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China’s Bold Strategy for Semiconductors

Gabe Moretti, Senior Editor

The East-West Center is a research organization Established by the U.S. Congress in 1960. The Center serves as a resource for information and analysis on critical issues of common concern, bringing people together to exchange views, build expertise, and develop policy options. The Center is an independent, public, nonprofit organization with funding from the U.S. government, and additional support provided by private agencies, individuals, foundations, corporations, and governments in the region.

The Center’s 21-acre Honolulu campus, adjacent to the University of Hawai‘i at Mānoa, is located midway between Asia and the U.S. mainland and features research, residential, and international conference facilities.  A few years ago I became acquainted with Dr. Dieter Ernst, a Senior Fellow at the Center.  He has recently published a paper with the title: ”China Bold Strategy for Semiconductors – Zero Sum Game or Catalyst for Cooperation?”

Abstract of the Paper

This paper explores whether China’s bold strategy for semiconductors will give rise to a zero-sum game or whether it will enhance cooperation that will benefit from increased innovation in China.  As the world’s largest producer and exporter of electronic products, China is by far the top market for integrated circuits (ICs), accounting for nearly a third of global demand. Yet its ability to design and produce this critical input remains seriously constrained. Despite decades and many billions of dollars of state-led investment, China’s domestic production of semiconductors covers less than 13% of the country’s demand.

As a result, China’s IC trade deficit has more than doubled since 2005, and now has surpassed crude oil to become China’s biggest import item. To correct this unsustainable imbalance, China seeks to move from catching up to forging ahead in semiconductors through progressive import substitution. The “National Semiconductor Industry Development Guidelines (Guidelines)” and the ”Made in China 2025″ (MIC 2025) plan were published by China’s State Council in June 2014 and May 2015, respectively. Both plans are backed by huge investments and a range of support policies covering intellectual property, cybersecurity, procurement, standards, rules of competition (through the “Anti-Monopoly Law”), and the negotiation of trade agreements, like the Information Technology Agreement. The objective is to strengthen simultaneously advanced manufacturing, product development and innovation capabilities in China’s semiconductor industry as well as in strategic industries that are heavy consumers of semiconductors.

Until recently, China has focused primarily on logic semiconductors and mixed-signal integrated circuits for mobile communication equipment (including smart phones), and on the assembly, testing and packaging of chips. Since the start of the 13th FYP, China’s semiconductor industry strategy now covers a much broader range of products and value chain stages, while at the same time increasing the depth and sophistication of its industrial upgrading efforts.

Based on a review of policy documents and interviews with China-based industry experts, Dr. Ernst describes a key policy initiatives and stakeholders involved in the current strategy; highlight important recent adjustments in the strategy to broaden China’s semiconductor product mix; and assess the potential for success of China’s ambitious efforts to diversify into memory semiconductors, analog semiconductors, and new semiconductor materials (compound semiconductors). The chances for success are real, giving rise to widespread worries in the US and across Asia that China’s bold strategy for semiconductors may result in a zero-sum game with disruptive effects on markets and value chains. However, Chinese semiconductor firms still have a long way to go to catch up with global industry leaders. Hence, global cooperation to integrate China into the semiconductor value chain makes more sense than ever, both for the incumbents and for China.

More About the Plan

Dr. Ernst goes to great details in his paper to describe the latest Chinese effort in semiconductors.  To begin with the present leadership team includes, contrary to the past, internationally recognized scientists and technical leaders.  The effort is focused on few areas of the industry and seems well managed.  One focus area is the design and fabrication of power and analog semiconductors especially with regards to the requirements for robotic applications.  In the paper Dr. Ernst writes: “On the demand side, China’s well funded programs to develop both electric vehicles and smart autonomous buses and cars will create a huge demand for analog semiconductors.”  Other areas that need analog devices are: smart grid, alternative energy technologies, and IoT systems.

On the supply side, Dr. Ernst points out, “analog semiconductors offer substantial advantages – they use mature process technologies, and thus are much more cost effective than digital fabs.”  This and other related advantages over digital IC design and fabrication make the choice an intelligent one especially manufacturing costs.

Dr. Ernst states that: “Of particular interest will be China’s push into compound semiconductors.  While still at an early stage, there are serious efforts under way to develop an integrated compound semiconductor value chain, drawing on the demand pull from China’s huge market for lighting/LED and power electronics.”  The paper details the names of companies, not all Chinese by the way, that are part of the effort.

Memory is a new sector of interest to the Chinese government.  In the past this segment of the industry had been neglected, but the new plan is now considering it important with significant investment for both flash memory and DRAM products.

In short, the present Chinese plan is very serious, focused, and so far, well managed.  China in a few years could become a serious disruptor of present semiconductor commerce.  American companies, as well as Taiwanese, Japanese, and South Korean, need to pay particular attention to Chinese efforts in semiconductors.   China could not only cover most of its internal needs, but can in fact develop into an international exporter of ICs.

Conclusion

Dr. Ernst paper goes into great details about the Chinese strategy for semiconductors.  What I have done is just provide highlights.  I strongly believe that the paper is must read for all those in the EDA, systems, and foundry business.  Not just to follow what the Chinese government is doing, but also to extract possible ideas on what the US companies might need to do to maintain their commercial and technological lead.  The entire paper can be found at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2836331.

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