Measuring distortions in international markets: the semiconductor value chain

trade policy brief

Measuring distortions in international markets: the semiconductor value chain

December 2019

Government support for 21 large firms along the semiconductor value chain exceeded USD 50 billion over the period 2014-18, with about a third of that support taking the form of below-market debt and equity.

Another third of all support for semiconductor firms was for research and development (R&D), which, while often beneficial for innovation, can nevertheless distort markets if poorly designed. hile found in few jurisdictions, government actions that lower the cost of equity for W semiconductor firms pose additional challenges for trade rules due to their complexity and opacity.

What’s the issue?

In a challenging time for global trade, there is growing interest in updating the international trade rule-book to better address concerns about fair competition in the global economy. Yet information on the nature and scale of the support that governments provide to their industrial sectors remains inadequate. In response, the OECD has built on its longstanding work measuring government support in agriculture, fossil fuels, and fisheries to estimate support and related market distortions in selected industrial sectors, starting with the aluminium value chain, and continuing more recently with the semiconductor value chain.

The semiconductor value chain is complex and global in scope: not only is the production of semiconductors one of the most R&D-intensive activities, but it also spans many specialised tasks performed by different companies around the world. The extent of fragmentation and specialisation in the semiconductor value chain makes it highly sensitive to shocks and to market distortions caused by trade barriers and government support.

Concern about government support is growing, due to increasing government investments in semiconductor companies.

What the OECD did Given the lack of transparency that surrounds government support in industrial sectors, the OECD had to look for information at the level of individual firms operating along the semiconductor value chain. This was done for 21 large

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semiconductor firms that are either vertically integrated (e.g. Intel and Samsung Electronics) or specialised in particular segments of the chain, such as chip design (e.g. Nvidia and Qualcomm), contract manufacturing (e.g.

SMIC and TSMC), and outsourced assembly and testing (e.g. ASE and JCET). Together, those 21 firms represented about two-thirds of global semiconductor revenue in 2018.

For each firm, the OECD analysed corporate filings, annual reports, and other public sources of information to identify and quantify government support in the form of budgetary support (e.g. grants and tax concessions), below-market credit (e.g. loans that state banks offer at below-market interest rates), and below-market equity in the particular case of firms in which governments hold stakes (government-invested firms).

What the OECD found For the 21 firms studied, total government support exceeded USD 50 billion over the period 2014-18 (Figure).

While about a third of that support went to Samsung Electronics (Korea), Intel (United States), and TSMC (Chinese Taipei), there are very large size differences between the 21 firms studied. Expressing support as a share of annual firm revenue shows SMIC (China), Tsinghua Unigroup (China), Hua Hong (China), JCET (China), and STMicroelectronics (Europe) to be the largest recipients of support relative to their size. While most Asian semiconductor firms received a majority of support from their home economies, companies elsewhere often

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Measuring distortions in international markets: the semiconductor value chain Government support for 21 of the largest semiconductor firms exceeded USD 50 billion over the period 2014-18 (Left axis: USD millions, current; right axis: % of firm revenue)

USDmn

Budgetary support Below-market equity -- Low estimate Total support in % of revenue (rhs)

Below-market borrowings Tier 1&2 Below-market equity -- Medium estimate

Below-market borrowings Tier 3 Below-market equity -- High estimate % of revenue

12 000

45% 40%

10 000

35%

8 000

30% 25%

6 000

20%

4 000

15% 10%

2 000

5%

0

0%

Note: Below-market borrowings under Tier 1 are estimated by comparing actual interest rates paid by firms with a market benchmark that comprises a risk-free base rate and spreads reflecting the risk profile of USD-denominated debts, taking into account individual company credit ratings. Tier 2 further considers the risk profile of debts denominated in the local currency (e.g. the Chinese yuan). Tier 3 considers the additional interest that would have been charged absent the implicit government guarantee enjoyed by some firms. Data for Toshiba are for the period 2013-17. Source: OECD (2019a).

obtained significant support in the other jurisdictions in which they have a sizable presence (e.g. China, Israel, and Singapore).

Support for R&D through grants and tax breaks is very common in the semiconductor value chain, reflecting the critical importance of knowledge and talent in chip production. Many governments also use investment incentives to attract firms locally. Support for R&D and investment incentives together represented more than two-thirds of all support identified by the OECD. Support provided through the financial system in the form of below-market debt and equity is another significant contributor to total government support in semiconductors; below market equity amounted to USD 5-15 billion for just six government-invested firms in the sample and more than 30% of annual consolidated revenue for two of these firms. It is also largely concentrated in China, which provided 86% of all below-market equity, linked to the construction of new production facilities, as well as 98% of all below-market debt identified by the OECD. In addition to being among the hardest forms of support to measure, below-market equity reflects greater state involvement in semiconductor production, which creates possible channels for the provision of a range of further support, as well as posing specific challenges for trade rules.

What does this mean for policy?

• Although there are good reasons for supporting R&D (e.g. market failures), care should be exercised in design so that measures foster innovation but minimise competitive distortions. www.oecd.org/trade

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• Disciplining below-market debt and equity may require not only improved subsidy rules, but also rules governing the nature and behaviour of government-invested enterprises.

• The need for improved policy transparency should extend beyond support measures to include government investments in commercially active firms and their financial results.

• This work also raises questions about the effectiveness of government support in R&D-intensive industries characterised by short product cycles. Yet irrespective of how effective it is, the provision of large amounts of support can nevertheless cause significant trade distortions.

Further reading • OECD (2019a), “Measuring distortions in international markets: the semiconductor value chain”, OECD Trade Policy Papers, No. 234, OECD Publishing, Paris, forthcoming.

• OECD (2019b), “Measuring distortions in international markets: the aluminium value chain”, OECD Trade Policy Papers, No. 218, OECD Publishing, Paris, https://dx.doi.org/10.1787/c82911ab-en.

• OECD (2019c), Agricultural Policy Monitoring and Evaluation 2019, OECD Publishing, Paris, https:// doi.org/10.1787/39bfe6f3-en.

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