Industry Luminaries Outline China’s Semiconductor Growth Prospects

Industry and government luminaries participating at the SEMICON China 2015 Grand Opening Keynote session, the Semiconductor Market & China Opportunity Forum, and the Tech Investment Forum reviewed the expanding business opportunities and the key domestic policies aimed at growing the semiconductor industry ecosystem in China. This article primarily covers insights on the government’s new national IC investment policy; Part 2 will summarize perspective from industry leaders about market opportunities in China.

The region’s long-standing position as the world’s largest market for integrated circuits coupled with new product drivers and ambitious policies to stimulate local industry growth presents a “new normal” and the prospects of significant industry inflection in the years ahead.

Wensu Ding, China National Semiconductor Industry Investment Fund
Wenwu Ding, President, China National Semiconductor Industry Investment Fund, said that China’s new industry investment and government promotion policy was crafted by the Ministry of Finance, together with the Ministry of Information Industry (MII) and the National Development and Reform Commission. The policy, which essentially calls for expansion and vertical integration of the domestic semiconductor value chain was articulated in the “National Guidelines for Development and Promotion of the IC Industry” released by the State Council in June of 2014.

The function of the National IC Fund is to support the targets established in the State guidelines for achieving domestic sales revenue of 350 billion RMB by 2020 and reaching the technology level of international “tier 1” companies by 2030.

Ding said that the National Fund and subordinate municipal funds are to be operated by investment professionals acting on market based principles. The fund is aimed at advancing key semiconductor sectors of design, silicon manufacturing, wafer processing, assembly and packaging and equipment technology. Another key objective is to support development of major regional semiconductor manufacturing clusters in key areas.

The government investment was established with an initial fund size of 125 billion RMB (~$20B). Over the next decade, the State development program and supporting policies of numerous municipal governments and private equity funds potentially amount to a $100 billion stimulation across the semiconductor ecosystem. Ding said that 60 percent of the fund is to be used for manufacturing.

He reiterated that fund support is designed to leverage equity investment and not be structured simply as grants or subsidies. The National Fund is currently comprised of 16 shareholders including local governments, private enterprise and financial institutions.

Ding discussed the Fund’s principles of capital allocation in terms of balancing between investments to fulfill big strategic objectives and projects with better profitability. He said there would be a mix of high-risk/high-yield investments those with likely low risk and low yield. He asserted that the fund will seek diversified sources of additional investment and operate according to open market principles. He said it will be important to integrate and coordinate government agencies including the development bank and to address tax policies, import/export policies and science and technology programs. Ding also stated that the National IC Fund will become the second largest shareholder of China’s largest indigenous IC manufacturer – SMIC.

The new national policies and industry funding programs portent a wave of international acquisitions aided by the State Fund, numerous municipal incentives and a private equity investment.

Wan Xinchao, Jiangsu Changjiang Electronics Technology (JCET)
Wang Xinchao, Chairman and CEO of Jiangsu Changjiang Electronics Technology Co., Ltd., (JCET) said, “The next decade will be the golden era for the development of the Chinese semiconductor industry.”

That Wang sees M&A as the most effective way to achieve rapid industry growth is consistent with his company’s alliance with SMIC in the recent $780 million acquisition of Singapore-based STATS ChipPAC Ltd. Acquisition of a leading provider of advanced semiconductor packaging design, assembly, test and distribution solutions addressed shortcomings in JCETs technology capability. The company also realized that to grow further, it would need to both advance its technology portfolio and have the capacity to serve international markets. The planned merger effectively makes JCET the world’s third largest packaging and testing enterprise. Wang outlined the financial structure of the deal in which JCET spent $290 million combined with $300 million from the National Fund, $100 million from SMIC and debt borrowed from other sources.

Zixue Zhou, SMIC
In a broad philosophical reflection on the emerging national IC policies, Zixue Zhou, chairman of China’s largest indigenous IC maker SMIC, opened the SEMICON China Market Forum and provided a compelling indication of the innovation and market-based principles shaping China’s new strategies for economic growth and technologic development.

Zhou emphasized that he was conveying his own opinions and was not speaking on behalf of SMIC. However, it’s difficult to dismiss his perspective as purely personal given his extraordinary influence over the national agenda, which is evident by his various positions including Chief Economist and Former director General of the Chinese Ministry of Industry and Information Technology (MIIT) and Vice Chairman and Secretary-general, China Information Technology Industry Federation.

Zhou commented on China’s new phase of growth in the wake of the wake of the global financial crisis and China President Xi Jinping’s call for economic reform. He said that economic reform should depart from the traditional state planning paradigm and follow more effective principles. As an example, he cited the innovation theories of Austrian-American economist and political scientist Joseph Schumpeter who developed the concept “creative destruction.” Zhou said that the fundamental driver of economic growth is internal structuring, new technology, products, materials and new organization. He emphasized that, “entrepreneurs are at the core of innovation.”

These concepts reflect a far more market-oriented underpinning than previous Chinese economic policy efforts and, therefore, represent a departure from earlier IC industry promotion efforts. Zhou acknowledged that most previous special projects took the form of government subsidy and were not effective. The new guidelines ostensibly emphasize the key role of the market and “Open Development” in achieving the domestic IC industry growth targets.

Zhou said it is important to establish multiple levels of financial support including the encouragement of banking, company bonds, rules for stock listing and reform, and the vigorous development of private equity participation.

Yongzhi Jiang, Goldman Sachs Gao Hua Securities
Yongzhi Jiang, Managing Director, Head of China Merger & Acquisition for Goldman Sachs Gao Hua Securities Company Ltd said that China is currently the most active M&A market outside of the United States. China had M&A deals totaling $447 billion in 2014 and there is a shift from low end to high-end sectors. Most were inbound M&A transactions, while there was also an increase in outbound deals focused on resources (such as coal).

Jiang estimates $23.7 billion in global semiconductor industry transactions last year motivated by industrial integration, the desire to increase core competencies (e.g. ASML’s acquisition of Cymer), economies of scale, and access to customers (NXP’s deal with Freescale), as well as the encouragement of sovereign funds.

Clearly, there will be a focus on M&A to achieve the rapid technological scale up necessary to realize the vison of the new national policy. The impacts of these strategies will present both opportunity and competitive risk to existing industry participants and SEMI (www.semi.org) remains committed to helping members understand and interpret the implications of these evolving developments.