The appropriate role of public policy in promoting specific industries has been a source of passionate debate in the United States since the founding of the Republic.1 Many nations in Europe and Asia have not hesitated to use the full force of government to attain commercial competitive advantage in industries they regarded as strategic. In the United States, however, the idea of proactive government help for private industry in the name of economic development has sometimes raised concerns about distorting market forces and the wisdom of letting public servants “pick winners.” The debate began with Alexander Hamilton, who was an early advocate of “bounties” to encourage desirable industry, continued through the 19th century, and has resurfaced many times in the post-war era as U.S. industry confronted new competitive challenges. These policy debates have to some extent obscured actual practice, both in the United States and abroad.
In reality, the U.S. federal government has played an integral role in the early development of numerous strategic industries, not only by funding research and development but also through financial support for new companies and government procurement. Telecommunications, aerospace, semiconductors, computers, pharmaceuticals, and nuclear power are among the many industries that were launched and nurtured with federal support.
The intensifying global race to dominate an array of emerging hightech industries once again has focused attention on the role of public policy. As China, South Korea, Germany, and Taiwan target industries such as renewable energy equipment, solid-state lighting, electric vehicles, and next-generation
1 The link between national security and the need to develop key domestic industries was identified by Adam Smith, a contemporary of Hamilton, who noted that “if any particular manufacture was necessary, indeed, for the defense of the society it might not always be prudent to depend upon our neighbors for the supply.” Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776.
displays with comprehensive strategies and generous subsidies, the U.S. has struggled to compete. The financial crisis of 2008 has made it even more difficult for U.S. technology companies to raise the capital needed to turn designs into prototypes and prototypes into products made in large volumes.
In recent years, the Science, Technology, and Economic Policy Board of the National Academies has extensively studied the competitive challenges facing a number of important high-tech industries. The STEP board also has studied the policies adopted other nations and compared them to those of the United States.
This chapter explores the major policy issues in four of these industries—semiconductors, photovoltaic products, advanced batteries, and pharmaceuticals. Each of these industries can be regarded as strategic to the United States. Integrated circuits are the building blocks of all electronics products and have enabled the breathtaking advances in information technology that drive productivity gains across all industries. American leadership in semiconductors also is vital to the technological superiority of the U.S. military. Photovoltaic cells are the enabling technology of solar power, a key source of renewable energy that can serve America’s national interests in reducing dependence on petroleum and cutting greenhouse gas emissions. Advanced batteries and their electrical management systems are the core components of hybrid and electric vehicles, much as internal combustion engines have been to conventional gasoline-powered cars and trucks. A strong domestic battery industry, therefore, is regarded as crucial to the future competitiveness of the U.S. auto industry. Lightweight, long-lasting, rechargeable energy-storage systems also are required for advanced weapons systems being developed by the U.S. military and for storing renewable energy for utility power grids. The pharmaceuticals industry is likewise strategic, producing medicines and vaccines that are essential to the well-being of Americans and indeed the world’s people. U.S. leadership in this sector has been secured through enormous federal investments, though the industry faces numerous challenges in terms of litigation, regulatory pressure, and counterfeit drugs.
Each of these three industries shares another characteristic. The core technologies are the fruits of decades of research at U.S. universities and national laboratories at considerable American taxpayer expense. Many of the early U.S. companies that pioneered these industries, moreover, were supported over the years through federal research grants, small-business loans, and government and military procurement.
As they reached the point of large-scale commercial production, each of these U.S. industries encountered severe global competitive challenges2. Concerted Japanese government policies to facilitate joint R&D, transfer
2 See Glenn Fong, “Breaking New Ground, Breaking the Rules—Strategic Reorientation in U.S. Industrial Policy,” International Security 25:2 pp 152ff.
commercial technology to companies, protect domestic producers from imports helped Japanese companies in the 1970s and 1980s seize a commanding global market share in dynamic random-access memory chips, sending the U.S. semiconductor industry into crisis. U.S. companies dominated the nascent photovoltaic industry through the 1980s. Leadership in mass production of cells and modules, however, was assumed by Japan in the 1990s—and then Germany, Taiwan, and China—after each of these nations or regions enacted policies to build domestic markets for solar power or to promote manufacturing. The lithium-ion industry is one of several high-tech sectors that grew from U.S.-invented technology but was never industrialized domestically. Instead, Japanese companies were the first to mass-produce rechargeable lithium-ion batteries for electronic devices and notebook computers because of their largescale production of consumer electronics. South Korean and Chinese manufacturers followed their lead. Asian producers, therefore, have a huge advantage in the small but extremely promising market for rechargeable batteries for cars and trucks.
The four industries illustrate different aspects of the public policy debate. The U.S. semiconductor industry is a case study in how a strategic sector that had lost competitive advantage in production and a once-dominant market share was able to regain global leadership through cooperation on precompetitive R&D and public policy initiatives with responsive government actions. The public-private research consortium SEMATECH and assertive U.S. trade policies in response to Japanese dumping and protectionism enabled the industry rebound.
The photovoltaic industry is an example of a U.S. high-tech sector that has lost global share but has a solid opportunity to re-emerge as a leader with the right mix of federal and state policy support. In the case of solar power, a deciding factor will be whether the United States will become a big enough market to support a large-scale, globally competitive manufacturing industry. Federal and state incentives will be essential for the next few years, until the cost of solar energy can compete against electricity generated from fossil fuels without subsidies. Another question is whether U.S. companies that focus on products incorporating promising new technologies will be able to survive surging imports of low-cost photovoltaic cells and modules based on mature technologies long enough to attain economies of scale. What’s more, because technologies are still evolving rapidly, and there are not yet commonly accepted manufacturing standards, the global race for future leadership remains wide open. Public-private research partnerships will be essential to ensure that the U.S. can be a leader in the race for global market share.
The emerging U.S. advanced battery industry represents a bold experiment by the federal government in direct financial support of private companies to establish a domestic manufacturing industry. Prior to 2008, the
U.S. had a number of lithium-ion battery start-ups but virtually no production plants.3 It now has dozens of battery-related factories that are beginning to rampup, thanks in part to $2.4 billion in grants and support under the American Recovery and Reinvestment Act. Like photovoltaic cells, however, prices of lithium-ion auto batteries are too high, making hybrid and electric vehicles expensive for most consumers compared to conventional gasoline-powered vehicles. Larger demand, in turn, is required for the industry to attain the economies of scale that will bring prices down, in turn generating higher demand. In addition, further innovation is required to improve battery performance and reduce cost. Federal policies to support expansion of the market and public-private R&D collaboration will likely be required for the foreseeable future, but the long-term gain to the economy and national security can be significant.
The ascent of the U.S. pharmaceutical industry has been driven by massive federal support for life sciences R&D, primarily by the National Institutes of Health (NIH). During the decade of 2001, U.S. firms developed 57 “new chemical entities” (NCEs) compared with 33 by European firms and nine by Japanese firms, erasing the European lead which existed in prior decades. Despite the spectacular successes of past two decades, the U.S. pharmaceutical industry’s future prospects are uncertain. Many of the blockbuster drugs that drove the industry’s success have gone off patent or will do so soon, including first-generation biotechnology drugs, and branded producers face growing competitive pressure from generic drug makers. The costs and risks of developing new drugs and bringing them to market are rising, while the productivity of the industry’s R&D appears to be declining. In light of key developments, especially in emerging markets, a key challenge is to sustain the productivity and competitiveness of this strategic U.S. industry.
A little more than two decades ago, the U.S. semiconductor industry appeared to be going the way of the U.S. consumer electronics industry. Japanese companies had seized a commanding world market share and technological lead in memory devices and were rapidly adding more production capacity. Struggling U.S. chipmakers were abandoning a large segment of the industry that made memory products, an essential part of computers and other leading semiconductor technologies of the eighties. There was widespread concern that erosion of America’s semiconductor industry posed not only economic challenges, but national security risks as well. Even after the U.S. government had begun to mount a strong policy response to bolster U.S.
3 “In 2009, the U.S. made less than 2 percent of the world’s lithium-ion batteries.” Jon Gertner, “Does America Need Manufacturing?” The New York Times, August 24, 2011.
competitiveness, a defense task force warned in 1987 that a dependence on foreign suppliers for state-of-the-art chips for weapons was an “unacceptable situation” because it would undermine the U.S. military strategy of maintaining technological superiority.4 This national security concern and the willingness of the semiconductor industry to collectively seek policy help from Washington were instrumental in reversing the loss of market share and technology lead that seemed irretrievably lost.
Remarkably, as recounted below, the U.S. semiconductor regained global leadership by the early -1990s and —despite the dramatic rise of new competitors in South Korea, Taiwan, and China—remains today a top semiconductor producer. Even though the U.S. market accounts for only 18 percent of the global sales for integrated circuits, sales by U.S. companies accounted for 48 percent of the world market in 2010.5 [See Figure 6.1] While only one U.S. company is still a major player in memory chips, the U.S. semiconductor industry dominates the lucrative market for logic devices such as microprocessors and analog mixed signal products.6
Moreover, despite rapid growth in outsourcing to Asian foundries (wafer fabrication factories that produce integrated circuits on a contract basis for other firms), the vast majority of production and R&D by U.S. semiconductor companies remains in the United States.7 Seventy-seven percent of capacity owned by America semiconductor companies is located in U.S. and 74 percent of compensation and benefits is paid to U.S.-based workers.8 And while the vast majority of chip companies now outsource fabrication of the devices they design to foundries located in Asia, approximately 500 of the world’s 1,200 so-called “fabless” design firms—including most of the industry leaders—are headquartered in North America.9
4 See U.S. Department of Defense, Report on Semiconductor Dependency, Office of the Undersecretary of Defense for Acquisition, prepared by the Defense Science Board Task Force, Washington, DC, February 1987.
5 Source: Semiconductor Industry Association citing data from based on World Semiconductor Trade Statistics data.
6 Micron Technologies, headquartered in Boise, Idaho, is the leading U.S. producer of computer memory chips.
7 For an analysis of semiconductor R&D has remained in the U.S. despite outsourcing of production, see Jeffrey T. Macher, David C. Mowery, and Alberto Di Minin, “Semiconductors,” chapter 3 in National Research Council, Innovation in Global Industries: U.S. Firms Competing in a New World, Jeffrey T. Macher and David C. Mowery, eds., Washington, DC: The National Academies Press, 2008.
8 Semiconductor Industry Association (SIA), Maintaining America’s Competitive Edge: Government Policies Affecting Semiconductor Industry R&D and Manufacturing Activity, March 2009. This report can be accessed at http://www.sia-online.org/galleries/defaultfile/Competitiveness_White_Paper.pdf.
9 Global Semiconductor Alliance, Industry Data at http://www.gsaglobal.org/resources/industrydata/facts.asp. The largest fabless companies include QUALCOMM, Broadcom, AMD, NVIDIA, and LSI.
FIGURE 6.1 Global market share of U.S. semiconductor companies, 19822010.
SOURCE: Semiconductor Industry Association.
NOTE: Share data based on nationality of company.
This turn of fortunes is primarily due to strategic moves and investments in new technologies by U.S. semiconductor manufacturers. Yet, their success also rests on the important contributions of U.S. policy that was driven by an engaged industry. There were two additional interrelated elements to the U.S. success:10 The research consortium SEMATECH, a $200 million-ayear research effort co-funded by the federal government and most large American chip companies, accelerated productivity and innovation in semiconductor manufacturing based on a common technology roadmap and
10 The recovery of the U.S. industry has been described as a three-legged stool. It is unlikely that any one factor would have proved sufficient independently. Trade policy, no matter how innovative, could not have met the requirement to improve U.S. product quality. On the other hand, by their long-term nature, even effective industry-government partnerships can be rendered useless in a market unprotected against dumping. Most importantly, neither trade nor technology policy can succeed in the absence of adaptable, adequately capitalized, effectively managed, technologically innovative companies.
enabled a rapid decline in prices.11 Persistent trade negotiations and enforcement of previous agreements won commitments from Japan to open its market to U.S. semiconductors and curtail dumping in any world market.12 This was deemed essential to prevent the United States from becoming a highpriced island in a sea of underpriced semiconductors. Had that occurred, it would have severely disadvantaged downstream American electronics equipment producers compared with competitors producing abroad utilizing lower-priced dumped chips.13
The decline and resurgence of the U.S. semiconductor industry offers many useful lessons for policymakers and industrialists grappling with how to bolster other American high-technology sectors facing intense international competitive pressure. It shows that erosion of U.S. leadership in manufacturing is not irreversible as long as both industry and government are committed to cooperative action, both on trade policy and in well-designed research programs that will lead to innovation. In a comprehensive analysis of the semiconductor experience, the National Research Council concluded that overcoming competitive challenges requires “continued policy engagement and public investment through renewed attention to basic research and cooperative mechanisms such as public-private partnerships.”14
11For analysis of the contributions of SEMATECH, see presentation by Kenneth Flamm of the University of Texas in National Research Council, Innovative Flanders: Innovation Policies for the 21st Century—Report of a Symposium, Charles W. Wessner, editor, Washington, DC: The National Academies Press, 2008. For a more extensive treatment, see Kenneth Flamm, “SEMATECH Revisited: Assessing Consortium Impacts on Semiconductor Industry R&D,” in National Research Council, Securing the Future, OP. CIT. See also, Peter Grindley, David C. Mowery and Brian Silverman. “SEMATECH and Collaborative Research: Lessons in the Design of High Technology Consortia, Journal of Policy Analysis and Management, 13(4) 1994, pp. 723-758.
12 In the U.S.-Japan Semiconductor Trade Agreement, signed on Sept. 2, 1986, Japan agreed to eliminate dumping of semiconductors following a U.S. Department of Commerce finding that Japanese producers sold memory chips in the U.S. at below the cost of production. Japan also agreed to open its market to foreign-made chips and to cease dumping in any market. In 1990, Japan signed a second bilateral trade agreement that provided U.S. producers with a “fast-track” process for addressing dumping allegations and promised to fulfill an earlier pledge that foreign producers achieve a minimum 20 percent share of the Japanese semiconductor market. This figure was chosen because it would give foreign producers access to the customer base of the six giant vertically integrated Japanese companies that controlled the Japanese market. The trade agreement was remarkable in that it did not close the U.S. market, but instead opened the previously closed Japanese markets and stopped dumping in third markets.
13 For a full description of the how Japan closed its market for all foreign semiconductor producers, see Thomas R. Howell, William A. Noellert, Janet H. McLaughlin, and Alan Wm. Wolff, The Microelectronics Race, Boulder, Colo., and London: Westview Press, 1988.
14 National Research Council, Securing the Future: Regional and National Programs to Support the Semiconductor Industry, Charles W. Wessner, editor, Washington, DC: The National Academies Press, 2003.
The importance of semiconductors to the United States is difficult to overstate. As an industry, the semiconductor sector directly employs over 180,000 Americans and has consistently ranked as either America’s No. 1 or No. 2 export industry.15 Semiconductors represent the core technology of the modern electronics revolution, enabling products from smart phones and computers to advanced weapons systems. More importantly, semiconductors have made possible the rapid advances in information technology that drive productivity gains across other industries. As one National Academies study noted—
“…often called the ‘crude oil of the information age,’ semiconductors are the basic building blocks of many electronics industries. Declines in the price/performance ratio of semiconductor components have propelled their adoption in an ever-expanding array of applications and have supported the rapid diffusion of products utilizing them. Semiconductors have accelerated the development and productivity of industries as diverse as telecommunications, automobiles, and military systems. Semiconductor technology has increased the variety of products offered in industries such as consumer electronics, personal communications, and home appliances.”16
The impact of semiconductor-based information technology has been so pervasive that many economists regard it as the catalyst behind the acceleration in productivity growth in the U.S. economy since the mid-1990s.17 Meeting critical national needs such as increased energy efficiency, lower-cost and improved health care services, and ubiquitous access to high-speed broadband data communications will depend on further advances in
15 Patrick Wilson, Director of Government Affairs, Semiconductor Industry Association, “Maintaining US Leadership in Semiconductors,” AAAS Annual Meeting, February 18, 2011.
16 This excerpt is taken from Jeffrey T. Macher, David C. Mowery, and David A. Hodges, “Semiconductors,” U.S. Industry in 2000: Studies in Competitive Performance, David C. Mowery, ed., Washington, DC: National Academy Press, 1999, p. 245.
17 For an analysis of the role of new information technologies in recent high productivity growth, often described as the New Economy, see Dale W. Jorgenson, “The Emergence of the New Economy” in Enhancing Productivity Growth in the Information Age, Dale W. Jorgenson and Charles W. Wessner, eds., Washington, DC: National Academy Press, 2007. Also see National Research Council, Measuring and Sustaining the New Economy, Report of a Workshop, D. Jorgenson and C. Wessner, eds., Washington, DC: National Academy Press, 2003, and Council of Economic Advisers, Economic Report of the President, H.Doc.107-2, Washington, DC: USGPO, January 2001.
semiconductors.18 Semiconductors also remain vital to national security, observes the Industrial College of the Armed Forces, because “they are the building blocks of the nation’s infrastructure and the space, communications, and weapons systems that allow the projection of American diplomatic, information, military, and economic power.”19
Continued American leadership in semiconductors certainly cannot be taken for granted, however. The industry faces a range of technological, financial, and competitive challenges. Among the most prominent—
• Declining share of capacity: U.S. semiconductor companies still invest billions of dollars in wafer fabrication facilities in the United States. But investment by manufacturers in Asia is expanding faster. The share of global installed wafer fabrication capacity in the United States declined from 42 percent in 1980 to about 16 percent in 2007.20 American semiconductor companies are investing a proportionately larger share of their total worldwide fabrication capacity spending outside of the United States. The share of spending in the United States for wafer manufacturing capacity has dropped by 14.6 percentage points between 1997-1999 and 2005-2007, from 78.5 percent to 63.9 percent.21 The Semiconductor Industry Association (SIA) expects the U.S. share to decline by another 9.3 percentage points by 2013.22 What’s more, only 14 percent of leading-edge capacity (300 mm wafers) is located in the United States. The largest market for state-ofthe-art manufacturing equipment is in Asia, principally South Korea, Taiwan and Japan.23
• Business and capital costs: As the cost of building new leading-edge wafer fabrication plants reach some $4 to $6 billion, factors such as tax rates and government incentives now heavily influence corporate
18 The RAND Corporation, for example, estimates that application of information technology in the health care sector could result in annual efficiency savings of $77 billion. See RAND Corporation, Health Information Technology: Can HIT Lower Costs and Improve Quality?, 2005, (http://www.rand.org/pubs/research_briefs/RB9136/index1.html). Also see Jorgenson, “The Emergence of the New Economy,” op. cit.
19 Industrial College of the Armed Forces, Electronics 2010, Industry Study Final Report, National Defense University, Spring 2010, (http://www.ndu.edu/icaf/programs/academic/industry/reports/2010/pdf/icaf-is-report-electronics2010.pdf).
20 SIA, Maintaining America’s Competitive Edge, op cit.
23 SEMI Industry Research and Statistics Group data.
decisions on where to build capacity. Countries such as Malaysia, India, Singapore, China, and Israel and regions such as Taiwan offer tax holidays or significantly reduced rates. Germany offers grants and loans to chip manufacturers. Federal and state tax breaks and other benefits offered in the U.S. are often either insignificant or noncompetitive,24 according to the SIA.
• Talent: The American semiconductor industry is becoming increasingly dependent on foreign-born R&D staff at a time when immigration rules have tightened and opportunities abroad are growing. More than 50 percent of students graduating from U.S. universities with master’s degrees and 70 percent of doctorates in science and engineering disciplines applicable to semiconductors are foreign nationals.25 Meanwhile, nations and regions such as India, China, and Taiwan are rapidly increasing their supply of semiconductor engineers. An inability of industry to hire top talent in the U.S. could lead to a greater shift of R&D offshore.
• Offshore R&D: Even though U.S. semiconductor companies conduct most of their R&D onshore, that proportion has declined by 8.4 percent points from 1997-1999 to the 2005-2007 period. Most of the work is going to Europe, Israel, and Singapore, and increasingly to Romania. Meanwhile, the outsourcing by American companies of chip fabrication to Asian foundries—plants that fabricate chips on a contract basis— means that semiconductor design can go to any place that has the best supply of engineers.26
• Competing Consortia: While federally funded U.S. research is under budget pressure, other nations have learned from the accomplishments of SEMATECH and have formed their own public-private partnerships aimed at becoming the first to commercialize next-generation semiconductor technologies. At the same time, the ability to continue improving the performance of integrated circuits along the path predicted by Moore’s Law27 through current transistor technology may be nearing its physical limits.28 The U.S. faces growing competition to develop technologies to replace silicon-based, CMOS semiconductors,
24 The U.S. currently offers a 9 percent manufacturing tax credit and a temporary R&D tax credit, although states such as New York offer sizeable incentives.
25 SIA, Maintaining America’s Competitive Edge, op cit.
27 Moore’s Law is based on the prediction by Intel co-founder Gordon Moore in 1965 that the number of transistors that can be placed inexpensively on an integrated circuit doubles every two years.
28 One recent development that could alter this view is Intel Corp.’s recent announcement that it had successfully demonstrated the world’s first 3-D transistor, called Tri-Gate, used in a 22nm microprocessor. Intel claimed its technology will “advance Moore’s Law into new realms.”
a challenge that Nanotechnology Research Institute Director Jeffrey Welser says is as dramatic as the replacement of vacuum tubes by semiconductors in the 1940s.29
These challenges must be addressed. “At some point,” the SIA warns, “without sufficient U.S. government support of basic R&D and supportive tax, immigration, and education policies, it may well prove to be very difficult if not impossible to reverse current trends.”30
The federal government was at the outset deeply involved in the U.S. semiconductor industry. Indeed, as economist Laura Tyson observed in 1992: “The semiconductor industry has never been free of the visible hand of government intervention.”31
The U.S. Signal Corps was the prime funder of the R&D that led to development of the transistor and semiconductors for three decades and purchased most of the initial output. The military funded the first pilot production lines of Western Electric, General Electric, Raytheon, and Sylvania and construction of production capacity far in excess of demand. From the late 1950s through the early 1970s, the federal government funded between 40 to 45 percent of U.S. R&D in semiconductors.32 Military purchases of semiconductors enabled the industry to establish the scale that led to a dramatic drop in prices between 1962 and 1968,33 making them more practical for commercial use.
Japan’s entry into the dynamic random-access memory (DRAM) industry, backed by low-cost capital and a protected home market, resulted in dramatic increases in capacity and dumping of product on third-country markets. Some U.S. companies also lagged the Japanese competition in quality and productivity using the same equipment sets. The result was a reduction of the U.S. global share in this market from around 90 percent to less than 10 percent by 1985, and producers such as Intel, Advanced Micro Devices, and National
29 Testimony by Jeffrey Welser, Nanoelectronics Research Initiative director, before the House Committee on Science, Space, and Technology’s Subcommittee on Research and Science Education, April 14, 2011, http://science.house.gov/sites/republicans.science.house.gov/files/documents/hearings/Welser%20Testimony%20FINAL.pdf).
30 SIA, Maintaining America’s Competitive Edge, op. cit.
31 Laura D’Andrea Tyson, Who’s Bashing Whom? Trade Conflict in High Technology Industries, Washington, DC: Institute for International Economics, 1992.
32 A concise history of U.S. government involvement in establishment of America’s electronics industry is found in Kenneth Flamm, Mismanaged Trade?: Strategic Policy and the Semiconductor Industry, Washington, DC, Brookings Institution, 1996. pp. 27-38.
33 Defense Science Board, “High Performance Microchip Supply,” 2005.
FIGURE 6.2 Government procurement as a catalyst for semiconductor development
SOURCE: Defense Science Board, “High Performance Microchip Supply,” 2005.
34For a discussion of American competitiveness challenges in the 1980s, See Laura Tyson, Who’s Bashing Whom? Trade Conflict in High Technology Industries, Washington, DC: Institute for International Economics, 1992. Also see Clyde Prestowitz, Trading Places: How We are Giving Away our Future to Japan and How to Reclaim It, New York: Basic Books, 1988.
especially because the high-volume memory devices were process technology drivers for the industry. The scale of production of the high-volume commodity DRAM chips justified investment in new process technologies and wafer fabrication facilities that could then also be used for lower-volume integrated circuits.
The impact of these policies and trade practices convinced the industry that it needed government policy support. By the early 1980s, the U.S. industry was in crisis and reached out to the federal government for help. The industry argued that Japan violated rules of the General Agreement on Tariffs and Trade as a consequence of trade and industry policy coordinated by Japan’s Ministry of International Trade and Industry (MITI) and supported by NTT.36 The industry also blamed Japanese government toleration of anticompetitive practices of Japanese companies. Reflecting growing concern for the health of the industry, the Defense Science Report in 1987 cited declining U.S. market share in semiconductors as a national security concern.37 By that time, the U.S. government had put into place the measures that were to improve the competitive position of U.S. producers to counter Japan government’s industrial policies.
The first step was to shore up research and enable U.S. companies to collaborate. In 1982, the semiconductor industry formed and funded the Semiconductor Research Corporation, an independent affiliate of the SIA, to conduct silicon-based research at universities. Two years later, President Ronald Reagan signed the National Cooperative Research Act, which reformed U.S. antitrust law to encourage joint R&D consortia.38 The Microelectronics and Computer Technology Corp., a privately funded industry consortium, was established in response to Japan’s government-funded “Fifth Generation” R&D program that aimed to put Japanese computer makers at the leading edge of technology. This first U.S. semiconductor consortium had a menu of projects that members could choose to fund and participate in, but was viewed as a failure and shut down in 2001.39
SEMATECH was the second and more successful consortium. At the
35 See Andy Procassini, Competitors in Alliance: Industry Associations, Global Rivalries, and Business-Government Relations, New York: Greenwood Publishing, 1995.
36 For an account of Japanese trade practices, see Prestowitz, op. cit. MITI and Nippon Telephone and Telegraph had worked with the large vertically integrated Japanese producers to move at least a generation ahead of their Western competitors in the production of DRAMs.
37 Department of Defense, Report on Semiconductor Dependency, op. cit.
38 For an account of the evolution of U.S. semiconductor research policy, see Kenneth Flamm presentation in National Research Council, 21st Century Innovation Systems for Japan and the United States: Lessons from a Decade of Change, Sadao Nagaoka, Masayuki Kondo, Kenneth Flamm, and Charles W. Wessner, eds., Washington, DC: The National Academies Press, 2009. Also see Kenneth Flamm and Qifei Wang, “SEMATECH Revisited: Assessing Consortium Impacts on Semiconductor Industry R&D,” in National Research Council, Securing the Future, op. cit.
39 Flamm, ibid.
recommendation of industry and the Defense Science Board, Congress in 1987 voted to match industry contributions for precompetitive research in a non-profit consortium. SEMATECH corporate members consisted of all of the largest device makers at the time, including IBM, Intel, Motorola, Texas Instruments, Hewlett Packard, and National Semiconductor. Former Intel chairman Gordon Moore described the organization as unique in that industry made sure that U.S. companies assigned top people to a public-private partnership.40 The strategy was to have SEMATECH focus on fabrication equipment and processes so that semiconductor companies could focus on design, quality, and innovation. The consortium included major initiatives in critical processing technologies, such as lithography, furnace and implant, plasma etch, and deposition. The SIA also coordinated government, industry, and academia to produce a roadmap guiding research and development and oversaw implementation of research.
SEMATECH is widely perceived as effective in accomplishing its goals and making a contribution to the U.S. semiconductor industry’s resurgence. By 1993, the U.S. industry had regained leadership in world market share in semiconductors.
A National Research Council analysis found that the consortium “played an integral role in promoting effective manufacturing technology in the semiconductor industry.” 41 SEMATECH also helped the equipment industry develop reliable, standardized chip-manufacturing tools, particularly in lithography. SEMATECH is credited with reducing R&D duplication by its members, thus lowering costs and freeing funds for additional investment.42
SEMATECH also helped achieve the original goals of the DOD to preserve access to state-of-the-art, low-cost chips from domestic commercial sources.43 In a subsequent review, a defense task force labeled the consortium “a resounding success.”44
40 For a first-hand account of the formation of the SEMATECH consortium, see Gordon Moore, “The SEMATECH Contribution,” in National Research Council, Securing the Future: Regional and National Programs to Support the Semiconductor Industry, C. Wessner, ed., Washington, DC: The National Academies Press, 2003. Also see Larry D. Browning and Judy C. Shetler, SEMATECH: Saving the U.S. Semiconductor- tor Industry, College Station: Texas A&M University Press, 2000. For a view from the Semiconductor Industry Association at that time, see also Procassini, op. cit.
41 Securing the Future, op. cit. In particular, see Gordon Moore presentation in that volume.
42 Flamm and Wang, op. cit.
43 See Jacques Gansler, Defense Conversion: Transforming the Arsenal of Democracy, Cambridge, MA: MIT Press, 1995. See also the presentation by Paul Kaminski, then Under Secretary of Defense for Technology and Acquisition, in National Research Council, International Friction and Cooperation in High-Technology Development, Washington, DC: National Academy Press, 1997. Dr. Kaminski points out that tighter linkage with commercial markets shortens cycle time for weapons-systems development and reduces the cost of inserting technological improvements into DoD weapons systems. By placing greater reliance on commercial sources, the DoD can field technologically superior weapons at a more affordable cost.
44 Department of Defense, “SEMATECH 1987-1997: A Final Report to the Department of Defense,” Defense Science Board Task Force on Semiconductor Dependency,” February 21, 1997.
Rapid advances in semiconductors, in turn, enabled dramatic innovation in information technology that resulted in robust industries and higher productivity growth.45 The Securing the Future report observed: “SEMATECH’s record of accomplishment was achieved in no small part through the flexibility granted its management and the sustained support provided by DARPA, the public partner, complemented by the close engagement of its members’ senior management and leading researchers.”46
Perhaps the clearest measure of SEMATECH’s success is that corporate members in 1994 agreed to continue the consortium without further government financial help, except for a $50 million grant by the DoD. Foreign companies have since joined SEMATECH, which became an international consortium in 1999, and other governments have established similar programs— often on a larger scale with greater political support. (See descriptions of several of these programs below).
International SEMATECH remains active, and has broadened its activities to design, materials, testing, and packaging technologies. Among other activities, it funds development of new 300-mm tools and continues to pursue technology roadmaps. Initiatives include mask-making tools and next-generation lithography using very-short-wavelength violet light from a special laser. Other U.S. industries, such as optoelectronics and nanotechnologies, also have emulated the SEMATECH model.47
State-of-the-art manufacturing process technologies and yield improvements were not the only elements that helped restore the U.S. semiconductor industry to health. An assertive U.S. response to Japanese trade practices that began in the mid-1980s also helped stem and then reverse the decline of the American semiconductor industry. In response to Japanese dumping and protection of its own market,48 the United States and Japan
45 Council of Economic Advisers. Economic Report of the President, Washington, DC: Government Printing Office, 2001.
46 Securing the Future, op. cit.
47 Flamm and Wang, op. cit. In April 2011, the school received a $57.5 million Department of Energy grant to become the base of the U.S. Photovoltaic Manufacturing Consortium, a partnership that includes SEMATECH and the University of Central Florida. See College of Nanoscale Science and Engineering news release, April 5, 2011 (http://www.albany.edu/news/12770.php).
48 See Prestowitz, op. cit, for an inside account of early U.S.-Japan trade conflicts over semiconductors. Also see Kenneth Flamm, Mismanaged Trade? Strategic Policy and the Semiconductor Industry, Washington, DC: Brookings Institution Press, 1996. Prestowitz co-chaired a U.S. Japan High Tech Work Group set of discussions, a largely fruitless exchange of views between the U.S. and Japan during his term of government service, but this allowed time for further industry research into the nature of Japan’s market closure and was a useful step in obtaining U.S. government understanding of the problem and action several years later. He was also instrumental in getting the Department of Commerce to self-initiate an antidumping case that provided needed leverage to obtain an end to the dumping of chips by Japan.
initiated a bilateral working group on high technology in 1983 to address trade conflicts. Two years later, the two nations agreed to completely eliminate tariffs on imported semiconductors. The SIA filed a Section 301 petition alleging that the Japanese government kept out imported chips through non-tariff barriers. In 1986, the U.S. Department of Commerce concluded that Japanese semiconductor firms were selling memory chips in the U.S. market at prices substantially below the cost of production. Together with the injury caused to U.S. industry, this warranted a finding of dumping. The further finding by the U.S. Trade Representative in 1987 that Japan had still not opened it market for foreign products and had breached its antidumping commitment prompted President Ronald Reagan to impose a 100 percent duty on $300 million worth of Japanese goods.49
The two nations reached an unprecedented agreement in 1986 under which Japan pledged that imported chips would account for 20 percent of its domestic market.50 The number was chosen because Japan’s integrated producers of semiconductors, who were at the same time large semiconductor consumers, accounted for only 13 percent of Japanese consumption of semiconductors. A 20 percent goal required that Japanese producers and the Japanese government allow access to a customer base beyond the big vertically integrated Japanese producers. Japan also agreed to a “fast-track” approach to resolving dumping allegations. In return, the U.S. dropped anti-dumping duties and its Section 301 case. By late 1992, the Japanese market was open to competitive foreign products, and foreign chips did indeed account for 20.2 percent of Japan’s market.51
The series of U.S. Japan Semiconductor Agreements “was a pivotal point in the recovery of the U.S. semiconductor industry and its return to global leadership,” said Semiconductor Industry Association President George M. Scalise.52 Antidumping cases provided a means for companies like Intel to stay in the production of erasable programmable read only memories (EPROMS), which allowed it to progress to the production of flash memory. The U.S.-Japan Semiconductor Agreements also enabled Texas Instruments and Micron Technologies to stay in the DRAM business and gave South Korea and Taiwan
49 Proclamation 5631 by President Ronald Reagan, “Increase in the Rate of Duty for Certain Articles from Japan,” April 17, 1987. The details of penalties were provided in an April 22, 1987 annex to the Federal Registry.
50 The original target amount committed to was in a side letter to the agreement.
51 For a discussion of the Semiconductor Trade Agreement, see National Research Council, Hamburg Institute for Economic Research, and Kiel Institute for World Economics, Conflict and Cooperation in National Competition for High-Technology Industry, Washington, DC: National Academy Press, 1996. Andrew A. Procassini, Competitors in Alliance: Industry Associations, Global Rivalries, and Business-government Relations, Westport, CT: Quorum Books, 1995.
52 Interview with Semiconductor Industry Association President George Scalise.
an opportunity to enter the memory market. Creation of a competitive multiple vendor base, in turn, spurred the production of ever more powerful personal and mainframe computers at diminishing cost and fueled the information technology revolution. Also, the agreements allowed Intel and other companies to pursue more attractive opportunities in devices such as microprocessors.53 The trade pacts with Japan are widely credited with giving the U.S. and foreign industries breathing room to adjust and regain the profitability needed to invest in advanced capacity and new technologies. Notably, by 2010, five of the top 10 semiconductor producers in the world were based in the United States, compared to two from Japan.54 [See Table 6.1] The agreements also enabled some U.S. manufacturers to make the transition from commodity memory products to new types of highly specialized products. In short, intervention to end Japan’s market closure and the restoration of the U.S. industry produced a worldwide burst of innovation that has never slowed.
The United States has a number of other public-private research collaborations addressing technological challenges under the umbrella of the Semiconductor Research Corp. Since its founding, the SRC has managed more than $1.2 billion in research funds, supported 2,000 faculty and 9,000 students at 257 universities, and produced 373 patents.55 One of the most extensive programs is the Nanotechnology Research Initiative (NRI), which seeks to advance technologies that ultimately can replace complementary metal-oxide semiconductor (CMOS) technology,56 the digital design style and set of
53 Dale A. Irwin, “The Politics and the Semiconductor Industry,” in Anne O. Kreuger, editor, The Political Economy of American Trade Policy, Chicago: University of Chicago Press, 1996. Few if any academics understood the dangers posed for the IT revolution due to Japan’s dumping and market closure. Nor could the participants in the bilateral U.S.-Japan Semiconductor Agreement negotiations foresee how these agreements would expand to cover all major semiconductorproducing countries and industries, create a tariff-free global trade environment for semiconductors, and encourage full cooperation toward shared environmental and energy-saving goals. For a short description of these new arrangements, see the World Semiconductor Council Web site and the series of conclusions reached by the six-nation Government and Association meeting on Semiconductors, and the tariff agreement on multi-component chips (MCPs) announced by then USTR and now Ohio Senator Rob Portman.
54 Two of the five U.S. companies (Qualcomm and Broadcom) are “fabless” producers, companies that develop and design integrated circuits but contract the production out to “foundries,” or contract fabrication facilities run by other companies.
55 Welser testimony, op. cit.
56 Complementary metal-oxide-semiconductor (CMOS) refers to a style of digital circuitry design and process used to implement the circuitry. CMOS is the most common technology used in verylarge-scale integrated circuits, such as microprocessors, static random-access memory devices, and microcontrollers. In CMOS devices, power is drawn by switching transistors between on and off stages. The devices have gates, typically of polysilicon or metals. The technology allows a high density of logic functions.
processes used in very large-scale integrated circuits such as microprocessors. Industry experts say that at some point, the extreme miniaturization of transistors—the basic building block within an integrated circuit—results in undesirable quantum effects that inhibit performance of the device.57 Today’s most advanced semiconductors contain billions of transistors.58
The Nanotechnology Research Initiative: The NRI, which receives funding through the National Science Foundation and NIST, supports four institutes—each based at universities—that pursue high-risk, pre-commercial research on technologies that are likely to result in commercial products within the next decade. Each institute, which brings together its own partnerships of universities, focuses on different approaches to developing devices cable of replacing CMOS in logic chips by 2020.59 Corporate members GlobalFoundries, IBM, Intel, Micron Technology, and Texas Instruments, as well as the states where the centers are based, also contribute funds.
The Western Institute of Nanoelectronics (WIN), for example, is led by the University of California at Los Angeles and includes UC Berkeley,
TABLE 6.1 Top Ten Semiconductor Companies in 2010 by Sales
|Rank||Company||2010 Revenue (Billions of Dollars)||Country|
|SOURCE: iSuppli, “Samsung Closes in on Intel for Semiconductor Market Leadership in 2010,” April 19, 2011.
NOTE: Sales based on vendor. Foundries not included.
57 The physical limits of transistor size was described in Paul A. Packan, “Pushing the Limits: Integrated Circuits Run Into Limits Due to Transistors,” Science, September 24, 1999.
58 The coming generation of advanced chips will have line widths of 22nm.
59 The mission statement and research objections of the Nanotechnology Research Initiative are found on the Semiconductor Research Corporation Web site at http://www.src.org/program/nri/about/mission/.
UC Santa Barbara, and UC Irvine. WIN focuses on nano-magnetic circuits, spin wave devices, spin torque logic, and SpinFET. The Institute for Nanoelectronics Discovery (INDEX) based at the University of Albany in New York, partners with schools such as MIT, Purdue, and Harvard. INDEX conducts research on a wide range of topics, such as new nanomaterials and atomic-scale fabrication technologies. Among other things, the INDEX consortium is studying the use of graphene to transmit electrons. Graphene is a strong, flexible atom-thick carbon material that are capable of carrying 1,000 times the density of electric current as copper wires, which researchers believe could lead to a new generation of super-fast, super-efficient electronics.60 The Midwest Institute for Nanoelectronics Discovery (MIND), based at Notre Dame, concentrates on energy-efficient devices and systems. The Southwest Academy of Nanoelectronics (SWAN), led by the University of Texas at Austin, focuses on the Bilayer Pseudospin Field Effect Transistor, which the SRC describes as a promising graphene-based device in terms of power consumption and speed.61
The Focus Center Research Program: The SRC oversees a number of other semiconductor-related research initiatives. The Focus Center Research Program, funded by $40 million from the DoD and industry contributions and run by SIA affiliate Microelectronics Advanced Research Corp. (MARCO), is devoted to pushing CMOS technology to its limits. The Focus Center program, supported by the Defense Advanced Research Projects Agency, involves 41 universities, 33 faculty, and 1,215 doctoral students.62 The guiding philosophy of MARCO is to have universities control research projects, back them with significant funding, train top students, and encourage “out of the box” approaches to technical problems.63 The Global Research Collaboration, another initiative of the SRC, funds R&D projects that address everything from sub-32 nm mixed-signal manufacturing processes and computer-aided design to advanced circuit and systems design. The new National Institute for Nanoengineering, based at Sandia National Laboratories, explores nano-enabled solutions to technologies that address various critical national challenges.
The competitive landscape has changed dramatically since the 1980s. The market is increasingly global, as are the locations of supply among the U.S., Japan, South Korea, Taiwan, the EU and China. Important new pools of
60 Holly B. Martin, “Miracle Material: Two-Dimensional Graphene May Lead to Faster Electronics, Stronger Spacecraft and Much More,” National Science Foundation Web site, May 19, 2011, accessed at http://www.nsf.gov/discoveries/disc_summ.jsp?cntn_id=119493&WT.mc_id=USNSF_1.
61 Semiconductor Research Corp. Web site.
62 Semiconductor Research Corp. data.
63 See Securing the Future, op. cit.
engineering talent are emerging. Decisions on where to build capacity are heavily influenced by government incentives. In addition to commodity memory chips, the new market-share battles are also fought on the basis of design and innovation. The coming technology transition has launched a new global R&D race. Government policy will loom large in determining the winners and losers. The following are some of the new challenges facing policymakers.
Declining U.S. Share of Global Capacity in the United States
The share of global production capacity located in the United States continues to decline. In 1980, 42 percent of worldwide fabrication capacity was located in the United States. That dropped to 30 percent in 1990 and reached 16 percent in 2007.64 IC Insights, a market research firm for the semiconductor industry, estimated that the share of installed wafer fabrication capacity in the Americas (primarily the United States) was 14.7 percent in 2010.65 [See Figure 6.3] Japan and Europe also lost share over the same period.
The rapid expansion of Asian semiconductor companies and offshore investment by U.S. companies are behind the shift. South Korea and Taiwan have been the largest gainers, led by Samsung and Hynix for South Korea and Taiwan Semiconductor Manufacturing Corp and UMC for Taiwan.66 Both Taiwanese companies are foundries. Samsung, one of the largest integrated device manufacturers, also entered the foundry business in 2005. Significantly, the vast majority of new leading-edge 300mm wafer fabrication capacity is being installed in Asia, an estimated 80 percent in 2011 and a forecasted 70 percent in 2012.67
The U.S. is drawing some important new investment. In 2009, GlobalFoundries, the former manufacturing operations of AMD and Chartered Semiconductor and 86 percent owned by Abu Dhabi’s Advanced Technology Investment Co., began construction of a $4.6 billion 300mm fab in Malta, NY,
64 SIA analysis of data from SEMI Industry Research and Statistics Group and Robert C. Leachman and Chien H. Leachman, “Globalization of Semiconductors,” in Martin Kenney and Richard L. Florida (eds.), Locating Global Advantage: Industry Dynamics in the International Economy, Palo Alto, Calif.: Stanford University Press, 2004.
65 IC Insights, “Taiwan to Pass Japan as Largest Source of IC Wafer Fab Capacity,” Research Bulletin, November 11, 2010.
66 The history of ITRI’s role in establishing Taiwan’s semiconductor industry is addressed below. The U.S. investigated brought a countervailing duty case against South Korean DRAM producer Hynix in response to allegations that the South Korean government had subsidized the company’s exports by orchestrating a financial bailout. The dispute was dropped without punitive duties being assessed.
67 Paul Dempsey, “Foundry Overcapacity – Yes, It Could Happen,” Tech Design Forum, June 20, 2011. The data cited in the article are from Gartner Dataquest. Article at http://www.techdesignforums.com/eda/eda-topics/design-to-silicon/foundry-overcapacity-–-yes-itcould-happen/.
FIGURE 6.3 Estimated integrated circuit wafer fabrication installed capacity by region – July 2010.
SOURCE: IC Insights, “Taiwan to Pass Japan as Largest Source of IC Wafer Fab Capacity,” Research Bulletin, November 11, 2010.
not far from the College of Nanoscale Science and Engineering at the University of New York at Albany. This facility will be able to produce 60,000 wafers per month with line widths of 28nm and below.68 The plant will deploy a technology called High K Metal Gate developed with IBM, Samsung, Infineon, and other partners that it claims far exceeds the capabilities of competing foundries. The company is seeking further financial aid from the state of New York to expand the plant.69 Intel announced in 2009 that it intends to invest $7 billion to upgrade
69 Drew Kerr, “GlobalFoundries Seeks New Incentive Money From State to Expand Operations,” PostStar, March 26, 2010.
existing plants in Oregon, Arizona, and New Mexico to produce next-generation 32nm chips.70
Capital spending by U.S. semiconductor companies on new or upgraded wafer plants rose by 10.6 percent from 1997-1999 to 2005-2007.71 Yet the portion of total investment in the United States slid from 78.5 percent to 63.9 percent over that period.
China is rising fast as a semiconductor consumer and producer, although the vast majority of production in China is still carried out by foreign semiconductor firms.72 Sales of integrated circuits produced in China reached 144 billion yuan ($21.3 billion) in 2010,73 which represented about 7.6 percent of total world integrated circuit sales in 2010.74 Because labor constitutes a small share of semiconductor manufacturing cost, China’s low wages are not a significant advantage. Rather, its advantages are access to low-cost capital and government policies aimed at leveraging China’s immense domestic market.75 Chinese consumption of semiconductors has grown at a 25 percent compound annual rate since 2001, four times faster than total worldwide consumption, and has represented 43 percent of global sales growth since 2003.76 Since 2009, China has become the largest consumer of semiconductors because approximately one-quarter of the world’s electronic products are assembled there by foreign-invested enterprises. Most of these products, once assembled, are then exported by foreign-invested factories as finished goods.77 Thus, approximately two-thirds of chips sold in China go into electronics products that are exported, such as mobile phones, personal computers, color TVs, and digital cameras.78 Most chips have to be imported because China does not produce many of these sophisticated semiconductor devices. This has led to a large and growing Chinese trade deficit in integrated circuits, which reached $128 billion in 2010. [See Figure 6.4] From 2008 through 2010, China’s imports of integrated circuits have exceeded its oil imports. Domestic demand is growing
70 Nicholas Kolakowski, “Intel Investing $7 Billion in Manufacturing Facilities,” eWeek, Feb. 10, 2009.
71 SIA, Maintaining America’s Competitive Edge, op. cit.
72 PricewaterhouseCoopers estimates that “there is no Chinese company within the top 50 suppliers to the Chinese semiconductor market.” PricewaterhouseCoopers, Global Reach: China’s Impact on the Semiconductor Industry 2010 Update, November 2010, p. 14, (http://www.pwc.com/gx/en/technology/assets/china-semicon-2010.pdf).
73 “China to Boost IC Sector as ‘State Strategy’,” Xinhua, April 16, 2011. China IC sales data from MIIT.
74 WSTS IC sales for 2010 were $278.52 billion. Total semiconductor sales (ICs plus discretes) were $298 billion. WSTS, “WSTS Projects Semiconductor Market to Grow by 7.6 Percent to $338.4 Billion in 2012,” Press Release, June 7, 2011.
75 SIA, Maintaining America’s Competitive Edge, op. cit.
76 PricewaterhouseCoopers, Global Reach, Ibid.
77 Ulrich Schaefer, “Semiconductor Market Forecast 2010-2013,” WSTS European Chapter, EECAESIA & WSTS, December 1, 2010.
78 PricewaterhouseCoopers, Global Reach, Ibid.
rapidly as well, including advanced devices required for weapons systems and telecommunications.
Most Chinese wafer fabs are several generations behind those of Japan, South Korea, Taiwan, and the United States. Only 27 percent of the new or committed capacity in China is for 300mm wafers, compared to a global average of 45 percent. Most will produce 6-inch or 8-inch wafers.79 As businesses, moreover, many of China’s semiconductor manufacturers have met with mixed success. In the first quarter of 2009, capacity utilization in China sank to 43 percent, the lowest level since 2000 and dramatically below the 92 percent utilization rate of mid-2004.80 Most Chinese fabs are foundries. Because most use mature technology, they cannot fabricate the most advanced chips and instead make thin-margin, commodity devices. As a result, many Chinese chip manufacturers have not earned the high profits required to invest in nextgeneration wafer fabs. Some analysts believe that China’s strategy has “collapsed.”81
It is important to note that there is more to China’s semiconductor strategy than just investment in Chinese-owned fabs or inducing foreign manufacturers to produce chips in China. The government also has introduced programs to deploy Chinese-owned intellectual property. The Ministry of Information Industry has announced a goal that China become 70 percent selfsufficient in integrated circuits used for information and national security and 30 percent for those used in communications and digital household appliances. 82 One of the government’s goals, to have all Chinese supercomputers use Chinese-made central processors, reached a milestone in late 2011 when China’s National Supercomputer Center in Jinan unveiled its first supercomputer, the Sunway BlueLight MPP, based entirely on Chinese microprocessors.83
The Chinese government still regards developing a globally competitive semiconductor industry as a high strategic priority. As part of its “indigenous innovation drive,” the government also is offering generous incentives to convince multinationals to build advanced capacity in China. In 2007, Intel agreed to build a 300 mm wafer fab in the coastal city of Dalian for chip sets. China’s glut in capacity also means that it is in a strong position to gain substantial share in chips and other silicon-based devices that do not require
80 Dylan McGrath, “China’s Fab Utilization Sinks to 43%, says iSuppli,” EE Times, April 20, 2009.
81 See for example, iSuppli analyst Len Jelinek quoted in McGrath, Ibid.
82 Ministry of Information Industry, “Outline of the 11th Five-Year Plan and Medium-and-LongTerm Plan for 2020 for Science and Technology Development in the Information Industry,” Xin Bu Ke  No. 309, posted on ministry website August 29, 2006.
83 John Markoff, “China Has Homemade Supercomputer Gain,” The New York Times, Oct. 28, 2011. See also Alan Wm. Wolff, testimony before the U.S. China Economic and Security Review Commission, Washington, DC, May 4, 2011.
FIGURE 6.4 China trade in integrated circuits, 2002 to 2010.
SOURCE: United Nations, UN Comtrade database. Accessed at
NOTE: Commodity code HS 8542 used to calculate trade values.
the most advanced technology, such as photovoltaic cells and light-emitting diode chips for solid-state lighting.84
Asia will likely remain the largest market for leading-edge semiconductor manufacturing equipment. Because process R&D and wafer fabrication are closely linked, moreover, the continued erosion of U.S. market share in wafer fabrication capacity could eventually give the technological advantage to nations that are investing more aggressively in state-of-the-art capacity. For this reason, U.S. industry leaders say, it is important that tax and regulatory measures be taken to encourage chip companies to build new and next-generation wafer fabs in the United States.85
84 China had an estimated 62 manufacturers of light-emitting diode chips as of 2010. LEDinside, “Ranking of LED Chip Manufacturers in China—Report on China’s LED Epitaxy Industry,” 2009.
85 SIA, Maintaining America’s Competitive Edge, op. cit.
Competition for Financial Incentives
The soaring cost of fabricating chips has made financial incentives an important determinant of where new capacity is built. Tax breaks, grants, lowcost loans, free land and other incentives typical defray $1 billion of a plant’s cost over a 10-year period. The SIA maintains—
“As a practical matter, any U.S. semiconductor management answerable to its shareholders must establish a new fab in a location that offers this type of incentive package or risk becoming less competitive vis-à-vis a competitor who receives such incentives. In other words, government incentives play a decisive role in determining the geographic location of advanced wafer fabrication facilities, and thus indirectly determine the location of the process R&D associated with that facility.”86
Nations and regions such as India, Israel, Malaysia, China, Taiwan and Singapore offer complete five- to 10-year tax holidays for corporate profit taxes or sharply reduced rates for R&D and for plant construction spending. Germany and other governments offer direct grants, project equipment, and central and state government loans and loan guarantees to semiconductor manufacturers. The German federal government and the state of Saxony, for example, covered the total construction cost of AMD’s “Fab 36” to produce 45nm and 65nm 300mm wafers in Dresden in 2004. Government agencies also provided $798 million in cash and allowances, a loan guarantee of 80 percent of losses sustained by lenders, and further funds for expansion.87 The Israeli government offered more than $1 billion in aid, including a $525 million grant, for Intel’s 300 mm plant in Kiryat Gat in 2005, plus $660 million in the form of tax benefits to upgrade another fab. Intel said the grants were pivotal in deciding to build the plant in Israel.88
Some U.S. states have offered generous incentives nearly matching those of foreign governments. New York, for instance, awarded incentives worth $660 million over 10 years to persuade IBM to build a new $2.5 billion wafer fab in Fishkill N.Y., in 2001.89 The state also awarded $1.2 billion in cash and tax incentives to GlobalFoundries, 86 percent owned by Abu Dhabi’s Advanced Technology Investment Co., to build a $4.6 billion fab in Malta, N.Y.
89 Jack Lyne, “IBM’s Cutting-Edge $2.5 Billion Fab Reaps $500 Million in NY Incentives,” Site Selection.
The deal amounted to the largest private-public investment in the state’s history.90
Such U.S. state incentives are awarded case by case, however, and remain highly controversial—especially at a time when budget deficits are forcing states to slash public services. What’s more, semiconductor manufacturers still must pay federal corporate taxes. In 2006, Intel CEO Craig R. Barrett testified that it cost $1 billion more to “build, equip, and operate” a $3 billion chip plant in the United States than it does outside the U.S., with 90 percent of that difference due to government policies.91
The Dispersion of Design
The United States remains the world leader in semiconductor design. Three-quarters of what American chip companies invest in R&D is spent in the U.S. America’s continued dominance of semiconductor design cannot be taken for granted, however. The chip-design industries in Taiwan, India, and China have grown tremendously, either as outsourcing destinations or as development bases for domestic industries. The share of research by U.S. companies performed in the United States declined from 86.2 percent in 1997-99 to 77.8 percent in 2005-2007, according to the SIA. By 2013, the portion invested in the United States is projected to drop by another 9.3 percentage points, with most of that activity going to Europe.92
The growing importance of foundries, wafer fabrication plants dedicated to contract manufacturing, has brought about a significant structural shift in the semiconductor industry that has accelerated the global dispersion of design work. By outsourcing manufacturing to large foundries, even small chip companies can gain access to state-of-the-art wafers and production processes without having to raise the billions of dollars required to build their own modern production capacity. Instead, they can focus their resources on design around standardized parameters. What’s more, major foundries offer “IP libraries” so that companies with only specialized proprietary designs can develop entire “systems on a chip.” 93 As a result, the industry has been undergoing a process that D. A. Hodges and R. C. Leachman describe as “vertical disintegration.”
90 Empire State Develop Corporation, “Empire State Development Corporation: A Description of the Corporations Operations and Accomplishments,” (http://www.siteselection.com/ssinsider/incentive/ti0011.htm).
91 Craig R. Barrett, testimony before the Subcommittee on Select Revenue Measures of the House Ways and Means Committee, June 22, 2006.
92 SIA, Maintaining America’s Competitive Edge, op. cit.
Even though the dedicated foundry industry is almost entirely based in Asia and is dominated by two Taiwanese companies—TSMC94 and United Semiconductor Corp. (UMC)—the U.S. design industry has thrived.
Seventeen of the top 25 “fabless” semiconductor companies in the world and nine of the top 10 are based in the United States, led by Qualcomm, AMD, and Broadcom.95 Because chip designs can be transmitted digitally, design R&D does not need to be close to wafer production plants. Indeed, an SIA survey found that location of fabrication capacity is not a key factor in a company’s decision of where to locate design R&D.96
By the same token, however, the shift to the foundry model means that design can be based any place with the best available talent. A number of governments are targeting semiconductor design and development for rapid development. India, already a major R&D base for companies such as Intel and Texas Instruments, has a plan to increase the nation’s share of the very large integrated-circuit market from 0.5 percent to 5 percent and to boost annual revenue to $1 billion.97 The India Semiconductor Association predicts that annual revenue of India’s semiconductor development industry will grow from $7.5 billion in 2010 to $10.6 billion in 2012. It also advocates a strategy to incubate at least 50 fabless semiconductor companies, each with annual revenue of $200 million or more, by 2020. 98 Eastern Europe, Russia, Brazil, and Israel are growing centers of semiconductor design as well.99
As a world technology leader in computers, displays, and smart phones, Taiwan also has become a major factor in semiconductor design. In 2002, the Taiwanese government launched the Si-Soft Project, which stands for “silicon and software.” The objective is to push the island’s industry beyond contract manufacturing and to become a major player in design of very large-scale
94 Taiwan Semiconductor Manufacturing Co., led by former Texas Instruments executive Morris Chang, was formed in 1987 as a joint venture between the Taiwan government and Philips Electronics NV. It was the first company dedicated entirely to the foundry business. United Microelectronics Corp. was spun off of the Industrial Technology Research Institute in 1980 as Taiwan’s first semiconductor manufacturer. UMC evolved into a dedicated foundry and became to first to fabricate 300mm chips on a contract basis.
95 See David Manners, “Top 25 Fabless Companies,” Electronics Weekly, January 19, 2010, (http://www.electronicsweekly.com/Articles/2010/01/19/47816/top-25-fabless-companies.htm).
96 SIA, op. cit.
97 Department of Information Technology, Special Manpower Development Programme in the Area of VLSI Design and Related Software (http://www.mit.gov.in/content/special-manpowerdevelopment-programme).
98 India Semiconductor Association, Study on Semiconductor Design, Embedded Software and Services Industry, prepared by Ernst & Young, April 2011, (http://www.ey.com/Publication/vwLUAssets/Study_on_semiconductor_design_embedded_software_and_services_industry/$FILE/Study-on-semiconductor-design-embedded-software-and-servicesindustry.pdf).
99 SIA, op. cit.
integrated circuits.100 Initiatives include establishment of a science park modeled after the Hsinchu Science and Industrial Park dedicated to design of systems on a chip. Sci-Soft also established six university research consortia in fields such as mixed-signal design, digital IP, electronic design automation, and system on a chip.101
China also is becoming a major location for chip design. Multinationals such as Intel and Freescale have opened Chinese design centers and a number of fabless design companies have opened in Shanghai and Beijing. China’s lack of intellectual property protection, however, has prevented the country from attracting more foreign investment. In an SIA survey of U.S. chip companies, a majority indicated they would not locate their most advanced and critical R&D activities in China, “despite encouragement and even pressure by the government to do so, and regardless of the availability, quality and size of incentives, due to concerns about the inadequacy of intellectual property protection.”102 If China follows through on commitments to protect intellectual property, however, the fact that it has the fastest growing market for semiconductors indicates that it has enormous potential to grow in chip R&D.
Perhaps the biggest threat to long-term U.S. leadership in semiconductor R&D is availability of talent. Foreign nationals comprise half of the master’s degree candidates and 71 percent of the PhD candidates graduating from U.S. universities in the engineering fields needed to design and manufacture integrated circuits and other semiconductor devices.103 One indicator of this foreign dependence is to look at where engineering Ph. D. graduates from U.S. universities receive their bachelor’s degrees. Only one U.S. school—MIT—ranked among the top 10. The leading university, Tsinghua University in Beijing, had 421 students who went on to earn Ph. D’s from U.S. universities in 2006, which was more than the 241 graduates from all California universities combined.104
The ability of companies to hire this talent in the United States has been complicated by tightened immigration procedures and a sharp reduction in temporary H-1B work visas. Taken together, these restrictions serve to inhibit U.S. semiconductor firms from growing research programs in the United States
100 For an explanation of the objectives of Si-Soft, see Chun-Yen Chang and Charles V. Trappey, “The National Si-Soft Project,” National Chiao-Tung University, (http://web.eecs.utk.edu/~bouldin/MUGSTUFF/NEWSLETTERS/DATA/si-soft-speech.pdf).
102 SIA, Maintaining America’s Competitive Edge, op. cit.
that depend on being able to hire the best and the brightest talent,” says the SIA.105
Other nations, meanwhile, are expanding their pools of semiconductor engineers and expanding efforts to woo émigrés back home. India, which has an available semiconductor engineering workforce of 160,000,106 has a number of programs to increase the supply further. The VLSI Manpower Initiative107 of the Department of Information Technology operates programs to expand semiconductor engineering training through the master’s and doctorate level at universities and the nation’s famed Indian Institutes of Technology and Indian Institutes of Information Technology.108 The India Semiconductor Association calls for boosting semiconductor manpower 20 percent a year and for India to have 500,000 in five years.109
Other Research Consortia
The perceived success of SEMATECH and other U.S. public-private partnerships have encouraged other nations and regions to expand semiconductor research collaborations among government, industry, and academia. For example—
• Japan: After curtailing heavy government industrial policies in the 1980s, the Japanese government and industry established a number of new consortia when the industry slumped in the 1990s.110
The Association of Super-Advanced Electronics Technology (ASET) is completely funded by the government and focuses on equipment and chip R&D. ASET has produced more than 100 patents and completed a number of projects with industry, including ones that developed technology for X-ray lithography and plasma physics and diagnostics. It recently has launched the Dream Chip Project, which focuses on 3-D integration technology, and another relating to next-generation information appliances.111
The Semiconductor Leading Edge Technology Corp. (SELETE), by contrast, is a joint venture funded by 10 large Japanese semiconductor
106 India Semiconductor Association, op. cit.
107 VLSI is an acronym for “very large scale integrated” circuits.
108 Department of Information Technology, op. cit.
109 India Semiconductor Association, op. cit.
110 For an overview of Japanese semiconductor consortia, see Shuzo Fujimura presentation in 21st Century Innovation Systems for Japan and the United States, op. cit.
111 Association of Super-Advanced Electronics Technologies Web site, http://www.aset.or.jp/english/e-link/e-link_index.html.
companies with no government contributions. Established in 1996, the joint venture conducts precompetitive R&D for production technologies using 300mm wafer equipment. Currently, SELETE is nearing completion of a research collaboration to develop 45nm to 32nm technologies.112
Other Japanese research consortia include the Millennium Research for Advanced Information Technology (MIRAI) program, which concentrates on alternative materials for future large-scale integrated circuits. MIRAI’s R&D base is the $250 million Tsukuba Super Clean Room. In 2002, Japan’s Ministry of Economy, Trade and Industry (METI) launched a five-year industry-government R&D project to develop extreme ultraviolet lithography for 50-nm device manufacturing in conjunction with 10 Japanese device and lithography equipment purchasers.
• Flanders: The Interuniversity Micro-Electronics Centers (imec) in Flanders, the Dutch-speaking region of Belgium, is one of the world’s largest semiconductor research partnerships and strives to be a global “center of excellence,” according to Chairman Leuven Anton de Proft.113 The organization, which received around half of its €285 million in revenue in 2010 from company research contracts and most of the rest from the Flemish government and the European Commission, has a staff of 1,900 and more than 500 industrial residents and guest researchers. It also has research partnerships in the Netherlands, Taiwan, and China.114 has “core partnerships” with Texas Instruments, ST Microelectronics, Infineon, Micron, Samsung, Panasonic, Taiwan Semiconductor, and Intel, and “strategic partnerships” with major equipment suppliers.115
imec emphasizes pre-competitive research that is three to 10 years ahead of industry needs, and therefore takes on risky projects that partners cannot afford to do on their own.116 Researchers from academia and industry work together under the same roof. Subject areas include chip design, processing, packaging, microsystems, and nanotechnology. In July 2005, imec produced its first 300mm silicon
112 Semiconductor Leading Edge Technology Corp. Web site, http://www.selete.co.jp/?lang=EN&act=selete_message.
113 Presentation by Anton de Proft of imec in National Research Council, Innovative Flanders, op. cit.
114 Interuniversity Micro-Electronics Centers data.
115 Greta Vervliet, Science, Technology, and Innovation, Ministry of Flanders, Science and Innovation Administration, 2006.
116 imec Mission Statement.
disks with working transistors, using its second clean room, a new, 3,200-square meter facility. A production ASML lithography system installed in 2006 offered capabilities that at the time were beyond those available at the U.S.-based SEMATECH.
imec has been of “great value” to its members, according to Texas Instrument executive Allen Bowling, who noted that moving a new material or device into production requires seven to 12 years of precompetitive research. 117 In 2010, Intel announced it was investing in a new ExaScience Lab in Leuven with, the Agency for Innovation by Science and Technology, and five Flemish universities that aims to achieve breakthroughs in power reduction software that can deliver 100 times the performance of today’s computers. 118 Because of its multinational membership, some analysts question whether is actually delivering on its mission to help develop a domestic semiconductor industry in Flanders.119, however, maintains that it is building a large research base that will eventually lead to the growth of domestic companies and the location of related industry.120
• Taiwan: Public-private research programs have been instrumental to Taiwan’s rise as a semiconductor power since the mid-1970s, when the government-funded Industrial Technology Research Institute acquired 7-micron chip technology from RCA and spun off chip manufacturer UMC. In the 1980s, ITRI helped launch TSMC, now the world’s dominant foundry.121 ITRI continues to operate substantial semiconductor-related R&D partnerships. The institute’s Electronics and Optoelectronics Research Laboratories, for example, include programs in fields such as next-generation memories and chips for lighting and 3D imaging.122
• France: After a previous semiconductor research consortium involving
117 Presentation by Allen Bowling of Texas Instruments in National Research Council, Innovative Flanders, op. cit.
118 Press release issued Aug. 6, 2010 (http://www2.imec.be/be_en/press/imecnews/flandersexasciencelab.html).
119 For example, see remarks by Kenneth Flamm in 21st Century Innovation Systems for Japan and the United States, op. cit.
120 de Proft, op. cit.
121 For a concise history of the role ITRI played in launching Taiwan’s semiconductor industry, see Alice H. Amsden, “Taiwan’s Innovation System: A Review of Presentations and Related Articles and Books,” submitted for NAS Jan. 4-6 symposium “21st Century Innovation Systems for the U.S. and Taiwan: Lessons From a Decade of Change,” Taipei.
122 ITRI, “3D System and Application Division,” Web site of ITRI Electronics and Optoelectronics Research Laboratories, accessible at http://www.itri.org.tw/eng/EOL/research-and-developmentcategory-detail.asp?RootNodeId=020&NavRootNodeId=02042&NodeId=0204222.
ST Microelectronics, Philips, and Freescale folded in 2007,123 the French government has launched an initiative called Nano 2012. Billed as the nation’s largest industrial project, the aim is to make the Grenoble region a world center for developing 32nm and 22nm CMOS technologies.124 The program involves nearly €4 billion in funding from the national, state, and local governments for R&D and equipment. Among the initiative’s partners are the CEA-Leti Institute for Micro- and Nanotechnology Research; IBM’s Fishkill, N. Y., semiconductor production complex; ST Microelectronics; the University of New York at Albany; ASML Holdings of the Netherlands; and Oregon-based and ST Mentor Graphics of Wilsonville, Oregon.125
The program is based at MINATEC, a campus in Grenoble that has become an important European center for semiconductor innovation. 126 MINATEC also is diversifying into biotechnology and clean-energy technologies to complement its strength in micro-systems. MINATEC brings academic programs from four universities. Its state-of-the-art facilities include a 300mm silicon wafer center that operates around the clock, a 200mm micro-electro-mechanical systems (MEMS) prototyping line for fast development of new products, and one of Europe’s best facilities for characterizing new nano-scale materials. The campus is home to 2,400 researchers and 600 technology transfer experts. MINATEC’s 200 industrial partners include Mitsubishi, Philips, Bic, and Total, and two-thirds of its annual €300 million annual budget comes from outside contracts. It also receives funding from the French and local governments, the French Atomic Energy Commission, and private investors. Researchers have filed nearly 300 patents and published more than 1,600 scholarly papers.127
The decline and resurgence of the U.S. semiconductor illustrates that government policy can help retain a high-tech manufacturing industry to keep America at the technological forefront. Government financial and policy support
123 Anne-Francoise Pele, “Freescale Eases Out of Crolles2 Alliance,” EE Times Europe, June 26, 2007.
124 MINATEC Web site (http://www.minatec.com/en/actualites/07/07/2009/nano-2012-underway).
125 Anne-Francoise Pele, “Mentor Joins 2012 R&D Alliance,” EE Times, March 16, 2010.
126 See presentation by David Holden of Minatec in National Research Council, Understanding Research, Science, and Technology Parks: Global Best Practices: Report of a Symposium, Charles W. Wessner, editor, Washington, DC: The National Academies Press, 2009.
127 MINATEC data.
for the original SEMATECH research consortium is widely regarded as a successful experiment and has influenced subsequent public-private partnerships in other U.S. industries and in other nations. The determination of the U.S. government to challenge unfair trade practices and to take action within international law at the time helped stem Japanese dumping and provided inroads into the Japanese market, providing U.S. semiconductor companies with an opportunity to make the large investments needed to diversify into other, more lucrative products.
The continued leadership of the U.S. semiconductor industry cannot be taken for granted, however. A new set of competitive challenges has arisen, such as America’s declining share of leading-edge manufacturing capacity, possible skilled talent shortages, and China’s drive toward “indigenous innovation” that envisions a diminishing foreign share in its huge and growing semiconductor market. Each of these elements requires American policy attention at a time of intensifying global competition. As the industry heads into historical technology transition, government funding of basic research is critical to maintaining U.S. semiconductor leadership. The U.S. partnership between industry, academia, and government is unrivaled in developing and implementing leading-edge semiconductor technology and in training talent. The U.S. should continue to nurture areas in which it leads the world today and compete in areas such as tax and regulatory policy that determine where companies build new production and R&D capacity.
Photovoltaic cells represent a classic case of technology developed in the United States with heavy federal support where high volume manufacturing developed largely offshore because of more supportive foreign government policies. Bell Laboratories scientists invented the first silicon-based cell capable of converting sunlight directly into electricity in 1954. Solar panels were first deployed in U.S. satellites. The U.S. government funded most of the pioneering research to develop photovoltaic cells as a source for clean energy in response to the oil shocks of the 1970s and backed the first successful start-ups. In the 1980s, the U.S. accounted for more than half of global production.128 The U.S. maintained its global manufacturing leadership position until 1999. But in the 21st century, the United States has fallen behind other nations in both installing and manufacturing solar-energy systems. [See Figure 6.5]
128 PV News and Navigant Consulting data cited in presentation by Minh Lee of the Department of Energy at the May 24-25, 2011, symposium “Meeting Global Challenges in Berlin hosted by the National Academies’ Science, Technology, and Economic Policy board and DIW Berlin.
FIGURE 6.5 Global share of PV shipments by region, 1997 to 2010.
SOURCE: Paula Mints, “Reality Check: The Changing World of PV Manufacturing,” Electro IQ, October 3, 2011.
Government policies have been a major reason behind the changes in global manufacturing leadership passing from the United States to Japan to Europe and now to China. Other nations have done more to promote adoption of solar energy and to encourage development of large-scale manufacturing. Even though Germany receives far less sunlight than any U.S. state except for Alaska, for example, it had 17.2 GW of installed solar capacity in 2010 compared to just 2.5 GW in the United States. 129 The U.S. accounted for just 5.3 percent of new global photovoltaic capacity installations in 2010. Because U.S. capacity additions have lagged those in other countries, the U.S. share of worldwide cumulative installed capacity has fallen from 9.5 percent in 2000 to
129 European Photovoltaic Industry Association, Global Market Outlook for Photovoltaics Until 2015, April 2011. Data from EPIA for U.S. capacity differ slightly from data released by the Solar Energy Industry Association (SEIA) in the United States. SEIA indicates that the United States had 2.593 GW of installed capacity by 2010, while EPIA indicates an installed capacity of 2.528 GW. EPIA data are used here for international comparison purposes because it is a consistent data source for all countries.
6.4 percent in 2010.130 [See Figure 6.6] The future of photovoltaic power generation as a significant source of electric power will depend on innovation in device and process technology which reduces the cost of PV relative to other sources of electricity production.131
Yet the United States has considerable opportunities to re-emerge as a global leader in solar and other clean energies. Among the world leaders in the two dominant photovoltaic technologies are SunPower in polysilicon and First Solar in thin film. Both of these companies are based in the United States, as are some of the industry’s premier producers of raw materials and manufacturing equipment.132 GE recently announced that it would build the largest solar factory in the United States in Aurora, Colorado. The factory, to start up in 2012, will use thin-film technology to produce solar panels that will be “more efficient, lighter-weight and larger than conventional thin film panels.”133 A U.S. federal solar-power production tax credit of 30 percent, introduced in 2008, has sparked a boom in large-scale commercial systems.134 Billions of dollars in private investment has flowed into more than 100 U.S.-based solar firms since 2006,135 while federal grants and loan guarantees have enabled cell and panel manufacturers to build major domestic plants.136 These policy measures helped
131 See Powell, Buonassisi, et al, Crystalline Silicon Photovoltaics, a Cost Analysis Framework, Energy and Environmental Science (February 2012), 5, 5874, http://pubs.rsc.org/en/journals/journalissues/ee, which is discussed in, Kevin Bullis, Technology Review: http://www.technologyreview.com/energy/39771/,2012.
132 While SunPower’s corporate headquarters are in San Diego, California, it manufactures solar cells in the Philippines and Malaysia and assembles solar panels in the Philippines and, through third-party contract manufacturers, in China, Mexico and Poland. Sunpower will soon assemble solar panels in California with a contract manufacturer. SunPower Corporation, Annual Report 2010, February 2011, p. 10. First Solar, headquartered in Tempe, Arizona, manufactures thin-film solar modules in Ohio, Germany and Malaysia. It plans to add manufacturing facilities in Malaysia, Germany, France, Vietnam and the United States. First Solar, Inc., Annual Report 2010, February 2011, p. 6.
133 “GE Plans to Build Largest US Solar Factory in Colorado, Expand Solar Innovation in New York and Deliver Lighter, Larger, More Efficient Thin Film Panels,” GE Press Release, October 13, 2011.
134 Peter Asmus and Clint Wheelock, “Clean Energy: Ten Trends to Watch in 2011 and Beyond,” Pike Research, 2011 (http://www.pikeresearch.com/wordpress/wp-content/uploads/2011/05/CE10T11-Pike-Research.pdf).
135 See presentation by Robert Margolis of the National Renewable Energy Laboratory in National Research Council, The Future of Photovoltaic Manufacturing in the United States: Summary of Two Symposia, Charles W. Wessner, editor, 2011. This volume summarizes presentations in two symposia on the U.S. photovoltaic industry convened in Washington April and July 2009 by the National Academies’ Science Technology and Economic Policy board.
136 The loan guarantee program that was launched in 2009 as part of President Obama’s stimulus initiative expired in 2011. In April 2012, the Department of Energy indicated that it would offer a smaller volume of loan guarantees to solar, wind, and geothermal energy products pursuant to a loan guarantee program established under the Energy Policy Act of 2005. “Energy Dept. to Revitalize a Loan Guarantee Program,” New York Times (April 5, 2012).
FIGURE 6.6 The U.S. share of worldwide installed photovoltaic capacity, 2000 to 2010.
SOURCE: EPIA, Global Market Outlook for Photovoltaics Until 2015, April 2011.
more than double the number of U.S. photovoltaic installations in 2010 compared to 2009.137
Perhaps the most important development is that solar-power is steadily nearing “grid parity,” the point at which solar-generated electricity costs the same as power generated by fossil fuels offered by utilities without subsidies.138
137 Solar Energy Industries Association, U.S. Solar Market Insight 2nd Quarter 2011: Executive Summary, 2011.
138 A number of different definitions for grid parity are used in the industry. The point at which solar-generated power is regarded as cost-competitive with conventional power offered through the grid differs depending on electricity costs in a given region. Parts of Europe, where electricity rates are much higher than in the U.S., grid parity can be reached sooner. The DoE’s SunShot Initiative measures grid parity in terms of “the installed system as a whole,” including costs associated with permitting. A more common understanding views grid parity in terms of electricity cost of between 8 cents and 12 cents per kilowatt hour in the U.S., about the price of power from a natural gas-fired plant. If defined as capacity cost, grid parity is generally defined as $1 per watt during peak demand.
Although there is considerable debate over how soon grid parity can be achieved,139 progress is unmistakable. The cost of installing photovoltaic systems connected to the power grid in the U.S. dropped from an average of $11 per watt in 1998 to $6.20 in 2010. Costs dropped by 17 percent in 2010 alone and by a further 11 percent in the first half of 2011.140 In 1990, solar energy cost between 50 cents and around 65 cents per kilowatt-hour, compared to around 5 to 8 cents utilities charged for conventional power. In 2011, residential rates for solar power were around 21 cents to 27 cents without federal subsidies.141 In some parts of the U.S., such as northern California, solar power already is regarded as economically viable, although further cost reductions and efficiency improvements are needed before it can compete against conventional electricity production in most of the U.S.142 The Department of Energy’s SunShot Initiative sets a target of reducing the total installed cost of utility-scale solar electricity to a “grid parity” rate of around 6 cents per kilowatt-hour without subsidies by 2020, a development that it predicts “will result in rapid, large-scale adoption of solar electricity across the United States.”143
While there are many positive trends, a number of challenges still must be overcome to achieve wide-scale adoption of solar energy in the United States and for the U.S. photovoltaic industry to resume global leadership—
• Inadequate scale: Because the United States accounts for less than 6 percent of global photovoltaic cell and module production, many U.S.based manufacturers lack the scale to compete on cost with highvolume producers in Asia and Europe.144 Scale applies to installation costs as well. It costs only $3.83—about 60 percent less than in the U.S. — to add one watt of capacity for a residential solar system in
139 The nonprofit Prometheus Institute, for example, predicts that two-thirds of the U.S. will have achieved grid parity by 2015. One criticism of grid-parity data presented by solar-industry advocates is that market prices for electricity in most nations ultimately are distorted by government policy, taxes, and subsidies. For a contrarian view of the progress toward reaching grid parity, see Lux Research, “The Slow Dawn of Grid Parity,” 2009.
140 Galen Barose, Naïm Darghouth, Ryan Wiser, and Joachim Seel, “Tracking the Sun IV: An Historical Summary of the Installed Cost of Photovoltaics in the United States from 1998 to 2010,” Lawrence Berkeley National Laboratory, September 2011. This report can be accessed at http://eetd.lbl.gov/ea/emp/reports/lbnl-5047e.pdf.
141 Michael Woodhouse, et. al, “An Economic Analysis of Photovoltaics Versus Traditional Energy Sources: Where Are We Now and Where Might We Be in the Near Future?,” National Renewable Energy Laboratory, presentation at the 37th IEEE Photovoltaic Specialists Conference, Seattle, Wash., June 19-24, 2011.
142 Ibid. Also see presentation by Eric Daniels of BP Solar in National Research Council, The Future of Photovoltaic Manufacturing in the United States, op. cit.
144 See comments by Ken Zweibel of the George Washington University Solar Institute and First Solar CEO Michael J. Ahearn in The Future of Photovoltaic Manufacturing, op. cit.
Germany, for example, mainly due to greater construction efficiencies.145
• Excess global capacity: Explosive growth in the production of solar cells and modules, especially in China, is pushing down world prices for commodity devices.146 While that makes solar power systems less expensive, it is even harder for U.S.-based manufacturers deploying next-generation technologies to compete with low-priced imports using mature technologies.
• Dependence on Subsidies: The relatively high prices of panels and installation means that solar power is not yet cost-competitive with fossil fuels for power generation without public subsidies such as feedin tariffs.147 Those subsidies can change due to policy shifts, making demand hard to predict.
• Intense International Competition: Other nations are investing aggressively in R&D and manufacturing capacity to attain global leadership. With more than 100 manufacturers of photovoltaic cells and more than 400 makers of panels, 148 China accounts for more than half of global production capacity.149 Germany has invested more than €2 billion in public-private photovoltaic R&D and €5 billion in support for manufacturing.150
• Technical challenges: Some industry experts maintain that another technological leap in materials and process technologies is required before solar power can become cost-competitive with carbon-emitting energy.151 Due to the high costs and risk of such R&D, public-private
145 Presentation by Minh Lee of the U.S. Department of Energy in May 24-25, 2011, symposium “Meeting Global Challenges: German-U.S. Innovation Policy” in Berlin, jointly organized by the Germany Institute for Economic Research and the National Academies.
146 For a discussion of the impact of excess Chinese capacity on the world market, see National Foreign Trade Council, “China’s Promotion of the Renewable Electric Power Equipment Industry: Hydro, Wind, Solar, Biomass,” prepared by Dewey & LeBoeuf LLP, March 2010 (http://www.nftc.org/default/Press%20Release/2010/China%20Renewable%20Energy.pdf).
147 Lux Research, op. cit. The same is true for Germany, even though utility electricity prices are higher than in the U.S. and the cost of solar-energy systems lower. See Thilo Grau, Molin Huo, and Karsten Neuhoff, Survey of Photovoltaic Industry and Policy in Germany and China, Climate Policy Initiative Report, DIW Berlin and Tsinghua University, March 2011.
148 ENF counted 102 Chinese manufacturers of cells and 473 panel manufacturers in 2010. ENF, Market Survey: Chinese Cell and Panel Manufacturers, 4th Edition, December 2010. Synopsis on ENF Web site.
149 GTM Research, “U.S. Solar Energy Trade Assessment 2011: Trade Flows and Domestic Content for Solar Energy-Related Goods and Services in the United States,” prepared for Solar Energy Industries Association, August 2011. This report can be accessed at http://www.seia.org/galleries/default-file/Solar_Trade_Assessment.pdf.
150 Grau, Huo, and Neuhoff, op. cit.
151 See presentations by John E. Kelly of IBM and Steven C. Freilich of E. I. du Pont de Nemours and Co. in The Future of Photovoltaic Manufacturing.
consortia of industry, universities, and government agencies may be required.
• Lack of technological standards: The market for photovoltaic products remains divided among several competing technologies with different materials and production processes and no industry-wide roadmap similar to the one adopted by the semiconductor industry in the 1970s. That makes it difficult for companies to decide where to make big investments in R&D and capital equipment with a long-term payoff.
Solar power is among a portfolio of renewable energy sources upon which many nations are counting to reduce their dependence on petroleum and coal and to reduce greenhouse-gas emission. In the United States, these energy goals are regarded as important for the environment, national security, and economic growth.152 President Barack Obama has set a target of boosting the portion of energy consumed in the U.S. coming from renewable sources from 7 percent in 2007 to 25 percent by 2020. Other U.S. targets are to conserve 3.6 million barrels of oil within 10 years and to cut U.S. greenhouse-gas emissions by 83 percent by 2050.153
Although solar power now accounts for just 2 percent of nonhydroelectric renewable energy in the U.S., capacity is expected to increase more than five-fold by 2035.154 “For a long-term, sustainable energy source,” notes the National Academy of Engineering, “solar power offers an attractive alternative” because energy transmitted from the sun is abundant, environmentally clean, and free.155 A strong domestic manufacturing industry for photovoltaic cells and modules is vital in order to dramatically lower the costs of installing solar-power systems in the United States and to keep the U.S. at the technological forefront in new materials and high-tech production
152 See National Academy of Sciences, Electricity from Renewable Sources: Status, Prospects, and Impediments. Washington, DC: The National Academies Press, 2009. See also National Research Council, The National Academies Summit on America’s Energy Future: Summary of a Meeting, Washington, DC: The National Academies Press, 2008. Also see National Research Council, Hidden Costs of Energy: Unpriced Consequences of Energy Production and Use. Washington, DC: The National Academies Press, 2009.
153 For explanation of the role of solar energy in meeting U.S. energy targets, see July 29, 2009, presentation by former Under Secretary of Energy Kristina Johnson in The Future of Photovoltaic Manufacturing.
154 U.S. energy Information Administration, Annual Energy Outlook 2011 (http://www.eia.gov/forecasts/aeo/pdf/0383(2011).pdf).
155 National Academy of Engineering, Grand Challenges for Engineering, Washington, DC: The National Academies Press, 2008, (http://www.engineeringchallenges.org/Object.File/Master/11/574/Grand%20Challenges%20final%20book.pdf).
processes. A large-scale domestic manufacturing and installation industry for solar power and other renewable energies also is a potential source of millions of new jobs.156
Although physicists had experimented with materials to achieve the “photovoltaic effect” of converting light to electricity since the mid-19th century,157 the photovoltaic industry didn’t emerge until the U.S. space race with the Soviet Union. Researchers at Bell Laboratories were the first to develop a working photovoltaic using silicon in 1954. The Signal Corps of the U.S. Army recognized the potential of solar-powered energy for satellites. The California Institute of Technology and the Jet Propulsion Laboratory led early development of photovoltaic cells, with the National Science Foundation as the lead funding agency.158 In 1958, solar cells were first deployed on the Vanguard I, which operated for eight years.
Serious research aimed at developing commercially viable solar power for energy began soon after the 1973 Arab oil embargo, when more than 100 representatives from government, industry, and academia convened at a conference in Cherry Hill, N. J., to develop a 10-year technology roadmap for crystalline silicon photovoltaic technology.159 Attendees called for $295 million for crystalline silicon technology research. Silicon Valley replaced Los Angeles as the base of the leading U.S. solar-energy cluster, with national laboratories and other public research institutions playing a heavy role in development of the U.S. industry.160
156 John Lushetsky of the U.S. Department of Energy noted that solar energy has created around 200,000 jobs in Germany. If solar energy would be adopted on a similar scale in the United States, a much larger market, it therefore would create an estimated 1 million jobs. From remarks at Nov. 1, 2010, “Meeting Global Challenges: U.S.-German Innovation Policy” symposium in Washington organized by the National Academies and DIW Berlin. Also see July 29, 2009, remarks by U.S. Senator Mark Udall (D-Colo.) in The Future of Photovoltaic Manufacturing.
157 French physicist Alexandre Edmond Baquerel is credited with discovering the photovoltaic effect in 1839 when he observed that illumination increases the conduction of electricity from metal electrodes and electrolyte. The first solar cell, made with selenium, was developed in 1877.
158 For a history of the development of photovoltaic cells, see John Perlin, From Space to Earth: The Story of Solar Electricity, Ann Arbor: AATEC Publications, 1999. Also see Steven S. Hegedus and Antonio Luque, “Status, Trends, Challenges and the Bright Future of Solar Electricity from Photovoltaics,” in Antonio Luque and Steven Hegedus, editors, Handbook of Photovoltaic Science and Engineering, Chichester, England: John Wiley & Sons, 2003. The Department of Energy also offers a concise timeline of the history of solar technology, (http://www1.eere.energy.gov/solar/pdfs/solar_timeline.pdf).
159 For an account of the Cherry Hill conference, see Henry W. Brandhorst, Jr., “Photovoltaics—The Endless Spring,” NASA Technical Memorandum 83684. (http://ntrs.nasa.gov/archive/nasa/casi.ntrs.nasa.gov/19840023712_1984023712.pdf).
160 For a good overview of the role of U.S. public research institutions in the origins of the photovoltaic industry, see “Phech Colatat, Georgeta Vidican, and Richard K. Lester, “Innovation
In 1978, Congress introduced tax credits to spur installation of solar panels and other renewable energy sources as part of the National Energy Act. The following year, President Jimmy Carter proposed a solar strategy to “move our Nation toward true energy security and abundant, readily available energy supplies.”161 Measures included installing 350 solar systems on government facilities and buildings, establishment of a Solar Bank, and $1 billion in federal investment in the form of tax credits, loans, and grants.162 President Carter set a goal of the sun meeting 20 percent of U.S. energy needs by 2000, and even had solar panels installed on the White House roof. The Reagan Administration dismantled much of the Carter Administration’s solar programs on the grounds that the government should limit involvement in programs that should be led by the private sector.163 A sharp drop in oil prices in the early 1980s also undermined political support for large investments in renewable energy.
U.S. companies still had a commanding world lead in the nascent photovoltaic industry through the mid-1990s. Then Japanese companies developed solar panels that could be installed on residential rooftops, which SunPower CEO Dick Swanson described as the “killer app.”164 The Japanese government also created a large market for photovoltaic panels by introducing financial incentives through the Residential PV System Dissemination Project in 1994. Japan became the global market leader in 1999 as the U.S. share steadily declined.165 [See Figure 6.5] Sanyo acquired a leading U.S. photovoltaic producer, Solec International, while another leader, Solar Technology International, was sold to Atlantic Richfield and then to Siemens. European nations such as Germany and Spain then took the lead by introducing high feedin tariffs,166 driving the second wave of industrial expansion. Companies such as Suntech, Q Cells, and Solarworld became new leaders in a market that had been dominated by Sharp, Sanyo and Kyocera. The rapid market expansion in
Systems in the Solar Photovoltaic Industry: The Role of Public Research Institutions,” Massachusetts Institute of Technology Industrial Performance Center, Working Paper Series, MITIPC-09-007, June 2009 (http://web.mit.edu/ipc/research/energy/pdf/EIP_09-007.pdf).
161 Carter Administration initiatives included enlarging the budget for NREL, which was established in 1974 as the Solar Energy Research Institute.
162 President Jimmy Carter, “Solar Energy Message to the Congress,” June 20, 1979, http://www.presidency.ucsb.edu/ws/index.php?pid=32503&st=foreign+oil&st1=#axzz1OmYKbnIb.
163 For a discussion of the Reagan Administration’s solar-energy policy, see J. Glen Moore, “Solar Energy and the Reagan Administration,” Mini Brief Number MB81265, Science Policy Research Division, Congressional Research Service, the Library of Congress, archived Sept. 23, 1982 (http://digital.library.unt.edu/ark:/67531/metacrs8799/m1/1/high_res_d/MB81265_1982Jul26.pdf).
164 From presentation by SunPower CEO Dick Swanson in The Future of Photovoltaic Manufacturing.
165 See presentation by Robert Margolis of the National Renewable Energy Laboratory in The Future of Photovoltaic Manufacturing.
166 Under a feed-in tariff system, utilities are required to purchase electricity generated by renewable sources under long-term contracts at premium rates high enough to guarantee a financial return for developers of power systems. The costs are generally passed on to rate-payers.
Europe also triggered a surge of venture capital and private equity investment in U.S. photovoltaic companies over the past decade, although they located most of their initial large-scale manufacturing in Asia and Europe. The volume of venture capital investment in clean energy technology has increased year-overyear in every year since 2005, except 2009 when VC investment fell off sharply. Venture capital investments in U.S. cleantech companies totaled $4.3 billion in 2011, an all-time high, although this figure is comprised substantially of ongoing investments, the funding of start-ups having declined.167
There currently are two main types of solar power technologies: flat plates and concentrators. The latter technology uses mirrors or lenses to concentrate solar thermal energy onto a small area. Solar thermal plants transfer the heat from concentrated sunlight into a hot working fluid, which powers a generator that produces electricity. Concentrated photovoltaic systems concentrate sunlight onto a small, highly efficient PV semiconductor device. Because mirrors or lenses can only concentrate an image of the sun, their use tends to be limited to cloudless regions with abundant, direct sunlight, such as deserts in the U.S. Southwest.
Flat plates are the far more widely used. The most common photovoltaic cells use polycrystalline materials to absorb and release photons that then are converted into electrical current. Polycrystalline cells, which account for 90 percent of the market, typically are laminated on large glass panels. Because their weight and rigidity, panels with polycrystalline cells tend to be manufactured close to the end market, and installation accounts for around half of the system cost. The other main type of photovoltaic cells use materials such as cadmium telluride or gallium arsenide to absorb light that are deposited in ultra-thin layers on more flexible materials, such as thin sheets of metal or polymers. Thin-film cells on the market yield less power, but are far lighter and easier to install than rigid polycrystalline cells, so their overall cost can be lower.168 Thin-film is expected to rise from around 50 megawatts of generating capacity installed in 2007 to around 4.5 GW (gigawatts) by 2012.169 Other competing technologies, such as dye-sensitized and nano-particle photovoltaics,
167 “There is No Cleantech Venture Bust, Sorry Wired,” Cleantech (February 14, 2012); “Busting the Myth of the ‘Clean-tech’ Crash,” Notes (February 15, 2012).
168 For a description and explanation of tradeoffs, benefits, and costs of each type of solar technology, see National Academy of Sciences, Electricity from Renewable Sources: Status, Prospects, and Impediments. Washington, DC: The National Academies Press, 2010.
169 From presentation by Mark Hartney of FlexTech Alliance in The Future of Photovoltaic Manufacturing, 2010.
are at an early stage of development. Commercialization will require much more technology development.170
The United States still has considerable advantages that could enable it to regain global leadership. The U.S. remains a global leader in photovoltaic research, with at least 11 public-private collaborative R&D consortia involving universities, industry, and government.171 The U.S. photovoltaic industries includes some 2,000 companies spanning the photovoltaic supply chain, including manufacturers of polysilicon, polymers, wafers, cells, modules, invertors, glass, and production equipment in 17 states. They include First Solar, the world’s leading producer of thin-film photovoltaic modules and a top provider of complete solar power systems. First Solar plans to boost production capacity to 2.8 gigawatts by the end of 2012.172 San Jose-based SunPower,173 a major producer of polycrystalline cells, also is regarded as the world technology leader.174
In fact, although the United States is a major net importer of solar modules, it enjoyed a $1.9 billion trade surplus in solar products in general in 2010, led by shipments of polysilicon—the feedstock for crystalline silicon photovoltaics—and capital equipment.175 SunPower President Emeritus Richard Swanson estimates that 70 percent of the content in a SunPower solar module is American, even though the device itself is manufactured in the Philippines. Most of the polysilicon, for example, comes from Hemlock Semiconductor Corp. in Saginaw, Mich., the world’s largest producer. Most of the equipment used to make wafers is made by U.S. companies such as Applied Materials. As production becomes more automated, Mr. Swanson said more work can shift to the United States if there is a sufficient market.176 Many U.S. plants have
171 For an extensive description of collaborative photovoltaic research programs in the U.S., see Charlie Coggeshall and Robert M. Margolis, Consortia Focused on Photovoltaic R&D, Manufacturing, and Testing: A Review of Existing Models and Structures, National Renewable Energy Laboratory, Technical Report NREL/TP-6A2-47866, March 2010, (http://www.nrel.gov/docs/fy10osti/47866.pdf).
172 First Solar Web site.
173 In April 2011, SunPower agreed to sell a 60 percent stake to Total of France for $1.38 billion but says its headquarters will remain in San Jose.
174 SunPower modules boast the highest efficiency rate in the industry, 22.4 percent, according to the DoE.
175 GTM Research, “U.S. Solar Energy Trade Assessment 2011: Trade Flows and Domestic Content for Solar Energy-Related Goods and Services in the United States,” prepared for Solar Energy Industries Association, August 2011. This report can be accessed at http://www.seia.org/galleries/default-file/Solar_Trade_Assessment.pdf.
176 Swanson presentation, op. cit.
struggled in the past year, however, due to plunging prices caused by a dramatic expansion of capacity in China.177
Although a number of U.S. module plants have closed because they could not compete on costs, others have opened or are expanding.178 As of 2009, a study by MIT counted 46 solar-cell manufacturing establishments in California alone, and half of those are in the Bay Area. MIT estimated 100 start-ups that had received some funding.179 Of $2.3 billion in venture capital and privateequity investment in solar companies in 2010, the U.S. accounted for 76 percent.180
Another big U.S. advantage is ample sunlight, the basic resource of solar energy. Most territory in the Western and Southern states receives as much sunlight as Spain or more. Parts of the Southwest can receive the equivalent of more than 2,000 kilowatts of energy per square meter each year.181 The “sunniest” part of Germany receives 60 percent of the energy that reaches the “sunniest” spot in the U.S.182
Finally, the U.S. market has growth momentum at a time when new solar installations in Germany, Italy, and Spain have slowed due to reductions and caps in feed-in tariffs.183 In 2010, photovoltaic demand in Germany reached nearly 8 gigawatts, compared to less than 1 gigawatts in the U.S. Demand for new capacity in the U.S. is projected to leap fivefold by 2013, however, while investment in Germany is set to decline below U.S. levels.184
Unlike many other nations, the U.S. does not have a feed-in tariff system requiring utilities to purchase solar and other renewable energies at a premium rate. Instead, the U.S. allows companies to accept either a tax credit or cash grant to cover 30 percent of investment in solar power-generation systems.185 The extension of tax credits to utilities has led to a dramatic increase
177 Swanson presentation, op. cit.
178 Solar Energy Industry Association and GTM Research, “U.S. Solar Market Insight: 2010 Year in Review,” Executive Summary, 2010 (http://www.seia.org/galleries/pdf/SMI-YIR-2010-ES.pdf.
179 Colatat, Vidican, and Lester, op. cit.
180 Source: Department of Energy based on Bloomberg NEF data.
181 National Renewable Energy Laboratory data.
182 Presentation by John Lushetsky of the U.S. Department of Energy at first Germany symposium.
183 Lux Research, op. cit.
184 Source: Department of Energy citing 2011 data from Barclays Capital, Citigroup Goldman Markets, Goldman Sachs, Jeffries & Co., and other sources.
185 Section 1603 of the American Recovery and Reinvestment Act of 2009 (H. R. 1) allows companies to claim either a cash grant or tax credit to cover portions of investments in renewable energy technologies. For solar energy projects, the grant is equal to 30 percent of investment in solar-energy property. The program has been extended through 2011.
in solar power systems for electrical grids. Pike Research predicts utility-scale capacity will surpass 10,000 megawatts by 2016. 186
The federal government also supports the photovoltaic industry with R&D funding, an R&D tax credit, a manufacturing tax credit for renewable energy equipment, and loan guarantees187. Combined with incentives offered by states, government assistance has considerably narrowed the cost gap between building a photovoltaic plant in the U.S. and China that had been created by Chinese incentives.188
Federal funding for Department of Energy solar-energy programs has risen sharply in recent years. In 2008, the budget of the U.S. Department of Energy’s Solar Program was doubled, to around $160 million a year, from levels of 2001 through 2007. The program received another $100 million boost in 2009 under the American Recovery and Reinvestment Act, with around half of that amount targeted at photovoltaic technologies.189 The federal government has awarded $6.4 billion in grants in lieu of tax credits to renewable energy projects, with $593 million, or 9 percent, of that money going to solar energy.190
The government also has expanded the breadth of its assistance to the industry, not only funding research and demonstration projects but also helping finance manufacturing projects from the prototype phase to full-scale production. The DoE has awarded $1.1 billion in manufacturing tax credits to the solar industry, with $601 million going to plants for polysilicon cells and $264 million to thin-film.191 In addition, the DoE has committed $12 billion in loan guarantees to 15 solar projects as of mid-2011 that have enabled companies to raise $35 billion in private investment.192 For instance, in June 2011 the agency announced a $150 million loan guarantee to 1366 Technologies, a company based in Massachusetts that developed a method for casting 200micron wafers rather than slicing them from a block, a breakthrough that the company says could reduce the manufacturing cost of a solar cell by 40 percent. The head of the DoE’s loan guarantee program said the loan illustrates the agency’s strategy to “develop a cradle-to-market innovation strategy that helps
186 Asmus and Wheelock, op. cit.
187 The loan guarantee program established pursuant to the 2009 stimulus legislation expired in 2011.
188 John Lushetsky, manager of the Department of Energy’s Solar Energy Technology Program, estimated that Chinese incentives had made the cost of building a photovoltaic plant there $131 million less expensive in the U.S. Incentives offered in the U.S. have closed that gap by approximately $96 million. From remarks in Nov. 1, 2010, “Meeting Global Challenges: U.S. German Innovation Policy,” op. cit.
189 Lushetsky presentation in The Future of Photovoltaic Manufacturing, op. cit.
190 U.S. Department of Treasury data cited in Minh Lee presentation in May 24-25, 2011, symposium “Meeting Global Challenges: German-U.S. Innovation Policy” in Berlin, op. cit.
192 The loan guarantees were awarded through the 1705 Loan Guarantee program established under the American Recovery and Reinvestment Act of 2009. The program is to end on Sept. 30, 2011. Data on private investment from Solar Energy Industries Association.
identify transformative technologies early in the process, and makes it possible for them to grow and mature rapidly, and leapfrog many of the steps along the way.” 193 Conditional loans included $1.2 billion to SunPower, and $967 million to AguaCaliete. Finalized loans included $1.45 billion to Abengoa, $1.37 billion to BrightSource Energy, $535 million to Solyndra, and $400 million to Abound Solar. 194 Several of these loans have generated political controversy, however, especially after the bankruptcy of Solyndra in September 2011.195 The loan guarantee program expired in 2011.
The DoE also has launched a Photovoltaic Technology Incubator program to accelerate commercialization of solar technologies. The incubator program has provided $59 million in support to 31 small businesses working on a range of promising solar technologies. These companies have in turn raised $1.3 billion in private capital and created 1,200 jobs.196 The DoE continues to run the PV Manufacturing R&D project, started in 1991 with federal funds matched by an equal amount of private-sector money, and the Technology Pathway Partnerships program, which supports early-stage collaborations between universities and industry and also is funded by both the federal government and private sector.197
A new DoE initiative, SunShot, focuses on accelerating cost reduction in solar energy so that it is comparable to other sources of electricity on utility power grids. The target is to lower solar power costs to 6 cents per watt of installed capacity. Achieving that target would require a 75 percent reduction of the cost of systems compared to 2010. In 2008, the systems price for solar power came to $8 per watt of installed capacity. By 2010, system cost had dropped to $3.80 per watt, which included $1.70 for the photovoltaic module, 22 cents for power electronics, and $1.88 for the “balance of systems,” which includes installation and permitting costs. The $1 per watt target envisions module prices dropping to 50 cents per watt through a combination of efficient improvements and manufacturing-cost reductions and 40 cents for “balance of system” costs, with the cost of power electronics dropping to 10 cents.198 As part of the initiative, the DoE has awarded $27 million in grants “to encourage cities and counties to compete to streamline and digitize permitting processes, such as
193 Matthew L. Wald, “Maker of Silicon Wafers Wins Millions in U.S. Loan Support,” New York Times, June 17, 2011.
194 See presentation by Kevin Hurst of the Office of Science and Technology Policy in The Future of Photovoltaic Manufacturing for explanation of DoE programs.
195 See Eric Lipton and John M. Broder, “IN Rush to Assist Solar Company, U.S. Missed Signs,” New York Times, Sept. 22, 2011, and Melissa C. Lott, “Solyndra —Illuminating Energy Funding Flaws?” Scientific American, September 27, 2011.
196 Minh Lee presentation, op. cit.
197 For an explanation of these DoE programs, see Margolis presentation, op. cit.
198 DoE SunShot press release, “DOE Announces $27 Million to Reduce Costs of Solar Energy Projects, Streamline Permitting and Installation,” June 1, 2011, (http://www1.eere.energy.gov/solar/sunshot/about.html).
through information technology and streamlined local zoning and building codes.”199
To sustain this positive momentum and enable solar energy to attain grid parity with fossil fuels will require sustained federal support and expanded public-private collaboration, especially given the intensifying competition for global leadership. Following are some major challenges confronting the industry.
Wide-scale deployment of solar power in a region lowers both the production and installation costs of photovoltaic modules. A rule of thumb used in the photovoltaic industry is that each doubling of production capacity leads to an average 17 percent drop in manufacturing costs.200 Production scale, therefore, has a major influence on which companies have competitive advantage. Dramatic increases in production have helped drive First Solar’s production cost for thin-film downs down from $1.40 per watt in 2006 to 77 cents in 2010,201 for example. Because it usually is more cost-efficient to manufacture modules close to where they are installed, wide deployment also helps determine which nations or regions have comparative advantage in manufacturing.
But the very recent build-up in capacity in Asia, primarily China, has led to a divergence between where photovoltaics are produced and consumed. This has resulted in a large increase in trade flows in solar cells and modules. In 2010, for example, most new capacity was installed in Europe, principally Germany, while most supply was from Asia, primarily China. [See Figure 6.7]
Because the U.S. accounts for less than 6 percent of the world’s installed solar capacity, the U.S. photovoltaic industry is at a competitive disadvantage against other several nations and regions in Europe and Asia. In 1997, U.S. manufacturers supplied 42 percent of the world market for photovoltaic models. In 2010, the U.S. produced only 6 percent while China and Taiwan accounted for 54 percent of the world market and Europe 15 percent.202
199 DoE SunShot Initiative Web site. See http://www1.eere.energy.gov/solar/sunshot/news_detail.html?news_id=17408.
200 Source: National Renewable Energy Laboratory cited in “Partnering for Photovoltaics Manufacturing in the United States,” overview chapter in The Future of Photovoltaic Manufacturing.
201 First Solar, “First Solar Overview,” 2011, on company Web site at Web site, http://www.firstsolar.com/Downloads/pdf/FastFacts_PHX_NA.pdf.
202 Paula Mints, Navigant Consulting, “Reality Check: The Changing World of PV Manufacturing,” Electro IQ, October 3, 2011.
[See Figure 6.5] As of 2009, Chinese companies accounted for half of Applied Materials’ order book for wafer-making equipment and 35 percent of equipment to produce photovoltaic cells, compared to just 5 percent by U.S.-based companies. What’s more, some of the capacity by U.S. companies was being built in China. 203 The size of plants being built offshore also is larger than those being constructed in the United States. A number of manufacturers in China and India are adding production lines that will bring their capacity to 1 gigawatts to 2 gigawatts.204 A one-gigawatt thin-film plant consumes enough glass to cover seven and a half football fields and can reduce production costs by around 20 percent, noted Mark Pinto of Applied Materials. Of new facilities capable of building solar panels the size of garage doors, Mr. Pinto added, China accounted for three in 2009, Taiwan one, India one, Abu Dhabi one, and Europe the rest. None were being built in California.205
Installation costs also drop with scale. A comparison with Germany illustrates the point. Germany had 7,408 megawatts of installed capacity as of mid-2011 compared to only 878 megawatts in the United States. Because Germany also has a smaller territory, capacity is more geographically concentrated. There are 53,728 watts of solar-generation capacity per million square feet in Germany and 90 watts per capita. In the U.S., there are 248 watts per million square feet of photovoltaic panels and only 2.8 watts per capita. As a result, it costs $3.83 to add one watt of capacity in Germany, compared to $6.50 in the U.S., mainly due to greater efficiencies in construction and permitting.206
The large scale of solar programs and well-established bureaucratic environment in other nations also makes installing solar systems much less expensive than in the United States. The non-module cost has dropped from around $7 per watt of capacity in Italy to around $2.50 since 1999. In Germany, non-module costs are around $2 per watt. In the United States, by contrast, installation costs have risen in the past three years, to nearly $5 per watt. 207
The smaller scale of the U.S. industry also makes it harder for domestic manufacturers to compete with inexpensive modules flooding in from large plants in China, where rapid expansion of the photovoltaic industry has led to a supply glut. DeutscheBank projected serious global oversupply in 2011 due to a 53 percent increase in shipments compared to only 3 percent growth in demand.
203 Presentation by Mark Pinto of Applied Materials in The Future of Photovoltaic Manufacturing.
204 Sandra Enkhardt, “Small Island with Big Prospects,” PV Magazine, December 2010 (http://download.taipeitradeshows.com.tw/2010/pv/news/201012_PV_Magazine.pdf).
204 Industrial Technology Research Institute Web site.
206 Minh Lee presentation, op. cit.
207 From presentation by Karsten Neuhoff of the DIW Berlin Climate Policy Initiative at the May 24-25, 2011, symposium “Meeting Global Challenges in Berlin.
FIGURE 6.7 Photovoltaic demand is concentrated in Europe but supply is concentrated in Asia – 2010.
SOURCE: Demand: EPIA, Global Market Outlook for Photovoltaics Until 2015, April 2011; Supply: Paula Mints, “Reality Check: The Changing World of PV Manufacturing,” Electro IQ, October 3, 2011 and SunPower and First Solar annual reports.
Average prices for crystalline silicon modules are expected to drop to $1.50 per kilowatt with the “potential to go much lower, and quickly.” 208 While that makes solar power systems less expensive, it is even harder for U.S.-based manufacturers deploying next-generation technologies to compete with lowpriced imports.209 U.S. imports of Chinese-made photovoltaic modules surged by more than 300 percent from 2008 to 2010, when the U.S. imported more than $1.4 billion worth. In the first eight months alone, Chinese module exports to the U.S. passed $1.6 billion.210 This surge, which helped push module prices down
208 Peter Kin and Hari Polavarapu, “Solar Photovoltaic Industry 2011 Outlook—FIT Cuts in Key Markets Point to Over-Supply,” Deutsche Bank, January 5, 2011 (http://www.strategicsiliconservices.com/wpcontent/uploads/2010/07/2011solarpvindustryoutlook.pdf).
209 For a discussion of the impact of excess Chinese capacity on the world market, see National Foreign Trade Council, “China’s Promotion of the Renewable Electric Power Equipment Industry: Hydro, Wind, Solar, Biomass,” prepared by Dewey & LeBoeuf LLP, March 2010 (http://www.nftc.org/default/Press%20Release/2010/China%20Renewable%20Energy.pdf).
210 The Coalition for American Solar Manufacturing, “U.S. Manufacturers of Solar Cells File Dumping and Subsidy Petitions Against China,” press release, October 19, 2011.
by 40 percent in 2011, prompted a group of U.S. crystalline silicon cell and module makers to file a dumping suit with the U.S. Department of Commerce and the International Trade Commission.211
Shipping glass panels from China, however, is costly and presents logistical risks. Companies, therefore, are likely to continue building capacity in nations where they are installed. The best way for the U.S. to regain leadership role in photovoltaic manufacturing is to become a market leader in installations, according to several industry experts. “Manufacturing will occur in the U.S. once we have adequate markets,“ said Ken Zweibel of the George Washington Solar Institute.”212 First solar CEO Michael J. Ahearn said the main reason that companies like his put most of their production offshore is because other countries have built a large market, while the U.S. market is “fragmented and sporadic.”213 Said Eric Peeters of Dow Corning: “It is going to be impossible to create a U.S.-based domestic industry if there is no domestic demand. This must be stimulated at every level, from residential to utility scale.”214
If other nations and regions race too far ahead of the United States in establishing large-scale photovoltaic manufacturing industries, several industry experts warn, it may be difficult for the U.S. to regain competitiveness. Bob Street of the Palo Alto Research Center drew a parallel with the flat-panel display industry. The U.S. pioneered many of the early technologies for liquidcrystal displays, but the industry ended up being dominated by Japanese, South Korean, and Taiwanese companies. As U.S. plants closed, the substantial ecosystem of local equipment manufacturers, materials suppliers, and technology developers went with them, Mr. Street explained. Because flexible photovoltaic technology also requires large, capital-intensive plants and similar clean-room production expertise used in new displays, Mr. Street warned that well-capitalized Asian companies are in position to take over the industry when the market is ripe.215
Intense Global Competition
The competition over 21st century leadership in photovoltaic technology and manufacturing is intense. Established players such as Germany are investing to become leaders in innovation and to broaden their value chains. Relative newcomers such as China, Taiwan, India, and South Korea are investing aggressively to expand their global market share in crystalline silicon cells and modules and to catch up with Western companies in new thin-film technologies. They also are rapidly expanding deployment of solar power. Both
212 Zweibel presentation, op. cit.
213 Ahearn presentation, op. cit.
214 Presentation by Eric Peeters of Dow Corning in The Future of Photovoltaic Manufacturing.
215 From presentation by Bob Street of Palo Alto Research center in The Future of Photovoltaic Manufacturing.
India and China, for example, have announced goals of having 20 gigawatts of installed capacity by 2020, three times more than the entire capacity in the world in 2009.216
Government financial incentives have played a big role in promoting the rapid growth of manufacturing and installation of photovoltaic systems in Europe and Asia.217 Because solar-generated power is more expensive than electricity produced by coal, oil, or natural gas, most governments subsidize solar energy to make up all or part of the cost difference. Also, installing solar-power systems entails high up-front costs with a long-term payoff for consumers and businesses. Therefore, many governments offer assistance to assure that financing is available at affordable interest rates. At least 64 nations have some type of policy to promote renewable energy generation.218 This has resulted in a rapid acceleration of solar power installations in the last decade. Cumulative installed photovoltaic capacity increased from 1.5 GW in 2000 to 6.9 GW in 2006, a compound average annual growth rate (CAGR) of almost 30 percent. Yet growth was even faster in more recent years as the CAGR accelerated to 54.2 percent from 2006 to 2010. [See Figure 6.8] The 16.6 GW of photovoltaic capacity added worldwide in 2010 equaled almost three-quarters of all the capacity added prior to that year.
Germany has set the global pace. The country has invested more than €2 billion in public-private photovoltaic R&D and €650 million in support for manufacturing, for example.219 Germany also has been a leader in subsidizing installation of solar-power systems, starting with low-interest loans from the state-owned German Development Bank through the 1,000 Solar Roofs Initiative in 1991 to introduction of some of the world’s most generous feed-in tariffs in 2000 (see discussion of feed-in tariffs below). Indeed, the U.S. Department of Energy estimates that Germany spends €4.6 billion on support for all kinds of renewable energies a year, equal to 0.2 percent of GDP. If the U.S. government devoted a similar share of GDP to renewable energy, it would invest $29 billion a year.220
Germany has been nurturing regional photovoltaic industrial clusters for the past two decades. In 2007, Germany also established a federally funded research consortium called SolarFocus that includes 12 universities and research institutions and 12 industrial partners. Foreign companies may participate as long as they manufacture domestically.221
216 See Vikas Bajaj, “India to Spend $900 Million on Solar,” The New York Times, November 20, 2009, and Steven Mufson, “Asian Nations Could Outpace U.S. in Developing Clean Energy.” Washington Post, July 16, 2009.
217 Zweibel, op. cit.
218 Ahearn, op. cit.
219 Grau, Huo, and Neuhoff, op. cit.
220 Lee Minh presentation, op. cit.
221 Coggeshall and Margolis, op. cit.
FIGURE 6.8 Worldwide annual and cumulative installed photovoltaic capacity, 2000 to 2010.
SOURCE: EPIA, Global Market Outlook for Photovoltaics Until 2015, April 2011.
China already is the world’s biggest exporter of crystalline silicon cells and modules. Now, it is determined to become a leading market as well. In 2009 alone,, China invested $34.6 billion in renewable energy industries—more than any other nation and nearly twice as much as the United States,222 – with solar power commanding greater attention.
Under the Golden Sun program, China is investing some $7.4 billion to install more than 600 megawatts of photovoltaic capacity, with at least 20 megawatts in each province. Through the Ministry of Finance, Ministry of Science and Technology, and the National Energy Administration, projects receive cash subsidies to cover 50 percent of investment in commercial buildings, 50 percent for large-scale photovoltaic systems connected to the power grid, and 70 percent of costs for remote rural residential buildings. In
222 Pew Charitable Trusts, “Who’s Winning the Clean Energy Race? Growth, Competition and Opportunity in the World’s Largest Economies,” 2010. This report can be accessed at http://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/Global_warming/G20%20Report.pdf.
addition, the cost of power is subsidized.223 The Golden Sun subsidy “is so large that it is virtually certain to increase the demand for solar power generation equipment,” according to a National Foreign Trade Council analysis.224 As of mid-2011, 294 projects had been approved. In addition to these subsidies, feedin tariff programs have been implemented in districts of Shanghai, Inner Mongolia and Gansu Province.225
China also offers many forms of support to photovoltaic manufacturers. For example, producers can access cash grants of between ¥200,000 and ¥300,000 ($30,900 to $46,300) available to high-tech startups that are less than three years old with no more than 3,000 employees. Large “demonstration projects” by manufacturers get grants of up to ¥1 million. The China Development Bank, meanwhile, offers low-interest loans of several billion dollars for major production plants. The bank reportedly provided $30 billion in low-cost loans to photovoltaic manufacturers in 2010.226 A number of Chinese provinces offer further incentives, including refunds for interest on loans and electricity costs, 10-year tax holidays, loan guarantees, and refunds of valueadded taxes.227 To open its production plant in China, Massachusetts-based Evergreen Solar was reported to have received $21 million in cash grants, a $15 million property tax break, a subsidized lease worth $2.7 million, and $13 million worth of infrastructure such as roads. 228
Such subsidies have spurred massive expansion of production capacity. By the first half of 2009, some 50 Chinese companies were constructing, expanding or preparing polycrystalline silicon production lines. Capacity for 2010 was forecast rise from 60,000 tons to more than 140,000 tons, even though much of that capacity is not being utilized.229
China’s domestic photovoltaic industry has another major advantage in that government procurement rules require that products required for “government investment projects” be purchased from domestic sources unless they are unavailable. Purchases of imported equipment require government
223 Grau, Huo, and Neuhoff, etc.
224 National Foreign Trade Council, “China’s Promotion of the Renewable Electric Power Equipment Industry: Hydro, Wind, Solar, Biomass,” prepared by Dewey & LeBoeuf LLP, March 2010 (http://www.nftc.org/default/Press%20Release/2010/China%20Renewable%20Energy.pdf).
225 For details of Chinese subsidies to photovoltaic plants, see Grau, etc.
226 Stephen Lacey, “How China Dominates Solar Power: Huge Loans from the Chinese Development Bank are Helping Chinese Solar Companies Push American Solar Firms Out of the Market,” Guardian Environment Network, guardian.co.uk, September 12, 2011.
228 Presentation by Doug Guthrie of George Washington School of Business, April 26, 2011, George Washington University Solar Institute conference.
229 Jiao Ming, “Photovoltaic Bubble Shattered in China,” China Development Gateway, August 28, 2009, chinagate.cn (http://en.chinagate.cn/features/earth/2009-08/28/content_18419484.htm).
approval.230 China is requiring that at least 80 percent of the equipment for its solar power plants be domestically produced.231 China’s policies are the subject of trade friction. The U. S. is investigating a comprehensive trade case filed by United Steel Workers, for example, alleging that China’s subsidies of renewable energies constitute unfair trade practices.232
Taiwan is leveraging its advantage as a leader in both semiconductor and flat-panel display manufacturing, which use similar production processes to those used in making both crystalline silicon and thin-film cells, to rival China as a photovoltaic exporter. Taiwan ranks behind only China in crystalline crystalline silicon cells, with some 230 companies across the entire supply chain,233 and is projected to add around 13 gigawatts of capacity by the end of 2012. Three companies, Gintech, Motech, and Solar Power, each are building 1.2 gigawatts to 2.2 gigawatts in new production lines.234 Industry consortia organized through Taiwan’s Industrial Technology Research Institute are developing a range of processes for thin-film cells and printable photovoltaic cells,235 technologies that also are being developed by Taiwanese producers of digital displays and solid-state lighting devices. Government incentives for manufacturers include a five-year tax holiday, credits that cover 35 percent of R&D and training, accelerated depreciation for facilities, and low-interest loans.236
Taiwan also offers an array of subsidies to accelerate domestic deployment of solar power, targeting 10 gigawatts of capacity. The government funds 100 percent of some photovoltaic projects in remote areas, as well as several “solar city” and “solar campus” demonstration projects. 237 Under the recently passed Renewable Energy Development Act, Taiwan implemented a feed-in tariff.
South Korea has recently joined the race to become a global photovoltaic leader. Solar power plays a big role in plans announced in 2009 to
230 “Opinions on the Implementation of Decisions on Expanding Domestic Demand and Promoting Economic Growth and Further Strengthening Supervision of Tendering and Bidding Projects,” Circular 1361, May 27, 2009.
231 See Keith Bradsher, “China Builds High Wall to Guard Energy Industry.” International Herald Tribune, July 13, 2009.
232 Sewell Chang and Keith Bradsher, “U.S. to Investigate China’s Clean Energy Aid,” New York Times, October 15, 2010.
233 Joeng Shein Chen, “Taiwan PV Roadmap: Strategies for PV Industry and Market Growth,” Taiwan Photovoltaic Industry Association, November. 17, 2009, (http://www.mbipv.net.my/dload/NPVC%202009/Dr.%20Joeng-Shein%20Chen.pdf).
234 Enkhardt, op. cit.
235 Industrial Technology Research Institute Web site.
236 Ministry of Economic Affairs, “Taiwan Photovoltaic Industry Analysis & Investment Opportunities,” Department of Investment Services, (http://investtaiwan.nat.gov.tw/doc/industry/05Photovoltaic_Industry_eng.pdf).
237 Chen, op. cit.
invest $84.5 billion, or 2 percent of GDP annually, over five years in environment-related and renewable energy industries.
South Korea also is rapidly expanding domestic photovoltaic production, targeting 5 percent of the world market.238 Hyundai Heavy Industries is building a $200 million plant to make thin-film cells using copper, indium, gallium, selenide materials with France’s Saint-Gobain.239 In all, South Korea wants to capture 10 percent of global green technology market by 2020. 240 The government will require companies to source 10 percent of their electricity from renewable sources by 2022.241
The Feed-in Tariff Debate
The development of photovoltaic power requires policy measures to address the fact that it is more expensive than electricity generated through conventional means242. The most common measure is the feed-in tariff, a subsidy scheme under which utilities are compelled to purchase power generated by solar installations at a specified rate. The added costs generally are passed on to rate-payers or absorbed by the government. The United States introduced the first feed-in tariffs for renewable energy in 1978.243 Germany introduced feed-in tariffs in 1990. While these early experiments led to some installation of wind turbines, they were not very successful in advancing solar power. The big boost came when Germany revised its feed-in tariffs in 2000 under the Renewable Energy Sources Act.244 The prices utilities paid were based on the cost of
238 PV Magazine, “Korea Expected to Pick up the PV Pace,” January 12, 2011.
239 PV Magazine, “Korea: Construction of 100 MW Thin Film Plant Underway,” April 18, 2011.
241 For a comprehensive explanation of South Korea’s renewable energy strategy, wee United Nations Environment Programme, Overview of the Republic of Korea’s National Strategy for Green Growth, April 2010 (http://www.scribd.com/doc/30498024/UNEP-Report-on-Korea-s-GreenGrowth).
242 In order for photovoltaics to increase penetration of the electric power generation market financing, power-purchase arrangements and tariffs must be structured in a way that solar-generated power is cost competitive with other firms of power generation from the perspective of utilities. Various schemes have been employed to address the fact that PV electricity is much more expensive than electricity generated by conventional means. These usually involve some combination of subsidies/incentives and favorable feed-in tariffs based on the assumption that PV electricity will become less costly relative to conventional electricity over a long time horizon (e.g. 20 years). See generally Steve O’Rourke, “Financing Photovoltaics in the United States,” in National Research Council, The Future of Photovoltaics Manufacturing in the United State (Washington, DC: The National Academies Press, 2011) pp. 88-93.
243 The Public Utilities Regulatory Policy Act of 1978 required utilities to purchase power from independent power producers at rates designed to reflect the cost a utility would incur to provide the same electricity generation. The tariffs led to some wind installations but few solar-power systems and fell out of favor when oil prices dropped.
244 The Renewable Energy Sources Act (EEG), passed in 2000 and renewed twice, offers feed-in tariffs for all kinds of renewable energy sources, including wind, water, biomass, biogas, geothermal
generating power for each renewable source, depending on the size of the project, plus a profit margin. Purchase guarantees were good for 20 years. Utilities were allowed to generate their own renewable energy. Italy, France, Spain, the Czech Republic, Japan, the United Kingdom, Greece, and the Canadian province of Ontario followed with their own feed-in tariffs.
Feed-in tariffs are popular with the financial community because the rate of return on a solar power system is guaranteed. This largely explains why Europe accounted for two-thirds of installed capacity in 2009, while the U.S., which lacks federal feed-in tariffs, had a small share, explained First Solar CEO Ahearn.245 Another advantage of the German feed-in tariffs system, noted Lee Minh of the Department of Energy, is that the purchase-agreement process and incentive structure are far simpler and more stable than in the U.S., which has a mix of subsidies that vary from state to state.246
High electricity prices cannot be borne indefinitely by industry and consumers, however. Therefore, the ideal feed-in tariff program triggers rapid expansion of supply, enabling manufacturers and installers to attain economies of scale and to lower prices. Tariff rates must be adjusted frequently as the prices of photovoltaic modules and installation decline. If subsidies—and investor profits—are too high, then investors rush to build as much capacity as possible, straining government budgets. Also, high tariffs can reduce motivation to find innovative ways to lower costs.247
Germany’s experience with feed-in tariffs illustrates the benefits and risks of the system. Between 2003 and 2009, Germany spent €4.26 billion for feed-in tariffs.248 The program was so popular that it triggered rapid expansion in the global industry, causing prices to drop sharply as manufacturers added scale. The program also helped establish a globally competitive manufacturing industry. Germany has 70 manufacturers of silicon, wafers, solar cells, and modules that registered more than €9.5 billion in sales in 2008. Germany also has 100 photovoltaic equipment manufacturers with €2.4 billion in 2008 sales. The photovoltaic manufacturing sector employs more than 57,000 people.
One downside of German feed-in tariffs is that consumers pay much more for electricity than in the United States. German households paid an average of around 35.5 cents per kilowatt-hour for electricity as of January 2011, nearly twice as much as British households249 and an average of just 11.2
and solar. But it grants the highest feed-in tariffs to electricity produced by photovoltaic devices. Tariffs are paid for 20 years.
245 Ahearn presentation, op. cit.
246 Minh presentation, op. cit.
247 From Nov. 1, 2010, presentation by Bernard Milow, director of energy program at the German Aerospace Center, at “Meeting Global Challenges” symposium.
248 Grau, Huo, and Neuhoff, op. cit.
cents in the U.S.250 Also, the photovoltaic industry tends to go from boom to bust. When tariffs are high compared to the cost of building capacity, developers race to build solar power systems. Tariffs for solar power ranged from 41 cents to 51 cents per kilowatt-hour in 2009. In 2010 alone, a record 7.1 gigawatts of capacity was installed. When tariffs drop, however, so does investment.251 Germany is reducing tariff rates sharply. Nations such as Spain, Italy, France, and the Czech Republic also reduced feed-in tariffs, enacted moratoriums on new connections, or set limits on new capacity. As a result, global growth in the industry slowed dramatically in flagship nations like Germany and Spain in 2011.252
While the U.S. federal government does not offer feed-in tariffs, many states do. Such tariffs have been enacted in California, Maine, and New Hampshire, and have been proposed in Washington, Minnesota, Wisconsin, Michigan, Florida, New York, Indiana, and Illinois. In addition, 29 U.S. states have set renewable portfolio standards, with 16 of them requiring solar.253 Such state programs are lowering costs of installing solar power systems, but one downside is that the wide variety of federal and state incentives makes investment processes very complex.254
Some industry experts maintain that another technological leap in materials and processes is required before solar power can become costcompetitive with carbon-emitting energy. John Kelly of IBM contended that incremental improvements, such as better production equipment or modules built from larger sheets of glass, won’t boost energy output of photovoltaic panels fast enough to meet current implementation targets for solar power. The cost gap “has to be closed by leaps of technology,” says Mr. Kelly. Nor can the U.S. remain competitive in manufacturing just by investing in more automation. “You have to innovate faster than anyone else,” he said.255
Dramatically improving thin-film photovoltaic technology presents particularly hard challenges. In addition to inventing new substrates, for example, thin-film panels require a flexible, durable, protective front that keeps out moisture as effectively as glass. “From a polymer perspective, this is essentially unheard of,” explained Steven C. Freilich of E. I du Pont de Nemours Co. Freilich of du Pont. Breakthroughs can only be achieved through substantial
250 U.S. Energy Information Administration data as of March 11, 2011.
251 See Lux Research, op. cit., and Neuhoff presentation, op. cit.
252 Kim and Polavarapu, op. cit. See also James Montgomery, “Europe’s 2011-2012 PV Installs: Two Tales of Growth,” Renewable World.com, February 1, 2012.
254 Lushetsky comments at Nov. 1, 2010, “Meeting Global Challenges” symposium.
255 Kelly remarks in The Future of Photovoltaic Manufacturing, op. cit.
investments and cooperative research in “radical new materials and processes,” he said.256
Research to develop new materials that then can be produced in mass volume is expensive and risky, however. The challenge is made even more difficult by that fact that there are few widely accepted standards for materials and production processes. Unlike integrated circuits, most of which have been based on complementary metal-oxide-semiconductor (CMOS) technology for decades and are made from silicon wafers with defined parameters, the photovoltaic market is not yet well defined. John Lushetsky of the DoE compared the two industries in this way: “Put simply, the IC industry is one materials set with an infinite number of circuits; the PV industry is one circuit with an infinite number of materials.”257 There is a mix of large and small photovoltaic companies operating in different markets with different manufacturing targets.258 Photovoltaic cells also are used in a wide range of formats. Nor does the industry have a well-defined technology roadmap delineating engineering benchmarks well into the future.
The inability to predict the technological direction of photovoltaic cells and the lack of widely accepted standards hampers efficiency in the industry and drives up cost and can result in uneven quality, according to Eric Peeters of BP Solar.259 It also makes it difficult for materials companies to decide where to make expensive long-term R&D bets, Mr. Freilich of DuPont said. Among other materials used in the industry, DuPont makes polymers for coatings for roll-toroll processing of thin-sheet modules only 20 nm thick “From a material supplier’s standpoint, there can be a disincentive to do truly revolutionary work when you see this rapid change in markets and technologies,” Mr. Freilich said. “We can do it, but the investment is so great, and the rate of return so dependent on the longevity of the technologies, that you’re not going to see the kind of innovation you need.”
The United States has an opportunity to reassert global leadership in the photovoltaic industry. It will require considerable national investment and public-private collaboration. The following are some of the major policy options facing the U.S.260
256 Freilich presentation, op. cit.
257 Lushetsky presentation, op. cit.
258 See comments by Bettina Weiss of Semiconductor Equipment and Materials International (SEMI) in The Future of Photovoltaic Manufacturing.
259 Peeters presentation in The Future of Photovoltaic Manufacturing, op. cit.
260 See Powell, Buonassisi, et al, Crystalline Silicon Photovoltaics, a Cost Analysis Framework, Energy and Environmental Science (Feb 2012), 5, 5874,
One of the most urgent decisions facing the U.S. is whether to extend tax credits for grid-connected solar installations, which currently are set to expire at the end of 2016. There was wide agreement among STEP Board symposium participants that federal incentives are necessary to promote the industry until the time when the costs of solar-power systems drop to the point where they can compete on their own with electrical generation from fossil fuels. Although technological advances are needed to bring down costs, so is greater domestic scale. Public commitment to continuing the expansion of solar power also is important to assure companies that are making long-term investments in research, new materials, and manufacturing capacity. “Government incentives that build market size and industry support can help industry make the right decision about programs on one side or another of that very gray line,”261 Mr. Freilich of DuPont said.
There also is considerable agreement in the photovoltaic industry that, like most other industrial and industrializing nations, the U.S. should consider requiring utilities to purchase solar power and other renewable energy. A number of states, such as California, are pushing ahead with feed-in tariff requirements, meaning that the incentive structure varies from state to state. The question is whether there will be sufficient political support for a German-style feed-in tariff requiring utilities to buy solar power at premium prices if that leads to substantially higher electricity rates for businesses and consumers. The more likely option is that the U.S. continues to stimulate the solar industry’s expansion through a combination of tax incentives, loan guarantees, and other measures.
Although a number of industry experts stress that the best way to promote a domestic photovoltaic manufacturing industry is to stimulate domestic demand, public incentives also are regarded as necessary given the intense global competition for large-scale production capacity. The tax difference along between the U.S. and Asia is such that were a company to move 20 percent of its photovoltaic production to the U.S. its profitability would drop by 14 percent, estimated Steve O’Rourke of Deutsche Bank Securities.262 In nations such as China and Germany, manufacturers receive tax credits rather than pay taxes, he noted. Malaysia, which has an ambitious goal to become the
http://pubs.rsc.org/en/journals/journalissues/ee, which is discussed in, Kevin Bullis, Technology Review: http://www.technologyreview.com/energy/39771/,2012.
261 Freilich presentation, op. cit.
262 Presentation by Steve O’Rourke of Deutsche Bank Securities in The Future of Photovoltaic Manufacturing.
second largest solar producer in the world by 2020, provides a 15-year tax holiday for solar manufacturing profits.263
It will be difficult, and probably unnecessary, for the U.S. to match the kinds of generous concessions to manufacturers offered in nations such as China. The U.S. can close the competitiveness gap, however, with a combination of federal and state support. Steven O’Rourke of DeutscheBank Securities estimated that a modest drop in U.S. tax rates, a 27-cent-per-watt manufacturing credit for equipment produced in the U.S., and a subsidy for capital spending, such as offered by Germany, would essentially close the profitability gap.264 Accelerated depreciation and state incentives also can make a difference, he said.
Another issue is financing where major unmet needs exist. The normal timeframe for venture capital investments of 5 to 7 years is not applicable to complex and capital intensive energy technologies subject to a long regulatory approval process. Although the U.S. accounts for most of the world’s venture capital and private-equity investment in the photovoltaic sector, it is much harder for such companies to borrow funds. SBIR loan levels are completely inadequate. Of the $44 billion in debt financing provided to the solar industry around the world in 2010, the U.S. accounted for only 9 percent.265 Mark Pinto of Applied Materials suggested that the U.S. create a clean-energy bank that offers low interest rates.266 First Solar CEO Ahearn said it would be preferable to making loans available to all photovoltaic manufacturers rather than have the Department of Energy decide which applicants receive loan guarantees, a process that he said had little visibility. “I think we’d be much better off if the government simply enabled all banks to make loans that the market would direct to the right place,” Mr. Ahearn said.267
Several U.S. regions are working to develop strong photovoltaic manufacturing clusters. Northern Ohio, for example, has long been an important center of innovation in solar cells and panels. The University of Toledo has had a strong basic research program and spun off several important startups, including thin-film cadmium pioneers Glasstech and Solar Cells Inc.,268 which
263 “Reasons Behind Malaysia’s Surprising Success in Solar Industry Beating Larger Rivals USA and Japan,” Green World Investor, October 26, 2010 at http://www.greenworldinvestor.com/2010/10/26/reasons-behind-malaysias-surprising-success-insolar-industry-beating-larger-rivals-usa-and-japan/. The tax holiday has been cited by First Solar as a factor in its expanding manufacturing presence there. See, e.g., First Solar, Inc., “First Solar Announces 100MW Manufacturing Plant Expansion in Malaysia,” News Release, January 25, 2007.
265 Department of Energy estimate based on Bloomberg NEF data. See Minh Lee presentation, op. cit.
266 Mark Pinto remarks, op. cit.
267Ahearn remarks in The Future of Photovoltaic Manufacturing.
268 Both Glasstech and Solar Cells were launched by Harold McMaster (1916-2003), a physicist who was regarded as the king of the Toledo glass industry.
later became First Solar. Manufacturing, however, has tended to move to other U.S. regions or overseas. Northern Ohio’s tradition as a leader of the U.S. glass and polymer industries also meant that the region was rich in expertise in materials and developing panels.269 In 2007, the state government awarded $18.6 million to establish the Wright Center for Photovoltaics Innovation and Commercialization at the University of Toledo. The state also mandated that 25 percent of Ohio’s electricity come from renewable sources by 2025, formed a public-private partnership aimed at commercialization, and built a demonstration plant for new solar technologies at a military base.270
Given the expense, high risks, and long-term payoff of photovoltaic R&D, a number of industry experts said that public-private collaboration is required. While lacking a comprehensive research consortium and technology roadmap, the U.S. has many smaller research consortia supported by federal, state, and industry funding that focus on photovoltaic R&D as well as manufacturing and testing.
Universities lead several of consortia in addition to Ohio’s Wright Center. The Silicon Solar Consortium, for example, combines the research efforts of four universities—North Carolina State, Georgia Tech, Lehigh, and Texas Tech—with several national laboratories and 15 companies. The consortium, which aims to reduce costs and boost performance of silicon photovoltaic materials, cells, and modules, is one of several dozen interdisciplinary Industry-University Collaborate Research Centers that receive seed funding from the National Science Foundation.271 The Center for Revolutionary Solar Photoconversion conducts basic and applied research for third-generation photon conversion. Several Colorado universities and the National Renewable Energy Laboratory, based in Boulder, Colorado, lead the consortium. Corporate members include Applied Materials, DuPont, Lockheed Martin, Sharp, and Motech. The Energy and Environmental Technology Application Center, based at the University of Albany, has 50 corporate partners that include IBM, Applied Materials, SEMATECH, Global Foundries, and Tokyo Electron. 272 DOE National Laboratories such as Sandia and Oak Ridge
269 See presentation by Norman Johnson of Ohio Advanced Energy in The Future of Photovoltaic Manufacturing.
270 For an overview of Ohio’s photovoltaic cluster activities, see remarks by U.S. Rep. Marcy Kaptur (D-OH) and Norman Johnson of Ohio Advanced Energy Association in National Research Council, The Future of Photovoltaic Manufacturing in the United States, Summary of Two Symposia, C. Wessner, Rapporteur, Washington, DC: The National Academies Press, 2011.
271 Presentation by Thomas Peterson of the National Science foundation Directorate of Engineering in The Future of Photovoltaic Manufacturing.
272 Profiles of these photovoltaic consortia are found in Coggeshall and Margolis, op. cit.
also have extensive photovoltaic programs and collaborate with industry and academia.
Photovoltaic research consortia in the U.S. have several limitations, however. Because the industry is still young and highly fragmented, there are many competing technologies and a lack of manufacturing standards. “There are dozens of groups and subgroups within the PV industry,” according to a report by the National Renewable Energy Laboratory. “This diversity makes the development of any industry-wide consensus, such as manufacturing standards, extremely difficult.” Because there are so many evolving technologies, there is good reason for companies to be protective of their intellectual property, the report added. “As a result, companies are less likely to participate in forums that could expose their proprietary information.”273 As a result, research collaborations tend to be on narrowly focused topics that meet the interests of companies funding the research.
Several industry executives questioned whether a SEMATECH -like research consortium would work for the photovoltaic industry. Doug Rose of SunPower noted that because CMOS already had become standard at the time SEMATECH was created, semiconductor manufacturers could share intellectual property that accelerated development of manufacturing processes on a predictable schedule and instead differentiate themselves on the basis of chip design. “There’s no analog to that in PV,” he said.274 Mr. Pinto of Applied Materials agreed that the lack of an established common technology make such collaboration problematic. 275
Still, industry experts say there are many other opportunities for precompetitive research collaboration among manufacturers. Photovoltaic companies could share work on processes such as modeling, simulation, reliability, and characterization, for example.276 Consortia also could accelerate solutions to technical issues such as metrology, material handling and deposition handling and in developing low-cost installation methods.277
Others in the industry believe such consortia could help. A technology roadmap similar to the one created by the semiconductor industry through SEMATECH278 in the 1980s for lithography would help companies choose among the many options for major R&D investments, Mr. Freilich of DuPont said.279 Governments in the European Union, China, India, Australia, and other
274 Comments by Doug Rose of SunPower in The Future of Photovoltaic Manufacturing.
275 Mark Pinto comments in The Future of Photovoltaic Manufacturing.
277 Lushetsky, op. cit.
278 For an explanation of how the SEMATECH experience may be applicable to the photovoltaic industry, see presentations by Eric Lin of the National Institute of Standards and Technology in The Future of Photovoltaic Manufacturing.
279 Freilich, op. cit.
nations, meanwhile, are organizing efforts to define industry standards. Eric Daniels of BP Solar described standards as “critical in building consumer confidence.”280
Having ceded the once-dominant position it held in the 1980s and 1990s in the photovoltaic industry to countries in Europe and Asia, the United States has an opportunity to regain global leadership. As European nations reduce feed-in tariffs, the U.S. has become one of the strongest growth markets for new solar capacity. The U.S. also remains at or near the forefront in photovoltaic research, and therefore could be the source of game-changing breakthroughs that lower the cost of solar power and dramatically improve efficiency.
Maintaining this momentum, however, will require consistent and substantial public financial support at a time of intense budget pressure. Expanding the U.S. market for solar power is essential to achieving the economies of scale needed to reduce production and installation costs of photovoltaic systems and to assure that the U.S. has a competitive manufacturing base in the face of intensifying international competition. Because solar power is not yet cost-competitive with electricity generated from fossil fuels, continued subsidies for solar-power installations are required. Given the scale, complexity, and long time frames needed for innovation solar technologies to come to market, public assistance, such as loan guarantees, early-stage capital, and R&D and manufacturing tax credits also will be required to enable fledgling U.S. photovoltaic companies to bring their products to market and establish domestic production at a time when Asian and European governments are increasing their aid to domestic manufacturers.
In this regard, public-private research collaboration can help accelerate the pace of photovoltaic innovation and reduce the costs and risks of developing the materials and production processes needed to make possible the widespread deployment of solar power.
American researchers have long been at the technological forefront of lithium-ion batteries,281 which produce electrical charges by lithium ions that
280 Daniels presentation, op. cit.
281 Development of the first commercially viable lithium-ion battery is generally credited to M. Stanley Whittingham of the State University of New York at Binghamton while working for Exxon Research & Engineering Co. in the 1970s. Other important breakthroughs were achieved by Bell Labs and teams led by University of Texas at Austin physicist John B. Goodenough. See J. B.
flow inside a liquid electrolyte mixture between anode and a cathode plates. But Sony Corp. was the first to market lithium-ion batteries in 1991. Japan has targeted lithium-ion batteries for vehicles since 1992, when the Agency of Industrial Science and Technology and the Ministry of International Trade and Industry established the New Sunshine Program.282 Unable to compete, many U.S. battery makers and start-ups failed in the 1990s, including Duracell, Polystor, Motorola, MoliCell, Electro Energy, and Firefly.283
Until just a few years ago, the United States faced the prospect of entering the age of electrified transportation without a domestic advanced battery manufacturing industry. Virtually all lithium-ion cells and battery packs—projected to be a nearly $8 billion industry by 2015284 and the dominant technology for electrified cars and trucks of the future—were manufactured in Asia285. There were many promising U.S. start-ups with innovative lithium-ion battery technology for cars, utility storage, and other uses, but few could raise funds to build capacity in America.
That situation began to change dramatically in 2009. The federal government awarded $2.4 billion in grants under the American Recovery and Reinvestment Act to dozens of makers of lithium-ion cells, battery packs, and materials.286 A host of other state and federal financial incentives, such as manufacturing tax credits and research grants, provided further assistance. The federal government also boosted the U.S. market for advanced batteries with incentives for consumers who bought electrified cars, subsidies for solar and wind-power projects, and the $25 billion in debt capital made available under
Goodenough and M.S. Whittingham, Solid State Chemistry of Energy Conversion and Storage, American Chemical Society Symposium Series #163, 1977.
282 Japan’s New Sunshine Program established a 10-year research program for lithium-ion batteries that set very ambitious targets for the time for power output, battery density, and cycle life. See Rikio Ishikawa, “Current Status of Lithium-Ion Production in Japan,” Central Research Institute of Electric Power Industry, Tokyo (http://www.cheric.org/PDF/Symposium/S-J3-0003.pdf).
283 Presentation by Mohamed Alamgir of Compact Power at the National Research Council conference on Building the U.S. Battery Industry for Electric-Drive Vehicles, op. cit.
284 John Gartner and Clint Wheelock, “Lithium Ion Batteries for Plug-in Hybrid and Battery Electric Vehicles: Market Analysis and Forecasts,” executive summary, Pike Research, 2009.
285 Although some question whether trucks, given their weight, are appropriate subjects for electrification, Taiwan is developing extended-range electric busses and electric commercial vehicles. “Taiwan Unveils First Electric Smart Commercial Vehicle,” Asia Pulse (September 28, 2010); “Taiwan Alliance, Set Up to Develop Extended-Range Electric Buses,” Taiwan Economic News (May 4, 2011).
286 The American Recovery and Reinvestment Act of 2009 (P. L. 115-5) is a $787 billion economic stimulus packaged signed by President Barack Obama on Feb. 17, 2009. See Department of Energy, “The Recovery Act: Transforming America’s Transportation Sector—Batteries and Electric Vehicles,” July 14, 2010 (http://www.whitehouse.gov/files/documents/Battery-and-Electric-VehicleReport-FINAL.pdf).
the Advanced Technology Vehicles Manufacturing (ATVM) Loan Program to help automakers produce more energy-efficient cars.287
From less than two battery-pack plants before 2009, 30 now have been built or are under construction by the end of 2010. If all of these facilities are built as planned, the U.S. is on track to have 40 percent of global capacity to produce lithium-ion batteries for automobiles and utility storage by 2015.288 As of mid-2010, some 16 battery-related factories that are expected to create 62,000 jobs in five years were being built just in Michigan, which aggressively targeted the industry with $1 billion in grants and tax credits.289
A major issue now is whether there will be enough demand for hybrid and electric vehicles for manufacturers to operate this capacity profitably.290 Under most current projections of U.S. sales of hybrid and plug-in electric cars, the American battery industry will experience considerable overcapacity for several years.291 Globally, significant excess capacity is expected to persist through 2015, resulting in significant consolidation. According to one projection, five producers will control 80 percent of the automotive lithium-ion battery market by 2015: AESC (a joint venture between Renault-Nissan and NEC), LG Chem, Panasonic, A123 ,and SB LiMotive (a joint venture between
287 The Advanced Technology Vehicles Manufacturing (ATVM) Loan Program was authorized under Section 136 of the Energy Independence and Security Act of 2007. It makes available $25 billion to provide debt capital to the U.S. automotive industry for projects that help vehicles manufactured in the U.S. meet higher millage requirements and lessens U.S. dependence on foreign oil.
288 U.S. Department of Energy, “The Recovery Act: Transforming America’s Transportation Sector—Batteries and Electric Vehicles”, July 14, 2010. Also see Rod Loach, Dan Galves, Patrick Nolan, “Electric Cars: Plugged In. Batteries Must be Included,” Deutsche Bank Securities Inc., June 9, 2008.
289Data from remarks by Michigan Economic Development Corp. CEO Greg Main in National Research Council, Building the U.S. Battery Industry for Electric-Drive Vehicles: Progress, Challenges, and Opportunities, a symposium convened by the NRC STEP board in Livonia, MI on July 26-27, 2010, in cooperation with the Michigan Economic Development Corp. and the U.S. Department of Energy.
290 As the Wall Street Journal has noted, the short term “mismatch between production and market demand” has led to lags in predicted job creation and production goals. In addition, it reports that “Ener1 Inc., a battery maker that built a plant in Indianapolis with $54.9 million of a $118 million government grant, sought bankruptcy protection earlier this year.” See Wall Street Journal, “Car Battery Start-ups Fizzle,” May 31, 2012.
291 The Boston Consulting Group projects overcapacity in the U.S. industry from 2012 through 2015. See Boston Consulting Group, “Batteries for Electric Cars: Challenges, Opportunities, and the Outlook to 2020,” accessible at http://www.bcg.com/documents/file36615.pdf. Battery industry consultant Menachem Anderman also contends the U.S. battery sector will face enormous overcapacity. See Anderman comments in St. Petersburg Times PolitiFact.com, “David Axelrod says U.S. will have 40 percent of global market for advanced batteries by 2015,” St. Petersburg Times PolitiFact.com http://www.politifact.com/truth-o-meter/statements/2010/jul/15/davidaxelrod/david-axelrod-says-us-will-have-40-percent-global-/.
Samsung and Bosch).292 Another question is whether the U.S. industry will be able to compete in high-volume manufacturing with bigger, well-funded Asian battery producers who by some estimates have a 10-year lead.293 The nascent U.S. advanced battery industry is at its “most critical stage of development,” according to A123 Systems executive James M. Forcier.294
The advanced battery industry is regarded as strategic because it addresses several critical national needs, such as reducing greenhouse-gas emissions and dependence on imported oil. Advanced batteries are the enabling technology for electrified vehicles. The transportation sector accounts for twothirds of U.S. petroleum consumption. The 240 million vehicles on U.S. roads, in turn, consume two-thirds of fuel used for transportation.295 Utilities also require advanced batteries for storing energy generated by solar farms and wind turbines.
The U.S. military regards advanced batteries as important as well. Lightweight, rechargeable batteries could greatly extend the range of combat vehicles, support the ever-growing energy needs of modern weapons and surveillance systems, and ease the logistical challenges of hauling fuel to battle zones on long convoys of trucks. Such batteries would considerably lighten the heavy loads of equipment carried by soldiers in the field.296 The U.S., which has one of the world’s largest military vehicle fleets, has committed to cutting its fuel consumption by 20 percent in the next 10 to 15 years.
A domestic advanced battery industry also is strategically important for the future global competitiveness of America’s automotive industry. Battery cells and packs are regarded as “the new power trains” of electrified automobiles, just as internal-combustion engine designs and technology are core to gasoline-powered cars, noted Eric Shreffler of the Michigan Economic Development Corp.297 Reliance on foreign battery technology and products, some fear, could put competitiveness of the U.S. auto industry at risk. U.S. Senator Debbie Stabenow (D-MI) stated that “building the next generation of
292 Roland Berger Strategy Consultants, “Global Study on the Development of the Automotive Liion Battery Market,” Press Release, September 6, 2011.
293 Estimate from battery industry analyst Menachem Anderman, ibid.
294 Presentation by James M. Forcier of A123 Systems at the National Research Council conference on Building the U.S. Battery Industry for Electric-Drive Vehicles, op. cit.
295 Data cited in presentation by Patrick Davis of the U.S. Department of Energy in Building the U.S. Battery Industry.
296 Presentations by Grace Bochenek and Sonya Zanardelli of the U.S. Army Tank and Automotive Research, Development, and Engineering Center at the National Research Council conference on Building the U.S. Battery Industry for Electric-Drive Vehicles, op. cit.
297 Presentation by Eric Shreffler of the Michigan Economic Development Corp. at the National Research Council conference on Building the U.S. Battery Industry for Electric-Drive Vehicles, op. cit.
energy-efficient vehicles is do-or-die for all of the automakers, for the state of Michigan, and for America.”298
Decades of experience in mass-producing rechargeable lithium-ion batteries for consumer electronic products such as cell phones and portable computers, however, have given Japanese, South Korean, and now Chinese companies a formidable edge.299 While reliable estimates of production are difficult to come by, in part because of the lack of standard definitions and measurement techniques, the consulting firm GBI Research has estimated that only about 2 percent of advanced batteries were produced outside of Japan, South Korea, and China in 2009.300 [See Figure 6.9] The United States produced only an estimated 1 percent of lithium-ion batteries.301
Large Asian producers also are more vertically integrated and better capitalized than most U.S. competitors. For example, South Korea’s LG Chem, the world’s third-largest producer of rechargeable lithium-ion batteries, is backed by the $113 billion LG Group. Having such deep pockets is important “to survive in this industry,” explained Mohamed Alamgir, CEO of Compact Power, a U.S. unit of LG Chem. The Korean company plans to invest $1 billion over five years in battery R&D. Due to the LG Group’s chemical businesses, LG Chem also has proprietary materials and processes. LG Chem supplies lithiumion cells to both Ford and GM is and is building a $151 million complex in Michigan that will produce enough cells to make 50,000 vehicle batteries.302
Perhaps more importantly, demand for electrified vehicles has been stronger outside of the United States. Higher fuel prices in Europe and Japan, for example, make hybrids and plug-ins more affordable alternatives. Other nations have moved more aggressively to develop their domestic markets for electrified vehicles with subsidies, government vehicle purchases, and investments in public battery-charging infrastructure. Because of such factors, Pike predicts Asia will account for 53 percent of global demand in 2015—more than the U.S. and Europe combined.303
298 Remarks by U.S. Sen. Debbie Stabenow at the National Research Council conference on Building the U.S. Battery Industry for Electric-Drive Vehicles, op. cit.
299 See, for example, Ralph J. Brodd, “Factors Affecting U.S. Production Decisions: Why Are There No Volume Lithium-Ion Battery Manufacturers in the United States?” ATP Working Paper 05-01, June 2005.
300 GBI Research, Future of Global Advanced Batteries Market Outlook to 2020: Opportunity Analysis in Electronics and Transportation, January 2010. Only 8 percent of the production of advanced batteries in 2009 was estimated to be for hybrid electric vehicles, with the rest destined for mobile phones, laptop computers, tablets and other electronic devices.
301 Data cited in presentation by Patrick Davis, at the National Research Council conference on Building the U.S. Battery Industry for Electric-Drive Vehicles, op. cit. Davis estimated that Japan accounts for 46 percent, South Korea for 27 percent, and China for 25 percent of world production. This compares to the estimates of GBI Research for 2009 of 55 percent for Japan, 25 percent for China and 18 percent for Korea.
303 Forcier presentation, op. cit.
FIGURE 6.9 Advanced battery production by country, 2002 to 2009.
SOURCE: GBI Research, Future of Global Advanced Batteries Market Outlook to 2020: Opportunity Analysis in Electronics and Transportation, January 2010.
The global competition will only grow more intense. Governments around the world are funding aggressive plans to expand their national battery industries and domestic markets for electrified vehicles. For example—
• South Korea has announced that its government and companies will invest $12.5 billion over 10 years in a bid to become the world’s dominant advanced battery producer. The Battery 2020 Project envisions Samsung and LG Chem boosting their combined share of the world lithium-ion battery market, which still is dominated by consumer electronics, to 50 percent. These two companies have aggressively entered the global lithium-ion market for cars. The national plan also calls for adding 1,000 engineers and technicians to R&D efforts to make the country’s supply chain more self-reliant. Currently, South Korea produces less than 20 of the parts and materials used in batteries. The goal is to boost that to 75 percent for domestically made batteries, and to create up to 10 globally competitive battery makers in a
decade.304 The government of South Korea has budgeted $345 million for the research and development of high performance lithium batteries during the period 2011-13305. A Korean company, LG Chem, was selected by General Motors in 2009 to supply advanced batteries for the Chevrolet Volt plug-in vehicle306 LG Chem’s Ochang factory in Korea, opened in 2011, is the world’s largest lithium-ion battery plant for electric vehicles.307
• Japan has launched a number of initiatives to shore up its share of the overall global lithium-ion battery market, which has declined from around 65 percent to 51 percent in the past five years.308 Japan remains the world’s biggest producer of lithium-ion cells for vehicles as well as materials such as cathodes, anodes, electrolytes, and separators.309 Panasonic Corp.,310 the industry leader and supplier to Toyota, is investing aggressively, as are Mitsubishi, Hitachi, Toyota, GS Yuasa, Fuji, and Toshiba.
Japan’s New Energy and Industrial Technology Department Organization (NEDO) has developed an ambitious roadmap that sees lithium-ion as the dominant battery technology until 2030.311 The Ministry of Economy, Trade, and Industry has a roadmap for the automotive industry that calls for up to 50 percent of cars to be “nextgeneration” electrified vehicles and up to 70 percent by 2030.312 Under these roadmaps, the performance of advanced batteries is to increase 1.5 fold by 2015 while costs will drop to one-seventh current levels. By 2030, “innovative batteries” are to offer a seven-fold increase in performance and cost one-fortieth of current models. The roadmap also envisions up to 2 million regular chargers and 5,000 rapid chargers
304Yonhap News Agency, “S. Korea Aims to Become Dominant Producer of Rechargeable Batteries in 2020,” July 11, 2010. Also see Foresight Science & Technology, “Regional Overviews: Asian Industry Overview (China, Japan, Korea),” July 27, 2010.
305 United States and South Korea Invest in Lithium Battery Technology,” The Street (December 22, 2011).
307 “LG Chem Builds World’s Largest Electric-Car Battery Plant,” Thai Press Reports (April 7, 2011).
308 New Energy and Industrial Technology Department Organization data.
309 Andy Bae, “Lithium-Ion Battery Materials: Japan Dominates in the EV Era,” Pike Research, Feb. 4, 2011.
310 Panasonic’s battery unit was named Matsushita Electric Industrial Co. until 2009.
311 New Energy and Industrial Technology Department Organization, “2008 Roadmap for the Development of Next Generation Automotive Battery Technology,” Ministry of Economy, Trade, and Industry.
312 Ministry of Economy, Trade and Industry, “Next-Generation Vehicle Plan 2010 (Outline),” (http://www.meti.go.jp/english/press/data/pdf/N-G-V2.pdf).
deployed across the country to “pave the way for full-scale diffusion.”313 The government’s Fiscal Year 2010 budget includes ¥3 billion for collaborate R&D by the government, industry, and academia for innovative batteries.
• Taiwan seeks to become one of the top three lithium battery producers in the world. This effort is spearheaded by ITRI, which has developed STOBA technology, the first materials technology to enhance the safety of lithium-ion batteries314. STOBA was selected in 2009 for an “R&D 100 Award” by U.S.-based R&D magazine315. In 2008, ITRI collaborated with Taiwan’s Welldone Co. to set-up a joint venture, High-Tech Energy Co., for the production of lithium batteries316. An ITRI battery expert left the institute to head up battery research at the new company317. ITRI formed the High Safety Lithium Battery STOBA consortium of Taiwanese companies to promote the development and diffusion of STOBA-based battery technology. As of 2011, four Taiwanese companies had entered into production of STOBA lithium batteries and the local industry was projected to invest $1.7 billion in 2012.318
• China’s Ministry of Industry and Information Technology has pledged to invest around ¥100 billion ($15.2 billion) by 2020 in subsidies and incentives over 10 years to support new-energy vehicle production. The government set a target of selling 1 million electric vehicles a year by 2015 and 100 million by 2020.319 Currently, the government offers a $9,036 subsidy to buyers of electric cars and subsidizes fleet operations in 25 cities.
The National Development and Reform Commission identifies lithiumion cells and batteries as strategic industries, and several government programs subsidize China’s industry through investment and tax credits, loans, and research grants. Argonne National Laboratories
313 Ministry of Economy, Trade and Industry, “The Industrial Structure Vision 2010,” June 2010 (http://www.meti.go.jp/english/policy/economy/pdf/Vision_Outline.pdf).
314 STOBA stands for self-terminated oligomers with hyper-branched architecture. STOBA is designed to prevent battery explosions. “MOEA to invest more in safe lithium-ion Battery Development,” Central News Agency (January 24, 2010).
315 “ITRI’s Battery Technology Wins Oscar of Invention,” Taipei Times (October 17, 2009).
316 “Welldone Ventures into Production of Lithium Battery,” Taiwan Economic News (July 15, 2008).
317 “Taiwan Spearheads Lithium-Battery Module Effort,” Taipei Times (May 15, 2008).
318 The companies are AMITA Technologies Inc., Ltd., E-one Moli Energy Corp., Synergy Science Tech Corp., and Lion-Tech Co., Ltd. “Taiwan’s Investment in Lithium Batteries to Exceed NT$50 B. in 2012,” Taiwan Economic News (March 22, 2011).
319 People’s Daily, “China to Sell 1 Million New-Energy Cars Annually by 2015,” Nov. 223, 2010. English translation viewable at http://english.peopledaily.com.cn/90001/90778/90860/7207607.html.
estimated China had 60 lithium-ion battery makers as of 2008, including BYD, Tianjin Lishen, CITIC Guoan MGL, and Shenzhen BAK.320 The government’s goal is for Chinese companies to produce enough batteries to supply 150,000 electric vehicles in 2011.321 To give its domestic industry an extra edge, the government essentially requires foreign battery companies to manufacture in China if they wish to sell there.322
• The French Atomic Energy Commission and the French Strategic Investment Fund have formed a joint venture with Renault and Nissan to manufacture lithium-ion batteries. The first plant, a €600 million investment, is to produce up to 100,000 batteries a year by mid-2012 in Flins, France. The venture also is building plants in Portugal, Great Britain, and Tennessee.323 The French company Saft supplies lithiumion batteries to Mercedes, BMW, and Ford.
The French government has set a target of having 2 million electric vehicles on the road by 2020. Government-linked companies such as Electricité de France, SNCG, Air France, France Telecom, and La Poste have committed to buying electric vehicles. In addition, the government is investing €1.5 billion to support up to 1 million public charging stations.324
Even though U.S. battery manufacturing is behind Asia, there is considerable confidence that the American industry has the potential to catch up and become a powerful force. American companies, universities, and national laboratories remain leading innovators of new lithium-ion chemistries, and the coatings and materials used in cathodes and anodes, which are more suitable to the demanding needs of automakers and the military. The U.S. supply chain is growing; a Duke University study identified at least 50 U.S.-based firms that manufacture or conduct R&D at 119 locations in 27 states, including 21 lithiumion battery pack makers relevant to the auto industry.325 Many are increasing the
320 Pandit G. Patil, “Developments in Lithium-Ion Battery Technology in the Peoples Republic of China,” Argonne National Laboratories, ANL/ES/08-1, January 2008.
321 Comments by Minister of Science and Technology Wan Gang cited in Reuters, “China Electric Vehicles to Hit 1 Million by 2020: Report,” October 16, 2010.
322 Forcier presentation, op. cit.
323 Details on Renault Web site at http://www.renault.com/en/capeco2/vehiculeelectrique/pages/sites-de-production.aspx.
324 David Pearson, “France Backs Battery-Charging Network for Cars,” Wall Street Journal, Oct. 1, 2009.
325 See Marcy Lowe, Saori Tokuoka, Tali Trigg, and Gary Gereffi, “Lithium-ion Batteries for Electric Vehicles: The U.S. Value Chain,” The Center for Globalization Governance and Competitiveness, Duke University, Oct. 5, 2010. http://www.cggc.duke.edu/pdfs/LithiumIon_Batteries_10-5-10.pdf.
capabilities to manufacture cells domestically. Dow, A123, and EnerDel acquired or formed strategic partnerships with South Korean manufacturers. While U.S. producers still must import most cathodes and anodes, there are several large American suppliers of electrolytes, separators, and lithium. Companies such as 3M, DuPont, and Dow Kokam, meanwhile, have created divisions to domestically produce anodes and cathodes.
Another cause for optimism is that the advanced battery industry for vehicles is still young and technological standards have not yet been established—leaving room for new entrants. Most analysts predict it will be at least five years before the costs and performance of battery-powered cars reach levels at which they will attain widespread consumer appeal. Pike Research, for instance, predicts hybrid and plug-in electrics will account for only 2 to 3 percent of the U.S. market in 2015 and 5 percent in 2020.326 Although Ford Motor plans to offer a full portfolio of hybrid and plug-in cars and trucks, it projects it will take at least 15 years for electrified vehicles to account for 25 percent of sales.327
Industry experts also believe lithium-ion batteries will have to go through several more generations of technology and manufacturing improvements before they are affordable, efficient, and light enough to win wide consumer acceptance for electric cars. The cost of a 25 kilowatt hybrid battery pack has dropped by more than two-thirds since 1997. Densities and life cycles have more than doubled.328 However, rechargeable auto batteries remain very expensive. Current lithium-ion batteries for cars cost an average of $800 per kilowatt-hour, which translates to more than $20,000 for a battery for an allelectric car such as the Ford Focus and $10,000 to $12,000 for a battery to power a typical hybrid. A general industry assumption is that those costs should drop nearly two-thirds to make such cars affordable enough to convince consumers to abandon gasoline-powered cars. The DOE roadmap calls for cutting costs to $300 per kilowatt-hour by 2014 for plug-in hybrids. Some analysts believe reaching that target will be difficult.329 What’s more, the battery for a Focus weighs 500 pounds, too large to make them easily replaceable, explained Nancy Gioia, Ford Motor’s director of global electrification. Ms.
326 Pike Research predicts the penetration rate of hybrid and plug-in vehicles will be 2.41 percent in 2015.
327 Presentation by Nancy Gioia of Ford Motor at the National Research Council conference on Building the U.S. Battery Industry for Electric-Drive Vehicles, op. cit.
328 Data cited by David Howell of the DOE in his presentation at the National Research Council conference on Building the U.S. Battery Industry for Electric-Drive Vehicles, op. cit.
329 Ford’s goal is for hybrid battery packs to cost $250 per kilowatt hour by 2020. See Gioia presentation, op. cit.
Gioia said it would be five or six years before batteries weighing a more manageable 250 pounds are mass-produced.330
The U.S. government has long supported basic battery research programs. Federal programs now address the full value chain, from accelerating development of commercial products and manufacturing to workforce training and charging infrastructure for electrified vehicles. The Department of Energy’s Vehicle Technologies Program331 has made lithium-ion battery research and development a high priority since 2000.332 The DOE also leads a governmentindustry partnership called the U.S. Advanced Battery Consortium,333 which funds projects aimed at commercializing new battery technologies and sets cost and performance development targets. The Duke University study counted 59 battery-technology development projects underway at U.S. universities and national laboratories such as Lawrence Berkeley, Argonne, Sandia, Oak Ridge, and the National Renewable Energy Laboratory.334
In terms of battery-related R&D, the U.S. has increased spending at every level. The DOE’s Basic Energy Sciences program has expanded research into fundamental materials and electrochemical processes. The DOE funds 60 energy storage R&D projects at 10 national laboratories and 12 universities, as well as projects with companies such as A123, Johnson Controls, and EnerDel. Five of the agency’s 46 Energy Frontier Research Centers are involved with batteries and vehicle technology. The DOE also has awarded a number of research grants to companies and partnerships working on advanced anode, cathode, electrolyte, and lithium materials and processing technologies.335 The DOE’s Advanced Research Projects Agency (ARPA-E) is providing $100 million for “transformational” advanced-storage research, including projects in lithium-air batteries at the Missouri University of Science & Technology, an all330 Gioia, ibid.
330 Gioia, ibid.
331 The Vehicle Technologies Program is administered by the Energy Efficiency and Renewable Energy Office of the Department of Energy. It funds projects aimed at developing “leap frog” technologies that will lead to more energy-efficient and environmentally friendly transportation.
332 Presentation by David Howell of the Department of Energy’s Vehicle Technologies Program at the National Research Council conference on Building the U.S. Battery Industry for Electric-Drive Vehicles, op. cit.
333 The United States Advanced Battery Consortium is a collaborative effort between the Department of Energy and the United States Council for Automotive Research, whose members consist of General Motors, Ford, and Chrysler. The group’s stated mission is “to develop electrochemical energy storage technologies that support commercialization of fuel cell, hybrid, and electric vehicles.”
334 Lowe et al, op. cit.
335 Howell presentation, op. cit.
electron battery at Stanford, and high-performance and ultra-low-cost rechargeable batteries at MIT.336
The 2009 Recovery Act grants to 48 cell, pack, and materials production projects marked the federal government’s biggest move to directly support domestic battery manufacturing and to create jobs. The Advanced Technology Vehicle Manufacturing program also supports batterymanufacturing projects.337 The Advanced Energy Manufacturing Tax Credit program provides credits that cover 30 percent of investments in new, expanded, or refurbished manufacturing plants producing renewable-energy equipment.338 The Obama Administration has expanded the advanced manufacturing tax credit program to $7 billion. Other incentives include the DOE’s 1703 and 1705 loan guarantee programs339 and the 1603 program that gives cash grants in lieu of tax credits for renewable-energy projects,340 many of which use advanced batteries.
To promote market acceptance of electrified cars, the U.S. government has offered $7,500 tax credits to purchasers of plug-in hybrid cars. The DOE is funding projects that will deploy 10,000 electric-drive vehicles, ranging from light-duty trucks to passenger busses, as well as home and public-access chargers across the nation. The DOE’s Clean Cities program works with 86 coalitions in 45 states to introduce electrified vehicles and charging stations.
Tougher federal and state environmental standards further boost the industry. The Obama Administration has set a target of reducing greenhouse-gas emissions by at least 30 percent by 2016.341 California has more aggressive emission targets. The state also is raising requirements on automakers to sell a
337 Davis presentation, op. cit.
338 The Advanced Energy Manufacturing Tax Credit was authorized in Section 1302 of the American Recovery and Reinvestment Act and also is known as Section 48C of the Internal Revenue Code. It authorizes the Department of Treasury to award $2.3 billion in tax credits to cover 30 percent of investments in advanced energy projects, to support new, expanded, or re-equipped domestic manufacturing facilities.
339 Section 1703 of Title XVII of the Energy Policy Act of 2005 (“EP Act 2005”) authorizes the DOE to issue loan guarantees to acceleration commercialization of technologies that “avoid, reduce, or sequester air pollutants or anthropogenic emission of greenhouse gases.” Section 1705 of the EP Act is a temporary program set up under the American Recovery and Reinvestment Act authorizing the DOE to make loan guarantees to renewable energy systems, electric transmission systems and leading-edge bio-fuels projects that commence construction no later than September 30, 2011.
340 Section 1603 of the American Recovery and Reinvestment Act created a program administered by the U.S. Department of Treasury that extends grants covering between 10 percent and 30 percent of the cost of certain renewable-energy property.
341 The U.S. Environmental Protection Agency and the Department of Transportation’s National Highway Traffic Safety Administration (NHTSA) are finalizing greenhouse gas-emission standards for model years 2012 to 2016 under the Energy Policy and Conservation Act. For details, see http://www.epa.gov/oms/climate/regulations/420f10014.htm.
certain number of zero-emission vehicles and wants the carbon-intensity of all fuels to be cut by 10 percent.342
The Defense Department is another major driver of advanced-battery development. The U.S. Army’s Tank-Automotive Command Research, Development, and Engineering Center (TARDEC) and the Army Research Laboratory collaborate with the DOE and industry on several battery, new material, and electrical system R&D projects. TARDEC, based in the Detroit area, oversees maintenance of the Army’s 400,000-vehicle fleet and development of next-generation vehicle capabilities. TARDEC has 60 batteryrelated research projects underway. These projects encompass basic research, applications, manufacturing processes, battery management, and safety.343
The Army has ambitious plans to introduce electrified vehicles into its fleet that require lighter, longer-lasting, more powerful batteries that will not fail in extreme climates and are safe when under heavy fire. Achieving greater energy independence for tactical units is a top priority. The Army wants to boost fuel-efficiency of future light tactical vehicles by nearly 50 percent, to 61 tonmiles per gallon. The Army also wants tanks that can operate two or three days without refueling and Stryker armored cars with cruising ranges of up to 360 miles.344
Dramatic improvements in batteries also are required to meet the everrising power requirements of combat vehicles, weapons, and other equipment. The Army consumes about 20 gallons of gasoline per day to support one soldier in the field. Half of that generates electricity for jammers, remote sensing devices, and other equipment. A high Army priority is to fit combat vehicles with Silent Watch capability, enabling them to operate essential systems while stationary without running the engine. Future light tactical vehicles will require 40 kilowatts of power, compared to 10 kilowatts now, according to Grace Bochenek of TARDEC. Future ground combat systems will need nearly 50 kilowatts. Cost reduction also is critical. Although current lithium-ion battery packs for light tactical vehicles weigh one-third as much as advanced lead-acid batteries and produce 50 percent more power, they cost nearly 20 times as much—around $10,000 each.345
342 Presentation by Daniel Sperling of the University of California at Davis in Building at the National Research Council conference on Building the U.S. Battery Industry for Electric-Drive Vehicles, op. cit.
343 Presentation by Sonya Zanardelli of TARDEC at the National Research Council conference on Building the U.S. Battery Industry for Electric-Drive Vehicles, op. cit.
344 Bochenek presentation, op. cit.
Other branches of the military also have an interest in advanced batteries. The Air Force is developing hybrid systems for unmanned aerial vehicles that operate 40 to 50 hours and need thousands of watts of power, for example. The U.S. Navy is looking to use hybrids for unmanned underwater vehicles, shallow-water combat submersibles, submarine distributed power systems, and surface ship fuel economy. In each scenario for reducing energy use, “batteries run rampant throughout them in almost every capacity,” explained John Pellegrino of the Army Research Laboratory.346
Collaboration with industry and academia is essential if the Army is to achieve its targets. Sharp cost reductions of domestically produced batteries can only be achieved with high-volume production, noted Dr. Pellegrino. Therefore, the Army is forming major partnerships with the private sector and collaborating earlier with industry to make sure new devices are manufacturable. “We don’t want each of those vehicles to cost $1 billion,” Dr. Pellegrino said.
Now that the U.S. has established a manufacturing base for advanced batteries, policymakers face a new set of challenges to make this nascent industry sustainable and globally competitive. If U.S.-based manufacturers cannot survive, the implications for American competitiveness in nextgeneration vehicles may be severe. “While the risk of overcapacity is very real for U.S. firms,” warns the Duke University study, “it may actually pale in comparison to the opposite risk: that of not being prepared to lead this new industry, with serious implications for the U.S. edge in the global automotive sector.”347
The following are several of the key policy issues identified by industry experts—
Accelerate R&D: Not all analysts agree on what kind of battery performance will be required for electrified vehicles to win wide consumer acceptance. Research by the Institute of Transportation Studies at the University of California at Davis, for example, suggests that drivers of plug-in hybrids adapt to limited driving ranges and battery recharging needs the more they drive their cars.348 Other analysts, however, contend that battery cost and performance are not improving fast enough.349
346 Pellegrino presentation, op. cit.
347 Lowe, et al, op. cit.
348 Presentation by Daniel Sperling of the Institute of Transportation Studies at the National Research Council conference on Building the U.S. Battery Industry for Electric-Drive Vehicles, op. cit.
349 Boston Consulting Group, for example, concludes that a “major breakthrough in battery chemistry” that leads to much higher energy densities without increasing costs of either battery materials or manufacturing processes is essential. See Boston Consulting Group, op. cit.
There is general agreement in the industry that the federal government should increase battery R&D through public-private partnerships in order to accelerate advances that will make electrified vehicles viable alternatives to gaspowered cars for the mass market in the near future. Experts also stressed that it is important to increase R&D funding for research into technologies beyond lithium-ion (such as hydrogen fuel cells) that can yield breakthroughs. GM estimates alternative technologies could be commercially viable by 2016.350
Government Purchases: Large-scale production is the surest way of bringing down the costs of advanced battery cells and packs. Government purchases of advanced batteries from U.S. based manufacturers can help the domestic industry to attain economies of scale. A number of industry executives and experts recommend the U.S. government to take stronger action to help stimulate demand enough to launch the industry, as are governments in Asia and Europe. The federal policy priority should shift to “demand-driven stimulation rather than stimulating manufacturing and research,” said Les Alexander, A123’s general manager for government solutions. “We can create the best battery in the world, but without vehicles to put them in, this industry will go back overseas and we will have stimulated another country’s industries,” he said.351 It is important to note that increased sales of electric vehicles in the U.S. will not necessarily result in increased sales of U.S. made advanced batteries.
Government purchases of electrified vehicles are one policy option. Several experts noted that the federal government could help create a substantial market by purchasing U.S.-made hybrid and plug-in electric cars and trucks to replenish the fleet of some 700,000 vehicles owned by the military and agencies such as the U.S. Postal Service. The Advanced Vehicle and Power Initiative, a program backed by TARDEC, calls for replacing 8 percent of the government truck fleet annually with electrified vehicles.352
The General Services Administration recently announced a goal to buy more than 40,000 alternative-fuel and fuel-efficient vehicles to replace aging and less-efficient sedans, trucks, tankers, and wreckers across federal agencies. 353 Such programs may need to be increased and implemented over a longer term. Michael E. Reed of Magna E-Car Systems noted that manufacturers make investments based on a five- to seven-year time horizon.354
350 Smyth presentation, op. cit.
351 Presentation by Les Alexander of A123 at the National Research Council conference on Building the U.S. Battery Industry for Electric-Drive Vehicles, op. cit.
352 See presentation by Bill Van Amburg of CALSTART in Building the U.S. Battery Industry. The Advanced Vehicle and Power Initiative is an effort facilitated by TARDEC to advance collaboration among manufacturers, academia, and government to accelerate deployment of advanced vehicle technologies. A May 25, 2010, draft of AVPI’s policy white paper is available on the CALSTART Website (www.calstart.org/Libraries/HTUF_Documents/AVPI.sflb.ashx).
354 Presentation by Michael Reed of Magna E-Car Systems at the National Research Council conference on Building the U.S. Battery Industry for Electric-Drive Vehicles, op. cit.
Improve Incentives: Federal incentives such as consumer tax credits for purchases of electrified vehicles will likely be required for several more years before the U.S. market is large enough to support fledgling advancedbattery manufacturers.355 Several industry experts suggested the life of such programs be extended.
Current incentive programs also can be improved. Under the current incentive program, for examples, buyers of plug-in hybrids receive a $7,500 credit that they can apply the following year on their income tax return. Such an incentive program would have a more immediate impact if consumers could receive the credit at the time they complete the purchase of the car.356 Some experts also recommend extending more federal incentives to purchasers of hybrid and plug-in commercial trucks.357
Public Charging Infrastructure. There is general agreement among experts that some level of public charging infrastructure is needed to ease socalled “range anxiety” by drivers who fear they will be stranded if their electric car batteries run out of power. Several countries have made nationwide publiccharging networks a top priority.
There is disagreement over how extensive such charging infrastructure must be. Research by the Institute of Transportation Studies, for instance, suggests that most drivers of electric cars do not use public charging stations, and rarely use them at work. Instead, they prefer to charge their cars overnight at home.358 Executives from GM and Ford agreed that public infrastructure is a lower priority than providing affordable battery-charging systems for homes, with charging stations at work sites a next priority. Home chargers for small, basic plug-in hybrids can be installed for less than $200, but units for all-battery electric cars cost around $2,000. Workplace or public stations can cost $50,000 each.359 Several experts suggested that policy should focus on R&D aimed at bringing down the costs of home and workplace charging units.
Developing the Value Chain: Developing a more extensive domestic supply base for advanced batteries also is required to make the U.S. industry globally competitive. Although some companies are investing in U.S. plants to make materials and key components, several industry executives describe the efforts as inadequate. In addition to cathodes, anodes, and separators, according to Johnson Controls executive Mr. Watson, most software and mechanical components must be imported.360 Nor is there a sufficient domestic supply base for key components used in electrified cars. Mr. Reed of Magna E-Car explained
355 Mr. Forcier of A123 estimates that consumer incentives will be required for at least another five years. Forcier presentation, op. cit.
356 Rep. Stabenow presentation, op. cit.
357 Van Amberg presentation, op. cit.
358 Sperling presentation, op. cit.
359 Gioia presentation, op. cit.
360 Watson presentation, op. cit.
that the complexity of the supply chain “adds significant cost” to U.S.-based manufacturing and is time-consuming.361 The impressive investment in North American lithium-ion cell production since 2008 has not “been balanced by necessary investment in the supply chain itself,” he observed.
The emerging U.S. advanced battery industry represents a bold experiment by the federal government in direct financial support of private companies to establish a domestic manufacturing industry. Prior to 2008, the U.S. had a number of lithium-ion battery start-ups but virtually no production plants. It now has dozens of battery-related factories, thanks in part to $2.4 billion in aid under the American Recovery and Reinvestment Act, making it an active competitor in the advanced vehicle battery industry.
The major question is whether the U.S. will be able to sustain the policy support needed for the nascent advanced battery industry through what are expended to be challenging years ahead. Most experts predict it will be at least five years before a combination of technological improvements and higher production volumes will bring costs of lithium-ion car batteries—and therefore the prices of hybrid and electric vehicles—to the point that they can compete with gas-powered vehicles in the market. There also is some doubt whether demand will be big enough to justify the battery-manufacturing capacity that is coming online.
Continued federal incentives to promote consumer purchases of hybrid and electric cars and perhaps greater public procurement—as other nations are doing—will likely be essential to make the U.S. battery industry viable. Continued federal and state support for public-private research collaborations also will be required to accelerate the advances in technology and manufacturing processes needed to bring the cost of rechargeable car batteries down to the point where electrified vehicles can compete on their own with gasolinepowered vehicles.
The U.S. pharmaceutical industry produces medicines through chemical synthesis and biological processes (biopharmaceuticals). Historically the industry has lagged behind the European pharmaceutical sector in innovation, but the phenomenal growth of the U.S. biotechnology industry after the late 1970s catapulted the U.S. into a clear leadership position in the development of new and innovative drugs. The ascent of the U.S. industry has been driven by massive federal support for life sciences R&D, primarily by the
361 Reed presentation, op. cit.
National Institutes of Health (NIH). In addition, the implementation of federal legislation and regulatory policies designed to foster innovation in the 1980s — most notably the enactment of the Bayh-Dole Act of 1980, which enabled universities to own intellectual property rights for technologies they developed through federal funding — enabled a burst of innovative entrepreneurial activity in biotechnology.
During the decade of 2001, U.S. firms developed 57 “new chemical entities” (NCEs) compared with 33 by European firms and nine by Japanese firms, erasing the European lead which existed in prior decades.362 Despite the spectacular successes of the past two decades, the U.S. pharmaceutical industry’s future prospects are uncertain. Many of the blockbuster drugs that drove the industry’s success have gone off patent or will do so soon, including first-generation biotechnology drugs, and branded producers face growing competitive pressure from generic drug makers. The costs and risks of developing new drugs and bringing them to market are rising, while the productivity of the industry’s R&D appears to be declining. Current research spending by the industry and by NIH is stagnant. The industry faces numerous growing risks, including various kinds of high stakes litigation, regulatory pressure, counterfeit drugs, and the hazards of operating in sometimes disorderly emerging markets, where the industry sees its best growth prospects.
The pharmaceutical industry produces medicines and vaccines that are essential to the well-being of the U.S. population. Pharmaceuticals ward off epidemics, treat cancer, and cure diseases. The availability of medicine to treat wounded military personnel drastically reduces the death rate from infections in wartime. The history of conflict in the Twentieth Century demonstrates the vulnerability of countries that lack the capability to produce medicine.363 The ability of U.S. forces to wage war in the Pacific during World War II was strengthened by the development of synthetic alternatives to the anti-malarial quinine, the principal sources of which were controlled by Japan.364
362 According to the U.S. Food and Drug Administration, an NCE is a drug that does not contain any active moiety that has already been approved by the FDA pursuant to an application submitted under Section 505(b) of the Federal Food, Drug and Cosmetic Act. NCEs are molecules a company has developed in the drug discovery phase which — assuming it passes clinical trials — could become a drug used to cure diseases and address chronic ailments such as arthritis.
363 When World War I broke out, Britain was entirely dependent on a hostile power, Germany, for the supply of aspirin, one of the most important painkillers then available. Britain tried but did not succeed in securing adequate alternative sources in Sweden and Switzerland, and “had no alternative but to continue importing German drugs via neutral countries.” Corelli Barrett, The Collapse of British Power (Marrow, 1922).
364 Malaria could have a devastating effect on combat effectiveness. During an Australian battalion’s retreat from Rabaul, New Britain, in January 1942, 50 out of 252 men died of cerebral malaria because of the lack of quinine. The remaining infected men experienced a long period of recuperation before recovering their fitness. Roy N. MacLeod, Science and the Pacific War: Science and Survival in the Pacific 1939-45 (Dordrecht: Kluwer Academic Publishers, 2000), p. 54.
The modern pharmaceutical industry is descended from small apothecary shops, principally in Germany, which began systematic production of drugs in the mid and late Nineteenth Century.365 In the United States, during the same era the principal drug companies were wholesaler/producers offering a full line of drugs, many of which were imported from Germany. The embargo of German goods during World War I compelled these companies to enhance their own technical ability to make refinements on existing drug technologies and to develop new drugs.366 While some sophisticated technological centers devoted to pharmaceutical science arose in the U.S., the European industry led in new drug development through most of the Twentieth Century, and as recently as 1980 eight of the top ten drugs were discovered in Europe.367
Economic historian Alfred Chandler observes that during the first quarter of the Twentieth Century a relatively small number of European and American companies developed internal organizational structures permitting the use of science for the systematic discovery, manufacture and commercialization of new drugs. Most current industry leaders trace their origins to these companies, including Pfizer, Merck, Eli Lilly, Squibb and Abbott Laboratories.368 During the 1940s the so-called “therapeutic revolution,” driven initially by the U.S. government’s emergency programs to develop antibiotics and synthetic antimalarial drugs, saw a “cascade of discoveries" including antibiotics, antihistamines, tranquilizers, steroids, and new prescription drugs for heart and lung disease, cancer, diabetes and ulcers.369 Between 1939 and 1957, total U.S. drug sales volume increased by seven fold.370
Federal support. Federal support for the development of medicines began in the latter part of the Nineteenth Century. In 1887, a laboratory was created within the Marine Hospital Service (MHS) to pursue bacteriological research into deadly diseases such as cholera and diphtheria. In 1902 Congress
365 These included serum antitoxins and vaccines drawing on the discoveries of Louis Pasteur and Robert Koch in microbiology and immunology, as well as synthetic organic drugs from coal tar, including aspirin, vernal, phenacetin, and Salvarsan, the first cure for syphilis.
366 Alfred Chandler, Shaping the Industrial Century: The Remarkable Story of the Evolution of the Modern Chemical and Pharmaceutical Industries. (Cambridge and Lander: Harvard University Press, 2005) pp. 177-179.
367 Ross DeVol, Armen Bedsoussian, and BejaminYeo, The Global Biomedical Industry: Preserving U.S. Leadership (Milken Institute, 2011). DuPont established an experimental research station near Wilmington early in the 20th Century which evolved into one of the world’s first industrial medicine centers. Ibid.
368 Brian D. Smith, The Future of Pharma: Evolutionary Threats and Opportunities (Farakaan, U.K.: Gower Publishing Limited, 2011).
369 Chandler (2005) op. cit. p. 179.
370 Smith (2011) p. 34.
renamed MHS the Hygienic Laboratory and delegated to it the authority to regulate the safety of biologics (technologies such as vaccines produced in animals), oversight which the laboratory continued until 1972. In 1930 the Hygienic Laboratory was renamed the National Institute of Health (NIH)371. During World War II the institute expanded dramatically and Congress enacted legislation converting existing divisions within the NIH into institutes and centers with topic-specific research and training missions. The National Cancer Institute became part of NIH in 1944. From the 1940s to the 1960s NIH budgets grew substantially, enabling the institute to increase research grants to academic institutions, to construct research infrastructure, and to expand training.372 The NIH budget also doubled between 1998 and 2003.
In addition to funding research and training in the life sciences, the federal government has contributed to the growth of the pharmaceutical industry through several landmark pieces of legislation. The 1962 Kefauver-Harris Amendment to Food, Drug and Cosmetic Act established the FDA drug approval process in its current form and this well-defined process has become the world “gold standard" for assessing the safety and effectiveness of new drugs, giving U.S.-based companies a major global competitive advantage. The Drug Price Competition and Patent Term Restoration Act of 1984 (the HatchWaxman Act) amended U.S. patent laws with respect to drugs to take into account the long time required to bring a new product to market by giving firms a larger period of protection in which to recoup their investments.373 The Prescription Drug User Fee Act (PDUFA), which became effective in 1992, authorized the FDA to collect fees from drug makers to expedite the drug review process, a measure which substantially reduced the average review time for new medicines.
Emergence of biotechnology. In the early 1970s researchers at Stanford University developed techniques for creating “recombinant DNA" — DNA sequences which combine genetic material from multiple sources.374 This discovery, coupled with advances in biochemistry, microbiology and enzymology, enabled the emergence of a radical new discipline, molecular biology, addressing the molecular basis of biological processes.375 Advances in
371 “Institute" became plural after additional institutes were formed and added to NIH.
372 Annual increases in NIH’s budget of 40 percent or more occurred between 1957 and 1963. National Research Council, Research Training in the Biomedical, Behavioral and Clinical Research Sciences, Washington, DC.; The National Academies Press, 2011.
373 The Hatch-Waxman Act protects drug patents for either 20 years from the date of a patent’s first filing or 17 years from the patent issued date.
374 P. Lobban and A. Kaiser, “Enzymatic End-to-End Joining of DNA Molecules,” Journal of Molecular Biology 78(3) (1973).
375 Biochemistry is the study of the chemical elements and processes which occur in living organisms. Microbiology is the study of microscopic organisms, which are one cell, a cell cluster or no-cell (acellular) organisms. Enzymology is the study of proteins that increase the rates of chemical reactions.
microbiological understanding, coupled with the development of techniques of genetic engineering, led to the formation and rapid growth of the biotechnology industry. In 1976, Genetic Engineering Technology, Inc. (Genentech) was established to take advantage of advances in large molecule drug development and to commercialize drugs developed with recombinant DNA technology. Its first product was synthetic human insulin (1978). Thereafter the industry grew rapidly, reflecting the fact that biomedicines could address clinical areas that were not reachable with conventional therapeutics, such as oncology and treatment of HIV and autoimmune disorders.
The advent of new learning in the biological sciences was paralleled by the concept of “discovery by design" which emerged from advances in the information industry. Traditional drug development relied on screening large numbers of chemical variants to find one that acted against disease agents. In the 1970s, researchers began applying computational technology, x-ray crystallography and nuclear magnetic resonance to develop hypothetical molecules that could interfere with biochemical sequences in disease agents. These "ideal" molecules were then given to chemists to search for real molecules whose structures most closely matched those of the ideal ones.376
Fostering innovation. The rapid advances being made in the biological sciences in the 1970s were paralleled by a public policy debate in the U.S. arising out of a slowdown in U.S. economic and productivity growth. An influential group of economists at the University of Chicago encouraged a reappraisal of the U.S. patent system due to a perceived "anti-patent" bias in the legal system and a “general concern about industrial stagflation and a lack of significant technological innovations.”377 Reflecting changing attitudes in government and the courts, a series of policy measures followed which established the institutional basis for the explosive growth of the U.S. biotechnology industry—
• The Bayh-Dole Act of 1980 provided that universities conducting federally-funded research could own the patents for technologies they developed, opening the door for the commercialization of universitybased R&D.
376 Chandler (2005) op. cit. p. 181.
377 Federal Trade Commission, To Promote Innovation: the Proper Balance of Competition and Patent Law and Policy (October 2003). This view was supported by an advisory body established by President Carter to study U.S. innovation policy which found that “diminished patent incentive" was contributing to economic stagnation. Advisory Committee on Industrial Innovation, Industrial Subcommittee for Patent and Information Policy, Report on Patent Policy (1979). David M. Hurt, “Antitrust and Technological Innovation,” Issues in Science and Technology (Winter 1998); William C. Kovacic and Carl Shapiro, “Antitrust Policy: A Century o Economic Thinking,” 14 Journal of Economic Perspectives (200); Richard A. Posner, “The Chicago School of Antitrust Analysis,” 127 University of Pennsylvania Law Review (1979).
• A key Supreme Court decision, Diamond v. Chakabarty, expanded the scope of patentable technologies to include living organisms, after which the biotechnology industry “virtually exploded.”378
• The U.S. competition agencies adopted new antitrust guidelines which were less hostile to patent monopolies and which substantially broadened the exclusive rights of innovators to exploit their inventions.379
• In 1982, Congress created the Court of Appeals for the Federal Circuit, giving it exclusive jurisdiction over all federal district court appeals of patent-related decisions, creating an institution which has upheld patent validity with more consistency than previously occurred. Stanford University took advantage of the new Bayh-Dole rules and the new legal environment after the Chakrabarty decision to secure a patent on process technology for genetic engineering that had been developed by Drs. Stanley Cohen and Herbert Boyer, launching a new era of university-industry collaboration in biotechnology. The patent was granted in 1980 and between that year and its expiration in 1997, it was licensed on a non-exclusive basis at relatively low fee levels to 468 companies — many of them fledgling biotech firms — and had been utilized to develop 2,442 new products. This massive transfer of basic enabling genetic engineering process technology “was the real technological foundation for the commercial biotechnology industry.”380
The advent of innovative biotechnology firms caused some established branded drug producers to seek to sidestep costly early stage drug development through acquisition of biotechnology firms and/or in-licensing of technology from such firms.381 Biologics like Avastin, Rituxan and Enbrel have
378 “Patenting of a Living Organism,” Patent Home (February 11, 2012); In Diamond v. Chakrabarty et. Al, 447 U.S. 303 (1980) the Court upheld a patent in a new form of bacterium developed by a microbiologist.
379 In 1981, the Department of Justice Antitrust Division renounced the so-called “nine No-nos,” which set forth fee arrangements and contractual restraints that could not be incorporated in technology licensing arrangements. Beginning in 1988, the Department of Justice issued Antitrust Enforcement Guidelines which commit the competition agencies to apply the rule of reason extensively in intellectual property rights cases, ensuring that antitrust challenges to patents will be subject to extensive antitrust analysis.
380 Rachel Schurman and Dennis Kelso, Engineering Trouble: Biotechnology and its Discontents (Berkeley and Los Angeles: University of California Press, 2003).
381 “How Big Pharma’s New Direction Might Help Little Research Firms,” Chemical Business Newsbase (November 24, 2009); “Big Drug Groups Urged to Buy in Test Products,” Financial Times (January 31, 2010).
TABLE 6.2 Branded Pharmaceutical Firms Biotech Acquisitions
|2009||Johnson & Johnson||Elan Corp|
|2008||Eli Lilly||ImClone Systems|
|2009||Johnson & Johnson||Cougar Biotechnology|
|2008||Johnson & Johnson||Omrix Biopharmaceuticals|
|SOURCE: “Roche Wins Fight for Genentech,” The Express (March 13, 2009); “Johnson & Johnson Completes Deal with Elan, Acquiring its Alzheimers Assets,” M2 Equitybytes (September 21, 2009); “Johnson & Johnson Completes Acquisition of Cougar Biotechnology,” Datamonitor (July 14, 2009); “Eli Lilly Completes $6 Billion Acquisition of ImClone Systems,” Financialwire (November 25, 2008); “Pharma Japan: Sanofi-Aventis too Acquire BiPar Sciences,” Chemical Business NewsBase (April 27, 2009); “Bristol-Meyers Squibb Completes Acquisition of Medarex, Inc.”, Chemical Business NewsBase(September 1, 2009); “Sanofi Pasteur’s Shantha a Shot in the Arm for Indian Pharma,” Financial Express (August 2, 2009); “Sanofi-Pasteur Acquires Acambis for GBP 285 Million,” Datamonitor (September 26, 2008); “Johnson & Johnson Completes Acquisition of Omrix Biopharmaceuticals Inc.,” Chemical Business NewsBase (December 30, 2008).|
demonstrated "blockbuster" potential and fueled a mergers-and-acquisitions wave. Perhaps the most dramatic acquisition has been Roche Holding AG’s acquisition of Genentech, the first biotechnology start-up in the United States, in 2009. Roche was previously a pharmaceutical company, and now, following the purchase of Genentech, it looks more like a biopharmaceutical company.”382 Eli Lilly’s 2008 acquisition of biopharmaceutical producer InClone Systems, a maker of oncology drugs, in 2008 transformed Lilly into the world’s fifth largest biotech firm, with biologic drugs comprising over half its pipeline.383
The U.S. achieves global leadership. As early as 1980, eight out of the world’s top ten drugs had been discovered in Europe. But advances in U.S. science, the rapid growth of the U.S. biotechnology industry and the sweeping changes in U.S. legal and regulatory structures which began in the late 1970s
383 IMAP, Pharmaceuticals & Biotech Industry Global Report — 2011 p. 10.
|Percent Total NCES by Headquarter of Inventing Finn|
SOURCE: Ross C. DeVol, Armen Bedroussian and Benjamin Yeo, “The Global Biomedical Industry: Preserving U.S. Leadership” (Milken Institute, 2011).
gave rise to an environment that was more conducive to innovation than was the case in Europe. Small firms and universities in Europe experienced difficulty in commercializing new drugs, at the same time that policy reforms was opening up opportunities for such entities in the United States. By the decade of 2001-10 the United States had reversed a prior European lead in the production of wholly-innovative “new chemical entities.”384
Current impact of federal policies. The federal government has played a major role in the development of the U.S. pharmaceutical industry. During World War II government scientists developed techniques for producing penicillin efficiently and transferred technology to a handful of small companies which arguably enabled them to emerge as major, research-intensive manufacturers in the 1940s.385 Since the war, federal institutions have conducted or funded much of basic research necessary for the development of new drugs, with the private sector then conducting the applied research and development necessary to bring new medicines to the market. A recent study by researchers from the National Institutes of Health (NIH) and Boston University estimated that between 1990 and 2007, public sector research institutions (PSRIs) – most of which are themselves federal entities or federally funded – contributed up to 21.2 percent of all products in new drug applications, including “virtually all of the important, innovative vaccines that have been introduced in the past 25 years.” These organizations also tended to “discover drugs that are expected to have disproportionately important clinical effect.”386
By far the most important federal research organization is the National Institutes of Health (NIH), a part of the U.S. Department of Health and Human Services. Roughly 10 percent of its budget supports research in NIH’s own
384 DeVol, et. Al., Global Biomedical Industry (2011) op. cit. p. 19.
385 These firms included Roche, Abbott Laboratories, Merck, Squibb, Pfizer, Parke David, Eli Lilly, Lederle, Winthrop and Upjohn. Peter Yourkin, “Making the Market: Howe the American Pharmaceutical Industry Transformed itself During the 1940s,” (University of California at Berkeley, November 2008).
386 “U.S. Public Research ‘Responsible for Many Major New Drugs,’” Pharma Times (February 18, 2011).
laboratories, which are staffed by around 6,000 scientists supporting the NIH Intramural Research Program (IRP). The IRP is the largest medical research organization in the world. 80 percent of the research budget is awarded via the NIH Extramural Research Program in the form of about 50,000 competitive grants to over 300,000 researchers at universities, medical schools and research organizations in the U.S. and abroad. NIH awards research grants to small pharmaceutical businesses for the development of new drugs through the Small Business Innovation Research (SBIR) program.387
In addition to research for the explicit purpose of developing new pharmaceuticals, much of NIH’s research spending supports basic research on the mechanisms of disease and augments the private sectors’ own research efforts. NIH funding supports graduate students and postdoctoral researchers at U.S. universities, and helps train researchers who are eventually hired by drug companies.388
In the 1970s the NIH Deputy Director for Science, Dr. DeWitt Stetter, chaired a national committee of scientists to develop guidelines for the emerging research in recombinant DNA, which transformed the manner in which scientists study diseases. On the basis of new legislation NIH spearheaded major research efforts against cancer and heart disease.389 In the late 1980s NIH launched the Human Genome Project to map and sequence the entire set of human genes. To date over 80 Nobel Prizes have been awarded for NIHsponsored research, which has led to cures for some forms of cancer, a substantial reduction in the occurrence of heart attacks and strokes, and the development of drugs targeting proteins involved in some disease processes.390
387 “Winston Pharmaceuticals, Inc. Receives SBIR Grant from the NIH to Investigate Treatment for Postherpetic Neuralgia of the Trigeminal Nerve,” Business Wire (April 9, 2012); “Achillion Pharmaceuticals Receives Phase I SBIR Grant from NIH,” Datamonitor (March 19, 2010). See also National Research Council. VENTURE FUNDING AND THE NIH SBIR PROGRAM. Washington, DC: The National Academies Press, 2009.
388 In a 2006 study the Congressional Budget Office warned that the sheer scale of the federal investment in life sciences research could “crowd out private sector investment.” CBO noted that federal spending tended to be directed toward basic research while the private sector concentrated on applied research and development. However, “the distinction between basic and applied research is not well defined, and the division of labor between the two has become less pronounced as the potential commercial value of basic life sciences research has become more widely recognized.” Federal crowding out in research could also occur via competition between the federal government and the private sector with respect to the supply of labor, which could drive costs upward. CBO, “Research and Development in the Pharmaceutical Industry,” October 2006, p. 4. CBO, “Research and Development in the Pharmaceutical Industry,” October 2006, p. 3.
389 The legislation was National Cancer Act of 1971 and National Heart, Blood Vessel, Lung and Blood Act. The Cancer Act created 15 specialized research, training and demonstration centers. The heart legislation mandated expanded research directed at heart disease, including high blood pressure, stroke, high cholesterol levels, and blood diseases such as sickle cell anemia. NIH, A Short History of the National Institutes of Health, http://history.nih.gov/exhibits/history/docs/page_09.html>.
NIH’s annual budgets have been flat since 2009, although it received $10 billion in one-off funding for short term stimulus in 2009-10.391 Its 2012 budget of $30.9 billion was only slightly more than the 2009 level of $30.5 billion.392 Critics charge that the lack of growth in NIH funding will inhibit innovation. The president of the nonprofit group Research America said in 2012 that “we strongly believe a frozen budget for the NIH will flat line medical breakthroughs in the coming years and stifle the business and job creation that begins with R&D…. Researchers will leave the field, potential breakthroughs will be shelved and new business opportunities grounded in medical discovery will evaporate as research institutions grapple with learner budgets.”393
The Human Genome Project. In 1990, the U.S. government launched a $3 billion dollar project to identify and map the genes of the human genome and determine the sequence of chemical base pairs that comprise DNA. The Human Genome Project (HGP) was jointly administered by the Department of Energy and NIH.394 This effort was paralleled by a privately funded project undertaken by the company Celera Genomics, which sought to patent several hundred genes. 395 The competition between the public and private efforts drove the effort forward more rapidly than anticipated in the original timetable and resulted in midcourse adjustments in strategy by both sides. In 2001, the HGP and Celera published drafts of their results, including analysis of sequences covering around 83 percent of the human genome.396 The data generated by HGP was deposited in the GenBank sequence database, which is managed by the National Center for Biotechnology Information, which is part of NIH. This data is available to any biomedical scientist in the world.397 The data generated
391 The American Recovery and Reinvestment Act (ARRA), enacted in 2009, made available to NIH $10.4 billion in funding for use in 2009 and 2010. Of this, $8.2 billion was used to support scientific research priorities and most of the remainder was used to upgrade infrastructure. NIH, “NIH’s role in the American Recovery and Reinvestment Act (ARRA), www.nih.gov/about/director/02252009statement_arra.htm.
392 NIH, History of Congressional Appropriations, Fiscal Years 2000-2012.
393 “Pharma Blasts Obama Budget, FDA to Get $4.49 Billion,” Pharma Times, February 14, 2012.
394 DOE’s National Laboratories concentrated on developing technologies for mapping, sequencing and informatics. Seven NIH centers were involved in the project, and scores of smaller research projects were funded by NIH to undertake gene mapping and sequencing research directed at singledisease-associated genes. National Research Council, Large-Scale Biomedical Science (Washington, DC: The National Academies Press, 2005), p. 35.
395 In 2000, President Clinton indicated that the human genome sequence could not be patented.
396 “Initial Sequencing and Analysis of the Human Genome,” Nature (February 15, 2001); “The Sequence of the Human Genome,” Science (February 16, 2001).
397 GenBank is part of an international effort to pool and share data on the human genome, the International Nucleotide Sequence Database (INSDC) which includes GenBank, the DNA Data Bank of Japan, and the European Molecular Biology Laboratory. New data on nucleotide sequences contributed from laboratories around the world are incorporated in the databases in a coordinated manner on a daily basis.
by the genome projects is expected to produce major benefits in medicine and biotechnology.398
The genome projects have given rise to the field of "omics,” involving application of the new knowledge about genes, proteins and other molecular characteristics of living organisms to detect disease, predict how individuals will react to drugs, and eventually to develop treatments. The patentability of various forms of DNA remains murky.399 However, a decade after the HGP and Celera published their drafts, few if any new medicines have been developed based on geonomic knowledge, or "pharmagenomics.”400 Premature use of "omics"-based clinical tests at Duke University, and alleged improper alteration of data, has led the Institute of Medicine of the National Academies to establish a committee to develop recommendations for strengthening omics-based research.401
Translational research. NIH devotes substantial effort toward translational research, that is, the translation of scientific ideas into practical application at the clinical level. In 2006, NIH established the Clinical and Translational Science Awards (CTSA) Consortium, which has grown to 60 linked medical research institutions dedicated to developing the discipline of clinical and translational science. This program aims to develop “a cadre of well-trained multi-and inter-disciplinary" research teams and investigators, to create an incubator for innovative research tools and information technologies, and to combine multi-disciplinary and inter-disciplinary knowledge and techniques for application in a clinical context. CTSA-sponsored programs create teams which may include biologists, basic scientists, pharmacists, geneticists, biomedical engineers and other specialists in "bench-to-bedside"
398 Because of DNA’s key role in cellular processes, the detailed information generated by the genome projects is expected to foster major advances in medicine in areas such as cancer and Alzheimer’s disease.
399 Notwithstanding the Supreme Court’s 1980 decision in Diamond v. Chakrabarty that new life forms could be patented, a federal district court in New York ruled in 2010 that isolated DNA gene sequences were not patentable. The Department of Justice has taken the position that isolated but otherwise unaltered genomic DNA is not patentable subject matter. “Gene Sequence Patents are Being Questioned,” Michigan Lawyers Weekly (June 27, 2011).
400 “Cancer, Diabetes, Dementia and Cystic Fibrosis: Having the Genome Has Not Meant an End to These Afflictions,” Irish Times (February 25, 2011). Cytrix Pharmaceutics, Inc. is reportedly raising venture capital to pursue novel drug-based cancer therapeutics based on data from the Human Genome Project which revealed that various forms of extra-hepatic cytochrome P450s are "overexpressed" during the malignant progression of most cancer. “Cyterix Pharmaceuticals Raises $9.2M in a Series A Venture Financing,” Chemical Business Newsbase (June 7, 2011).
401 Institute of Medicine, “Evolution of Translational Omics: Lessons Learned and the Path Forward,” (Report brief, March 2012); “Panel Calls for Closer Oversight of Biomarker____ Tests,” Science Insider (March 23, 2012).
developmental efforts which include designating technologies for licensing and commercialization.402
In December 2011, Congress created the National Center for Advancing Translational Sciences (NCATS) under the supervision of NIH to accelerate the development of new medicines. NCAT’s a 2012 budget is $574.7 million. Its intended role has been compared with that of a “home seller who spruces up properties to attract buyers in a down market.” The idea behind the center is for NIH researchers to evaluate novel drugs and to develop leads with respect to promising compounds — work traditionally done by the private sector.403 NCAT will perform “as much research as it needs to do so that it can attract drug company investment.” NCAT will screen chemicals for potential use in medicines, perform animal tests and conduct some human tests – activities which have “traditionally been done by drug companies, not the government.” Existing translational research programs under way at other NIH organizations will be transferred to NCATS.404 The creation of NCATS reflects governmental frustration over industry’s reluctance to “follow the latest genetic advances with expensive clinical trials.”405
Development of orphan drugs. In 1983 Congress enacted the Orphan Drug Act to promote the development and commercialization of “orphan drugs” – medicines to treat rare diseases. The Act relaxes certain requirements in the regulatory development path for new drugs, provides for enhanced patent protection, and authorizes tax incentives and subsidies. Most importantly the Act provides for seven years of market exclusivity that is independent of the drug’s patent status and which does not begin to run until FDA approval is granted. The result was an exponential increase in the development of orphan drugs which, while having a relatively small market, could be sold at high
402 “US $23 Million Grant Makes Cincinnati University CTSA Members" Pharma Times (April 8, 2009).
403 “New $1b NIH Center Will Tackle Early-Stage Drug Development to Ease Industry Risk of Failure,” Centerwatch (February 7, 2011). “Increased Funding for NIH: A Biomedical Science Perspective,” Life Sciences Forum.
404 R&D programs will be transferred from NIH’s National Human Gerome Research Institute, National Center for Research Resources, and the NIH Director’s Common Fund “US Govt Drug Research Agency ‘To Start Work in October,’” Pharma Times (January 25, 2011).
405 “Federal Research Center Will Help Develop Medicines,” New York Times (January 22, 2011).
In 2003 NIH launched the Rare Diseases clinical Research Network (RDCRN) to promote research on rare diseases. In 2009 NIH awarded $117 million over a five year period to 19 research consortia and a data management center to fund research into the natural history, epidemiology, diagnosis and treatment of over 95 rare diseases (defined as affecting less than 200,000 people in the U.S.). RDCRN has enrolled thousands of patents for clinical studies and established an extensive data management system.409 In 2009 NIH invested $24 million in the Therapeutics for Rare and Neglected Diseases (TRND) program, which develops research collaborations with universities working on rare diseases. The NIH Director observed that—
The federal government may be the only institution that can take the financial risks needed to jump-start the development of treatments for these diseases, and NIH clearly has the capability to do the work.410
Stem cell research restrictions. Some federal policies have hampered critical research. In 1995, the so-called Dickey-Wicker Amendment was attached as a rider to an appropriations bill that was passed by Congress, prohibiting the use of appropriated funds for the creation of human embryos for research purposes or research in which embryos are destroyed.411 In 2001, President George W. Bush issued an executive order that prohibited NIH from funding research on embryonic stem cells beyond using the 60 cell lines which then existed. He subsequently vetoed a number of bills which would reduce limitations on federally-funded research on embryonic stem cells. In 2009, President Barak Obama signed an executive order lifting the ban and a memorandum establishing more independence for federal science program. The President commented that “in recent years, when it comes to stem cell research,
406 In the 1970s, prior to enactment of the Orphan Drug Act, fewer than 10 orphan drugs were approved by the FDA. Between the effective date of the Act and the beginning of 2011, the FDA approved over 350 orphan drugs. “U.S. Pharma’s ‘Record’ 460 Drugs in Development for Rare Diseases,” Pharma Times (February 28, 2011).
407 Vioxx, Botox, Cialis, Provigil and Abilify are orphan drugs. Olivier Wellman-Laback and Youwen Zhou, “The U.S. Orphan Drug Act: Rare Disease Research Stimulator or Commercial Opportunity?” Health Policy (May 2010).
408 “U.S. Pharma’s ‘Record’ 460 Drugs in Development for Rare Diseases,” Pharma Times (February 28 ,2011).
409 “NIH Award US $117 Million to Rare Disease Consortia,” Pharma Times (October 7, 2009).
410 “NIH to Create Development Pipeline for Rare, Neglected Diseases,” Pharma Times (May 25, 2009).
411 The Dickey Amendment language was added to subsequent appropriations on a yearly basis. The Dickey Amendment was an impediment to researchers seeking to create their own stem cell lines.
rather than furthering discovery, our government has forced what I believe is a false choice between sound science and moral values.”412 The Dickey-Wicker Amendment remained in force, however, and provided the basis for an unsuccessful legal challenge to NIH guidelines which permitted federal funding of research projects using embryonic stem cells but not for the destruction of embryos.413 Dismissal of the case in 2011 was seen as a decisive victory for NIH, but as one stem cell researcher at Harvard Medical School put it, “I hope we’re done for now, but nothing surprises me anymore.”414
The politicization of stem cell research has hampered the development of stem cell-based therapies in the U.S. Other countries which encourage stem cell research have captured R&D activity that otherwise probably would have taken place in the United States.415 Korea, not the U.S., introduced the world’s first stem cell-based medication, a drug developed by a domestic bio-venture company, FCB-Pharmcell, to help regenerate damaged coronary arteries.416
While the U.S. pharmaceutical sector currently leads the world in innovation, the industry faces daunting challenges in maintaining its position. The costs and risks of developing new drugs are increasing, and have become so substantial that many major, traditionally innovative companies are cutting or not increasing their R&D spending. While the innovation crisis is the most serious problem confronting the industry, it faces other significant risk factors, including high stakes civil and criminal litigation, compulsory licensing by foreign governments, counterfeiting, and an increasingly complex and hazardous global supply chain.
The innovation crisis. The pharmaceutical industry “has plunged ever deeper into a crisis that threatens to turn off the tap of all new medicines.”417 The traditional innovation model of the large U.S. pharmaceutical firms
412 “Obama Overturns Bush Policy on Stem Cells,” CNN Politics (March 9, 2009).
413 “Obama’s Stem Cell Policy Hasn’t Reversed Legislative Restrictions,” Fox News (March 14, 2009).
414 Stem Court Ruling a Decisive Win for NIH,” Science (July 27, 2011).
415 In 2006, Singapore established a $45 million consortium for stem cell research headed by an American scientist Roger Pederson.
416 This development would represent a recovery from a 2005 incident in which an eminent scientist, Huang Wo-suk, was found by a review board to have manipulated key stem cell research data. Two more stem cell-based medications were approved in Korea in 2012: Cartistem, which uses stem cells to regenerate knee cartilage, and Cupistem, which uses stem cells to treat anal fistula occurring as a result of Crohn’s disease, an inflammatory bowel disease. “Major Stem Cell Medication Given Green Light,” Chosun Ilbo (January 20, 2012). “Korea Set to Approve World’s First Stem Cell Drug,” The Korea Herald (June 24, 2011).
417 “Why the Gene Revolution Has Been Postponed — It Costs $1bn to Develop a New Drug, so Don’t Expect Personalized Treatments, But the Genome Project is Still Worthwhile,” The Times (London, August 25, 2011).
emphasizes the pursuit of proprietary "blockbuster" drugs which generate $500 million to $1 billion or more in annual revenues. Patents on these drugs last 20 years, and given that the time frame from patent filing to market is seven to ten years, the patent holder typically enjoys a legal monopoly on the drug for 10 to 13 years, which can result in huge profits during the protected period. However, upon expiration of the patent, the drugs come under intense competitive pressure from generic drug makers, eroding if not eliminating the profit margins achieved under patent. An obvious response to the expiration of drug patents is innovation — develop new blockbuster medicines that can be patented and offset the effect of the drugs going off patent. However, the development of new drugs by the pharmaceutical industry appears to be slowing down, and the looming expiration of patents will leave some drug companies with no clear replacement with equivalent profit potential. Between 2012 and 2014, pharmaceutical firms will lose patent exclusivity on over 110 products in the United States.418 In some cases generic versions of proprietary drugs appear on the market on “day one of patent expiry.”419 A 2009 study by the Congressional Budget Office observed that—
[T]he patents for many top-selling drugs have expired, subjecting them to competition from cheaper generic compounds. The resulting decline in spending on those drugs has not been fully offset by added spending or new brandname drugs because, at the same time, the rate at which new drugs are being introduced has slowed substantially.420
The FDA approval process. Historically FDA approval process has worked to the advantage of U.S. firms, reflecting its comparative efficiency relative to regulatory regimes in Europe and elsewhere. But this edge is eroding, with the approval process becoming more protracted, uncertain, and costly for drug developers.
Development of new drugs entails a long time frame between initial discovery and actual commercialization, and most new drugs never become products. During the pre-discovery phase, of every 5-10,000 compounds tested, roughly 250-500 are identified as promising. These are subjected to preclinical testing to identify a “lead molecule” capable of altering the course of a disease or condition, the compounds are tested for safety and effectiveness, and redesigned variations are pursued. The combined pre-discovery and preclinical
418 “Drug R&D Spending Fell in 2010, and Heading Lower,” Reuters (June 26, 2011).
419 “Teva Fast Out of the Blocks to Sell Generic Seroquel,” Pharma Times (March 27, 2012).
420 CBO, “Pharmaceutical R&D and the Evolving Market for Prescription Drugs,” October 26, 2009.
phases take 3-6 years.421 Before a new drug is approved, it must undergo clinical trials in which its potential benefits and risks are assessed based on tests using human volunteers. Of every 250-500 compounds subject to pre-clinical testing, about 5-10 are ultimately submitted to clinical trials. Clinical trials typically take 6-7 years to complete and involve thousands of people in three research phases—
• Phase I trials. Phase I trials are usually performed with healthy volunteers and are intended to ascertain whether a new drug is safe (20100 volunteers).
• Phase II trials. Phase II trials involve assessing a drug’s effectiveness using volunteers who actually have the condition or illness the drug is intended to address and identifying common short-term side effects (100 to 500 volunteers).
• Phase III trials. The final and largest phase of trials involved testing the drug on a large population to generate data with respect to safety and effectiveness of the drug (1,000 to 5,000 volunteers often at multiple sites).
When clinical trials are completed, the drug is reviewed by the Food and Drug Administration and either approved or disapproved. With approval, the pharmaceutical company can begin investment in production capability. On average, of every 5,000 compounds that are examined in the preclinical phase, only one becomes an FDA-approved commercial product.
In recent years, the FDA has established more stringent requirements for clinical trials, making them more time-consuming and costly. In 2008, Congress heard testimony that the FDA was “barely hanging on by its fingertips" and that it suffered from a shortage of scientists who understood the newest technologies, inability to speed the development of new drugs, and an information technology infrastructure that was a pervasive source of risk.422 The fact that the FDA is underfunded “is a consensus held by patient organizations, consumer and research groups, the professional community, and all the industries regulated by the FDA.”423
Clinical trials are becoming more complex and the failure rate for drugs entering clinical trials is growing rapidly. Between 2000-2003 and 2004-2007, the median number of procedures per trial increased by 49 percent and the work
421 Pharmaceutical Research and Manufacturers of America, www.innovation.org/index.cfm/InsideDrugDiscovery/Inside_Drug_Discovery> visited April 24, 2012.
422 “U.S. Congress Warned of ’Gatering Storm’ at FDA,” Pharma Times (February 8, 2008).
423 “FDA Has Critical Budget Shortfall,” AJC (February 16, 2010). The FDA’s Science Committee recently reported that the FDA had to bring back retired computer experts to repair its computers, which so obsolete that younger repairmen did not know how to fix them. Ibid.
burden per protocol increased by 54 percent.424 Increasing complexity results in stricter eligibility criteria for volunteers, which has translated into declining volunteer enrollment and retention rates. Over 50 Phase III trials were terminated in 2010 and the number of drugs entering Phase III fell by 55% from the prior year. Phase I and Phase II trials also fell by 47% and 53%, respectively, in 2010.425
U.S. clinical trials’ lengthening time frame and complexity is a factor underlying U.S. firms’ increasing resort to clinical trials in Asia and Central and Eastern Europe, which enable them to reduce costs and accelerate time-tomarket.426 South Korea, for example, is emerging as a global center for clinical trials for new drugs, reflecting the government’s sustained efforts to establish an excellent infrastructure for clinical tests in the nation’s hospitals. In 2004, multinational corporations sponsored 61 clinical trials in Korea, a figure which surged to 216 in 2008. The President of Bayer Korea, Friedrich Gause, commented in 2010 that—
These clinical trials provide enormous benefits to Korea. They benefit Korean patients, Korean medical institutions and clinical experts, and the Korea economy in general … [T]hey offer immediate access to innovative treatments to patients involved in Phase II and III global trial program.427
Stagnant R&D spending. The average cost of researching and developing a successful drug is estimated by the U.S. pharmaceutical industry at $800 million to $1 billion. These figures include the costs associated with thousands of failures.428 Because the industry does not make detailed R&D investment data available, these figures cannot be independently assessed, and some estimates place the average development cost of a new drug at much lower levels. However, even at reduced levels the cost of R&D is substantial.429
The U.S. pharmaceutical industry’s trade association, PhRMA, takes the position that U.S. biopharmaceutical company R&D “remains strong.”430
424 PhRMA, 2011 Profile, p. 13.
425 Stephanie Sutton, “The Status of Pharma R&D,” BioPharm (July 5, 2011).
426 “Looking Abroad: Clinical Drug Trials,” Food and Drug Law Journal (2008), p. 673; “Novartis Stays Ahead with New Ideas: Country Head Says Dedication,” The Korea Herald (March 31, 2004).
427 “Korea Emerging as Global Trial Hub,” The Korea Herald Online (May 26, 2010).
428 The source of these figures is the Pharmaceutical Research and Manufacturers of America (PhRMA) the trade association representing U.S. research-based pharmaceutical and biotechnology companies.
429 A study published in BioSocieties journal in 2011 calculated the cost of R&D for a new drug at “a controversially low $75m.” “Cost of New Drug Development Remains High,” Evaluate Pharma (March 10, 2011).
430 PhRMA, 2011 Profile, p. 11.
FIGURE 6.10 Total biopharmaceutical company R&D and PhRMA member R&D: 1995-2010.
SOURCE: PhRMA, 2011 Profile, p. 11
But PhRMA’s own figures indicate that R&D spending by its members has been stagnant since 2007 and actually declined in absolute dollars in 2008 and 2009.
The rate of introduction of “priority drugs” – defined by the FDA as drugs that represent a “significant therapeutic or public health advance” – has dropped from an average rate of over 13 per year in the 1990s to about 10 a year in the 2000s.431 According to a number of analysts, the stagnation in pharmaceutical R&D spending reflects disillusionment with the shrinking returns on R&D investment.432 Evaluate Pharma, a London-based research firm, calculated in 2011 that the pharmaceutical industry was spending $57 billion per year more on R&D than the value of the new products it was launching, and concluded that “the industry as a whole is not yet generating a return on R&D investment.”433 Pfizer, the world’s largest pharmaceutical firm, will cut its R&D
431 CBO, “Pharmaceutical R&D and the Evolving Market for Prescription Drugs,” October 26, 2009.
432 “Drug R&D Spending Fell in 2010, and Heading Lower,” Reuters (June 26, 2011); Stephanie Sutton, “The Status of Pharma R&D,” BioPharm (July 5, 2011); Ben Hirschler, “Analysis: Big Pharma Strips Down Broken R&D Engine,” Reuters (May 11 2011).
433 “R&D Spending Soars Above Value of New Drugs,” Indianapolis Business Journal (July 5, 2011).
budget by about 25 percent during the period 2011-2013.434 Eli Lilly CEO John Lechleiter commented in 2011 that “Our industry [R&D] is taking too long, we’re spending too much, and we’re producing far too little.”435 Chris Viebacher, CEO of Sanofi, observed in 2011 that—
Five years ago people would say the more I spend on R&D, the more shots in the goal I will have, the more successful I will be. Now you have got some investors out there who believe that what we do in R&D is actually value destroying.436
Patent litigation. The profit sanctuary represented by proprietary drugs is undergoing pressure in the courts. Generic drug manufacturers have been challenging branded pharmaceutical companies’ patents aggressively since 2000, when Barr Laboratories broke Eli Lilly’s patent on Prozac. By the end of 2008 Lilly was engaged in litigation to protect drugs which collectively represented half of its revenues.437 In 2009 Johnson & Johnson won a $1.67 billion award against Abbott Laboratories based on rival claims for the two firms’ rheumatoid arthritis drugs.438 Under such circumstances a pharmaceutical firm’s very survival is linked to the outcome of patent litigation.
Antitrust risk. What is widely perceived as the high cost of proprietary medicines, coupled with the monopoly associated with patent rights, gives rise to an abiding risk of antitrust action, both formal and informal, against proprietary drug makers in the U.S. and a number of other key countries. In 2009, the U.S. Federal Trade Commission scuttled a proposed $3.1 billion acquisition by Australia’s CSL of U.S.-based Talecris Biotherapeutics on the grounds that the acquisition would “hasten the market’s path toward cartelization.”439
A particular area of antitrust vulnerability is the so-called reverse payments or “pay for delay" agreements pursuant to which branded drug makers pay generics manufacturers to delay their market entry upon expiration of the branded firms’ patents, giving the latter an additional interval of comparatively high-priced sales. In the European Union, a competition policy authorities have initiated investigations against branded pharmaceutical makers such as Johnson
434 Pfizer announced plans in February 2011 to close an R&D facility in the United Kingdom employing 2,400 people. “Pfizer to Close UK Research Site,” BBC News (February 1, 2011).
435 “The World’s Biggest R&D Spenders,” Fierce Biotech (March 8, 2011).
436 “Analysis: Big Pharma Strips Down Broken R&D Engine,” Reuters (May 11, 2011).
437 “Generic Meds Don’t Come Cheap,” Indianapolis Business Journal (December 15, 2008); “Patent Battles Could Savage Drug Giant,” The Independent on Sunday (March 18, 2007).
438 “J&J Wins $1.67 Billion Lawsuit Against Abbott,” Modern Healthcare (June 30, 2009).
439 “Obama Administration Plans to Take More Regulatory Approach on Healthcare Mergers,” Modern Healthcare (June 24, 2009).
& Johnson, Pfizer, GlaxoSmithKline and AstraZenica on suspicion of conspiracy to maintain the prices of their drugs after the patents expired.440 In the U.S. the FTC has denounced pay-for-delay deals for over a decade, although its challenges to such agreements in the courts have thus far proven unsuccessful.441 The Obama Administration has proposed legislation banning pay-for-delay agreements.442 Senator Kohl and Grassley are backing bipartisan legislation to prohibit pay-for-delay deals.443
White collar prosecutions. The marketing of pharmaceutical products entails substantial legal risks. A manufacturer which touts the therapeutic benefits of a drug may be severely penalized for "fraud.”444 The massive outlays of public money for health care, combined with complicated and opaque payment systems creates opportunities and motivation for individuals employed by drug companies to engage in kickback schemes and other practices which are prohibited by law. These realities expose pharmaceutical companies to penalties which can be staggering.445 If anything the risks to industry are increasing, given the Obama administration’s stated intention of attacking health care fraud through more aggressive prosecutions and deployment of advanced monitoring technology.446
440 In October, 2011 EU competition authorities disclosed that they had opened an investigation into pay-for-delay arrangements between Johnson & Johnson and the generic branches of the Swissbased company Novartis. EU Competition Commissioner Joaquin Alumunia said that “paying a competitor to stay out of the market is a restriction of competition that the Commission will not tolerate.” He said that with respect to this issue, the Commission “has been firmly on the sector’s back for the last couple of years.” “EU Antitrust Authorities Probe Johnson & Johnson, Novartis,” Agence France-Presse (October 21, 2011). “Drug Companies Trigger European Ire for Holding Back Supplies of Cheap Medicine,” The Times (London, November 29, 2008); “EU Says Investigation Raid Pharma Giants,” Agence France-Presse (October 6, 2009).
441 “FTC Loses Bid to Block Pay-for-Delay Drug Settlements,” Thomson Reuters News & Insight (April 25, 2012); FTC, Pay-for-Delay: How Drug Company Pay-Offs Cost Consumers Billions (FTC Staff Study, January 2010).
442 “Obama Seeks $135B Drug Price Cuts Over 10 Years,” Pharma Times (September 23, 2011).
443 “U.S. CBO Doubles Estimated Savings from Pay-for-Delay Ban,” Pharma Times (November 13, 2011).
444 In April 2012 Johnson and Johnson and a subsidiary were ordered to pay over $1.2 billion in fines after an Arkansas jury concluded that they had minimized or concealed damages associated with the antipsychotic drug Risperdal when marketing it. “J&J Fined $1.2 Billion in Drug Case,” New York Times (April 11, 2012).
445 Pfizer was fined $2.3 billion in September 2009 in the settlement of charges that it had promoted use of its drugs for purposes not approved by the FDA, and for entertaining doctors as an inducement to prescribe the drugs. Eli Lilly agreed to a $1.4 billion fine to settle federal criminal and civil charges to the effect that it had illegally promoted the sale of Zyprexa, an antipsychotic medication. “Officials: Pfizer to Pay Record $2.3 B Penalty,” Forbes (September 3, 2009); “Eli Lilly Owes $1.4B Over Off Label Use,” CBS News (February 11, 2009).
446 “Making Them Pay,” Modern Healthcare (October 12, 2009); “Attorney General Holder and HHS Secretary Sebelius Announce New Interagency Health Care Fraud Prevention and Enforcement Action Team,” Department of Justice Press Release (May 21, 2009).
TABLE 6.4 Class Action Lawsuits Against Life Sciences Firms on Behalf of Consumers Claiming Injury
|Advanced Medical Optics, AMO Canada Company||COMPLETE contact lens solution||Solution caused serious eye infections, ancanthamoeba keratitis|
|Baxter International||Heparin||Tainted drug caused several deaths|
|Pfizer||Trovan, Rocephin||Eleven Nigerian children died after being given these drugs in a human trial|
|Novartis||Zelnorm||Increase in cardiovascular events by users of the drug|
|Merck||Vioxx||Heart attacks attributable to drug use|
|Hoffman LaRoche||Accutane||Several, chronic stomach injuries|
|Pfizer||Bextra, Celebex||Increase in cardiovascular events by users of the drug|
|SOURCE: “Advanced Medical Optics Sued Over Lens Solution,” OCRegister.com (June 5, 2007); “Baxter Loses First Heparin Lawsuit,” Pharmalot (June 10, 2011); “Pfizer to Pay $75 Million to Settle Nigerian Trovan Drug-Testing Suit,” Washington Post (July 31, 2009); “Novartis in Tentative Pact to Settle Zelnorm Lawsuits” Drug-Injury.com (July 15, 2010); “Jury: Merck Negligent,” CNN (August 22, 2005); “First Acculane Verdict Yields $2.6 M in NJ Superior Court,” Lawyers USA (July 2, 2007); “Pfizer Reaches Massive Settlement in Celebex, Bextra Lawsuit,” Huffingtonpost.com (October 17, 2008).|
Class action lawsuits. Consumers who believe that they have been injured by a pharmaceutical product can bring a product liability lawsuit against the manufacturer for damages. Many of these suits are class actions involving massive damage claims. While these product liability lawsuits can make a valuable contribution to protecting consumer interests, they also represent a significant business risk for pharmaceutical manufactures. The relationship of product liability lawsuits to both drug innovation and drug safety/effectiveness
involves complex matters that the committee has not had an opportunity to examine in detail.
Stock prices of life sciences firms are frequently volatile and can be affected by disclosure (whether or not authorized) of the results of clinical trials and FDA proceedings associated with approval of a promising new drug. Allegedly misleading disclosure or nondisclosure of problems can result in volatility in the share prices of a company’s stock. The collapse of share prices under such circumstances commonly gives rise to costly class action lawsuits.447 Companies may also face enforcement proceedings by the Securities and Exchange Commission.448
Compulsory Licensing. Pharmaceutical companies with proprietary drugs are under price pressure from many governments outside the United States, and one powerful legal tool that is sometimes utilized is the compulsory licensing of patented drugs.449 The World Trade Organization (WTO) Agreement on the Trade-Related Aspects of Intellectual Property Rights (TRIPS) permits governments under certain conditions to compel a patent holder to allow the subject of the patent to be used by others.450 This clause has been invoked by several countries.451 A number of governments have used a threat of
447 The experience of Sequenom illustrates this phenomenon. In June 2008, Sequenom disclosed that a non-invasive prenatal test which it had developed to screen maternal blood for Downs syndrome was effective in all samples, sending its shares up 21.8 percent on eight times average volume. However, on the eve of the product launch, Sequenom revealed that the introduction of the test would be delayed “due to the discovery by company officials of employee mishandling of R&D test data and results,” and that the company’s board had launched an independent internal investigation. The special committee charged with conducting the investigation concluded that Sequenom “failed to provide adequate protocols and controls" of results of the prenatal test. The company’s CFO and other executives resigned. The company fired its CEO and head of research and development. Share prices collapsed, and numerous class action suits were brought on behalf of shareholders who bought Sequnom shares after the 2008 disclosure of a promising new drug. The complaints alleged that the company made “materially false and misleading statements regarding the clinical performance of the Company’s developmental Down syndrome test.” “Sequenom Announces Additional Positive Tests Results for Down Syndrome Test at Analyst Briefing. "Chemical Business NewsBase (September 23, 2008); “Sequenom Raises Bar in Prenatal Test Field,” Investor’s Business Daily (December 16, 2008); “Sequenom Readies Tests for Market,” Business Review Western Michigan (March 26, 2009); “Sequenom Announces Delay in Launch of SEQureDx Trisomy 21 Test,” Business Wire (April 29, 2009); “Sequenom: Bloodied and Unbowed,” Barron’s (September 29, 2009).
448 In 2008, the SEC filed a civil fraud action against Biopure Corporation, alleging that the company materially misled the investment community by failing to disclose — or by framing as positive developments — certain negative information from the FDA regarding the approval prospects of its synthetic blood product, Hemopure.” “Increased Scrutiny of Investor Communications by Federla Regulators,” Food and Drug Law Institute (January/February 2006).
449 “Big Pharma Learns to Live With Generics,” Bangkok Post (August 15, 2009).
450 Compulsory licensing can be used in “a national emergency as other circumstances of extreme urgency.” TRIPS Article 31.
451 In 2007, Brazil issued a compulsory license for Merck’s anti-AIDS drug Efavirenz. In 2006, Thailand issued compulsory license for two anti-AIDS drugs made by Merck and Abbott Laboratories, and a compulsory license for the anti-cancer drug Docetaxel, patented by the French
TABLE 6.5 Shareholder Class Action Lawsuits Against Life Sciences Firms
|2009||PozenInc||Treximet||False or misleading statements about migraine drug candidate, Treximet|
|2009||Caraco Pharmaceutical Laboratories||various tablets||Failure to disclose material information re FDA warning letter on drug manufacturing.|
|2009||Rigel Pharmaceuticals||R788||False and misleading statements with respect to clinical trial of a drug, R788 for treatment of rheumatoid arthritis|
|2008||KV Pharmaceutical Co||Makena||Failure to disclosure compliance problems with FDA requirements|
|2009||Immucor||Blood reagents and related equipment||Failure to disclose compliance problems with FDA requirements|
|SOURCE: Brian Johnson et al v. Pozen Inc. et al, U.S. District Court, Middle District of North Carolina (2009)l ; Wilkofv. Caraco Pharmaceutical Laboratories, Ltd., U.S. District Court, Eastern District of Michigan (2009); Immucor, Inc. Form 10-K for the fiscal year ended May 31, 2011, p. 16; “KV Pharmaceutical Company Hit by Investor Class Action Over Alleged Securities Law Violations, “ Shareholders Foundation (October 19, 2011).|
compulsory licensing to pressure foreign pharmaceutical firms into reducing drug prices.452 TRIPS requires that compulsory license “shall be authorized predominantly for the supply of the domestic market,” but in 2009 the WTO
firm Sanofi-Aventis. “Compulsory Thai Licensing of AIDS Drug Sets Precedent,” Deutsche Press Agentur (July 29, 2008); “Commerce Ministry Asks Council of State for Opinion on Legality of Compulsory Licensing of Cancer Drug,” Thai Press Reports (August 22, 2008).
452 In 2009, Korea threatened Roche with compulsory licensing in negotiations over the supply of Tamiflu to Korea. The government of Brazil has applied similar pressure to multinational drug makers, particularly with respect to the supply of anti-retroviral drugs to treat HIV/AIDS. “Tamiflu Generics Protection Planned,” Korea Times (September 9, 2009); “GSK and Fiocruz to Develop and Product Vaccines,” Economist Intelligence Unit (September 14, 2009).
ruled that Pakistan could grant compulsory licenses on patented drugs for export to third countries that lacked their own manufacturing capacity.453 In March 2012, the Controller of Patents, Mumbai, granted Natco Pharma, an Indian company, a compulsory license for manufacture of a generic version of sorafenib toyslate, a drug developed by Bayer to treat liver and kidney cancer, stating that the drug was “exorbitantly priced.”454
Supply chain vulnerabilities. Governments in western countries are pressing pharmaceutical firms to reduce the cost of their products, and one way in which the industry is responding is to move the manufacture of drugs to lower cost countries and to source ingredients from those countries. Roughly 80 percent of the active ingredients used in U.S. prescription drugs originate outside the U.S.455 “[W]hether locally made generics, or patented drugs produced by either a multinational or a contract-manufacturing organization, Chinese-made prescription drugs will soon become unavoidable.” Imports from China and India accounted for about 20 percent of the generic and over-thecounter drugs sold in the U.S. in 2008.456 A number of scandals have occurred in which U.S. consumers have been harmed through use of drugs with adulterated ingredients derived from unregulated or under-regulated companies in China.457 Recently the Chinese government has taken steps to strengthen supervision of companies which comprise the pharmaceutical supply chain, but a recent incident in which large numbers of commonly used capsule drugs were found to contain high levels of toxic chromium indicates that significant risks still exist.458
453 “WTO Allows Pakistan to Grant License,” Business Recorder (October 3, 2009).
454 “India Uses Arm-Twist Rule for Cancer Drug,” The Telegraph Online (March 13, 2012).
455 “Counterfeit Avastin Seized in the US,” Pharma Times (February 16, 2012).
456 “Clamping Down on Fakes,” Chemical Business NewsBase (September 8, 2008).
457 “Chinese Chemicals Flow Unchecked Onto World Drug Market,:” The New York Times (October 31, 2007). In 2008 Baxter International suspended sales of the anti-coagulant heparin produced at an uncertified plant in China which was not inspected by the government after four U.S. users died and 350 suffered complications. “China Didn’t Check Drug Suppliers, Files Show,” The New York Times (February 16, 2008). “Will US Inspections Help Improve the Safety of Chinese Drugs?” Economist Intelligence Unit (April 15, 2008).
458 The capsules were made of industrial gelatin, and the chromium could cause digestive disorders and internal organ failure. An advisory expert at the State Food and Drug Administration commented that “drug quality control has been quite strict on end products. We examine all the quantities and qualities of medical substances inside the capsules. But somehow we have left out instrumental materials like the capsules themselves. That’s a loophole, and we certainly need to address it.” The government shut down two of the capsule plants and took four plant owners into police custody. “Capsule Scandal Exposes Loopholes in Drug Quality Control,” China Radio International Online (April 17, 2012). In China, Good Manufacturing Practices (GMP) standards were introduced in the late 1970s but were phased in very slowly. The State Food and Drug Administration (SFDA) issued revised GMP standards in 1999, requiring all pharmaceutical manufacturers to meet GMP standards and secure GMP certification by June 30, 2004. New and more stringent GMP rules governing pharmaceutical production took effect October 1, 2010, requiring producers to apply for supplementary registration if the new standards were not met.
Supply chain vulnerabilities arise out of the increasing use of lowercost bulk active pharmaceutical ingredients (APIs) as ingredients in manufactured drugs. In some major countries makers of APIs can sidestep regulatory scrutiny by not disclosing that their chemicals will be used in pharmaceutical products.459 Bulk APIs are now sold over the Internet, which is also a global platform for marketing and sale of counterfeit drugs. Some contaminated substances find their way into the U.S. healthcare system.460
Counterfeiting and mislabeling. Counterfeit and mislabeled medicines are a growing global concern both for legitimate pharmaceutical manufacturers and consumers. According to the World Health Organization, fake drugs account for under one percent in developed countries but from 10 to 30 percent of drug sales in emerging markets.461 Counterfeit medicines “are often produced in unsanitary conditions by people without any medical or scientific background.”462 Spuriously/falsely-labeled/falsified/counterfeit (SFFC) medicines can result in treatment failure and death. In 2012 the FDA sent out letters to 19 medical practices warning that counterfeit versions of Avastin, made by Roche and Greentech, had been detected in the U.S. and “may have left patients without their therapy.”463 The World Health Organization cites a number of other examples of known SFFC incidents.
Counterfeit drugs increase the business risks of legitimate pharmaceutical manufacturers. Branded firms may find themselves targeted by lawsuits based on consumer use of worthless or toxic counterfeit medicine bearing the company’s brand. U.S. and European pharmaceutical firms which have Chinese operations or incorporate Chinese APIs in their manufacturing processes risk legal actions by consumers. Historically legitimate
Many Chinese manufacturers are finding compliance with GMP standards to be financially burdensome. Some companies reportedly received GMP certification despite their deviation from GMP requirements, and “one factor causing this poor state of GMP implementation is believed to be a lack of transparency in the drug administration system” (Royan Gai, et al, “GMP Implementation in China: A Double-Edged Sword for the Pharmaceutical Industry”, Drug Discoveries and Therapeutics (January 2007))
459 Chinese regulators do not supervise the production of raw materials used in pharmaceutical manufacture, so-called “intermediates” which are used to make APIs. The lack of oversight has contributed to tragedies such as the death and disability of 128 Panamanians who used cold medicine manufactured in China which contained diethylene glycol, a toxic substance normally used as engine coolant but sometimes utilized as a substitute for glycerine. “Chemicals Flow Unchecked from China to Drug Market,” Kyodo (November 1, 2007).
460 In 2007 University Health Care System, based in Augusta, Georgia was warned by one of its suppliers that some of the oral care kits used by the hospital might contain toothpaste made in China containing toxic diethylene glycol. “This Problem Made in China,” Modern Healthcare (October 22, 2007).
461 “Just How Big is the Counterfeit-Drug Problem?” FiercePharma (September 13, 2010).
462 “Pfizer Steps Up Campaign in Fight Against Counterfeit Drugs,” Pharma Times (September 30, 2011).
463 “Counterfeit Avastin Seized in the US,” Pharma Times (February 6, 2012).
TABLE 6.6 Examples of SFFC Medicines
|Anti-diabetic traditional medicine (used to lower blood sugar)||China, 2009||Contained six times the normal dose of glibenclamide (two people died, nine people hospitalized)|
|Metakelfin (antimalarial)||United Republic of Tanzania, 2009||Discovered in 40 pharmacies: lacked sufficient active ingredient|
|Viagra & Cialis (for erectile dysfunction)||Thailand, 2008||Smuggled into Thailand from an unknown source in an unknown country|
|Xenical (for fighting obesity)||United States of America, 2007||Contained no active ingredient and sold via Internet sites operated outside the USA|
|Zyprexa (for treating bipolar disorder and schizophrenia)||United Kingdom, 2007||Detected in the legal supply chain: lacked sufficient active ingredient|
|Lipitor (for lowering cholesterol)||United Kingdom, 2006||Detected in the legal supply chain: lacked sufficient active ingredient|
|SOURCE: WHO Fact Sheet No. 275 (January 2010) www.who.int/mediacentre/factsheets/fs275/en/.|
pharmaceutical companies have been reluctant to complain publicly about fake drugs because it could damage their business.464
464 Robert Cockburn, Paul Newton, Kyermateng Agyarko, Dora Akunyii and Nicholas White, “The Global Threat of Counterfeit Drugs: Why Industry and Government Must Communicate the Dangers,” Plos Medicine (March 2005).
The U.S. pharmaceutical industry continues to pursue growth strategies despite the numerous challenges it confronts. Major branded pharmaceutical companies will seek to offset declining R&D productivity through partnerships with innovative biotechnology firms, a strategy which also may help to counter competitive pressure from generics makers. U.S. pharmaceutical firms will increase investments in R&D in emerging markets, where demand for medicines is growing at a far more rapid rate than in developed country markets. And the industry will pursue niche strategies in areas such as biosimilars and orphan drugs.
Strategic combinations. Pharmaceutical and biotechnology firms are increasingly entering into complex strategic alliances with other companies, including licensing and cross-licensing of patents, joint ventures, joint development and trials, and distribution alliances. Such combinations mitigate the costs and risks associated with development of new drugs and enable companies to enter new product and geographic markets. Development of biopharmaceuticals may also help branded pharmaceutical firms to counter competition from generic drug makers. The high cost of developing biologics such as monoclonal antibodies serves as a partial competitive foil to generics makers. On industry analyst observed in 2010 that—
It’s not going to be that easy for generic players to be very successful in the biotech area. They are not easy to copy and not easy to manufacture.465
In 2009 the CEO of Johnson & Johnson, William Weldon, said that J&J would acquire minority shareholding and develop alliances with its competitors in order to share costs and risks.
[Weldon’s] remarks reflect a trend even by large, cash, generative pharmaceuticals companies to fund new ways to share the potential costs as well as the profits in proving the safety and efficacy of new drugs to regulators and winning agreement by health care systems to reimburse them.466
466 J&J Wants Deals with Rivals to Share Risk,” Financial Times (October 25, 2009).
TABLE 6.7 Strategic Alliances in Pharmaceuticals
|2008||Sequenom, MetaMorphix||Apply Sequenom genotyping to enhance livestock DNA screening|
|2009||PRA International, LSK Global Pharma Services, Mediscience Planning||Joint management of clinical trials in Asia|
|2009||Illumina, Agilent||Scalable solution for researchers conducting targeted sequencing studies|
|2009||Eli Lilly, Cadila Heath care||Development of cardiovascular drugs|
|2009||Johnson & Johnson, Elan||J&J acquires rights to Elan Alzheimer immunotherapy program, 18 percent stake in Elan, and links to Elan partners BiogenIdec and Wyeth (Pfizer)|
|2009||Johnson & Johnson, Crucell N.V.||Develop monoclonal antibodies for prevention/treatment of influenza|
|2009||Johnson & Johnson, Gilead||Use joint trials to develop a once-daily HIV therapy|
|2009||GlaxoSmithKlein, Pfizer||Combine experimental and existing HIV medicines with joint venture|
|2009||AstraZeneca, BristolMeyers Squibb||Joint development of diabetes treatment drugs|
|SOURCE: “Johnson & Johnson Completes Deal with Elan, Acquiring its Alzheimers Assets, “ Business Wire (October 14, 2009); “Johnson & Johnson and Crucell form Drug Discovery Collaboration,” Datamonitor (September 30, 2009); “MetaMorphix and Sequenom Agree to Build on Success,” Business Wire (January 9, 2008); “PRA International, LSK Global Pharma Services and Mediscience Form Partnership,” Datamonitor (January 15, 2009); “Illumina and Agilent Sign Co-Marketing Agreement,” Datamonitor (April 20, 2009); “PharmaChem, Cadila, Eli Lilly in Drug Development Deal,” Chemical Business NewsBase (March 31, 2009); “j&J, Gilead HIV Drug Wins FDA Approval,” Blomberg (August 10, 2011); “GaxoSmithKline, Pfizer Inc. HIV Venture Plans Russian Manufacturing,” Chemical Business NewsBase (November 3, 2011); “Onglyza Study by Bristol-Meyers Squibb and Astrazenica,”Asia Pulse ( June 29, 2010).|
Emerging markets. Pharmaceutical markets are growing far more rapidly in emerging economies than in mature markets in the United States, Europe and Japan.467
The pharmaceutical industry will necessarily pursue growth by increasing its presence in emerging markets, particularly countries with large populations and rising standards of living.468
China. China is now the world’s third largest pharmaceuticals market, is reportedly growing at a rate of over 25 percent per year, and is forecast to overtake Japan as the world’s second largest market in 2016. In 2011, the government announced its intention to boost healthcare spending by 16.3 percent to about $26 billion. At present over 90 percent of China’s population is covered by some form of insurance, making modern medicine more affordable. Demand is particularly strong for drugs to treat chronic illnesses, which account for 80 percent of deaths in China.469 In 2011, Merck indicated its R&D spending in China would reach $1.5 billion over the next five years, and that it would construct a 600-person R&D headquarters in Beijing.470 U.S. pharmaceuticals companies investing in China face a number of challenges, including government intervention in drug pricing, competition from locallyproduced generics, and infringement of intellectual property.
Major foreign pharmaceutical makers have made significant commitments in China.471 Novartis announced in 2009 that it would invest $1 billion in R&D in China over the next five years, augmented by acquisition of an 85 percent stake in one of the largest private makers of vaccines in the country, Zhejiang Tianyuan Bio-Pharmaceutical Co. Ltd. Eli Lilly opened an R&D center in Shanghai in 2008 and has entered into a venture capital initiative to launch new products in collaboration with Chinese institutes and companies.472
South Korea. Major U.S. pharmaceuticals firms are establishing a presence in South Korea, a country with a strong university and science infrastructure, a large pool of skilled manpower, and the ability to conduct
467 “A 2010 study by Thomson Reuters Pharma observed that demand for pharmaceuticals was growing at an annual rate of 25-27 percent in China and 15-17 percent in markets such as Brazil, India, Poland and Russia. Western European markets were growing at an annual rate of 1-3 percent and the United States 3-5 percent.” Thomson Reuters Pharma, “The Ones to Watch: A Pharma Matters Report,” (July-September 2010).
468 Merck has reportedly embraced an aggressive growth plan for emerging markets which would up its 18 percent growth rate in 2012 to 25 percent in 2013, focusing R&D in each country on products that are important for that country. “Merck and Company Firms Up Plan for Emerging Markets,” The Economic Times (Mumbai, February 17, 2012).
469 “Alliances Form in Growing Pharmaceutical Market,” Business Daily Update (August 3, 2011).
470 “Merck Play R&D Centre in China,” Chemical Business Newsbase (December 12, 2011).
471 “Foreign Giants Dominate China Pharmaceutical Market,” SinoCast (November 5, 2010).
472 “Eli Lilly Opens China R&D Headquarters in Shanghai,”SinoCast (October 17, 2008); “Eli Lilly Asia VC Fund Settles in Shanghai,” SinoCast (November 16, 2007).
clinical trials in an extremely efficient manner.473 Pfizer announced in 2007 that it would make Korea a “key research bank for its new medicine development" and invest $300 million over a five year period.474 In 2007, VGX Pharmaceutical Inc., a U.S. firm that specializes in hepatitis and HIV treatments, announced it would invest $200 million to establish its Asian headquarters in Korea.475 Johnson & Johnson manufactures drugs in Korea through a subsidiary, Janssen Korea, which functions as J&J’s production base for the entire Asian market.476 Foreign pharmaceutical firms operating in Korea face significant challenges, including pressure by healthcare providers to give suppliers rebates,477 lack of transparency with respect to Korea’s pricing and reimbursement of drugs,478 and government pressure on the intellectual property of branded drug firms.479
Biosimilars. The first generation of biotechnology drugs is going offpatent, giving rise to a promising new market for "follow-on biological,” also known as biosimilars. A number of the major branded pharmaceutical producers are entering the biosimilars markets, including Merck, Eli Lilly, and AstraZenica. In contrast to small molecule drugs formed through chemical synthesis, biologics are molecularly complex and potentially sensitive to changes in manufacturing processes, raising the prospect that they might not have the same effects in human beings as the original drug.480 As a result, biosimilars face an uncertain regulatory path to approval which is still evolving
473 Korea has a unique advantage in the form of large hospitals in a dense area; with so many patients, clinical trials can be done quickly. In addition, Korean hospitals have strong links with university R&D organizations. “Novartis Stays Ahead with New Ideas: Country Head Says Dedication,” The Korea Herald (March 31, 2004).
474 “Pfizer Pharmaceutical Company to Invest 300m Dollars in South Korea by 2012,” Yonhap (June 14, 2007).
475 “US Drug Maker to Have Headquarters in Korea,” Korea Times (July 9, 2007).
476 “Pharmaceutical Giant to Expand Korea Operations,” Dong-A Ibo (February 18, 2008).
477 Since 2007, a significant number of manufacturers, including Eli Lilly, Pfizer and GlaxoSmithCline have been fined by the Korea Fair Trade Commission (KFTC) for illegal payment of rebates to hospitals, doctors and pharmacists. The U.S. government has noted concerns expressed by U.S. companies targeted by the KFTC that they have not been accorded a significant opportunity to review and respond to the evidence against them, including an opportunity to cross-examine witnesses at KFTC hearings. "10 Pharmaceutical Firms Face Heavy Fines for Rebates,” Korea Times (October 25, 2007); “War Declared on Drug Makers’ Rebates to Doctors,” Dong-A Ilbo (July 31, 2009); “Cleanup Drive to Sweep Pharm Industry,” Korea Times (March 31, 2009). Office of the U.S. Trade Representative, 2009 National Trade Estimate on Foreign Trade Business (2009) p. 316.
478 Imported pharmaceuticals are subject to multiple price reduction mechanisms under the Korean Drug Expenditure Rationalization Plan (DERP) cost containment measures, enacted in 2006, which affects not only drugs entering the market since DERP was adopted, but retroactively affects drugs approved for reimbursement in the pre-DERP era. Office of the U.S. Trade Representative, 2009 National Trade Estimates Report on Foreign Trade Barriers (2009) p. 317.
479 “ROK Firms Plan Tamiflu Generics Production,” Korea Times (September 9, 2009).
480 The makers of follow on biologic drugs do not have access to the originating company’s active drug substances, cell bank, molecular clone or fermentation and purification processes.
in the U.S. and Europe.481 The Patient Protection and Affordable Cure Act, enacted in 2010, establishes a 12 year period of data exclusivity for new biological drugs between the date of FDA approval and the filing date for biosimilar approval based on the innovator’s original data, a measure which may inhibit the introduction of biosimilars.
The global competitive environment is being shaped to an important degree by the national policies of our competitors. This chapter has explored the major policy issues affecting the competitiveness of the semiconductor, photovoltaic products, advanced batteries, and pharmaceuticals industries. Each of these industries can be regarded as strategic to the United States. While many nations in Europe and Asia use the full force of government to attain commercial competitive advantage in industries they regarded as strategic, the idea of proactive government help for private industry in the name of economic development has sometimes raised concerns in the United States about distorting market forces and the wisdom of letting public servants “pick winners.” In reality, the U.S. federal government has long played an integral role in the early development of numerous strategic industries, not only by funding research and development but also through financial support for new companies and government procurement.
Each of the four industries studied face unique circumstances and challenges. At the same time, they illustrate the important role that national investments have played in supporting their development and the need for public policies to ensure that the nation captures the benefits of these investments in terms of economic growth and high value employment.
481 In the U.S. the Biologics Price Competition and Innovation Act of 2009 was enacted in 2010 to create a shortened path to regulatory approval for biosimilars. The FDA is currently developing guidelines for the approval process for biosimilars. As of March 2012 it had not yet received its first biosimilars application. “Fitch Looks at Implications of FDA Biosimilar Guidance,” Pharma Times (February 13, 2012).