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How China can Lead in the Semiconductor Industry

How China can Lead in the Semiconductor Industry
by Pawan Fangaria on 03-06-2016 at 8:00 pm

Since a few years China has been very aggressive in acquiring semiconductor companies around the world. Last year, Chinese government along with PE (Private Equity) and other investors in China announced an ambitious plan under which more than $150 billion were to be invested over next 5 to 10 years in developing semiconductor technology, in-house and by acquisitions from outside. The rationale for doing this is valid for making China self-reliant in semiconductor technology; 90% of China’s semiconductor chip consumption relies on imports from outside.

Between 2013 and mid 2015, China acquired multiple semiconductor companies including Spreadtrum, STATS ChipPAC, ISSI, OmniVision, Montage Technology, and also acquired stakes in other global companies. In 2015, Micron’s acquisition by China’s Tsinghua Unigroup was proposed for $23 billion; however that did not succeed. Also, Fairchild’s acquisition by ‘China Resources Holding’ failed due to concerns about US federal regulation. Similarly, Chinese institutions’ attempts to buy stakes in Western Digital, SK Hynix, MediaTek, and others fell apart due to political backlash and other reasons.

China’s goal is to become a driving force in the semiconductor industry by 2030, technologically as well as in business terms with most of the semiconductor demand by Chinese domestic electronic industry met by internal production within China. In my opinion, China’s aspiration to lead in the semiconductor industry cannot be accomplished by mere acquisitions. They will have to establish their technological as well as business leadership. They have a great potential in doing so, provided they gradually build a leading culture in several aspects of semiconductors. Here are the steps that can be taken –

Innovate In-house

China should develop an innovative culture in companies within the country as well as their subsidiaries around the world. They must spend sizable amount of money in R&D for chip design and fabrication. They have innovative design companies such as HiSilicon in communication network and media applications. Also, SMIC is a leading semiconductor foundry in .35 micron to 28 nm technology. These companies can be seeded for further innovation and expansion of current and future technologies.

Also, there are experienced technologists of Chinese origin working in other countries. They can be attracted to lead the innovation in China. Besides, R&D centres can be opened in other countries to attract top talent there and innovate for China.

Technical collaboration with top semiconductor companies can lead to innovation too. Intel’s investment in Tsinghua Unigroup for development of mobile chips by its group companies Spreadtrum and RDA Microelectronics is an opportunity to excel in mobile technology. Similarly, collaboration with Qualcomm in server chip development can unleash innovation in China.

Build Technology Leadership

China is improving in terms of wafer capacity. SMIC has both 300 mm and 200 mm fabs. According to an IC Insights report, China’s wafer capacity surpassed that of Europe in 2010. However, at 9.7% of worldwide wafer capacity, it’s at 5[SUP]th[/SUP] rank. Considering China’s domestic consumption, there is good scope for investment in fabs to increase the wafer capacity according to the country’s requirement.

China is a good base for manufacturing of electronic items with imported semiconductor chips. While it improves on manufacturing of chips in-house, it also needs to usher into indigenously designing ASICs and high-end chips such as processors in-house. The cost advantage of manufacturing laptops, smartphones, TVs, and other electronic items in China is no more attractive. Hence China must upgrade its workforce to design and manufacture complex chips as well.

The hard part is to find a gap in the semiconductor industry and fill it to become an undisputed leader. In the past, Japan, South Korea, and Taiwan have done it.

In 1980s, Japan was the initiator of ramping up the IC manufacturing when global GDP was moderated to ~3% from a high of 5.4% in 1960s. And in 1990s, when global GDP was at a low between 2.7% and 2.6%, the IC growth was negatively correlated with GDP. At that time, Taiwan ushered in pure-play foundry model to fulfil the manufacturing demand from fabless design companies. Also South Korea ramped up its IC production. South Korea was top wafer provider till 2014. At the end of 2015, Taiwan became the top wafer capacity holder at 21.7% of total global wafer capacity.

Unfortunately, today the semiconductor market has matured and there is no visible large gap to fill in there. However, China can still look forward to lead in upcoming areas such as IoT and automotive related chipsets and software. Also, power efficient and high performance server chips need innovation, and can offer big business opportunity for big-data management. In anyway, China will need to first build a base for indigenous technology development and then take up business leadership from its home ground.

Improve Business Outlook

China has been largely viewed as a local market for electronic products with local standards and low-prices. That’s fine considering China’s large domestic consumption, however in order to catch up with global leaders, China will have to break out of that mode. It will have to consistently adhere to global standards. The standard products that are exported out of the country comply with global standards, but that should apply broadly to all products.

In order to serve the global community, China will have to make major improvements in its business practices. Often China is perceived as a provider of low-quality products at cheap prices; duplicity, piracy, and security often emerge as other concerns. This perception about China along with global political concerns seems to have played in the failure of some of China’s acquisitions. To achieve a global footprint in the semiconductor industry, China will have to work hard to remove these perceptions. These perceptions may be right or wrong, but an inward review of business practices and improvement in those can create a better perception about China. This can help China in building better partnership with global leaders with a greater sense of confidence and responsibility for sharing of technologies.

Improve Operational Efficiency

China’s workforce has not remained cheap as earlier, however the manufacturing of electronic products is largely based on assembly of components where profit margin is shrinking gradually. In order to keep pace with ROI, China will have to upgrade the skills of its workforce and move them to higher value-added jobs such as designing of complex SoCs, complete systems, specialized chips for automotive components, development of embedded software, etc. And of course fabrication of semiconductor chips of all types.

In other industries such as steel and coal, Chinese government has initiated efforts to shut down loss making factories and mines. This is the right time to streamline electronic industry as well towards higher value-added development to compete in global market which can pay higher dividends to China.

Channelizing all of these efforts at the ground level will require more investment and provide minimum or no return in the short term. However, such an investment on companies and people within the country will bring organic expansion in the long run. Chinese government and private equity investors will have to be patient enough for long to see an everlasting leadership emerge from within the country.

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