An electronics engineer works on semiconductor test equipment. Photo: iStock
An electronics engineer works on semiconductor test equipment. Photo: iStock

Following now well established historical patterns, capitalism around the world gets a big helping hand from government initiatives to either develop growth industries or protect the ones that already exist in their geographies. These activities include capital loans on favorable terms, subsidies, tariffs, import limits and controlling the ownership of companies considered strategic to avoid their take-over by foreign entities.

For history, we can easily go back to the policies of the French king Louis IVX’s minister of finance Jean Batiste Colbert in the 17th century who established sophisticated industries producing luxury products such as lace, fine glass or tapestries. These industries were then centered in other countries and to gain the expertise in France, Colbert systematically attracted technologists and entrepreneurs who were funded to start manufacturing companies in France. The effort was successful in that new industries were established to produce products that were previously imported from the Netherlands, Venice and elsewhere. France even became an exporter of excellent products competing internationally on the basis of price and quality. These policies did not gain him many international friends.

If this sounds familiar, it is because this playbook has been followed by other countries to this day. To build industries a country imports technology, experts and offers capital for company building at the same time controlling competing imports while offering subsidies for exports. The desired industries change. Attempts to protect industries have a mixed history of success. In the case of England, for example, protecting the manufacture of steam engines – the key strategic product of the age – proved futile. Each age had its strategic industries that became the beneficiaries of state attention: steel, armaments, communications equipment, shipbuilding – the list is long and a changing one as products become commoditized with time.

Now electronics industries are the strategic ones because they are engines for economic growth and good job creation.

In Asia, the process of national economic interest is focused on increasing product sophistication. The assembly of electronic products such as computers and smart phones with imported components have moved largely to Asia, mostly China. It is logical, therefore, that China, which imports components to assemble over 50% of the electronic systems sold in the world, seeks to develop the chip industry that combines sophisticated manufacturing and design and is key element of the value chain. This clearly provides a challenge to the incumbent component suppliers who are at risk of losing plants and jobs.

The reason why the advanced chip industry needs to be considered a national strategic industry is clear. Chips (integrated circuit containing up to billions of transistors on a single device the size of a thumb nail) constitute a worldwide industry approaching $300 billion in annual sales and the advances made in chip cost reduction and performance improvement paces to a large extent the growth of the electronics industry as a whole. Chips are the digital devices that enable the implementation of ever more sophisticated software. Strip away the design link to production, and you leave the system designers at the mercy of those companies that link manufacturing advances to chip performance.

While a new entrant into that highly sophisticated part of the industry faces a steep learning curve to develop the required intellectual property and talent, the incumbents to protect their business must be committed to high capital investments in technology and product research and development. Manufacturing is highly capital intensive. It costs over $5 billion to build a state of the art plant and these costs will only increase. In the US, the long-term world leader in chip technology, has in place a huge eco-system of university research, federal funding for research and development and a large group of companies providing the complex software design skills in addition to manufacturing.

The long-term challenge for any country striving for leadership is the ability to innovate process and chip design methodologies to meet ever more complex system requirements. This requires highly trained engineers working closely with system requirements and manufacturing process technologists to push the state of the art in a highly competitive industry. Here is where established leading companies like Intel in the US, have succeeded in developing over many years the combined manufacturing and design skills to continue to offer to the most advanced market leading-edge products.

If we want to define examples of national industrial assets, we could focus on companies that compete by combining tightly coupled manufacturing, process innovation and design where the barriers facing new entrants are high. Having said that, we should not ignore the contributions of smaller companies to the national capabilities as that they develop unique expertise on the basis of new innovative technologies that they pioneer. Nvidia is a good example in the US that has emerged in recent years as a new international participant in the highly sophisticated chip industry. Such companies with growth potential constitute one of the elements of a strategic national program.

While national support for capital and development must be considered important to support strategic industries, a national economic policy must not divert resources to support marginal companies which fail to innovate and hence whose presence in a particular market is likely to decline. These companies become fossils. Companies worthy of support are leaders with a bright future: “strategic” companies must continue to demonstrate technological and product leadership by investment and innovation. There is no alternative to maintaining industrial leadership in dynamic industries.

Dr. Henry Kressel is a noted private equity investor, technologist and inventor and the author with Noman Winarsky of “If you want to change the world” (Harvard Business Review Press, 2015)

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