Feb 3, 2016
With solid government support the Chinese semi-conductor industry intends to become the top world producer in the next decade.
In a recent McKinsey Insights article, “A new world under construction: China and semiconductors” Christopher Thomas said China has traditionally been a consumer market for semiconductor chips.
However, China’s long-awaited guidelines released in June 2014 lay out ambitious targets for industry revenues, production volume and technological advances.
These guidelines will have major implications for the global semi-conductor industry.
Understanding China’s semi-conductor strategies
According to Thomas, three related factors have made it more important for companies to understand the opportunity and proactively refresh their China strategies.
The Chinese government is actively reshaping the domestic semiconductor market and assisting local companies in becoming national champions.
Secondly, Chinese consumers and companies are becoming increasingly important to the global semiconductor market’s growth.
And finally, Chinese capital—from both government and private sources—is actively pursuing merger, acquisition, investment, and partnership opportunities worldwide.
Questions for Chinese and multinational companies
These changes, Thomas said raise important questions for Chinese and multinational companies, including how they can continue capturing China’s semiconductor market’s inevitable growth.
Companies must examine in detail the political, economic, and financial-market factors behind China’s growing role in the global semiconductor industry because they may shape the market for years to come, he said.
China’s new semiconductor industry guidelines lay out ambitious targets that differ from previous policies.
Under the new guidelines, the government’s investment is 40 times higher than previous targets, with a five-year investment target of about $19 billion.
“Overall, the government hopes that the industry will receive about $100 billion to $150 billion from all sources, including state-owned enterprises and other investors.”
Creating segment winners
The new guidelines, Thomas said focus on creating segment winners, or national champions, through M&A and other consolidating moves.
“The government is also adopting a more market-based investment approach by giving local private-equity firms responsibility for allocating public funds—a bold experiment designed to improve the likelihood of success.”
Made in China policy
In May 2015, China’s State Council announced the “Made in China 2025” policy, which focuses on building indigenous capabilities in high-end precision manufacturing, with semiconductors as the first priority segment.
“The goal of this policy is to have China increase its self-sufficiency rate for integrated circuits to 40 percent by 2020 and to 70 percent by 2025. While the definition of self-sufficiency is unclear and there are no guarantees of hitting policy objectives, these targets clearly indicate that the government has ambitious aspirations.”
Semiconductor consumption in China is outpacing the overall global market, rising by 9 percent in 2014 to reach about $160 billion, or 50 percent of the global total.
Meanwhile, Chinese fabless companies and Chinese branches of fabless multinationals sales grew by 20 per cent in 2014.
The fast growth of China-based customers, especially in the mobile space, helped fuel this rise.
Leading Chinese smartphone brands (such as Huawei, Lenovo, Meizu, and Xiaomi) increased their global market share from 15 percent in the fourth quarter of 2013 to 27 percent in the second quarter of 2015.
Semiconductors – a global business
Thomas said the semiconductor industry is global, with products rarely customized for specific regions.
“There are no Taiwanese packages, South Korean memory chips, or Japanese industrial semiconductors—these products all serve a global clientele.”
Global leadership, he said was important for Chinese players because of the efficiencies derived from scale and experience.
McKinsey’s research noted that the top one or two semiconductor players, by industry segment, earn 100 percent of total economic profit, while their competitors lose money.
Three fundamental shifts required
To become top one or two global leaders, Chinese companies require three fundamental shifts.
The first is significantly increasing technical skills and global-management capabilities.
Secondly, they must adopt a technology-leader mind-set.
And thirdly, they must encourage the development of patient financial capital willing to invest over long horizons and through business cycles.