The demand for semiconductors in China has grown significantly in the last five years, as OEMs and other consumers of semiconductors have shifted production to China, however, domestic Chinese production hasn’t kept pace, leaving a $20 billion gap in 2003, up from $5.7 billion in 1999. Indeed, according to a new report from PricewaterhouseCoopers entitled China’s Impact on the Semiconductor Industry, the domestic integrated circuit consumption/production gap will continue to accelerate in the next several years, strengthening the Chinese government’s resolve to increase domestic production.
The report, prepared by PwC’s Global Technology Centre, shows that the most significant impact Chinese production capability will bring to the industry is cost-related. Cost efficiency has long been the focus of many chip suppliers, particularly those with an Asia-Pacific focus, but circumstances in China will create another dimension to this competition — because the Chinese industry’s deverticalized fabless/foundry model makes lower cost structures possible.
Additionally, many Chinese companies are supported by state-owned financial institutions and are able to continue their operations in spite of losses for many years.
China’s export market will continue to be a primary demand driver for semiconductors through 2010. “Though growing rapidly, China’s domestic market as measured in GDP will be only half that of Japan’s by 2010,”
remarked Raman Chitkara, global head of PricewaterhouseCoopers’
semiconductor group. “In terms of chip demand, two thirds of the chips consumed in China are used for products that wind up being exported — a proportion that isn’t expected to change significantly in the near future.”
Also, contrary to popular belief, labor costs represent only one of several reasons semiconductor industry companies locate plants in China
— the others include a need to be geographically close to their customers as well as to the local market.
Concerns about protection of intellectual property will remain as the biggest hurdle in the near term as companies contemplate where to locate their future semiconductor fabrication plans globally.
