This year, I joined Limin He from Cadence Design Systems and Professor Shaojun Wei from China's Qinghua University for a DAC Pavilion Panel moderated by Junko Yoshida from EE Times and organized by Cadence's Tom Wong. The topic was China's semiconductor industry and whether its tremendous growth is a threat or an opportunity.
Having spent about half of my life in China, half in the US, and now living in China managing Oski's Asia Pacific business, I can attest to the changes China has gone through in recent decades, particularly in the semiconductor industry. I believe the growth of China's semiconductor industry has been and will continue to be an opportunity for EDA vendors, engineers, investors, and even the US semiconductor industry as a whole.
Today, the Chinese semiconductor industry is a dominant force in the overall world semiconductor stage. As shown in Figure 1, China's semiconductor consumption has dominated the worldwide market since 2005. Since 2001, it has grown at a 22.2% compound annual growth rate (CAGR), compared to 6.9% worldwide. More than half the semiconductor consumption comes from China, mostly in the computing, communication, and consumer sectors.
Worldwide semiconductor consumption market
by region; click here for a larger image.
(Source: "Continuing to Grow, China's Impact
on the Semiconductor Industry," 2013 update, PwC)
Despite the stellar growth, only a small portion of semiconductors consumed in China are actually produced there. Figure 2 shows the China's integrated circuit (IC) consumption and production gap, with an ever-widening gap projected for 2015 and beyond.
China's integrated circuit consumption and production comparison.
(Source: "Continuing to Grow, China's Impact on the Semiconductor Industry," 2013 update, PwC)
Most of the ICs consumed in China are provided by semiconductor giants such as Intel, Samsung, TI, Freescale, and Qualcomm. Hence, the growth of China's semiconductor industry offered tremendous opportunities and rewards for multinational companies (MNCs) in the semiconductor industry.
However, the ever-widening consumption and production gap is not what the Chinese government wants. It is said that today China spends as much money importing ICs as crude oil -- about 230 billion RMB ($37 billion). To reduce the gap, the government has instituted policies in the last several decades to encourage the growth of the semiconductor industry, especially promoting domestic IC design and production. As a result, the landscape of China's semiconductor industry changed considerably.
Before 2000, all the semiconductor companies were state-owned enterprises with 100% government ownership. Foreign direct investment was heavily restricted. IC design activities were mostly conducted in state-owned research institutions scattered in more than 100 "high-tech parks" across the country. The Chinese government controlled all the decision making.
Recognizing the inefficiency of this model, the semiconductor industry, like many other state-owned industries in China, has gone through privatization since 2000. The government implemented aggressive policies to encourage foreign investment, and it has offered major tax benefits to promote the growth of the semiconductor industry.
A key set of policies, State Council Rule 18, was released in June 2000 as part of the 10th Five-Year Plan; it designated the semiconductor industry an encouraged industry. The goal was to make China a leading design and manufacturing center for ICs by 2010 while ensuring that ICs produced there would match most demands from the domestic market and be exported in large quantities. Here are some major promotional policies in Rule 18.
- Eligible IC manufacturers could receive a five-year tax holiday from corporate income tax starting on the first year that a firm earns a profit. The five-year tax holiday was followed by five additional years in which the corporate tax rate was halved.
- IC manufacturers were exempt from paying the 17% value-added tax (VAT) and duty on imports of machinery, equipment, and raw materials.
- Capital construction/infrastructure investment was allocated to provide financial support for the IC industries.
- The government provided assistance in establishing venture capital companies and funds.
These policies promoted the growth of China's semiconductor industry. Several foundries were established in China during this period, including SMIC, Hejian, Grace, and TSMC's SongJiang Operations. The output of these foundries achieved a CAGR of 21% over a 10-year period, reaching $300 million.
However by 2010, the efforts fell short of the goals the Chinese government wanted to achieve. For example, semiconductor production in China supplied less than 25% of worldwide consumption. Most foreign establishments in China focused on less capital-intensive, backend testing, assembly, and packaging. Finally, China is still several generations behind on IC design and fabrication technologies.
There are a variety of reasons why things did not go as well as the Chinese government had hoped, including restrictive investment and export control policies by foreign governments to prevent advanced technologies from being transferred to China. A lack of IP protection laws makes MNCs wary about establishing leading-edge design centers in China. Another challenge is the shortage of talented engineers due to the relatively short development time for the Chinese semiconductor industry. Also, there was not enough focused funding in the industry, because government investments are spread into many regions.
Rule 18 expired in December 2010, and was succeeded by State Council Rule 4, part of the 12th Five-Year Plan published in February 2011. The new policies, set to expire in 2017, have largely continued and improved upon previous ones. Six major differences exist between Rule 18 and Rule 4.
- Favorable policies were extended to backend testing, assembly, and packaging companies.
- Recognizing the unachieved goals for Rule 18, the status of the semiconductor industry was given much stronger emphasis. An indication of this is the language used in both rules. In Rule 18, only one chapter out of 13 was dedicated to the semiconductor industry; the rest were about software development. In Rule 4, 29 of the 34 policies are related to the semiconductor industry.
- The focus was placed on solving real challenges faced by the newly started semiconductor companies.
- Rule 18 was not uniformly executed in local governments. Rule 4 offered more details on how local governments should execute these rules to make sure they are effective.
- Rule 4 encourages company mergers and integration to strengthen businesses and enhance their capabilities.
- Investment in the industry reached around $50 billion, twice that of 11th Five-Year Plan.
This time around, the policy shifted from an emphasis on the pursuit of capacity and output value growth to a focus on improving R&D capabilities for advanced technology. The government's earlier method of pouring funds directly into the industry was also replaced by an emphasis on strengthening the operations of market mechanisms, in order to foster a group of semiconductor firms with global market share and the capacity for technological innovation.
It seems to be working. Several of the largest semiconductor companies are in China (see Figure 3).
The 12th Five-Year Plan is set to end in 2015, and there's already buzz about a new set of government activities to spur further semiconductor industry growth. The rumor is that China will invest $10 billion a year in the industry over the next decade.
Rather than expecting the government to dictate which IC industry sectors should get investment money, the plan is to set up a fund and let professional investors identify which Chinese entities -- fabless, foundries, and/or research institutes -- should be funded. Moreover, the overseers of such investment would not be the government, but investors, who would demand tangible results and a real return on investment. The semiconductor industry has finally shifted from the planned model to a more market-driven economy.
The goals, as set out by Chinese Premier Li Ke Qiang: "We will build a platform for supporting business startups and innovation in emerging industries. We will strive to catch up with and overtake advanced countries in areas of new-generation mobile communications, integrated circuits, big data, advanced manufacturing, new energy and new materials, and to guide the development of emerging industries."
This is significant because it is the first time in 64 years that the prime minister has mentioned integrated circuits in his report. Recognizing China is still behind, he showed resolve and confidence in catching up, and the government is ready to support the endeavor.
Beijing has budgeted 300 million RMB ($48.3 million) to set up this fund. Local governments are expected to follow suit. This influx of investment will sure spur further growth in China's semiconductor industry and create tremendous opportunities for many.
- Investors: Only a portion of the fund will come from the government. The rest is expected to be filled by investors, offering opportunities for government-backed investment into China's major semiconductor industries.
- US semiconductor companies: China is working hard to reduce the production and consumption gap, but the turnaround will take time. Meanwhile, demand for products such as smartphones, tablets, and wearable devices will continue to drive growth in China's domestic market, offering continued opportunities for these companies.
- Engineers: The semiconductor industry in China will continue to grow, and it needs talent. Many Chinese nationals who have been educated in the West have returned to China and are taking key roles in semiconductor companies to bring knowledge and expertise locally. Talented resources are needed. For example, many companies have contacted Oski looking for resources in the formal verification space. If you have good skills, you will find a good job in China.
- EDA vendors: Piracy still exists, but things are getting better. EDA companies are making money in China. That's why China has become a contributing factor in EDA vendors' annual reports recently. As IC design becomes more prevalent in China, more licenses will be needed.
Overall, I am positive that the Chinese semiconductor industry's enlarging pie will benefit the whole ecosystem. Of course, as China strengthens the capabilities of its semiconductor industry, there will be more competition. Competition is good, because it brings about innovation, reduced costs, and better products to enhance our lives. I am looking forward to the announcement of new policies to advance China's semiconductor industry.
-- Jin Zhang is senior director of marketing and general manager for Asia Pacific at Oski Technology. With more than 15 years of experience working in EDA, she is responsible for Oski's overall marketing strategy, as well as business development in the Asia Pacific region.