Canada should target strategic investments to leverage its semiconductor industry’s strengths and opportunities

Canada can’t spend its way to the front of global semiconductor competition so it should invest strategically to support the industry’s strengths and opportunities within the worldwide supply chain, says a new study from the Canadian Standards Association’s Public Policy Centre.

The global semiconductor industry is in the midst of technological, geopolitical and economic change, with firms and governments in the U.S., China, Europe, India and elsewhere making multi-billion-dollar investments to generate and secure advantages, the study says.

“Canada has strengths that could be enhanced with strategic investment. Yet, the inertia that plagues much of the Canadian innovation ecosystem also seems to affect the semiconductor sector. Canada has been slow to act.”

Canada should focus its semiconductor strategy on better integration with global value chains rather than self-sufficiency in manufacturing chips, the study says.

Last month, the federal government announced a $120-million investment, through the Strategic Innovation Fund, in a $223-million, five-year project led by Montreal-headquartered CMC Microsystems. This investment will support the creation of a pan-Canadian network to support the design, manufacturing and commercialization of semiconductors and the development of state-of-the-art intelligent sensor technology.

While industry welcomed the funding, Canada’s Semiconductor Council which represents the industry has for years called for a national strategy in semiconductors.

The CMC Public Policy Centre’s study points out that while Canadian manufacturers have semiconductor needs, the volume of raw chips required cannot justify efforts to achieve self-sufficiency. “Nor would it be economically sound since global value chains will continue to provide chips at lower cost than new capacity in Canada could anytime soon.”

Moreover, with so much additional capacity expected to come online soon, Canadian firms requiring chips should be able to secure them relatively easily, the study says. The study’s authors are Daniel Munro (photo at right) and Creig Lamb (photo at left), co-directors of the research and policy consultancy Shift Insights. Munro is also a senior fellow and the director of policy projects in the Innovation Policy Lab at the Munk School of Global Affairs & Public Policy at the University of Toronto.

Canada’s semiconductor industry is unlikely to capture a major stage of global production, their study says. However, the semiconductor sector has substantial strengths and opportunities in photonics, compound semiconductors, advanced packaging, and chip design for emerging technologies.

Semiconductors are critical components of numerous business and consumer products, including cars, computers, appliances, gaming systems and manufacturing equipment. Global semiconductor value chains offer opportunities for countries and their firms to innovate in, and sometimes monopolize, key segments, the study notes.

For example, in 2022, Taiwan’s chip manufacturers produced an estimated 60 percent of the world’s semiconductors and 90 percent of the most advanced chips, generating sales of US$200 billion or about 25 percent of Taiwan’s GDP.

Similarly, Netherlands’ ASML – Europe’s second-most valuable company at an estimated US$417 billion – dominates the global market for lithography equipment used in semiconductor production and the entire market for advanced extreme ultraviolet lithography machines used to manufacture integrated circuits.

Innovation across a variety of industries in recent years has generated new opportunities in the semiconductor industry, the study says.

Many semiconductor firms have found that using AI in chip design is a competitive necessity, prompting incumbent firms to adapt while new entrants exploit the technology. Meanwhile, the computing power needed by AI technologies and applications in other industries is driving demand for more sophisticated kinds and larger quantities of chips.

Quantum computing also promises to change semiconductor design and generate additional demand to support quantum computing power needs.

Semiconductors are also playing a growing role in clean tech. Solar panels, wind turbines, electric vehicles and other clean technologies depend on semiconductors for sensors, resource optimization processes, and underlying digital infrastructure.

At the same time, the semiconductor industry faces pressure to improve its own environmental performance. This means there are opportunities for firms that can develop semiconductors for emerging clean technologies and do so in ways that minimize environmental impact.

Canada has new opportunities that are prompted by and can piggyback on American efforts to enhance U.S. domestic semiconductor capabilities and position in the global value chain, the study says.

Canada’s semiconductor industry is dwarfed by global competitors

The size and production capacity of the global semiconductor industry is staggering, the study says. In 2021 – the year of the global chip shortage – the semiconductor industry worldwide “produced more chips than the combined quantity of all goods produced by all other companies, in all other industries, in all human history.”

In 2024, the global industry is expected to top US$588 billion in sales – beating the industry’s previous high of US$574 billion in 2022.

However, chip production depends on the efficient functioning of a global value chain. When all the activities involved in production run smoothly, it can take between four and six months – and involve inputs and activities crossing international borders more than 70 times – before a chip is ready.

The reality of long, multi-stage, multi-country value chains means Canada’s semiconductor trade is highly exposed to global forces, the study notes.

Policymakers in many countries have responded to vulnerabilities and opportunities by adopting new legislation and making massive investments.

In August 2022, the U.S. adopted the US$52.7 billion CHIPS and Science Act to support semiconductor research and manufacturing capacity in the U.S., and to reduce dependence on global supply chains for some of America’s chip needs.

China announced a US$40 billion fund to support domestic chip capabilities in 2023 – partly to ease its dependence on Taiwan-based suppliers and in response to U.S. chip investment and trade restrictions.

The European Union passed a US$47 billion European Chips Act in April 2023 to contribute to European semiconductor capabilities, enhance chip supply security, and remain competitive with the U.S. and Asian semiconductor leaders.

 Canadian firms must act quickly to secure a place as strong contributors to, and priority customers of, global semiconductor value chains, the study says. “But the industry must also act prudently.”

Canada’s semiconductor industry has about 500 firms. The vast majority (86 percent) are small firms (employing between one and 99 people), while 13 percent are medium-sized (100 to 499 employees), and one percent are large (500+ employees).

Given the importance of scale in competing in the global economy, “the high proportion of small firms is concerning,” the study notes.

 Semiconductor firms in Canada generated $5.5 billion in revenues in 2022 and contributed $1.3 billion to the country’s GDP.

However, in 2000, at the peak of Nortel Networks’ reign and before its bankruptcy in 2009, Canada’s semiconductor industry’s GDP contribution was three times higher than the 2001–2022 average.

In 2023, Canada’s semiconductor industry spent an estimated $363 million on R&D – up about 10 percent over the previous year and nearly three times greater than 10 years ago.

“While impressive by Canadian R&D standards, the domestic semiconductor industry appears to fall well short of R&D intensity in peer countries’ semiconductor industries,” the study says.

In addition there are concerns about the long-term supply of new skilled workers to support the growth of Canada’s semiconductor industry.

There were 16,056 people employed by Canada’s semiconductor industry in 2022. This was somewhat higher than a two-decade low of 13,074 employees in 2014, but far below the 29,341 people employed in the industry in 2001 during the peak of Nortel’s operations.

Industry observers believe there is a sufficient supply of skilled workers at present, taking both domestic education and immigration pathways into account. But they worry that policy changes and global disruption could upset immigration pathways to employment in the industry. “If that happens, domestic education pathways may not be ready to fill potential gaps,” the study says.

Build on strengths of Canada’s semiconductor industry

The strengths of Canada’s semiconductor industry are in some of the more granular or focused segments of the value chain, the study says. “Canada exhibits some unique advantages, and it is around these that a semiconductor innovation and growth strategy could be built.”

These areas of strength are:

• Compound semiconductors. While most semiconductors rely on silicon, about one-fifth use other materials – usually to achieve higher or additional performance capabilities. Compound semiconductors are often more difficult to manufacture, but their advantages in power, speed, and light make them more suitable for a range of uses, including in electric vehicles, 5G, and solar power. Canadian innovators have developed expertise with gallium-arsenide, gallium-nitride, and indium-phosphide compounds, and could do more in compound semiconductors.
• Advanced packaging. Near the end of production, semiconductors are placed in cases (“packages”) to protect them from contamination and then tested, before being shipped for integration into end-user products. Canada plays an important role in packaging and testing, anchored by an IBM packaging facility — the largest in North America — in Bromont, Que. As semiconductors become more complex and create new technical challenges in packaging, the packaging sub-sector has an opportunity to do higher-value work and claim greater rewards.
• Photonics – the science of light waves – has played a central role in Canada’s semiconductor industry. Before its collapse, Nortel Networks was a world-leader in photonics and photonic devices. Canada’s substantial expertise and capacity in photonics could be leveraged to play a larger role in global semiconductor value chains.
• Specialized Design and Development. Canada also has an array of experts and activity in niche areas like AI chips, quantum computing and other applications. Researchers and firms have been working on innovation in chips to power certain AI-based technologies, while quantum-focused researchers and companies have been working on semiconductors-for-quantum and quantum-for-semiconductors. There is enough diversity of specialized applications and chip needs in emerging digital sectors that Canadian researchers and firms could launch and grow sustainable businesses in these markets.

The study says a semiconductor strategy for Canada needs to focus not only on supporting domestic semiconductor firms, but also on ensuring a secure supply of the kinds of chips needed by other Canadian firms throughout the economy.

Canada is a net importer of raw semiconductors – nearly $7.2 billion worth in 2022 – but most of the semiconductors used in Canada are imported as components of other already manufactured and assembled technologies.

“This has major implications for the design of a semiconductor strategy,” especially if there are disruptions in global semiconductor supply chains, the study says.

Semiconductor chips are generally not imported into Canada in large quantities as discrete products, but are already integrated as important components within intermediate or finished goods.

“In that case, addressing Canada’s chip vulnerabilities by building more domestic production capacity is misguided, since the semiconductors Canadian firms produce would have to be exported for integration into other technologies before being imported back as components of those technologies.”

The development and use of digital technologies has grown rapidly across the Canadian economy – including in agriculture, energy, finance and insurance, health care, and mining. Digitization trends create opportunities for some Canadian firms to make and sell these technologies, and many of those firms may need more direct access to semiconductors, as well as semiconductor R&D and design services, the study says.

Similarly, firms developing AI technologies, as well as those providing the computing power needed to enable them, may have more direct demand for semiconductors as part of their innovation and commercialization activities.

In quantum, as researchers and firms in Canada move to commercialize quantum technologies, demand for specialized semiconductors may increase – both among the companies developing quantum products and those requiring computing power to use them.

The demand for quantum-support chips will be a mix of direct and indirect demand, “but the need to develop a semiconductor plan for this emerging sector in Canada is real,” the study say.

R&D support, stronger IP strategies, enhanced infrastructure are critical

Canada has long-standing programs and facilities to support the semiconductor industry, including recent initiatives such as $250 million for semiconductor innovation through the Strategic Innovation Fund, and $90 million for the National Research Council to modernize the Canadian Photonics Fabrication Centre.

“R&D support and stronger IP strategies are critical for supporting Canadian semiconductor ambitions,” the study says. It makes several recommendations, including:

R&D Funding and Intellectual Property Strategies:

• Increasing direct R&D funding would further advance and commercialize new technological and process innovations in key areas and, if well-designed, ensure that returns on R&D are appropriated by Canadian firms.
• Requiring researchers and firms that receive funding to have plans and strategies to retain IP for Canadian benefit, and providing them with IP education and advice, would ensure that Canada’s semiconductor R&D investments generate benefits for Canada.

These two options could be delivered effectively through a semiconductor stream housed within the recently announced Canada Innovation Corporation (CIC). However, given that the CIC’s launch has been delayed to at least 2026–27, and given the need to move quickly before windows of opportunity close in the changing global semiconductor industry, research funding and IP services might best be channeled in the interim through the National Research Council’s Industrial Research Assistance Program and stand-alone semiconductor-focused programs.

Supporting Semiconductor Startups and Scale-ups:

• Canada has hundreds of small semiconductor firms, but few large and growing firms – especially domestically controlled. As the industry advances innovation in compound semiconductors, photonics, advanced packaging and additional niche areas, firms will need support to grow and position themselves for success in competitive global value chains.

While funding for startups is relatively robust, the funding and support landscape for scaling firms is less so. Business Development Canada, Export Development Canada, and (until the Canada Innovation Corporation is launched) Innovation, Science and Economic Development Canada should collaborate to create a better suite of semiconductor scale-up programs.

Enhancing Semiconductor Innovation Infrastructure:

• Fund and build well-designed, purpose-fit infrastructure and facilities that directly serve the domestic industry’s greatest opportunities.
• Create and sustain a network of new and emerging low-to-medium volume chip fabrications that support regionally specific design, prototyping, and other innovation opportunities.
• Create and sustain an advanced packaging research and innovation centre to help researchers and firms accelerate Canada’s efforts to make packaging a higher-value, more critical activity in global value chains and to support the “packaging corridor” envisioned by Canada and the U.S.

Supporting Talent: Semiconductor Education and Career Pathways:

Given uncertainties in immigration pathways to build semiconductor talent and challenges spurring interest among domestic students, stakeholders must develop robust education and career pathways and strategies to support the industry, including:

• Create initiatives to raise awareness and spur interest in the semiconductor industry among younger students – designed and delivered with collaboration among industry leaders, educators and policymakers.
• Provide scholarships and research funding to support post-secondary students pursuing semiconductor-related programs and projects.
• Offer additional funding to create and sustain new research opportunities and positions at the National Research Council, to help retain semiconductor talent and provide space for them to innovate and develop new opportunities for the industry.

Strengthen Global Partnerships:

Canada’s semiconductor opportunities – like those of all countries and firms – depend on strong integration in global value chains and relationships with key players in the worldwide industry. If Canada is to succeed in becoming a global hub for advanced packaging, for example, supporting packaging R&D and facilities must be combined with substantial and sustained efforts to build partnerships with global firms and countries that will make Canadian firms integral parts of their production chains. These efforts should include:

• Exploring additional opportunities to create partnerships with firms in the U.S., Europe, and elsewhere to ensure Canadian firms’ innovation in design, compounds, photonics, and advanced packaging can be better integrated into ever-evolving constellations in global value chains.

Securing Semiconductor Supply:

• Canadian firms and policymakers should continue to strengthen relationships with U.S.-based semiconductor manufacturers and suppliers as additional capacity comes online.
• While Canada’s chip demand volume is very small by global standards – and therefore not always a priority for chip suppliers – Canadian firms can improve their customer position by pooling demand among themselves, and possibly among firms in other friendly countries as well.

Canada has opportunities to play a larger role and better secure chip supplies, “but needs to focus on building advantages in areas where we have both domestic strength and clear openings in global value chains,” the study says. “With significant, smart investment in key semiconductor capabilities, Canada can be successful in this industry.”

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