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China’s Semiconductor Industry: Past and Present (1/2)

· semiconductor

{{{Sharon Chen}}}

The semiconductor industry, which has gained publicity in recent years as an arena of fierce technological (and sometimes political) contention, is a complex market worth $440 billionworldwide in 2020, with a substantial CAGR of 8.4%. 

The figure below displays the key playertypes involved in the global semiconductor industry value chain. The main valuechain starts with an active field of technology R&D, often in university labs or private sector R&D departments. Their results enable new generations of integrated circuits (ICs) to be designed, and most firms specializing in IC design do not manufacture their own chips (they are called “fabless” firms). They instead send their designs to “fabs”, which specialize in the advanced chipmaking techniques and serve as contract manufacturers for the design firms. After the main manufacturing steps, chips are sent to assembling, testing and packaging (ATP) firms that perform the less technically challenging final processes before distribution. There also exist vertically integrated firms such as Intel and Texas Instruments that design, manufacture, and sell their own products. Furthermore, crucial to supporting this value chain are companies that license technology, supply raw materials, provide design software, and sell manufacturing equipment to players in the main value chain. 

Overall, this complex, highly internationalized playing field features a large diversity of players and some of the highest technical barriers of any commercialized product class. 

Source: The Semiconductor Industry(Semiconductor Industry Association America)

Today, China is the largest consumer for semiconductor products (microchips) in the world, accounting over 50% of worldwide demand. The domestic Chinese semiconductor industry can only supply around a third of the country’s total demand, rendering China reliant on imports and determined to develop a strong domestic ecosystem.

This article series will examine the pastand present state of the Chinese semiconductor industry. Section One reviews thehistory and growth of early Chinese semiconductors from the early 90’s until 2014. Then, Section Two presents case studies of major players in the current industry today. Section Three analyzes the current state and trends within the semiconductor startup landscape in China.

The 90’s: Hard-Learned Lessons SOEReforms and State-Run Projects

At the start of the 1990’s, at eve of thestate-owned enterprise (SOE) reforms, the Chinese semiconductor industry lagged behind leading international players, featuring around just a dozen firms employing out-of-date tools and processes. Recognizing the importance of electronics in technological development as well as the domestic industry’s poor competitive position, the Chinese government channeled industrial policyinto two successive projects in attempt to accelerate the development of the country’s semiconductor industry: Project 908 and Project 909.

Project 908 was a state-run collaboration between SOE Huajing and the American company AT&T-Lucent, with the aim of achieving significant capital and technological upgrades in semiconductor manufacturing. The project began in 1990, but due to various delays and obstacles in obtaining funding, did not make significant progress by its scheduled end date of 1995. Today, Project 908 is largely regarded as a failure. 

In 1996, with hard-learned lessons in mind, the government invested 10 billion RMB into the even larger-scale Project 909,spearheaded by a joint venture between Shanghai Huahong and Japanese firm NEC. Ledpersonally by the Minister of Electronics Industry, Project 909 proved to be more successful, with Huahong-NEC generating 3 billion RMB in sales and 516 million RMB in profit by 2000. However, the Dot Com Bubble of 2001 caused the joint venture to generate a loss of 1.4 billion RMB, drawing criticism to the project’s financial sustainability. Today, the Huahong Group still plays an active role in semiconductor design and manufacturing.

Huahong-NEC leadership, includingChina’s Minister of Electronic Industry Hu Qili (front, second from left), breakingground for the Project 909 flagship semiconductor plant in November, 1996

At this point, despite these two monumental government-supported undertakings, the rapid technological progress in thesemiconductor field (following Moore’s Law, which predicts transistor densityto double every two years) meant that China’s technical capabilities, asdefined by resolution and wafer size, were still 2-3 generations behind theglobal leading edge.

Meanwhile, the emergence Taiwan SemiconductorManufacturing Company’s (TSMC’s) successful foundry (fabrication only, nodesign) business model drove de-verticalization of the global semiconductorindustry, meaning that “fabless” companies could focus only on chip design,leaving the capital-intensive fabrication step to third-party contractmanufacturers. China’s capability in the assembling, testing and packaging (ATP) processes that follow chip manufacturing also developed rapidly, thanks to competitive labor costs and the relatively low technical barrier, compared to chip design and manufacturing. 

The 2000’s: A Market-Driven ApproachEmerges

Starting fromthe early 2000’s, the Chinese government began promoting the growth of its semiconductor industry using a different strategy than that behind Project 908 and 909. Instead, a set of policies were laid out in “Document 18” in 2001 that outlined tax incentives, infrastructure support, and the establishment of government-backed venture capital funds to assist the development of semiconductor companies, especially IC design firms that required more technical skill and higher value-add than the ATP services then-dominant in China’s industry. These incentives created a fertile environment, rather than another specific project, that encouraged market-driven players to enter the industry.

As hoped, thefollowing decade saw a rush of Chinese talent that had studied, trained andworked overseas return to China, and the birth of hundreds of new companies, of which some would later become the backbone of China’s modern semiconductor industry. Among these companies are SMIC, a pureplay foundry that has emerged as the country’s largest chip manufacturer (after years of legal embroilment with Taiwan’s TSMC), Gigadevice, a leading designer of flash memory, Spreadtrum, a designer of telecommunication chips for mobile devices, and HiSilicon, the Huawei-owned designer of ARM CPU’s (used in cell phones) that has recently encountered severe US restrictions. Many of these companiesessentially offered import substitution products, and competed based on customer service and understanding of the massive Chinese market, in addition to technical capability. Overall, the first decade of the 21st century was marked by significant market-driven growth and diversification of the Chinese semiconductor industry. 

Source: PwC, China’s impact on the semiconductorindustry: 2015 update

However, despitethe emergence of impactful companies along the domestic value chain, and thehoped-after growth of the design sector, the rapid pace of technological advancement made (and still makes) it difficult for Chinese firms to catch up to the global leading edge. As such, a state-backed investment fund was set up in 2014 with 139 billion RMB in capital to further support semiconductor startups andR&D. This, along with technological and political developments, ushered in a new boom in China’s IC industry that is ongoing today, which will be covered in the next part of this series.

All opinions expressed in this essay represent my personal views only.

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