Re <<Supply chains are not fungible... do not function like light switches.>>
Deeper dive than I intended when starting out, but useful at least to myself, and so contribute as public service
:0), no, the chains are definitely not fungible, even as strategists and politicians of deep-states everywhere act as if they are and do.
they are however assuredly breakable, if not like light switches then perhaps gas main, probably fragile, w/ difficult to predict and likely unintended macro and not-counted-but-cumulative micro consequences
as example, the semiconductor story should keep all amused until epilogue make appearance
In the meantime Team Taiwan undergoing drought bloomberg.com
"Taiwan Cuts Water Supply for Chipmakers as Drought Threatens to Dry Up Reserves"
and CoVid issues japantimes.co.jp
"World’s semiconductor supply is in danger unless Taiwan gets vaccines"
Likely as yet nothing to do with field trials re weather and whatever alleged re CoVid, because suspect Bloomberg is on the fear--mongering job bloomberg.com
"Has China Mastered Weather Modification? Should We Worry?"
scmp.com
"US-China tech war helps drive Taiwanese semiconductor investment in mainland, despite tensions
Despite a chorus of voices in Washington calling for tougher restrictions on China, Taiwanese tech companies are expanding operations in the mainland
Taiwanese investment rose 29.9 per cent year on year to US$330 million during the first quarter of 2021, according to official Chinese data"
asia.nikkei.com
"China's progress in advanced semiconductor technology slows
Struggle of chip equipment makers indicates difficulty in becoming self-sufficient"
totaltele.com
"Chinese semiconductor industry is speeding up advanced chip development
Despite several challenges, the Chinese semiconductor industry is all set to grow in prominence. By acquiring expertise in new areas like the manufacturing of 14nm and 7nm chips, the Chinese industry is well on its way to becoming self-reliant and disrupting the global semiconductor industry."
scmp.com
"US-China tech war: China becomes world’s top semiconductor equipment market as Beijing pushes local chip industry
Taiwan was the second-largest market last year with sales of US$17.15 billion
ASML CEO believes export controls on China will fail to halt the country’s technological progress, and will also hurt the US economy"
The below chart is interesting, if treated as a chess game, hilarious if poker, and fascinating if Go.
I suspect that the China semiconductor production, aside from the top-end national defence stuff is concentrated on the low-end everyday stuff, and if so, might have something to do with everyday needs for the planet.
A perhaps balance and looks like a nuanced set of two articles
executiveinstitute.fiscalnote.com
The US-China Battle for Semiconductor Supremacy: A Case Study on Technology Competition
Guest Author
March 31, 2021
Over the last 30 years, China’s economic emergence has led to it challenging the United States for technological pre-eminence — not unlike Japan in the 1960s to 1990s. The West has long labeled China as the “Copycat Nation,” but few commentators today would still doubt its innovation capacity.
A trade war in 2018 precluded what many are now calling the “U.S.-China Technology Cold War.” Since then, each nation has utilized legal and economic instruments such as investigations, sanctions, and tariffs to target each other’s technologies and strengthen their respective geopolitical positions. Recently, the two superpowers have injected tens of billions of dollars to stimulate research and development (“R&D”) of next-generation technologies and boost access to hi-tech manufacturing capabilities, especially those relating to semiconductors. By examining the semiconductor market, can we determine if China will succeed the U.S. in global technological leadership?
Since mid-2019, the United States has issued executive orders and export controls restricting trades with Huawei, ZTE, and other Chinese technology firms. The U.S. has also made high-profile commitments to prioritize strategic resources to address Chinese technological threats. In late 2020, the Chinese government retaliated by issuing its own set of measures, including a restricted entity list and amendments to its Catalogue of Technologies Prohibited or Restricted from Export.
A key battleground in this Cold War is the semiconductor industry. This industry is critical to growth at the dawn of the Fourth Industrial Revolution. The semiconductor is a basic technological building block. No nation can claim technological leadership without ample access to its supply. Moreover, the challenges faced by the United States and China in the semiconductor industry mirror their technological race. The U.S. is maintaining the leadership position, while China is the top contender given the sheer scale of its commitment to technology advancement.
As the U.S. has shown since World War II, technological leadership requires a nation to achieve several areas of ascendancy, including its capability for scientific discovery; access to raw materials; and capacity for advanced manufacturing and production. The United States can maintain its leadership, because it has an outsized share of the world’s top innovators and universities, and it dominates several hi-tech markets. U.S. companies constitute 73 percent of the global IT sector in market capitalization.
But China holds the most patent grants in the world, followed by the United States and Japan. Certainly, patent grants alone say nothing about the scientific and economic value of the inventions. What generates economic value is the capacity to commercialize scientific discoveries and inventions. Yet China is highly experienced in commercialization, having been the “World’s Factory” for four decades.
Global Chip MarketThe computer chip market lies squarely at the crossroads between global trade and technological competition. A complex web of cross-border supply chains is needed to support the $400 billion p.a. global chip industry — from extraction and refining of raw metals and minerals to advanced material fabrication and assembly. Chips are typically made of semiconductors and mostly consist of silicon and various alloys. High-end chips also contain rare-earth minerals, which are formed in the Earth’s crust. While, as Table 1 shows, China produces the most silicon and rare earth in the world, Taiwan and South Korea lead in chip-making capacity. Still, U.S. companies dominate chip sales worldwide.
Although China is the largest exporter of electronics, it still lags in acquiring the know-how to design and manufacture cutting-edge chips. Chipmakers typically spend 15 percent of their annual revenues on R&D. Each chip model has a two to four-year shelf-life before obsolescence. Experts estimate that in early 2020, the top Chinese foundry run by SMIC in Shanghai can only produce chips that are two generations behind the much-smaller, cutting-edge chips produced in the foundries of TSMC, Samsung, and Intel. These cutting-edge chips are smaller (5 nanometers or below), and therefore faster in the semiconductor world. They are critical components of graphics and central processing units of personal computers and smartphones, which are the most profitable kinds of chips.
The United States and China have become highly interdependent in many industries — including semiconductors — especially after China joined the WTO in 2001. In the past 10 years, however, driven by domestic and international political shifts, Sino-American relations have transformed from strategic cooperation to strategic competition. While no nation desires to rollback globalization completely and surrender its benefits, Sino-American relations will undergo decoupling over the next decade. As Wright at the Brookings Institution observed, the U.S. and China are expected to adopt domestic and foreign policies, developing “spheres of independence” to ring-fence certain strategic areas.
Since 2019, President Xi Jinping has repeatedly called on China to prioritize hi-tech self-reliance. But China has adopted specific directives since 2014, including the Guidelines to Promote National Integrated Circuit Industry. China aims to meet 70 percent of its domestic semiconductor needs with indigenous production under the “Made in China 2025” policy. By contrast, China could only meet 16 percent in 2019. Meanwhile, Beijing has invested about $150 billion in its semiconductor industry; the equivalent of the annual total market size in China and double the global industry’s total investment in R&D.
Finding Trusted FriendsTechnological self-reliance is necessary but not sufficient for supremacy. Successful semiconductor companies can maintain world-leading levels of innovative growth. They can manage cross-border R&D, highly integrated supply chains, and large expert workforces, and create and protect intellectual property. While Chinese semiconductor companies have regularly recruited non-local talents (e.g., from Taiwan), they are struggling to secure overseas collaborators. For example, the Dutch company ASML is the sole commercial supplier of the extreme ultraviolet scanner, which is a critical equipment for fabricating semiconductors. In late 2019, the Dutch government blocked exports by ASML to the Chinese SMIC after U.S. intervention. Moreover, Huawei is facing massive challenges securing foreign contract manufacturers of high-end chips. In August 2020, Washington, D.C., extended export controls to Huawei’s foreign suppliers. TSMC, with its majority revenue based in the United States, stopped manufacturing Huawei’s designs in September 2020.
The U.S. and China have been battling for the hearts, minds, and pockets of trading partners. In 2020, the United States achieved a tipping point in convincing many EU states to reject or phase out Huawei and ZTE as providers of 5G infrastructure on national security grounds. In 2018-19, there were still plenty of mixed signals in the EU on this subject. Some states resisted American influence in deciding their paths forward; indeed, they welcomed Chinese technologies for their efficiency, reliability, and low costs. Similar struggles have manifested in Africa, Asia, and Latin America. Perhaps, this is the nature of the Cold War in a multi-polarized world. The regional engagements are far more nuanced than those of the Soviet-American era.
Strategic OutlookThere is a global chip shortage, and it is expected to last well into 2022. Among other factors, the COVID-19 pandemic has delayed production worldwide. Since the U.S.-China trade war began, U.S. and Chinese companies have been facing enormous challenges collaborating to produce chips. The shortage presents an international imperative, given the world’s dependence on electronic systems for commercial and military applications. However, addressing the chip shortage involves overcoming a multitude of macroeconomic and political challenges. It will be a great test of global commerce and international relations in the era of Sino-American decoupling.
Kennedy and Lim at the Australian National University observed that the United States has adopted three types of policies to protect its technological advantages:
shielding: policing and prosecuting objectionable behaviors by the competitor;
stifling: preventing/disrupting the competitor’s access to critical resources. e.g. foreign suppliers; and spurring: investments and tax breaks for R&D.
These policies have been implemented using legal and “geo-economic” (economic approaches influenced by geopolitics) measures. China has also employed them against the United States to a more limited extent. The scholars have also observed that China has adopted three strategies to close the technology gap:
making: developing indigenous capacity, transacting: buying foreign firms or investing in foreign commercial projects, and taking: academic and non-commercial acquisition of know-how.
Whether or not China will assume technological ascendancy depends on the future interplay between the U.S. and China in their adoption of shielding, stifling, and spurring policies and China’s making, transacting, and taking policies. It may be sufficient for China — for example, to achieve economic hegemony — to disrupt the American technological supremacy, even if it fails to overtake it.
China’s 13th Five-Year Plan (for 2016-2020) featured prominently the national strategic objectives to enhance semiconductor capabilities and areas heavily reliant on semiconductors, including 5G and artificial intelligence. These areas have taken center stage again in the 14th Five-Year Plan (for 2021-2025). China has an existential need to develop rapidly strategic technologies to sustain economic growth and manage a more hostile international environment.
Unsurprisingly, President Joe Biden issued an executive order in late February 2021 directing the U.S. federal government to conduct a 100-day review of critical supply chains, including those of computer chips. U.S. politicians have attributed the U.S.-China strategic competition to motivating this review and to find “trusted friends.”
ConclusionThe United States is about five to 10 years ahead in semiconductor R&D and manufacturing capability. While the U.S. and its allies are highly influential in the chip markets and are producing the majority of the talents in this area, they will likely adopt more strategies to slow down and contain Chinese technological progress. Lacking access to large talent pools and foreign partners with the necessary know-how, China should continue to lag behind the United States at least in the mid-term. But Chinese firms are resourceful and may catch up quickly; they are backed by the state and the Chinese government is committed to playing the long game. By comparison, American corporates tend to focus on quarterly earnings and plan for shorter timeframes.
The nation that controls the semiconductor market has the upper hand in the Technology Cold War. The computer chip is indispensable to virtually all fields of technological advancement. Undeniably, hi-tech chips are needed to develop revolutionary technologies, such as quantum computing and autonomous vehicles. U.S.-China relations may reduce intensity under the Biden Administration, although both nations are locked into protracted strategic competition. Indeed, the growth of American and Chinese spheres of independence could lead to an era of techno-nationalism, which would reshape capital markets and global commerce in the 21st Century.
Winning the battle for semiconductor supremacy will take more than brains, bucks, and diplomacy.
SourcesBarrera, P. (2020). 10 Top Countries for Rare Earth Metal Production | INN. [online] Investing News Network. [Accessed 28 Feb. 2021].
Kennedy, A.B. and Lim, D.J. (2018). The innovation imperative: technology and US–China rivalry in the twenty-first century. International Affairs, [online] 94(3), pp.553–572. [Accessed 28 Feb. 2021].
King, I. (2021). Chip Industry Rebounded in 2020 as Lockdown Fueled Demand[online] Bloomberg.com. [Accessed 28 Feb. 2021].?
Li, Y.F. (2018). Understanding China’s Technological Rise. [online] [Accessed 28 Feb. 2021].
Usgs.gov. (2020). Silicon Statistics and Information. [online] [Accessed 28 Feb. 2021].
Webb, A. (2021). China’s $150 Billion Chip Push Has Hit a Dutch Snag. [online] Bloomberg.com. [Accessed 28 Feb. 2021].
Wright, T. (2014). The Rise and Fall of the Unipolar Concert. The Washington Quarterly, 37(4), pp.7–24.
daxueconsulting.com
China’s Semiconductor Industry: 60% of the global semiconductor consumption
The growth and development of China’s semiconductor industry is the product of two related trends. First, the Chinese government incentivized companies to locate in China while simultaneously lowering the barriers to entry for foreign participants in China’s domestic semiconductor production. Second, Taiwanese investors and semiconductor executives moved their manufacturing operations to China, which provided for the initial foundation of China’s semiconductor industry.
Chinese semiconductor demand exceeds productionChina’s semiconductor market is the largest in the world. Annually, China consumes more than 50 percent of all semiconductors, both for internal use and eventual export. As such, the rapid growth of Chinese demand lifted the entire industry worldwide. However, domestic Chinese manufacturers are still only capable of meeting approximately 30 percent of their own demand. Therefore, to rebalance China’s reliance on external semiconductor demand, the Chinese government has urged its national champions and leading digital businesses to improve their domestic semiconductor manufacturing capabilities.
China’s State Council ‘2014 “ National Integrated Circuit Industry Development Guidelines” set the goal of becoming a global leader in all segments of the semiconductor industry by 2030. In addition, the Made in China 2025 initiative maintains achieving the know-how with regards to advanced semiconductor manufacturing as a vital component of China’s future economy and society. Lastly, in the midst of shifting supply chains and macroeconomic policy, the Chinese government is spending aggressively in semiconductor investment, acquisition, and talent recruitment to uplift the industry by on-shoring chip manufacturing equal to those of the world’s top foundries.
 [Sources: PwC; SIA; IC Insights, Gartner; CCID Consulting, Statista. China’s semiconductor consumption is around 60% of global consumption.]
List of semi-conductor companies in ChinaSamsung Electronics China Semiconductor Co., Ltd. (SESS)Founded: 1994, Suzhou, Zhejiang.
The market leader in China’s semiconductor manufacturing industry since the 90s.A broad product line of semiconductors such as flash memories, SRAMs and DRAMs.Samsung’s smartphone factory in China shut down in 2019, there are only remaining two semiconductor manufacturing sites (Suzhou and Xi’an).Intel Semiconductor (Dalian) Ltd.Founded: 2010, Dalian
In 2015, the brand started making processor chips on the 65nm process to making 3D NAND Flash chips. 70% of 3D NAND chips of Inter’s production was produced here.Oct. 20, 2020, SK Hynix announced that they would acquire Intel’s NAND memory and storage business for $9 billion, which includes the Dalian NAND memory manufacturing facility in China.SK Hynix Semiconductor (China) Co., Ltd. Founded: 2005, Wuxi
SK Hynix (China) mainly offers 12-inch integrated circuit wafers which are used in DRAM product, such as PC-DRAM for PCs and server DRAM for large-capacity servers in data centers.With the requisition of Intel NAND busniess, SK Hynix will have a market share of 23.2% in the global NAND market, and a more sufficient capacity of chips supply.Taiwan Semiconductor Manufacturing Company (TSMC)Founded: 1987, Taiwan
The world’s largest dedicated independent semiconductor foundry. Main customers are Apple and Huawei.TSMC Nanjing reached CNNY 4 billion in 2019, becoming the third-large foundry in China behind SMIC and HLMC.Semiconductor Manufacturing International Corporation (SMIC)Founded: 2000, Shanghai
A state-owned publicly listed Chinese semiconductor foundry company.It provides services mainly to Huawei HiSilicon and Qualcomm, with 8-inch wafer fabs (0.18µm) and low-end AP/SoC (28nm, 14nm) respectively.NXP Semiconductors (Guangdong) Co., LtdFounded: 2000, Dongguan
NXP primarily serves the automotive, communication infrastructure and industrial markets.It has worked with a variety of Chinese tech brands, such as Baidu in automotive and Xiaomi in mobile payments.Infineon Technologies (China) Co., LtdFounded: 1996, Wuxi
One of the top players in the automotive, power semiconductor and security chips.It has set up a complete industrial chain in China, including R&D, production, sales, and technical support.ON Semiconductor Corporation (China)Founded: 1999, Suzhou
Holds a 46% market share of CMOS sensors in the automotive active safety market.ON semiconductor plans to put emphasis on automotive, solar, and 5G/cloud power in the future Chinese market.HiSilicon Technologies CO., LtdFounded: 2004, Shenzhen
A fabless semiconductor company based in Shenzhen and fully owned by Huawei.It is mainly responsible for designing in monitoring chips, video-chips. It also offers manufacturing and technology solutions.Since Huawei was put on the U.S. blacklist, HiSilicon has focused more on the domestic market.What drives the Global Semiconductor MarketIn the figure above, China has witnessed a trajectory of steady growth in the global consumption market, far outweighing the Americas, Europe, Japan, and the rest of the world. Simply stated, the growing demand for smartphones, tablets, digital televisions, wireless communications infrastructure, network hardware, computers and electro-medical devices is stimulating global demand of semiconductors.
However, the global semiconductor industry is expected to witness low growth in the near future, paving the way for industry consolidation via mergers and acquisitions. On the other hand, the Chinese semiconductor industry is expanding in terms of domestic manufacturing in order to bridge the gap between the consumption and production of semiconductors domestically. With the emergence of China as the largest supplier of electronic devices, the consumption of semiconductors has grown drastically in the last decade. However, China’s ability to manufacture semiconductors is still far lesser than domestic demand. Therefore, several Chinese semiconductor industry acceleration plans are being initiated by the government, creating great potential and opportunity for relevant firms to maximize on.
China’s Agenda for Semiconductor DominanceMany Chinese companies are designing specialized semiconductors for AI, as well as chip architectures that are at the bleeding edge of the mobile smartphone industry. Due to the strong coordination between state and domestic manufacturers, China wields a great deal of capital strength to advance its interests. MIC 2025 and the National IC Plan represent China’s most prominent plans for semiconductor industrialization and manufacturing. Taken together, these two strategies encourage China’s semiconductor industry players to adopt a “fast-follower” approach. This scenario calls for the industry to leapfrog several generations ahead to catch up with international competitors at a time when the decay of Moore’s Law is slowing the ability of leading firms to win the innovation race simply by building faster and more powerful chips.
The Chinese government’s commitment to building up its local semiconductor industry by offering huge capital and tax incentives to IC makers is expected to be the major driver of the market. However, China still depends on various countries to meet its semiconductor demand. Nonetheless, the Chinese government aims to reduce these imports, shrink the sizable trade deficit, and achieve self-sufficiency for its semiconductor needs.
Specifically, China has formally created a $29 billion state-backed fund to invest in the semiconductor industry, advancing its goal of reducing a dependency on U.S. technology. China is the world’s biggest chip importer, and the long-awaited 204 billion yuan ($28.9 billion) fund will fuel Beijing’s efforts to forge its own semiconductor supply chain from chip design to manufacturing. It will play a key role in steering the overall strategy and investment in the integrated circuit sector, which includes processors and storage chips used in smartphones and data centers.
 [Source: Deloitte, players in China’s semicondutor industry.]
Major Players in the Chinese Semiconductor MarketChina’s Strategy for Chip ManufacturingThe figure above made by Deloitte provides an organized picture of the major players in the Chinese Semiconductor Market. From this, we can say, in essence, that China’s ambitious goal is to create national champions in each semiconductor market segment. At the low end of the market, they have had considerable success. China now supplies more than half of the world microelectronics and hopes to build on this to create similar success in memory, CPU, and AI chips. But China has had embarrassing failures in its efforts to make logic chips. Memory chips are less complex and less expensive to manufacture. There is a huge global market for them that China, building on its strong microelectronics sector, hopes to use as a stepping stone to more sophisticated products. Memory chips will likely be the first major market sector that Chinese semiconductor policy will disrupt.
Chinese firms are becoming competitive in memory chips but face difficulties in manufacturing CPUs or other specialized chips that are globally competitive in price and performance. China still relies on U.S. suppliers for high-end products. Making advanced semiconductors requires more than sophisticated production machinery and advanced designed. It requires “know-how,” knowledge and skills built up with years of experience. Even if China gains access to advanced manufacturing equipment, there is still a need for know-how when it comes to making high quality chips with consistent performance at a competitive price.
Industry DisaggregationHere we can see just how broad and yet intricate the semiconductor industry is. In essence, semiconductor manufacturing has been reshaped by disaggregation, as firms have divided along the stages in the manufacturing process into design houses, wafer production, foundries, assembly houses, and testing houses. This “horizontal segmentation” has led to a “fabless” approach to semiconductor manufacturing, which now accounts for about 17 percent of semiconductor production and continues to grow. Horizontal segmentation makes it easier for firms in China to find a place in the production cycle of the semiconductor industry.
[Source: SIA, “Beyond Borders,” May 2016. Operating models in the semiconductor industry]
The disaggregation of chip production and the increase in fabless chip production means that design, fabrication, and testing is spread among different countries, including China. China is more likely to develop indigenous chip supplies if it relies on Chinese design houses (of which there are more than 1,000) and then contracts out production to a dedicated semiconductor foundry, such as the Taiwan Semiconductor Manufacturing Company (TSMC). The dilemma so far for China in using a fabless approach is that these chips are designed to meet Chinese standards. This can make them less valuable for the global market.
The ability to manage this global supply chain is one of the keys to profitability. Disentangling this integrated supply chain, created under different and more favorable political conditions, will be difficult if not impossible. This creates opportunities for China in the acquisition of semiconductor technology, but it also creates obstacles in trying to build a purely national industry since competitive advantage lies with the international supply chains. China is still dependent on foreign expertise for semiconductor production, particularly from Taiwan and the United States. Imports of both chips and technology will be the norm in China for many years to come.
China’s semiconductor industry’s Achilles HeelDespite decades of efforts to develop a robust domestic semiconductor industry, China remains weak in the design and fabrication of leading-edge memory and processors. This weakness is particularly grave for fabrication, where SMIC and other Chinese players continue to lag years behind in leading-edge process nodes.
Of particular concern is the persistent gap between semiconductor consumption and production. China has been the largest market for semiconductors since 2005. Yet only slightly more than 15 percent of China’s total semiconductor consumption was supplied by China-based production in 2018. Additionally foreign companies with fabs in China may account for almost half of that domestic fab capacity.
While the U.S. semiconductor industry has consistently retained nearly half of the global market, China-based production has only around 5 percent. Other well-documented weaknesses are in leading-edge multi-core processors and memory devices, and China’s embryonic stage of development in semiconductor equipment and design tool services.
Noteworthy achievements of China’s semiconductor industry include optical devices (especially LED), low-power embedded processors, sensors, and discrete devices, with China now approaching self-sufficiency. Equally important is the surge of China’s semiconductor assembly, packaging, and testing (APT) industry, which has moved ahead of Taiwan and Japan.
Segmenting the Chinese Semiconductor Industry & MarketChina’s semiconductor market comprises the total consumption of semiconductors in China. This includes both the production of semiconductors in China, and the semiconductors imported from foreign countries. China’s semiconductor industry denotes the total semiconductor manufactured in China. It includes the semiconductors manufactured by foreign players in China and the semiconductors manufactured by the domestic players
[Source: daxue consulting, China’s semiconductor market vs industry]
What drives the growth of China’s semiconductor industryThe major factors driving the growth of the Chinese semiconductor industry are the increasing demand for semiconductors from major end-use verticals and government initiatives to promote domestic manufacturing. The market for various end-use verticals such as data processing, communications, consumer, and automotive is growing due to continuous technological advancement and development and intense competition. Consumer electronic devices in China have shown tremendous growth in recent years. Furthermore, the aims of the Chinese government, as stated in the 13th Five-Year Plan, for improved national optic fiber coverage as well as the full roll-out of 4G mobile communication technology will also drive the market. Similarly, the increasing electrification of vehicles is expected to boost the demand for semiconductors in the automobile vertical.
However, China remains a net importer of technology. At present, China depends on imports for 84 percent of its semiconductor requirements. Because of its ever-increasing purchase and import demand for semiconductors, it remains a key market for global businesses operating in different technology sectors.
China is the largest market for semiconductors in terms of consumption, and each of the top 10 worldwide firms in 2018 had a presence in China ranging from R&D centers to fabrication facilities. This is due to the large and growing demand for chips used in goods that China produces and consumes domestically. According to various estimates, 90 percent of the world’s smartphones, 65 percent of personal computers, and 67 percent of smart televisions are made in factories located in mainland China, though some of this production is done in facilities operated by non-Chinese-headquartered firms.
The Central Government wants to push China’s semiconductor industry forwardYet, in spite of this reliance on chips and chip-enabled goods, Chinese-headquartered semiconductor firms supply less than 5 percent of the worldwide market and remain at least two generations behind international competitors in their ability to produce semiconductors that are incorporated into consumer electronics. Though Chinese firms lack worldwide market share, the semiconductor industry has had a long presence in the country. China’s central role in the global electronics value chain has prompted many of the leading chip firms to establish back-end assembly, test, and packaging facilities in the country to take advantage of low labor costs and proximity to the Chinese market.
Thus, developing and strengthening the industry is a high priority for the Chinese government. China wants to move “up the value chain” from assembling final products from imported components to creating advanced technology in China itself. Despite this inclination, imports of chips and technology will be the norm for years to come. Today, only 16 percent of the semiconductors used in China are produced in-country, and only half of these are made by Chinese firms. China is very dependent on foreign suppliers for advanced chips. In 2015, China introduced the Made in China 2025 initiative to achieve technological self-reliance in sectors such as robotics, IT, and new energy vehicles. With this initiative, the Chinese government aims to produce 40 percent of its semiconductor requirements by 2020 and 70 percent by 2025.
Market OpportunitiesChina is the largest and fastest growing semiconductor market in the world, representing 29 percent ($100 billion) of the $335 billion global market in 2015.China, in particular, commands almost half of overall market value, split roughly 50-50 between domestic demand and Taiwan-based, world-leading ODMs (e.g. Foxconn and Quanta) or foundries (e.g. Taiwan Semiconductor Manufacturing Company TSMC) serving global clients.China has become a source of income for top global semiconductor companies, many of which generate over half of their revenue from China.Near-term prospects for China’s overall market seem favorable and stable for many sectors, including high-end ICT goods and services.Domestic consumption is mainly being driven by data processing and communications applications sectors, with consumer electronics also being a significant contributor.China’s appetite for semiconductors is so great that domestic production only counts for 9 percent of consumption – leaving 91 percent of China’s demand to be satisfied by imports.Demand is growing for high quality semiconductor devices.Expected increases in Chinese spending on semiconductor manufacturing equipment to equip and upgrade fabrication (fab) facilities.China’s integrated circuit design sector continues to be the fastest growing part of China’s semiconductor industry. [Source: daxue consulting, SWOT analysis of China’s semiconductor industry]
China’s Semiconductor Manufacturing IndustryThe Semiconductor Manufacturing industry manufactures semiconductors and electronic devices, including diodes, triodes transistors, power transistors, transducers and sense devices. Industry firms may also manufacture special parts for these electronic devices.
Semiconductor manufacturing requires experience, ownership of (or access to) a substantial amount of IP, managerial skills, a highly-skilled workforce, and a close connection to scientific research. It also requires a close understanding of the market and the product in which the chip will ultimately be used, an area of “know-how” where China has lagged. Currently, the United States leads in chip design, followed by Taiwan.
The major players in China’s semiconductor manufacturing industry are:On Semiconductor Corporation (China)Fairchild Semiconductor (China)NXP Semiconductors (Guangdong) Co., LtdInfineon Technologies (China)ST Microelectronics (China)The majority of semiconductors manufactured by Chinese enterprises are low-end products with low technology. To better satisfy domestic demand, domestic manufacturers will have to enhance their research and development (R&D) capabilities and expand output. In the next five years, industry revenue will increase 2.2 percent annually to $83.5 billion in 2023. The main drivers of industry growth will be steady increases in overall demand, gradual growth in demand from downstream domestic industries and increasing demand for the industry’s exports. The main markets for semiconductor devices will remain the computer and peripheral equipment manufacturing industries and the network communications industries.
Moving Forward: Industry OutlookThe Chinese semiconductor manufacturing industry is in the growth phase of its life cycle. Contributing to the industry’s development phase has been the rapid rate of technological change occurring within the industry. In recent years, foreign manufacturers have introduced new advanced technologies and management knowledge into the local industry. At the same time, domestic manufacturers have experienced a high level of development, which is expected to continue as they expand their local operations. In addition, given the size of the domestic market, there still exists considerable potential for demand growth for high quality semiconductor devices.
What are the Major Markets for Semiconductor Manufacturers in China?Computer and peripheral equipment manufacturers: Demand from this market segment is increasing due to the development of the computer and peripheral equipment manufacturing industries, which is being driven by demand for products such as memory boards, personal computer modems, loaded computer boards and peripheral controller boards.
Network communications firms: In line with the strong development of the communications sector in the past five years, there has been increased demand for semiconductor devices to be used in telegraph transformers, fiber-optic connectors and wireless communication terminal equipment.
Electrical lighting manufacturers: Indicator lights and LED displays and lighting.
Consumer electronic goods manufacturers: China is one of largest producers of household electrical goods, which is reflected in the high level of demand for semiconductor device products from consumer electrical goods manufacturers.
Automobile electrical equipment manufacturers: This segment is expected to grow in the next few years due to the development and expansion of China’s Automobile Manufacturing industry.
What are the key success factors for succeeding in China’s Semiconductor MarketHaving links with suppliersAccess to highly skilled workforceAbility to quickly adopt new technologyEstablishment of export marketsEconomies of scaleEffective quality controlUndertaking technical research and developmentHaving a good reputationNo One-Size-Fits-All Solution for Market EntryMultinationals trying to access the Chinese market should consider a multitude of factors such as policies, technologies, marketing, logistics and global strategies. It is also important for multinationals to realize the position they are in before entering China to come up with the best entry strategy. Obviously, there is no one single correct method, but in general, MNC’s technology status as well as China’s domestic technology status play a crucial role.
Domestic demand from China will still be a growing source of revenue for foreign semiconductor manufacturers over the next few years. This encourages MNC’s to continue targeting Chinese consumer electronics, data processing and communications companies manufacturing in China. However, semiconductor firms, in addition to providing chips, must find ways to either monetize new technologies beyond the actual chips themselves or expand into new business models enabled by those technologies. Companies that do so will thrive. Those that don’t will be overtaken by more agile competitors.
When an MNC has the upper hand in technology, it has higher bargaining power and will have less incentive to share intellectual property. However, MNCs might altogether avoid cases where domestic players are already strong. For instance, China is relatively weak in the high-end design of semiconductors and manufacturing, and competition is not high, so MNCs typically need to set up regional offices or a wholly foreign-owned enterprise (WFOE) to access the market. In areas where China is relatively strong such as packaging, testing and low-end design, MNCs may opt to setup a JV or avoid the market altogether.
Author: Jeffrey Craig |
