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Southwest Economy, Fourth Quarter 2021

Semiconductors key to global growth; geographic supply risks loom

On the record: A conversation with Tyson Tuttle
After nearly 25 years with Silicon Labs in Austin, Tyson Tuttle will retire at year-end 2021. He began his career as a chip designer, advancing through engineering and management positions to eventually lead the global semiconductor company. He shares his insights on current issues in the industry and the challenges and opportunities that lie ahead.
Q. To begin, what are semiconductors, and why are they so important?

Semiconductors are the heart of every electronic device and are critical components in the global economy. The U.S. has been a leader in the semiconductor industry ever since semiconductors were invented here, with Texas Instruments playing a key role. Semiconductors are the fourth-largest U.S. export, and this year, output in the industry will exceed $500 billion.

Moore’s Law states that every two years producers can fit twice as many devices on a semiconductor chip. Essentially, this has played out ever since 1965. Today, producers can get a million times more devices on a semiconductor chip than in 1986. This has been driving computing power. Every year, however, this dramatic improvement gets more difficult to achieve, and some in the industry are questioning how long it can last.

Whether it’s cars, industrial machines, computers, mobile phones, data centers, computer networks or appliances, the internet of things is connecting just about everything in our lives and economy, making devices smarter and more useful. For at least the past several decades, this [transformation] has been spreading across the world and driving a global transformation of the economy and improving lives and productivity.

Q. There have been notable shortages of products that rely on semiconductors in the past year. What happened, and when will shortages likely ease?

Coming into the pandemic, semiconductor capacity was nearly full. Once the pandemic hit, there was increased need for automation and connectivity, which led to a surge in demand for things like personal computers, mobile devices and data centers. The pandemic basically accelerated the demand for semiconductors by two to five years.

The February deep freeze in Texas also played a role in the shortage, as four large semiconductor plants in the state shut down, causing about two to three months of lost production and resulting in more than $100 billion in lost gross domestic product globally. This downtime impacted many industries, but it hit the U.S. automotive industry particularly hard. Currently, the semiconductor industry is only able to ship about two-thirds of demand, and this shortage will likely persist until we get more capacity built.

It takes about 18 months to expand a semiconductor factory and more than three years—at a cost of early $20 billion—to build an advanced semiconductor factory. It will be the end of 2022 before we see a significant increase in semiconductor manufacturing capacity. Due to the large capital expenditures needed and a slowing of Moore’s Law, semiconductor prices, which typically fall 5 to 7 percent a year, are increasing 20 to 30 percent. Given the amount of products that use semiconductors, the rise in semiconductor prices is a concern for overall inflation over the next year or so.

Q. You have been with Silicon Labs since 1997. How has the industry changed, and where is it headed?

Overall, we are in an era where semiconductors are becoming more and more important. They are becoming an ever-increasing share of the economy and a larger portion of the content of many products. If you look at how things have changed, there are a couple of key trends: consolidation—moving production from components to systems—and vertical integration.

Tyson Tuttle

Technology increases the access to and lowers the cost of information and brings opportunity to the masses—not just the wealthy. Technology can bring a lot of people out of poverty.


As the industry has matured and mergers and acquisitions have occurred, there are half as many public companies as there were 10 years ago. Also, a lot of companies in the ’60s, ’70s and ’80s divested their semiconductor businesses, including Motorola (Freescale), AT&T (Agere, Broadcom), Philips (NXP) and Siemens (Infineon).

Now, we are seeing more large companies producing their own semiconductors. For example, Apple, Google, Facebook, Amazon and Tesla are producing their own semiconductors where they control the whole system, including the software and hardware. This is leading to a lot of system-level integration and innovation, focusing on how the entire product is built versus just individual components.

Q. When you think about the industry and its challenges, what tends to worry you the most? What gives you the most hope?

The biggest challenge is related to geopolitics—in particular, how it relates to China. The question is, are we going to separate our industry supply chains and standards from China? Our industry has worked hard on global standards so that components work with each other and parts are interchangeable across a global environment. If we separate Chinese production and there is bifurcation of components, depending upon where the product is built, it will be a big challenge.

Another issue is the concentration of manufacturing in Taiwan. Taiwan has about 50 percent of the world foundry capacity and 90 percent of the most-advanced processing technology. The weakest link in the global supply chain is a few semiconductor factories in Taiwan.

If you think about the Cold War, it was nuclear missiles that were our mutually assured destruction; today, it is the semiconductor manufacturing base in Taiwan. If we lose access to Taiwan or China loses access to Taiwan, it could lead to a global depression where the production of homes, autos, computers and other products containing electronics would be dramatically reduced. It would make the current semiconductor shortage pale by comparison. We need to work with China in a judicious and constructive way; the global economy is at stake.

Cybersecurity is also a big concern as everything becomes interconnected. There are bad actors out there seeking to profit from hacking into communication and data systems. There are currently a lot of efforts to track these hackers and mitigate the risk, but it is something that everyone needs to be cognizant of. We need to have more regulation and policy to safeguard our systems and data.

In terms of hope, I am an optimist at heart. Technology and semiconductors have greatly improved our lives and enabled huge productivity gains. In the future, technology will play an even larger role in our economy and will continue to improve human enlightenment. Technology increases the access to and lowers the cost of information and brings opportunity to the masses—not just the wealthy. Technology can bring a lot of people out of poverty. We should continue to strive as a society to make sure that the benefits are well-distributed across income groups and other demographics.

The disruption of the economy is happening at a faster pace, and so we need to think about lifelong education, and how do we educate the workforce of the future? The increase in job churn over the current generation of workers will increase further and, thus, we must focus on education and making sure a high-quality education is available to all.

Q. Silicon Labs is among a host of technology companies that began in Austin. Why have so many high-tech companies started in or moved to Austin?

We just lost one of the pioneers of the high-tech industry in Austin; [Texas power broker and attorney] Pike Powers just passed away. He brought many high-tech companies to this area including Tracor, IBM and Motorola. A lot of companies that have come to Austin were attracted by the quality of life and the talent the University of Texas, Texas A&M and other universities in the region produce. The reasonable taxation, cost of living and regulatory environment in Texas have also played an important role in attracting firms and workers.

The region has a strong entrepreneurial and start-up culture along with a thriving venture capital industry that helped create companies like National Instruments and Dell. The number of high-tech companies has grown dramatically with companies like Silicon Labs, AMD, Oracle and Tesla, and major outposts from Silicon Valley.

Q. What challenges does Austin face to keep attracting high-tech companies?

We face challenges in many areas including affordability, infrastructure, workforce issues and keeping Austin and Texas as attractive places to do business. Going forward, as population density and housing prices increase further, we will face greater challenges retaining our attractiveness. We must work hard to be a place where individuals and firms want to be.

Fundamentally, if the cost of living is too high and people can’t get around, the growth will go somewhere else. While we have a transportation system that has worked up until now, we need to look at areas across the world for how to make the economy of the future work. If we build and improve the infrastructure and provide policies that ensure a certain amount of affordable housing, Austin’s population could double in size in the next 25 years. It’s going to be a challenge, but Austinites are proud, smart and determined to make sure we remain one of the greatest cities on the planet.

Southwest Economy is published quarterly by the Federal Reserve Bank of Dallas. The views expressed are those of the authors and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.

Articles may be reprinted on the condition that the source is credited to the Federal Reserve Bank of Dallas.

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