The revenues for semiconductors manufactured in China will grow by 25% to approximately $110 billion in 2019 from an estimated US$85 billion in 2018. China still only supplies 30% of its domestic demand of about $330 billion in 2019
- Definition / Scope
- Market Overview
- Market Risks
- Top Market Opportunities
- Market Drivers
- Market Restraints
- Industry Challenges
- Technology Trends
- Regulatory Trends
- Other Key Market Trends
- Market Size and Forecast
- Market Outlook
- Technology Roadmap
- Distribution Chain Analysis
- Competitive Landscape
- Competitive Factors
- Key Market Players
- Strategic Conclusion
Definition / Scope
- Semiconductors control the flow of current in electronic devices. The unique properties of the materials that they are made up of, silicon being the most common one, make them both a conductor and an insulator of electricity.
- Semiconductors are the crux of the modern age technology especially where information technology is concerned. Semiconductors are tiny electronic devices, usually smaller than a postage stamp and operate by implicating data-processing brains for products, from smartphones to cars and spacecraft.
- Semiconductor are crucial for all electronic products. Some of the uses of semiconductors are:
- Communications: Smartphones, wireless networks and the Internet of Things (IoT), Computers and tablets
- Consumer electronics: Digital TV, game consoles, home theatre systems
- Cars: Chips such as GPU’s have enabled new functions like voice assistance and autonomous driving
- Factories: Automation and IIoT
- Military and Aerospace: satellite systems, drone, military radar among others
- Two stages of specialization:
- The Integrated Device Manufacturer (IDM) model- A firm involved in this space carries out all of the four major production stages: design, manufacturing, assembly, testing and packaging.
- The Fabless-Foundry model: The production process is split among different companies. Design companies focus on design and contract out the manufacturing, or fabrication, and are thus “fabless.” Foundries concentrate on contract manufacturing, while the firms that perform assembly, testing and packaging are known as Outsourced Semiconductor Assembly and Test (OSAT) companies
- The semiconductor industry can be categorized into four major areas: wafer manufacturing, IC design, packaging and testing, and upstream equipment and materials. China has been aggressively pushing developments in all four fields.
- As of 2018, IDMs still account for 50% of the industry’s revenue, fabless manufacturers, foundries and OSAT firms have reported higher CAGR because of economies of scale.
- The value chain has become increasingly dispersed across the world, with most IDMs and design firms based in the US and South Korea, while foundries and OSAT firms are concentrated in Taiwan and China.
- China’s surging demand for chips in the past two decades has fueled the growth of the global semiconductor market. The country now consumes more than half of the world’s chips.
- In 2018, China imported $312 billion worth of semiconductor products and its trade deficit in semiconductors amounted to $227.4 billion in the year.In addition, if the deomestic IC manufacturing value is included, China’s demand is likely to total around $251.1 billion in 2018, accounting for 58.3% of the worldwide semiconductor consumption.
- Domestic consumption which accounted for around 30% of worldwide demand from 2013-2016, rose to 36% in 2018 or an amount of $155 billion mostly due to the expansions of China’s smartphone vendors globally.
- There are two primary application fields Chinese chip companies cater to: Security and Smartphones:
- In security, China will have over 600 million security cameras by 2020. The country’s CAGR for Security in 2018-2022 period is estimated at 22.6%, with wide-range applications in public security, urban transportation, eco-architecture and industrial parks respectively. However, one challenge that exists is that the chips used in video surveillance is quite expensive considering this factor, the demand may slump.
- The four major China-based smartphone vendors, Huawei, Lenovo, Xiaomi and BBK were all in the top-10 rankings in terms of semiconductor purchasing in 2018, together spending as much as US$60 billion. In addition, China’s US$155 billion semiconductor demand in 2018, 62% came from local players and 38% from non-China players.
- In 2018, China has put more than $170 billion into its semiconductor industry. The government gave $20 billion to private equity to fund semiconductor companies and technology. There was another $97 billion from commercial sources and regional government. There is a new $47 billion funding.
- The semiconductors manufactured in China is expected to grow by 25% to approximately $110 billion in 2019 from an estimated $85 billion in 2018 to meet the increasing demand of chipsets driven in part by growing commercialization of AI.
- By 2019, a Chinese chip foundry is also expected to begin producing semiconductors specialized to support Artificial intelligence and Machine Learning.
- The Growth of China has lifted the entire semiconductor industry in the world. China accounts for 50% of the consumption of the global semiconductors. However, Chinese manufacturers only meet 30% of their domestic demand.
- The government and tech companies in China have signaled that the greater domestic supply of the semiconductors will further boost the country’s market share. The government is also hiring and spending substantially to create an onshore manufacturing capabilities approaching those of the top global foundries. In addition, the agenda of producing specialized semiconductors for AI is further supported by the state and domestic manufacturers in China that are wielding a great deal of capital and market. Thus, creating a relationship between next gen technology and computation may finally allow China to succeed in the industry.
Under the trump administration, US has blocked big-ticket blocks on Chinese chip makers bids particularly, Chinese companies such as Lattice and Xterra. In addition, trump has also been handed with US governments power to restrict foreign investments for national security reason.
However, this will become a big impediment for the Chinese firms’ tech-ambitions and those looking to invest in the US. As these Chinese companies are blocked from external efforts to acquire competent companies in US, their growth might slowdown.
To add more burden, the Sino-US war kicks in where US has imposed tariffs on billions of dollars’ worth of semiconductor goods imported from China. As a result, China is more likely to focus on local market which is further going to hamper its fast paced growth.
Top Market Opportunities
After a year of exciting growth in 2017, industry leaders are being asked about their thoughts on what to watch for across the semiconductor industry in 2018. In particular, many eyes are on China, as the country continues to build up its local semiconductor ecosystem.
The continuous growth in the global semiconductor market is fueled by increasing demand from smartphones, abundance of emerging applications including autonomous driving, the internet of things (IoT), high-performance computing, artificial intelligence among others.
These dynamics together create a great opportunity for semiconductor industry growth in China, as it seeks to increase its semiconductor capacity and grow its local supply chain. The pace of growth of the industry in China is like in no other region/country.
At the same time, the global technology slow-down offers a good time for many parts of the supply chain to invest in a solid foundation in China for the long-term. These companies can focus on developing their R&D talent, optimizing their processes for high-quality products, and implementing improved manufacturing practices.
Although, the percentage of the consumption of semiconductors in China is very small, but the volumes of domestic production continues to rise. For the Chinese companies involved in the industry, they must be both global and local. Global, because all players are competing on the world stage and they must be local, because a local presence is the only way to truly understand and support local and differentiated needs.
As, China continues to increase its domestic semiconductor supply, companies will be demonstrating their high-volume manufacturing, but they must simultaneously invest in technology and fab capabilities.
Made in China 2025: The agenda is introduced for the first time where, it is a 10-year action plan with a goal to transform the country from a manufacturing giant into a worldwide manufacturing power.
The road map built under the plan is a 3 decade plan which focuses on 10 key areas such as: aerospace equipment, rail transportation equipment, energy saving and new energy vehicles, new material and composites, high-CNC materials tools and robotics among others. At least 4 industry areas depend on semiconductors for their manufacture. Some of the targets that the plan has made include:
By 2020, China aims to increase CAGR of revenues from the industry by more than 20% and lead development of safe, secure value chain of the industry.
By 2030, China aims to create a world class semiconductor industry value chain and also to promote a set of leading companies to be considered tier 1 players in global semiconductor market.
Domestic demand: China imports about $200 million worth semiconductor annually and is the largest consumer country of the industry. There are about 800 million internet users in China, with the growth of population and economy it drives a number of foreign suppliers profits.
The growing demand of Chips coming from China has helped it to have more control over foreign manufacturers and how they can access China’s domestic market.
State sponsorship: Since 2014, with the announcement of National Guidelines for promotion of IC industry by state council of China the state has been involved in multiple funding for the industry. In 2014, $21.8 billion was injected into the economy by the government backed businesses.
In addition, with the commencement of ‘Made in China 2025’ plan, more funds have been raised to support its goals. Similarly, SIMC expects its state subsidies for 2018 to near $100 million.
Further, the industry organization SEMI estimates that China will spend addition $13 billion on fabrication equipment and become world’s largest buyer. In addition, China plans to build 14 new chip foundries with support of its state level government.
Growing demand for AI: The entire global semiconductor industry is likely to focus more support on needs of AI. With anticipated growth rate of 5-6% in next two decades, advances in AI is a major driving force for the semiconductor industry.
China has declared that its future of the industry is driven by advance technologies with AI being the major ingredient. In 2017, China’s State Council published next gen AI development plan with which China’s aim of becoming leader in AI by 2030.
This will allow largest companies in the landscape to leverage their own chipset in future that meets the AI need of China based global technology companies such as Baidu, Tencent and Alibaba.
Lack of fabrication: Most of the Chinese manufacturers lack in the fabrication for most advance processes. As the foundries require huge amount of capital investments, they also need to build incredibly large industrial processes capable of making small circuitry.
Top manufacturing foundries such as Semiconductor Manufacturing International Co (SIMC) are working to scale production at 14nm while AMD and TSMC are reaching 7nm. With these standards, Chinese foundries are two to three generation behind other global players.
Lack of technology & talent shortage: At present autonomous vehicles require very complex intersection of AI, semiconductors and robotics. In line with that, they present very difficult design challenge and the startups in the landscape along with country’s top hyper-scale players look to Silicon Valley for such technology expertise.
To continue developing their domestic chip supply, the Chinese companies should also attract more talent to their country. For instance, smart factories with advance technologies if leveraged by the Chinese companies may attract skilled manpower such as engineers to work for them.
The Chinese telecom giant ZTE’s business came to a halt when it was banned by the US from buying American-made chips. Despite, US bailed the company, ZTE loomed into crisis as the management team shook within 30 days and also it had to pay $1 billion fine. The incident is the direct evidence of the situation of the Chinese semiconductor industry where the major reasons for that happening is: inadequate core technology and weak innovation. The companies in the landscape lag far behind in comparison to their international counterparts and China does not have much say in the global semiconductor industry.
Although, China accounts for more than 50% of the global demand for chips. However, only 8% of the chips used in the country are produced within the domestic market. In 2016, China imported US$227 billion worth of semiconductors, almost double that year’s imports crude oil, which is the second-largest category. The overreliance of the industry to import semiconductors has led to the cause of country’s lack of core technologies as well as its weak chip manufacturing.
The existing government policies are weak and in order to boost the industries effective policies has to be introduced. The government should also increase the income of researchers and set up industrial funds. As for companies, technological breakthroughs are key, which could be achieved by strengthening research and development at universities and institutions.
Although government might intervene but the companies in the industry are too dependent upon the states and put a strain on limited resources available with the states which has also created a chaotic competition among companies to get access to those funds.
Within the manufacturing sphere, initiatives are predominantly geared toward chip manufacturing, while more attention should be paid to the equipment and materials side of things. For this, China could also look upon other regions for answers. Without technological innovation companies cannot succeed and the challenge lies in transfer of real technology.
China began mapping out its semiconductor strategy in the 1950s. However, it was largely an outsider during the “golden age” of the ’60s, when most of the industry leaders kicked off. The semiconductor industry started in the ’70s and developed really fast. In the early days, Japan bought American chips but later switched to chip R&D.
At that time, Chinese companies were inactive and only got back into the game in the 2000s, when the market was dominated by several big companies. Thus, one of the major challenge for China at present is have competitive edge over other players in the industry because they did not advance in the industry early on.
A world-class chip factory would cost $2 billion to $5 billion to build. With such a demand for capital, it would be hard for the sector to take off without financial support from the government. Thus, China’s chip sector wouldn’t be possible without government support. However, the state’s initiatives can co-exist with market competition and innovation.
China’s huge market is not a solution for the semiconductor industry. In recent years, the country has won on many grounds: the world’s largest PC market and the world’s biggest mobile phone market. But such titles have not helped the chip sector of the country, which still relies heavily on imports. Thus, many hurdles lie on the way ahead for China to prosper in the industry.
With the rapid development of the semiconductor industry, application scenarios have been continuously expanded and embedded in automobiles and other various products.
Meanwhile, with the emergence of emerging technologies such as artificial intelligence, virtual reality and IoT, the market demand for semiconductors is constantly expanding since 2013.Some of the other major trend in the industry are:
A new opportunity has evolved for the bitminers in the bitcoin ecosystem where by simply using a special custom type of chip, they will be able to enhance their processing power of the computer which then allows them to solve a mathematical puzzle efficiently and get rewarded with bitcoins.
To meet the requirements for young bitcoin economy, in 2013, Bitmain Technologies Ltd. was formed in Beijing. Bitmain was one of the first players in the industry to meet the demand with special chip architectures. The design of Bitman chips is advance with recent product line using 16 nanometer (nm) process.
As China regulated cryptocurrency markets, the need moved to other advance technologies such as AI. The GPU’s in chips were exploited further to support the application of AI. Beijing’s Horizon Robotics founded by Baidu’s head of deep learning supplies chips for machine vision.
Backed by Intel, Horizon is working with major automotive brands to provide edge processing with machine vision for vehicles. Another notable chip player Cambricon also has line of chips to support Machine Learning.
The company contributed design in Huawei’s kirin smartphone chipset, then it provided its own chipset for data centers. Besides, non-companies from digital business lines are also pursuing their own chip lines to meet the needs of their hyper-scale digital platforms.
China’s semiconductor industry has been thriving since 2015 and one of the major reason is the Chinese Government’s driven supportive policy and industry fund. In 2019 and beyond, the Chinese government will continue supporting heavily in this industry at levels of central government and local authorities.
The government backed fund in the industry is also known as “big fund” which will mainly focus on three key sectors in the coming years, including memory, SiC/GaN compound semiconductor, and IC design with its application in IoT, 5G, AI, smart vehicles, etc.
The commencement of the government initiative kicked off in 2014, with the announcement of National IC Industry Development Outline in June and the “Big Fund” in September.
Before that, the government only provided R&D rewards, tax reduction and land subsidies, but after 2014, for the first time, M&A, and state funds were leveraged to enhance the manufacturing capacity and international competitiveness of China’s semiconductor industry.
With the support of the Big Fund by far,some of the M&A activities that have took place inclue, Tsinghua Unigroup bought Spreadtrum and RDA, Jiangsu Changjiang Electronics Technology Co., Ltd (JCET) acquired STATS ChipPAC and grew to a global top 3 IC testing and packaging company, Tongfu Microelectronics Co., Ltd (TFME) launched new joint venture combining AMD’s high-volume assembly, test and packaging facilities(ATMP).
In addition, steps have been taken to increase domestic IC production. As the result, China’s semiconductor industry has made progress regarding both quality and quantity, shortening the gap between China and other foreign rivals.
By September 2017, the first phase of the “Big Fund” raised approximately $20 billion with a total investment in 55 projects. In addition, for the same period, the promised funding was around $14 billion and the actual investment it turned out to be around $9 billion, of which IC manufacturing accounts for the largest proportion (65%).
Since 2018, the second phase of the “Big Fund” i.e. $47.8 billion is being raised. The investment projects will also be adjusted accordingly. With the fund, the government is set to focus on bolstering IC design which will increase to 20-25 %, and the investment projects will also be expanded to potential startups.
Finally, China’s strategy of developing domestic semiconductor industry has been witnessed as a clear trend – the central government drives local development. In response to the central government’s strategy, local authorities have put forward special policies for the semiconductor industry that includes funding, research and development, investment, innovation and talent, etc.
This shows that local authorities not only have the determination to develop semiconductor industry, but also initiative substantial practical support.
Other Key Market Trends
Five current conditions that is likely to lead China’s semiconductor industry to ascend include:
- China’s huge state and private funding ranges around tens of billions per year. At the end of 2017, China had plans to build at least 14 new chip foundries.
- China is trying to have an edge in new-gen technologies such as AI hardware and software. Baidu, Alibaba and Tencent have a combined market capitalization of over $1 trillion are supporting the industry’s vision of AI and are set to invest billions for dollars for the same future projects.
- Chinese designs and IP for chip architectures are now globally competitive. Huawei designed its new mobile chipset at 7 nm and claims that it uses less energy and provides better performance than its competitor. Further, looking into 2019 and beyond, China after EU is likely to invest more in technology and designs even leaving behind US.
- China goal is to grow domestic chip production as a percentage of total chip consumption to 40% by 2020 from 30%.
- Some of the technologies that semiconductor industry in China is looking forward to leverage on are 5G enabled capabilities, IoT and IIoT, sensor fusion, security, pattern recognition (AI, ML, automotive) among others.
Market Size and Forecast
In 2016, the market scale in China reached $218.83 billion dollars. As of 2017, China semiconductor market size achieved approximately $244 billion, with year-on-year growth of 11.4 %.
With the continuous growth of China integrated circuit design, manufacturing, packaging and other industries supported by national policies, it is estimated that China semiconductor market size will be close to $274.8 in 2018, with a growth rate of 12.4 %.
The revenues for semiconductors manufactured in China will grow by 25% to approximately $110 billion in 2019 from an estimated US$85 billion in 2018. China still only supplies 30% of its domestic demand of about $330 billion in 2019.
As of 2019, the Chinese semiconductor is in its primary stage of development and that too at a level lower than the international standard of advance level. However, it’s strengths are: large-scale introduction, digestion, absorption and key construction that has led China to become the largest semiconductor market in the world.
The Global Semiconductor industry outlook is good, with market having y-o-y growth of 21.62% and $412.2 billion revenues. The industry seems to take off mostly with memory price increase and IoT technology demands. The annual revenues for 2018 is expected to reach around $450 billion with 7.7% growth since 2017.
Further, China has realized three years of consecutive growth in the sector and also has the highest growth rates among all regions. According to the global sales in second quarter 2018, regionally, China, America, Europe, Japan, Asia-Pacific and all other regions have a growth rate of 30.7%, 26.7 %, 15.9 %, 14.0 % and 8.6 % respectively.
Following the world pattern of semiconductor equipment industry, the globally well-known semiconductor equipment manufacturers are concentrated in the United States, Japan and Netherlands.
However, the third industry transfer will accelerate rise of China semiconductor. From 2017 to 2020, 62 new semiconductor production lines are expected to be added globally, of which 26 are located in mainland China, accounting for 42 %.
With the rapid growth of domestic industry investment volume in the Semiconductor industry of China, the equipment demand of relevant manufacturers has also increased.
Sales amount of China equipment market has grown at a CAGR of 26.9 % since 2012, while the relative global sales growth rate is only 8.9 %. The cleaning equipment market is also dominated by Chinese market, which provides domestic semiconductor equipment manufacturers with a broad market space.
The growth of the industry in China is also supported by the increasing domestic demand for chipsets driven in part by the growing commercialization of AI. Further, in 2019, Chinese chip foundry is set to begin producing semiconductors specialized to support AI and ML.
With the high proliferation of the companies and applications of AI spreading in number of areas such as: cars, phones, drones and robots, China recently launched a Science and Technology Innovation Board (STIB) on the Shanghai Stock Exchange (SSE).
The main goal of establishing STIB was to enable a sci-tech innovation board which can provide assistance in piloting the registration system for the capital market.
With open market and ready for the next mega chip company to emerge, Chinese semiconductor industry will not only need to withstand foreign competition but also evolve as a competitive player by leveraging next generation technology like AI into its semiconductor industry.
The leading players in the semiconductor industry belong to countries such as US, South Korea and Tiwan. In addition, Europe and Japan also have a cutting-edge technology to support production. However, China lags about 5-10 years behind in this critical technology.
Although, China is set to invest hundreds of billions for technology. AI, 5G, Internet of things and other technological competition have semiconductor technologies as the foundation for competitive advantages.
Distribution Chain Analysis
There are around 300 production plants spread across 20 provinces in China. The majority are in the economically more advanced eastern region
With local government’s active involvement in semiconductor industry, some of the cities that are likely to grow more prominent are: Hefei, Xiamen and Jinjiang (expected to emerge as major industrial regions of China’s new generation of semiconductor industry.)
Further in 2019, at least 11 state governments across the nation are looking for setting up production which include: Beijing, Chengdu, Chongqing, Hefei, Shanghai, Shenzen, Wuhan, Xiamen and Shaanxi provinces.
While the mature players in the Chinese industry are receiving funding from the state and government supported funds, most Chinese semiconductor startups looking to venture in AI landscape are operating on a net loss and are likely to continue on the same trajectory for the next two years. The underlying reason behind this is US that has placed export controls on close to a dozen AI and machine learning technologies.
At present China’s semi-conductor industry’s focus entirely lies on AI enabled chips. For instance, most current AI chip solutions use GPUs, but more FPGA/ASIC solutions emerging for example from Cambricon and DeePhi, while Huawei HIsilicon has become a big player in specialized SoC.
Deep learning is one application in Semiconductor where the most compatible chips for the technology supported by GPU’s are produced by companies NVIDIA and AMD. However, these chips are energy consuming and expensive. An alternative such as chips supported by FPGAs (Field-Programmable Gate Arrays), are manufactured by Chinese companies such as Xinlinx, Lattice, and Intel Altera.
A third emerging option in the market is ASICs (Application-Specific Integrated Circuits), which are are fully customizable, but whose initial implementation is also relatively costly. They are being developed by companies such as Google TPU, Huawei Hisilicon, and Amazon’s ASIC etc.
The edge computing market is expected to represent more than 75% of the total market opportunity, aside from cloud and data centre environments. Chinese startups lack the experience of large semiconductor companies with CPU, GPU and FPGA designs, therefore ASICs are seen as a catch-up opportunity. Some of the Chinese companies in this field include:
- Bitmain (Series B+ $440 million, 2018-08)
- Cambricon (Series B Hundreds of million approx., 2018-06)
- Horizon Robotics (Series B $600 million, 2019-02)
- Kneron (Series A+ $18 million, 2018-05)
- NextVPU (Series A $28.82 million, 2018-10)
- Easytech (Series A Undisclosed, 2019-03)
- DeePhi Tech (Acquired by Xinlinx, 2018)
- Huawei HiSilicon (Established in 1991)
According to the 2017 ranking, two Chinese companies, HiSilicon and Unigroup (Spreadtrum and RDA), are among the top 10 fabless IC sales leaders in the world.
In February 2018, Chinese AI semiconductor manufacturer Horizon Robotics raised US$600 million in Series B funding from SK China, SK Hynix and big auto groups, making it the first to get entitled to astounding amount of US$3 billion. According to Horizon, their next goal is to become the “Intel of edge computing” in areas such as intelligent driving and AIoT.
Similarly, the Huawei Mate 10 and Glory V10 for example have the cutting-edge Huawei Neural Processing Unit (NPU) Kirin 970. The smartphone giant of China is looking forward to incorporate more AI features into its line of phones in near future which is definitely going to boost the AI incorporated chip manufacturers in China.
Yangtze Memory Technologies in China has invested $24 billion to build China’s first advanced memory chip factory .They announced progress on its 32-layer NAND memory chip—a good sign which is still behind the state-of-the-art 64-layer chip that other memory manufacturers are achieving.
SMIC hired a senior executive away from Taiwan’s TSMC, the world’s largest contract foundry and one that is considered to be two to three generations ahead of SMIC. TSMC has begun constructing a foundry in Nanjing to gain a stronger foothold in the Chinese market. Thus, the competition among the domestic players is high.
Key Market Players
According to the revenue in 2017, some of the top market players in the industry include:
- Hisilicon-$3.87 billion
- Tsinghua Unigroup-$1.86 billion
- Omnivision-$1.39 billion
- ZTE Microelectronics-$893 million
- CEC Huada-$506 million
- Nari Smart Chip-$478 million
At present the semiconductor market in China is set to grow at an astounding speed. The current backbone of the electronics and telecom industry in China, semiconductor companies in China are driving innovation with new trends like spending on wafer fab equipment.
Although China is expected to play an increasingly influential role in the global semiconductor market over the next few years, government incentives and market conditions still need improvement to allow for the further reduction in the consumption/production gap and long-range moderate growth.