China is preparing for the worst case scenario: 'decoupling" of its technology development from other regions...
China is preparing for the worst case scenario: “decoupling” of its technology development from other regions.
The crisis in the global semiconductor industry that started with the U.S.-China trade war has not abated. The economic impact of the 2020 Covid-19 pandemic is making a soft year for the semiconductor industry even worse.
At the same time, China sees an opportunity to bolster its chip-making capability as re-emerges from the coronavirus quarantine, according to ESMChina, EE Times‘ sister publication.
Globally, the economy is facing a rough year. On June 24, the International Monetary Fund (IMF) released a new issue of the “World Economic Outlook Report.” The IMF predicts the global economy will shrink by 4.9% this year. The negative impact of Covid-19 on economic activities in the first half of 2020 was worse than expected, and a recovery will take longer than predicted.
Wei Shaojun, director, Institute of Microelectronics, Tsinghua University, acknowledged that in May that the IMF’s May predication – that the economy would decline 3.5% — would reach 4.9% by June. It is still difficult to predict whether the recession will push it down further.
As of the beginning of July, the cumulative number of confirmed Covid-19 cases in the United States has exceeded 2.5 million, and the number of deaths has exceeded 125,000. About 30 states of 50 are seeing new cases every day. Confirmed cases in China experienced a small rebound, and the infection rate in Beijing is changing every day.
The most direct impact of the Covid-19 pandemic is the reduction in end-consumer demand. In the U.S., for example, the epidemic has caused the unemployment rate to soar, which in turn has led to a decline in consumer’s purchasing power for electronics products and stagnated IC shipments. Wei Shaojun believes that the continuation of the epidemic in the United States and China will have an impact on U.S. and Chinese semiconductors soon.
Technology decoupling and corporate return?
The coronavirus outbreak has not only paralyzed the global semiconductor industry — it has allowed Europe, America, Japan and South Korea to see the strength of China’s manufacturing industry. This has also prompted countries allied with the United States and Japan to try to withdraw manufacturing from China, arguing the industry is too dependent on China.
Wei Shaojun believes that the current situation is a mixed bag and is influenced by political factors. Americans have raised the issue of “technological decoupling,” requiring the United States to move manufacturing back onshore; and Japan is showing signs of following America’s lead.
In order to encourage reshoring, according to Bloomberg, the U.S. did not hesitate to make a “100% reimbursement of corporate return costs.” The Japanese Ministry of Economy, Trade and Industry launched an “anti-epidemic economic rescue plan” totaling 7 trillion yuan ($997 billion), of which RMB 143 million ($20 million) will be used to fund the relocation of Japanese companies from China to the mainland. Another RMB 1.5 billion ($210 million) will be used to fund the transfer of Japanese companies from China to other countries to diversify production bases.
For the United States and Japan to succeed in reshoring, Wei Shaojun believes that it will take some time to evaluate the results. He believes that even if the U.S. government has such intent, American companies may not. Even if American companies are willing to reshore, implementation is still in question. Even if American companies bring back manufacturing to the U.S., they must consider the problems of survival and development.
In Wei Shaojun’s view, the process of globalization is not political but economic. The globalization issue needs to be returned to the basic attributes of the economy. He emphasized that the “competition” between China and the United States will have a very large negative impact on the global semiconductor industry.
With the escalation of the Sino-U.S. trade conflict, “domestic substitution” has become a buzzphrase; a few companies are promoting “total substitution” in China. Wei Shaojun believes that such “slogan” remarks will encourage the further development of China’s semiconductor industry. To avoid a negative impact, however, he called on the Chinese industry not to overemphasize “domestic substitution,” which will also bring a certain degree of pressure to the government.
In his view, whether the United States proposes to relocate the manufacturing industry, or China overemphasizes “domestic substitution,” it is an act of “knowing one another but not knowing oneself,” which will bring economic harm.
The ‘driving force’ of IC industry development
“The driving force for the development of the IC industry has not changed, and the basic and supporting role of the global semiconductor industry has not changed. This can be seen from the parallel trajectory of GDP development and the development of the integrated circuit industry,” Wei Shaojun said.
“We see that the concept of GDP has not been growing for a long time since its emergence in 1970,” he said. “China’s annual GDP is about 1 trillion yuan, but since 2002, although GDP growth rate has been average, its value has increased rapidly. The data shows that the average global value of GDP in the first 30 years increased by 1 trillion U.S. dollars annually, but in the next 20 years it increased by 3 trillion U.S. dollars each year.”
Wei Shaojun emphasized that the growth momentum of the semiconductor industry is closely related to the positive growth of GDP. As long as GDP is growing, semiconductors can continue to thrive. Strictly speaking, the information infrastructure industry that represents the core of semiconductor development is the engine that drives rapid GDP growth.
The development of the information technology industry has made human wealth accumulate continuously in the past 20 years. “In an industrial society, we have closed our doors and lost our development opportunities,” said Wei Shaojun. “If we recognize that this is a new historical stage, the information revolution will bring new opportunities. Can we use this opportunity to realize the great rejuvenation of the Chinese nation? I think this is exactly what President Xi considers the division of the whole society.”
Meanwhile, Moore’s Law is nearing its limits. In 2015, Mr. Hu Zhengming, a Chinese electronic engineer who specializes in microelectronics, said: “Many people think that Moore’s Law has stalled. This is not enough to understand the basic and supporting role of the semiconductor industry. It is also not enough to understand the basic laws of semiconductor development. The development of China’s integrated circuits is driven by the rapid development of China’s economy, so its power will not change.”
In Wei Shaojun’s opinion, China’s development in information technology is a miracle of China’s economic evolution in the past 20 years. China has produced most of the world’s electronics information products, such as tablets and mobile phones, creating the basis for China’s demand for a large number of integrated circuits.
The market share of Chinese technology companies at home and abroad shows a considerable part of their industrial market is still in China, and a large proportion of components provided by Chinese tier-1 suppliers are also consumed in the domestic market.
“The reason why China has such a large market is that it has long been integrated into the world, and the trend of globalization has not changed. Chips are designed in the United States, processed in Taiwan, packaged in Malaysia, and finally sent to China for production and distribution worldwide. This general trend has not changed. Under these general trends that have not changed, it is difficult to change something else,” said Wei Shaojun.
What is the future development trend?
China’s National Development and Reform Commission first clarified the scope of “new infrastructure” for the first time at its regular press conference in April, and the vast majority of new infrastructure projects are in information technology. Information technology supports other initiatives such as industrialization, agricultural modernization, and urbanization, and integrated circuits are the fundamental building block of the entire national economy.
The development of 5G will completely change China’s network infrastructure. In the next 5-10 years, China’s transformation and modernization will all depend on 5G. The U.S. has sanctioned Huawei because it sees the key core role of 5G. It’s fair to say 5G is an epoch-making and watershed technology.
Although there are not many achievements in automotive electronics, mainland China has reached agreements with at least three large international companies — GM, Volkswagen and Honda. Each produce 30% of their cars in mainland China. “Localization” of automotive electronics is an inevitable trend.
Wei Shaojun said that everything must be prepared for the pessimistic prediction that China’s technology development will be decoupled from other regions. The former French Prime Minister used the word “unlinked” in a speech at the China Europe Business School last year. There is a considerable possibility that two systems – America’s and China’s — will develop in parallel in one world. China and the United States will each develop their own technology systems.
Finally, he emphasized that under the current situation, China has to keep a clear head, and should not overemphasize “domestic substitution,” which won’t help the development of China’s semiconductor industry.