OEMs can expect procurement managers to be making more business trips to China in the near future as the country becomes a more significant player in the global chip industry.
For two decades now, China has been known as the world’s low-cost manufacturing center for electronics equipment built by large global electronics manufacturing services (EMS) providers such as Foxconn, Flextronics, Jabil, and others. But the country’s recent investment in semiconductor manufacturing is changing that perception as China looks to compete directly with South Korea and Taiwan for a share of the global chip market.
As part of a 10-year plan announced by the Chinese government in 2014, about $150 billion is being invested by the government and equity firms in the Chinese semiconductor industry and that investment will soon start to deliver returns.
Researcher IC Insights says that China initially targeted the foundry market, but those efforts faded when China could not gain foundry market share because it was unable to keep up with technology advances at foundries in other countries. It then decided to pivot into the fabless market, which has led to significant growth for Chinese fabless IC suppliers.
China is making huge investments in development and production of semiconductors and has set some lofty goals for its chip industry. For instance, it wants to produce semiconductors using 16/14nm process technologies and make chips on 450mm wafers by 2020, according to IC Insights.
Because of its investment in the chip industry, analysts say China will become an important manufacturer of semiconductors, including memory ICs, application processors, and logic, which will have a major impact on supply and pricing for many semiconductors. Supply of some semiconductors could increase by as much as 20%, which will depress market prices and negatively impact competitors.
China is investing in semiconductor development because it is intent on displacing many foreign-made semiconductors used in domestically manufactured electronics systems. But the semiconductors produced in China will also be sold globally. “After all, it’s a world market and they will sell chips everywhere,” says Jim Handy, general director of the research firm Objective Analysis Handy.
“Today China imports over 80% of all the chips for equipment manufactured in China,” says Handy. The government has said China needs to become “self-sufficient” in the materials used in production, which includes integrated circuits, he says.
China’s policy is to have a self-sufficiency rate of 40% for semiconductors by 2020 and 70% by 2025, according to McKinsey & Company. Today, only about 9% of semiconductors used in equipment built in China are produced in China.
Handy says an important step toward that goal is producing NAND flash memory, because NAND demand is growing and the memory chip is undifferentiated. “All you need to do is provide a product at a better price and you suddenly become a market presence,” he says.
China will make other semiconductors besides NAND and other memory ICs. “They are also looking at application processors for phones,” says Mike Howard, senior director of memory and storage for IHS Markit Technology. “They have their sights set on Intel, Qualcomm, and Texas Instruments for sensors.”
The impact of China’s penetration into the semiconductor market on a large scale may not be felt for several years. “We think 2018 is the window where there will be meaningful production in NAND,” says Howard. If China can introduce a 3D NAND part by the end of this year, they will be more competitive at the end of 2018, he notes.
“China is going to add huge amounts of wafers per month and will have a meaningful impact to the overall supply,” says Howard. “In doing so, China will upset the market and push it into a pretty significant oversupply.”
Oversupply means buyers can expect lower prices for NAND and other memory chips. Once China ramps up production for NAND, chip buyers can expect prices to fall by 20-30%. “Those are not unreasonable price declines,” says Howard. Memory prices often fall by 20-30% during periods of oversupply. For instance, DRAM chips fell 32% in 2012 and 30% in 2015, says Howard.
From a buyer’s perspective, China’s entry into the chip manufacturing business is a good thing, because it will mean more competition and lower prices, according to Howard. And from a supplier’s perspective, it may not necessarily be bad news because more NAND demand will be created.
“The attractive thing about NAND is if you push the price down, you push consumption up,” says Howard. OEMs tend to design more NAND into their products when the price is low.
More competition in the semiconductor industry will be welcome news for procurement professionals as the chip industry has consolidated significantly over the last three years, resulting in fewer supplier choices for some semiconductors.
However, the growth of China’s semiconductor industry may face headwinds over concerns of intellectual property protection, security, and trade practices. Also, U.S. chip companies have had to partner with Chinese companies as a requirement for expanding their businesses in China.
Indeed, some governments, including Japan, Taiwan and the U.S., are suspicious of IC technology sharing as a result of mergers and acquisitions taking place between their domestic companies and Chinese companies, according to IC Insights. As a consequence, the U.S. has banned the export of some high-technology products to China.