PwC: Strategies, analysis of China’s chip industry

Nov. 24, 2008 – A new report from PricewaterhouseCoopers breaks down China’s semiconductor industry, its “dislocated” nature, growing relevance to the global market, and how worldwide firms should investigate opportunities within it.

China’s semiconductor consumption grew by 23% in 2007 and now exceeds most global markets (including North America, Japan, and Europe), largely because local EMS firms (electronic systems manufacturers) increased their chip consumption by 3×-5× the rest of the world. Growth is slowing from a 2003 peak, but should still outpace the global pace by >50% for the next two years, notes the PwC study’s author, Raman Chitkara. The fact that China’s IC consumption exceeded IC market growth indicates this consumption is at the expense of other regions.

Consumption of chips in China for exports have soared 59% (to $21.8B), more than two-thirds of the total market; domestic consumption has increased at half that pace (27% to $5.7B). Multinationals are still the big domestic suppliers — even if the largest Chinese semiconductor companies’ entire outputs were sold domestically, none would have been among the top 50 suppliers in 2007.

IC production in China is a bit less spectacular, growing 27% in 2007 to $27.4B, or ~9% of total global chip sales, mostly driven by multinational, foundry, and backend (packaging and assembly/test). And the consumption/production gap is widening, from $5.9B in 1999 to $54.9B in 2007, and is expected to increase through 2010.

“To continue to capture new demand growth, many major semiconductor companies will need to expand their presence in China,” writes Chitkara. Of the top 70 worldwide chip suppliers, nearly half (32) still have what he calls “below-average” shares of China’s consumption. The Chinese market, he estimates, was more than 7× bigger than Taiwan’s market in 2007, though much of that demand was from Taiwanese EMSs and ODMs. The Greater China market (including Hong Kong and Taiwan) surged 39% in 2007 to $101B, with nearly 40% share of the worldwide semiconductor market, and about 24% of worldwide industry revenues.


Analysis of 2006 & 2007 semiconductor consumption vs. purchases, China vs. worldwide by regions. Difference between consumption and purchase in US $B. (Source: PwC, Gartner Dataquest)

Chitkara’s recommendations to those seeking to better understand and take a better position in China’s semiconductor market:

- Ramp up bizdev efforts;
- Adapt to the local “dislocated” buying structure (almost half of chips consumed here are purchased outside and transshipped/consigned into China for consumption);
- Keep an eye on competition from local EMS/ODMs;
- Utilize multiple channels (e.g. foundries, other supply-chain participants) to gain access to the market;
- Locate local backend facilitiets near EMS/ODM/OEMs;
- Design for the marketplace — in China that means low-cost consumer, i.e. low-ASP analog and standard logic devices;
Adapt to China’s standards;
- Explore partnership opportunities, including small and targeted design firms;
- Use local foundries (mainly 150mm-200mm) as a low-cost alternative, and move mature product lines to China;
- Rebrand for local markets;
- Discrete firms should participate actively in China to preempt local competition;
- Figure out how neww Chinese corporate income tax laws would affect business (e.g. incentives tied to R&D, design, and foundry operations);
- Monitor loosening restrictions with Taiwan’s semiconductor industry, for both risks and new market opportunities;
- Look to diversify manufacturing — greater China (incl. Taiwan and Hong Kong) had nearly 50% of all new fabs and 57% of all fab capacity under construction in 2007.

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