A word on Semiconductors

By Laurent Carbonneau & Abu Kamat

During the Second World War, the American government launched a secret project to create the next generation of fighter aircraft. The team at manufacturer Lockheed charged with designing the plane ended up with the curious name “Skunk Works,” which has since become a term of art to refer to research teams working on weirdo projects.

As a research team that loves working on weirdo projects, we’ll be using this space to explore issues in the innovation economy at the intersection of technology and public policy in Canada. The skunk is a worthy animal, but we’ve decided to honour a thoroughly Canadian icon — the moose.

In this new age of industrial policy, everyone agrees that innovation is a wonderful thing. And this consensus isn’t new. For decades, federal and provincial governments have solemnly intoned at every opportunity their commitment to finally set Canada on track to becoming a leading innovation economy.

And yet, here we are — in the last two years, Canada’s private sector research and development fell behind Italy’s and Poland’s. Not a perfect indicator, but a worrying one.

In some ways, you can’t fault government for lack of effort. Government certainly doesn’t fault itself. After tabling the penultimate budget of the Mulroney era in 1992, Finance Minister Don Mazankowski rose to remind Canadians that “despite a very generous tax regime, Canadian business have failed to invest in R&D to the same extent as our major trading partners.”

A few years later, Finance Minister Paul Martin got up to proclaim that “After years of rhetoric and promises, the federal government will put in place a true strategy for R&D, one with real priorities, real direction, and a real review of results.”

And just last year, Deputy Prime Minister Chrystia Freeland announced that her government had “a plan to tackle the Achilles heel of the Canadian economy: productivity and innovation,” noting that “we are falling behind when it comes to economic productivity” and declaring that “it is time for Canada to tackle it.”

It’s wonderful to hear such strong commitments to innovation and growth. But we’ve heard them before — we’ve been hearing them for decades! Since 2015, the Council of Canadian Innovators has advocated for putting actual Canadian innovators at the heart of our attempts to make Canada more productive and ensure that we remain a rich country able to invest in a generous and compassionate social state.

We hope you’ll join us as we explore what Canada can do to become a first-class country of innovators.

The United States’ big move to reshore semiconductor manufacturing through last year’s _CHIPS and Science Act _has created an opportunity for Canada to involve itself in a more serious way in the global semiconductor value chain.

This is an opportunity we should take. Semiconductors are in everything, and the rise of connected devices, sensors and AI technology will only make them more significant. The semiconductor value chain is global, deeply interconnected and vulnerable to sharp disruptions, as we saw when automakers had to lay off employees during the acute chip shortage of 2021. Many things have been touted as “the new oil,” but semiconductors might have the best claim: they enable virtually all modern technology and are a genuinely geo-strategic asset, found in only a few places thanks to the incredibly specialized process of designing, manufacturing and assembling them.

The federal government has shown some interest in this direction, having recently announced semiconductor funding. As ever, Canada faces a choice about how to intelligently structure state assistance and industrial strategy. In this post, we’ll take a quick look at how two European countries situated themselves in this critical global industry.

The CEO of Intel, the venerable American semiconductor giant, said a few years ago that Europe has “two jewels” in the global semiconductor space: the advanced lithography equipment manufacturer ASML and the imec (Interuniversity Microelectronics Centre) research institute.

Both are children of the 1980s: ASML, based in the Netherlands, was spun off from Dutch electronics giant Philips, and imec was started by the Flemish regional government in Belgium to strengthen the region’s electronics industry.

Both have had state support over the years. Imec was, of course, established explicitly as a long-term economic development project by a regional government, and ASML has received considerable subsidies from the Dutch government over its lifetime. Both have also worked together over the years, with ASML providing research equipment to imec, and the institute taking on research contracts for the company.

Both play an important global role. Imec is one of the foremost semiconductor research institutions in the world and it has essentially singlehandedly allowed Belgium to squeak into the top five countries for semiconductor research. Imec has revenues on the order of 750 million euros and employs over 5000 researchers. By the standards of Canadian innovation policy, it is a roaring success.

ASML’s story is very different. It is a $270 billion (USD) company with annual revenues of over $22 billion that employs around 40,000 people. The _what _of this story of business success is not the really interesting part here, however — it’s really the how. ASML is the world’s _only _maker of the extreme ultraviolet lithography (EUV) equipment that is used to make the world’s most advanced semiconductors. They identified and built upon a promising technology early on in its life-cycle and forged strong connections to American and Taiwanese chip companies, and the Netherlands’ status as a trusted international partner of the United States ensured that the American government did not perceive this critical offshore bottleneck as a threat.

Critically, as China attempts to close its technological gap in onshore semiconductor manufacturing, it is having to do so without the benefit of ASML’s technology, since the Dutch government announced the imposition of export controls. Advanced manufacturers are wholly reliant on this Dutch company’s technology, giving the country serious strategic weight as well as creating large economic returns. The Dutch government has recognized this and capitalized PhotonDelta, an agency with a mandate to build on their existing semiconductor expertise and develop a photonics ecosystem there to corner a market niche in the same way ASML did.

As Canada looks to find a place for itself in a global semiconductor value chain that is reshoring to North America, it has a range of choices. Belgium took the traditional Canadian route of funding basic research and created a technological and research leader that brings in respectable revenues from research partnerships and employs thousands. The Netherlands, on the other hand, exploited a critical market niche, and have ended up with an effective monopoly on a critically important input in a critically important industry — a position that has created both lasting wealth and real strategic weight for a small country.

Europe has two jewels — and it’s worth thinking about which of the two we would want to build here, given the choice.

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Mooseworks is the Council of Canadian Innovators' innovation policy series. To get posts like this delivered to your inbox twice a month, sign up for CCI's newsletter here.