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Rise of the "Big 4" the Semiconductor Industry in Asia Pacific

Rise of the "Big 4" the Semiconductor Industry in Asia Pacific

Rise of the "Big 4" The in Asia Pacific

Table of Contents

The Asia Pacific "Big 4" 1

On the to recovery 6

The emergence of "multi-markets" 13

Resilience is key 16

Self-sufficiency takes time 18

Too big to ignore 24 The in Asia Pacific | The Asia Pacific "Big 4"

1 The semiconductor industry in Asia Pacific | The Asia Pacific "Big 4"

The Asia Pacific "Big 4"

Rise of "Big 4" in semiconductor

Driven by government support, revenue and each have several global vast market and increasing R&D semiconductor giants. Asia Pacific is spending, , , also the world's biggest market for and together have become , for 60% the "Big 4" semiconductor players in of global semiconductor , within Asia Pacific, holding four of the top which China alone accounts for over six spots by overall semiconductor 30%.

Figure 1: Semiconductor revenue by country (Top 6) :

Taiwan (Province of China) 6% South Korea 19%

United States 47% Japan 5% China 5% The 4%

Source: SIA

Figure 2: Top 10 Asian semiconductor vendors by revenue in 2019 (USD million)

2019 Revenue Company Country/Region (USD million) 52,214 South Korea

TSMC 34,632 Taiwan (Province of China)

SK hynix 22,478 South Korea

Hisilicon 11,550 China

Kioxia 8,797 Japan

Sony 8,654 Japan

MediaTek 8,066 Taiwan (Province of China)

Renesas 6,755 Japan

SMIC 3,014 China

ROHM 2,803 Japan

Source: Company reports

2 The semiconductor industry in Asia Pacific | The Asia Pacific "Big 4"

The semiconductor value chain is long and involves many specialized fields: equipment, Electronic software (EDA), Intellectual Property core (IP), Integrated Device Manufacturer (IDM and fabless), foundry and Outsourced Semiconductor Assembly & Test (OSAT). Each of the "Big 4" has different strengths and plays a critical role in the global semiconductor value chain.

Figure 3: Relative strength of the "Big 4" across the semiconductor value chain

EDA&IP

Fabless Material Foundry OSAT /IDM Equipment

EDA&IP Material Equipment Fabless/IDM Foundry OSAT

China

South Korea

Japan Taiwan (Province of China)

High Medium Low

Source: analysis

South Korea – Leading the pack

South Korea's semiconductor South Korea has more than 20000 has been created in South Korea, industry is large and include semiconductor related companies, city clusters of semiconductor numerous enterprises. The biggest including 369 IC industries such as Yongin and Icheon, semiconductor enterprises are enterprises, 2650 semiconductor supporting the whole semiconductor Samsung and SK Hynix. Samsung is equipment enterprises and 4078 industry of South Korea. South the most important semiconductor semiconductor material enterprises. Korea also surpassed Japan and company in South Korea, which A typical semiconductor factory is Taiwan to become the second largest conducts in IC design、smart phones surrounded by a variety of supporting semiconductor country after the and manufacturing. SK Hynix enterprises. Through layers of . has led the world in DRAM and NAND and subcontracting, a Flash market share for many years. huge semiconductor industry chain

3 The semiconductor industry in Asia Pacific | The Asia Pacific "Big 4"

Japan – Specialty expert

Japan's strengths in semiconductors Semiconductor materials have high industrial expertise should not be are in raw materials, equipment and requirements for purity, which only underestimated. For example, in 2019, small active-passive components. Japan is capable of creating. Although semiconductor became a top 10 Along the semiconductor value chain, Japan's performance in other fields global semiconductor supplier just by Japan has substantial advantages in of the semiconductor industry producing image . upstream semiconductor materials. remains under the , its deep

Taiwan (Province of China) – Manufacturing powerhouse

Taiwan has well-developed competitive in chip manufacturing from those received by Chinese semiconductor clusters. It is one and IC design and has the world's companies. But, the brand image of the few regions in the world biggest foundry and most advanced accumulated over the years still wields with a depth and breadth of semiconductor manufacturing power. Taiwan is also benefiting from semiconductor clusters packed into process . Taiwan also has the impact of the US-China trade war, a small geographical area. Taiwan's an advantage in brand image. For in which a large amount of talent and cluster effect has great advantages example, many of Taiwan's ODM/OEM many enterprises are rapidly flowing for semiconductor development, production bases and supporting back to Taiwan. This means Taiwan's which focuses on supply chains have been transferred semiconductor industry should and cooperation between different to China, and the subsidies they continue to grow. industries. Taiwan is very strong and receive are essentially no different

China – Rapidly advancing

China's strength in semiconductors is main players in Asia Pacific IC design. returns. Semiconductor products that its ability to rapidly scale a technology Although labor costs in China have require longer investment periods once it reaches maturity, an area in increased, overall cost is still quite low have less of a footprint in China. For which no country can really compete because manufacturing continues to example, it takes time for automotive with it. China is also quite strong in be subsidized by the government. electronics to be certified, and there's OSAT, and has a large share of the little participation in this segment global market. In The development of China's by Chinese manufacturers. That (IC) design, China's capability has semiconductor industry has been said, China will play an increasingly surged over the past 5 years, and comparatively rapid, making Chinese important role in the semiconductor started to catch up with Taiwan's and enterprises accustomed to investing industry. South Korea's, joining them as the in areas that can earn short-term

4 The semiconductor industry in Asia Pacific | The Asia Pacific "Big 4"

Figure 4: Major semiconductor clusters of "Big 4"

Key Cluster Characteristics Major Companies Key Areas

Japan Island • Accounts for about 5% of all world • Sony • Integrated device Kyushu semiconductor production Semiconductor manufacturers (IDMs) • Surrounded by 41 • Sony LSI Design • ULSI Systems • Corporation • Fukuoka • High-tec

South lGyeonggi- • It plans to spend about 120 trillion won over 10 • Samsung • SME Korea do and years and forming semiconductor cluster in 2030. (semiconductor • SK Hynix Chungcheong- manufacturing • Establish four large semiconductor do regions equipment) manufacturers and about 50 upstream and downstream suppliers

Taiwan • More than 70% of global IT industry products are • TSMC • Wafer foundry (Province Science park initiated from companies at the Hsinchu Science • UMC • IC Design of China) Park. • Media Tek. Inc • PC • Generates an annual revenue of more than 33 billion USD over the past five years and enjoys its • • Telecom global reputation as a brilliant science park. • CHIMEI • Oproelectronics • More than 520 tenant companies employ more INNOLUX than 150,000 people. • Precision Machinery • Macronix & Materials • Close to the Industrial Technology Research Institute(ITRI), Tsing Hua and National Chiao Tung University • Covers six locations—the Hsinchu, Jhunan, Tongluo, Longtan and Yilan parks as well as the Hsinchu Biomedical Science Park—that span a total area of nearly 1,400 hectares.

China ZhangJiang Hi- • China's largest semiconductor cluster. • SMIC • Yangtze River Delta Tech Park (YRD) account • LinGang free trade zone is currently the • HuaHong for 53% of total for fab development. • ASML domestic fab • Surrounded by Wuxi, Nanjing, Suzhou, Ningbo revenue. • ASE and Hefei forming the Yangtze River Delta (YRD) • 33% of chip design with major fab investments in the past decade. • NXP revenue. • infineon • Up to 60% of ATP (assembly, test and package) revenue in 2018 according to the Integrated Circuit Association.

Source: Deloitte analysis

5 The semiconductor industry in Asia Pacific | On the road to recovery

6 The semiconductor industry in Asia Pacific | On the road to recovery

On the road to recovery

Global semiconductor revenue was other hand, has fared well due to declining even before the COVID-19 the increasing number of pandemic (down 12% in 2019 to in . In the next 5 years, USD418 billion, according to IDC), logic IC and analogy IC will likely largely due to lower demand and the continue to grow, with inventory US-China trade dispute dampening clearance eventually driving up silicon industry sentiment. In addition, chip's average selling price. inventory pressures in smartphones and cloud infrastructure caused In addition, the maturity of many prices to decline, which impacted disruptive , including semiconductor revenues. The AI, big data and , will drive the emergence of COVID-19 drove another growth of the semiconductor contraction in the semiconductor market. Considerable growth will market. be maintained once the economy recovers, especially in connectivity- The semiconductor industry can be related products and applications. divided into several sub-segments. After all, connectivity is the mother The market for memory is volatile of advanced technology and the due to oversupply and falling prices, premise of all technology applications. which are expected to continue. Therefore, despite the volatility Analog IC has suffered due to weak caused by COVID-19 delaying the end-equipment markets, particularly recovery, the long-term outlook for in industrial and legacy automotive the semiconductor industry remains segments. , on the positive.

Shock to small-sized firms

Although the pandemic and trade The companies that suffer blows from war are impacting large companies the pandemic will probably be small with healthy financials, in the long assemblies and factories, because run they are merely a dent. However, their gross profit margins are low to the impact will be extensive for small begin with. With decline falling due companies and those in relatively poor to COVID-19, they have very little financial health, and some could shut leeway to use volume to support their down due to poor capital turnover. operations.

7 The semiconductor industry in Asia Pacific | On the road to recovery

Semiconductor capex rolls on

Due to the nature of the most. Foundry, on the other hand, semiconductor industry, capital will likely experience the largest expenditure will continue (albeit at a growth in expenditure. For example, slower pace), because it is used for TSMC essentially accounted for all manufacturing process improvements of 2019's increase in foundry capital and additional wafer capacity to expenditure, and in 2020 it is expected increase competitiveness. Now that to spend a further USD560 million. the pandemic has eased across Meanwhile China-based SMIC is most of the world, capex is expected planning to increase its outlay this year to experience a slight dip at worst, by about USD1 billion. with memory suppliers suffering the

Figure 5: Global semiconductor capex (2002-2020F)

120 120% 105.9 107% 102.3 99 100% 100 95.6 80%

80 60% 52% e 67.4 66.1 65.2 67.8 61 41% hang 40% 57.5 59 60 54 55.3 C 25% 47.7 48.1 19% 20% 20% 14% 43.4 11% 6% 4% Annual Billions of Dollars 40 1% -1% 0% 31.3 -6% -3%- 3% 27.5 26.1 -12% -20% 20 -29% -29% -40% -40%

0 -60% 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20F Year Capital Spending Percent Change

Source: IC Insights

8 The semiconductor industry in Asia Pacific | On the road to recovery

R&D will continue to rise

The semiconductor industry has however, the industry's R&D-to-sales role in semiconductors, resources for decades led all other major percentage averaged 13%-14%, will be invested continuously, driven industrial sectors in R&D, with annual mostly due to stronger revenue by growing product complexity and spending averaging about 15% of growth and industry consolidation. process advancements. total sales. Over the past three years, As R&D investment plays a major

M&A activities stable

In the past five years, Japan has the for 30,164 million USD, which is the activities with 137 deals in the past highest M&A deal value because in biggest deal in the past five years. five year. 2016 Softbank acquired UK based However, China is the most active semiconductor design company ARM in semiconductor industry M&A

Figure 6: M&A Deals of "Big 4" (2015-2019)

In addition, China is also most active in outbound semiconductor deals in the past five years while South Korea is mainly focused on domestic M&A.

9 The semiconductor industry in Asia Pacific | On the road to recovery

Figure 7: 2015-2019 semiconductor cross border deals number

Figure 8: 2015-2019 big four as buyer semiconductor deal value(mUSD)

There is ups and downs in big four M&A activities. After 2018's boom, the "Big 4" M&A deal value shrank in 2019 but China is still most active in deal making.

10 The semiconductor industry in Asia Pacific | On the road to recovery

Figure 10: Top 10 deals of "Big 4" in 2019

Announced Bidder Company Bidder Target Company Target Deal Value Motivation Date Country/ Country (Million Region USD) 9/12/2019 Ingenic China Integrated Silicon Solution USA 863.97 Expand industry Semiconductor Co., Inc; Integrated Silicon supply chain Ltd. Solution (Cayman); Si En Integration Holdings Limited 30/4/2019 South Korea Samsung Electro-Mechanics South 677.47 Strengthen Co., Ltd. Co., Ltd. (PLP business) Korea market position and expand market share 29/4/2019 Huada China GTA Semiconductor Co Ltd China 504.15 New Product line Semiconductor (84.88% Stake) funding Co., Ltd.; Shanghai Integrated Circuit Industrial Investment Fund Co., Ltd. 17/12/2019 MinebeaMitsumi Inc. Japan ABLIC Inc. Japan 312.97 Expand industry supply chain 27/11/2019 China Academy of China Datang Semiconductor China 258.55 Major assets Telecom Technology Design Co., Ltd. (49.22% restructuring Co., Ltd. Stake) 28/11/2019 Nuvoton Technology Taiwan Semiconductor Japan 250 Strengthen Corporation (Province of Solutions Co., Ltd.; market position China) and expand market share 31/1/2019 Vanguard Taiwan GLOBALFOUNDRIES U.S. 236 Strengthen International (Province of Inc. (Fab 3E) market position Semiconductor China) and Corporation expand market share 31/3/2019 Wuxi Xichan Weixin China SMIC Hong Kong 175.96 Expand industry Semiconductor Co., International Limited supply chain Ltd. 23/12/2019 SG Micro Corp. China ETA Solutions (Nantong) Co., China 152.51 Strengthen Ltd. (71.3% Stake) market position and expand market share 18/10/2019 NARI Technology China Narui Lianyan Power China 78.76 Set up a Joint Co., Ltd. Semiconductor Co., Ltd. Venture (69.83% Stake)

Source: MergerMarket

11 The semiconductor industry in Asia Pacific | On the road to recovery

Light at the end of

The pandemic initially started as a Smartphones will continue to be supply-side problem issue confined to the largest driver of semiconductor China. But, as COVID-19 spread across demand. OEMs in China are focused the globe, it began to hit the global on launching 5G handsets despite economic crisis as its demand-side uncertain demand. As ODMs and problems impacted the consumers. OEMs roll out a broad range of 5G Given rising unemployment worldwide, devices, they will drive semiconductor consumer spending is expected to content. The beginning of 1Q20 saw reduce in the next 1-2 years. slight rebounds in smartphones, , connectivity and memory. The supply chain in China had largely sales in many parts of recovered by the end of Q2, but Asia Pacific bounced back from all- consumers globally are spending more time lows, but changes in consumer cautiously during a of economic behavior will still hinder consumer uncertainty, with sales of consumer and business spending in the second electronics such as smartphones half of the year, and demand for suffering as a result. The closure of semiconductors will be uneven across shops also contributed to a drop different markets. In the short term, in demand. Worldwide smartphone upstream semiconductor companies shipments fell 11.7% year-on-year are still getting orders from OEM in the first quarter of 2020 (1Q20, and ODM factories, and the impact according to IDC). The largest regional on operations has been relatively decline was in China, which saw slight. In the long term, if consumer shipments drop 20.3%. Given China demand cannot rebound consistently, accounts for about a quarter of global development of new devices could be shipments, this sent shockwaves delayed, and OEM and ODMs might through the market. not recover lost sales.

12 The semiconductor industry in Asia Pacific | The emergence of "multi-markets"

13 The semiconductor industry in Asia Pacific |The emergence of "multi-markets"

The emergence of "multi- markets"

Companies worldwide rely on Asia Disruption has not been limited to Pacific manufacturing now more China. It has spilled over into other than ever. China accounts for 30% Asian economies. In South Korea, of global manufacturing and more some semiconductor production than 50,000 companies worldwide plants had to temporarily stop have Tier 1 suppliers in China. operations. Japan has also been hit, The semiconductor industry is no with its sourcing of semiconductor raw exception. Wuhan in China, one of materials challenged. Due to a sudden the world's largest manufacturing drop in overseas demand, economies bases for optoelectronics, at the in Asia Pacific are struggling to beginning of 2020 under COVID-19, win orders from abroad. In China, was frustrated by the logistics factories have reportedly seen 10%- issues, while its manufactures 20% of their orders cancelled (in some running around the clock to ensure cases for that were already output against the severely reduced manufactured). workforce though. The fabs in other parts of China have been resuming But the semiconductor "Big 4" are to the normal thanks to their returning to normal, so there is hope highly automated facilities, while the that a disastrous supply-side hit to the downstream assembly, packaging and global technology supply chain can be testing factories were badly hit due to avoided. However, slackening demand the labor shortage. for end products could further delay the recovery. It will be important to observe the long-term impact of the pandemic and how the US-China tech war reshapes the market and supply chain.

14 The semiconductor industry in Asia Pacific | The emergence of "multi-markets"

A tale of multi-markets

The US-China tech war is likely capacity cannot reside in only one It's not easy to move a factory, but in to prompt global semiconductor country. This not only bears much risk, the past two years, manufacturers manufacturers to divide between but it also discomforts customers. have prepared contingency plans. Any multiple groups for production, Most downstream OEM and ODM intensification in the trade war or the design and sales. This might not customers—even some Chinese pandemic will show manufacturers be wholly deliberate. Market enterprises—are beginning to shift whether their policies are correct, and separation sometimes comes down to supply chain for other countries. TSMC if so they will speed up relocations. differences in demand, and different has plants in Taiwan and China, and Each manufacturer will move at adjustments in specification. This plans to build a foundry in the US. a different pace, so this should is not far removed from a product not have much impact. That said, design issue, so is less complex than The US-China trade war has been manufacturers could rethink their it might appear. In the semiconductor going for nearly two years, and large relocation choices after the pandemic. industry, it's a given that production factories have started to respond.

OEM and ODM diversification underway

Multinationals have long enjoyed The integrity and completeness of a it built a supply chain in Southeast a reliable supply chain in Asia supply chain is the priority when OEM Asia. South Korean semiconductor Pacific, but its interconnectedness and ODM companies have no plans to relocate and layered interdependency also manufacturers choose to relocate. production outside China, but increased risks. In a recent Deloitte Due to its proximity to China, South they might consider some supply survey of managers at Japanese, East Asia is set to benefit from some chain adjustments. If South Korean South Korean, and Taiwanese MNCs, of the relocations. semiconductor companies relocate one-third of respondents had their plants, Vietnam would benefit, already relocated some or all of their For example, some of the world's as Samsung Electronics is already manufacturing or assembly outside biggest pure-play foundries have a production base there. China in response to trade tensions. manufacturing facilities in Singapore, Some 55% of Japanese MNCs plan to as well as leasing outsourced Malaysia is also another possible move some or all of their operations semiconductor assembly and test choice. According to SEMI, Penang out of China, with the figure reaching companies. They are also supported contributes approximately 8% of 78% and 75% among South Korean by an ecosystem of leading materials the global back-end semiconductor and Taiwanese MNCs. The COVID-19 & equipment and electronics output, making it among the pandemic will likely accelerate the manufacturing services players. world’s leading location for longer-term shift of low-value- assembly, packaging added manufacturing from China Vietnam, because of its proximity and testing. Thailand is yet another to Southeast Asia as the Chinese to China, is an ideal choice for possible candidate because of the government looks to move into high manufacturers. Last year, completeness of its electronics value value tech production, including shifted its smartphone chain due to the long-time investment semiconductors. production to Vietnam from China as made by Japanese corporations.

15 The semiconductor industry in Asia Pacific | Resilience is key

16 The semiconductor industry in Asia Pacific | Resilience is key

Resilience is key

Supply chain disruption from the COVID-19 pandemic was caused by a combination of lean production and global, multistage supply networks. Only a small fraction of companies have carefully assessed their supply-chain risks. Businesses should promptly consider actions that will improve supply chain network resilience. The most pressing needs are to find alternative supply sources, account for supply chain visibility and build safety reserves. In the long term, sourcing is a complex issue that will take time to perfect. To succeed, it is likely to need a combination of:

• Mapping and digitize supply chains: Supply chain mapping results in better visibility, indicating which suppliers, sites, parts and products are at risk of disruption. This allows businesses to develop mitigation strategies to ease constrained inventory and identify alternative capacity, and most companies find the benefits outweigh the cost. Businesses with limited resources can start with a focus on key parts that drive the most revenue, and down through as many tiers as possible to gain visibility. Companies should also look for ways to digitize supply chains. For example, an apparel manufacturer can create 3D samples of clothing online, instead of having to travel back and forth between their buyer and manufacturer to see samples in person.

• Build strategic backup capacity and flexibility: Business should also invest in back up capacity by "hiding" one or more supporting supply networks within their core supply chains. A backup network will be able to take over immediately if a core network is shut down. For example, redistributed its standard components manufacturing after the 2011 Tōhoku earthquake, giving multiple nodes of its supply network the same production capability. Flexible manufacturing, meanwhile, improves supply chain resilience. General Motors has factories in Argentina, Poland, Thailand and that follow the same design, template and manufacturing processes, so if one region experiences issues, factories elsewhere can provide immediate support.

• Keep a global perspective while diversifying: Businesses should also consider that over-reliance on one region could jeopardize their ability to continue business-as-usual. Add to this the risk of ever-more-frequent unforeseen disasters, and it becomes apparent that companies need to reconfigure their global value chains to mitigate and manage risks in advance. Businesses should first assess their supply chain risks, and look to diversify their supply chains by building up parallel networks—more fragmented but tightly managed value chains to diversify risks. This requires longer term, scenario-based analysis of risks and opportunities, rather than simply shifting to a lower-wage country.

• "Re-shoring" an option for some: Businesses can also consider strategies such as bringing supply chains closer to demand with on-shoring or near-shoring. For example, South Korean and Taiwanese manufacturers have plans to re-shore some of their high value manufacturing. The trend of companies moving back to their home bases is most prevalent among Taiwanese MNCs, driven by the “Invest Taiwan” initiative, which aims to attract companies back home with low-interest loans to cover the cost of relocation. The Japan and US governments have similar incentives to lure multinationals back to their home soils.

17 The semiconductor industry in Asia Pacific | Determined to be self-sufficient

18 The semiconductor industry in Asia Pacific | Determined to be self-sufficient

Determined to be self-sufficient

Quest for import substitution

The US-China trade war has in That said, in 2019 the US added Currently, China is the largest IC fact had a relatively small impact several Chinese companies to its consumer globally, but its domestic on the upstream semiconductor restricting the sale of US IC production has lagged. According companies, but it has been more components. The immediate impact to IC Insights, of the USD19.5 billion severe for downstream ODMs was to push Chinese vendors into in ICs manufactured in China in 2019, and OEMs. This is due to the cost looking outside the US for alternative China-headquartered companies structure of final products, wherein IC suppliers in Japan, Taiwan, South produced only 6.1% of the country's represents a relatively low proportion. Korea, and China itself. However, IC market. TSMC, SK Hynix, Samsung, Therefore, even if a semiconductor further tightening of restrictions could , and other foreign companies is manufactured in China, so long put Taiwan and South Korea out of with IC wafer fabs in China produced as assembly of the final product is reach for Chinese vendors. The latest the rest, showing MNCs are a big part elsewhere, it will not be subject to such restrictions will likely make things of China-based IC production. tariffs when sold to the US. difficult for both sides.

Figure 11: IC market vs IC production in China

250 2019-2024F CAGR = 11% $208

200

$145 150 $125 $118

$94 USD billio n 100 $83 $77 $69 2019-2024F CAGR = 17% $63 $57 $62 $43 50 $41 $19.3 $23.9 $19.5 $10.3 $11.7 $13.4 $13 $4.2 $5.8 $7.9 $8.8 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2024F

China IC Market China IC Production

Source: IC Insights

19 The semiconductor industry in Asia Pacific | Determined to be self-sufficient

Moreover, many of the top US semiconductor industry. An avalanche Hence, China is expected to accelerate semiconductor companies receive of events has exacerbated China's semiconductor import substitution, more than 50% of their revenue from sense of crisis, and it began to worry so its demand for non-imported China, so trade actions risk cutting that the US could prohibit most semiconductors will grow, and it off these MNC's biggest market and semiconductor exports to China, or will eventually to an increase in could hinder their ability to invest in even the export of semiconductors domestic investment. That said, the R&D. This is a particular issue given to China from other countries. China road to self-sufficiency will not be semiconductor R&D is very costly, so a is therefore expected to accelerate easy, and it will require a huge amount slowdown in spending could hurt the the structural adjustment of its of capital, talent and time to catch up. competitiveness of American firms. semiconductor industry, which has already been underway for many The trade war and entity list years. After all, China is aware of its restrictions could give China the low self-sufficiency in semiconductors. impetus it needs to develop its

More R&D spending needed

In the semiconductor industry, leveraged in two phases. But it mostly big enough to provide the needed size matters. This is because firms focuses on manufacturing capacity capital in the long run. For example, need to continuously invest to stay and acquiring existing technology the top 10 US semiconductor competitive. R&D is of paramount instead of original R&D and lack companies spend more on R&D each importance and companies with investment in tools and equipment year than all industry and government higher revenue can invest more in (for chip manufacturing), and software spending put together. It will be new technology and . In (for design) in the value chain. difficult to catch up with industry terms of available capital, China has In contrast, many top global leaders when they spend much the "Big Fund", of USD 50 billion for semiconductor companies spend more on R&D to maintain their tech the development of its domestic more than USD1 billion on R&D every advantages. semiconductor industry, which will be year, so the "Big Fund" might not be

Talent shortage an issue

According to China's Ministry of industry fivefold before 2030. China many universities can train quality Industry and will also need to nurture its talent electronics engineers. Currently, (MIIT), China needs at least 400,000 pool by strengthening salaries for chip-related hardware more people working in IC industry and encouraging more students to research is low compared to to reach its goal of growing the major in electronics, although not companies.

20 The semiconductor industry in Asia Pacific | Determined to be self-sufficient

Closing the gap on all front

The semiconductor industry's level of Chinese companies mostly value chain. Particularly lacking in the global value chain spans materials, generally lags that of the global mid-to high end segments, such as equipment, design, manufacturing, leaders. China is still a relatively small those for semiconductor equipment assembly and testing. The technology player in the global semiconductor and EDA & IP.

Figure 12: Semiconductor revenue along the value chain for "Big 4"

Source: Company reports

21 The semiconductor industry in Asia Pacific | Determined to be self-sufficient

Equipment: Many different EDA & IP: The Electronic Design Fabless & IDM: Fabless design & types of equipment are needed Automation (EDA) software market in IDM is the largest segment of the to manufacture semiconductor China is dominated by global giants semiconductor value for the "Big chips, including lithography, like Cadence and Synopsys. There 4". Including Samsung, SK Hynix, implantation, deposition, etching, are some domestic EDA companies and fabless design companies cleaning, and testing equipment. but their offerings and capabilities lag HiSilicon (owned by ; Most of them are manufactured in behind those of peers overseas. China smartphone chips, GPU and server the US, Japan and the Netherlands. also lacks core IP, which is the crucial chips) and Unis (part of the Tsinghua In lithography equipment, the most building block for chip design. Most IC Unigroup ecosystem; owns fabless, advanced maker, ASML, is based in design companies use their own and foundries and OSAT companies). the Netherlands. Its only competitors third party IP to design IC chips. For Chinese in Asia Pacific are Japan's and example, most smartphones today company Xiaomi has also been Canon. In deposition equipment, use ARM architecture. The company active in chip design, focusing on Japan is the regional leader. In China's has been selling IP licenses to China, the development of AI and IoT chips domestic market, NAURA and AMEC although it has now developed some as well as investing in IP provider are the largest semiconductor local Chinese IP. China could use open VeriSilicon. equipment companies. source architecture such as RISC-V, which is not yet export controlled. Chinese companies are increasingly active in this segment, with some claiming their RISC-V IP has the world's most powerful design.

Figure 13: Share of Chinese domestic chips

System Equipment Core Integrated Circuit Share of Domestic Chips System Server MPU 0%

Personal computer MPU 0% Industrial application MCU 2% General Electronic Editable logic devices FPGA/EPLD 0% System processing equipment DSP 0% Application Processor 18% Equipment Communication Processor 22% Mobile communication terminal Embedded MPU 0% Embedded MPU 0%

Core network equipment NPU 15% Storage Device DRAM 0%

Semiconductor memory NAND Flash 0% NOR Flash 5% Display and Video Image Processor 5% System HDTV/Smart TV Display Driver 0%

Source: China semiconductor association

22 The semiconductor industry in Asia Pacific | Determined to be self-sufficient

The outlook for homegrown China OSAT: Taiwan is also strong in OSAT, design is positive. China has recently accounting for half of the top 10 developed a domestic x86 CPU to globally. China has recently caught reduce reliance on foreign chips. up in this segment, and has a good It may not be competitive in the chance of a breakthrough. It now has consumer market, but it is good more than 20% of the global OSAT enough for government use. Others market, and three of the top six OSAT have created domestically RISC-V companies. This demonstrates the based CPUs, AI inference chips and rapid progress of Chinese OSAT firms, chips. Meanwhile, but China's semiconductor industry is HiSilicon has become one of the not yet mature. For example, Chinese biggest semiconductor companies by manufacturers' yields and quality in revenue. packaging and testing lags behind those of other "Big 4" manufacturers. Foundry: The semiconductor foundry market is dominated by Taiwan’s TSMC. The Chinese Mainland's largest foundry is SMIC. China has made rapid progress over the years and is capable of mass producing 14nm chips, although this still lags the capability of industry leaders such as TSMC and Samsung, which are out 5nm processes. Although China does not yet have state-of-the-art processes, it is making important steps towards self-sufficiency.

23 The semiconductor industry in Asia Pacific | Too big to be ignored

24 The semiconductor industry in Asia Pacific | Too big to be ignored

Too big to be ignored

China's consumption is difficult to replace

China's population is too large for the country not to be an important market in Asia Pacific and the world. Of the 15 largest semiconductor companies globally, most sell more to China than they sell to the United States. Consumption of semiconductors by region indicates China absorbed more than 50% of supply in 2019.

Figure 14: Semiconductors consumption by geographic region

Source: IBS

25 The semiconductor industry in Asia Pacific | Too big to be ignored

China's semiconductor consumption semiconductors are consumed by expected to be consumed internally. pattern is also shifting. Ten years domestic firms, including smartphone In addition, China is expected to ago almost 90% of semiconductors makers and data centers. By 2035, spend the most in semiconductor were for exports. But today, 50% of 75% of China's semiconductors are equipment in the next 5 years.

Figure 15: Share of semiconductor consumption (domestic vs foreign) (USD billion)

Source: IBS

26 The semiconductor industry in Asia Pacific | Too big to be ignored

Figure 16: New semiconductor equipment spending in 2018 (USD billion)

Source: SIA

Furthermore, not all manufacturing Thus, regardless of whether and how about 70% of the world's 5G enabled can be outsourced to Southeast external factors hinder the Chinese smartphones. In the past, Chinese Asia. China's sheer scale is difficult market, it will remain large. The smartphone companies lagged behind to be replicated, because it has importance of the terminal market global leaders, but now many of the more migrant workers, clusters of in particular cannot be ignored. A biggest vendors are Chinese, and they key suppliers and a relatively higher key initiative to drive higher levels will drive semiconductor consumption. level of skill. For example, China’s of semiconductor consumption is established supply chain network 5G. By 2020, China will have about and capabilities allow MNCs to source 1 million 5G base stations installed. any kind of type of technology from In addition to the of 5G Guangdong and its vicinity. infrastructure, China will produce

27 Contacts

Taylor Lam Frank Li Deloitte China Technology, Media and Deloitte China Technology Sector Leader Industry Leader Tel: +86 10 85207290 Tel: +86 10 85207126 Email: [email protected] Email: [email protected] Andrew Chen Leo Chen Deloitte China Technology Consulting Leader Deloitte China Semiconductor Sector Leader Tel: +86 755 33538168 Tel: +86 21 61411911 Email: [email protected] Email: [email protected] Jae Ho Son Gordon Chen Deloitte Korea Technology, Media and Deloitte Taiwan Technology, Media and Telecommunications Industry Partner Telecommunications Industry Leader Tel: +82 2 66762502 Tel: +886 3 5780899 Email: [email protected] Email: [email protected] Lisa Zhou Roger Chung Deloitte China Technology, Media and Deloitte China Technology, Media and Telecommunications Industry Manager Telecommunications Industry Tel: + 86 10 8512 5909 Research Director Email: [email protected] Tel: + 86 21 23166657 Email: [email protected]

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