer level are coming from Taiwan, right? So the intent of the CHIPS Act here was to say, especially coming off the wake of the COVID-19 pandemic, and the semiconductor shortages we encountered as a result of that is to say,

If the United States only makes 12% of the world’s semiconductors, and if 92% of the world’s most sophisticated semiconductors are coming off a geopolitcally contested island in the South China Sea for our own national and economic security purposes, there’s a compelling need to invest in considerably expanding US semiconductor production activity.

– One of the criticisms of the CHIPS Act is, I think, is that it’s seen as a handout, and it is picking winners and losers, and you’re really saying that’s not the case at all. It’s really not following the picking of winners and losers that might happen in,

Might have happened in the past or happen overseas. Am am I hearing that correctly? – I think I contextualize it slightly differently in a couple ways. You know, first the reality is that nations have moved from being price makers to price takers in global marketplaces. And then what I mean by that

Is globalized companies now shop the world and they say, you know, US, Israel, England, Germany, Brazil, what do you have to offer us in terms of the best pools of skilled talent, the best digital and physical infrastructure, the best tax policies, the best regulatory regime? How easy is it to do business?

You know, semiconductor companies consider over 500 factors when choosing to cite a fab, right? So companies or countries and states or regions therein are competing fiercely to win on all these factors. And kind of what’s come to take place in this industry over the past several decades,

Is that hungry nations like Korea, Taiwan will say to these semiconductor firms, you know, we’ll offset $2 billion of you putting a fab here. And of course, a leading edge fab is now a $20 billion investment. They’ll say, well, you know, we’ll offset some of your energy consumption costs to fray your taxes.

If you need a road or a rail facility built there, happy to help you out. And so, according to a Boston Consulting group report, foreign government incentives can reduce the upfront capital expenditures for land construction and equipment involving a fab by up to 15 to 40%

Of the 10-year total cost of ownership of the fab. And the BCG report found that the 10-year total cost of ownership of US-based semiconductor fabs is 25 to 50% higher than in other locations with government incentives in those countries, accounting for 40 to 70% of the US TCO gap.

So really what the incentives that the CHIPS Act intends to offer is a mechanism for the US to provide a means to offset those types of incentives that other countries are offering. And it’s critically important to understand this point. So the OECD did a study looking at subsidies

In the global semiconductor industry from 2014 to 2018. They looked at 21 of the world’s largest semiconductor companies. What they found was that 86% of the subsidies they could identify went to Chinese firms. And again, this is a key point. What is the subsidy? So in China’s case, for firms like SMIC,

Which is their semiconductor manufacturer, they found that 40% of SMIC’s quote unquote, “revenues were in fact a direct government handout to the bottom line.” 40% of SMIC’s revenues was government money. That’s a subsidy, right? So what we’re talking about here is, what that means is

That the government is capitalizing the firm to enable it, to sustain it, to compete in global markets in a way that it would not be able to do if it was required to earn a market-based rate of return. That’s not what is going on with the US Chips Act, right?

We’re not capitalizing Intel, not bailing out Intel if we build out General Motors, right? We’re providing a pot of money that offsets some of the types of investment incentives that other countries offer. And it is critically important to understand that this is a fundamental and huge difference.

So, you know, is it picking winners as you say? Well, building a $20 billion fab at most, these companies are gonna get maybe 10% of that investment. So is it enabling? Is it helping? Is it sustaining? Okay. But I wouldn’t say that we’re now anointing a US semiconductor champion, right?

The way France did with Groupe Bull. It’s also important to recognize that the subsidy, or sorry, the incentives and grants that are in the CHIPS Act are available to companies of all corners of the world so long it has not been designated foreign adversaries. So it looks likely once the CHIPS funding starts

To flow that in fact, the very first CHIPS funding that was offered was to BAE Systems. So a European company that has a semiconductor facility that makes some of the parts for the F-35 fighter was one of the first to get the funding. So, I think that’s another important difference

To understand that this is not just picking US winner companies, but it is to help build a competitive ecosystem for like-minded, allied nations to be able to compete in this industry. – Okay, thanks for clarifying that because this is one of the criticisms I’ve seen multiple times within my professional network

On LinkedIn, and I’ve seen some posts using the term socialist to describe it. And I don’t know that that’s necessarily appropriate, so thank you for that. But one thing, another thing that I’m wondering here is kind of stems from a conversation that I had with Happy Holden on another episode.

So he was in the industry during the time when the Chinese and Taiwanese industrial policy was helping them grow their PCB production capacity back in the 1980s. And he broke it down pretty clearly as far as cost comparisons between building your captive manufacturing operation in let’s say, Virginia versus building it in Taiwan.

And when he put it in those terms, it became pretty clear why it was so attractive and what the momentum was for taking all this production capacity overseas. So how does CHIPS and Science compared to that time period where the Taiwanese were providing incentives to get companies to outsource their production overseas?

Were they doing just direct subsidies, or were they doing more of a chip-sack style innovation management type of approach? – It’s interesting you asked that particular question ’cause we’re now working on the study that will make a comparative assessment of the strengths and weaknesses

Of the National Innovation Systems of the US against China, Korea, Taiwan, and Japan. And, of course, I mean there were, you go back to Taiwan, I mean there are a number of factors there that were so important to the development of their PCB and semiconductor sector, you know, of course, there,

You had a very active set of industrial policies, the support of public research institutes, notably in Taiwan, the Industrial Technology Research Institute which intentionally was designed by the Taiwanese government to find ways to acquire Western technologies. In fact, the start of the Taiwan industry for semiconductors was they got a license

From RCA for CMOS technology. And a lot of that actually came outta US Antitrust Policy in the fifties and sixties that forced our companies to divulge that intellectual property. So the Taiwanese government essentially would go out, see where they could acquire foreign technology, use that as a basis throughout the industry,

Then come along with what you said, oh, yes, we have a lower cost production environment, now we can do this. And that was instrumental in encouraging the offshoring of a set of US manufacturing to lower cost sectors. I think another critical point in this is US companies made very serious mistakes.

I mean, Morris Chang, as I have read the history or to Texas Instruments, of course, Morris Chang, founder of TSMC came up with a fabulous business model, right? The idea that most companies heretofore, like ITM like TI, Texas Instruments have been these integrated device manufacturers

And do all of the design, a fabrication, and ATP in-house. And then what he did, of course, was broke that integrated model by saying, hey, we’ll just focus not on design, but solely on the fabrication that chips, we can protect your IP. But, you know, Morris took that idea to TI,

And the executives at TI turned down that idea, right? I mean, the US could have had TSMC, right? So, I think that Taiwan has come to lead in this sector. Yes, it was a result of effective industrial policies. It was also kind of a failed by some of our businesses

To explore new business models that might have been disruptive to their sector. This question does come up a lot, like what’s different now? How can we be certain that the investments we’re making now deliver sustained returns, and we don’t go back to the old situation we found ourselves in?

And I think it’s important to have a broader discussion here of the history of US manufacturing. because, my colleague, our president, Rob Atkinson, actually wrote a book on this called, “Innovation Economics, the Race for Global Advantage.” But really, since the 1990s in Washington DC, there has been an attitude that the United States

Does not need to be manufacturing. We shouldn’t be manufacturing. The US, in fact, if you remember, Lawrence Summers, Lawrence Summers, who was the Chair of the Economic Advisors at the start of the Obama administration, said, quote, “America’s role in the global economy is to be a provider of ideas and services.

It is not to make things.” The head of the Peterson Institute for International Economics here in Washington DC was once asked, “How much manufacturing should America, does America need to have to remain a high-value added, you know, kinda high-wage economy?” And he said, “Really, America could lose all

Of its manufacturing and be just fine.” There has quite seriously been an attitude among economists and policymakers in this town that manufacturing does not matter. And that was actually exacerbated in our view over the past several years. I dunno if you know, Clayton Christensen, up at Harvard, wrote this wonderful book

Called, “The Innovator’s Dilemma,” “The Innovator’s Solution.” But what he points out is that the financialization of the US economy in the 2000s meant that all CEOs were focused on one thing, RONA, Return On Net Assets. If you maximize that RONA, then that allows us to compare the profitability

Of a bank against of an airline, against a manufacturer, right? So what was the US response in boardrooms across the country? Get rid of your assets ’cause if you offshore your assets, you boost your RONA. So in our view, what I’m trying to say is if it’s gonna be different now,

It’s only gonna be because economists, CEOs, and policymakers understand that manufacturing matters to sustaining a high-wage, high-value added US economy, one also capable of defending itself in case of wartime or a pandemic. And if we now have this understanding that it matters to invest in these industries,

In these sectors, then it might be different. But yeah, so what happened? Yeah, we started moving stuff offshore, and then agglomeration effects in places like Shenzhen and Taiwan just meant that at some point, because all the component, the cabling, the PCBs, since it was all made there,

The entire look of civil electronics manufacturing shifted from the United States to Asia in about a 20-year period. And our policymakers were with us at the time to about it. – You know, everything that you just said, right? You mentioned US but I think you could remove the word, United States,

And put in Europe and. – Absolutely. – I think 99% of what you just said would be equally applicable. – Absolutely. No, and even worse in Europe’s case. I mean, and yeah, I mean they you know, Europe’s happy to make cars and maybe some yachts in Italy

And of course, they have ASML in Holland, and Sweden sees it totally differently than the rest of Europe to be sure. But yeah, I mean, England, I mean, I mentioned our book and the second chapter of our book is about the industrial decline of Britain in the post World War II era.

And it’s a staggering tale of, I wanna be clear where ITIA stands. Our view is that the choice is not between all government or no government support for innovation in tech industries. It is what’s the right level of support for government innovation. But I think in the English case,

With respect to our British friends, they took laissez-faire approaches to the extreme and almost entirely lost all their manufacturing sector. I mean, they have what? They have some engine manufacturing left and a couple semi firms, but our book talked that it was like the biggest industrial decline for any nation in known history-

– Wow. – for the UK. – I had no idea about that, but I’m gonna have to read about that. So I think that begs the question, now that we’ve done this in the US, should the EU or individual European nations implement similar approaches, you know, not the approach of France

Where they’re trying to pick winners and losers, but really an innovation management kind of approach that is enshrined in the CHIPS and Science Act? – Yeah, no, they certainly are. Germany’s putting $20 billion forward for its semiconductor sector, and the EU actually has its own European CHIPS Act, that’s what they called it,

$47 billion that they have put forward, again, a mix of R&D and incentives to attract the manufacturers. We actually, we used to report, called an allied approach to semiconductor competitiveness which tries to make the case that to ensure that these policies don’t lead to over capacity or a non-coordinated collect of investment,

Like-minded countries should be collaborating to some degree to invest in R&D efforts for kind of the, what comes beyond Moore’s Law type of approaches. We should be coordinating amongst ourselves to ensure that, I don’t know, there’s a saying that exists with like export credit, and it’s a deal now between Airbus and Boeing

About how they will handle Export Credit Financing. It’s called the OECD Aircraft Understanding. So, you know, some ideas like that for how we can ensure that the competition we want to have in this sector unfolds not in a protectionist way, but in a market-based way.

– Yeah, I think that’s another danger of these types of policies is that you start to see protectionist policies start to arise and then you get tariff wars and things like that that we saw about eight years ago and. – And we see it right now, right?

So you look at all the back and forth between US and Europe over the solar panels and the electric batteries, and electric vehicle aspects of the IRA. Yeah, that’s gotten very much protectionist, the incentives are only available to manufacturers if they’re here in the country. Yes, it’s very important that competition

In the semiconductor sector does not go the route as it’s evolved in the clean energy sector. – Yeah, I see kind of a danger here because if you don’t have enough capacity locally, but then you have these protectionist measures, it forces you to procure offshore

And then you’ve really done nothing to reduce costs. In fact, all you’ve done is increased costs for companies who are trying to produce end products. Obviously, we’ve been talking a lot about semiconductors, but without a printed circuit board, the semiconductors are kind of meaningless. And the differential between overseas production in Asia,

Specifically in the Chinese market share versus production in the US and Europe is massive. You could drive a semi-truck through it. So I think that begs the question, would a PCBs Act succeed in creating the same kind of results that we wanna see with the Chips and Science Act?

Can we take an innovation management approach with PCB manufacturing or is PCB manufacturing just such a race to the bottom on price that a different approach is needed to try and geographically diversify that part of the supply chain? – Yeah, I mean, my view is that we can,

And we should, I mean, when we talked about semiconductor manufacturing, we said the US share fell from 37% to 12%. If the CHIPS Act is a wonderful success, maybe we’ll get it back up to 20%, right? So in like manner, when you look at the US share

Of PCB production, that was about 25% in 2000 and has fallen just 4% today because we’re 9% decline. China manufactures 56% of the world’s PCBs now between China and Taiwan. That gets up to 70%. Rest of Asia, it’s, you know, over in the nineties.

So, yes, we have in PCB is a massive dependence on Asian production today as well. And this is why the US industry, the Printed Circuit Board Association of America has worked with several congress members, including Blake Moore of Utah and Anna Eshoo of California to advance this Protecting Circuit Boards

And Substrates Act, which much like the CHIPS Act, would provide a 25% tax credit for the purchase requisition of American-made printed circuit boards and offer $3 billion in incentives for a financial assistance program for companies, for facilities manufacturing or doing research on PCBs. I think we absolutely need this as well

As Travis Kelly and David Schild of the PCBA say that “Semiconductors don’t float.” They need to be on a substrate and then on a printed circuit board that PCB needs to be secure just like the semiconductor itself does. And when you’re only manufacturing 4% of the world’s supply and then only for,

Mostly for very specific defense purposes. Yeah, I think that introduces a national security vulnerability and economic dependence that US policymakers would be wise to address as well. – Yeah, I think one of the big criticisms of just reshore everything that comes up and really gets applied hard to PCB production is,

Well, do you wanna pay a thousand dollars for your toaster oven? And it’s because I think a lot of products that use PCBs really are price sensitive. I mean, there’s not sensitive IP. It’s not being used for defense purposes or anything like that.

You know, you don’t have a lot of advanced components in it, so it kind of could be manufactured really anywhere and you’re not in danger, you’re not putting yourself in any economic danger until you geographically concentrate everything in one place. And then natural disaster, geopolitical, pandemic, whatever, creates that supply chain risk.

So if we can’t do it all in the US due to such extreme price sensitivity, is it appropriate to implement some kind of innovation management or industrial policy that takes it to French shoring? So let’s say, Latin America, Canada, something like that. – Yeah, we, my organization released a report last week assessing

How one country in Latin America, the Dominican Republic, could assume a greater role in PCP or semiconductor and packaging value chains. Yeah, I think there’s substantial opportunity to bring this type of production back to like-minded hemispheric countries in the Americas. I think, you know, if you look at the Dominican Republic,

Their hourly manufacturing cost is just 6% of that of the United States, right? So that’s why they actually have a very robust electronics manufacturing industry down there. Mostly it’s circuit breakers and junction boxes, but could it come like that? Do they have the base of skills and electronics manufacturing know-how

To make the jump up the value chain into PCBs? Yeah, I think they could. Mexico, Costa Rica, are obviously getting in the space as well, Mexico, that’s a fair amount. I don’t know the percentage, but I know that they do a lot of the PCB baseboard manufacturing for like Rockwell Automation

And Eaton Corporation, and stuff like that. So yeah, no, but this is a critical point that like with semiconductors. It doesn’t all have to come back to the United States, but I think it’s a win if some more share of it does come back to the United States.

Can we get that back to 10%? Can we get it back to half of what it was at the start of this millennium? And then can we get more of it going to friendly near-shore places across the world? By the way, this leads me to another point that I like to make.

Our view is that China’s economic strategy has fundamentally evolved since the 1980s along the following trajectory. Initially, it started with an attraction strategy, Deng Xiao Ping, come manufacturer here, far lower labor costs environment, lot sizes of a million. So that was, the attraction was largely the Chinese strategy

Up until Xi Jinping comes into office and around the mid 2010s, it turns to much more of what we call a compulsion economic strategy. Okay, you have to manufacture here if you wanna sell to our market. You have to transfer IP or your technology if you wanna sell or what China

Called trading market for technology. We argue that it’s now evolved to an expulsion strategy. So if China has a domestic competitor that can suffice for the local market, the foreign enterprises are no longer invited to service that marketplace. So we see this, there was initiative called DIOE,

This was called, this was D, Intel, Oracle, and EMC. And the Chinese government literally went around all these and said, you’re getting these companies, products outta your business, right? So here’s the situation we encountered. Right now, 36% of US semiconductor industry sales go to China.

Now, this is why when we debate issues like export controls in Washington DC the industry are probably says, well, if you don’t let us sell to China, then we can’t earn revenues that we need to reinvest in future generations of innovation. That’s exactly right, but here’s the conundrum.

China wants your share to be zero. If China could wave a wand and have its way with its trillion dollars its invested in the semiconductor sector over the past decade, you wouldn’t sell anything in China. So how do we deal with that economic game board?

And the only answer is that we intentionally design a world where in a decade, our semiconductor companies say, only 15% of our sales have to go to China. Why and how? Well, because we’re making the world’s laptops and servers, and mobile phones, and friendly places like India or South America

That the US policymakers intentionally rearchitect the global economic game board in advanced industries in our economic favor. That’s what policymakers in Washington should be doing. And if we can do that, then we can help our own companies get out of the box that they find themselves in needing to sell a third

Of their products to a country that wants nothing more for their product sales to be 0%. – Interesting conundrum because, and this is funny because you just brought up something which I sometimes hear on CNBC and Bloomberg that so many big name companies are trying to break into the Chinese market,

And that could be a real new source of revenue if they can do that. And I think it’s just kind of assumed that they can just go over to China and sell their products. And really, the Chinese government doesn’t want that. They want to be more self-sufficient, especially in terms of technology.

– When we created the World Trade Organization after World War II, we did so on Ricardian Theory of Comparative Advantage. Nations specialize at what they produce best and trade with other countries and other companies they’re from in a way that maximizes global economic output, right?

Well, in our view, China fundamentally rejects that vision. So in theory, China should be totally happy with making PCBs or choskeys or what have you, and trading for a Boeing aircraft for instance, right? But China doesn’t accept that. China wants absolute advantage in all advanced technology industries, right?

They want to lead in high-speed rail, in semiconductors, and solar panels, and networking equipment, right? And, of course, more broadly, what they want is unfettered access to global markets while the ability to control their own and be autocratic and optimistic in their own market. So this is a vision of economic trade craft.

And this is like what, there’s a term for this is called power trade. It’s what actually the Germans practiced in the 1910s and 1920s, but in our view, we’re dealing with a competitor that fundamentally rejects the structure of the global economy that the United States

And other countries stood up in the post-war era. And you know, we need to be wise to the fact that China’s playing an entirely different game than we are, and it’s had a massive impact. And it’s a good reason with PCBs is just one example of the industry

Of how they’ve come to claim 56% of the market share, or they had virtually nothing 40 years ago. But by the way, look at just solar panels and 2008, China made 6% of the world’s solar panels. By 2018, they made over 70%. Complete change. And it’s because we used policies

Like massive industrial subsidization to kind of build these industries from the ground up and dump products in global marketplaces on non-market based terms. Our response in these types of industries needs to be wise to these dynamics. Because in our view, at least at ITIF, that’s the nature of the way the game

Is being played in the global economy. And yeah, if you want to do things like get more semiconductor, more PCB manufacturing back here, you know, we just gotta be wise to the dynamics of the global marketplaces in which these sectors compete. – Sure, I understand.

And I guess the end goal here is not to say, well, they can’t manufacture anything. It’s more to say, well, you know, we want some more market share. And I think ultimately, this benefits everybody, whether you’re small startup company trying to scale or whether you’re a large OEM,

Because now you have much greater access to the components and materials that you need to build your products and serve your customers. – Yeah, and to be clear, just, and we want nothing more than for China to fully comply with this WTO commitments and conduct its trade

And economic affairs in a way that it’s committed to, it would for its partners. ‘Cause you know, nations agreed that that would be the best way to maximize global warfare. But if that’s not gonna be the case, then we gotta be wise that it has an effect on our industries and our workforce

And compete accordingly. – Well, this is all so interesting and it’s certainly an area that I probably need to do some more reading on, so I can learn more about all of this. But I want to just say thank you so much for joining us to talk about all this stuff.

Of course, very relevant in the post-COVID era, and I’m sure going to continue to be relevant going forward in the near future. – Zach, thanks so much for the invitation. I’ve enjoyed it. – Thank you so much. To everyone that’s out there listening, we’ve been talking with Stephen Ezell,

Vice President of Global Innovation Policy from the Information Technology and Innovation Foundation. If you are watching on YouTube, make sure to hit that like button, hit the subscribe button. You’ll be able to keep up with all of our podcast tutorials and episodes as they come out.

And last but not least, don’t stop learning. Stay on track, and we’ll see you next time. Thanks everybody.

Explore the intersection of Global Innovation Policy and the CHIPS Act with Stephen Ezell, VP of Global Innovation Policy at the Information Technology and Innovation Foundation (ITIF), in this insightful episode of the OnTrack Podcast.

Hosted by Tech Consultant Zach Peterson, this discussion delves into the complexities of navigating the Chinese market, the principles of comparative advantage, and the critical role of policy in fostering technological self-sufficiency. Discover how the CHIPS Act aims to bolster the electronics industry and innovation within the global tech landscape.

0:00 Intro
1:24 ITIF’s Background
2:48 ITIF & Policy Issues
4:40 Hardware vs. Software in Policy Makers
7:20 ITIF’s & the CHIPS and Science Act
11:52 Global CHIPS Act Comparisons
18:32 Is the CHIPS Act a Handout?
24:15 Was CHIPS Modeled after Chinese/Taiwanese Industrial Policy?
33:00 Should Other Western Countries Implement CHIPS-like Initiatives?
35:49 Would a “PCBs Act” Encourage Onshoring/Nearshoring?
39:26 Should We Make Policy to Encourage Friendshoring?
41:21 China’s Economic Evolution Since the 1980’s
44:18 China’s Massive Economic Impact

👉 For more episodes of the OnTrack Podcast, go here: https://www.youtube.com/playlist?list=PL3aaAq2OJU5FLgl8HQLrNEDnZx1cT2WrQ

👉 Learn More about ITIF: https://itif.org/

👉 Learn More about Stephen Ezell: https://itif.org/person/stephen-ezell/ & https://www.linkedin.com/in/stephen-ezell-69945/

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