EXECUTIVE SUMMARY

Overview

The first five years of the 1990s were a period of tremendous growth for the semiconductor materials industry. The increase in production of computers swelled the need for semiconductors, as did the significant increase in semiconductor orders from the communications industry, various consumer products manufacturers, and the automotive industry. The U.S. re-emerged over Japan as the largest producer of semiconductors in 1995. As a result, most segments of the U.S. semiconductor materials industry -- manufacturing equipment, components and parts, and raw materials -- were healthier in 1995 than they were in 1991.

The 1990s also witnessed the increased globalization of the semiconductor manufacturing and semiconductor materials industry. Japan remains the second most important producer, but major new industry centers emerged in such nations as South Korea and Taiwan, and nascent but important industries appeared in Singapore, Malaysia, and Hong Kong. This increased competition and the rising costs of research and development forced some smaller U.S. companies to join larger corporate entities, domestic or foreign, to win needed capital for expansion.

Global competition has impaired one significant area of the U.S. semiconductor materials industry. Total shipments of domestic packaging materials declined in several important areas between 1991 and 1995, the time period studied for all aspects of this assessment. In addition, total research and development in this area fell a dramatic 94 percent between 1991 and 1995. The decline in R&D was indicative of the abandoned effort by two U.S. companies to challenge the foreign domination of the U.S. ceramic materials industry. The episode demonstrates that even in a time of sharply increasing demand for semiconductors, global competition has itself also correspondingly increased.

Background

• This critical technology assessment of the domestic semiconductor materials industry was initiated to assess the capabilities and competitiveness of the U.S. industry. The U.S. Government is interested in the ability of the domestic supplier chain to meet the needs projected in the industry's National Technology Roadmap to the 21st Century, a 15-year business plan. A primary objective of this assessment is to provide industry executives and government policy makers with information and analysis on the production and technology status, economic performance, and international competitiveness of private sector firms involved in the semiconductor materials industry. A more detailed version of this assessment which contains proprietary industry data was prepared for senior government policy advisors.
• A comprehensive questionnaire was developed and used by the Department of Commerce's Bureau of Export Administration (BXA) to collect data from a wide range of companies that produced any of the eight distinct groups of products within the semiconductor materials industry: wafer fabrication materials; packaging materials; high temperature materials; wet processing materials; testing materials; assembly materials; shipping and handling materials; and clean room/antistatic/antiparticle materials.
• BXA is grateful for the support it received from various semiconductor industry experts, both within the industry and the government, who provided support in the area of survey design and field testing, technical advice, mailing lists, and establishing company contacts.

Participants

• A total of 110 companies that had either domestic manufacturing or domestic sales operations participated in the data collection effort. Approximately 37 percent of the responding companies were based in California, confirming the state's continued importance in the U.S. semiconductor industry. The other 63 percent were located in 22 individual states.
• Thirty-one of the firms in the survey were owned by foreign parent companies, a number that reflects the global nature of the semiconductor industry. Japanese companies accounted for two-thirds of the total foreign-owned semiconductor manufacturing material firms, along with smaller shares owned by such nations as Belgium, France, Germany, South Korea, Taiwan, and the United Kingdom.

Manufacturing Base

• Survey respondents identified 133 domestic semiconductor materials plants. The greatest numbers, 38, were located in California. The majority of plants were spread among 28 different states. Texas had the second highest number with 16 plants, and New York the third with eight plants. 
• Survey respondents identified 37 foreign plants. Nine of these (25 percent) were located in Japan. Asia overall hosted 22 manufacturing facilities, or 59 percent of the total, demonstrating the strength of the region's semiconductor industry. 
• U.S. plants in the survey were on average 19 years old, with 56 percent built since 1980. Foreign plants were on average 10 years old, with 89 percent built since 1980.
• In 1994, domestic plants on average operated at 66 percent of capacity while foreign plants operated at 60 percent. However, foreign plants operated at a higher capacity in three of the four materials categories with sufficient data to make a comparison -- wafer fab materials, shipping and handling materials, and assembly materials. U.S. plants outperform foreign plants in the packaging materials category. 
• Forty-eight respondents planned to add a total of 69 new factories, a figure indicative of a rapidly growing industry. Approximately 27 percent are to be built overseas, almost all in such Asian nations as Japan, Singapore, South Korea, and Taiwan. This figure is higher than the 22 percent of total plants currently identified by respondents as located in foreign nations. 
• No respondents had any future plans for plant closings and only three firms reported a previous closure. Two factories closed so companies could move production into newer facilities. One factory closed in 1990 because of overseas competition.

Cooperative Agreements

• The capital intensive nature of the industry, particularly the high cost of research and development, generated a large number of joint projects. Survey respondents reported a total of 191 such cooperative agreements, with a roughly even number of agreements between U.S. firms and foreign firms. 
• The most common type of domestic agreement was for the research and development of new products. There were also a number of distributor agreements and agreements concerning the use of patents. 
• Of the agreements with foreign firms, 40 percent were with Japanese companies. South Korea was second with 11 percent and Taiwan third with eight percent. Overall, 70 percent of the foreign cooperative agreements were with companies based in the Asian nations of Hong Kong, Japan, Malaysia, Singapore, South Korea, and Taiwan.
• The largest number of foreign cooperative agreements were either patent license agreements or sales agreements, each with 30 percent. Research and development agreements, which were first on the list of domestic agreements, were fifth on the list of foreign cooperative agreements.

Financial Data

• Financial information was collected on both a corporate basis and on a divisional basis, since many companies in the semiconductor materials industry are operating units of large diversified corporations. When the corporation's sole business was semiconductor materials, the study combined that corporate information with the semiconductor material divisional data to calculate the total semiconductor material sales covered by the survey.
• Seventy-four domestic companies provided five years of information on their total semiconductor materials sales. Total sales rose from $1.554 billion in 1991 to $3.154 billion in 1995, an increase of 103 percent.
• Sixty-three domestic companies provided five years of information on total semiconductor materials sales, income, and profit. Net income rose 335 percent between 1991 and 1995. The average profit rate almost tripled from 2.9 percent to 8.6 percent. The number of firms operating at a loss fell from 28 percent in 1991 to only eight percent in 1995.
• In the assembly materials category, sales accounted for 1.2 percent of semiconductor material sales reported by the 63 companies in 1991. This figure dropped to 0.95 percent in 1995. Sales within this sector during the same period rose 73 percent, although this growth rate was less than those of other categories. Average profits for this sector, however, rose from 16.2 percent to 21.2 percent during the same period.
• In the testing materials category, sales dropped from 2.1 percent of total materials sales in 1991 to 1.4 percent in 1995. Sales collectively rose by 92 percent within this category, and average profits rose from 0.4 percent to 7.1 percent during the same time period.
• In the high temperature materials category, sales declined slightly from 2.9 percent of total materials sales in 1991 to 2.6 percent in 1995. The actual dollar amount of sales rose 92 percent during this time period, as average profits rose from [-5.0] percent to 7.7 percent.
• In the shipping and handling materials category, sales were a constant 4.2 percent of total materials sales in 1991 and 1995, yet sales within this category rose by 120 percent. Average profits rose from 10.6 percent to 15.2 percent during this period, and no firm reported a loss.
• In the packaging materials category, sales dropped from 38.1 percent of total materials sales in 1991 to 31.1 percent in 1995. Sales within this industry sector rose by 78 percent during the review period, and average profits rose from 2.0 percent to 7.3 percent, yet in 1995 this was the second lowest profit rate of any materials sector in this study.
• In the wafer fab materials category, sales rose from 42.8 percent of total 1991 materials sales to 52.5 percent in 1995. Sales within this sector rose 167 percent during this period, although a number of firms experiences losses each year. Average profits rose from 2.8 percent to 9.0 percent.

Employment

• Respondents reporting five consecutive years of employment data saw total employment in all materials categories rise by 36.2 percent between 1991 and 1995.
• Total domestic employment grew by 32.8 percent, while total foreign employment increased by 50.5 percent. The ratio of foreign to domestic workers increased from 24.4 percent in 1991 to 27.6 percent in 1995, demonstrating the increasing importance of the foreign semiconductor materials industry.
• Foreign firms hired a significantly lower number of new workers in the important labor categories of production workers and scientists/engineers. Only 58.2 percent of new employees hired by foreign companies were in these two categories. By contrast, of new employees domestic firms added between 1991 and 1995, 81.6 percent were either production workers or scientists/engineers.
• The different rate of growth within employment categories significantly narrowed the gap between foreign and domestic firms in the percentage of total employment comprised of scientists/engineers and production workers. Employees in these two categories comprised 67.5 percent of total domestic employment in 1991, as compared to 79 percent in foreign firms. In 1995, domestic firms increased the figure to 71 percent while the number for foreign firms had declined to 72 percent.
• Total domestic salaries for the companies with complete information rose from $282.989 million to $406.598 million, an increase of 43.7 percent. The largest increase was in the category of production workers, which grew by 52.4 percent overall. 
• The average salary for domestic production workers ($24,633 in 1991) and engineers/scientists ($39,345 in 1991) experienced increases of 11.2 percent and 4.6 percent, respectively. The average domestic management salary rose from $62,251 to $68,184, or 9.5 percent. Salaries for marketing and sales as well as administration employees rose 15.4 percent and 18.9 percent each, from $44,470 and $36,378 to $51,314 and $43,257, respectively.
• Total foreign employment salaries from reporting firms rose from $18.848 million to $31.733 million from 1991 to 1995, an increase of over 68 percent. Average annual salaries for both management and administration fell, the first from $21,206 to $21,069 (0.6 percent) and the second from $5,890 to $4,081 (30.7 percent). The annual salary for foreign marketing and sales employees rose by 27.4 percent, from $24,257 to $30,898, making them the highest paid workers in the foreign semiconductor materials industry.
• Foreign marketing and sales personnel were the closest to wage parity with U.S. workers of any category of semiconductor employees. In 1995, they earned 60.2 percent of the wage of a U.S. marketing and sales employee.
• The category with the next closest wage parity was foreign engineers and scientists, who made $21,008, or 51 percent of their American counterparts at $41,160. Foreign production workers earned $7,661 in 1995, 28 percent of a U.S. worker's salary of $27,394. The lowest wage parity was in administration. In 1995, foreign semiconductor firms paid $4,081, only 9.4 percent of what these domestic administration workers earned ($43,257).

Shipping Information

• Survey respondents provided 137 product-specific responses for domestic shipments and 22 product-specific responses for foreign shipments for all five years in the study. These firms accounted for approximately $1.1 billion in shipments in 1991 and $1.9 billion in 1995, an increase of 73.2 percent.
• The percentage of total shipments represented by foreign facilities was relatively constant, ranging from a low of 15.6 percent of 1992 shipments to a peak of 17.0 percent in 1994.
• The rate of growth was slightly higher for foreign firms. Between 1991 and 1995, shipments of foreign semiconductors materials rose from $175.275 million to $326.585 million, an increase of 86.3 percent. Domestic shipments rose from $943.943 million to $1.612 billion, an increase of 70.1 percent.
• Four materials categories reported information only from domestic plants and could not be broken down into any materials subcategories. Shipments from these four categories -- shipping and handling materials, and clean room/antistatic/antiparticle materials, high temperature materials, and wet processing materials -- all increased at or above the overall industry growth average.
• Total shipments of wafer fab materials were $554 million in 1991, which represented 49.5 percent of all reported semiconductor materials shipments. In 1995, total wafer fab shipments increased to over $1 billion and represented 52.7 percent of all reported semiconductor shipments. Every wafer fab materials subcategory experienced significant increases, with the vast majority of reported shipments being from domestic facilities.
• Shipments in the testing materials category showed significant differences between subcategories TM1 (probe card materials) and TM2 (die/package burn-in fixtures). Domestic shipments in TM1 increased by 263 percent between 1991 and 1995, while TM2 shipments rose by 47 percent.
• Domestic shipments of assembly materials rose by 72 percent between 1991 and 1995, while foreign assembly materials rose 238 percent. This increase left foreign suppliers controlling the majority of the U.S. assembly materials market.
• Shipments of domestic packaging materials increased by 36 percent while shipments from foreign facilities increased by 81 percent. Most of the growth in domestic shipments occurred in the last year of the survey, 1995. Domestic packaging materials shipments in the 1991-1994 period grew by only 12 percent. 
• Domestic shipments of packaging materials (PM) actually declined in three subcategories. Shipments of PM4 (bonding processes) declined by 14 percent between 1991 and 1995. Shipments of PM6 (die attach materials) declined by almost 28 percent during the same period. Shipments of the largest category, PM2 (ceramic packaging), declined by four percent.
• Foreign shipments in PM9 (other packaging materials) rose from 1.4 percent of total PM9 shipments in 1991 to 18.3 percent in 1995. Foreign shipments of PM2 (ceramic packaging) increased from 47 percent to 62 percent. Foreign shipments in PM3 (encapsulating resins) remained at approximately 74 percent of total PM3 shipments.

Defense Shipments

• Few respondents reported a significant level of military shipments. Total military shipments for the 22 firms with five reported years of such sales declined from over $33 million in 1991 to $13 million in 1995. A small increase in wafer fab shipments was overshadowed by a decline in packaging materials shipments.
• Respondents both experienced and expected little decrease in sales from defense spending reductions. In a time of a rapidly expanding world market for semiconductor materials, the decline in the U.S. military budget has not significantly affected the U.S. semiconductor industry.

Research and Development

• Fifty-four companies operated 88 research and development (R&D) facilities, 72 in the United States and 16 overseas, equally divided between Europe and Asia. The 17 companies that owned more than one R&D facility accounted for 39 of the 72 domestic R&D centers and 12 of the 16 overseas R&D facilities.
• These 17 companies, accounting for only 15 percent of survey participants, owned approximately 58 percent of the research and development facilities listed in this survey.
• Research and development spending rose in almost every materials category. Total R&D spending, excluding packaging materials, rose from $40 million in 1991 to $67 million in 1995, an increase of 67.7 percent.
• Research and development expenditures in packaging materials (PM) decreased significantly between 1991 and 1995. Spending for R&D declined in two PM subcategories, die attach materials and lead frames, by 42 percent and 23 percent, respectively.
• The largest decline in R&D expenditures was in the ceramic packaging materials category, which fell by 94 percent between 1991 and 1995. The decline was indicative of the effort by two U.S. companies, since abandoned, to challenge the domination of the ceramic materials industry by Japanese companies.^*
  
• Firms reported government R&D support only in the wafer fab and packaging materials categories, and even there the support was minimal. Government R&D grew from 0.8 percent to 5.0 percent of wafer fab R&D expenditures, and 0.0 percent to 0.9 percent of packaging materials R&D expenditures.

Sourcing and Dependency

• Respondents identified 44 examples of key imported manufacturing equipment, with 30 of these items (68 percent) from Japanese suppliers, seven (16 percent) from German suppliers, and the remainder from Australia, Israel, the Netherlands, and Switzerland.
• Respondents identified nine items of key imported manufacturing equipment (22 percent) that had no known domestic source and 14 items (34 percent) in which the domestic source was inadequate. Frequently listed items were presses, lathes, edgers, plating, and platers.
• Price does not appear to be the prime motivation in the import of semiconductor manufacturing equipment. Respondents listed price only seven times - - twice as the sole factor for importing an item, five times in conjunction with better quality, and once paired with faster delivery. By contrast, respondents listed better quality as a reason for importing an item 21 times - - five times as the sole factor, nine times paired with inadequate domestic source, five times paired with better quality, and twice paired with supplement to domestic source.
• Respondents identified 26 examples of key imported components and parts, with 10 of these items (38.5 percent) from Japanese suppliers, three each (11.5 percent) from both Germany and Luxemburg, and the rest from Australia, Canada, Italy, New Zealand, Singapore, Switzerland, and Taiwan.
• Surveyed firms listed seven key imported components and parts (27 percent) with no known domestic source and seven items (27 percent) in which the domestic source was inadequate. Frequently listed items were lead frames, burn-in sockets, scanning magnet and beam lines, and optical equipment.
• Quality was more important than price in the importation of components and parts. Price was listed once as the sole reason for importing, and once in conjunction with inadequate domestic supply. By contrast, respondents listed better quality 10 times - - three times alone, four times paired with inadequate domestic supply, twice paired with faster delivery time, and once paired with supplement to domestic supply.
• Respondents listed 85 key imported raw materials, with 58 (68 percent) from Japanese suppliers, 14 (14 percent) from German suppliers, and the remainder from Australia, Canada, Finland, France, the Netherlands, Norway, Switzerland, and the United Kingdom.
• Twenty-nine items of key imported raw materials (34 percent) were imported because of no known domestic supplier, and 25 items (29.5 percent) were imported because the domestic supply was inadequate. Frequently listed items were silicon, resins, fillers, quartz, and high purity minerals and chemicals. 
• Price was listed 18 times as a reason to import raw materials. Five items were imported for lower costs alone, six items were listed as imported because of lower costs and an inadequate domestic source, five items as lower costs and better quality, and two items as lower costs and other. However, quality was listed 31 times. Four items were imported on grounds of better quality alone. Respondents paired better quality with inadequate domestic source 11 times, with supplement to domestic source seven times, with lower costs five times, and with other four times.

Competitiveness

• Respondents were asked to estimate the foreign share (as a percentage) of the domestic market for each material subcategory. These figures provide one rough measure of the competitiveness of particular sectors of the U.S. semiconductor materials industry. Absent categories and subcategories signify areas where respondents did not supply enough information to estimate the foreign market share of the U.S. market.

• The U.S. packaging materials industry has suffered significant reverses in the last five years and, in most major product subcategories, is no longer globally competitive.
• Survey respondents also identified a growing dependency on foreign suppliers for high quality silicon. 
• Survey respondents also expressed concern about the increasing dependence on foreign firms for a number of high quality chemicals. High purity chemicals are crucial for the production of the most advanced semiconductors.

Conclusions

• The double-figure annual growth in semiconductors sales in the last five years has won increased sales for the U.S. semiconductor materials industry. Overall, the higher sales increased profits, and left the industry in a far stronger position in 1995 than 1991. 
• The U.S. materials industry is rapidly expanding production capacity to meet increased market demands. Based on the survey data, a 38 percent increase in the number of plants is expected by 1998.
• Competition in the semiconductor materials industry also increased, both because of the strong existing industry in Japan and the development of new production centers in a number of Asian nations. This competition, combined with the industry's strong need for high levels of research and development funds, rewards size and has created a tendency toward consolidation.
• Respondents were split on the effects of such consolidation for the relative position of the U.S. semiconductor industry. Some believed foreign companies might use their lower costs abroad to dominate the U.S. market, as well as buy small innovative U.S. firms in need of capital. An equivalent number believed that the semiconductor industry requires a continuing large investment in research and development and that capital -- whether foreign or domestic -- provides needed resources for technological innovation.
• Competitive pressures have weakened some sectors of the U.S. materials industry. This market for ceramic packaging materials, and numerous other packaging materials subcategories, are now largely controlled by foreign firms.
• A modest but growing number of other specific semiconductor materials identified in the report can only be bought in sufficient quality and quantity from foreign producers. Among the most important are silicon products, resins, quartz, lead frames, burn-in sockets, optical equipment, and high purity minerals and chemicals. 
• Trends in the next five years promise to bring even more competition to the semiconductor materials field. The industry appears to be moving toward a competitive phase similar to the last half of the 1980s, even while retaining the large annual growth rates of the first half of the 1990s.