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Loss of US Dominance in Global Electronics and Semiconductor Industry: Causes, Solutions and Economic Growth

electronics and semiconductor industry, multinational corporations, (MNCs), offshoring, outsourcing, low labor cost countries (LLCs), trade imbalances and deficits, backshoring industries, 99% economy with 99% Americans, All American Dream,

The Great Recession that started in 2007 has forced many observers to write an obituary for hi-tech electronics products and transistor technology nodes manufacturing for the US semiconductor industry. Trade liberalization policies that have permitted US-headquartered Multi-National Corporations (MNCs) to establish manufacturing bases in Low Labor Cost (LLC) countries have been one cause of the loss of dominance. This process of offshore outsourcing has disrupted the US supply chain for electronics and semiconductor goods.
It began with MNCs increasing their influence in trade agreements such as the General Agreement on Tariffs and Trade (GATT) and, later, the World Trade Organization (WTO) to promote “free trade” by lowering and abolishing trade barriers between member countries – which include the United States [3]. This opportunistic capitalism on the part of MNCs, caused (i) micro-economic fallouts due to the unemployment of former workers at those MNCs that moved manufacturing abroad, as well as (ii) macro-economic disasters due to decreased exports and increased (duty-free) imports, thereby increasing trade imbalances and deficits and affecting the market value of the US dollar [1].
In order to backshore and insource US manufacturing jobs lost due to outsourcing offshore, proper incentives are required to bring manufacturing to US rural areas (having much lower cost-of-living relative to cities). [3] Also, by setting up more rural universities and effecting a mutually beneficial collaboration between the rural universities and industries, the costs for R&D can be reduced. Furthermore, an altered cooperative structure for companies, with employees involved in company management decisions and sharing company profits, would enable companies to address home needs and also benefit their employees to thereby enhance consumer purchasing capacity and demand; this would result in the growth of our overall economy. [4] These solutions can help to rejuvenate the US electronics and semiconductor industry, restore prosperity for working class Americans, preserve the incentive for hard work and the realization of the American dream.
Globalization’s Role in Loss of US Dominance
American corporations established operations abroad to gain market share and to increase their profits. Wall Street pundits played an important role in encouraging the shifting of the manufacturing bases from the US to LLCs, in order to increase returns to investors. Semiconductor companies in the US – Texas Instruments, IBM, AMD, Intel, etc. – were manufacturing high quality products; there was proximity of labs and fabs (manufacturing plants), and they were hence called Integrated Device Manufacturers (IDMs).
There were some small semiconductor companies like Qualcomm, Broadcomm, Xilinx, etc., that did not invest in capital-intensive semiconductor wafer manufacturing. Hence, many small fabless semiconductor companies were established.
The new concept of a fabless semiconductor business was to enable the semiconductor companies to focus on complicated circuit designs and outsource the manufacturing of wafers to external foundries.”Free trade” made it cost effective for the US fabless companies to commission cheap manufacturing in LLCs and then bring the goods into the US without any import duty. [7] This process led to very high profits for the fabless semiconductor companies, due to significantly lower mass production manufacturing costs in the LLCs. [9]
Due to high returns on their investments, fabless companies’ share values soared to new highs. Wall Street gurus were very happy with the fabless semiconductor companies’ business model. Wall Street also pressured the CEOs of IDMs to achieve higher returns for their shareholders – another important reason US electronics and semiconductor businesses lost dominance due to manufacturing offshoring.
A 2006 study from the Government Accountability Office (GAO) summarized the offshoring trend in the semiconductor industry: “The US semiconductor industry began offshoring labor-intensive manufacturing operations in the 1960s, followed in the 1970s and 1980s by increased offshoring of complex operations, including wafer fabrication and some research and development (R&D) and design work.[10]. Semiconductor assembly and testing was the first to move to Asia, followed by fabrication and, more recently, by some design operations.” [10] The GAO found that the “US semiconductor industry has foreign operations in several locations, notably in Taiwan and China.” This is largely because of the government policies in those low-labor-cost countries like Taiwan, China, etc., which “created favorable investment conditions for US semiconductor firms.” [10]
Decreased exports and increased imports have increased the trade deficit over the years, causing serious concerns and political tensions. [5] This deceptively defective economic policy, in the guise of Free Trade, has resulted in the once-upon-a time US manufacturing innovation and economic dominance being transferred to China. In this way, globalization has worked to the detriment of American workers and reinforced unfair labor competition because of the lower wages and sometimes horrific working conditions that exist in LLCs, which have little to no enforced labor protections.
The trade deficit with China has resulted in soaring corporate profits for American MNCs that outsource manufacturing jobs to China. With high-paying manufacturing jobs moved offshore, this process has also resulted in increased dependence on foreign manufacturing and threats to the Intellectual Property (IP) of US corporations. [7]
Backshoring Industries to Low Cost-of-Living Rural Areas
Federal and state governments need to consider providing incentives for setting up manufacturing industries in rural areas. The advantage is the lower cost-of-living and lower pay scales in rural areas, as compared with big cities. It costs manufacturers roughly $1 billion more to build a wafer fabrication facility in the United States ($6.7-$6.8 billion) than in foreign LLC locations ($5.6-$6.1 billion) [2] – a manufacturing cost differential of 20%. According to the New York State Department of Labor, labor cost accounts for 10% of cost differential [3], which amounts to 50% of the total manufacturing cost differential. Hence, by backshoring industries to low cost-of-living rural areas, this 10% differential can be reduced, thereby making it more viable for MNCs to be located in rural areas.
Incentives in terms of providing broadband services, good roads and public transportation services would all serve to encourage MNCs to make investments in setting up their manufacturing plants in rural areas. [2]
Domestic Higher Education Institutions
To bring the MNCs’ manufacturing operations to our rural towns and counties, we need to set up more rural educational institutions. If rural towns and counties take upon themselves budgeting for the establishment of rural colleges and universities, the rural towns and counties would get returns in the form of infrastructural projects including building and maintaining roads, water-supply, sanitation, renewable energy systems expansion of broadband infrastructure, etc. [8]
On top of the return on investment made by rural townships to set up rural and home-grown colleges and universities in the form of cheaper and even more elaborate infrastructural projects, the rural colleges and universities would be able to provide the technological and R&D support to the manufacturing companies, to make it attractive for them to relocate their manufacturing plants to rural regions. The relocation of manufacturing plants in rural regions would enhance jobs opportunities and employment in rural regions. Forward thinking and planning needs to be carried out by the economic and industrial development boards of the rural regions. Setting up rural colleges and universities would enhance community-based higher education, rural infrastructure, rural population, rural employment and consumer demand; all of this would enhance the rural economy and hence the national economy.
Investing in rural economies would help rejuvenate regional economies as well as the national economy. This is an innovative scheme proposed by author Professor Ghista in his drive for the innovative planning of Ozark Rural University [8] as a nationwide model and trigger for rural development through rural universities.
A Model for Cooperative Management
Wall Street investors require high and rapid return on their investments and consequently Wall Street pressures US businesses to outsource high-paying manufacturing jobs offshore to increase corporate profits and short-term stock values. To end capital’s blood-sucking of businesses, we propose a radical change in companies’ internal organization and management framework, by stipulating that only company employees should be permitted to become the majority shareholders. Company employees would also then automatically become involved in sharing managerial decisions and company profits. In other words, the company would then be organized as a cooperative, wherein all the staff are partners and have say as well as a stake in company operation and policy.
This system of cooperative ownership of companies, resulting in “collective and cooperative management” by employees, constitutes an economic system that is based on PROUT (Progressive Utilization Theory). [4] [12] This system would eliminate outside (Wall Street) shareholders and insulate companies from their pressures to increase profits at the expense of employees’ and national interest. [1] Elimination of outside interference by the institution of this Cooperative Business Managerial System (CBMS) will help to preserve incentives for innovation and not only avoid undue pressure from investors on Wall Street to ship jobs overseas but would also eventually restore the country back to the 99% of the population. [6]
Figure 2: Annual US income share of the Top 1% 1910-2010. As shown in the figure above, a huge disparity in income caused the Great Depression during 1930s and the same disparity is also the cause of the Great Recession since 2007. [11]
This policy of cooperative ownership of companies would also ensure that the wages of hardworking Americans catch up with their productivity, eliminating budget deficits, and paving the way for a balanced national economy, thereby constituting both micro and macro economic reforms. [1] This CMBS is a most innovative way to rejuvenate US electronic and semiconductor business and it would also restore the legitimacy of a US supply chain.
Towards Cooperative Capitalism and Realization of the American Dream:
Thus far, CEOs and owners of corporations have dominated the 99% by controlling businesses, banks and even governance policies. Now when, due to CMBS, workers have joint stakes in companies’ business operation and policy making, the economy will automatically come within the control of the 99% Americans. [13]
This will in fact replace corporate capitalism with cooperative free market capitalism, and bring relief to the 99% Americans. With that, many policies will become 99% people-centered. [13] For instance, we could even make the universal health care dream of the 99% people become a reality. Not just that, but we can foresee the realization of the all-American dream of education for all, health care for all, housing for all, jobs for all, and fulfilling lives for all!
[1] A. Mulay and D. Ghista, Distorted Supply Chain caused by MNCs Manufacturing abroad and Importing back without Import duty, and How to Restore its Legitimacy, EBN
[2] A. Mulay and D. Ghista, Globalization of Semiconductor Manufacturing Industry: From Deception to Reformation Towards Recovering US Macro-Micro Economic Losses, Circuits Assembly, Publication in print.
[3] New York State Department of Labor and Empire State Development. September 2010. “The Offshore Outsourcing of Information Technology Jobs in New York State – A report to David A. Paterson, Governor and the legislature of the state of New York.”
[4] P.R. Sarkar, 1959. “PROUT in a Nutshell”, Ananda Marga Publications.
[5]World Trade Organization from Wikipedia, the free encyclopedia.
[6] A Mulay, 2 March 2013, A Failure Analysis of the US Economy.
[7] A Mulay, May 2013,”Mitigation of Counterfeit Electronics through Macro-economic Policies”, Pgs.45-47 Electronic Device Failure Analysis Magazine (Volume 15 Issue 2).
[8] Dr. Dhanjoo N. Ghista, 19 March 2012. Ozark Rural University, West Plains Daily, Howell County, Mo.
[9] Jorgenson, Dale W. 2005. “Moore’s Law and the Emergence of the New Economy,” Semiconductor Industry Association, 2005 Annual Report.
[10] Government Accountability Office, September 2006. “US Semiconductor and Software Industries increasingly produce in China and India.”
[11] Saez, Emmanuel. 2013. Striking it Richer: The Ev olution of Top Incomes in the United States. (January 23).
[12] P R Sarkar, Proutist Economics: Discourses on Economic Liberation, by (ISBN81-7252-0034), Ananda Marga Publications, EM Bypass, Tiljala, Culcatta-39, 1992.
[13] Dhanjoo N Ghista, August 2004. Socio-Economic Democracy and the World Government: Collective Capitalism, Depovertization, Human Rights, Template for Sustainable Peace.
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