Wei Shaojun, a professor at Tsinghua University in China and chairman of the semiconductor design division of the China Semiconductor Industry Association (CSIA), spoke at “Global High Tech Executive Forum 2020″ held in Shenzhen, China,  discussing whether in the current volatile market environment  the strategy of “All Made in China ” is the right choice for Chinese semiconductor industry.

As the trade war between China and the United States continues to worsen, the slogan of “Make everything in China” has become widespread among semiconductor manufacturers in China in recent months. The determination of the Chinese semiconductor manufacturers has been exemplified by a will to focus on completing all stages of semiconductor supply chain domestically from design to manufacturing and to provide China with almost no reliance on overseas technologies, products and suppliers

In his talk, Wei warned, “The idea of’make everything into Made in China’is quite popular, but it’s a bit overhyped.”

Given that the semiconductor industry is currently in a difficult market environment  both in China and abroad, China has softened its stance and sought strategic alternatives.

Wei presented a graph of global GDP growth over the last 50 years. According to data analysis, the cumulative GDP growth for the 31 years from 1970 to 2001 was US $ 568.3 trillion, with an average annual increase of US $ 18.3 trillion. While, the world GDP growth for the 19 years from 2001 to 2019 was US $ 1172.50 trillion, with an annual average increase of US $ 65.1 trillion, an increase of 3.6 times compared to the previous 31 years.

Why has world GDP achieved such high growth in about 20 years? It was neither due to oil, coal, transportation, or agriculture.

Since 2000, with the advent of internet and mobile phones the world economy developmet experienced a boost. 

In the 15 years from 1987 to 2001, cumulative sales in the global semiconductor market reached US $ 5,221.3 billion. Average annual sales were at US $ 290.1 ​​billion.There is a strong correlation between GDP and the growth of the semiconductor industry. This is because semiconductors underlie the whole IT segment.

The same can be said about China today. China’s rapid economic growth over the last two decades also comes from the growth of its IT sector.

From 2004 to 2019, China’s IC industry grew rapidly, with production value nearly 14 times higher now in comparison to 2009. Wei points out that the compound annual growth rate was 19.2%, well above the global annual growth rate of 4.5%. According to data released by CSIA in 2020, China’s semiconductor IC industry maintained double-digit growth in 2019, and annual sales increased by 15.8% year-on-year to RMB756.23 billion (about 11 trillion yen). 

Over the last 15 years, the chip design industry has developed rapidly. China’s chip design industry has overtaken Taiwan to become the second largest in the world, and China’s share of the global IC design industry has increased from 3.56% in 2004 to 42.99% in 2019. Chip manufacturing is also maintaining steady growth with a compound annual growth rate of 17.96%. Furthermore, under the traction of industrial policies such as “Made in China 2025” and dedicated government funds, China’s IC manufacturing industry is about to enter a new even more rapid pace of growth. Since 2014, the average annual growth rate of the Chinese manufacturing industry has been 24.72%.

Chip products manufactured in China account for 10.3% of the global market, according to Wei. However, high-end chips still rely heavily on outsourcing outside China. “We can’t get rid of our dependence on semiconductor imports,” Wei said.

Considering the accelerating decoupling between the United States and China, some experts are arguing for creation of independent supply chains . Both the US and Japanese governments are actively promoting the domestic return of the manufacturing industry. But realistically, those moves did not play an important role. After all, China has a huge market and relatively complete industrial chain that underpins its ecosystem. Moreover, under the pandemic China was first to recover and completely resume production.

China and the United States have long been incorporated into the global technology system, and it is not realistic to completely separate them. In the context of a global pandemic and the US-China high-tech war, China’s semiconductor industry faces both opportunities and difficulties. “China is under tremendous pressure, but I’m sure it’s a good time for us to calm down,” Wei said.

Wei argued that: “China is already embedded in the global high tech supply chains and it is impossible to go back. Over the past two years, many domestic experts and industry executives have asked us to build another supply chain. I think the idea is wrong, because we are already part of the global supply chain.　In next-generation technologies such as quantum computers and space-related technologies, there is no global supply chain, so we can proceed in our own way. But we have integrated in almost every other area (electronic components, electric vehicles, IoT, AI) and are an important part of international standards and supply chains. That is why we cannot leave it. It’s impossible to build a new world from scratch. “

 China has not been able to stand on its own in many other core technologies such as electronic components, electric vehicles, consumer devices,  internet, robotics or AI. 

Although the proportion of domestic suppliers is relatively high, the competitiveness of Chinese suppliers is low. This means that China does not have many sources of technological innovation, and China needs to continue to interact with the outside world.

From another point of view, in fields such as photovoltaic panels, high-speed rail, digital payments, smartphones, cloud services, and robots, the domestic market share exceeds 50%, but in overseas markets, with the exception of photovoltaic panels and smartphones, Chinese manufacturers have a very low market share, Wei said.

Wei said, “We have to keep developing these technologies, but it’s also important to expand into the global market and increase our market share. If we don’t expand into the global market, how can we continue to develop and grow? We must keep this direction. Not only in semiconductors”

According to data released by the Semiconductor Industry Association (SIA), sales of IC products sold in China by US semiconductor manufacturers in 2018 exceeded US $ 100 billion

It is said that products destined for China accounted for about half of the total sales. Clearly, it is of no benefit to US semiconductor makers for China and the US to further decouple. Further split will have a significant impact on US leadership in the semiconductor market. As a result, SIA and many US semiconductor manufacturers have voiced opposition to the US government’s move to distance from China.

According to a report submitted to SIA, if the United States did not impose deliberate sanctions on China in 2018, the global market share of US semiconductor manufacturers would reach 48% of global sales. The price was expected to be about US $ 226 billion and R & D investment was expected to be US $ 40 billion.

However, according to the Made in China 2025 policy plan, the gradual technological decoupling between China and the United States will lead to replacing 15-40% of all US suppliers. This is expected to reduce global sales of US semiconductor manufacturers to US $ 205-220 billion. In addition, global market share will shrink to 43-46%, and R & D investment costs are expected to decline due to lower sales.

If complete technological isolation between the United States and China takes place, global sales of US semiconductor manufacturers are expected to drop further to US $ 143 billion, and global market share is expected to shrink to 30%. R & D investments are also expected to decline to US $ 16-28 billion. The leader position of US in the semiconductor market will be shaken significantly and first place will be overtaken by the Korean semiconductor industry. And in the long run, Korean leadership will be replaced by China.

“Of course, China and the United States each have their weak sides” Wei said. “The United States isn’t doing as well as China in the mobile communications network market, but it’s far better than China in the semiconductor space.”

Every country is concerned that some of its core technologies and equipment will be controlled by others. Under these circumstances, many countries think that it is in their best interests to pursue “replacement by localization (replacement by their own products)” and “controllable independent solution”. 

If so, what would “Made in China” replace ?

“Some foreign products that have occupied the Chinese market for decades are clearly superior in terms of performance and speed, making the localization process long and painful,” Wei said. But we must insist that it is necessary. “

Cyberspace is China’s “fifth undeveloped field,” following four areas: land, sea, air and space. Ensuring the security of cyberspace is protecting national sovereignty, and its importance is becoming more and more prominent today. If the replacement by localization is likened to war, the basic hardware and software such as CPU, OS, and database are controllable and independent “front battlefields” that guarantee the foundation of national network security. 

Wei points out: “Chinese industry has been discussing localization replacement for about two years now, but should we be prepared to see the limits? The main theme of the semiconductor industry is “to stay open”. It should be about cooperation. There is no substitute for it.”

The semiconductor industry in China and the United States must compete for development. With a product focus, the five key areas of the semiconductor industry should be revisited: design, manufacturing, packaging, testing and materials.

“As for future development, shouldn’t it be balanced in these five fields? Currently, we are a little ahead in the design field, but the materials field is relatively weak. Still, the time is on our side. ” – Wei said.

Wei also pointed out that Chinese companies haven’t been able to produce IDMs (Integrated Device Manufacturers) because they think the separate  design and foundry models are the best.

But now, this view is changing. While continuing to pursue the “design-foundry model,” it may be a time to energetically develop IDM. Typical IDM industries such as memory segment are slowly evolving in China.

One example would be the Wuhan-based Yangtze Memory Technologies Corporation (YMTC), which was established in July 2016. In September 2017, the company’s main product, the 3D NAND flash memory factory, was completed. Trial production started in October 2018, and mass production in small quantities started in 2020. The technology level has also evolved to 32 layers and 64 layers, and it announced that it succeeded in developing a 128-layer 3D NAND flash in 2020.

Another example is Changxin Memory in Hefei, which was established in May 2016. With DRAM products as its main business, the factory was completed in January 2018, trial production started in June, the yield reached 20% in August, exceeded 80% in October, and mass production was started in December. In the fall of 2019, it started production of 8Gbit LPDDR4 by applying 19nm process technology. The 17nm process is scheduled to be completed in 2021.

Wei said China was quick to recover from the COVID-19 pandemic and China’s economy is recovering rapidly. On the other hand, due to the United States sanctions, many Chinese companies ended up with a large inventory of US products. 

Recently, there has been widespread concern in the market for some chip-related projects. “This is because companies that have” no experience, no technology, and no talents are entering the semiconductor industry. Some companies are blindly launching projects without knowing enough about IC development. It is leading to waste of resources.

Since 2007, China’s wafer production capacity has increased rapidly, much higher than in other countries. In 2019, there are 199 wafer production lines (4 inch wafers and above) in China, of which 28 are 12 inch wafer production lines and 35 are 8 inch wafer production lines (including 1 pilot line). Despite high enthusiasm for investment and construction of factories around the world, many manufacturing projects remain unfinished and face shutdowns. Blind impulses that violate the laws of development of the semiconductor industry deserve caution.

Wei emphasized that China should humbly learn from the US semiconductor industry and increase its investment in innovation. Since 1988, the United States has significantly outpaced other countries in terms of productivity growth and real GDP growth. The technological advantage has allowed US companies to build a virtuous cycle of innovation. Large-scale R & D will bring about superior technologies and products, resulting in higher market share and higher profit margins, and yet more investment in R & D.

RR