Expert Insights Kyna Wong: China is making good progress in its semiconductor development

Kyna Wong: China is making good progress in its semiconductor development
Kyna Wong is Head of China Technology Research at Credit Suisse

How have government-backed initiatives and policies set new horizons for China’s semiconductor industry?

Kyna Wong: In June 2014, China's government published a new “Guideline to Promote National IC Industry Development”. This high-level national semiconductor policy framework outlined its plans to further develop the local IC industry supply chain and ecosystem. The new guideline also targeted growing local semiconductor industry revenue from USD 57.5 bn in 2015 (RMB 350 bn) to USD 143 bn by 2020 (RMB 870 bn) at a 20% CAGR. So far, we see the growth momentum is on track with 17%/22% YoY growth in 2016/17. 

We also see multiple programmes to support the semiconductor development including:

  • Setting up state/private IC industry funds e.g. the National IC Fund with RMB 138 bn investment pool in the first phase;
  • Localizing standards and protection to support the industry development such as TD-LTE, 5G, UnionPay bank cards etc.;
  • Made-in-China 2025 initiative driving c.20-30% of local content of end products; and 
  • 13FYP addressing innovation and new supply chain.

The National IC Fund has equity investments in China’s leading foundry, IC packaging, IC design house and semis equipment companies in order to support their M&A and R&D and lift their global positions. Localization of content and standards should also stimulate the development of the local supply chain.  We also see many local governments investing in manufacturing projects jointly with domestic semis companies such as SMIC Beijing 12” fab, Hua Hong Wuxi 12” fab, and YMTC Wuhan NAND fab. These initiatives and policies are driving the industry to build up and strengthen the ecosystem. 

We could imagine China manufacturing its own 14nm mobile chip, 64L NAND chip, 5G modem, and AI accelerator by 2020.

How does China compare to the US or its global peers in semiconductors?

KW: We believe China is making good progress in its semiconductor development, China has a complete value chain in its domestic market including foundry, IC packaging and IC design and system design houses. Foundry accounts for 10% of the global market, back-end test and assembly around 15%, and fabless c.18%, but China is still a long way from having an influencial market position. In technology, China is lagging behind global peers in terms of intellectual property portfolio and advanced technology development such as 10nm node or beyond. The US’s IC design capability is still far ahead China’s (China does have Huawei but it’s only one company). Taiwan’s foundry is 5 years ahead of China’s. In IC assembly and packaging, China has stepped up to being a top 3 player globally (post JCET acquiring STATS Chippac).

How do you think the China’s semiconductor industry will develop in the coming 1-3 years?

KW: We believe the 20% CAGR target for China’s semiconductor industry is likely on track in the coming 1-3 years and share gain momentum will continue in the global market. China is committed to investing more resources to commercialize its fab projects and funding new design companies, and will emphasize more focus on semis materials and equipment, IC design companies etc. We could imagine China manufacturing its own 14nm mobile chip, 64L NAND chip, 5G modem, and AI accelerator by 2020.

What are the key opportunities and challenges?

KW: China is the largest semiconductor consumer as it is the major manufacturing location for electronic products such as smartphones, computers, wearables and other consumer electronic devices. Along with rising Chinese brands in global markets, we see a rapid growth opportunity for China’s IC market. In order to enhance their proximity to the end market, overseas IC design or system companies may switch their contract manufacturing to China from other Asia Pacific countries, which could benefit China’s foundry/IC packaging companies. Besides, given rising consolidation in the supply chain and slowing technology advancement (Moore’s Law), it could be a good opportunity for China to climb up the ladder and overtake some global peers.

However, there are several challenges for China’s semiconductor industry in terms of taking advantage of the opportunities.

  • A highly fragmented supply chain: there are around 1,700 IC design houses in China and only ten companies have good business scale. The resource allocation is not efficient as there are too many small companies without core technology capability asking for support from the government and local VCs, which could dilute efficiency. The Chinese government is encouraging local semiconductor supply chain consolidation to consolidate resources. We do see the National IC Fund is only investing in key industry leaders but still some local governments/funds may be not be as focused.
  • Lack of experienced talent: the semiconductor talent is mainly in Beijing and Shanghai where there is a good cluster effect. Other provinces or cities may face the challenge of hiring and boosting R&D progress. The government has talent hiring programs and has also encouraged collaboration with foreign semiconductor companies on technology development and talent training.
  • Lack of intellectual property: we believe China is lagging behind global peers that have been investing and developing technology in semiconductors for several decades. China has caught up a lot in the past ten years, but not sufficiently yet to stand independently. Following the lessons from the ZTE sanctions and trade conflicts, China is accelerating its own technology development and strengthening its IP portfolio.

What are 3 things investors should keep in mind when investing in China’s semiconductor industry?


  1. We see limited investible ideas in China’s equities market – 2 foundry players and 1 semis equipment player are listed in HK, while back-end and IC design companies are listed in the A-share market.
  2. Although China’s semiconductor industry is growing in a structural uptrend, there is seasonality in each period as this is generally a cyclical sector.
  3. Selecting quality names with R&D capabilities is important for sustainable investment. Currently A-share semis valuations look expensive given many stocks are small players with high growth stories but limited R&D capabilities.