How the U.S. Lost Chip Dominance and How It Can Be Regained

the latest step in your plan to do that, I assume. Yeah, so we're not going to do that, And realistically, I don't think we're going to have a new spinoff Odd Lots branded uh semi conductor show, but I do think but we are going to do some more episodes on the topic because it really does just intersect with a

lot of different themes. There's sort of the pure tech question of their role in the economy, why different companies are rising and falling, but there's it also intersects with um things like national security and sort of economic strength and some of the questions we've seen during the COVID crisis about say domestic manufacturing and reliance on manufacturing in other countries, So it's a it's a rich load to mine. Yeah, well,

I mean you could go even further. So it kind of gets to, I guess, the heart of a large body of economic thought, right, how do you balance domestic interests with market forces? So when the entire market is telling you to outsource manufacturing to a cheaper place and they can do it more efficiently, is that the way to go for something as important as a sensitive technology like a semiconductor. And I think we're seeing those tensions

over and over. I think we see them reflected in a lot of US politics and the way people feel at the moment. But of course we also see that reflected in the U. S. China trade war, and technology is really ground zero of that. And within technology, semiconductors are the epicenter of the ground zero. I'm mixing my metaphors, but I think you get it. The epicenter of the ground zero. No, I get it, And I think you're

absolutely right. Like it's kind of a it's a business topic, but it intersects with a lot of our favorite macro themes that we discuss all the time. And I think another sort of macro theme is you know, we talked about it a lot in but the sort of rethinking the role of the public sector and rethinking the role of government spending, rethinking the role of government investment, and I think that's also I mean, that's a that's a

big topic for us, it's a big topic nationally. I mean, I think you know, if you look at one of the successes that we've had in this crisis, most people would say the speed with which we were able to develop a X seeing for covid um was in part due to the government investment and operation warp speed, and of course the longstanding investment in pharma. So there's all kinds of reasons to sort of use this moment as a chance to reconceptualize what is the role of the

public sector. How can the public sector spur more innovation, manufacturing production. So it's a it's a great topic because it hits a lot of odd themes. I would say, yeah, that's right, And I think we have seen a proposal in Washington about how to boost domestic semiconductor capabilities, So yes, it hits all the sweet spots. It's something that's happening right now as well. And I think it's going to be an interesting conversation. Yeah, I'm really excited about this.

Um our guest today is um Professor of Management Practice at Harvard Business School, Willie She. He writes a lot about the topic about semiconductors, about manufacturing, US manufacturing, and particular what it takes to make it work. So we're going to dive into all of these questions with him. Professor She, thank you so much for joining us. Well, thank you for having me, Joe. So I'm trying to

think like where the best place to start is. But you know, obviously, uh, we're talking about Intel, and for a long time, Uh, Intel is not just the leader in semiconductors, but the sort of like the vanguard of US tech and tech manufacturing capability. And of course the story over the last couple of years has been the problems they've run into in manufacturing. Also business model questions.

But to start, why is it important for a country like the US or a country like China for that matter, But why is it an important for country like the US to have this capability at scale to produce high tech goods such as semi conductors. Well, I think the reason semiconductors have attracted so much focus in this regard is because they are a building block for so much

modern technology. In fact, if you look at and it's been really highlighted by the pandemic kind of the role of electronics and technology communications technology, whether it is conducting classes and meetings and business on Zoom or it's ordering online, underpinning all this sort of the the core building block

are semiconductors. When you start to look at the numbers on what percentage of the manufacturing happens in the US and how that has declined over the years, it's only about twelve for the microelectronics that we're talking about, for things like Intel microprocessors or the chips that go into smartphones. And you look at how much of the dependence is in Asia, and combine that with the rhetoric around you know, dependency on China or areas that China claims like Taiwan.

I think that has really brought attention to a concern that I would say has been around in some circles for the past twenty years. Mhm. So, I think there is a recognition that semiconductors are strategically important for the reasons that you just laid out. But we've we've discussed this in some previous episodes. It's an incredibly competitive industry and it has huge startup costs. How difficult is it to actually um set up and create a semiconductor manufacturing capability?

And what are the business decisions that kind of go into that. Well, there are a couple of things that I think have evolved as you get to the more advanced technologies. The cost of setting up kind of a minimum efficient ale manufacturing facility. It used to be, you know, back thirty years ago, you could do this for a few hundred million dollars, okay, or at the beginning it

was a few million dollars. Now to set up the most advanced, leading edge fab will probably cost about twenty billion dollars, right, And that's a substantial capital cost That really strikes fear in the hearts of many uh CFOs as they look at the level investment. And and when you make that level investment, you have to make it successful in order to earn a return. That means you have to be able to learn all those processed technologies.

You have to be able to manufacturer to high yield, okay, because if you don't have high yield, then you're throwing out half of your output and then your cost just you know, you don't have anything to absorb your costs. So it's a technological challenge in this the financial challenge as well. So, uh, you know we're talking about Intel. You're the co author of a book Producing Prosperity, why

American needs a manufacturing renaissance. So when when thinking about this question, it seems like there's kind of two parts to it. One is, Okay, something is going on at Intel, they're having tech problems, they're having business model problems as well, But there's also a sort of broader US manufacturing malaise or you know, a reason that there's less and less of it happening here. How do you sort of disentangle

the two things? How much of it is sort of macro factors about something that's going on in the US that's causing this decline in high tech manufacturing capability and know how versus specific micro things going on at a company that happens to be stumbling. Well, so let me start with the macro thing, because I think in essence, the financial risk and the technological challenge a are linked. Because what we saw, we've seen this type of crisis before.

It was actually in the nineteen eighties, and at the time it wasn't China. It was a Japanese who were manufacturing memory chips so called d rans dynamic random access memories. And in the nineteen eighties, the Japanese had invested in manufacturing and they were actually much better at it than American companies, even like Intel. Right, Intel was founded as

a memory company. Many people forget that, right, but Intel Texas Instruments was a big player in memories, moss tech companies like that, and the Japanese out executed American manufacturers because they were delivering higher yields. Right, So if you think out, I'm going to sink all this money into a factory. If I have higher yields, that means my cost is lower. And uh, Intel really was pushed the wall on memories and they decided to get out of

memory manufacturing and focused on microprocessor manufacturing. At the time, you know, IBM had picked UH their microprocessor for the IBM PC. There were early comments in Intel where they weren't sure if you know, this PC thing was going to be big, Okay, But in some sense they were smart and they were lucky in moving two microprocessors, okay, and then they were able to escape this problem of

being the best manufacturer. Okay. Now, at the same time, what we saw in American industry was this separation of design from manufacturing, which was really enabled by a lot of these computer aided design tools, right, which you know, separated out the manufacturing process. And then we saw the rise of some Asian companies, in particular in Taiwan, but also Korea and in Japan at the time, who said, well, we're very happy to do the manufacturing because we're not

the experts of the design, right. So we saw that bifurcation okay. And now as that has developed, what we've seen is as you go to the more advanced manufacturing processes, there were very few companies who could kind of keep

in that game. Intel has historically been one of them, right, because after they left the memory business, they invested a lot in manufacturing to give their microprocessor business a lead, right, And historically Intel lead with manufacturing in that regard, okay, and they were able to beat competitors like a m D because their manufacturing processes were a generation or two ahead, okay, So it didn't matter if you had a design that

might have not been quite as efficient. Okay. Now a m D also had their own manufacturing, but then they spun it off a decade ago into Global Foundaries. And once a m D separated their manufacturing from their design and uh, you know, they left Global Foundaries and they shifted over to Taiwan Semiconductor. Okay. Once am D now had access to a more advanced process than Intel did, they have been able to take a lot of market share from Intel. Right. So you know this this problem

has been a long time in developing. But the roots of it are the manufacturing part is capital intensive and it's hard, it takes a lot of discipline, Okay, and you can make more money on the design side, right. So hey, if somebody else wants to do the manufacturing, let them do it. I'll be more profitable. And a lot of people have said, well, the U S. Semi can actor industry had a renaissance in the nineteen nineties because a lot of those companies let go of the

manufacturing part. Not everybody did, but a lot of them did, and they've been able to be very successful. Companies like Qualcom and in Video in particular. Uh, and now am d by letting go of manufacturing. So this is the I think it's called idem model, where you design and manufacture chips like what Intel has been doing, versus the

fabulous foundry model like in Video and Qualcom. We got into this a little bit with um Well in the episode with Stacy raskin the semiconductor analysts over at Bernstein. I'm curious, like the consensus in the industry right now seems to be if you move to the fabulous foundry model, where you sort of outsource your manufacturing to a foundry like t SMC, that that's the way to go. But your argue that there are some hidden costs or some synergies that a company might lose in that model, Is

that right? Well, yes, I think so. And here I would argue that more broadly speaking, there's a set of capabilities that comes with your manufacturing which can feedback into design as well. Now, I think in the chip industry what we have seen is manufacturers have continued to work very closely with the foundaries. Uh. And you know a lot of that capability is transmitted through like software, design

tools and so on. Right, So that chip industry has been able to the fabulous companies have been able to leverage those manufacturing processes by working closely with their foundry partners. Okay. I think the question in Semiconnectors is really what would it be like for the US if it was unable

to manufacture anything domestically okay. And I think here the COVID pandemic has really shined a light on that because on a lot simpler commodities, things like personal protective equipment okay, or ninety masks and things like that, you know, we didn't have the manufacturing capability. Uh. And the question would be what if Asian manufacturing capability was suddenly turned off?

You know. I'll point out that an awful lot of the semiconductor manufacturing capability is in three science parks in Taiwan, which is a seismically active region okay, And there have been minor disruptions over the last few decades in terms of ta typhoons and earthquakes and so on. But you know, there's also the risk of geopolitical disruptions. Okay. So I think that has heightened the sensitivity about having manufacturing concentrated

in such a small geographic area. It's a little different, I would say than the the know how from manufacturing in a lot of other processes, but you do see

it in semiconductors. In terms of the tool manufacturers okay, and here American companies have a large presence and tool manufacturing okay, and being close to the actual manufacturing facility is very important, and you see a lot of those toolmakers moving their development activities and manufacturing activities closer to the market, be at Singapore or Taiwan, or Korea or

or even China. Can you explain in a little more detail the mechanism by which learning by doing actual know how in the manufacturing feeds through back to innovation, because you know, it sounds good this idea that like, okay, if you're actually in the process of sort of building chips, if you're not outsourcing it, that also helps the technological innovation. And that this idea, this dream of okay, you can just separate the design and the manufacturing and still be

a world leader. That it's problematic. How does that work in practice? Walk us through a little bit why that link is important? So I think the key idea here is tacit knowledge okay, And tacit knowledge is that which you know but you maybe haven't written down or haven't really explained to people. Right, So there is a lot of know how on the shop floor that comes from kind of learning as I produce more product, then the question is how is that knowledge captured and how is

it uh communicated? Okay? Oftentimes you will see there's this concept called design for manufacture. In other words, I was in one factory once where the people assembling this piece of equipment and said, you know, the guys who design this, they haven't thought about you know, assembly sequence for example. It's like, you know, you can't put that part there

because I can't I can't install it. But there's a lot of those kind of tricks of the trade that come from practice and manufacturing, which then feeds back into design that says, okay, when you design it, recognize that we have to do these things in manufacturing, and how that change your design? Right? So tacit knowledge is really the main concept you know that which I know, which

I cannot have not or cannot explained necessarily. So we've sort of laid out the scene here and laid out the differences between the two business models and why semiconductors are important, and also why the industry is different to a lot of other types of manufacturing and design. What

can actually be done about this? If if we agree that Intel is falling behind on semiconductors, that the U S should do more to boost its domestic capacity in order to have a more resilient supply chain and you know, be able to withstand unexpected disruptions like the pandemic, what's the first step towards actually achieving that? Well, Tracy, I think this is a tough question, uh, And a lot of people I've talked to agree on the problem, but you know, I think there's really a searching for what

kinds of steps would help. Now, what some people say is Intel needs to establish a foundry operation. Okay, I think I agree with that because in manufacturing, and especially in manufacturing semiconductors, you need to have value, right because through manufacturing lots of volumes, that's where you get your process learning, that's where you get your process improvement, that's where you improve your yields, okay, and find out what

works and what doesn't work. Okay. As Intel's microprocessor volumes come under competitive assault from other designs, where people go to say t SMC or a foundry to manufacture it, Intel needs to keep its volumes up. One way it could do that is it could establish a foundry operation that would make both its own chips and chips for

other customers. That has its challenges, though, because Intel has its own way of doing things which have served its own needs historically, and so what it needs to do then it needs to learn how to be a service business that will service the needs of other customers, including

its competitors. Okay. And and that's that's kind of a tough transition because that means it has to give priority to its uh customer slash competitor needs okay, and it's competitors who might use it as a foundry then will ask the question of why do I want to help Intel because they've been a tough competitor over time, and if I give business to this foundry and my helping Intel, okay.

And the other question as a potential US foundary customer I'm gonna ask is like, are you going to give me the same level of technology and process capability that I can reliably get in Taiwan today? So there there are a lot of barriers to making a foundry business like that work. But I would argue that Intel needs to do something like that in order to keep its manufacturing volumes up. You know why Intel wow? Because Intel is probably the last best chance for the US to

have a leader into this technology. Let me just actually back up here because I'm still sort of struggling with a key question, which is when we talk about the stumbles at Intel or the decline. I mean, here is a company that has been integrated, it's uh connected, you know sort of, it has this lots of tacit knowledge and having manufactured its own chips for so long, unlike some of its competitors. What is your core diagnosis for

what's wrong with the company? And also, um, you know, recently, I think it was the hedge fund Third Point came out with some proposals the activist firm to try to revive the company. But a, um, how would you sort of summarize your diagnosis of what went wrong there? And then what do you make of some of the suggestions by them? Well, I think uh, Intel needs to invest heavily on process leadership. Ten years ago, they were two generations ahead of the SMC. Now ten years later there

behind t SMC. Right, so they they need to invest heavily on that. I think Intel historically has tried to be very self sufficient in terms of using a lot of their own tools and a lot of their own methods. Okay, I mean I think one thing that would be helpful would be to work more with others in the industry in broadening the funnel of ideas that come to them. Okay, because in some sense, trying to do it all yourself in this very challenging technological era may not be the

most competitive path. If you look at companies like t SMC, they have heavily leveraged partnerships with a SML who's the lithography leader for DPUV. They have heavily leveraged organizations like im EC in Europe, which is kind of a shared

research collaborative. Okay. And t SMC is very good about working with a broad range of parties, and I think that would help Intel, right, And that that means they have to kind of set aside some of their established ways of doing things and open themselves up to maybe

broader approaches to the competitiveness. Okay. Now on the third point question, Okay, I think I agree with the need for Intel to really establish a foundry business because, as I said earlier, I think volume is very important for them.

But just the simplistic idea of separating their design business, which is designing microprocessors, and manufacturing, which is manufacturing semiconductors, taking them down the path that am Be went down before and many other companies went down before, that will create value for shareholders. Okay, but then you have to ask how likely is that foundry going to be absent some other moves to ensure that it has customers and

ensure that it is competitive. Right, So at a simple level, I could see how it would create a lot of shareholder value, but is that the right answer for the United States? So one thing I'm wondering is, you know, we're having this conversation now, and uh, there is a proposal in Washington, as I mentioned, to do some of this, and we can talk about that in some more detail

in just a bit. But why hasn't this been done before, or why hasn't there been more of a concerted effort to boost America's you know, strategic capability when it comes

to a technology that people agree is increasingly important. I think we have h in some sense been looking at a rosy picture of the semiconductor industry, reflected by the success of fabulous companies like Nvidia, like Broadcom, like Qualcom, like Apple by the way, uh, and we're seeing it as well in companies like Amazon and Google who say I don't need the manufacturing, but you see the valuations

of these companies and you see the financial success. As long as you know, Asia represents a secure manufacturing supply based one could argue if they want to subsidize that, or they want to do lower value work, then we should let them. And there are people in Silicon Valley I've talked to who said, you know, there's a strong argument for Hey, if Asian countries want to subsidize manufacturing, we should let them. We should take advantage of that.

And then the only question is what happens if you get cut off from that supply. Now, I think we tend to believe in the US that people wouldn't cut us off from supply. Okay. In the last couple of years, the US has really weaponized supply chains against other countries, notably against companies like Huawei or z t E or you know a lot more recently. Okay, So then the question is do we open ourselves to that kind of

quid quid pro quo behavior. So let's talk a little bit more about national policy and you talk about the case for why it should be a DC priority. Now, just two for my recollection or knowledge. In the later Uh, there's the Foundry Act, which I sought to encourage more domestic investment. Has that been passed? Now? Well, there was the American Foundries Act, Okay, and then uh there was

another act. Those got merged into the National Defense Authorization Act, which was passed, but the funding still has to be worked out. Okay. And if you and if you read the language in the n d A A uh, I forgot exactly how many pages it was, but it was around sev hundred something. And uh, you know, so I went to and found all the language on the semi conductor stuff, and I would describe it as aspirational, right understanding that we're gonna we're gonna direct Commerce Department to

do these things. We're going to direct all these people to report and all that. The challenge right now, I mean, I think Congressional staff have good intense here, right but the challenge right now is this micro electronics leadership in this segment. You know that intel is in. There is a dearth of what I would describe as good ideas,

good strategic moves on how to handle this. I've been racking my brain on this recently, but I think it's a very tough problem that has been decades in the making. I hope people, you know, don't kind of get dissolution of these things. It's like my mother always told me, problems that we're a long time in the making are a long time in solving. Right. This is not a problem that gets solved in three years or five years. Right.

If you look at t SMC, which was found in the nineteen eighties, Okay, they've been working very, very hard for decades to get to where they are, all right, and they're not about to lose this either. So what is I mean you say there's this dearth of ideas. But obviously, and we talked about this on the previous episode, there's sort of a limit to how much you can achieve just by throwing money at the problem. But of

course money it has to be part of it. Um So in your view, what would be the sort of basics of the beginning of rebuilding that capability domestically, both in terms of how much investment would need from d C, but also investment trained in the right way such that it really fostered a sort of self sustaining and more,

you know, robust capabilities. So one of the ideas, Joe, that I have been floating is they're an awful lot of proposals that focus on the supply side, like let's get people to build fabs in the US, you know, let's get bowl to do more R and D in the U s Okay, And that's all well and good. But you know, if you build a new foundry in the US and nobody shops there, it's not sustainable, right. So what I've been saying is instead of only focusing on the supply side, we should also think about the

demand side, okay. And the reason I highlight that is if you go back to the nineteen sixties and I'm I'm dating myself now, but you know, if you go back to the nineteen sixties, at the birth of the integrated circuit and the birth of the semiconductor industry in the United States, d D and NASA bought of all the integrated circuits that were made in the world, Okay, And that was something that helped companies like Texas Instruments, who was one of the pioneers okay, and and Fairchild

which gave birth to Intel and others. Okay, But it was that demand that really helped foster the growth of the industry. It was a customer for kind of those early products who worked with the suppliers to improve. Okay. So I've been saying, it's like, let's focus on demand as well. Now, one of the things that we do have in the United States is we do have demand

for a lot of high and semi conductors. If you look at all these hyper scaled data centers along the Columbia River or around the DC area, or spaced across the country. Let's take some of these big hyper scale data centers from you know, Google or Microsoft or Amazon along the Columbia River. Well, where did those zon microprocessors come from? Well, probably Hillsboro, Oregon, where Intel has a fab. You know, that's one of their leading fabs in the US.

And then what happened as well, Well, those chips then went to the finished wafers with the chips on them that were then sent to either end China or Vietnam or Malaysia where they were tested and cut apart into individual die and then they were put into packages, and then they would go to a distribution center somewhere in Asia and then go to a serverboard manufacturer in China probably, and then they ship them back to the Columbia River Valley,

you know, a hundred miles away from where the chips originated. And it's like, now, why do they take that round trip? Well, they take that round trip because in the early days of the chip industry, when you had to cut these chips apart with the diamond saw and then put them into little packages, you would have rows and rows of workers looking through microscopes. Why are bonding those die into packages? Okay? And it was very labor intensive. And semi conector chips,

you know, they have a very high value density. So it's no problem to air air fraight them over to Asia. Haven't packaging and haven't come back. Okay. These days, all that stuff is automated, so there's no reason for it to go to Asia except over the last four or five decades, Asia has developed the capability for chip packaging and automation and so on. So one of the things I would focus on is I would focus on let's

bring kind of chip packaging back to the US. We still have companies in the US like am Corps who are leaders in that technology, you know, and let's help them to do packaging in the US and just kind of move a key part of that value chain where

we have some of that demand. You know. The other reason I think packaging is important is we're seeing the end of Moore's law where it is becoming harder and harder to push the frontier and these advanced processes okay, but an awful lot of the horsepower you need in these chips come from lots of different processes and maybe some not so advanced, and you can get a lot of the benefit by going to what people call three D packaging, where I'm going to put multiple chips into

a single package and then kind of bond them together with what are called vas or you know. Basically, I'm going to use multiple chips in one package because if i can cut the distance between them and pack them more densely, I'm going to get a lot of the benefits from Moore's law without having to go to the

most advanced processes. Right. So, by focusing on parts of the value chain that we can win over the shorter term or get some some of that manufacturing capability back while you are working to restore process leadership, particularly looking at next generation, like what comes after all the technologies that we know will take us to three nimeter today

with Moore's Law that has gotten very expensive. Investing in new process technologies, new technologies that will take US and global semiconductor production to kind of the next era that would be a good investment as well. Right, So, I mean, I think there are things that we can do that will take investment, okay, but those also play to some

of the strengths of this country. Has I want to go back to something said earlier about the idea that the US has been weaponizing supply chains, particularly in China and with its actions against Huawei UM. We've seen Huawei not necessarily struggle to source semiconductors, but they've had to stockpile a bunch of them UM and they're sort of starting to run through their supply because they can't get

them in the way that they used to. There's a perception within China, or at least there's one strand of thinking within China that this isn't necessarily the worst thing for the country because it's going to end up accelerating their own domestic manufacturing ability. So they're going to sort of rush through development UM and the US has in some ways done them a favor by sort of sparking a big fire under them to get this done. Is

that a credible argument in your view? Or I guess in your view, what are the dawn sites and the benefits to targeting um external manufacturing or targeting China in this way? Well, in in some sense what China is doing is uh there you know, on an imports substitution drive now in response to this weaponization. Okay, A lot of economies have used import substitution very successfully to kind of bootstrap themselves up. Taiwan notably one of them, right, Korea, Japan,

a lot of Asian nations have used that. Okay, will China be able to get there? Right? You will hear a lot of skeptics who say, well, China won't be able to get there fast because they still need technology from the West. Okay, and it may take them a while. But you know, I have friends in China who said, you know, you guys in the US, you're a young country, free your less than years old. That's like, you know, one dynasty, right, and it's like they have a very

different scale on time. Okay. And I would point out that the Europeans in the late sixties and early seventies, we're looking at the commercial hygenemy in commercial aircraft in the US, and they were concerned about it. They put together air Bus as a consortium. Right Now, air Bus had lots of political issues early on, okay, But here fifty years later, air Bus arguably is the global leader. Right. Is fifty years a long time for China? Well, it is in the context of their five year plans, okay,

but I wouldn't underestimate, you know, their ability to get there. Now. I personally don't think that's a good idea, right because I still believe that the world is better off if we trade with each other. But that also requires, uh, some notion of balance, right. I mean what you're hearing out of China analysis so called dual circulation strategy, right, which is they're going to be self sufficient as much as possible, but they still want to be a source

of manufacturers for the world. Right. That's something I would question because if you don't want to buy from anybody else and you want them to buy from you. I don't see how that's going to play very well over the long term, right, So I don't think you can have it both ways. But I wouldn't underestimate China's ability to get there. There are still some people, I think, who believe all China is just about copycats and so on. There are some very innovative people in China. They're very

some very innovative companies. So I would not underestimate there are capabilities over the long term. Might they spend much more money getting to you know, parody and semiconductors than they would have if they took a more global approach. Probably does that matter to them? Maybe not? I want no asking a slightly shift the conversation just slightly to another sort of timely topic, but it's related to this. So we're talking about these sort of global hubs of technology,

know how. Obviously Taiwan is a q on. Also Singapore Silicon Valley has silicon right in its name, the home of the home of this industry and lately and this is sort of maybe more software outside of technology, but we here Heart especially like it really is accelerating the last several months people talking about moving to new tech

hubs or creating tech hubs. So maybe people are annoyed with politics or the government in California and they're like, you know, we're all gonna let's move to Austin, Texas, or let's move to Miami and we'll just sort of set up a new a new tech hub in this area, get away from California regulation or whatever it is. What does history say about sort of what will make a

tech hub succeed or not? And is this the kind of thing that can sort of be done if you know, have a few venture capital leaders say we're all moving to Miami, We're gonna set up the next Silicon Valley here. Does it work that way or does it sort of need to be more emergent and organic. Well, I think one of the benefits of physical proximity has always been the movement of people. And this goes back to what we were talking about earlier in terms of testent knowledge.

If you think about how testent knowledge moves, it generally moves into the head of heads of people. I worked for IBM for fourteen years, okay, and every disk drive startup in Silicon Valley was started by people who came out of the IBM research operations in San Jose, California, where they did descrive development every single one. Right, So what happened is they had different ideas or they wanted to pursue different ideas, you know, Phineas Connor, Allan Sugar,

all those guys. And so that's one of the things that makes hubs productive, right, which is the spreading of ideas, this movement of ideas, movement of people. Now the phenomena you describe, I mean, I lived in Austin, Texas for a while, and you know, I like the no income tax and the much lower cost of living there compared to California. I lived in California as for a while.

Those movements, I would argue, are really about being able to attract talent and lifestyle when you're unconstrained by having to be in a physical office. I don't know if zoom and uh Microsoft teams or virtual whatever, what the impact will be that movement of tested knowledge between organizations. And if if what we have as a new era

of that kind of movement, maybe we'll see some more dispersion. Okay, But I would argue one of the things that really has help Silicon Valley over time has been the people movement between jobs to the extent that they're willing to geographically relocate, which is something that has historically been very strong in the US but has diminished over the last decade. It could work, right, but we'll see on that, Professor

she this is a great conversation before you go. I wanna sort of I was reading one of your articles and I thought this was super interesting and maybe super helpful for listeners. And that is the brutal math the brutal mathematics of UM yields, and we've talked about it on a few a couple of previous episodes. But this idea you sort of enter do this process. As you mentioned, a fab could cost twenty billion dollars here, making this

huge investment extraordinarily complex. And then to hit your margins and to actually make a return, you need to guarantee that if you produce that on the way to creating a finished product UM, that it actually works, or that most of them actually work, so that you're not throwing away a bunch or whatever, and that even if you have say like effectiveness on various steps, that that might not be enough. Can you talk us through how yields

are calculated and why the requirements for excellence are so demanding? Yes, okay, so in semiconductors. Uh. The thing that makes this one of the most challenging manufacturing processes is that it has so many steps. Okay. And if you just do the math of saying, let's say I had seven steps, okay, and let's say I have yield for the first step. Okay. If I have yield for the first step and then for the second, for the third, after each step, I'm getting fewer and fewer, Okay, By the time I get

to seven steps, I will get no good output. Okay. Therefore, what that means is I actually have to have my yields way up there. That means I have to have point nine nine more than that. Right. If I have yield at each step, and most of us think, oh, that's pretty good, right, ninety nine times seven steps will give me fifty yield out the other end. Okay. Now, let's think about the economics of a twenty billion dollar

fab that might produce let's say wafers a month. Okay, And on those twenty thou wafers, if I have to throw out half of them. You can see the economic cost of that is unbelievable. Right, So when you have an expensive fab you need everything coming out of it to be good, okay, and when you have a lot of steps, that means you've got to be almost flawless on every single step. And that's why this process, this

manufacturing process is so hard. I love that. That's a great place to, uh to stop and I think I sort of perfectly clear explanation of how this industry is just so brutal. Professor she thank you so much for coming on. Well, thank you for having you. Thank you. I really like that conversation. You know, obviously, that last answer that he gave about yield math, to me, it's sort of like what I really liked about his perspective overall.

I mean, obviously that was super interesting. Is this sort of way business and technological demands sort of intersect, And I feel like you just had like super clear and also like concrete examples of how that really works. Because we could talk to sort of like vague ideas about oh, it's important to have technological know how or it's important to uh, you know, be able to trade with advanced partners, but professor she really had a very concrete way of

describing what's actually going on. Yeah, was a good example. Um. The other thing that really comes through in those discussions, I mean it's coming through in every episode that we're doing on semiconductors, but it's sort of the uniqueness of the industry, right, It's sort of like an exceptional industry

in many ways. And again that yields problem that professor she just described, as well as the startup costs for creating a foundry, the idea that you used to be able to do it for a few million dollars like back in the seventies or eighties maybe, and now it costs upwards of twenty billion. Uh. That kind of goes to show just how complex and advance the technology has become. But it also like as it advances, of course, it becomes harder and harder to get in that game. And

that's where the question of public support comes in. Yeah, because it's interesting, Like so obviously, um, there are companies in the US, and you mentioned some of them, you know, like a M D or in video they've just done like phenomenally well that don't have their own fabs, So you don't have to have that integration to work, and from a pure shareholder perspective, those companies have like shout the lights out, which then raises this question like for

the government, it's like, okay, well, maybe you could just have this sort of total separation and some people in a design shop somewhere in the US or California, Austin, Texas, and then you ship the design to somewhere in Taiwan and then they produce it. And maybe that model is really great for shareholders, but it does raise the question of a how does that serve sort of strategic public needs?

But then be is that sustainable the sort of the long term separation of designing and building, because big part of his whole core thesis is that the two really do go together, right, It's the short term goals of of shareholders who are interested in returns versus the long term value of having a strategic industry that's competitive globally. I guess yeah, another big macro theme to add to

this conversation. You know another thing that um and again it's it's sort of thinking about how this fits in our other themes. His whole um the whole discussion of like demand side policy for tech. I thought it's super interesting because you know, I think the clear you're just like, all right, what do we need to do to create a more robust manufacturing sector here for high tech? And I think a lot of people would say, well, invest in R and D, create tax credits for building foundries

here and so forth. But this idea that there is also an important demand side component, and of course go back to the history of Silicon Valley. The idea that the Department of Defense and NASA as being NASA is being customers of last resort or first resort for a lot of these things was a big part of it.

It's also interesting, you know, bringing into the vaccine discussion, a lot of what has allowed the fast pace of vaccine development has been this sort of guaranteed buyer at the end that the government pre committed to buy all these shots from visor Maderia Johnson and Johnson if they were successful, and the ability of the government on the government alone to de risk the process by promising to

buy the end output. That's uh. I thought a super interesting point, right, And I mean we've talked about the history of Silicon Valley before, and I think there's still a tendency to think about tech is this very entrepreneurial, uh industry that you know, people started in their garage and they're smart, and they sort of get lucky and they're able to do it. And one of the things people don't really realize is the degree to which having

that government backstop has actually helped the tech industry. I do wonder, based off the experience of the vaccine development, whether that starts to change. And again, as we've been discussing for most of whether there is going to be a larger recognized role for the government in a sparking book, Demand and Supply. Yeah, one of our previous guests, actually I think we've had them on a couple of times, although maybe you weren't there for one of them, but uh,

Bill Janeway, the venture capitalist. He talks a lot about exactly this point and the idea of like government underwriting guaranteed government demand and how important that is for the commercialization of innovation, and also like you know, with an eye towards like puncturing a little bit of Silicon Valley's own myth making that if the government just left tech alone, that they would do all these great things and so forth, and that how much of that all all the industries

that really take off, I'd say green technology or clean technology is another area in which the government has had a big role or could play a big role, both in terms of the supply side investing in R and D, but also the demand side in being a customer for ventures that take a lot of risk, take a lot of money, and therefore high rid Yeah. Well, it seems like we might have a new example in the form of a u S Semiconductor is not not too far from now. Maybe to add to that pod, we'll see, Okay,

shall we leave it there? Yeah, let's leave it there. This has been another episode of the All Thoughts Podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe Why Isn't Though. You can follow me on Twitter at the Stalwart. Follow our guest professor Willie she He's on Twitter at Willie she Underscore at HBS. Follow our producer Laura Carlson. She's at Laura M. Carlson.

Follow the Bloomberg head of podcast, Francesco Levi at Francisco Today, and check out all of our podcasts under the handle at podcast. Thanks for listening to