16 Jan

Investments, M&A and New Policies: Semiconductor industry trends in China

The last decade has witnessed a new Chinese development strategy that has become well-known to most: the unified governmental and private sectors effort to switch the country’s internationally recognized role of factory of the world, into master of the tertiary sector. Most industries have gone through major reforms to fit PRC’s development plans, and the semiconductor industry in particular has been a subject of worldwide attention, given the steady growth that new measures and government maneuvers have helped the sector with.

But if up until 2013 this continuous growth was considered benevolent by the West, which saw in China unlimited ground for business opportunities, a new panorama has recently been unraveling, shaking the same ground that seemed to be promising, only a few years before.

Even though it’s undeniable that China is ranking first in terms of semiconductors demand for its manufacturing industry, which is largely satisfied by imports, this scene might soon be changing. In 2015, only 9 percent of the country’s demand for semiconductors was covered by domestic production, while 91 percent of it was provided by companies abroad. As reported by a study conducted in 2016 by the US Department of Commerce, “China is the largest and fastest growing semiconductor market in the world, representing 29 percent ($100 billion) of the $335 billion global market in 2015.”

pwc

Worldwide semiconductor consumption market by region, 2003-2014.

So why should foreign companies worry about the future of their business in China?

In 2015, Bloomberg published an article which reported how China is slowly trying to move away from this state of dependency from the import of semiconductors. The head of the PRC, President Xi Jinping, announced in 2015 that the government would have spent as much as 1 trillion yuan in the upcoming 10 years to develop the domestic industry. Even though it costs $5 billion to set up a state-of-the-art chipmaking plant, China has financial resources and it’s gradually gaining experience in building and operating semiconductors factories. The moment the Asian giant stops relying on Western technical support, China won’t be in need of keep importing foreign chips.

The 2015 prophecy has shaped up the current year, when Yangtze River Storage Technology was founded. The new company is the result of the merger between Tsinghua Unigroup, China’s largest chip designer, and XMC, one of China’s leading chip makers. The deal, which has been supported by the central government, will give a hard time to medium and small domestic chip makers, as well as to those supported by regional financing, and it will soon represent a threat internationally, after the firm gains full commercialization capabilities.

board-1607174_1920

Part of the strategy that is supposed to turn China into the new semiconductor leader can also be found in the increasing number of M&A that the country is trying to seal with foreign companies. During the current year, the PRC’s M&A expenditure hit a record of $194 billion, as reported by Fortune, which has doubled in comparison to the year before.

Earlier in 2016, Canyon Bridge Capital Partners, a Chinese private equity firm, had tried to acquire programmable-chip maker Lattice Semiconductor, a Oregonian chip maker for connected cars. The deal that was being monitored by the Committee of Foreign Investment in the United States (CFIUS), was unapproved by the US Congress over security concerns, and definitely blocked on Monday. As discovered through an article on Reuters, the Lattice Semiconductors deal was backed by funds coming from the Chinese Government, and indirectly related to the county’s space program. The South China Morning Post,  reported the US Congress concern toward the acquisition; according to the 22 US lawmakers against the acquisition,  “the deal could disrupt the US military supply chain and possibly lead to a reliance on foreign-sourced technologies for many critical US Defense Department programmes,” the South China Morning Post reported.

It was the same U.S. intelligence services that in October 2016 warned Germany against the Chinese takeover of Aixtron, a semiconductor manufacturing equipment maker. As reported by Reuters, the US intelligence services expressed concern toward an acquisition that potentially gave China access to technology that could be used in the military sector. This isn’t the only reason that pushed the Germany economy ministry to withdraw the deal during the review process, the country is also afraid of losing technologies to China, given the increasing number of deals China has been making with the European country.

Even though China has an expansion strategy planned, it will be interesting to keep observing how the other international forces are going to react to what seems to be a new hegemony in the semiconductor sector. Whether China will be able to free itself from the dependence from a massive import of foreign manufactured chips, and possibly become the new dominant player in the industry, will only be unraveling in the near future. In the meanwhile, Influence Matters promises to keep an eye on the industry for you!

 

Influence Matters, as a strategic communication agency in Beijing focusing on B2B tech, keeps a close eye on the semiconductor industry trends. We have extensive experience supporting leaders in the semiconductor industry to build and maintain a thought leadership position in China.

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