Canada’s semiconductor industry seeks renaissance from AI, shifting geopolitics

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A renaissance is under way in Canada’s semiconductor industry, with companies attracting hundreds of millions of dollars in investment to build the future of artificial intelligence, quantum computing and electric vehicle hardware.

While still short of its former glory, the industry is growing. But it is also puzzling over what direction that growth should take.

Semiconductors are physical components that control the flow of electric current in microchips, which are essential to almost every electronic device, from LED light bulbs and blenders to EVs and rocket ships.

The industry includes manufacturers that operate fabrication plants (commonly called fabs), design companies known as fabless firms, as well as those that package, test and integrate chips into proprietary products.

“There’s a renaissance in terms of the commitment from industry, the alignment of government priorities and also the mentality of Canadian founders,” said Melissa Chee, an initial member of the Canadian Semiconductor Council and chief executive of Markham, Ont.-based semiconductor accelerator ventureLAB.

Increasingly, she said, semi startups are choosing to set up in Canada. Meanwhile, funding to the industry through the federal Business Development Bank of Canada reached a 10-year peak last year, and private investors are warming up to investments in hardware, venture capitalists say.

But the industry says Canada still lacks an overarching strategy that brings together public and private stakeholders to plan how the country can take advantage of the window of opportunity as key parts of the global semiconductor industry return to North America.

“We need to place big bets as a nation. There’s a practical way to do that but it does take some risk taking. That’s not always in the Canadian ethos,” Ms. Chee said.

Canada has a strong legacy in semiconductors dating back half a century, with companies such as Nortel Networks Corp., Tundra Semiconductor Corp., Teledyne Dalsa Inc. and Gennum Corp. designing and fabricating chips for clients worldwide.

“We were never the world’s biggest manufacturer of chips, but we punched above our weight,” said Duncan Stewart, a technology research director at Deloitte.

Over the past two decades, however, the industry shrank as many of the country’s large companies were acquired and folded into foreign companies, leaving some facilities and staff here, but taking head offices, intellectual property and corporate profits elsewhere, Mr. Stewart said.

Nortel, Canada’s networking equipment superstar, founded in 1895, filed for bankruptcy in 2009. Within three years, Tundra, Dalsa and Gennum had been acquired by foreign players. Some new chip companies were founded in the 2000s and early 2010s but as a whole, Canada’s reputation as a semiconductor leader “atrophied,” said Benjamin Bergen, president of the Council of Canadian Innovators.

While chip design remained an international endeavour, Southeast Asia cemented its role as the dominant region for semiconductor manufacturing, with just a handful of companies – including Taiwan Semiconductor Manufacturing Co. Ltd. and South Korea’s Samsung Group – making the majority share of the world’s advanced semiconductor devices.

But changes in technology and geopolitics over the past eight years have spurred a new wave of semiconductor companies in Canada and worldwide.

Semiconductors now scale in mere nanometres (one-billionth of a metre), necessitating investment in research and development to push the laws of physics. Meanwhile, AI technologies require cutting edge new hardware that can hold up to the pressure of the intense computer power required to run calculations, and to make doing so more efficient (AI can have a heavy carbon footprint).

As the COVID-19 pandemic took hold, microchip lead times stretched to over a year as demand for laptops boomed, major manufacturing facilities in Asia shut down and ports became overloaded. Automobiles, appliances and industrial equipment – all of which require hundreds of microchips apiece – shot up in price or became impossible to find.

At the same time as countries were fighting over supplies of vaccines and masks, they were becoming aware of the vulnerabilities of the semiconductor supply chain.

Chips, also essential in defensive and military equipment, have taken on a greater importance in national security and sovereignty.

This has only become more apparent over the past year amid mounting geopolitical tensions, particularly between China and the United States over Taiwan.

In response, countries have moved aggressively to limit chip sales to Chinese companies, onshore manufacturing and rethink industry strategy.

In 2022, Washington committed US$52.7-billion to entice manufacturers to build chip factories in the U.S. through its dedicated CHIPS and Science Act. Britain passed its £1-billion (about $1.7-billion) strategy in May, and the European Union is in the midst of finalizing its own €43-billion (about $62-billion) legislation, with the goal of doubling its semi market by 2030.

In May, Canadian industry experts and academics met with U.S. and Mexican representatives in an invitation-only, first-ever trilateral semiconductor forum. The two days of meetings focused on understanding how the three countries could co-ordinate to fill supply and skill gaps, as well as a closed-door session with a restricted group of cabinet officials, according to e-mails viewed by The Globe and Mail.

Canada has seen its own mini-boom over the past few years, with a slew of startups emerging since 2015.

Untether AI and Blumind, for example, have leapt into designing chips for AI applications, a field in which Canada is already a strong contender.

Untether’s design improves on traditional chips by placing memory and processing side by side on the hardware, allowing for the fast processing speeds required by AI applications. Applications for its chip range from robots and drones to financial services and data centres.

Blumind’s semiconductor consumes much less power to process neural networks, which collect information gathered from sensors such as the cameras on self-driving vehicles to make decisions. This will extend the life of battery-powered sensors such as in augmented-reality headsets or glucose monitors.

Companies such as Ranovus, Xanadu and Tenstorrent Inc. are also drawing more attention and investment, raising more than $300-million combined over the past two years. Ranovus’s chip improves efficiency in data centres and communication networks. Xanadu’s chips are for quantum-computing applications. Tenstorrent, which recently penned a deal with South Korea’s LG Electronics Inc., builds multipurpose AI chips for applications that include smart TVs.

New sources of funding are becoming available to help fund these companies.

Over the past 10 years, BDC invested $235-million in Canadian semiconductor companies, with the amount growing by 21 per cent a year, on average, during that period, said BDC spokesperson Marion Pilon-Cousineau. And 2022 was the largest year on record, with $63-million invested.

Over the past two years, Ottawa has put $90-million toward revamping the National Research Council of Canada’s semiconductor component fab, launched a $150-million Semiconductor Challenge Callout to fund startups in the space and earmarked $250-million for more investment through the Strategic Innovation Fund (SIF).

Interest from venture-capital funds is warming up, too. Moe Kermani, managing partner of Vanedge Capital Partners Ltd., an early-stage venture-capital fund based in Vancouver and Silicon Valley, said he is seeing greater interest among Canadian venture capitalists in hardware.

“I think investor sentiment has changed. There’s a realization that this is an area of growth, where government mandates are aligned,” said Mr. Kermani.

A new incubator has also sprung up to help new companies grow. Since 2020, 80 semiconductor companies have emerged from the Hardware Catalyst Initiative, an incubator exclusively for hardware products run out of ventureLAB, the tech accelerator headed by Ms. Chee in Markham.

Nonetheless, scaling a semi company is difficult. Hardware companies are very capital intensive, require significant expertise and take longer to reach profitability than software companies. It can take 10 years or more to commercialize a complex chip, for instance. Large investments from Canadian investors can be hard to find, meaning companies have to look elsewhere, essentially shifting IP ownership outside Canada.

One such departure took place in March, when Canadian success story GaN Systems Inc. was purchased by German chip giant Infineon Technologies AG for US$830-million. GaN said the move will allow the combined company to accelerate its strategy of building power semiconductors, but Canadians, including Ms. Chee, consider it a significant loss for this country, as GaN held valuable and unique IP.

“The problem is that we could never find the money in Canada,” said Matt Roberts, son of the late GaN founder John Roberts. “It would have been nice in the mid-2000s to have had a venture capitalist that would do a semiconductor deal. But there were none.”

While there may be more funding available now, industry experts say it’s not yet clear how that investment should be focused.

Among the most popular strategic views is that concentrating on AI chips is the key to Canada’s future success. But integrating with the U.S. corridor also means looking at other parts of the process.

Ms. Chee is among leaders who say Canada should build up its domestic manufacturing capabilities and specialize in certain types of manufacturing such as in industries that Canada is already strong in: EVs, aerospace and defence.

CMC Microsystems, which helps Canadian semi companies by buying expensive design tools and manufacturing runs and then splitting them between academics and startup companies, is also pushing for more investment in Canadian manufacturing. It has proposed a five-year, $200-million plan to accelerate chip manufacturing in Canada through the SIF, for which it is awaiting sign-off from the federal department of Innovation, Science and Economic Development (ISED), said CMC CEO Gordon Harling.

But investing in manufacturing is controversial because fabs are so expensive to build.

“Nobody in their right mind will do all the manufacturing for semiconductors locally in Canada because there’s no cost advantage to it. There’s not enough volume here. And so, you’re only going to ever use it for short run experimental stuff,” said Mr. Roberts.

Some experts suggest Canada could focus on the parts of the manufacturing process that do not require the multibillion-dollar down payment of a fab: business model and supply chain planning, assembly, testing and packaging.

Canada could also dig in on its natural resources. The country has access to gallium, used in electronic circuit boards, and tellurium, another mineral used in semis, is refined in Quebec. But critics of this strategy have said it risks leaving Canada as a resource extraction country in the digital era.

Regardless, without a single strategy to guide government investment and policy creation, Ms. Chee said, government and industry could be left scrambling to settle on a clear road map toward generating strategic IP, leaving Canada without a leadership position in global standards-setting bodies and at risk of losing more talent and companies.

When asked if it is planning or developing a single strategy or parliamentary act for chips, ISED said it is committed to “playing an important role in building resilient semiconductor supply chains.” The department is positioning priorities “around areas of the value chain where we have existing capabilities and where we can be complementary to efforts being made by ally nations,” said ISED spokesperson Doreen Flynn.

To push the government toward a unified strategy, a coalition of industry organizations led by the Council of Canadian Innovators have combined forces to create SILICAN – the Semiconductor Industry Leadership and Innovation Canada Action Network.

“Over the last six to 12 months, there have been a lot of different people coming out of the woodwork saying, ‘We need this, we need that,’ ” said Mr. Bergen of the Canadian Council of Innovators. “But I think we need to step back and ask, what are our capabilities as a country? And where do we want to go from here?”