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Increased Chip Production on China’s Mind

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.

14 comments on “Increased Chip Production on China’s Mind

  1. SunitaT
    April 20, 2011

    Nicole,

      I am sure China will be successful in its goal of raising domestic chip production quickly because it has the backing of its government. The Chinese government can generally build whatever project it likes because the government owns the land, labor is cheap and protests against the system can not be organized. I feel overall this is good for semiconductor industry because it will bringdown the production costs as well as it will bring diversity to supply-chain model.

     

  2. The Source
    April 20, 2011

    Hi Tirlapur,

    I think it will be very interesting to see how quickly China implements its semiconductor manufacturing plans.  It’s a very competitive business that requires a great deal of capital expenditure. It’s hard to predict where China’s semiconductor manufacturing sector will be after five years, but the low level of production that they currently have is seen by the Chinese government as unacceptable.

    Thanks for reading my article and for your thoughtful comments.

  3. Barbara Jorgensen
    April 20, 2011

    Interesting development but no surprise–it makes a lot of sense. Why ship chips from the US, Europe or elsewhere when they can be manufactured in China and transported within the country? It's another way to save costs. The downside, of course, is the IP–China still has a reputation fro IP theft and piracy. I think that will be a big burden to overcome if China is banking on being the next Taiwan (so to speak)

  4. Anna Young
    April 21, 2011

    China will certainly implement its semiconductor manufacturing plans and will be successful at it. It makes economic sense. I'm sure Chinese government will move all to ensure this happens. Whatever the challenges ahead for China, I'm sure the government have got it planned. What happens after five years is anyone's guess.

  5. tioluwa
    April 21, 2011

    I think it is about time China took that matter serious. The news about the iPAD2 struck me particularly. with the iPAD2 manufactured exclusively in China, yet, practically every component had to be imported. It would really help their semiconductor industry, however, it don't see china having a world dominance in that area, like they have had in manufacturing outsourcing.

    Alot more players are getting into the market, taking their big of the semiconductor slice.

  6. Adeniji Kayode
    April 22, 2011

    I,m not surprised China is making a move in the area of semiconductor manufacturing. China saw an opportunity and is taking the chance too.No doubt there is so much in it for China, expect to see improvement in the supply chain

  7. t.alex
    April 22, 2011

     

    TIOLUWA,

    Yes, especially India is strengthening its role in semiconductor manufacturing, and other asian countries are rising as well.

  8. Parser
    April 22, 2011

    It would be interesting to know where the ICs are made for the Chinese fabless designs? Who makes the fake ICs for the gray market? Patents and intellectual properties will be copied for sure. Because of that they may not be able to sell some of the products to Europe or USA. They will have huge domestic market to fulfill instead and our products will not see any part of it. China will do whatever they want to do. The cost of identifying counterfeit products and then legal proceedings will make business in China very difficult. This push for IC manufacturing is quite well planned to fit model of independence. Hopefully this is not going to be as bad as it could. 

  9. electronics862
    April 23, 2011

    Low-cost labor,proximity to the largest and fastest-growing markets in the world and other incentives offer compelling reasons to locate chip-production capacity in China or nearby..

  10. Kunmi
    April 25, 2011

    China is becoming a robus nation in major investments. Increasing chip production is not an issue for a country that have tasted the the sweetness of the reward of hard labor. Cheap materials and labor will help China. Because it is going to be easy to maximize the profit, and the fact that demand is always there, will encourage China to go for it.

  11. The Source
    April 25, 2011

    Hi Anna,

    I was thinking about your last story regarding the European Commission’s efforts toward building a low-carbon society.  I’m sure you will agree with me that we hope China will adhere to proper environmental standards as it plans to boost its semiconductor manufacturing plants.

    Thanks for reading my article.

     

  12. The Source
    April 25, 2011

    Hi Parser,

    Undoubtedly, intellectual property will be a key factor in determining how China’s semiconductor industry moves forward.  This new semiconductor push will give China an opportunity to show a higher level of maturity in this area.  I think we both are looking forward to witnessing how this will all unfold. 

    Thanks for reading my article, and for your thoughtful comments.

     

  13. prabhakar_deosthali
    April 27, 2011

    With Japan, one of the largest producer of ICs undergoing a crisis which may last longer and may have a far reaching effect on Electronic manufacturing, this the right time for players like China and India to change the landscape of this industry. Bothe India and China are now at that inflection point where they are technologically , economically and infrastructure-wise cabable of jumping into this fray and become established players. Where as political will power and beurocratic lethargy may be still a cause of concern in India , for China things can progress at much faster pace.

  14. mario8a
    April 27, 2011

    Hello

    Talking about wafer design and IC manufacturing in China, brings a few questions in my mind, most of the design houses are located or managed  by Taiwan, this means, China will rely on Taiwan on this endeavor? o Chinese designers will be running houses in China?

    Few years ago we had encounter with several QA issues with IC's either packaged or distributed in China it seems like  the black market will play it's role as it does in many other commodities, however talking about IC it will be difficult to manage the intellectual property.

    However, Kudos to China on taking the Step forward

    Regards

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