Electronics: The semiconductor industry

This section discusses the evolution of China’s electronics industry based on the semiconductor industry. The semiconductor industry consists of ICs and discrete devices. The section begins with a brief history of China’s semiconductor history before going into the current position of its

semiconductors in the world market. Three segments of the IC industry in China – IC design, manufacturing, and test and assembly – are discussed.

The conclusion is that China will move forward in the semiconductor industry, despite the challenges.

China’s electronics industry began to develop rapidly in the early 1980s with its Open Door policy. From the beginning, China aimed to be

independent in its consumption of ICs. Specifically, China’s company called Hua Jing acquired 3-inch wafer technology from Toshiba in 1982 (Pecht, 2006).

In the 1990s, China’s semiconductor industry development strategy included encouraging the transfer of technology through FDI. In 1995, it launched the Pudong Microelectronics Centre in the Pudong New Area of Shanghai to encourage domestic production of IC and reduce reliance on IC imports, which were increasing as more electronic and electrical items

99 were being assembled in China. Under Project 908,⁴⁹ Huajing further set up a 6-inch wafer productions line with technology from Lucent.⁵⁰ It also sought help from companies such as Motorola, NEC, Mitsubishi,

STMicroelectronics, Phillips, Siemens and Toshiba in building its IC industry (Pecht, 2006). Later in the decade, NEC established joint ventures with a Chinese partner, Hua Hong-NEC, under Project 909 for two wafer

fabrication plants to produce Dynamic random-access memory (DRAM) IC for export back to Japan (Pecht, 2006). ⁵¹

In the decade 2000-2010, China continued to seek foreign technology to develop its semiconductor industry. During this time, Taiwanese companies such as TSMC and UMC invested in manufacturing ICs in China. Intel also invested in assembly and testing at Shanghai in 2003, followed by an R&D centre, also in Shanghai, a year later.

The case of Motorola’s exit from the wafer fabrication business in 2003 exemplifies the transfer of technology from foreign firms to China (Pecht, 2006). Motorola build a fabrication facility in Tianjin city in 1995 with plans to double its size in 1998 with cumulative investment of US$3.4 billion. In 2003 it sold the wafer fabrication business to a contract manufacturer, SMIC. SMIC was founded in 2000 by a Taiwanese-American Richard Chang, who was recruited by the People’s Republic of China’s Government to help them to bring its semiconductor foundry industry to the next level. It helped China to launch its first 300 mm wafer fabrication plant with 0.11 to 0.10 µm process technology in 2004, marking China’s entry into the IC industry at a very sophisticated level. SMIC is headquartered in Shanghai

49 National Project 908 and National Project 909 are projects launched by the State Council and the Ministry of Electronics Industry in Beijing.

50 In IC industry, 6-inch refers to the silicon wafer size that is used in fabrication process, the bigger the wafer, requires higher technology development costs but offers lower unit costs in the long run.

51 DRAM is the IC chips that hold the data that is needed to be accessed by the Central Processing Unit (CPU) of the computer quickly, the DRAM is dynamic memory because it is volatile and once power is cut-off, the memory held by DRAM is lost. (The PC Guide, 2001)

100 and is one of the top semiconductor companies in China by revenue. It is state-owned, although its stock is listed on both the Hong Kong and the Shanghai stock exchange.⁵² China’s strategy for development includes acquiring foreign technology when required, as in the case of Motorola exit from China. This exit from China is part of Motorola’s global business and part of it involves spins off its IC fabrication business as Freescale

Semiconductor in 2004.

Despite SMIC’s achievements, Taiwanese foundries still lead in

manufacturing process technology. As a comparison, TSMC of Taiwan has wafer plants for 300 mm wafers for 0.13 μm to 90 nm, 65 nm, 40 nm and 28 nm process technologies. TSMC also has R&D under way to churn out 450mm wafers for cutting edge 10 nm process technologies (Lisa Wang, 2012) compared to SMIC’s processing technology capacity of 0.35 μm to 28 nm.⁵³

Figure 4.6 China’s Semiconductor Industry by Sector, 2003-2013

52 The biggest shareholder of SMIC is the investment arm of the Shanghai Municipal Council. (Chu, M.-C. M., 2013)

53 For semiconductor productions, the lower the figure, the better and more powerful processor is produced as more transistors can be fitted into a processor of the same area.

The figures are referring to the area between the ’field-gates’ of the transistors implanted within the processor.

101

Source: PricewaterhouseCoopers (January 2015, pp. 23.)

Referring to Figure 4.6 above, the share of revenue based on the

semiconductor industry segment reflects the structural changes in the IC industry. Total revenue in the China semiconductor industry grew on average by 23.0% per year from US$8.3 billion in 2003 to US$65.8 billion by 2013. The IC design segment’s share of total revenue in the semiconductor industry rose from 6.5% in 2003 to 20.0% in 2013, and IC manufacturing from 9.1% in 2003 to 14.9% in 2013. Shares of total revenue in the semiconductor industry in the IC packaging and testing and

optoelectronics, sensors and discrete devices segment fell from 2003 to 2013. China’s increased share in semiconductor design and the

manufacturing segment, both of which are more skills-intense and require complex production facilities, shows that it has developed its capability over the last ten years.

The design segment is the strength of China’s semiconductor industry. In 1990 China had only 15 design enterprises in this segment, and this grew to 463 in 2003 and to 583 by 2013. Secondly, China has created economies of scale to help the domestic semiconductor company to thrive. In 2011, China achieved another milestone with its first RMB1-billion-revenue

0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

US$ Bil

102 domestic semiconductor company, HiSilicon Technologies. HiSilicon

Technologies is a fabless, or design-based semiconductor player, and most of the top semiconductor companies in China are in the design segment, as shown in Table 4.9 below.

Table 4.9 Top 10 Chinese Semiconductor Company in China

Segment Rank Sales Revenue No. 55 Research Inst. of

China Electronics Tech.

Note: PricewaterhouseCoopers (PWC) ranked, based on ‘indigenous’ company. SMIC is ranked 3^rd largest manufacturer by revenue in 2013 by PWC, but is not technically indigenous as it is listed on both the Hong Kong and the New York stock exchange.

Source: PricewaterhouseCoopers (January 2015, pp. 36.)

China has increased the capacity and technology level of its IC

manufacturing segment. It had 15 foundries in 1990; by 2003, this had grown to 56 and by 2013, to 160, and their capacity grew from 5.7% of world capacity in 2003 to 10.9%, or 2.3 million 8-inch-equivalent wafers per month in 2013 (PricewaterhouseCoopers, January 2015).⁵⁴ The top five major foundries in ranked capacity are S.K. Hynix (13% of China’s total capacity), SMIC (13%), Hua Hong Grace (6%), Intel (5%) and TSMC (5%) (PricewaterhouseCoopers, January 2015). However, in the manufacturing segment capacity is not the only measure, with processing technology in

54 An 8-inch wafer is equivalent to 200mm wafers.

103 nanometres (nm) representing closeness to the chip fabrication frontier.

TSMC’s 20 nm manufacturing process is ahead of SMIC’s 28 nm in 2015. In 2010, SMIC’s 65 nm process was about 3 generations from the

manufacturing process frontier. Part of the constraint in the development of China’s IC manufacturing segment lies in export control on the part of the FDI country of origin such as the US, as explained in Chapter 8 (Section 8.3.1).

China’s production capacity in the semiconductor packaging and testing segment has increased from 10.5% of world capacity in 2003 to 27.4% in 2013, based on floor space, with an increase from 77 production facilities in 2003 to 116 facilities in 2013 (PricewaterhouseCoopers, January 2015).

Most of the largest and most advanced packaging and testing facilities were foreign-owned in 2003 but this changed in 2013, marking a structural shift in this segment. The top 5 players in packaging in China in 2003, representing 22% of China’s total capacity, were ASE, followed by Intel, SDI, STATS ChipPAC and Integrated Microelectronics

(PricewaterhouseCoopers, January 2015). In 2013, 3 of the top 5

semiconductor packaging companies, listed here in order of capacity, were indigenous Chinese companies: Jiangsu Changjiang Electronics Technology Co., Ltd. (9.5% of China’s total capacity), Tanshui Huatian Technology (8.3%), ASE (7.0%), Chipmore (4.7%), and STATS ChipPAC (3.5%). ASE is headquartered in Taiwan, while STATS ChipPAC is a Singapore-based company. (PricewaterhouseCoopers, January 2015)

Despite adding semiconductor IC production capacity for since the 1990s and early 2000s, China’s local production of ICs could only supply 30% of demand in the decade 2000-2010s, with the rest imported (Pecht, 2006).

China’s dependence on imported IC semiconductors continues today.

Based on 2013 figures, it now produces 12% of the world’s semiconductors but consumes 55.6% of global capacity or US$169.9 billion (RMB 1,111.7

104 billion) of worldwide consumption of US$305.6 billion

(PricewaterhouseCoopers, January 2015), making it the world’s biggest consumer of semiconductors.⁵⁵ Interestingly, PricewaterhouseCoopers (January 2015, pp. 2.) expected China’s production of semiconductors to grow faster than its consumption ten years ago, but it turns out that consumption has outstripped production. At this point it is useful to recall the Asian Drivers literature (IDS, 2006), which discusses China’s threat to other developing countries’ exports while at the same time creating new demand for goods. Based on the semiconductor segment alone, it seems that the story fits the latter rather than former.

Although China has been more successful in developing its semiconductor design segment, it is still reliant on foreign MNCs for manufacturing technology. The top 10 semiconductor suppliers in China are all foreign companies and account for 42.9% of total revenue earned by all semiconductor producers in China in 2013.⁵⁶ However, China has

developed some of its manufacturing capability through companies such as SMIC. The top semiconductor suppliers are shown in Table 4.10 below:

Table 4.10 Top 10 Semiconductor Suppliers in China 2012-2013

Rank Revenue in US$ Bn

Company 2012 2013 2012 2013 change % Market

share

Intel 1 1 25.1 24.9 -0.5% 13.8%

Samsung 2 2 11.5 13.7 19.9% 7.6%

55 China’s production figure by revenue actually puts it at 17% of total global production, based on data provided by the China Semiconductor Association, according to PWC. PWC however thinks the figure is influenced by the Integrated Device Manufacturer (IDM) model, where foreign MNC dominates production in China. Therefore PWC re-estimates Chinese production to be around 12% of global semiconductor production. Malaysia on the other hand is a net exporter of IC semiconductors, with consumption estimated by the researcher to be around 3.6% of total world consumption and production close to 5.8% in 2013, based on the world production figure of US$315.4 billion provided by Gartner.

(Gartner, 2014).

56 Suppliers inclusive of all type of players, IC Design, Manufacturing, Assembly and Tests, and IDMs.

105

SK Hynix 5 3 5.1 7.2 41.5% 4.0%

Toshiba 4 4 5.2 5.9 14.2% 3.3%

TI 3 5 5.4 5.6 3.8% 3.1%

Qualcomm 10 6 3.2 4.7 46.9% 2.6%

ST 6 7 4.4 4.5 4.3% 2.5%

AMD 7 8 4.2 4.1 -4.0% 2.2%

Freescale 8 9 3.6 4.0 11.1% 2.2%

Renesas 9 10 3.3 3.0 -7.7% 1.7%

Total Top 10 70.8 77.6 9.7% 42.9%

Total Top 10 (%

of market) 43.0% 42.9% -0.2%

Source: CCID, IC Market China 2013 & 2014 Conference -March 2013 & March 2014 in PricewaterhouseCoopers (January 2015, pp.15.)

Despite recent progress in building its semiconductor industry, challenges remain: China’s industry development is still dependent on government funding and lacks a sustainable business model and a strategy for competing in ways other than pricing (Allen Lu, 2015).

Regionally, the semiconductor industry begins in the coastal area

concentrated in the Yangtze River Delta, the Bohai Area and the Pearl River Delta before spreading to the interior of China (most notably in the Sichuan area). ⁵⁷ Provinces around the Yangtze River Delta such as Jiangsu, Anhui and Zhejiang account for 65.7% of wafer fabrication capacity, followed by Bohai, the region associated with Beijing; Tianjin and Shandong in Northern China with 9.4% of total wafer fabrication capacity; and in the south of China around the Pearl River Delta, 6.7% of wafer fabrication capacity. For test and assembly segment, Guangdong area, which includes the Pearl River Delta has 16.4% of total China’s capacity, second only to Yangtze area with 65% of China’s total capacity. To illustrate the movement from coastal area into inner China, Intel moved its manufacturing plant westward into Chengdu, in Sichuan province, when labour costs increased in Shanghai,

57 Yangtze River Delta area is associated with Shanghai area. Bohai area is associated with Shandong, China. Pearl River Delta is associated with Hong Kong and Guangdong Area.

106 but kept an R&D centre in Shanghai. Figure 4.7 below, shows a detailed map of the semiconductor industry in China.

107 Figure 4.7 Map of China’s Semiconductor Industry

Source: PricewaterhouseCoopers (January 2015, pp. 52.)

108 China’s huge consumption of semiconductors is due to the increasing shift of global production of electronic and electrical products such as mobile phones, tablets and computers into China. The IC demanded from China feeds into the production of final electronic goods and household electrical items. The production of an estimated 35.1% of worldwide electronic equipment is located in China, and this will continue to increase to 38.0%

by 2017 according to the Gartner forecast cited in PricewaterhouseCoopers (January 2015). The report (ibid.) estimates the top 10 Original Equipment Manufacturer (OEM) companies such as Huawei, Lenovo, Haier, TCL and Changhong consume about US$55 billion or 30% of total semiconductor consumption in China. Haier, TCL, and Changhong are household electrical brands in China, and are discussed in the next section of the chapter.

In conclusion, China’s electronics industry has grown rapidly in terms of both revenue and capacity, especially in the last decade. If we include SMIC in the analysis of the manufacturing segment, China is a step closer to frontier technology with 28nm wafer process technology. Finally, China also faces challenges in the electronics industry such as the fear of lack of IP protection, and the Chinese government strategy of influencing the direction of foreign-owned enterprises in China (Pecht, 2006). These issues can slow the pace of technology transfers as foreign firms are reluctant to locate their cutting edge plants in China. Still, China, with its generous semiconductor fund and dynamic workforce, can only move upwards in the world market for semiconductors.

109 4.3.2 Electrical Industry

Interestingly, the TV industry in China created demand for ICs, bringing about the rise of the semiconductor industry in China. The Huajing Group, imported the Toshiba production line of IC to manufacture the components that feed into TV production in China (Pecht, 2006). This section discusses China’s electrical industry based on the TV segment, briefly touching on parts played by the computer and small appliances segments in the development of the industry.

According to National Bureau of Statistics of China (2014), TV production in China reached 127.7 million units in 2013. Based on IHSGlobal’s estimation about 43.5 million TVs are consumed locally, leaving about 65.9% of

China’s TVs to be exported worldwide. ⁵⁸ The TV manufacturing business is described as cut-throat domestically, with all six of the top 6 TV makers in China experiencing losses in 2012. (IHSGlobal Technology, 2012). Chinese companies have had to turn to international markets for better profit margins. This is an achievement considering the humble beginnings of Chinese TV manufacturing companies about three decades ago.

According to Pecht (2006), the first TV in China was made in Tianjin in 1958. The present TV industry started in 1979, when Shanghai Gold Star TV factory bought the TV production line from Hitachi of Japan, followed by factories based in Tianjin and Beijing purchase of production line from Toshiba and Panasonic respectively (Pecht, 2006). By 1985, Pecht (2006) reports, Shenzhen-based Konka had imported a 147^th line of TV production into China from a Hong Kong company. The major players in the TV

industry in China are listed in Table 4.11 below:

58 Figures on based on IHSGlobal Technology (2012).

110 Table 4.11 Major TV manufacturers in China by Capacity in the 1990s

Name of

Changhong 1979 12,000,000 State-owned

Konka 1984 7,000,000 Former Hong Kong joint-venture acquired by mainland interest in 1997 Panda 1982 4,000,000 State-owned

TCL 1992 3,600,000 State-owned

Qingdao Hisense

1983 1,300,000 State-owned

Haier 1997 1,000,000 State-owned white goods maker diversified into CTV market by acquisition

West Lake 1982 1,000,000 State-owned

Hitachi 1981 800,000 50%-owned joint venture (Japan) Sanyo 1992 1,200,000 50%-owned joint venture (Japan) Skyworth 1990 2,000,000 Private firm, Hong-Kong controlled Philips 1992 800,000 51%-owned joint venture, Netherlands

controlled

Samsung 1994 800,000 50%-owned joint venture (S.Korea) Sony 1996 3,000,000 70%-owned joint venture (Japan) Matsushita 1996 500,000 50%-owned joint venture (Japan) Sharp 1996 1,000,000 70%-owned joint venture (Japan) Toshiba 1996 1,000,000 70%-owned joint venture (Japan) Source:White and Linden (2000) and Xie (2001) in Xie and Wu (2003, pp. 1468.)

Xie and Wu (2003) divide the development of China’s TV industry into three stages. The first stage is 1980-89, when China’s players were exposed to TV imports from Japan which were more sophisticated, far more reliable and had more product offerings. China’s TV-makers were in learning mode in 1980-1985 and producing low-quality sets compared to the imports. In 1989-2000, during the deregulation period, China’s TV industry started to become competitive. This was because before 1989 the central

government set TV prices and therefore there was no cost competition among domestic TV makers. In 1989 Changhong disregarded the government rules by reducing its TV price unilaterally, unleashing the

111 market mechanism, and domestic TV makers started to face cost pressure and had to innovate to survive in the industry.

The Chinese government was pragmatic about the developing industry. In the beginning, tariff protection was given to domestic TV makers and the reduction of import duties was carried out gradually in 1992, 1996, and 1999. This gradual removal of tariff protection was paced with the

domestic industry player’s development. By 1997, China’s domestic players had already increased their share of the domestic market to 81.0% from 15% in 1983 (Shaojia, 2001, pp. 23.). And from 2000 onwards, China’s TV manufacturers have continued upgrading the technology and reducing costs, although they are still dependent on foreign firms for key

components.

China is currently the biggest exporter of TVs in the world, overtaking the Japanese and the South Koreans. In 2013, China’s TV exports were worth US$26.2 billion, 26.1% of the world exports market. This is a major achievement given that twenty years ago China only contributed 4.2% of total world exports in 1993. By 2013 approximately one in four of the TVs on the world exports market were made in China.⁵⁹ China continued to accelerate its TV industry development and in 2010, overtook Mexico (20.3% of world’s export) as the biggest exporters of televisions in the world with 22.2% of world exports.

China achieved top exporter status while developing its own brands such as Changhong, Hisense, and Haier, which become significant international players by the end 2000s. China’s top TV exporters are now brand owners

59 The figures based in this paragraph are based on UNComtrade, therefore, some of the exports could include Japanese companies based in China exports. However, the discussion that follows will show China has indeed been becoming more dominant a nd presents great challenges to the Japanese and South Korean TV manufacturers.

112 and lead firms themselves in the TV market to the extent that China now outsources 40 million TV units, worth about US$4.5 billion, to Taiwanese firms to meet demand (Xinhua, 2012). As further testament to the success of China’s firms, in the third quarter of 2014 for the most sophisticated TV market segment to date called Ultra High Definition (HD) TV, Hisense shipped 10% of global Ultra HD TVs, in third place, ahead of Sony (7%) and behind South Korea’s Samsung (36%) and LG at 15% of global Ultra HD TVs (Wheatly, 2014). The success of Chinese firms such as Hisense was

predicted in the Asian Drivers literature (IDS, 2006), but what is astonishing is the pace: Hisense only entered the TV market in 1983 and is now already one of the top players, not only in China but also globally.

The computer industry began in 1955,⁶⁰ but its development started rapidly after the opening up of China from the 1980s onwards. This section will refer to the Lenovo group and its origin, to illustrate China’s path developing its computer industry. In 1985 China marked the rebirth of its computer industry with Great Wall 0520CH, the first PC to process

information in Chinese (Pecht, 2006). The Great Wall 0520CH was built by

information in Chinese (Pecht, 2006). The Great Wall 0520CH was built by

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