www.pwc.com/technology Another year of strong growth China’s impact on the Technology Institute semiconductor industry Chapter 3: Design in China 2012 update August 2012 About this report In 2004, PwC released its original report, China’s impact on the semicon- ductor industry, in response to our clients’ interest in the rapid growth of the semiconductor industry in China. Specifically, clients wanted to find out whether China’s production volumes would contribute to worldwide overcapacity and a subsequent downturn in the industry. For the past seven years, we have provided updates that included an analysis of both the semiconductor market (consumption) and industry (production). We also covered design, the value chain and possible production growth scenarios along with a number of other topics. Because the report relies on a number of data sources, we have been unable to deliver it in full until the fourth quarter of the following year. This year, in an effort to get you this vital information in a more timely fashion, we have chosen to release the report in a tiered fashion. This is the third chapter in the series. Please note that figure and table number- ing continue from the second chapter, thus the first figure in this chapter is numbered 16 rather than 1. In the coming weeks, we will release ad- ditional chapters, until we have covered as much material as in previous reports. At the end of the release period, you will be able to download a complete pdf file of the full report. Please visit www.pwc.com/chinasemicon to read online or download this year’s report. Individual chapters are also available: 1. Exceptional relative performance 5. Growing capabilities Market and industry overview Manufacturing 2. Strong but variable growth 6. Supporting growth and China’s semiconductor industry measuring progress 3. Noticeable growth Government and production Design in China growth scenarios 4. Undergoing a structural shift Greater China The Integrated circuit (IC) design segment of China’s semiconductor industry enjoys the unique distinction of positive year-over-year (YoY) revenue growth for every year since 2000. There are currently no more than 100—possibly less—local indigenous IC design enterprises that are truly viable fabless semiconductor companies. In 2011 China reported its first billion dollar IC design company and two of the worldwide top five fastest growing IC design companies. The 47 major indigenous Chinese semiconductor companies with revenues greater than US$30m reported an average 39% increase in revenues which is notably better than the 0.4% increase for the worldwide semiconductor industry. Noticeable growth Integrated circuit design IC design revenues grew from US$178m in 2001 to US$7.3bn in Integrated circuit (IC) design is the 2011—experiencing a compounded only segment of China’s semiconductor annual growth rate (CAGR) of 45%. industry that achieved positive year- As this sector has grown larger, its over-year (YoY) revenue growth for ev- YoY growth rate had decreased from a ery year since 2000. Its revenue comes peak of 108% in 2003 to a plateau of China’s IC design industry primarily from China’s indigenous about 55% in 2005 and 2006, followed even grew during the fabless semiconductor companies, and by decreases to 14% in 2008 before it has been the fastest growing segment improving to 17% in 2009 and 36% 2008/2009 downturn of China’s semiconductor industry in 2010 and 2011. Notably, China’s IC thanks to booming since 2000. In fact, China’s IC design design sector dollar revenues did grow industry even grew during the by 14.1% and 16.8% in 2008 and 2009 domestic demand. 2008/2009 downturn thanks to boom- despite a 2.8% and 9.0% decline in the ing domestic demand. During 2009, worldwide semiconductor market for a series of domestic stimulus policies those years; by 36% in 2010 exceeding introduced by the government were the worldwide market growth of 32%; implemented, driving up demand. and by a further 36% in 2011 far ex- China’s fabless semiconductor industry ceeding the worldwide market growth further benefitted from the seemingly of 0.4%. endless demand for semiconductors used in cell phones as shipments of mo- China’s IC design revenue growth bile handsets designed in China surged of 36% in 2011 exceeded that of by nearly 60% in 2011. China’s IC manufacturing, IC packag- Chapter 3: Design in China 3.1 Integrated circuit design 3.6 Design focus 3.2 Design enterprises 3.7 Design industry outlook 3.5 Design employees 3.9 Chinese semiconductor companies ing and testing, and even the much includes foreign joint venture (JV) and larger O-S-D sectors. Consequently, multinational company (MNC) subsid- the IC design sector’s share of China’s iary company design and research and semiconductor industry increased to development (R&D) activities. There 16.8% in 2011, as compared to 14.1% is a great diversity among this group of in 2010, after having remained flat enterprises. It includes: state-owned, at 10.8% for three consecutive years OEM-owned subsidiaries and spin-offs; through 2008 before increasing to IC design teams affiliated with univer- 13.5% in 2009. Most of the revenue sity research departments; start-ups in this sector can be attributed to founded by returning Chinese engi- China’s fabless semiconductor compa- neers and local entrepreneurs; and the nies, which in 2011 has increased to Chinese staffed development centers of constitute about 10% of the US$74bn multinational companies. worldwide fabless IC industry up from a 1% share in 2001, 4% share in 2004 While the 2008/2009 financial crises and a 7% share in 2010. had less effect in China than else- where, it still hindered many Chinese companies, including some IC design Design enterprises (fabless) companies. With a significant slowdown in the Chinese market and According to China Center of Informa- a decline in the worldwide semicon- tion Industry Development (CCID) ductor market growth in 2008, com- Consulting, China had 503 IC design petition between Chinese IC design enterprises at the close of 2011, an companies intensified. Many of these increase from the 485 reported at the companies’ products had concentrated close of 2010. Although this num- on low-end consumer applications and ber of IC design enterprises is based the differentiation between enterprises upon a list maintained by the China and products became blurred as the Semiconductor Industry Association applications became more homoge- (CSIA), there has been considerable neous. Price wars became the common skepticism by many foreign industry mode of competition and the slow- associations and analysts about its size down in the start-up of new markets and makeup. CCID advises that “CSIA further restricted the operations of has the list of 503 companies, but CCID some IC design companies focusing did not get this list” and that the list on those markets. This environment Figure 16: China’s integrated circuit design industry revenue and growth, 2000–2011 Annual growth Revenue in US$bn 120% 8 $7.33 90% $5.38 $3.95 60% 4 $3.38 $2.97 $2.34 30% $1.52 $.98 $.54 $.26 $ .13 $ .18 0% 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: CCID, CSIA Another year of strong growth: Design in China | China’s impact on the semiconductor industry—2012 update | 3.2 put a severe strain on many of China’s is now spread across the more than IC design companies and several had 280 multinational semiconductor difficulty surviving. Several compa- companies and the 100 largest semi- nies went bankrupt in 2008 and more conductor-consuming OEM/ODMs did so in 2009. Last year, many of identified in the Gartner market share the survivors grew stronger, but the databases. Over the last five years this fundamental issue remains that there group has become a bit more concen- are just too many local fabless compa- trated among the smaller companies. nies with similar products competing It includes the Chinese design activities purely on price. Therefore, it is still of 16 of the top 25 multinational semi- estimated that there are currently conductor companies and 17 of the top no more than 100, possibly less, of 25 semiconductor-consuming OEM/ the local indigenous IC design en- ODMs. Thirty-four of the 100 largest, terprises that are truly viable fabless eleven of the middle 100 and forty of semiconductor companies. the remaining 95 smaller multinational semiconductor companies have design Of the 503 IC design enterprises activities in China. reported at the end of 2011 as many as 240 could be the design or research According to an analysis PwC did of the & development (R&D) units or activi- top 280 multinational (MNC) semicon- ties of foreign-invested or subsidiary ductor companies (not including any multinational companies (MNC). Of Chinese companies) we identified: this group, PwC analysis has identi- • 85 MNC semiconductor companies fied over 238 participants. This group that have design facilities in China; Figure 17: Number of IC design enterprises in China, 1990–2011 2011 503 2010 485 2009 472 2008 483 2007 491 2006 488 2005 479 2004 471 2003 463 2002 389 2001 200 2000 98 1999 76 1998 62 1997 56 1996 41 1995 32 1994 27 1993 23 1992 20 1991 17 1990 15 Source: CCID Another year of strong growth: Design in China | China’s impact on the semiconductor industry—2012 update | 3.3 • 84 MNC semiconductor companies • Servicing large Chinese that have R&D facilities in China OEMs that are addressing the (of which 14 have design facilities worldwide market; in China as well) and • Developing products for the unique • 155 MNC semiconductor companies and specific standards and require- that have either/or design and/or ments of the Chinese market; R&D facilities in China.