The cost of developing 5G systems and beyond requires massive government support. Photo: iStock

The digital data systems that are fundamental to the operation of modern economies depend on two strategic infrastructure industries – semiconductors (chips) and communications equipment.

 We have come to expect ever better and more sophisticated digital data products and services at declining prices. As a result, these two industries’ products are growing rapidly in complexity while the investment needed to bring new generations of products to market escalates. Because of rising costs, companies in the US and Europe have been consolidating to try to maintain profitability, reducing capital requirements and development costs. However, satisfactory return on private capital is poor. Both industries are reaching a point where government support is essential to maintain their technological momentum as the governments of certain leading  Asian economies have recognized.

Consider the semiconductor industry. The transistor is the basic data switching, storage  and amplifying device in digital systems. The computing capability of a system increases with the number of interconnected transistors. By shrinking the dimensions of the transistors, ever more powerful systems can be built at ever reduced unit costs. The dimensions have shrunk for decades from millimeters to a few nanometers. Whereas a single transistor sold for $5 in 1960, an integrated circuit chip the size of a fingernail with over a billion transistors sells for the same price, making smartphones as powerful as early mainframe computers.

But such value creation is costly. A chip factory could once be built for a few million dollars.  Today it costs in excess of $12 billion and becomes obsolete in a few years. This capital intensity has resulted in only a few such plants being built recently and the next generation will see even fewer plants without substantial government funding. None are likely to be built in the US with solely private capital. Such plants are needed to produce the highest performance chips needed by the new communications systems.

The communications equipment industry is a second example of rapidly escalating new product development costs because the problems that need solutions get harder and harder. Each generation of systems faces increasing requirements as services are added, and data rates increase. Developing a new generation of communications like 5G is a multibillion, multiyear project involving many thousands of engineers and many billions of dollars.

First is the problem of better utilizing limited spectrum to carry ever more data, which entails the use of ever more sophisticated signal processing chips and software. The second is data security protection through better encryption, transmission and routing of data which requires a combination of wireless and fiber optic transmission and sophisticated computing routers. Large communications systems run on lots of costly state of of the art chips that can cost hundreds of millions of dollars to design.

But manufacturers cannot easily pass on higher costs through higher prices because they need to make their equipment economically viable for their communications service provider customers. This places enormous restraint on the prices that equipment suppliers can charge and hence on their profit margins. Making money in this industry has proven to be an elusive objective and massive consolidation has occurred in the search for viability through consolidated cost control. The last mainstream US supplier, Lucent, went out of existence when it merged with Nokia. Currently, there are only four large scale equipment suppliers left – Huawei (China), ZTE (China), Ericsson (Sweden) and Nokia (Finland).

Recent history has shown that while sophisticated communications services are a vital national asset, the equipment providers’ financial performance has been poor.

 This is where government investment becomes critical.

The next generation of communications systems, after 5G, will be enormously more sophisticated and complex in order to deliver much higher capacity. First, the available spectrum will have to be expanded by the increased use of spectrum in the high gigahertz range, and second, spectrum sharing will become more prevalent among different classes of users. Making that feasible involves very sophisticated signal analysis and software. These issues will need to be addressed by new artificial intelligence software, novel chip architectures, sensors and better integration of lasers with chip packaging and optical fiber architectures. Again note that access to the highest performance chip technology will be essential.

What this means is a huge multiyear development program involving scientists and technologists of many disciplines. There was a time when Bell Labs would have been able to muster and manage much of the talent needed, but today no organization in the world is in that position.

This is why a new government-funded strategic organization centered in the US is needed. This organization would be tasked to establish standards and collaborative programs with commercial companies and universities with the objective of leading the development of future generations of telecommunication systems. It would use part of its budget for internal development and to fund research work at universities. However, an important part of the budget would be used to partially fund collaborative programs at corporations that will commercialize the systems. These would be targeted at the products that would be part of the system offering.

This would not be the first time that such a  large collaborative programs is established, but it would be the first time that it would be done in telecommunications and with the clear objective of establishing and build generations of systems. Such a new organization would also become the hub of a resurgent domestic US communications equipment industry.


Dr. Henry Kressel is a technologist, inventor and long term Warburg Pincus private equity investor. Among his technological achievements is the pioneering of the modern semiconductor laser device that enables modern communications systems. He is the author with N. Winarsky, of If you want to change the world: A guide to creating, building and sustaining breakthrough ventures (Harvard Business Press, 2015).