Will it really become the new center of the semiconductor universe? Maybe.
China’s impact on the semiconductor market is unmistakable. The question so many industry watchers wonder: Is it the new center of the semiconductor universe?
Some statistics may help determine the answer. China topped the list of five worldwide exporters in 2014, with the European Union coming in second. The U.S. finished third, followed by Germany and, in fifth place, Japan. (See Fig. 1.) China is an electronics powerhouse, owning 80% of the mobile phone business, 50% of the liquid crystal display (LCD) television market, 60% of the notebooks and tablets sector and about 65% of the digital cameras sold.
Those numbers certainly are impressive, but here’s the rub. While China is the world’s largest consumer of integrated circuits (ICs) –– 45% of all worldwide semiconductors, to be specific –– 90% are imported. No China semiconductor fab has made it into the top 20 listing as yet.
The Chinese government is well aware of these numbers and realizes it needs to build its own domestic IC industry and infrastructure to mitigate its reliance on outside suppliers and grow the economy. As such, the government will invest anywhere from $20 billion to $50 billion over the next five years to stimulate the growth of a localized industry driven through a number of different initiatives and programs. For example, the State Council established a goal in 2014 to grow the domestic IC industry by $56 billion in 2015 to $140 billion by 2020. This is an impressive 20% year-to-year growth rate –– and an equally impressive target. (See fig. 2.)
The implications for the worldwide semiconductor market are not insignificant, especially China’s pressure for localization. The mandate for the establishment of a domestic supply chain will naturally lead to a push to use local, low-cost suppliers. However, because the supply chain cannot be built overnight, there also will be collaborative opportunities with foreign partners to help “jump start” the build out of the domestic infrastructure. For example, in 2014 Intel invested close to $1.5-billion for a minority stake of the holding company Tsinghua Unigroup, which owns Spreadtrum and RDA. The risk component that is of most concern to Tier 1 companies eyeing these collaborative opportunities are concerns about the protection of their intellectual property (IP). Analysts predict Chinese companies will become much more aggressive in pursuing international mergers and acquisitions (M&A), as illustrated by recent bids from Chinese investment consortiums to acquire OmniVision, Integrated Silicon Solutions, and memory producer Micron.
China’s bold moves within the semiconductor ecosystem are fraught with challenges, too. A large investment in technology innovation is welcome news, but a successful outcome is not guaranteed. In fact, even a large investment in advanced IC manufacturing may not be enough. The worldwide industry consolidation creates barriers to entry for newcomers. The technology, the talent, the market and supply chain are global and China’s value proposition and ability to go global is untested.
Questions have been raised about whether Chinese startups will be able to flourish when information access is restricted, and reliance on government initiatives and funding often hinders innovation and competitiveness, key drivers of a robust presence in the global semiconductor market. Moreover, the established competition is a generation ahead and there is no sign of a slowdown. After all, China’s semiconductor industry started late and currently lacks the necessary scale and core competencies.
However, history shows that markets are unpredictable. At one point, Japan seemed invincible in the semiconductor market. And applications drive the semiconductor industry, from the PC and notebook that dominated from 1979-1999 to mobile phone from 2000-2009 and now the hot mobile computing and the Internet of Things. The emerging mobile Internet will bring explosive growth of computing and communication terminals, with an estimate of 50 billion connected devices by 2020, a number that exceeds the world population.
All in all, the timing is right for semiconductor companies in China to seize the opportunity. After all, they have a pool of talented and well-educated engineering and science graduates to draw from. The global semiconductor industry is entering a maturation phase with narrower margins, an opening for China’s low-cost suppliers. Electronic device manufacturing continues to be transferred to Asia from the U.S., Japan and Europe. In the U.S., the semiconductor industry is no longer favored by investors. In fact, little U.S. venture capital funding has gone to equipment and materials companies in the last 10 years, in stark contrast to the China initiative.
The Chinese government policy and special project funding has proven to be effective. Its equipment and material companies include all major process segments, from wafer and lithography to sputtering targets, chemical mechanical polishing/planarization (CMP) slurry, plating solution, chemicals and special gas.
A word of caution, however. Chinese semiconductor companies need to establish a solid and sustainable business model and core competencies, and avoid competing on price alone. Given the restrictions in information access, can innovation flourish?
Successful global collaboration will be critical to China’s success. One IP company based in the U.S. serves as a useful case study. Its goal was to establish a foothold in China with a highly desirable IP core that has been used in many consumer electronics products. It found that electronic products, notably in the mobile and consumer sectors, increasingly are being defined and developed in China. Culture, language and the ecosystem of the application marketing is fast replacing cost and becoming the differentiator.
The strategy was to build recognition of its brand and aggressively promote itself and its IP. The tactics were straightforward enough –– establish a local office with sales and technical support, augmented with local sales reps. Promotions within China included an IP symposium to address design challenges, promote the brand and products and deliver useful information.
Securing the first and second buyers was an important element of the follow-up because word-of-mouth testimonials and references can be the best marketing tools. Corporate visits to present the company and products were scheduled to build exposure with executive management. The company participated in local events and afforded aggressive pricing and deals. It learned through this process that customer support and service prevailed. This IP vendor secured several IP license deal and an architectural technology licensing agreement. It is building key relationships within China.
The conclusion is that China has all the elements, along with the goal, to become the new center of the semiconductor universe, offering many opportunities for global semiconductor players and service providers. It won’t be easy, however. Its government policy and resources will drive the IC industry growth for the foreseeable future and its semiconductor industry has been growing. But, China faces challenges in scale and core competency, and continued global collaboration and M&A are critical to its success. Government funding and mandates cannot guarantee innovation. The caution, as always, is the unpredictability of the semiconductor industry, noted for its boom and bust economy –– something out of China’s control and the industry’s as well.