Brexit and Semiconductors

Interesting news last week with 51.9% of British voters saying yes to Brexit (exiting the European Union). What does it have to do with semiconductors? Plenty! After reading the media’s take on the subject and talking to friends (experts) in China, Taiwan, and Hong Kong, I must say that there is not a consensus to be found and there probably won’t be until the history books document it years from now.

Most compare Brexit to the Donald Trumpism that is sweeping America (angry but largely misinformed people acting out). But to me the risk is FUD (fear, uncertainty, and doubt) that will be used by devious people for their own personal and political advantage, absolutely. China is most certainly one of the countries to watch during Brexit, Russia as well, due to their focused political strength.

According to my friends, the EU is like a three legged stool with France, Germany, and the UK being the legs. Amongst those legs, France and Germany control the EU semiconductor business (STM and Infineon for example). The EU is also China’s top trading partner. If you take away Britain, which is China’s dominant trade partner in the EU, France and Germany are now a two legged stool under the weight of a country (China) with the fastest growing economy and the most FUD capable government the world has ever seen. China has also made semiconductors their National Charter which is an important piece of this Brexit puzzle (for me anyway).

Take the automotive semiconductor industry for example, which today is a $28B market. Three of the four top vendors are from the EU (NXP, Infineon, and STMicro). The market is expected to grow over the next five years at a CAGR of 5.8%. Most of this growth is in Asia and specifically China. The mobile (smartphone and wearables) and Internet of Things (IoT) semiconductor markets are also examples of industry revenue growth domination by China. The smartphone market is still growing at a 6% CAGR and the IoT chip market is estimated to grow at a 11.5% CAGR. Again, Asia is the dominant market growth for both smartphones and IoT and China is aggressively pursuing these segments as both a consumer and supplier.

In fact, according to a recent survey by SEMI.org, more than half of the new semiconductor fab starts in 2016 and 2017 are in China:

From what I understand, all EU trade agreements will have to be renegotiated and with China under political pressure to continue its record economic growth you can expect heavy handed trade negotiations with Britain, the EU, and the rest of the world. So really, Brexit could not have come at a better time to refuel China’s economic growth engine. Taiwan will also benefit as China’s number one semiconductor manufacturing partner.

Meanwhile, the United States, Japan, Korea, and the other economic super powers are at an all-time low in regards to trade negotiations strength so the Brexit winners here will be China and Russia, my opinion. That’s if Brexit actually happens of course, which is a whole different discussion, one that I have not had yet.