OTTAWA — As chip shortages snarl supply chains around the world, a Canadian group of tech executives and investors is calling for a national strategy to grow the domestic semiconductor industry.

In its first report published Tuesday, Canada’s Semiconductor Council asks governments to give multinational manufacturers financial incentives to set up domestic production, and to make rules to help keep domestic companies, expertise and IP in the country. It also urges Canadian companies to band together to increase their power with suppliers.

The combination of geopolitical tensions, increased consumer demand for electronics and vehicles during the pandemic and disasters at key sites in the production process have helped create a global chip deficit. In Canada, the carmaking sector has felt its effects most acutely, causing “production curtailment in all major auto assembly plants,” Statistics Canada said last week. Semiconductor companies are planning to spend billions to increase output, while governments have promised tens of billions in subsidies. But “it may take years before new capacity comes on stream,” Scotiabank economists Tuuli McCully and Rebekah Young noted in an October report, forecasting the shortage will goose inflation until mid-2022.

The council, which launched in May, says Canada must avoid the economic consequences of being left out as technology becomes increasingly chip-intensive, and can reap financial and security rewards by maintaining a competitive semiconductor sector. It’s hoping for “a commitment of dollars in the spring 2022 budget,” said council member Melissa Chee, CEO of Markham, Ont.-based VentureLab. The report does not put a price tag on its recommendations. 

The report is based on views from more than 100 startup, multinational and industry-group executives, academics and investors whom VentureLab staff interviewed or surveyed over the summer. “This is industry speaking,” said Chee. While Ottawa has proposed strategies for AI, quantum and other subsectors, semiconductors are a foundational technology that require their own plan, she said. “It’s an infrastructure play, no different than broadband was probably 20 years ago.” 

The report calls for governments to provide incentives to attract an international manufacturer to set up a fabrication facility, “with the goal of announcing a new foundry investment by 2022.” Such fabrication plants or “fabs” can cost between US$5 billion and US$20 billion and require significant power and water, the report notes. Other countries are proffering significant manufacturing subsidies. In June, the U.S. Senate passed a bill that set aside US$39 billion in incentives to build or expand domestic plants, while the Indian government is reportedly offering over US$1 billion per company that sets up there. 

It’s unlikely that Canada will ever be “a high-volume manufacturer of basic components,” acknowledged Salim Teja, who is a partner at Toronto-headquartered Radical Ventures and another council member. But there’s potential in making specialized products that the country’s traditional industries use in bulk. For example, increasing the quality and number of Canadian-made sensors could contribute to improving supply-chain logistics, connecting and electrifying cars, greening oil and gas production and automating mines, Chee said. Facilities that make such components can be considerably cheaper to establish than those for the most advanced AI chips. 

The report also calls for measures to keep IP, talent and companies within the country, including using the Investment Canada Act to conduct national-security reviews of foreign takeovers in the sector. In the 2000s, U.S. competitors acquired several promising Canadian chipmakers. In the largest such deal, Advanced Micro Devices (AMD) announced the acquisition of Markham-based ATI Technologies for US$5.4 billion in July 2006. (AMD retains a large presence here, and country general manager Kevin O’Neil is a member of the semiconductor council.)

The federal government has signalled it will act to retain Canadian-funded and -developed IP, and is considering new requirements for foreign takeovers in sensitive technology sectors. Some venture capitalists have expressed concern that more restrictions could depress exit values and investment. Any rules in the semiconductor sector must be clear, and coordinated with Canada’s trade partners and allies, according to Teja. “This can’t be thought of in silos, otherwise we will stifle innovation capital and activity,” he said. 

Chee said the report doesn’t advocate excluding multinational firms, which can provide expertise and efficiencies from their global operations to support domestic manufacturing. But Canada also needs to foster domestic startups. Chee cited Toronto-founded Alphawave, Tenstorrent and Untether, which each raised hundreds of millions earlier this year. “On the design side, those are anchor companies that can continue to scale,” she said.

While Radical has financed Untether—alongside Intel—Alphawave and Tenstorrent have taken their recent capital from U.K. and U.S. investors, respectively. The report says there aren’t enough domestic VCs that can fund the $100-million-plus it costs for a company to develop a chip. It calls for Ottawa to provide money and incentives for semiconductor investment, including allowing firms to issue flow-through shares and setting up a new early-stage risk capital fund. Teja said the federal government should also “extend the runway” for firms by providing matching financing in Series A through C rounds.

The council cites the expertise and training of Canadian workers as an existing area of semiconductor strength. The report recommends governments fund a chip version of the Waterloo, Ont.-based quantum-focused Perimeter Institute or Toronto’s AI Vector Institute, as well as new academic programs at universities to grow the labour force. And it proposes semiconductor-using Canadian firms band together in cross-sector buying groups, on behalf of whom Ottawa could negotiate with trade partners and vendors for more stable supplies.

Ottawa pledged funding for biotech firms during the pandemic, and should do the same to solve the chip challenge, said Teja. For example, the federal Strategic Innovation Fund allocated up to $415 million for Sanofi to establish an influenza-vaccine plant in Toronto, and nearly $176 million to Vancouver-based AbCellera to keep developing its antibody-identifying technology. “That’s the scale of the investment that is probably warranted” in the semiconductor space, said Teja. “I could see the number being in the hundreds of millions to approaching a billion dollars.”