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China Is Worried About China
By Jeff Chappell, 10/12/2005 Electronic News
BEIJING -- There is no end of conjecture in the semiconductor industry as to what the rise of
China means to the industry as a global whole. It ranges from dire predictions of tremendous overcapacity that will take years to absorb, to
ridiculously bullish forecasts of domestic chip demand.
The conjecture isn’t just limited to the chip industry, but involves all sorts of industries, such as agriculture to automobiles, not to mention the
economic and political concerns of those in the U.S. and other western governments.
But Chinese officials say that China is not really concerned so much with dominating the semiconductor industry, or anything else, for that matter, as
it is with addressing its own internal issues. And one of the ways it sees to address those issues is the continued development of the domestic chip industry.
"It’s a live or die industry,” said Yang Xue Ming, an analyst with the Institute of Chinese Electronic Industry Development, part of the central
government’s Ministry of Information Industry. Information technology is a modern engine for China’s economy, just as it is elsewhere in Asia and in the
West, he explained, and the IC is in turn the foundation of IT – “without the chips, information technology is just a slogan.”
One of the key ways Yang suggests China will continue to build its domestic chip industry is cooperation, as opposed to domination.
"Cooperation is based on mutual understanding," said Yang. "The deeper the understanding," he added, "the more successful the cooperation will be."
And he sees many opportunities for Sino-U.S. cooperation.
Yang, who spent some 20 years as an engineer in China’s chip industry before getting involved in management and government, is quick to point out this is
his own opinion, and not necessarily a reflection of the official position of the Chinese government. And yet, he notes that the Chinese government has paid special attention to the chip industry, and how it is connected to China’s
macroeconomic environment.
Domestic Demand Outstripping Growth
Yang doesn’t see China alone being able to build so many fabs in the next few years that it causes a global capacity glut. Currently China’s fab lines produce approximately 2.2 billion (18 billion yuan), but it wants to triple
that capacity by 2008. Factoring in die size shrinks, the transition from smaller wafer sizes to 200mm and 300mm wafers and the process capabilities of domestic chipmakers, this translates into 10 to 15 additional fabs to be built
in China over the next three years, according to Yang.
Even with this aggressive expansion, China will still need to import an estimated 80 percent of the chips it will consume. According to Chinese
government estimates, the domestic market demand for semiconductors will reach $61.8 billion (500 billion yuan) in 2008, but only $21 billion (170 billion yuan) of those will be produced in domestic fabs; the remainder will come from outside China.
Against that backdrop, he observed that the rise of Japan’s chip industry in the 1980s is completely different from China’s ascension in the semiconductor
world. China recognizes that it can’t come close to fulfilling its domestic demand; even so, it recognizes the need to foster a domestic industry, said
Yang. Thus, China doesn’t have the ambition to be a leading chip producer in the world, rather it just wants to put a dent in that trade imbalance and
fulfill its own needs, or at least part of it.
This has been one of the major drivers behind China’s opening up to foreign investment and privatizing state owned businesses, and its joining the World
Trade Organization, he said – the country realizes that if it is going to make strides toward self reliance in the chip industry, it is going to need foreign
investment to do so. The chip industry is a global one; no one country can realistically go it alone, and China recognizes that the benefits of global
cooperation and participation in the WTO outweigh the deterrents, according to Yang.
In China, prior to 2000, the domestic chip industry was totally supported by the state. But then, the government shifted its stance, determining that it
would continue to support domestic R&D efforts, but would encourage private industry, recognizing that it was only through outside investment that China
would gain the ability to participate in the global chip industry in a significant way, said Yang.
In short, China recognized that it needed to create an environment via federal policy that attracted both local and foreign capital that would fund China’s
development and growing economy, creating local jobs in the process. And it learned this from a nearby neighbor.
"This lesson has been taught by the Taiwanese," Yang said. "The Taiwanese are very good at this strategy."
There’s a Reason Its the Capitol
China also realizes that to support its own domestic need for technology, it not only has to take further steps to protect the intellectual property (IP)
of foreign companies investing in China, but that it has to begin to develop its own IP as well. And while it looks outside of China to investors and
companies to help it foster that IP, those looking in might not be seeing the whole picture, suggested Liang Sheng. In fact, some executives may be
downright shortsighted.
Liang is the section chief of the Department of Information Industry of the Beijing Municipal Government. When most people in the West think of the chip
industry in China, the first word to come to mind is Shanghai. And if cheap labor costs and manufacturing are all that a company is looking for in China,
then Shanghai is the place to be, Liang acknowledged.
But if companies want to get in on the ground floor, they need to be plugged into China’s traditional capital: Beijing.
"Here in Beijing, we have the IP," said Liang, observing that China’s Semiconductor Manufacturing International Corp. (SMIC), while having its
principal production fabs in Shanghai, has its headquarters and is building its 300mm fab in Beijing.
Of the 400 design houses in China, 85 are in Beijing; out of the 16 design houses that achieve more than $100 million in annual revenue, nine are in
Beijing, Liang noted. And China’s only EDA company, CEC Huada, also resides in Beijing.
The bulk of China’s technical universities are also here."The Chinese market is so big, it grows so quickly, it is impossible to
depend on imports – we need our own technology, our own standards," he said. Which is why he wants foreign investors and foreign chipmakers to be aware of
Beijing, and what it has to offer in terms of local IP opportunity, as opposed to just cheap manufacturing.
"If you want to do something in this area, you have to cooperate with Beijing," Liang said.
China’s Fabless Industry to Quadruple by 2008
Explosive demand coupled with strong government support is expected to quadruple China’s
fabless semiconductor market from $288 million in 2003 to $1.2 billion in 2008 – a compound annual
growth rate of 32 percent, iSuppli Corp. believes.
As of mid-year, the El Segundo, Calif.-based firm estimates that there are about 468 IC design
companies in China, most of which are engaged in a struggle for survival or are burning through
funding from the government or private investors.
While iSuppli believes there is a place for local fabless companies in China, it will likely
be many years before the industry grows to a significant size.
Until recently, Chinese OEMs had not used the services of local fabless companies because of quality
and availability concerns, the firm noted. But these companies have proven their capabilities after earning
some significant design-win contracts from leading Chinese OEMs. With this change more customers have become
willing to try Chinese fabless firms, which should help them companies grow quickly, iSuppli said.
Chinese fabless companies still have a way to grow with only a dozen generating annual sales topping $12 million,
with the top player, Beijing Datang Microelectronics, reporting $60 million in sales for 2003, the firm reported.
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