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The Next Wave Opportunities and Winning Strategies for Semiconductor Companies April 2019

The Next Wave Opportunities and Winning Strategies for Semiconductor Companies April 2019

Semiconductors – the Next Opportunities and winning strategies for companies April 2019

Semiconductors – the Next Wave

Foreword

The ever-evolving semiconductor scene 5

Future of automotive semiconductors 12

Race is on for AI chips 30

Muted tone for M&A 38

Accessing the Chinese 46

Digitalization is key to competitiveness 52

2

Semiconductors – the Next Wave

Foreword

Semiconductors are essential enablers that many of the cutting-edge digital devices we use today. The global semiconductor is set to continue its robust growth well into the next decade due to emerging such as autonomous , artificial (AI), 5G and of Things, coupled with consistent spending on R&D and among key players.

East Asia (Mainland , , and ) is where some of the world's most important semiconductor players are located. The has become a hotspot for the due to its burgeoning , the rise of mobile and growth in cloud . China, in particular, commands almost half of overall market value, split roughly 50-50 between domestic demand and Taiwan-based, world-leading ODMs (e.g. and Quanta) or foundries (e.g. Taiwan Semiconductor Company [TSMC]) serving global clients. China also aspires to a self- sufficient semiconductor industry and ascension to become a global powerhouse at the same time. Japan, on the other hand, is an important supplier of semiconductor materials, high-end equipment and special semiconductors. Meanwhile, South Korea has a commanding in the global HBM (high memory) DRAM (dynamic random- memory) market.

M&A activity in the semiconductor industry has already peaked and specialized verticals are becoming the primary focus. Japan and Korea are seeking to revive their industries through acquisitions, while the continuing trade war and disputes over will hamper China's ambition to go on a global spending spree.

3 Semiconductors – the Next Wave

The semiconductor sector's growth trajectory will flatten somewhat as demand for consumer saturates. However, many emerging segments will provide semiconductor companies with abundant opportunities, particularly semiconductor use in the automotive sector and AI.

In the automotive sector, the adoption of safety-related electronics systems has grown explosively. Semiconductor components that make up these electronic systems will cost USD600 per by 2022. Automotive semiconductor vendors will benefit from a surge in demand for various semiconductor devices in , including (MCUs), and memory. , electrification, digital connectivity and will result in the addition of more semiconductor content to and subsystems in the next decade.

The AI semiconductor scene has seen a race not just at the application level, but also at the semiconductor level, where different are vying for a piece of the pie. The cloud is the biggest market for AI chips, as their adoption in data centers continues to increase as a means of enhancing efficiency and reducing operational cost.

Finally, China has become a source of income for top global semiconductor companies, many of which generate over half of their revenue from China. Multinationals trying to access the Chinese market should consider a multitude of factors such as , technologies, , and global strategies. It is imperative for a multinational to realize the position it is in before entering China to come up with the best entry strategy.

4 Semiconductors – the Next Wave | The ever-evolving semiconductor scene

1

The ever-evolving semiconductor scene

Robust growth expected and the inclusion of emerging In the past few years, growth of the technology such as AI in products global semiconductor industry has and 5G networks, as well as rapid been driven largely by demand from growth in automotive and industrial electronics such as electronics, will be some of the and the proliferation of applications market's key driving . The including the Internet of Things bulk of semiconductor revenue will and cloud computing. The global come from processing electronics semiconductor sector's total revenue (e.g. storage and cloud computing) is set to increase from USD481 billion and electronics (e.g. in 2018 to USD515 billion in 2019 ). and continue its robust growth well into the coming decade. Continued enhancements of existing products

5 Semiconductors – the Next Wave | The ever-evolving semiconductor scene

Figure: Global semiconductor revenue (2016-2022, billion USD)

542.64 billion (2022) 600 0.25 542.64 515.51 509.07 514.19 500 481.09 0.2

420.39 Communication Electronics: 30.2% 400 0.15 345.85 Data Processing Electronics: 300 0.1 34.2%

Consumer Electronics: 200 0.05 9.3%

Automotive Electronics: 100 0 12%

Industrial Electronics: 0 -0.05 /Civil 13.2% 2016 2017 2018 2019 2020 2021 2022 Electronics: 1.1%

Source: , analysis

Automotive and industrial the semiconductor industry, with revenue run-away segments from , data Automotive electronics and industrial processing and communication electronics are expected to be electronics set to grow steadily. the fastest growing markets in the

6 Semiconductors – the Next Wave | The ever-evolving semiconductor scene

Figure: Semiconductor revenue growth by electronic equipment type (2017- 2022)

Head Mounted Display：34.9%

Smart Watches：23.9%

ADAS：23.6% Automotive Electronics Industrial Electronics Other Wearables：22.9% Consumer Electronics EV/HEV：21% Data Processing Communication Electronics Security：18.5 % Military/Civil Aerospace Electronics 2017-2022 Other Industrial: 17.5% GAGR Body：13.3% Other Consumer：13.0% - : 12.4% Storage：11.8% Instrument Cluster：11.2% Automation：11.2% ：8.5%

Infotainment：8.2% Transportation：7.7% Fitness wearables：7.7% 5% 0% 10% 15% 20% Mean：7.2% Other Audio：6.1%

Chassis: 6.1%

Aftermarket：6.1% Wired Communication：5.1%

Commercial Amusement：4.3% Medical/healthcare：3.8% Test/measurement：3.6% Powertrain：3.4% Appliances：3.0% Military/Civil Aerospace Electronics：3.0% Other Video：2.9% Wireless Communication：2.6% Safety：2.6% Compute：1.9% TV：0% Digital Set-Top Box：-2.9% video consoles/handhelds：-4.0% Digital Camcorder：-5.5% Digital Still ：-7.1% (Blue )DVD Player/Recorder：-12.0% Portable Media Players：-15.9%

Source: Gartner, Deloitte analysis

7 Semiconductors – the Next Wave | The ever-evolving semiconductor scene

Consumption of automotive electronic Head mounted displays will be the Communication electronics include components for safety, infotainment, main driver of semiconductor growth wired and wireless electronics. In and efficiency will in consumer electronics. In addition, wireless electronics, traditional phone increase for years to come due to wearables and smart watches will be and cellular will experience ever-more electronic components new point of growth. However, other large declines, while smart phone being applied in advanced safety consumer electronics markets, such demand will increase only slightly. features added to . Among as DVD and portable media players, Revenue growth from the wireless applications driving semiconductor will see sharp declines. Hence, the market could be quite slow. In wired growth, advanced driver-assistance overall revenue increase of consumer communication electronics, enterprise systems (ADAS) will have the largest electronics will be somewhat limited. WANs (wide area networks) deployed increase. They will drive demand for as appliances should be the fastest- ICs (Integrated Circuits), MCUs and Data processing electronics include growing segment. sensors. computing and storage. Storage, especially SSDs (solid-state drives), APAC appetite remains strong Industrial electronics encompass will account for the largest increase. The Asia Pacific region will remain security, automation, solid-state As the price declines seen in 2018 the world's biggest market for lighting, transportation and continue, the trend towards greater semiconductor consumption. An energy management. Security SSD adoption and increased average increasing proportion of Chinese is the most substantial driver of capacity will retain strong momentum; products, which is stimulating the industrial electronics. New memory particularly in enterprise SSDs as growth of the whole Asia Pacific technologies enhance the energy data center demand will remain a key market, will be the major contributing savings, security and functionality of driver. factor. In addition, more M&A will IoT devices. benefit semiconductor sector growth going forward.

Figure: Semiconductor sales by region (2018) Figure: Semiconductor sales growth (2018)

14% North America 19.60%

Americas 10% Asia Pacific (exclude Japan) 14.50% EMEA Japan 6% Asia Pacific (exclude Japan) EMEA 13.90%

70% Japan 9.30%

Source: Gartner

8 Semiconductors – the Next Wave | The ever-evolving semiconductor scene

In terms of growth, the US had the Figure: Semiconductor sales in East Asia fastest growth rate in 2018 due to the rise of DRAM and high demand for MCUs, especially in the storage market. The Asia Pacific region China Mainland Korea Taiwan Japan has benefited from a boom in the memory market as the rising price of Source: Gartner memory generated great revenue. The (IC) industry in Mainland China grew 24.8%, making a major contribution to China playing catchup of the IT industry. By increasing Asia-Pacific. Korean semiconductor In East Asia, Japan has held a leading added value, Taiwan should solve the industry growth depends mainly position in the semiconductor downside in the IC industry on IC suppliers, particularly in the R&D and materials industry, with caused by a lack of capital and memory chip market. On the other semiconductor giants including talent investment. China is taking up hand, the semiconductor industry , and Renesas. South Taiwan's semiconductor market share. in Taiwan is based on the foundry Korea and Taiwan are strong in Moreover, the expanding Chinese model. However, price fluctuations memory and foundry, respectively. Mainland market will be a have harmed many foundries. This South Korea leads in DRAM and NAND channel for the IC design industry and has prompted vendors in Taiwan and has many top semiconductor its companies will continue to invest in to transfer some foundries into companies such as and SK the semiconductor industry in Taiwan. Mainland China and re-prioritize to Hynix, mainly thanks to Firstly, Mainland China can provide focus on IC design in order to buck support. In terms of NAND, it is market support. The semiconductor the price decline. As for Japan, as increasingly difficult for new players industry in Taiwan needs to be close semiconductor companies have split to participate in the competition to the consumer market to support and reorganized, they have exited due to the required accumulation of and economic the DRAM business, which has low the technical know-how. However, of scale. Secondly, talent can be technical value, and shifted focus South Korea also has challenges. provided to allow Taiwan to focus on to exploit high value-added system The price of DRAM is falling and higher value-added product R&D. chips. exports are declining. Hence, South Korean semiconductor vendors are The Chinese semiconductor industry devoting themselves to equipment is on an upward trajectory, with and materials as they seek to double-digit growth. Even though expand into other sectors to tilt away the competitiveness of Chinese from a heavy emphasis on memory. semiconductor vendors has improved greatly in recent years, the industry Taiwan has become the world's still relies heavily on key components leading location for semiconductor from the West, resulting in a self- foundry manufacturing. Taiwan's sufficiency rate of less than 20%. The semiconductor foundry industry Chinese government has paid close is dominated by two contract attention to this issue, promulgating manufacturers, TSMC and United numerous favorable policies to Company (UMC). strengthen the semiconductor Semiconductor foundry is a mainstay industry.

9 Semiconductors – the Next Wave | The ever-evolving semiconductor scene

Figure: Major players in the Chinese semiconductor industry

National Team Local Team Headed by the likes of Big Fund and Under the guidance of Large Fund, Tsinghua Unigroup, has invested many local have also hundreds of billions of dollars into the set up local versions of IC investment semiconductor ecosystem. fund. China Semiconductor Players Returnees Team MNC Many returnees have participated in , TSMC and other MNCs have the development of semiconductor been in China for a long time. Many industry in China, often backed by PE/ joint venture has been setup across VC. China.

Broadly speaking, there are four participated in the development of Looming uncertainties from the categories of players in the Chinese the semiconductor industry in China, Sino-US trade war semiconductor industry—the including and Veri , 2019 is destined to be a bumpy one "National Team", "Local Team", PEVC Giga Device and Montage etc. These for the tech sectors of China and funds and MNCs—each of them enterprises are normally founded the US. Tit-for-tat tariffs will likely vying to make China a world-leading by returnees, focus on IC design and continue and could even escalate, semiconductor powerhouse. The in most cases are backed by PEVC. if no agreement from both side National Team is spearheaded by Among MNCs, Intel, TSMC and many can be reached in areas such as Large Fund and Tsinghua Unigroup, other foreign-invested companies intellectual property, technology which have invested hundreds of have been in China for a long time. transfer and cyber-attacks. The billions of dollars in the value chain. In recent years, a growing amount of hardest hit sector in the trade war The "Local team", on the other hand, foreign capital has paid attention to will be semiconductors, where the US acts under the guidance of Large China opportunities. Global Foundries imports USD2.5 billion worth of Fund, with many local governments has a factory in . ARM and a year. having set up investment funds such have established joint as the IC Industry Fund and ventures in China. In particular, after SummitView Capital Fund. Taiwan loosened restrictions on These local semiconductor funds high-tech investment in the mainland, are estimated to have exceeded TSMC set up factories in Nanjing and RMB200 billion. In the PEVC system, Unicom entered Fujian via Jinhua. many overseas returnees have

10 Semiconductors – the Next Wave | The ever-evolving semiconductor scene

Figure: China imports: IC chips vs Crude Oil Figure: US deficits with China

Computers & electronics 300 $167.3

Electrical equipment $39.9 250 Misc.manufacturing $38.6 200 Apparel $29.3

150 Machinery $25.7

Furniture $23.4 100 Fabricated metal $20.3 50 $19.8

0 & rubber $15.6 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Textiles $11.6 Crude oil imports (billion dollars) Chip imports (billion dollars) 05 01 00 1502 00

Source: Deloitte analysis

Currently, China imports over USD200 In the grand scheme of things, however, billion worth of IC chips from the US, far the short-term impact of the Sino-US exceeding its imports of crude oil. Any trade war on China's high-tech industry hiccups in the semiconductor value chain may not be as big as it appears, since will have a severe impact on other parts of the majority of IC chips made in China the industry. As the trade war continues are absorbed domestically. The back- to intensify, a handful of domestic and-forth trade war will in some ways semiconductor giants and MNCs have Chinese enterprises to innovate begun to re-evaluate their positions in independently and accelerate the the supply chain. Apple, for example, has of domestic substitutions to ease future long used China as its production base for risks. everything from its signature to accessories. The company's supply chain now spans hundreds of companies. However, these suppliers may consider shift some iPhone production away from China should tariffs on US imports continue to rise.

11 2

The future of automotive semiconductors

Surge in automotive electronic and customer demand, the systems adoption of safety-related electronics The has come a systems has exploded. Most of the long way in terms of providing factory- automotive taking place installed electronics meant for safety today arise from electronics rather and comfort. Back in 2004, only a than mechanics. The cost contribution quarter of cars had and less of automotive electronics increased than 50% had factory-installed power from around 20% in 2007 to about seats. However, due to government 40% in 2017.

12 Semiconductors – the Next Wave | Future of automotive semiconductors

Figure: Factory-installed electronics

Interior Voice/Data Lightering Communications Accident Recorder Auto- Active System DSRC Driver Dimming Cabin Cabin Battery Alertness Suppression Environment Management Monitoring Controls Instrument Event Repair Night Cluster Data Vision Recorder Lane Correction Head-Up Display Electronic Toll Collection

Windshield Digital Turn Parental Wiper Control Signals Controls Navigation System Control Deployment Differential

Adaptive Front EV/HEV Lighting Security System

Adaptive Cruise Active Exhaust Control Noise Suppression Automatic Braking Hill-Hold Power Regenerative Control Braking Electronic Throttle Control Antilock The Pressure Braking Electronic Monitoring Timing Idle Stop/ Start OBDII Electronic Drive Blindspot stability Shaft Parking Direction Seat Cylinder Remote Lane Position De-activation Active Keyless Departure control Vibration Active Yaw Entry Warning Control Control Control

ADAS: uses sensors installed on the EV/HEV: hybrid that combines a Body: represents for vehicle components vehicle to sense the surrounding conventional internal combustion engine itself, including power , power environment at any time of driving (ICE) system with an electric , climate control and mirror wiper process, which can collect data, detect system. control. and potential dangers. Instrument Cluster: a control panel Chassis : the framework of an artificial Powertrain: refers to series of parts and usually located directly ahead of a object, which supports the object in its components that generate power on the vehicle's driver, displaying instrumentation and use. vehicle and transmit it to the surface. and controls for the vehicle's operation. Infotainment: provides a combination of Safety: includes active and passive safety Aftermarket: concerned with the information and entertainment based on systems that reduce the risk of accidents, manufacturing, remanufacturing, vehicle integrated information processing as well as their consequences. , retailing, and installation system. of all vehicle parts after the sale of the automobile by the original equipment manufacturer (OEM) to the consumer.

13 Semiconductors – the Next Wave | Future of automotive semiconductors

The automotive industry has come a long way in terms of providing factory-installed electronics meant for safety and comforts.

100% 100% 100% 80% 80% 80% 60% 60% 60% 40% 40% 40% 20% 20% 20% 0% 0% 0% ABS Stability Control Side Airbags 2004 2017 2004 2017 2004 2017

100% 100% 100% 80% 80% 80% 60% 60% 60% 40% 40% 40% 20% 20% 20% 0% 0% 0% Pressure Sensors Rear Object Sensors Blind Spot Sensors 2004 2017 2004 2017 2004 2017

Electronic systems as % of total car cost

2030F 50%

Advanced driver assist Active-passive safety 2010 35% Powertrain / vision infotainment

2000 22% Airbag ABS/ESP

1990 15%

1980 10% Electronic

1970 5%

0% 10% 20% 30% 40% 50% 60%

Source: Deloitte analysis

14 Semiconductors – the Next Wave | Future of automotive semiconductors

The cost of semiconductor content, from a surge in demand for various i.e. the components that make semiconductor devices in cars, such up electronic systems, has grown as MCUs, sensors, memory and more. from USD312 per car in 2013 to By 2022, the figure is expected to around USD400 today. Automotive reach close to USD600 per car. semiconductor vendors are benefiting

Figure: Cost contribution of automotive electronics and semiconductor content per car

700 Semiconductor price 50% (per car) 45% 45% 600 40% Automotive electronics cost 600 40% (% of total car cost) 500 35% 475 30% 400 27% 25% 300 18% 300 20% 200 15% 150 10% 100 5% 0 0% 2000 2010 2020 2030

Source: IHS, Deloitte Analysis

Semiconductor vendors play a entire ecosystem for years to come. critical role in the automotive Advances in technology such as AI, industry supply chain. In the electric vehicles (EVs), autonomous classic automotive ecosystem, driving, , and cyber semiconductor vendors sell to security; social awareness of topics Tier 1 electronic systems vendors, such as safety and ride-sharing; which then integrate technology environmental concerns like ; into modules and send these to the and economic considerations automaker (OEM) for assembly. In including infrastructure spending and recent years, the automotive industry growth in Asian markets are all set to has been undergoing massive reshape the automotive industry. transformations that will re-invent the

15 Semiconductors – the Next Wave | Future of automotive semiconductors

Figure: Role of semiconductors in the automotive ecosystem

~10% <10% ~40%-70% <10% ~20% Cost for automakers

R&D & Material Parts Parts Marketing Assembly Design Supply Sourcing Integration & Services

Material Component Distributor & Standardizers Integrators OEM Suppliers Specialists Exporter

Semiconductor role

Tier 2 Tier 1 EDA Semiconductor Electronic OEM Vendors Systems

IP Vendors Bosch, Delphi, , NXP, Kostal, GM, Ford, Tesla, Renesas, Harman, Audi, BMW, , Denso, Honda, Toyota, Foundry Toshiba, , Nissan, Volvo, Infineon, Continental, Hyundai, STMicro, TI, , Gentex, Daimler Samsung Johnson Control, Magna OSAT

$400M $30B $120B $2T CAGR: CAGR: CAGR: CAGR: 4% 6% 5.5% 5.5%

Source: Cadence, IHS, Deloitte analysis

16 Semiconductors – the Next Wave | Future of automotive semiconductors

Key words: Automation, electrification, connectivity and security Four mega trends will result in more semiconductor content being added to automotive electronics and subsystems in the next decade.

Figure: Mega automotive semiconductor trends

rs do en Au r V to to m c Au a u c ton ke d tri Dr o r n e c s ivi m s o El icle ng o ic h ( u ec AD s m V A e S S )

Automation

Intelligence Artificial

Electrification

Advanced Electronics

T

e s l c Connectivity r

o Digital o

d P

l n a I n e y V P f e l o r a t h s t a c f Advanced o in e Security T r m m Security e s Standards

Lig ht htweig

Te y chnolog

Lig gy htweight Technolo

Trends Players Technology Transfomation

Source: Deloitte analysis

17 Semiconductors – the Next Wave | Future of automotive semiconductors

1. Automation Safety is a key selling point for will play a critical role in the shift to Widely considered as the ultimate autonomous vehicles. However, autonomous driving. More sensors goal for the future of mobility. getting to full autonomy (Level are required to enable autonomous Automakers and Tier-1 suppliers, as 5), requires advancements in capabilities. The number of sensors well as technology providers (e.g. technologies such as ADAS safety used in vehicles will increase as semiconductor vendors) and smart systems that can reduce the number autonomy levels rise. At Level 4, the mobility companies (e.g. ride-sharing of accidents, including number of sensors could reach 29. companies) not traditionally involved electronic stability control, lane These features will not be limited to in the automotive industry, are all departure warning, anti- , high-end cars, but will move into mid- racing to develop and invest in related adaptive and traction range and economy models where technologies. Semiconductor vendors control. All of these require complex volume movement is going to be in particular are actively developing electronic components that include much higher in the next few years. a wide-range of microchips, fusion high-speed processors, memory, and system-on-a-chip devices controllers, sensors and data links incorporating AI and learning to ensure the reliability and safety technologies. of a vehicle. For example, sensors

Figure: Number of sensors for different levels of autonomous driving

ACC: Active Cruise Control Level 5 (2040) LDWS: Lane Departure Warning System AP Anywhere LKA: Lane Keep Assist PA: Parking Assist AEB: Automatic Emergency Braking Level 4 (2028) DM: Driver Monitoring AP: Auto Pilot Fusion TJA: Traffic Jam Assist ~32 AP

Ultrasonic 10 Radar LRR 2 Level 3 (2022) ~29 Radar SRR 6 AEB DM Camera for surround 5 Ultrasonic 10 Long distance 4 TJA Radar LRR 2 Stereo camera 2 Level 2 (2015) Radar SRR 6 Ubolo 1 Level 1 (<2012) Camera for surround 5 PA LKA ~13 LIDAR 1 Long distance cam 2 ACC LDWAS Dead reckoning 1 Ultrasonic 4 Stereo camera 1 ~6 Radar LRR 1 Ubolo 1 Ultrasonic 4 Radar SRR 4 LIDAR 1 Radar LRR 1 Camera for surround 4 Dead reckoning 1 Camera for surround 1

Source: Deloitte analysis

18 Semiconductors – the Next Wave | Future of automotive semiconductors

2. Electrification 3. Digital Connectivity especially have an advantage in this The need for cars to be more Then there is digital connectivity— area, due to their core capabilities fuel-efficient, and the impetus advanced vehicle connectivity (V2I, and aggressive capital investment. of government regulation to V2V, in-vehicle)—that connects both From a consumer's perspective, in- lower emissions, are driving up the inside and outside of a car and car digital connectivity and content semiconductor demand for both makes it a part of the Internet of will become the norm, particularly traditional vehicles and EVs/hybrid Things. Automakers have begun to with Asian customers who consider electric vehicles (HEVs). In today's provide operating systems (OS) to act entertainment a basic automotive traditional internal combustion (ICE) as platforms for potential app stores, function with flawless integration , there is still huge potential to as well as developed tailored apps, of their personal mobile devices. lower CO2 emissions. Many sensors services and media content. Digital Connectivity is not just entertainment; and controls are required to run an technology players are adapting vehicle-to-vehicle communication is engine efficiently and significant their mobile platforms to cars and a critical technology for autonomous improvements can still be achieved. developing in-car entertainment cars to realize driverless technology The Chinese government, for example, platforms. Some media-streaming and avoid accidents. It is expected will introduce the new "6A" emission services and device manufacturers that by 2023 over 90% of vehicles standard by 2020 to further lower have formed with produced will be connected. vehicle emissions. automotive OEMs. Digital tech players

At the same time, EV/HEV advances require progress on the electrification Figure: Components of the connected car of power . Governments in many countries are beginning to ban, or in the process of banning, ICE-based cars completely. China is targeting increased EV production by Vehicle communication automakers (10% of total production busses from 2019). Many global automakers have also set goals to have EVs account for 15%-25% of their sales Advanced/ within 10 years, thereby bringing autonomous Mobile vehicle applications EVs to the masses. As major OEMs systems pursue their EV goals, growth of the semiconductor industry will increase Wireless proportionally. Thus, conditions communications are ripe for innovation in electronic Connected powertrain technologies that will vehicle be used to reduce total emissions, services thereby accelerating more demand for semiconductors.

Infotainment Integrated systems vehicle security

Source: Deloitte analysis

19 Semiconductors – the Next Wave | Future of automotive semiconductors

4. Security vendors today are more focused than secured with no introduced back As vehicles become more connected, ever on the safety and reliability of or Trojans, assess vulnerabilities hardware and platforms vehicles. in software and firmware, provide will be increasingly exposed to over-the-air (OTA) updates and have hacking risks. A failure in one vehicle Two levels of protection are being communications links. component could have an avalanche considered to deter any potential effect. For example, if vehicle threats. The first is developing Future states of mobility will communications were attacked and establishing cybersecurity coexist maliciously, advanced vehicle systems standards, so that manufacturers We envision that these would not be able to receive vital can follow a rigorous process for transformations will create four situational awareness information and establishing the safety of connected co-existing states in future mobility, integrated vehicle security systems vehicles. Standards alone may not be where vehicle diverges (control braking, and sufficient, however, as automakers between the shared and the personal, crash avoidance, etc.) would fail to and technology players will need to while vehicle control continuously react. Thus, automotive electronics build components that are highly moves towards complete automation.

Figure: Future states of mobility

Vehic le Control Technology Landscape Level 3 & Level 4 of Tech players and startups play 1 autonomy. Advanced a c ritic al role with automakers. driver assistance system Autonomous vehicle become (ADAS). Cheaper economical. 1. Private 3. Shared technology. Autonomous Autonomous Autonomous Connected vehicle. Level Little change to the existing 2 0 & Level 1 of ecosystem. Automakers autonomy, adaptive continue to push unit sales. speed steering, ABS, Tech players emerges. speed control.

3 On-demand mobility High asset utilization, high services, entertainment, efficiency autonomous ride- assist

- navigation, apps. sharing network. Greater collaboration between players 2. Private 4. Shared in disruptive environment. Driver Automation Automation Mobility and data-driven Ride-sharing proliferates. 4 services, mo bile devices Multi-vehicle households such as on reduces. Tech players to offer Vehic le the rise. more personalized services. Ownership Private Shared

Source: Deloitte analysis

20 Semiconductors – the Next Wave | Future of automotive semiconductors

In Private-Autonomous (state 1), automakers, technology players, fleet vehicles, such as ADAS and in- vehicle ownership remains private, owners and regulatory bodies to vehicle infotainment (IVI), becoming but the automation level has achieved create a complex urban ecosystem. an important growth market for an all-time high due to decreases semiconductor players. in the cost of technology, thereby In Shared-Automation (state 4), boosting the number of autonomous where vehicle ownership is shared, a Asia Pacific the most attractive vehicles. Collaboration between OEMs rapid increase in adoption of shared region and technology players is the norm in mobility will emerge. Point-to-point Overall automotive semiconductor this state. transportation will be created via revenue is projected to reach USD40 ride sharing and cost per-mile will billion (an all-time-high) in 2018, In Private-Automation (state 2), where decrease. The landscape in this state before hitting USD60 billion in 2022. vehicles are personally owned with will allow technology players to offer The Asia Pacific region is expected limited ADAS. Auto OEMs will continue more enhanced and personalized to lead the world with 41% growth, to focus on unit sales and bring in services. driven by supportive government incremental technological advances. policy and consumer demand for There will be little change in the Opportunities in , particularly in China. China ecosystem. semiconductors are emerging is now the largest market for the Although mobile is, and will remain, automotive industry, with almost 29 In Shared-Autonomous (state 3), the largest market for semiconductor million cars sold in 2017. China is also the majority of cars are shared with companies, overall growth has becoming a major auto-manufacturing autonomous capabilities. In this been saturated for many years. The center, attracting global automakers, landscape, there will be a rise in only exception is the automotive for close to 29% of on-demand mobility services such semiconductor segment, where worldwide vehicle production. All as entertainment, and we will see demand is strong as more electronic this makes the region highly attractive deepened collaboration between components are being added to to semiconductor vendors.

Figure: Automotive semiconductor revenue and unit production by region

65 US$)

of 55

45

35 revenue(billion

25

15 semiconductor

5

Automotive -5 2016 2017 2018 2019 2020 2021 2022

Powertrain Infotainment Body EV/HEV Chassis Safety Aftermarket ADAS Instrument Cluster

21 Semiconductors – the Next Wave | Future of automotive semiconductors

ADAS to lead growth sensors and power semiconductors, The growth of the automotive because in hybridization and electrical semiconductor market depends vehicles, semiconductors are the on electronic equipment and primary driver for the efficiency of the semiconductor content growth electric drive . in vehicles. The ADAS application segment is expected to have the highest growth rate. ADAS Asia/Pacific semiconductor content will rise along with the level of automation. In fact, partially automated cars will EMEA have about USD100 in added-in semiconductor content, with a highly automated car potentially having USD400 added. A fully automated Japan car would have about USD550 of semiconductor content. In other 0.00% 10.00% 20.00% 30.00% 40.00% segments such as powertrains, there is huge demand for microcontrollers, Source: Gartner, Deloitte analysis

Figure: Average ADAS semiconductor content at different levels of automaton

Partial automation High automation Full automation

Level 2 Level 3 Level 4

$400 $550 12% 10% 20% 35% 8% 60% $100 5% 25% 45% 40% 40%

Radar Lidar Radar Lidar Radar Lidar Camera Camera Camera total BOM Actuatorstotal BOM Actuatorstotal BOM Sensor Fision Sensor Fision Sensor Fision

Source: Infineon

From a device perspective, different will generate large demand for example, when vehicles reach Level types of components will be sensors and microcontrollers as 4 or 5, systems need to be able to required for increasingly complex well as processing for each of these process all sensor data to create a functionality sets. Some segments sensors. The industry is also in the holistic view that allows the car to will grow faster than others do. process of developing more powerful make the right judgement. For example, autonomous driving MCUs/MPUs to handle the data. For

22 Semiconductors – the Next Wave | Future of automotive semiconductors

Figure: Automotive semiconductor application and device growth (2022)

Segment Growth Size Sub segment (2017-2022) (2022)

Blind spot detection/Collision warning/Park ADAS 23.6% 11b assistance/V2X/Front view camera

Aftermarket 6.1% 3b Vehicle parts/Equipment/ repair/Collision repair

Power door/Power window/Climate control/Mirror wiper Body 13.3% 12b control USD 600 semiconductor Chassis 6.1% 7b Suspension/Differential/drive shaft content per car Gartner)

by 2022 （ EV/HEV 21% 6b

Infotainment 8.2% 9b Connectivity//Car navigation/Car audio by Application

Instrument Cluster 11.2% 4b Instrument panel, instrument wiring harness

Powertrain 3.4% 6b Engine Control/Transmission

Safety 2.6% 5b EPS/ABS/Airbags/Traction control/Tire pressure monitor

Data Converter, , , , General-Purpose Logic IC 12.5% 2b Reference

Memory IC 10.9% 4b DRAM, Emerging Memory, , NAND

Optoelectronics 18.9% 8b , LED, Photosensor

) Discrete 9.9% 9b Power ,

Gartner Environmental Sensors, Fingerprint Sensors, Inertial （ Nonoptical Sensors 7.2% 6b Sensors, Magnetic Sensors, Device

by Micro-Component IC 7.7% 11b , ,

Data Converter, Switch, Multiplexer, Voltage Regulator, Analog IC 7.4% 4b Reference

ASIC 6% 3b ASIC

ASSP 12.3% 19b ASSP

Source: Gartner, Deloitte analysis

23 Semiconductors – the Next Wave | Future of automotive semiconductors

Seizing the opportunities these opportunities, leaders in the failure rate might be acceptable in The automotive segment is not really semiconductor industry should the mobile space for suppliers, but a new market for semiconductor consider the actions and automakers will want less than one vendors. In fact, many of them have approaches to the market: defective part per billion (DPPB) for 15 been participating in this market for to 20 years. several years. However, it was not 1. Understanding the automotive considered a big revenue source since sector's unique hurdles Furthermore, in the mobile world, there were not enough customers, When it comes to requirements, the regularly reach 3GHZ, it took a very long time to qualify automotive electronics market is where frequency and speed are a process and volume was low vastly different from the consumer top priorities. On the other hand, compared to consumer electronics. electronics market. For example, automotive frequencies and speeds However, sentiment has changed consumers seek the latest, leading vary. But, as 5G-connected cars due to rising demand for automotive edge technologies in cellphones. soon become a reality, the two electronics such as ADAS, AI, However, in automotive, some domains might eventually merge, with connectivity and sensors. To seize sensors are still being manufactured connected cars in a way become cell at 150nm. This is because automotive phone-like. Automotive chips also design requires substantial need to operate at a wider range of redundancy and size is less of a temperatures: -40°to 155°centigrade concern, so there is little incentive versus 0°to 40°centigrade for a to move to 7nm sensors like those in . Voltages also vary cellphones. In addition, the failure rate greatly between automotive and requirement is much more stringent mobile. In mobile applications, in the automotive space, because voltages are kept low to conserve when a cellphone goes down a simple battery life. However, there are reset can fix the issue, which is not high voltages in cars and many possible for a car on the road. A 10% semiconductors are still analog, which requires devices to operate correctly in a wider range.

24 Semiconductors – the Next Wave | Future of automotive semiconductors

Figure: Automotive IC requirements versus mobile This is especially important since future autonomous driving will rely on components working together perfectly. How devices will fare over time in a harsh external environment 28nm  7nm Process >180nm  7nm is yet to be determined. A typical

100M+ Design Sizes(μP/C) <1M  1000M+ car model can be on the market for 10-15 years, a refresh cycle that is 900MHz  2.7GHz Frequencies 30MHz  5.9GHz much longer than that in consumer electronics. 0.5V to 1.8V Voltages ~1V  >60V

0  40 Temperatures -40  155 It will be incumbent vendors to conduct more simulation, ℃ ℃ 1-3 years Operation Lifetime ~10-15 years inspection and testing of larger sample sizes to ensure reliability <10% Target Zero Failure Target Field Failure Rates while controlling time and added cost throughout the process. Suppliers Source: , Deloitte analysis have to be ready and plan for long product life cycles to support manufacturing and . 2. Expect stringent and These requirements create an challenging qualification assortment of challenges for 3. Leverage M&A to jumpstart requirements semiconductor vendors. For example, market entry In the automotive industry, semiconductor foundries normally For many semiconductor vendors, chips, components, modules and develop a process technology and gaining access to the automotive subsystems must meet stringent qualify it using a relatively normal semiconductor market is not a specifications on , reliability, sample size. In automotive however, trivial task. They must weigh the cost, power and safety, since foundries need to conduct more pros and cons of in-house operating conditions in cars are much inspection, testing and screening to capabilities versus acquisition. With more demanding than in typical achieve higher levels of quality and semiconductor vendors seeking consumer electronics. For instance, yield. Latent reliability is another new areas of growth and expansion, the Automotive Electronics Council focus, in which failure may not M&A deal activity has been quite (AEC) has developed a failure stress occur until components have been active over the last few years. For test qualification (AEC-Q100) for operating out on the road during example, NXP and Freescale's integrated circuits (IC). Qualified ICs a vehicle's useful lifetime, due to merger enabled the resulting entity should met a series of reliability stress age, latent manufacturing defects, to become a leader in automotive tests (electrical, lifetime, etc.), as well thermal stress or electromagnetic semiconductor solutions, while Intel's as be subjected to testing under interference. acquisition of Mobileye allowed it to various intense temperature ranges. enter the market and filled in its Electronics and semiconductor automotive product offering. suppliers are expected to support qualification testing pre-shipment as well as failure analysis post-shipment. Ultimately, product development and manufacturing are all linked back to safety and everything should be traceable.

25 Semiconductors – the Next Wave | Future of automotive semiconductors

Table: Automotive semiconductor related M&A

M&A Amount (USD) Date

NXP/Freescale 118 million March 2015

Avago/Broadcom 370 million May 2015

Intel/ 167 million June 2015

Analog Devices/Linear 130 million July 2016

Softbank/ARM 302 million July 2016

Qualcomm/NXP 459 million October 2016

Intel/Mobileye 153million March 2017

Source: Mergermarket, Deloitte analysis

Thus, M&A should be considered an the best chance of producing high is also seen by Samsung as a new integral part of an overall strategy quality components. M&A allows and profitable revenue stream. to maintain competitive edge. The quicker access to this expertise to Samsung will expand its reach across potential benefits M&A brings include strengthen competitiveness and the connected car market, ADAS, filling gaps in product line, accessing increase market share. cybersecurity and over the air (OTA). state-of-the-art technology and The acquisition also aligns with gaining access to a wider customer Oversaturation of the smartphone Samsung's IoT universe strategy to base. These are especially important market has pushed many big achieve volume. in the automotive semiconductor semiconductor players to explore industry, because it takes great effort possibilities in the automotive Meanwhile, Panasonic is refocusing to secure long-term semiconductor market to broaden its from home electronics to agreements with automotive their portfolios and diversify revenue high-tech auto parts, leveraging companies. Added to this is the fact streams. The connected car provides its expertise in electronics to that most automotive semiconductor an entry point for the expanded role build advanced capabilities in the projects are lengthy, often taking semiconductor vendors can play. automotive electronics market. years from concept initiation, product Panasonic has made several development and qualification For example, Samsung acquired acquisitions in the last few years, process all the way to production. Harman to build its infotainment coupling these with building In addition, customers are seeking capability in connected cars. The autonomous driving capability integrated, comprehensive solutions move allowed Samsung to gain a in-house. Panasonic has begun from one company instead of many. foothold in the automotive market, testing autonomous cars, teamed as Harman is a global leader in up with and Qualcomm on From a technology perspective, connected autonomous vehicles. infotainment, and formed a joint automotive semiconductor The acquisition not only allowed venture (JV) in China to provide key EV components have to adhere to Samsung to position itself as a key components. stringent quality standards, and supplier of infotainment systems semiconductor vendors with cutting- using an established brand name, edge manufacturing capabilities have but the autonomous vehicle market

26 Semiconductors – the Next Wave | Future of automotive semiconductors

4. Rethink collaboration models Players' roles are shifting and new or JVs, the roles in the supply chain and roles players are rising. Customers are are blurring. As vehicles become more The ecosystem and collaboration becoming partners or competitors autonomous, systems within them are models of the traditional automotive and vice versa. From acting as a ever more connected and cannot run semiconductor are no longer static supplier and strategic in isolation. but more intertwined than ever. partnerships to entering M&A deals

Figure: The evolving automotive semiconductor supply chain

Classic automotive semiconductor supply chain New automotive semiconductor supply chain

Tier 1 Electronic Systems Tier 2 Tier 1 Semiconductor Electronic OEM Vendors Systems

Tier 2 Tech & Digital Semiconductor OEM Players Vendors

27 Semiconductors – the Next Wave | Future of automotive semiconductors

This market landscape adds a layer applications. New tech entrants of complexity to the existing supply are positioned to take the lead in chain. Some automakers are now software-focused elements. Digital designing their own IC (e.g. Tesla) and players are adapting their smartphone extending their activities beyond core platforms to car-specific customer hardware business into the provision needs, integrating infotainment OS of software OSs designed to serve as and software platforms into car platforms for potential app stores, as systems and cars' human-machine well as developing specific apps and interfaces. Media-streaming other services or media content. services and end user equipment Other Tier 1 players are also manufacturers have already formed designing ICs and getting involved in partnerships with some automotive software. Continental's purchase of OEMs. Semiconductor vendors Elektrobit is an example of this trend. can expand their roles by not only Furthermore, semiconductor vendors serving traditional automakers and are now developing electronic control their suppliers, but also through units, as are some IC houses. collaborating with technology vendors to offer more products. Automotive suppliers are also trying to become less dependent on OEMs At the same time, semiconductor this involved a few critical automotive by establishing direct relationships vendors are increasing collaboration products such as infotainment with end customers. For example, with both automakers and tier-one and display drivers, with critical Bosch's app allows customers to automotive suppliers. For example, components such as power train monitor car functions and provide Nvidia and Audi are collaborating or chassis control components still a direct connection to the nearest to build an AI platform with deep made by IDMs themselves. However, Bosch repair center. learning technology for autonomous the trend is shifting, as IDMs are now driving. Utilizing neural networks critical applications to Technology players are applying to understand the surrounding foundries. For example, ADAS requires their existing capabilities to digital environment and determine safe advanced MCUs but many IDMs do automotive platforms. Tech players routing to incorporate into Audi's not have the in-house capabilities to have significant advantages, including line of L3 cars. This type of strategic create them. capabilities, operating models and partnership brings in skills from both capital for aggressive investment, side that complement one other and as they focus on making horizontal create a mutually beneficial situation. moves to create new revenue models. Several high-tech players Meanwhile, many IDMs have stopped are developing autonomous-driving building leading-edge fabs and systems that are quite likely to merge turned to "fabless/fablite" over the into operating systems. Leading last 20 years due to leading-edge online and technology companies fabs' prohibitive cost. But, they have are focusing on in-car entertainment in general kept their proprietary platforms, which they hope will processes in-house while outsourcing become the standard for such some production to foundries. Initially,

28 Semiconductors – the Next Wave | Future of automotive semiconductors

5. Keep an eye on start-ups and vibration and shock, wear and tear, their disruptions and cleaning that is normal to the Start-ups are a hotbed of activity harsh conditions of driving. Finally, in connected cars, VRV/V2X there are still edge cases to be communication, mobility services, resolved, such as bright sun against cybersecurity and the AI/machine a white background, blizzards that learning space. Investments in causes whiteout conditions and early these auto tech companies have morning fog. also seen huge increases in recent years. There is a wide variety of There are several reasons why startups in the industry to address semiconductor vendors should different pain points. For example, pay attention to startups. First, the new hardware startups are looking of these startups in the at ways to address the pain points connected vehicle space affords associated with light detection and the opportunity to cooperate ranging (LiDAR), which is integral to with them. Second, gaining access the safety of autonomous vehicle. to technologies such as digital First, LiDAR is still quite expensive and connectivity and AI will be increasingly many big automakers do not use it; important for semiconductor vendors second, (dynamic) range is a big issue and OEMs, as R&D cost and risk are with the technology, i.e. how near, high. Third, these startups could far and widely can LiDAR accurately be potential acquisition targets for build a 3D picture from millions of semiconductor vendors to acquire pixels. Robustness is another issue, innovative technologies or enter niche with LiDAR having to withstand the markets.

Figure: Automotive startups' areas of specialization

Driver Connected Car V2V/V2I/ V2X assistance/ Fleet Telematics

Safety Mobility LIDAR/ mapping Cybersecurity /system Services systems

Machine Autonomous learning/ AI/ Vision/ UX/ Design platforms Deep learning/ Detection

Source: Deloitte analysis

29 3

The race is on for AI chips

The race for AI chip domination "Depth" refers to the layers and The framework number of nodes in a neural network can be broadly characterized into model. Over the years, the complexity three layers. The infrastructure layer between layers and the number of includes the core AI chips and big nodes have grown exponentially. data that support the sensing and This presents a significant challenge cognitive computational capabilities of for computation. Traditional central the technology layer. The application processing units (CPUs) excel at level sits at the apex, providing general workloads, particularly if they services such as autonomous driving, are rules-based. However, CPUs can smart robotics, smart security and no longer keep up with the parallelism virtual assistance. AI chips form the required of AI . heart of the AI technology chain and are central to the processing of AI algorithms, particularly for deep neural networks (DNN).

30 Semiconductors – the Next Wave | Race is on for AI chips

Figure: AI chips' role in the layers of AI

Flexibility

• Robotics • Autonomous Driving CPU • Business Intelligence (Intel) • Smart Factory Application • Personal Assistance • …… GPU • (NVIDA,AMD) • Deep learning Technology • AI Platform • Speech Recognition Image Recognition • FPGA • Biometric (, Altera, …… …) • AI chips • Sensors Infrastructure • Computing ASICs • Data (Google, Horizon …… Robotics, Bitmain, Cambrian…)

Efficiency Source: Microsoft, Deloitte analysis

There are two major ways to address GPUs used to process graphic and flexibility, especially when an the parallelism issue. One is to add intensive tasks such as are AI has not been finalized. a dedicated accelerator based on built with parallelism in mind. GPUs This allows vendors to optimize existing computational . have very high performance suitable custom chips for their applications The other is to re-develop completely for deep learning AI algorithms that while avoiding the cost and potential to create a new architecture that require a lot of parallelism. This new technology obsolescence of the ASIC simulates the neural networks of role makes GPUs a great choice for approach. human brains. The latter approach is AI hardware. GPUs are now widely still in the early phase of development used in cloud and data centers for ASIC AI chips, on the other hand, and unsuitable for commercial rollout. AI training. They are also used in the have dedicated architecture for AI The addition of AI accelerators will automotive and security sectors. The applications. ASIC-based AI chips have therefore be the primary method. GPU is currently the most widely used, many variations, including TPU, NPU, Numerous types of AI chips are most flexible AI chip available. VPU and BPU, etc. These are all aimed available for acceleration: mainstream at diverse, computer-intensive, rules- ones including GPUs, field- FPGAs, meanwhile, are programmable based workloads with high efficiency programmable arrays (FPGA) and arrays suitable for clients that and performance and the flexibility application specific integrated circuits want to reprogram based on their of a CPU. Typically, ASIC AI chips have (ASIC), with variations including TPU, own requirements. FPGAs are higher efficiency, a smaller size, as NPU, VPU and BPU, etc. Each has its characterized by a faster development well as lower power consumption than own strengths and weakness. cycle (versus ASIC) and low power GPUs and FPGAs. But, ASIC chips' requirements (compared to GPUs). development cycle is longer and less But, their flexibility makes their cost flexible, which has contributed to its relatively high. FPGAs can be seen as a slow commercial adoption. good compromise between efficiency

31 Semiconductors – the Next Wave | Race is on for AI chips

There are two distinct AI deployments The training phase requires a phase is typically done via hardware in deep learning: training and tremendous amount of computational in the cloud. The inference phase, on inference. AI utilizes big data as a power because it requires the the other hand, can be handled either to "train" neural network application of a huge data set to a in the cloud or on devices (products) models, using training datasets to neural network model. This requires at the edge. Compared to training obtain these newly trained models. high-end servers that have advanced chips, inference chips require more A newly trained model is then armed paralleled performance to be able thoughtful consideration of power with new capability to "infer" from new to process large, diverse and highly usage, and cost. data sets to reach a conclusion. parallel datasets. Therefore, this

Figure: The two-phases of deep learning DEEP LEARNING

TRAINING INFERENCE Learning a new capability from existing data Applying this capability to new data

TRAINING NEW App or Service Untrained Neural Deep Learning Trained Model DATA DATASET Featuring Capability Network Model Framework New Capability

“Cat”

“？”

Trained Model Optimized for Performance

“dog” “Cat” “Cat”

Source: nVidia

Innovation in AI chips has just AI chips to enjoy growth begun, with vendors taking different The AI chip market is expected to approaches to chip acceleration. account for over 12% of the total Google, for example, has taken the AI market by 2022, with a CAGR of ASIC path, whereas Microsoft has 54%. The Americas is expected to demonstrated that comparable, lead the market, followed by EMEA and sometimes even better results and then APAC. The Americas overall can be achieved using an FPGA. will dominate the market throughout Meanwhile, Xilinx, and 2022. are all working to lower the traditional barriers to FPGA adoption.

32 Semiconductors – the Next Wave | Race is on for AI chips

Figure: The global AI and AI chip market (2022)

120 120 100% 16 120% 14.616 14 100 97.1 80% 100% 12 10.998 80 74.5 80% 60% 10 7.445 60 51.9 8 60% 40% 6 40 4.798 40% 29.3 4 20% 2.388 20 20% 2

0 0% 0 0% 2016 2017 2018 2019E2 2020E 2016 2017 2018 2019E2 2020E

Global AI market size (billion dollars) YOY Global AI chip market size (billion dollars) YOY

Source: CDIC

Cloud-based AI chips the most promising segment The AI chip market can be split into two categories based on deployment methods: cloud-based and network edge.

Deployment Application Market Potential (2022) CAGR (2018-2022)

Foundry 1 Training ~17billion ~55% Cloud-based Infer ~7 billion ~85%

AI Chip

2 Security ~2 billion ~40% Network edge Automotive ~5 billion ~43%

IP Smart Phones ~4 billion ~60%

Source: CICC, Deloitte analysis

33 Semiconductors – the Next Wave | Race is on for AI chips

The cloud is the biggest market Inference AI chips in smartphones are for AI chips, as their adoption in now part of a three-way race between data centers continues to increase, smartphone manufactures like Apple, enhancing efficiency, reducing Samsung and ; independent operational cost and improving chip providers such as Qualcomm and infrastructure management. In MediaTek; and IP license providers particular, the AI training market including ARM and Synopsys. AI chips will reach almost USD17 billion, from smartphone manufactures with inference chips on the cloud are typically optimized for their own accounting for USD7 billion. By phones with the goal of improving product type, GPUs have become the performance and user experience. mainstream choice for AI chips and However, independent chip providers have the largest share, accounting for could come out with better chip over 30% of the market. specifications to compete for the rest of the market. Network edge AI chips are emerging Autonomous driving the ideal AI chip deployment is not limited to application for AI chips the cloud, but can also be seen in a Autonomous driving is not only a wide variety of network edge devices complex application scenario for such as smartphones, autonomous artificial intelligence but also an vehicles and security . Most AI important one. It is expected be a chips at the edge are inference chips, major driver for AI inference chips, and they are becoming increasingly with an estimated market value of specialized. The AI inference chip USD5 billion and a CAGR of 40%. market is expected to grow at a CAGR of 40% and reach USD2 billion by Sensing, modelling and decision 2022. making are the three-step process normally required for autonomous AI chips drive smartphone ASP driving, and inference chips AI chip vendors could benefit from are involved every step of the the rising cost of their products. For way. Whether they are used for example, Apple's A11 chip cost has environment sensing or obstacle risen to USD27.50. The rise in cost of avoidance, autonomous driving AI chips will in turn increase prices of has high requirements for the smartphones, providing smartphone computational power of AI chips. manufactures with increased revenue. AI chips have also moved down from high-end phones to mid-range ones, potentially bringing even more revenue to smartphone vendors.

34 Semiconductors – the Next Wave | Race is on for AI chips

Owning to limitations in latency, The addition of AI can be seen as computation in autonomous driving the "third wave" of transformation. should ideally be done on the edge AI inference chips are now added to rather than in the cloud because cameras at the edge, allowing real- decisions need to be made in near time processing of video data. This real-time. According to Toyota, saves storage space on the cloud computational power of 12 tera and increases the performance of operations per second (TOPS) is surveillance systems as massive required to realize L5 autonomous amounts of data are generated on the driving, but most chips today are edge each day. only capable of supporting 2-3 TOPS. There is a clear urgency for AI chips to China now the hotspot for AI chips migrate to the edge instead of doing AI chip funding activity in China has the heavy lifting in the cloud. been active and M&A is also on the rise. One example is the acquisition OEMs are testing chips from of DeePhi, a start-up with industry- vendors to identify the most suitable leading capabilities in machine candidates. Large OEMs have prefer learning, deep compression, pruning, constructing their own autonomous and system-level optimization for driving platforms and purchasing neural networks, by global giant Xilinx. AI chips separately, whereas newer Tech giants are also getting entering OEMs normally prefer buying the field of play, led by Alibaba, Baidu complete autonomous driving and Huawei. In particular, Huawei platforms. has lit up AI chip competition in the smartphone sector. Some Bitcoin Smart surveillance systems have equipment manufacturers are high demand also getting into the AI optimization Surveillance systems are getting game. smarter thanks to AI. The surveillance system industry has gone through AI companies in China are generally three phase of transformation in the swift at identifying viable business past 10 years. The first wave was applications for AI, especially the "high definition" phase, where innovation and rapid a system is capable of recording implementation. However, original -clear videos. The second wave AI model creation capabilities are a was the "networking" phase, where rarity among Chinese players, with networking and interconnection most domestic research in AI focused capabilities are added to the system. on tweaking and perfecting existing models, rather than creating an original and systematic AI framework. In addition, training devoted to AI is also limited in China compared to countries such as the US.

35 Semiconductors – the Next Wave | Race is on for AI chips

Navigating the AI scene neural networks stuck in the cloud. The rise of artificial intelligence has Efforts are being made to create a certainly created new opportunities new architecture that allows more in semiconductor devices, particularly tightly coupled processors and for AI chips. , which improve performance companies already in or planning to and energy efficiency. The is enter AI systems should adhere to to add new functions to memory the following key observations to stay that will make devices smarter competitive. without replacing the . The semiconductor industry should Specialization is key to AI chips: In embrace such designs so AI can be future, AI chip companies should no brought out of the cloud and onto the longer be content just to be hardware edge. companies, but possess a deep understanding of the requirement Select the appropriate of their customers to create suitable semiconductor process products. Customers today are not technology: Unlike CPUs, which just looking for a general-purpose need the most advanced processing chip with some added AI capability; technology available according to they are looking to see whether it can Moore's , it is not always necessary satisfy their business requirements for AI chips to be designed on the at a reasonable cost. They should latest process technology due to balance power, performance and cost. AI's use of parallel processing. For Computational density (computational example, 40nm and 28nm processes power per unit of power consumed) are sufficient to provide 1 TOPS of will become a core competitiveness computational power. In addition, for AI chip vendors. older-generation processes have access to mature toolsets and Moving from the cloud to the building blocks. Many large foundries edge: Opportunities have begun offer a wide range of advanced to pop up at the network edge process technologies, ranging from and many large players are moving 28 nm all the way to 7 nm, depending from the cloud to the edge to offer on their mix of performance and comprehensive AI solutions that power capability. For semiconductor span the spectrum, from training to vendors, selection of the appropriate inferencing workloads. It is worth semiconductor process technology noting that most AI systems today should ideally be based on criteria run on , such as computational capability and in which processing and memory power consumption, as well as form are separate. This has led to AI factor. becoming power hungry and left

36 Semiconductors – the Next Wave | Muted tone for M&A

Software support is Look for opportunities beyond essential: The amount of support AI chips: Artificial intelligence does semiconductor companies have not rely on AI chips alone to achieve for standard open-source software its processing power. Memory is frameworks is key to winning the also an important component in AI race, particularly for challengers the advancement of AI, where high trying to catch up with leaders that throughput parallel processing already support literally all deep places multiple strains on data learning software and tools for bandwidth in memory systems. The their semiconductor chips. To be demand for AI system memory will a viable contender in this market, create opportunities for memory semiconductor vendors should at vendors. In addition, as AI systems a minimum support major open scale up, the performance of source software frameworks such as interconnects between subsystems TensorFlow, Caffe2, Theano, CNTK, and devices will become a bottleneck. MXNet and Torch. Tools to help Thus, opportunities also exist for developers build applications are also semiconductor vendors to create required. Semiconductor vendors high speed interconnects to meet the will need to invest in software and demand of high volume data flowing collaborate with software developers between systems. Further, AI chips to access their AI device architecture. today can contain multiple processors The number of software frameworks to achieve maximum parallelism, for processing neural networks is resulting in a very large die size. growing. Many will be developed and This presents a great challenge for released over the next few years, so thermal and high voltage power there is still room for new entrants to management in which custom cooling grow. solution may be required. This creates opportunities for packaging vendors to come up with products that have thinner form factor and less thermal dissipation for a more cost-effective solution.

37 4

Muted tone for M&A

M&A activity in semiconductors is market. Regardless, semiconductor already past its peak and specialized conglomerates are always on the verticals such as automotive, AI and lookout for potential targets in various network/data centers are becoming verticals that have high market share the most sought after emerging and profit. verticals. Japan and Korea have been actively seeking to revive M&A enters plateau phase their semiconductor industries Global semiconductor M&A via acquisitions of mid-sized transactions peaked at over USD120 companies in the US and , billion in 2016. In 2017, the value of as well as cooperation with China. M&A in the semiconductor industry At the same time, disputes over fell sharply. In addition to fewer M&A intellectual property and national targets due to previous transactions, security issues will dampen China's tightened regulatory reviews by ambition to go global. The tightening Europe and the US were an important of Chinese outbound investment in factor. M&A transaction value rose high-tech companies from the US again in 2018 due to value per deal. For will become the new norm, shrinking example, US-based Broadcom acquired the overall size of the global M&A CA Technology for USD17.99 billion.

38 Semiconductors – the Next Wave | Muted tone for M&A

Figure: Global semiconductor M&A transactions (2014-2018)

140 500

120 400 100 300 80

60 200 40 100 20

0 0 2014 2015 2016 2017 2018

Value ($B, LHS) Volume (RHS)

Figure: The Top 10 Global semiconductor M&A transactions (2018)

Districted District of Value Date Bidder Target Motivations bidder ($B)

2018.07.11 Broadcom Inc. US CA Technologies US 17.987 Expand industry supply chain

Microchip Microsemi 2018.03.01 Technology US US 9.836 Expand industry supply chain corporation Incorporated Renesas Integrated Search for cutting-edge 2018.09.11 Japan US 7.004 Electronic Device Technology application

Tsinghua Mainland Linxens 2018.07.25 2.632 Acquire advanced technology Unigroup China Group

Will Mainland Beijing OminiVision Mainland Strengthen market position and 2018.08.15 2.178 Semiconductor China Technologies China expand market share

Beijing Mainland Beijing Yandong Mainland Strengthen market position and 2018.05.25 0.626 Electronics China Micro-electronics China expand market share

Strengthen market position and 2018.09.14 UKC Holdings Japan Vitec Holdings Japan 0.529 expand market share

United Mie Strengthen market position and 2018.06.29 Taiwan Japan 0.519 Microelectronics Semiconductor expand market share

Ingenic Mainland Mainland 2018.11.10 Beijing Xicheng 0.38 Expand industry supply chain Semiconductor China China

GigaDevice Mainland Mainland Strengthen market position and 2018.01.31 Silead Inc. 0.268 Semiconductor China China expand market share

Source: Mergermarket, Deloitte

39 Semiconductors – the Next Wave | Muted tone for M&A

In East Asia (China, Japan, South Korea expansion, the pace stalled somewhat and Taiwan), M&A volume showed in 2017 and 2018. In 2017, the volume rapid growth between 2014 and 2015, of semiconductor M&A in East Asia amounting to over USD22 billion. declined 1%, while value grew a However, after several years of rapid modest of 2%.

Figure: East Asia (China, Korea, Japan and Taiwan) M&A transactions (2014-2018)

Expansion Phase Plateau Phase 30 140

25 120 100 20 80 15 60 10 40

5 20

0 0 2014 2015 2016 2017 2018

Value ($B, LHS) Volume (RHS)

Figure: M&A transaction value - China, Japan, South Korea and Taiwan (2014-2018)

25

20

15

10

5

0 2014 2015 2016 2017 2018

Mainland China Japan South Korea Taiwan District

40 Semiconductors – the Next Wave | Muted tone for M&A

Figure：Top 10 M&A deals in China, Japan, South Korea and Taiwan (2018)

Districted District of Value Date Bidder Target Motivations 1 bidder target ($B) Renesas Integrated Device Search for cutting-edge 2018.09.11 Japan US 7.004 Electronics Technology application

Strengthen market United Mie Fujitsu 2018.06.29 Taiwan Japan 0.519 position and expand Microelectronics Semiconductor market share

Advanced Strengthen market ASEN Mainland 2018.03.27 Semiconductor Taiwan 0.127 position and expand Semiconductor China Engineering market share

Strengthen market Hoejin Mainland 2018.07.10 SK Hynix System South Korea 0.075 position and expand Semiconductor China market share

Strengthen market Taiwan 2018.06.26 Taiwan ON Semiconductor US 0.006 position and expand Semiconductor market share

Strengthen market 2018.02.09 NEC Corporation Japan XON Holding South Africa 0.023 position and expand market share

Strengthen market Shanghai Fortune 2018.01.11 Mainland China Upstar Technology 0.022 position and expand Techgroup market share

Huada Salantro Acquire advanced 2018.09.07 Mainland China N/A Semiconductor Semiconductor technology

Strengthen market 2018.05.09 TDK Japan Faraday Semi US N/A position and expand market share

Acquire advanced 2018.02.28 TDK Japan Chirp Microsystems US N/A technology

Source: Mergermarket, Deloitte

China leading the way in domestic for semiconductor M&A. From 2014 M&A to 2018, the volume of M&A in China's Regardless of the volume or value semiconductor industry ballooned of transactions, Mainland China is from 48% to 72% in 2018 at a undoubtedly the most active region compound annual growth rate of 18%.

41 Semiconductors – the Next Wave | Muted tone for M&A

Figure: Domestic M&A transaction volume growth – East Asia (2014-2018)

2018

11 2017 2016 10 11 2015 2014 12 15

10 10 11

89 73 51 6 36 8 6 30 11 6 2 2

Mainland China Japan South Korea Taiwan

Source: Mergermarket, Deloitte

Government policy has been the Outbound M&A mixed Figure: Motivations for M&A in the largest contributor to the rapid Overall, volumes of cross border M&A semiconductor industry development in China over the from East Asia declined after 2016, past five years. China today is the particularly as the US strengthened its largest importer of semiconductor investigations of Chinese companies Acquire Strengthen advanced market chips globally and the government's seeking leading-edge technologies. technology position and overall strategy is to reduce reliance In 2017, the White House published expand on foreign imports and build up the report, Ensuring Long-Term US market share its domestic semiconductor base, Leadership in Semiconductors, which which has fueled Chinese companies' sets out the perceived threat posed entrance into the industry and by China's semiconductor policy to acquisition of advanced technologies. the and suggests the Search for Expand

US government take steps to prohibit cutting-edge industry application supply chain In domestic M&A, Mainland China is or heavily restrict Chinese acquisition, undoubtedly the most active region as well as tighten rules that restrict in East Asia. Its M&A volume had a the flow of critical semiconductor compound growth rate of 24% from intellectual property. Yet, despite Source: Deloitte analysis 2014 to 2018. For example, in 2018, increasing government reviews of Alibaba acquired C·SKY. M&A, North America and Europe are Before this, Alibaba had invested still the main destinations for East in five chip companies: Cambrian, Asian semiconductor companies. Barefoot Networks, Deephi Tech, Kneron and ASR. The motivations for M&A are clear Semiconductor companies today M&A activity in Japan, South Korea, are motivated to conduct domestic and Taiwan was relatively quiet and cross-border M&A primarily for compared to China. The main four reasons: to acquire advanced motivations for deals there are technology; strengthen market strengthening market position and position and expand market share; expanding market share, as well as search for cutting-edge applications; searching for emerging applications. and expand their industry supply chains.

42 Semiconductors – the Next Wave | Muted tone for M&A

Acquiring advanced technology: Strengthening market position: Accessing emerging sectors: The The semiconductor industry in By acquiring competitors, enterprises rapid development of emerging China relies heavily on imports. In play a synergistic role to increase technologies such as artificial 2018, there have been some urgent market share and enhance intelligence and autonomous driving moves from Chinese tech players. profitability. In 2018, Shanghai Will has greatly stimulated demand For instance, Chinese semiconductor Semiconductor acquired a 85% stake for semiconductor chips. Chip cleaning equipment company NAURA in Beijing SuperPix Micro Technology companies are now expanding acquired Akrion, a semiconductor and a 96% stake in Beijing OmniVision their business areas to emerging cleaning equipment company in Technologies for USD2.18bn to sectors through M&A. For instance, Pennsylvania, to expand its business take advantage of the high-end has acquired into silicon , MEMS technics of OmniVision and cost Haman, one of the largest suppliers and packaging, becoming the first control capabilities of SuperPix. M&A of connected, intelligent automotive case approved by the Committee also paves a path to quick market component globally. In 2018, Japan- on Foreign Investment in the United entry, particularly overseas. South based developer and manufacturer of States (CFIUS) since the Trump Korean foundry SK Hynix acquired semiconductors Renesasa Electronics administration took office. a 50% stake in Chinese foundry acquired US-based company company Haejin Semiconductor Integrated Device Technology (IDT) to Despite possessing more advanced (Wuxi) by investing USD75m as enhance its competence in self-driving semiconductor technology, Japan, a strategy to expand its foundry car technology. South Korea and Taiwan are still business. China-based company seeking semiconductor-related Huada Semiconductor has acquired Expanding industry supply chain: technologies through M&A. Canadian Solantro Semiconductor, The semiconductor industry chain Taiwan-based company United which designs integrated circuits, to includes design, manufacturing, Microelectronics acquired a 84% establish and grow its presence in packaging and testing from upstream stake in Japan-based wafer foundry Ottawa. to downstream. By entering other company Mie Fujitsu Semiconductor parts of the value chain, incumbents for USD519m in June 2018 to enable not only create new revenue streams, UMC to leverage its IC production but also create synergies. In 2018, experience. Meanwhile Taiwan , the leading Semiconductor Manufacturing embedded CPU chip and solutions Company acquired US-based ON provider in China, acquired a stake in Semiconductor for USD6M to expand Beijing Xicheng Semiconductor, which its semiconductor application will enable Ingenic to expand into the portfolio and strengthen its core high-end memory chip business. business.

43 Semiconductors – the Next Wave | Muted tone for M&A

Look out for M&A risks Risks Related to Financial Risks Related to Overseas M&A Despite the many benefits of M&A, Information and Due Diligence and Integration a host of issues can arise pre and Compared with domestic M&A There are many challenges for cross- post- merger, including mistakes in projects, overseas M&A projects border judging the target, failure to conduct have a different quality of financial in the process of transaction and detailed due diligence and poor information, interpretation, supply integration, including the complexity implementation. method and verification. Accordingly, of restructuring, lack of local due diligence procedures should be integration resources and teams, Risks Related to M&A Target reasonably arranged to deal with management of external stakeholders Screening and Valuation these differences. and loss of talent, differences in The Chinese technology industry management information systems, faces various political and legal risks M&A involving foreign semiconductor and differences in , salary and in overseas M&A. Governments in companies needs to focus on the risks welfare systems. Specifically, these the US and Europe have very tight in shareholders' backgrounds: include: restrictions on foreign acquisitions or investments, especially in 1) Small and medium-sized Differences in culture and subsidy semiconductors as a high-tech enterprises managed by founders: benefits systems: Different industry. It will be difficult for Chinese these companies often do not pay performance appraisal systems companies to acquire high-tech enough attention to daily accounting, will have an impact on employee companies with the advantage of have relatively confused financial performance. Generally, the higher high technology and high commercial data, and do not employ well-known the degree of company localization, value, which can increase the difficulty accounting firms to their the lower the basic wage and of selecting M&A targets. In addition, financials. It is difficult to obtain the higher the sales commission; although Chinese enterprises can financial data to conduct business whereas the basic wages of foreign obtain intangible assets (such as analysis through written materials. enterprises are generally higher and technology and brand) and advance sales commission relatively low; these their industry level by acquiring 2) Private-equity fund management differences may cause inequalities in foreign enterprises, the premium enterprises: Private-equity funds wages and subsidies in the integration paid is generally high, which brings tend to plan business expansion in of two enterprises, affecting the substantial operational and financial the early stage, and sell at better enthusiasm of employees. risks to Chinese enterprises. High performance points. Therefore, financial leverage is the most financial data is detailed and significant characteristic of overseas comprehensive, corresponding M&A for Chinese enterprises. And written materials are available and high leverage inevitably brings high financial data is highly authentic. risks. If M&A fails or companies fail However, good historical financial to integrate, leading to losses, M&A performance can often be caused companies will face great financial by short-term incentives. Although risks. current profits are high, the development prospects may be limited.

44 Semiconductors – the Next Wave | Accessing the Chinese market

Brain drain and management: Low-efficiency in external Differences in management M&A can result in the loss of core stakeholder management: information systems: Most Chinese managerial personnel, thus affecting customers and suppliers may think companies adopt a native enterprise the normal operations of a company's restructuring will bring uncertainty resource planning (ERP) system, such business. Core personnel include: to a company's business, and lose as UFI, which will hinder information people who master key technologies/ confidence in cooperation or confuse sharing with companies using processes, those who master future partnerships; disruption of Oracle/SAP ERP systems to a certain government and customer resources. supply flow and customer losses may extent, resulting in some delays in Senior managers with multiple be difficult to reverse; competitors information reception and operation. roles will have greater resistance to could seize the opportunity to corporate restructuring. A company compete for flow during is likely to lay off employees after the restructuring run-in . reorganization and its leadership responsibilities can change.

Complexity and chain reaction in restructuring: Foreign labor highly favor the employees' side; if restructuring could cause social instability, local governments might interfere with factory relocation/ restructuring plans.

Lack of local project teams with the function of supervising the reorganization process: M&A and reorganization projects are typically headquarters-led, but a lack of local team participation can lead to local problems that cannot be submitted to a preparatory committee for resolution; a lack of local team leadership will reduce the effectiveness of the implementation of a reorganization plan. Language and cultural barriers can hinder project teams' ability to communicate effectively with local staff.

45 5

Accessing the Chinese market

Semiconductor cash cow for MNCs It is no surprise then that China is a China is expected to maintain its source of income for many of the top position as the world's largest global semiconductor companies, semiconductor consumption market. several of which generate over half In 2018, China's semiconductor their revenue from China. Qualcomm, consumption accounted for 41% of for example, gets 65% of its revenue the global total. from China. of artificial intelligence, adoption of the Internet of Things and 5G will further drive growth. By 2024, China will account for 57% of global semiconductor consumption.

46 Semiconductors – the Next Wave | Accessing the Chinese market

No one-size-fits-all solution for single correct method, but in general, weak in the high-end design of market entry MNC's technology status as well as semiconductors and manufacturing, Multinationals trying to access the China's domestic technology status and competition is not high, so MNCs Chinese market should consider a play a crucial role. When an MNC typically set up regional offices or multitude of factors such as policies, has the upper hand in technology, a wholly foreign-owned enterprise technologies, marketing, logistics and it has higher bargaining power and (WFOE) to access the market. In areas global strategies. It is also important will have less incentive to share where China is relatively strong such for multinationals to realize the intellectual property. However, MNCs as packaging, testing and low-end position they are in before entering might altogether avoid cases where design, MNCs may opt to setup a JV or China to come up with the best entry domestic players are already strong. avoid the market altogether. strategy. Obviously, there is no one For instance, China is relatively

Figure: Semiconductor MNC revenue from China (2017)

90% 83% 80%

70% 65% 62% 60% 54% 50% 39% 40%

30% 24% 20% 20%

10%

0% Skyworks Qualcomm QorvoBroadcomAcaciaIntel Nvidle

Source: Mergermarket, Deloitte

47 Semiconductors – the Next Wave | Accessing the Chinese market

Figure: MNC's position/involvement in the Chinese semiconductor industry

Strong Low competition Moderate competition High competition

Design – High end

• MNCs typically setup Manufacturing regional offices only

• MNCs typically setup WOFE Packaging & Testing MNC’s relative technical capability • MNCs typically setup JV Design – Low end

• MNCs typically avoids

Weak

Weak China’s relative technical capability Strong

Source: Deloitte analysis

Regional office: This model is Capacity generally applicable to sectors where Commissioning Company Headquarter Location (thousand date technology is completely monopolized /month) by MNCs. There is little incentive to share. For example, Qualcomm has TSMC Taiwan Nanjing 20 2018 established regional offices in Beijing, Shanghai, and Xi'an. Taiwan Hefei 10 2018

WFOE: Leading semiconductor MNCs are keen to set up wholly owned AOS US Chongqing 20 2018 plants to meet the enormous demand for semiconductors in China. Overseas Intel US Xi’an 100 - foundries from Taiwan, South Korea, and the United States have set up new plants to increase production capacity SK Hynix South Korea Wuxi 168 2018 in China. For example, TSMC will build a 12-inch wafer plant in Nanjing, and Samsung South Korea Xi’an - 2014 its production capacity will reach 20 thousand/month. SK Hynix also plans Source: SEMI, company , Deloitte analysis to build a production plant in Xi'an, with a capacity of 168 thousand/ month.

48 Semiconductors – the Next Wave | Accessing the Chinese market

Joint ventures: China, Taiwan and Figure: Top 10 packaging and testing companies worldwide (2017) the United States hold the leading positions worldwide in semiconductor 12.00% packaging and testing. From 2010 10.10% to 2016, the value of China's 10.00% local packaging and testing industry 7.90% increased from RMB62.9 billion to 8.00%

RMB156.4 billion at a compound 6.20% annual growth rate of 20%, higher 6.00% 5.20% than the global average. As of 2017, 3.70% there are three domestic companies 4.00% in the top 10 globally, namely CJCET, 2.00% 1.80% Huatian and Tongfu. 2.00% 1.30% 1.30% 1.20%

Given local semiconductor companies 0.00% ASEAmkor JCET SPIL PTI HuatianTongfuKYECUTACChipMOS have become among the best in Technology the packaging and testing sectors, MNCs can further enhance their Note: Taiwan based SPIL was acquired by ASE in 2018. technology via cooperation with local Source: Founder Securities, Deloitte companies. In 2016, AMD and Chinese advanced Nanjong Fujitsu Microelectronics Co. minimal incremental investment is established a joint venture enterprise, required. On the other hand, if the which absorbed the R&D team and market is already competitive and the advanced equipment assets of AMD strategic value of the market is still in Suzhou and Penang, to high for China, aggressive localization become the world's top packaging and opportunities might be needed to testing company. maximize value. In the worst case, where an MNC's capability and In essence, an MNC has to consider strategic value are both low, the MNC its competitiveness and the strategic should exit the market. value of the Chinese market. Unlike domestic players, MNCs' China For example, some MNCs gave initiatives are heavily influenced up medium to low-end cell phone by their global strategies, which business to focus on advanced, high- determine their next steps. The end cell phones. Meanwhile, other majority of MNCs' participation comes MNCs cooperate with local IT giants in areas where their competitiveness to localize hardware and software and the strategic value of China technologies, in order to avoid are both high. But, there are other regulatory restraints. Meanwhile, options. For instance, if an MNC many MNCs have exited China's possesses a strong ability to compete market and withdrawn even though the strategic value of their investments in JVs. China is relatively low, it can take an "opportunistic harvest" approach to select favorable in which

49 Semiconductors – the Next Wave | Accessing the Chinese market

Figure: MNC's China initiatives

High Note: Strategic Value: Opportunistic Harvest • Direct financial value contribution amongst its global portfolio; Select favorable MNC Initiative • Indirect value (e.g. cost saving by local business which need production, PR building with government for minimum incremental other product sales) investment Source: Deloitte Analysis

Aggressive Localization

Aggressively Withdraw seeking localization opportunities to CapabilityCompetitiveness maximize value Low Low Strategic Value Of China market High

Navigating risks and challenges differences in culture, laws and Multinational companies from other regulations. By differentiating the countries or will encounter two dimensions of impact and a series of challenges when entering controllability, we have identified four Mainland China, due to various major issues MNCs can encounter.

Figure: Challenges foreign MNCs can encounter:

large Notes: Impact denotes the degree to which Localization a certain risk will influence a deal; Cultural Controllability measures how well Differences companies can control specific risks.

Law and Source: Deloitte regulations Impact Security review

Protectionist trend

Small Low Controllability High

50 Semiconductors – the Next Wave | Accessing the Chinese market

Cultural differences can hinder Compared to localization, the trend multinational companies from towards protectionism means security obtaining the expected returns. reviews are less controllable and When a foreign company completely have a greater impact. Since the replicates its business model in China, ZTE event, the Chinese government its corporate culture and working and enterprises have fully realized methods will also be brought in, the importance to national security which will create cultural conflicts and of and thus become a risk factor for developing a complete semiconductor the company's business activities. industry with advanced technology, Completely copying rather than and have begun to invest heavily understanding the business model in the semiconductor industry to of Chinese companies will also achieve semiconductor localization. bring certain risks. Moreover, with Once Chinese companies make the expansion of their businesses, breakthroughs, local products should overseas companies also need to quickly occupy almost the entire consider recruiting talent that is market, which would spell bad news familiar with foreign corporate culture for MNCs. and language, and at the same time proficient in the business. It is therefore a challenge to build a talent system that is in line with the business development and corporate culture in Mainland China. At the same time, given laws and regulations in Mainland China are different from those in other countries, so foreign companies entering the Chinese semiconductor market face compliance challenges.

51 6

Digitalization is key to competitiveness

Semiconductor companies tody has become the must be more rapid and agile main strategy for many enterprises than ever to remain competitive. to meet the challenges they face. For The commercialization of new example, the digital transformation technologies such as AI and big data is of the industry has penetrated promoting the digital transformation all areas of the value chainInvolving of enterprises and the realization consumer-oriented demand of intelligent production, intelligent forecasting, personalized marketing, management and intelligent sales. purchasing experience and intelligent By investing in digital infrastructure customer service. The main aim is to to increase and develop continuously improve efficiency and new business channels, companies effectively attract consumers. will have the opportunity to The foundations of digitalization are overcome development barriers and sound, as chip processing capacity, digitalization will provide new impetus cloud service popularization, sensor for their development. and other hardware prices have

52 Semiconductors – the Next Wave | Digitalization is key to competitiveness

declined and computing power has Many semiconductor companies are improved a great deal. From the already utilizing digital tools to gain application perspective, technology throughout companies have provided the market the product life cycle. For example, with various data analysis tools to the application of AI and analytical improve data utilization rate, improve tool applications in the semiconductor operational efficiency and reduce industry extends from design, production costs. manufacturing, packaging and testing all the way to management.

Figure: Digital tools utilized by semiconductor companies

Current situations Improvement

Design • Companies have to correct errors in physical • Correct design errors using virtual tools designs (R&D) • Obtain data from device and tool to find out the • Hard to find errors based on past factor creating mistakes and instruct next design experience (Upgrade)

Manufacturing • Data generated from each devices cannot be • Connect data from all equipment and create data connected set • Manual maintenance are required and • Analyzing data set to predict the equipment failure cannot predict the machine failure in advance

Packaging and • Consume a lot of time during testing • Build plat platform for data sharing between testing testing companies and component suppliers • Reduce the time required to achieve acceptable shipping quality management • Pricing based on subjective opinions • Data-based analysis could provide more accurate • Difficult to obtain data from other players information for pricing along the supply chain • Create system to track all information related with • Hard to spot potential customer and provide chip and make it easier to find mistake service for them • Spot potential customers that could contribute more on revenue

Source: Public information, Deloitte

53 Semiconductors – the Next Wave | Digitalization is key to competitiveness

Artificial intelligence paves way Some leading Japanese semiconductor firms have for efficiency AI technology will play an already used AI extensively in the manufacturing indispensable role in all aspects process. For example, in the manufacturing and of semiconductor production and transportation process, a large amount of images and company operations. Massive amount of data is generated in vibration data are collected and analyzed, and the effect the semiconductor manufacturing of improving productivity and yield is already shown. The process and traditional data analysis adoption for AI at the moment is mostly concentrated in methods can only utilize parts of the structured data for post- manufacturing, but it will be relevant in various fields in mortem analysis. But intelligent the future such as quality control and demand forecast. analytics based on AI can perform comprehensive real-time analysis of data sets to improve production and management efficiency.

Design: Artificial intelligence can alter Figure: The benefits AI brings to semiconductor manufacturing the process of design. Each step in the semiconductor design produces a large number of parameters. Unlike Huge amount of Real-time traditional analysis tools, new analysis data including analyze technology can help semiconductor unstructured designers comprehensively analyze data all the data they obtain, and learn from experience, as well as analyze past data and extract relationships from the data and results. Whether it Increase efficiency is high frequency or low- to medium- frequency data, data combination can be used to spot potential errors Make Precise and increase yield, providing insights prediction control into newly generated data to make decisions or correct errors by simply changing a certain parameter. In addition, using data as a basis for decision-making can avoid Source: Deloitte analysis communication barriers between design teams and process teams. .

54 Semiconductors – the Next Wave | Digitalization is key to competitiveness

Manufacturing: In the Management: An AI customer information on changes in enterprises' manufacturing process, data service system starts with semantic daily income and the corresponding generated by each process are understanding and problem sales data. Combined with customer shared, as well as directly analyze identification derived from customer information and external auxiliary and report errors, thereby reducing questions, searches for big data in data, analytical tools can provide manual inspections that may contain the identified problems, analyzes the strategies and suggestions for the errors, and improving efficiency. An meaning of the problem, produces a pricing of semiconductor products AI system can check data thousands knowledge and performs answer and form a smart pricing plan. A of times in a minute, providing nearly matching and decision-making. An large amount of data is generated in 600 times the efficiency of staff. AI AI customer service system realizes interactions with customers. Through detection and maintenance system 24-hour customer service online, the continuous accumulation of connections cover the entire process answers questions at any time, customer demand data, a company of production data, and can build real- improves customer satisfaction and can analyze and understand time predictions about equipment saves the labor costs of semiconductor preferences and needs in depth, as failures, reducing losses caused by enterprises, as well as frees staff from well as support precision marketing production interruptions. boring and high-pressure work to do and large-scale personalized more valuable work. recommendations and services. Packaging and testing: The full use of data shortens testing time Analytical tools to know Master data management (MDM) and accelerates time to market. customers better is important Data integration and connectivity Analytical tools are mainly being used Master data management involves can greatly improve data utilization in management, including decision- data collection, classification, efficiency. On one hand, building a making and customer development. management, cleaning and other data exchange platform between Data-driven decision support has areas within different . semiconductor testing companies undoubtedly become an important It is the basis of AI data analysis and and component suppliers can enable strategy to help semiconductor various data analysis tools. the causes of errors to be found in time, companies gain insights into potential and on the other hand, it can reduce the customers, thereby making more number of malfunctioning chips. These rational decisions and reaching out platforms have reduced the number of to more customers. The application malfunctioning chips by 50%. of data analysis tools includes

55 Semiconductors – the Next Wave | Digitalization is key to competitiveness

Figure: Master data management

Data Preparation: Information Lifecycle Management: Automated aggregation, classification, and Consistent management of information from filtering of data at the edge limits the “noise” creation to final disposition (strategy, process, and technology) • Edge Computing • Self-Service Enterprise Data Preparation Monitor and Access and Adapt to new data Classify Data requirements

Manage Data Dispose Data

ERP Advanced Master Data Management: Integrate various systems and maintain the CRM Video Sensors consistency and visibility of Master Data across the

Source: Deloitte analysis

The digitization of semiconductor In the semiconductor design and companies is based on the use manufacturing process, MDM can of data, as well as more refined alsoprovide intelligent device data-to- management of enterprises' data analysis. In the packaging and production and operations. Can the testing process, it can link the data of data generated by various sensors packaging and testing enterprises and and smart devices be stored in the component suppliers. In management data set in time? How is the data processes, it can deal with business classified? How can structured and operations and financial data. unstructured data be managed and cleaned? How is the data from each area shared? MDM can solve all of these issues.

56 Semiconductors – the Next Wave | Contacts

Contacts

William Chou Leo Chen Deloitte China Technology, Media Deloitte China Semiconductor and Industry Sector Leader Leader Tel: +86 21 61411911 Technology Sector Leader : [email protected] Tel: +86 10 8520 7102 Email: [email protected] Andrew Chen Deloitte China Technology Sector Jennifer Shao Consulting Leader Deloitte China Semiconductor Tel: + 852 22387678 Sector Partner Email: [email protected] Tel: + 86 21 23166586 Email: [email protected] Lisa Zhou Deloitte China Technology, Media Roger Chung and Telecommunications Industry Deloitte China Technology, Media Manager and Telecommunications Industry Tel: + 86 10 8512 5909 Research Senior Manager Email: [email protected] Tel: + 86 21 23166657 Email: [email protected]

Acknowledgements

The authors would like to thank Deloitte Taiwan TMT Industry Leader Gordon Chen, TMT Industry Manager Betty Fang, Deloitte Korea Technology Sector Leader In Kyoo Baek, Industry Leader Hyung In Lee, and Deloitte Japan Technology Sector Leader Yuki Shuto for their contributions to this report.

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