China’s desire for a bigger share of global semiconductor production will trigger massive changes in the industry, force further consolidation in the sector and accelerate the re-ordering of the electronics supply chain. EPSNewsbelieves electronics makers must develop a viable response to China’s objective and work with the various governments involved to avoid a partitioning of the market into regions that can or cannot be served by certain enterprises.
A more assertive China has already torn up the IC procurement rule book. It has imposed stringent local purchase requirements on critical information and communication technology equipment sold in the country and has forbidden foreign enterprises from bidding on projects considered strategic to the country’s national security. Western government sources say these purchasing conditions will become more onerous in future, impacting chipmakers and influencing where and how contract manufacturers and electronic component distributors operate in the country.
“The Chinese government has begun implementing ambitious policies aimed at supporting domestic semiconductor design and manufacturing in order to develop a globally competitive semiconductor industry by 2030,” said the U.S. Trade Department in a report. “Potentially discriminatory policies implemented to support its industry to become self-sufficient pose a real long-term threat to not only U.S. firms but the entire global semiconductor ecosystem.”
The electronics industry is only now waking up to the challenges forced upon chip vendors and others by the China-West semiconductor dispute. China wants to reduce importation of semiconductor products into the country but with limited locally available chip IP and constraints imposed by Western governments on what chipmakers can transfer to local producers, the industry has been thrust into a long-simmering conflict it has so far ignored. For China, continued dependence on foreign semiconductor supplies is a problem that can no longer be ignored but the solutions offered to this dilemma have pitched the country against parts of the industry and Western governments.
“Potentially discriminatory policies implemented to support its industry to become self-sufficient pose a real long-term threat to not only U.S. firms but the entire global semiconductor ecosystem,” the U.S. Trade Dept. warned. “U.S. industry contends that as China develops its industry, it tilts the playing-field further in favor of domestic firms by actions such as dictating indigenous standards and imposing local-content requirements. Industry has also raised concerns about potentially discriminatory enforcement of China’s Anti-Monopoly Law.”
The stress on electronics makers and the supply chain will intensify in coming years in what will be an increasingly futile effort to avoid falling afoul of Western regulations while simultaneously meeting Chinese demand for localized production. China’s rising profile as a major consumer of and market for semiconductors as opposed to its earlier position as a manufacturing center for the rest of the world will result in the country insisting on gaining more of the profits from chip production at a time the industry is developing newer products with higher dual-use (military and civilian) potentials. This will deepen enterprise management’s perplexity as to how to satisfy the two contending parties.
For now, though, the Semiconductor Industry Association, (SIA), is moving in lockstep with the U.S. government. It agrees that Chinese actions have put its members at a disadvantage in a market growing faster than other parts of the world.
“While China is an important part of the global semiconductor value chain, SIA has long raised concerns about market-distorting aspects of its state-led industrial policy – such as forced technology transfer practices – that disadvantage U.S. companies and imperil their IP,” said John Neuffer, president and CEO, of the SIA, in a recent statement. “A balanced, fair, objective, and thorough investigation aimed at ensuring that China meets its global trading obligations and that market forces determine competitive outcomes will be helpful to address these market-access issues.”
However, with China accounting today for the biggest share of global electronics production, companies involved in chip production, distribution and assembly into end-products cannot ignore its demands. China wants more of the semiconductors consumed locally produced in the country because it has become a huge market accounting for more than one-third of the worldwide industry. This long sought goal is a top priority in what President Xi Jinping declared the beginning of a “new era”. Economic growth and military advancements are central to the attainment of that vision. So is the establishment of an “independent” local semiconductor market.
How, How and How?
How will China achieve its quest for a bigger piece of global semiconductor production; how will Western governments respond to this initiative and; how will the achievement of this objective impact the electronics industry supply chain? Answers to these “how” questions are vital now following China’s latest proclamation, which builds on actions taken in recent years to devote more resources – up to $150 billion, according to reports – on creating a market that is less dependent on foreign IP and foreign production.
If China succeeds in becoming a big semiconductor production country, the positions of all other players in the supply chain are bound to change. OEM procurement will be more heavily impacted. Although not involved in chip production, distributors, too, will come under greater Chinese influence. More of the components offered in the country will be determined by China, meaning distributors will have to identify and work closely with local vendors.
The country’s quest for a vibrant local IC market that is independent of foreign enterprises is understandable. In 2015, Chinese firms produced less than 10 percent of the semiconductors consumed in the country. The balance was supplied by foreign companies, dominated by U.S. producers. Despite its low production base, China remains the world’s largest semiconductor market with local consumption rising 8 percent in 2015, to $98.6 billion. This does not include semiconductors shipped to China for assembly in products meant for export.
China is only keenly aware of its paltry position in the semiconductor market. To change this, it has adopted a 3-pronged strategy, including acquisition of Western enterprises, regulatory actions to increase domestic production and enhanced investments in the sector. These actions are putting a squeeze on Western enterprises and sparking a low-intensity war for dominance in the sector.
Who will Blink First?
The stakes are too high for China to easily give up on its quest to become a dominant player in the semiconductor market. Hundreds of billions of dollars in sales and profits are at stake. Jobs, too, and bragging rights. More importantly, though, semiconductors are now so closely tied to national military defense capabilities that none of today’s biggest military powers will permit other nations to control their access to ICs or the type of chips they can use.
“China’s leadership views China’s reliance on foreign semiconductors as a major national security concern,” the U.S. Trade Dept. said in the report referenced above. “Because semiconductors are foundational to information and communication technologies, China’s leadership views the industry as a cornerstone of China’s goal of security its ICT ecosystem and technologies of the future through indigenization of the ICT supply chain while concurrently transforming and upgrading China’s economy.”
At the same time, though, countries that today have an edge in the use, development and deployment of semiconductors in military hardware are understandably loath to grant access to advanced technologies to nations they consider adversaries. This is the conundrum facing the technology industry and it is not a problem they can unilaterally resolve.
EPSNews believes China will win many, perhaps most, of the battles involved but the West will also win some skirmishes. However, Western governments will continue to effectively block attempts by Chinese enterprises to buy chipmakers headquartered in their territories.
Eventually, though, some of the blocking efforts will be neutralized as Western governments discover the technologies they seek to block China from accessing might already be in the country’s possession, having been developed by local companies or acquired in some other ways. A new reality of collaborative competition should thereafter emerge.
The danger for Western companies is that many of them may be crushed or outwitted by rivals in China before this happens. The addressable market for these companies may also shrivel as they are locked out of “critical” segments by the Chinese government. The industry can reduce the impact of this East-West tussle by implementing the following actions:
- Collaborate more with each other in the West and – where feasible, legal and advisable – with Chinese enterprises
- Remain current by staying on top of the legal requirements and political developments on both sides of the divide. Simply put, don’t be caught napping to avoid falling foul of government rules. The U.S. government, for example, will not look kindly on companies that wittingly or unwittingly violate its dual-use technologies rules; Ignorance won’t be a viable defense.
- Involve and engage with trade bodies that are active in defending the industry’s interest. Lobby the government directly and in conjunction with other interested parties offer credible solutions to address the concerns of all involved parties.
- Nurture innovations in all segments of your business operation to assure survival. Companies must focus on innovations that would help differentiate them in the market. Simply squeezing greater returns from existing product portfolio is a losing strategy.
- Diversify beyond your company’s traditional markets. The concept of firewalls between market segments is losing its utility. In the last decade, many non-traditional OEMs have invaded the electronics industry, and this will continue to happen. No single sector is immune to outside invasion and your enterprise should not restrict itself either. Explore adjacent markets and extend your products outside its current segments.