International forums have concluded that China's IC industry is becoming a threat to the world. Prof. Wei Shaojun makes the case why that's not true.
China may be the world's largest market for ICs today, but there's no denying that its semiconductor industry's self-sufficiency remains weak and its dependence on foreign supply remains strong. A number of recent international forums concluded that the development of China’s IC industry is a threat to the world.
Wei Shaojun, Chairman of China Semiconductor Industry Association (CSIA) IC Design Subcommittee and Professor at Tsinghua University Micro- and Nano-Electronics Department, delivered a keynote address at the China (Shenzhen) 2016 IC Innovative Application Summit entitled, “Is the Development of China’s IC Industry a Threat?” During his address, Prof. Wei provided an overview of the development of China’s IC industry, spoke whether this development is a global threat, and discussed how to resolve this contradiction.
Figure 1: Wei Shaojun, chairman of China Semiconductor Industry Association (CSIA) IC Design Subcommittee and a professor at Tsinghua University's Micro- and Nano-Electronics Department.
The diagram below shows the projected development of the global IC industry. Prof. Wei said that although the projections were made in 2014, they remain essentially unchanged today. “Many people believe that the personal computer has already peaked, and that the market is gone. However, that's not necessarily true. Many in leadership positions are easily fooled, fooled by a small group of people, fooled by certain special interest groups,” he pointed out.
Figure 2: Editor's note: EDN China's Franklin Zhao shot this image of Wei Shaojun's presentation. We did not translate the slide deck but felt the article was interesting on its own.
Over the last two years it may seem that PC production has declined, but from a global perspective there is actually no decline; the total number is still increasing. Moreover, China leads this global development (the chart shows the proportion and relationship of major product groups in China over the last several years). For example, in 2009 China’s mobile phone production accounted for 47% of the global total. In 2014, this stood at 84% and has continued to rise in the last two years. Furthermore, China produced 82% of tablet computers, 66% of colour TVs, and 81% of PCs of the world. China’s electronics industry as a share of the global market is continuing to rise. Both the Chinese and the global electronics industries are growing, with China acting as the world’s factory.
China’s share of the smartphone market has yet to reach 50% but is projected to get there by 2020. Currently, China’s share of the tablet market is high, but that doesn’t mean that it will stay this high indefinitely. In terms of the Ultra HD TV (4K and above) market, China still occupies a relatively small portion but will see a large increase by 2020. China’s portion of consumer semiconductor products will also increase; it currently stands at about 1/3 globally and is projected to increase into the future.
Because China is the world’s factory, China’s imports of foreign chips are correspondingly high. In recent years, China’s chip imports have remained high. In 2015, China imported nearly 70% of the world’s chips (of course, this number includes some double counting).
In terms of IC products purchased by China, the professor said the largest import categories are specialty logic circuits (cell phone chips), memory devices, and analogue circuits. Because the industry will not experience any fundamental disruptions in the coming years, these shares will see no drastic change. At the same time, 50% of the ICs China imports will be exported as an integrated part of our finished products. Although we import a great deal, we don’t consume them ourselves. We consume about 25.4% of the world’s chips, worth about $85 billion.
China is an indispensable part of the global IC industry
Talking about the development trends of the IC industry in China for 2015, Prof. Wei said there is a discrepancy between the statistics from China and abroad. China’s statistics reflect the sum of three elements: design, packaging, and manufacturing; however, these elements overlap in the calculation of the true overall value. International statistics calculate the final value of the ICs, indicating their design or IDM value.
The development of each segment in the industry chain for 2015 is shown in the diagram below. Last year, packaging and testing grew by 10.2%, and chip manufacturing surpassed design for the first time last year, reaching 26.5%. This rate of development is good (although this high number is partly due to new production by Samsung’s Xi’an factory, which accounts for 10 of the 26.5% points; in reality, our investment has not yet been fully put into place). When looking at China’s share of the design segment of the industry globally, the number is less optimistic—merely 5.8%.
To summarise, China imported 70% of the world’s chips and used 25%, and globally only 6% of the chips were manufactured in China. However, the world benefited significantly from China’s large purchases.
Prof. Wei said that these increases in China’s manufacturing are exciting–from 2008 to 2015 the compound annual growth rate (CAGR) reached 12.59%, while the global growth rate for last few years has been in the 2%-3% range. In comparison, China’s growth rate was very high. As investment is gradually put into place in the coming years, China will maintain a double-digit growth rate.
China’s fab technologies still lag behind other nations. After deducting the contributions of Samsung’s Xi’an fab, the real growth rate of the IC manufacturing segment of the industry is 16.7%. China lags by two generations (four years), and this situation will not change until 2020. Because of this, there are now two prevailing notions in China. One is very cynical: trying to catch up is useless, and China should continue to follow in the footsteps of others. The other point of view is more important: a lack of major breakthroughs in manufacturing will hinder our design segment. In fact, our design segment finds it difficult to find the production capacity needed in its extensive search. Prior to 2020, we will largely rely on global partners for advanced technology.
The chip design segment of the industry in the Mainland China will continue to grow rapidly. The CAGR from 2000 to 2015 reached 45.68%, and it will continue to rise this year. China’s first quarter CAGR was 26.1%, and we can predict with a great deal of confidence that it will be over 20% for the year. If the calculation is modified to include sales by enterprises acquired by Chinese companies in 2014 and 2015, this number would be sustained at above 25%. Therefore, there is hope that this year’s total sales will reach RMB 160 billion to 165 billion. This figure, according to Prof. Wei, persuasively indicates that China is holding firmly to its number two position globally.
In 2015, China’s chip design segment held a 22.9% share of the global market, but the situation was not ideal if we look at the product breakdown. Aside from chip used in telecommunication, which grew from RMB10 billion to RMB60 billion, growths in other fields (computers, multimedia, navigation, simulation, power, and consumer products) were extremely slow. Therefore, without that growth in telecommunication, China’s overall growth in the design segment in 2016 would be essentially the same as in 2011. This indicates the presence of major limitations that hamper product innovation among Chinese companies.
Among China's largest design enterprises, HiSilicon and Spreadtrum have already entered the global top 10. The gap between AMD and HiSilicon is not large, which will perhaps close the gap a bit further this year. It is also possible that Spreadtrum will make more progress this year. China currently has more than 10 companies that have entered the global top 50 ranking, and by 2020 there may be a third Chinese company entering the top 10. The packaging segment is a little bit less active. This year, the size of the design segment will surpass the packaging segment to become the largest. The packaging segment is labour intensive. Rising labour costs and falling unit prices, following product technology improvements, are contributing factors to the slowing growth in the packaging segment.
Investment will increase, but investment in China as compared to the rest of the world will remain small. Over the next five years, China’s direct investment in the IC field will surpass RMB50 billion ($7.5 million), with 20% of that coming from global partners, such factory constructions by TSMC in Nanjing, UMC in Xiamen, and PowerChip in Hefei.
China is an important part of the global value chain. China’s IC industry is an integral component of the global IC industry; we have arrived at true inseparability and interconnectedness.
Given this scenario, why would people persist in asking the question whether the development of China’s IC industry is a threat?
Let’s look at some examples.
At the 2015 GAMS (the Government and Authorities Meeting on Semiconductors) Meeting of the World Semiconductor Council (WSC) held in October, there was a request to organise a seminar to discuss regional support policies during the 2016 GAMS meeting in Berlin the following October. The GAMS meeting discussed government/authorities recognition of the impacts of the semiconductor industry. It invited the WSC to further study and disseminate information about policy incentives for the industry in various regions, and report any problems they might identify at the meeting in Berlin this October.
A 2015 requirement mandated the reporting of any possible new developments receiving government support, the size of any investments in the IC field or other areas, the goal and criteria of those investments, whether they were open to foreign industry, and whether they were open for public consultation globally. It was plainly obvious that these measures were aimed entirely at China. In response, the Chinese government is working on counter-measures.
This development has a major impact on the industry worldwide. The following topics will be discussed at this year’s meeting in Berlin: best practices for market-oriented regional support programs, economic assessment of regional support, and WTO compliance. The subtext of these topics is: “You are not abiding by WTO rules; you are not implementing global best practices; and, you are not following the principles of transparency, openness, and broad participation.”
“Our industry cannot stay forever at the bottom of the chain. Take a cell phone for example. This model sells for $749. The manufacturing cost is only $4.5, while items in the box are worth $5. The manufacturing cost is even lower than the things in the box. This is the money that China earns. Is this fair? Our manufacturing cost is just 0.6% of the retail price. This is what’s happening in our industry,” Prof. Wei stressed.
Let’s now look at our major products. Besides a small number of application processors, telecommunication processors, NOR Flash, and image processor chips, our share of the other core chip markets is 0%. In those fields where we have a tiny share, our businesses are fighting a vicious price war. This is the state of our industry. “If our industry can’t upgrade and develop, this chart will change very little in the next five years. How can we look at ourselves in the mirror?” said Prof. Wei.
The professor pointed out, “We rely primarily on imports for the core chips that we need. What do you base your criticisms of our development on? The development of our industry cannot be controlled solely by others. This is a fundamental point.” The Wassenaar Agreement restricts us, and the Americans places embargos, sanctions, and inspections on us.
Recently, the unveiling of the supercomputer Sunway TaihuLight has caused a strong global reaction. “During a CCTV interview yesterday, I said that what was being said in the newspapers, on the media, and by experts, connecting TaihuLight to the U.S. embargo on China, was complete and utter nonsense,” said Prof. Wei. “Did TaihuLight get built because the United States placed an embargo on us? You should know that we started research on the chips used by the TaihuLight in 2009. It took us seven years of hard work. Does this have even a penny’s worth of relationship to the U.S. sanctions? We’re belittling ourselves. I said, first you belittled our national development strategy, second you belittled the innovative ability of our technologists. We tried to turn it into a story of us defeating a foreign monopoly, as the U.S. embargo led to our development. This is completely erroneous.”
In addition, many things in this world are globalised. Nothing in this world can be done with 100% control by a single country. Even the United States cannot do that. In the U.S. sanctions on ZTE, we saw clearly who our real friends are. Once we have swallowed our pride, we still must cooperate. No one can control everything themselves.
Cell phones are an excellent model of global cooperation. As an example, Apple phones are designed in the U.S., taped out in Taiwan, packaged in Malaysia, assembled and manufactured in China, then sold all over the world (of course these roles are sometimes switched). We must gradually raise our position, shifting to the higher end of the value chain.