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2019

08/26

Four Challenges for Semiconductors in China

Semiconductor industry has attracted the attention of the whole society at present. All kinds of social capital are investing across the border, such as Hengda investing 100 billion yuan in semiconductors, Gree Electrical Appliances Company, and Ali also entered the industry through the acquisition of Zhongtianwei.


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There are many reasons behind this.




First of all, this is the result of competition among big powers. China must develop its own semiconductor industry. Because the output value of information industry is huge, and semiconductor is the foundation of information industry.




Secondly, the market and financing environment of China's semiconductor industry are much better than before.




China has always attached great importance to the development of semiconductor industry. From 908 and 909 projects in the 1990s to supporting design enterprises in 2000, and then to launching major national science and technology projects of tens of billions of scale, China began to set up a large fund in 2014, hoping to support China's semiconductor companies through the market. Various tax reduction policies have been introduced. The establishment of Kechuang Banks also provides a broad exit channel for semiconductor investment funds. At present, one third of Guohui companies are semiconductor companies. Compared with 20 years ago, China has formed a better semiconductor ecological environment, and China Semiconductor Corporation has ushered in a golden development period.




Similar to Silicon Valley, China has a complete semiconductor eco-chain, and has produced a large number of first-line brand systems companies with global competitiveness using the international semiconductor supply chain.




In the past, they only used the international semiconductor supply chain from the perspective of performance and risk, but the Huawei embargo sounded an alarm to them. From the point of view of ensuring the security of their own supply chain, these brand companies began to support the local semiconductor companies vigorously. All product lines are open to domestic companies as long as they have performance and reliability. It is comparable and acceptable for high prices.




Semiconductor investment seems hot, but it is still not easy for enterprises to get funds. This part is related to the upside-down valuation of the secondary market. In addition, people have high expectations for the secondary market, because they are afraid of harm, so many people do not understand and dare not invest. On the other hand, semiconductor companies started with low gross margins and low returns from investors, which hindered investment enthusiasm. The first step in the development strategy of China Semiconductor Company is import substitution, which is usually to enter the market through low price, and then iterate new products to enter the high-end and high-margin market according to the market, but this requires a process. For the current semiconductor investment, more professionals are needed.




Core Strategic Industry


Chips are figuratively compared to the "industrial grain" of the country, the "heart" of all equipment, and the core of the information industry. As early as the 1980s, the semiconductor industry was listed as one of the core strategic industries in the United States.



2018 is 60 years since the invention of integrated circuits. Over the past 60 years, Silicon Valley Semiconductor has evolved into an ecosystem of six industries: the underlying semiconductor, system software, semiconductor equipment and its surroundings, the middle-tier network equipment and systems companies, and the top-tier Internet companies.


The output value of 1 yuan of chip industry can drive the output value of 10 yuan of related electronic information industry and bring about 100 yuan of GDP. In 2018, the top 50 listed companies in Silicon Valley have annual sales of nearly $1 trillion. In addition to Amazon and Microsoft, which are not headquartered in Silicon Valley, the size of GDP affected by the information industry in the United States is about 35 trillion to 400 trillion yuan, while China's GDP in 2018 is about 90 trillion yuan.


From the past global semiconductor output change rate and global GDP change rate, semiconductor industry is strongly related to macroeconomic, interest rate fluctuations, international oil prices, regional politics and other factors, which is directly related to the trend of global GDP.

Challenges of Chinese Industry




China's semiconductor industry has been growing at a high speed, especially in the design industry, with an annual growth rate of about 15%. In 2018, there are about 1700 semiconductor design companies in China, with total sales of about 300 billion yuan, accounting for about 10% of global semiconductor output. Hess and Ziguang are among the top 10 design companies in the world and the top 50 enterprises in the world.




But there is still a big gap between Chinese and American enterprises. According to the global semiconductor sales ranking in 2018, the United States accounts for 7 of the top 10 semiconductor companies in the world, and none of them are selected in China, mainly because of the lack of influential IDM companies in China. IDM's sales account for 73% of the total semiconductor industry, which has a great impact.




By contrast, South Korea has a population of only 50 million, but Samsung and Hynix are two companies with huge influence in the industry. How to catch up with China's semiconductor industry is a question we need to think about.




At present, China's semiconductor industry is facing four major challenges:




First, the R&D ratio is too low. The top 50 companies in Silicon Valley make up about 20% of their revenue in an average year, which means they do 100 yuan business and spend 20 yuan on research. Intel spends about $13 billion a year on R&D. This figure is almost the same as China's big funds'investment in national semiconductor companies in the past five years. The gap between China and the United States is obvious.




Next is the shortage of talent. Why is Silicon Valley strong? It's because people can flow into high-tech industries.




Again, the industry needs to be integrated. For example, China now has more than 1700 design companies. Too many of them will lead to market share and resource decentralization. In the future, large-scale mergers and acquisitions will occur.




Finally, it is necessary to strengthen the operation. The company needs a large amount of operating capital to stock up. How to effectively utilize the supply chain to reduce costs is an important challenge.




What vents are there?




Semiconductor industry has some new application outlets at present, if not grasped, it may cause fatal damage to the industry.




Firstly, 5G + AI. 5G will bring a wave of change and stimulate a new wave of growth of semiconductor companies. Internet of Things and AI have created new business models. Internet companies need semiconductor companies to support new demands. AI market is huge and emerging, so the existing commercial chips can not meet the needs of Internet companies for AI. Baidu and Alibaba make their own chips at home, while Google and Amazon abroad make their own custom AI chips.

Another is the import substitution of domestic mobile phone chips. Mobile phones are the largest semiconductor market. In addition to Samsung, Apple and LG, the top ten brands in the world are all Chinese companies. The US embargo on chips gives Chinese semiconductor companies an opportunity to import alternatives.




The second is the opportunity of IoT (Internet of Things). IoT has been talked about for the past 10 years, but it hasn't really started. In 2018, IoT appeared in everyone's eyes again. There are a large number of Wifi and Bluetooth chip companies in China, such as Lexin, Shanghai Broadcom, Zhuhai Gerry and so on. There are also many smart home terminal products.




Finally, there are new energy sources, including new energy vehicles. Green environmental protection is an eternal theme. Semiconductor technology can improve the efficiency of electricity use, improve the quality of power grid, and achieve energy saving and emission reduction.