China is the biggest consumer of semiconductors. It produced more than 90 per cent of the world’s 1.9 billion smartphones last year, 80 per cent of televisions and 70 per cent of PCs. Yet only 13 per cent of the chips used were made in the country by Chinese companies. That was worrying the government even before the trade tensions with the US.
Even adding in semiconductors produced in China by foreign firms, 58 per cent of the chips used were imported. Technological independence is now a policy priority. Beijing has no desire to remain the world’s No 1 assembler of electronics.
Chip imports rose 15 per cent to USD260 billion last year, making them China’s biggest import category - higher than oil, agricultural products or iron ore.
The ‘Made in China 2025’ industrial development policy announced three years ago aims to increase self-sufficiency in integrated circuits to 49 per cent in 2020 and 75 per cent in 2030 - including production in China by foreign companies.
To achieve that, Beijing set up a fund in 2014 to invest in chip manufacturing, boost industrial production and research, and to promote mergers and acquisitions. It has also introduced tax breaks for domestic chipmakers.
During the past decade, China’s semiconductor consumption growth has averaged 12 per cent a year far ahead of the global rate of 3.2 per cent. It now uses more than 60 per cent of global production.
But shortages remain in processors/controllers and memory products. Local suppliers can currently provide only mid-to-entry level microcontrollers and memory products: the challenge is to move up the value chain.
Chinese chip companies can compete in categories such as smartphone application processors, base band processors and network processor units, but are weak in more advanced areas such as microprocessors, memory and graphic processing units.
At the product level, domestic companies can supply most lower-end integrated-circuit chips for surveillance cameras, set-top boxes and home networks, identify cards, SIM cards, and bank cards that require simple functionality and limited computing power. Overseas suppliers can better customise components than their Chinese peers.
This creates opportunities for China to catch up. Greater R&D investment in new materials such as graphene and photonics may allow it to become a global leader but technological change is slowing, potentially making the gap harder to close.
However, as China becomes more active in setting technical standards in areas such as 5G, artificial intelligence, the internet-of-things and autonomous driving, it will have greater influence and closer collaboration with suppliers: that should eventually enable Chinese companies to move up the value chain from software or system design.
We see three opportunities for Chinese companies. Firms that focus on design, engineering and marketing, rather than fabrication, are increasingly important and China is catching up rapidly. Ten of the world’s top 50 chip design companies were Chinese last year, compared with just one in 2009.
Second, China’s spending on fabricated equipment is set to increase by 57 per cent this year and 60 per cent in 2019, overtaking Korea. Third, China’s technology gap with global peers is smallest in packaging and testing but its capacity is expanding, with new plants attracting new orders.
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Frank He
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