China’s Endeavor in Chipmaking

 

Q1: Why does China want to develop its own semiconductor industry?

China is the largest purchaser of semiconductor globally but has small presence in the supply side. China accounted for 34% of global semiconductor end-demand in 2018, the largest region globally. In 2019, China imported US$305.6Bn worth of integrated circuit (IC) products, which is one of our largest imported products. On the other hand, it only had 5% market share in the semiconductor industry in 2018. The need to develop a domestic semiconductor industry comes naturally due to the strong domestic demand.

Q2: What are the US sanctions?

For sanctions on China semiconductor, the US has been more company-specific, mainly targeting Huawei. Under the current ban, companies cannot produce or sell chips to Huawei if they use any US technology in their manufacturing or design process.

Q3: What are the opportunities?

We think areas like chip design, foundry, assembly & packaging are relatively easier to localize, while chip design software, semiconductor production equipment still have high barriers.

For chip design, for example, a few developments in the industry lower the barrier for Chinese companies to catch up.

• The development of the fabless model separates design and the production of chips, which greatly reduces the capital expenditure burden on chip design companies, and provides them with flexibility in capacity expansion.
• ARM licenses its architecture and core design for fabless companies to innovate on top of their foundation. This lowers the barriers to enter the chip design business.  In 2014 there were only 681 chip design companies in China, by 2018 that number reached 1698.

Foundries also have high potential to localize. Domestic foundries are growing rapidly, with some companies breaking into advanced processes.

Q4：How can China develop its own semiconductor industry? 

We think talent, policy, and local demand are the three key factors to developing China’s own semiconductor industry.

• Leading local semiconductor companies to continue to hire graduates, and vigorously develop vocational training locally. More experienced oversea Chinese/ethnic Chinese engineers join Chinese semiconductor companies.
• China Integrated Circuit Industry Investment Fund (‘the big fund’) invests in chip manufacturing and designing in China. The government also introduced policies around capital market fundraising and tax breaks to support the industry.
• Strong local demand for semiconductors as Chinese companies have high market share in PC, smartphone, telecom equipment, and other electronics.

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