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Putting the chip buzz back in U.S.

George Scalise, president of SIA, says the federal government needs to do more to encourage domestic chip production.

George Scalise wouldn't mind making fewer trips to China.

The president of the Semiconductor Industry Association recently visited the country to learn more about how it is encouraging the development of its own chip industry. He and his staff came away impressed with the gleaming new universities and

The SIA, a consortium of U.S. chip companies, is trying to bring some of that buzz back to the United States. The U.S. share of worldwide chip production has fallen to 15 percent of the world's total, which isn't enough to sustain a "critical mass" of educational opportunities, design breakthroughs and overall competitiveness, according to Scalise.

The group would like to see that number increase to 30 percent over the next few years. But it doesn't believe that will happen unless the U.S. government increases funding for math and science education and research in grade schools and universities; allows more foreign workers to come to the U.S.; and reforms tax policies to give U.S. companies a better chance of competing against heavy government subsidies in other countries. Scalise and a group of SIA representatives recently visited San Francisco to talk about their proposals for encouraging more domestic chip production. An edited transcript of that conversation with CNET News.com follows.

Q: How will your proposals for increased educational resources and tax policies and whatnot increase the incentives for chip companies to build in the U.S.?
Scalise: You've got to see the total picture, and then I think it comes together and it makes a lot of sense. The thing that will make the investment come back, is there is a consequence of those components. You have the trained students; you have the technology coming out of universities; and those students can then go exercise it. We already have a capital structure in this country that allows good ideas and good people to get investment money, and you also have the trained students from foreign lands that are coming over here. Finally, you also have a competitive investment climate that says I made the investment in California, or if I make it in China or Ireland, I can come out with roughly the same cost structure and therefore be successful against my competition.

This is all about choosing to compete. If you ever get to the point where you are viewing this thing as corporate welfare or industrial policy or things of that nature then you have missed the whole argument.

This is all about choosing to compete. If you ever get to the point where you are viewing this thing as corporate welfare or industrial policy or things of that nature then you have missed the whole argument. It is only about what it will take to compete in this new global economy, and these are the three things in the technology world. When I came along, we didn't worry about what China or Japan or Europe is doing. They didn't really make any difference. They didn't matter. Today, they matter and therefore you cannot ignore them.

So there are two things you need to do today. One is strengthen the areas where we are really good: university research programs, rule of law, intellectual property protection, venture capital capability, financial institutions, and on and on. But then you also have to go look at what is the competition doing and what can they do to derail me, because they are getting good at some of these other things, but they are also doing some things in addition to that that we are not doing.

Are you going to be able to resist making the choice (to invest overseas) even if the conditions in the United States improve?
Scalise: If (former Intel CEO) Craig Barrett was sitting here--and I hate to put myself in his shoes--but he was talking not too long ago about caring about the industry as a chief executive and a chairman of a semiconductor company, and the decisions he'd have to make with that hat on were not necessarily the decisions he'd want to make if he were wearing the grandfather hat or the, you know, the family hat or the American taxpayer hat. Sometimes those decisions are at odds, but I believe what we're trying to do is close the gaps so that the decisions that you would make are clear regardless of where you sit. And the decisions are to invest here and to continue to support the industry here. So everyone, given the level of the playing field in a better competitive U.S. environment, will further invest in the U.S.

Is this an altruistic thing that the companies would prefer to invest in the U.S.?
Scalise: No, that's business.

If it's just the business then why do you care (where you invest)?
Scalise: Because you need to do basic research. You need to get the students out. You need to go do the development work, and you have to do the commercialization work; you have to do the consortium work and on those bigger problems that need a consortium effort, and then you have to manufacture, so that you can continue that loop. That's why you want to do it here, and you want to have those things to be the best.

What portion of design is still U.S.-based versus what happens overseas?
Scalise: When Craig Barrett testified before Congress last Friday, he said 80 percent of Intel's R&D is done here, so I can't break it down exactly the way he broke it down, but I think that probably gives you the answer.

So when you're choosing to locate design elsewhere, how do you guarantee the intellectual property will be protected?
Scalise: There are lots of ways to go about that. If you're talking about in the case of these companies designing semiconductors, you can partition it in a way where the work that is being done in a given area doesn't really have enough knowledge. They know what they've got to do relative to another piece, but they don't have enough knowledge to have the IP under their control, so they can't do a lot with it. That's one way of dealing with the issue.

What can the U.S. learn from China?
Scalise: They're making huge investments in the university infrastructure. They're also increasing their funding, their basic research at these universities. We're at 0.7 percent of GDP (gross domestic product) going into basic research. They are at 1.5 percent. They have a smaller GDP right now, but that's OK. They are still a higher level, but they're going to bump that up to 2.5 percent.

The third thing that they're doing, and again I think it was described here, is that the states are taking the entire risk in the investment so that the companies don't even have to go to the financial community and say, "We want to make a new investment and here's why we are worthy of our loan or whatever, a bond float to do this." If you're getting funded by the state and then it's being leased back to them, I mean, that's about as generous as I've ever heard of. Japan did something similar to that in the 1980s but not even as aggressive as that. So the point is, they are being very, very aggressive about all of the things that we were talking about need to be done here. They're doing them already.

Today 85 percent of that market is served with imports from around the world. The vice premier told us their objective is just to turn that around so that 85 percent is delivered from within China and 15 percent from outside. If you're going to deal with an environment like that and you want to hold out in a market share, you're going to have put some capacity out there. You may not want to do it, but you may not have a choice if you want to stay in that game. But that doesn't mean you can't do your critical mass here as well.