China is tired of playing second fiddle in the semiconductor market. Although it is the world's biggest market for chips, China produces far fewer semiconductors locally than are used in the country by equipment manufacturers and electronics manufacturing services providers.
That's about to change. Although Western governments worried about the transfer of critical dual-use (business-military) technology may have a thing or two to say about this, the Chinese government is pressing ahead with plans to provide state support to the country's fabless IC sector to boost total domestic production. This would eventually result in increased competition for the world's biggest IC producers.
The government recently announced it is raising the chip sector to a "state strategy" level over the next five years, in a clear signal to IC manufacturers in the United States, Europe, Japan, South Korea, and Taiwan that their days of treating China as a sales-only market are coming to an end. Soon, and to the extent China can swing the pendulum in its favor, semiconductor production in the country is due to increase.
Will China be successful in its goal of raising domestic chip production quickly in such a sensitive and IP-intensive market? How will foreign governments react? And would foreign semiconductor suppliers respond by setting up fabrication facilities in the country, or would they balk at having to spend billions to do so -- the necessary price for keeping China happy? The Chinese government does not seem too concerned about the roadblocks ahead or the controversy its announcement has sparked. Nor does it seem bothered by the huge cost of building new semiconductor fabrication plants.
Yang Xuexhan, China’s vice minister of industry and information technology, told Chinese news agency Xinhua last week that China will produce a series of chips with independent intellectual property rights. The plan also includes support for research, manufacturing, and marketing during the country's 12th Five-Year Program (2011-2015).
China wants a larger piece of the semiconductor market as part of its next push deeper into the high-tech supply chain and also because the sector is growing at a fast clip. Worldwide semiconductor sales for 2010 reached a record $298.3 billion, an increase of 32 percent from the $226.3 billion recorded in 2009, according to the Semiconductor Industry Association.
A large portion of the global semiconductor production is gobbled up by China. Data from IHS iSuppli shows China's consumption of semiconductors surged to $98.2 billion in 2010 from $79.5 billion in 2009 and is projected to rise to $110.9 billion in 2011. However, China accounts for only 1.1 percent of the worldwide production of semiconductors, with revenues of $3.3 billion in 2010. This means that China is only producing 3 percent of what it consumes.
Chinese officials say the government wants to bolster the IC sector, which lags behind the US, Japan, the Republic of Korea, and other countries, by offering increased state support. Earlier this year, IHS iSuppli reported on another Chinese government initiative -- dubbed No. 18 -- to support China's fabless IC business, the output of which is seen rising to $8.8 billion by 2014 up from $5.1 billion in 2010.
Over the next decade we can expect to see China boosting its semiconductor production, but how successful it will be in providing significant competition to its global rivals remains to be seen.