China's impact on the chip industry

According to a study made by Raman Chitkara, Global Leader of PriceWaterhouseCoopers' (PwC) Technology practice, the growth of China’ semiconductor market, which consists primarily of electronics manufacturing services (EMS) companies, original design manufacturers (ODMs) and original equipment manufacturers (OEMs) that consume chips in China, continues to be a major catalyst for changes in the industry. It has become clear that market growth in China is far more significant to the worldwide semiconductor industry than the nation’s production volumes. China has become a dominating consumer of semiconductors. Through the last eight years of ups and downs of the semiconductor business cycle, China’s consumption growth has continuously outrun the rest of the world. Since 2001, the bottom of the last semiconductor business cycle, China’s semiconductor consumption has grown at a 25.0% compounded annual growth rate (CAGR). This compares to a CAGR for total worldwide consumption of only 6.2%. China’s semiconductor consumption has grown many times faster than the worldwide market. This is the result, primarily, of two driving factors: the continuing transfer of worldwide electronic equipment production to China and the above-average semiconductor content of that equipment. The worldwide technology trend towards mobility is also contributing to China’s increasing share of worldwide electronic systems production. China’s share of global electronic equipment production has increased from 17% in 2004 to 33% in 2009, while the semiconductor content of that production averaged 25%. Regarding the latter, this compares to a worldwide average of only slightly more than 19%. The consumption of semiconductors for export, i.e., semiconductors used in China as components of finished products exported for sale in other countries, has been the major contributor to the growth of China’s semiconductor consumption market. However, as a result of the global recession, such export market consumption became the principal drain. China’s export market consumption decreased by more than US$3 billion in 2009. Meanwhile, China’s consumption of semiconductors for domestic products increased by almost US$1 billion. China’s domestic market—semiconductors consumed in China and used in components of finished products assembled and sold in China—has become of increasing significance to the global semiconductor industry. Fueled by an expanding middle class and rising demand for mobile devices, China’s domestic consumption market has made up almost 41% of the total world wide semiconductor market growth since 2003. China has been credited with initiating or leading the industry’s recovery from the depths of its decline in the first quarter of 2009. Although noticeably impacted by the global recession in 2009, China’s semiconductor production has also been growing for the past decade. Much of that growth has been led by multinational integrated device manufacturers (IDMs) that make up four of the five largest semiconductor manufacturing enterprises in China. The top two are now completing evolutionary extensions, becoming truly vertically integrated IC manufacturers within China, which could result in a paradigm shift in the semiconductor industry. China’s semiconductor production accounted for at least 7.5%—and possibly 11%— of the worldwide semiconductor industry in 2009, up from just 2% in 2000. Thanks to booming domestic demand driven by China’s economic stimulus policies, China’s IC design (fabless) industry sector grew against all odds. China’s fabless sector revenues increased by almost 17% to reach a record US$4 billion in 2009. As a result, four new start-up companies with 2009 revenue increases of over 100% were added to PwC's listing of China’s Top 50 Semiconductor Manufacturers. During the past five years, China has emerged as a significant source of new semiconductor companies and, more recently, of financial funding for semiconductor start-ups. Chinese domiciled companies represented the third largest group of semiconductor initial public offerings (IPOs) completed worldwide between 2005 and 2009. Although less than half of these Chinese IPOs were completed in China’s financial markets, that trend shifted significantly with the opening of two exchanges: the Shenzhen Stock Exchange Small and Medium Enterprise (SME) Board and the ChiNExt Board. Both entities facilitate fund-raising for small and medium-sized enterprises and growing venture enterprises. As a result, during the last four quarters (3Q/09–2Q/10), as the semiconductor industry recovered from the global recession, Chinese companies have accounted for more than half of all semiconductor IPOs completed worldwide. Moreover, Chinese financial markets have provided more than 80% of all the semiconductor IPO funding. While it is likely that some these new Chinese public semiconductor companies will achieve larger scale either organically or through mergers, the emergence of a major indigenous Chinese semiconductor company seems less probable now than it did when PwC first began this series. While the Chinese government has provided some very innovative investment funding for China’s largest foundries, those foundries have yet to earn a return that would support further expansion. For now, these seem to be limited by high depreciation expenses and low selling prices, owing to dated technologies. In fact, the enterprises remain two or more years behind their leading competitors in implementing the most advanced technologies. So, while China will continue to grow in semiconductor manufacturing, it appears the nation still lacks the indigenous ability to fully innovate and develop all the technologies needed to address their unique mobile standards.