AIM Photonics Will Miss Target (Part II) -- Limited Job Creation

April, 2016

As we continue our critical look on the prospects of AIM Photonics, we will maintain our focus on the hurdles faced by this new organization. Secondly, fibeReality will get into greater detail on what is sometimes falsely cited as an example of a successful Public-Private Partnership (PPP) in the chip space, Sematech, as well as provide assessments of other consortiums. Lastly, we will discuss the reasons why AIM will not fulfill its promise of creating many new jobs.

As a general rule, federal government spending in private industry should be confined to only a limited number of cases, such as in its biggest role, in defending the country. Secondly, as we have pointed out in the past, there are situations in which it is the nation’s interest in remaining competitive with the rest of the world, including in potentially providing fiber to everyone’s home, which the private sector cannot totally achieve by itself economically. However, while there is likely a national security interest in funding the development of integrated photonics, the establishment of AIM results in winners and losers inevitably chosen through an excessive centralization of research. Again, the largest corporations will tend to be favored by definition, which are frequently slower to adopt change than smaller firms, and with the inevitable concessions to reach agreements (with even greater bureaucratic inertia resulting from the government-influenced organization itself), the end-results are likely to be rather unimpressive, and perhaps even ineffective on an individual entity basis.

While a key difference with AIM in comparison to Sematech is that over twice as much of the financing is coming from the state of New York, it is in effect, at least partially, the price of exclusive admission over the other states, and as with the other manufacturing initiatives, AIM will remain a de facto federal program on the government side, as it is the current administration that has been pushing for these programs for several years. It should also be remembered that money is fungible, and the feds subsidized New York State businesses and municipalities about $6 billion in 2012 alone. At the same time, it provides an added advantage to those members of AIM either currently situated or looking to relocate to NY, which can now strive to receive an even greater amount of disproportionate support by lobbying the state legislature.

Only about 40 percent of the total $610 million in funds for AIM is expected to come from the private sector (compared with at least half in the case of Sematech), which still may be a tall order given the multiple signs that the country is heading for a major economic decline. Obviously, less of an investment by the private entities will only ensure a higher chance for an undesirable outcome. Adjusted for inflation, Sematech’s budget in its first five years of existence, approached $2 billion, and once more, it was at least initially about just getting the lead back in the market for mature computer chips, not the overly ambitious effort today, which requires lots of innovation in finding ways to bypass the laws of physics.

On the other hand, bigger amounts of financing of PPPs can easily mean a greater amount of waste for the federal government. Douglas A. Irwin and Peter J. Klenow, professors at the University of Chicago's Graduate School of Business in their National Bureau of Economic Research working paper, "High Tech R&D Subsidies: Estimating the Effects of Sematech," found that the partnership "induced members to cut their overall R&D spending on the order of $300 million per year,” and that the consortium subsidized research that would have been conducted otherwise. In addition, they stressed, "Firms should have every private incentive to form joint ventures to raise their R&D efficiency."

A review of this paper demonstrated that “this estimate does not account for the dynamic [benefits from research, thus,] the R&D saving...was substantially higher.” All in all, not only was Sematech unnecessary for its members to gain these developments, they also received a windfall from US taxpayers that did not have to be returned.

Irwin and Klenow further stated that the “formation of Sematech coincides with a substantial depreciation in the foreign exchange value of the dollar, a semiconductor trade agreement with Japan that blunted foreign competition, and the declining importance of memory chips compared with microprocessors in the semiconductor market.” There have also been some other analysts, who despite being inclined to favor PPPs, had trouble making the case that Sematech could be proven to have been responsible for the bounce-back in U.S. market share.

Regarding the less than stellar performance of European PPPs, the Microelectronic Developments for European Applications (now MEDEA+), the Joint European Semiconductor Consortium -- JESSI (in the 1980s and 1990s) and the UK’s Alvey Program in the ‘80s) were (of course, like Sematech) accused of leaning heavily towards the bigger firms. With Alvey itself, the British IT business was in a poorer position afterwards and JESSI was criticized for providing inadequate value, partially because it suffered with budget constraints. Despite the efforts of even other consortiums, such as Belgium’s IMEC, Europe has apparently lost close to half of the global share in semiconductor revenues since the 1990s. Paradoxically, in 2005, Arthur van der Poel, chairman of MEDEA+ referred to “the U.S. entrepreneurial culture [as] a role model for Europe.”

In Japan, MITI, not only was unable to reverse its loss its chip market share, it has an abominable record for return on investment in all kinds of spaces. For example, it lost $1 billion on analog TV technology.

Regarding new employment creation, it is not a coincidence that AIM’s CEO is reluctant to discuss the subject. First of all, nobody could possibly believe that a mere $610 million investment will result in much production of chip components shifting from Asia to the U.S. Secondly, after the first five years of Sematech’s existence back in 1992, the Government Accounting Office had the following admonishment: members need to understand that "improving U.S. manufacturers' technological position will not necessarily lead to more jobs in the U.S. economy because international business relationships are increasingly complex.” Also, when it comes to the advanced manufacturing of chips today, it results in only a smaller number of well-paying opportunities.

[written by Mark Lutkowitz]

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