China's distant semiconductor dream
The South China Morning Post
Despite massive government investment, China's semiconductor industry remains well behind that of leading global chipmakers. There are no mainland Chinese companies among the world's leading IC makers by revenue, which include companies from the U.S., Western Europe, South Korea and Taiwan. China buys about 60% of the world's semiconductors, according to research by PriceWaterhouseCoopers. Roughly 90% of China's semiconductors are imported.
China's chip-making dream dates back decades. The complexity of semiconductor technology and massive capital required to set up and operate fabrication plants make the industry's entry barriers high.
In a 2014 report, consultancy McKinsey and Co. notes that early efforts to develop China's IC sector in the 1990s yielded "mixed results" because of a focus on research and academia rather than market needs. Further, investments were not strategic. With 130 fabs in 15 different provinces, "none was able to capitalize on the scale and scope of its neighbors’ sites, and supporting industries never materialized," the report says.
Today, Beijing has changed some elements of its approach to the IC industry. The DNA is the same: top-down, centrally planned directives; the state calls the shots. However, to prevent fragmentation, China aims to build national semiconductor champions. McKinsey describes them as "a small set of leaders in each critical segment of the semiconductor market:" design, manufacturing, tools, and packaging and testing. IC firms will be concentrated in a few provinces where potential exists to build industry clusters.
A confluence of factors is pouring cold water on Beijing's IC dream. Firstly, local governments are racing to set up semiconductor manufacturing facilities in a bid to please Beijing and boost GDP growth. There's plenty of capital, but too few engineers and managers. That looks like a formula for wasteful spending. Some of the talent can be poached from Taiwan, where salaries are low (Mainland Chinese IC makers may offer up to five times the salary of their Taiwanese counterparts), but it won't be enough.
Secondly, under President Donald Trump, the U.S. has closed the door on Chinese investment in the IC sector. Meanwhile, both European and South Korean chipmakers are wary of Chinese acquisition attempts and other tie-ups.
To be sure, many foreign chipmakers are eager to tap opportunities in China's massive market, while maintaining a technological edge over local IC makers. "Foreign chipmakers want to delay their day of reckoning by becoming local suppliers," says Roger Sheng, a semiconductor analyst at Gartner in Shanghai.
But they rarely share their IP with local partners. Without ownership of industry-leading IP, Chinese IC makers will have trouble competing with global heavyweights like Intel, Micron and Samsung. Even global chipmakers who have invested heavily in China fabs won't share their IP with local partners. Taiwan Semiconductor Manufacturing Co. (TSMC), the world's largest contract chipmaker, agreed to build a US$3 billion fab in Nanjing on the condition that it would not have to share its technology with a local partner. Given the size of the investment, the Nanjing local government agreed to TSMC's request.
Leading memory-chip maker Samsung, which has a large fab in Xi'an, goes to extreme lengths to protect its IP in China, market insiders say. "Samsung is concerned enough about trade-secret leaks that in its China fabs it has set up secure communication lines with South Korea headquarters," one executive in an IC firm told O2O Brand Protection.
Analysts do not expect Chinese IC makers to achieve global preeminence anytime soon. In the foundry segment, Shanghai-based Semiconductor Manufacturing International Corporation (SMIC) is the only firm that will be capable in the near future of fabricating the most advanced chips, according to the Market Intelligence & Consulting Institute (MIC), a Taipei-based research firm. In IC design, where Chinese firms are stronger, Shenzhen's based HiSilicon is most likely to become the industry leader, MIC says.