News & Insights Inside China’s semiconductor industry

Inside China’s semiconductor industry
The U.S. sanctions against ZTE, China’s leading telecom equipment maker, in May this year banned the company from importing key components from American companies and exposed the vulnerability of China’s technology sector as being highly dependent on foreign imports especially when it comes to semiconductor components. 

The ban was lifted after rounds of negotiations, yet questions still linger about China’s capability to produce and self-supply high-end chips. The escalation of the US-China trade war also casts concerns over potential risks to the US that could come from withholding exports of equipment or other intellectual property (IP) such as electronic design automation (EDA) tools into China as it did with ZTE, blocking technology licensing and export of important components.

As the world’s largest consumer of the semiconductor industry, China accounted for 32% of global semiconductor sales in 2017 according to World Semiconductor Trade Statistics (“WSTS”). WSTS forecasts the worldwide semiconductor market will grow by 15.7 percent in 2018 to reach USD 477.1 billion. The Chinese government is working on establishing the China Integrated Circuit (IC) Industry Investment Fund to finance semiconductor research and development and invest in chip manufacturing, with an aim to improve competitiveness and bolster its tech supply chain over the longer term. But where does China stand today in the development of its USD 150 billion semiconductor industry, compared to its international peers?

Ahead of Credit Suisse’s China Investment Conference, we posed this question, among others, to Dr. Joseph Xie, Founder and President of IC Engineering and Business School (ICEBS) at China’s Fudan University and a more than 20-year veteran in the semiconductor industry.

About Dr. Joseph Xie

Dr. Joseph Xie 谢志峰 is the Founder and President of IC Engineering and Business School (ICEBS), and Professor at China’s Fudan University, School of Microelectronics. Dr. Xie has over 20 years’ experience in the semiconductor industry and was one of the founding members of Semiconductor Manufacturing International Corporation (SMIC). He also founded QST Corp. a motion sensor chip company in China.

What is China’s competitive edge in the (Integrated Circuit) IC industry, and the challenges it faces?

Dr. Joseph Xie: China’s competitive edge lies in its huge domestic market and its rich supply of talent. That said, the huge market is also a challenge for Chinese semiconductor companies as they tend to focus on the domestic market and pay less attention to expanding in overseas markets. In terms of its supply chain, China’s semiconductor industry needs to catch up in the areas of manufacturing, equipment and materials, while in IC design it’s slightly better. Therefore, despite reports that the country has around 1,700 IC design companies, only about ten of these companies have achieved good business scale.

I think Chinese IC design companies may overtake US IC design companies in the future.

Do you think the virtual Integrated Design Manufacturer (IDM) model could work in China?

Dr. Joseph Xie: I don't think the virtual IDM model would work effectively in China. First, IC design partners would have limited influence over the JV fab and as a result would have difficulties in running the fab efficiently. Second, IC design engineers don’t typically have manufacturing know-how, so for them to operate a manufacturing fab would be challenging. Further, the Chinese government may not be fully supportive of the model.

In which areas would you expect China to catch up after its significant investment?

Dr. Joseph Xie: China’s IC design sector will be the first aspect of the domestic supply chain to catch up to the international peers. Chinese IC design companies can leverage leading foundries to produce advanced chips, and there is significant IC design talent in China. Also, some Chinese IC design companies are already ahead of Taiwanese IC design companies in terms of their technology. I think Chinese IC design companies may overtake US IC design companies in the future. Currently, the second phase of the China IC fund’s investment will focus on the IC design sector.

China having some success growing back-end / fabless

Sources: Company data, Credit Suisse estimates

Do you see risks given that many foundry/IC manufacturing projects were announced in the past two years? How many projects are actually viable?

Dr. Joseph Xie: Only a few of the projects announced from 2000 still exist today, and a lot of projects announced recently may not succeed, because 1) there is a shortage of talented professionals available to work on all of the announced projects, 2) the infrastructure is not yet ready, 3) Chinese semiconductor companies have limited business/customer expertise , and 4) the industry has increasingly higher technology barriers/requirements. The cluster effect is important for the development of the semiconductor industry. Within China, Beijing and Shanghai are the two cities with a good cluster effect.

China IC import-export deficit increased in 2017

Source: CSIA, Credit Suisse Research

While China has improved its competencies in IC design related to application processors, artificial intelligence (AI), and cryptocurrency, how can it further leverage these capabilities? What’s the gap between US and China in IC design?

Dr. Joseph Xie: Both the US and China have leading AI chip firms, but China has some advantages over the US. The development of AI chips requires complex algorithms, computing power and big data – all of which China has as well as many different application scenarios currently being tested for further development. Moreover, the China market is very open to new technologies.

Do you think the US-China trade war will decelerate the development of China’s semiconductor industry?

Dr. Joseph Xie: Both countries need each other in the semiconductor industry. But in the near term, there will be many difficulties and frictions. Negotiations between the two countries are expected to go on for one to two years.