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China's Chip Industry Forward in Difficulty

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According to the statistics of China Semiconductor Association and National Bureau of Statistics, China's chip production grew at an average rate of 15% from 2013 to 2017, and its annual output also increased from 90.3 billion to 156.5 billion. However, overall, China's chip supply market still relies heavily on foreign imports. Chip imports exceeded US$200 billion in 2015, surpassing crude oil and commodities and becoming China's largest import, reaching US$260.1 billion in 2017.

As we all know, the chip industry is the core component and cornerstone of the whole information industry, and also the last barrier of national information security. The occurrence of ZTE incident makes the community realize the importance of the independence of the core technology of the chip.

Recently, Erie Consulting released "China Chip: The Way to Survival under the Growth of trillion Market" (hereinafter referred to as "Report"). The report points out that there are roughly five main links in chip manufacturing. The production process is dominated by circuit design. The chip design company designs the chip, then commissions the chip manufacturer to produce wafers, and then commissions the packaging factory to package and test the chip. While core technologies are still controlled by developed countries such as Europe and the United States, the development of China's independent chips is still difficult, but there are many bright spots.

Highlights 1: downstream packaging testing of industrial chain. The high-end development of China's sealing industry, through endogenous development and merger and acquisition, is the most competitive link in the industry. Based on China's advantages in cost and close to the consumer market, global semiconductor manufacturers have shifted their sealing and testing plants to China in recent years. The domestic sealing and testing industry has already possessed the scale and technological basis. The gap between domestic sealing and testing industry and the leading enterprises in the industry has gradually narrowed, and the most advanced technology has been basically mastered. At present, the domestic sealing and testing industry presents the tripartite position of wholly foreign-owned, Sino-foreign joint ventures and domestic capital. As a result, domestic enterprises such as Changdian Technology, Huatian Technology and Tongfu Micropower have entered the top 20 of the global sealing and testing enterprises. They have continuously participated in international competition through overseas acquisitions or mergers and reorganizations, and advanced packaging capacity has been greatly improved.

Highlight 2: Upstream chip design of industrial chain. IP (Intellectual Property) dependence is still high, but independent chip design has achieved rapid development in recent years. Chip is the cornerstone of the electronic information industry, and chip design, as the upstream of the chip industry chain, is the most important link of innovation, with the characteristics of high input, high risk and high output. In recent years, China's chip design field has made a great leap forward. According to the statistics of China Semiconductor Industry Association, by 2017, China's chip sales amounted to 541.2 billion yuan, an increase of 23.1% over the same period of last year. Among them, the contribution of the design sector increased by 26% year on year, and the sales volume was 207.4 billion yuan, which was the fastest growth in the three sub-areas. Chip design in China currently mainly serves the field of communication. The sales of communication chips accounted for nearly 50% of the total sales of chip design in 2018, increasing 45% year-on-year. Four of China's top ten chip design companies are located in the Pearl River Delta, three in the Yangtze River Delta and the other three in Beijing, Tianjin and Hebei.

As for the dilemma, the report considers that it is the manufacturing of chips in the middle reaches of the industrial chain. Wafer manufacturing is a large-scale economy with the characteristics of large investment and slow return. There is a big gap between China and the international technology level, and there is a natural threshold for its development. Compared with the design industry in the chip industry chain, wafer manufacturing sector has been neglected due to its high capital expenditure and long return cycle, resulting in a declining market share and a widening gap with the international advanced level.

Regarding the future trend, the report points out that AI chips will be on the stage and have broad application prospects. It can also promote the structural adjustment and renewal of various industries. Beijing is the most active city in the development of AI chips, where more than half of the resources are concentrated. Traditional research institutes such as Tsinghua University, Microsoft Asia Research Institute and Chinese Academy of Sciences Computing Institute have strong strength. Emerging Internet head players such as Jingdong, Baidu and Millet are also accelerating research and development of AI chips.

The report predicts that the global AI chip market is still in its infancy. Relevant AI standards are still in development, and have not yet formed an international universal intelligent ecological standard. Although China started late in this field, it has not been widened by developed countries.