Amid the investment boom, what shortcomings does China's integrated circuit industry still have?

China's integrated circuit market demand accounts for 62.8% of the world's total, making it the world's largest integrated circuit market.

Driven by market demand and supported by relevant national policies, my country's integrated circuit industry has maintained a high-level stable and progressive development trend.

28nm is growing in volume, 14nm has made its debut, and 7nm has started research and development... From 28nm to 7nm, the gap between my country's integrated circuit industry and the international advanced level is getting smaller and smaller.

Especially in recent years, China's semiconductor investment has continued to boom. Under such circumstances, what shortcomings still exist in my country's integrated circuit industry?

In recent years, my country's integrated circuit manufacturing industry has developed rapidly, and the current status of the industry also presents the following characteristics:

First, the overall market size is growing rapidly.

Data shows that the scale of China's integrated circuit industry has increased from 193.3 billion yuan in 2011 to more than 433.5 billion yuan in 2016, with the market growing rapidly.

In 2016, my country's integrated circuit output was 132.9 billion pieces, a year-on-year increase of about 22.3%. The annual sales volume reached 433.55 billion yuan, a year-on-year increase of 20.1%, far higher than the global growth rate of 1.1%.

According to statistics from the Semiconductor Industry Association of the United States, from the first quarter of 2014 to the first quarter of 2017, China's share of the global semiconductor sales market increased from 26.37% to 32.61%, far higher than 19.33%, 9.29% and 9.61% in the Americas, Japan and Europe in the first quarter of 2017. China has become the world's largest market for semiconductor sales.

Secondly, the integrated circuit industry is showing a good trend of structural optimization and a continued increase in the proportion of design.

In the early stages of development of my country's integrated circuit industry, it started and developed rapidly from the packaging and testing links with low technical content and moderate capital thresholds.

In the early days, the proportion of packaging and testing in the overall industry was close to 80%, and then gradually declined. The proportion of integrated circuit manufacturing also experienced a process of first rising and then falling. At its peak, the sales share was close to 1/3, and currently it is less than 30%.

The proportion of design has continued to rise. In 2016, my country's integrated circuit design sales amounted to 164.43 billion yuan, accounting for 37.93%, surpassing the sales of 156.43 billion yuan of the packaging and testing industry for the first time and ranking first.

In the first quarter of 2017, the sales of integrated circuit design, manufacturing and packaging were RMB 35.16 billion, RMB 26.62 billion and RMB 33.65 billion, respectively, accounting for 36.84%, 27.89% and 35.26%, respectively. Design continued to rank first.

Along with the development of the integrated circuit industry, the "Big Fund" has played a vital role in it since its establishment in 2014, and has further promoted the arrival of an investment boom.

As we all know, the integrated circuit industry is an industry that requires large investments, has slow returns, and is a "money-burning" industry. Therefore, it has never been a market that capital is keen on, which has restricted the development of integrated circuits before.

In September 2014, the National Integrated Circuit Industry Investment Fund (Big Fund) was officially registered and established. As of September 2016, the total scale of the first phase of the fund raised was RMB 138.7 billion, far exceeding the planned scale of RMB 120 billion. The Big Fund was established in the form of a company and uses the market-oriented mechanism of equity investment to implement national strategies, which is fundamentally different from the previous national subsidy model.

As of October 2016, the investment of the National Integrated Circuit Industry Investment Fund in the fields of integrated circuit manufacturing, design, packaging and testing, equipment and materials accounted for 60%, 27%, 8%, 3% and 2% respectively. By the end of 2016, the National Integrated Circuit Industry Investment Fund had decided to invest in 43 projects, with a total committed investment of 81.8 billion yuan and actual investment of more than 56 billion yuan. The implemented projects cover all aspects of integrated circuit design, manufacturing, packaging and testing, equipment, materials, ecological construction, etc., realizing a complete layout in the industrial chain.

The companies that the National Big Fund has invested in include all areas of the industrial chain, including the following companies:

Chip manufacturing: SMIC, SMIC North, Yangtze Memory Technologies, Huali Phase II, Shili Microelectronics, Sanan Optoelectronics, and Navtech;

Chip design field: Unigroup Spreadtrum, ZTE Microelectronics, Apex, Hunan Goke Microelectronics, BDStar, Shenzhen Guowei, Centec Networks, Analogix, and VeriSilicon;

Chip packaging and testing field: Changdian Technology, Nantong Fujitsu, Huatian Technology, SMIC Changdian;

Equipment field: China Micro Semiconductor, Shenyang Tuojing, Hangzhou Changchuan, Shanghai Ruili, Beijing Sevenstar Huachuang and North Microelectronics are integrated;

Materials: Shanghai Silicon Industry Group, Jiangsu Xinhua Semiconductor, Anji Microelectronics, Yantai Debang;

Ecosystem construction: local sub-funds (Beijing, Shanghai), leading enterprise sub-funds (Core Energy, SMIC Juyuan, Anxin Fund), high-performance team sub-funds (Wu Yuefeng, Hongtai, Yingfutech), Xinxin Financial Leasing

Influenced by favorable factors, China is ushering in a new round of integrated circuit investment boom.

Chen Xian, vice chairman of the China Semiconductor Industry Association, said at the 20th China Integrated Circuit Manufacturing Annual Conference 2017 held recently that the current domestic integrated circuit manufacturing industry is in a very good situation. In 2016, the output value of my country's integrated circuit manufacturing industry exceeded 100 billion yuan for the first time, reaching 112.69 billion yuan; in the first half of this year, the integrated circuit manufacturing industry continued to maintain a good growth momentum, with a year-on-year increase of 25.6%, and the industry scale reached 57.1 billion yuan.

Currently, many places in China are welcoming a new round of investment and construction boom in integrated circuit wafer manufacturing. According to the forecast of the Semiconductor Equipment and Materials International (SEMI), 19 new wafer fabs will be built worldwide between 2016 and 2017, of which 10 are in China.

By the end of 2016, the National Integrated Circuit Industry Investment Fund had invested more than 80 billion yuan to support the integrated circuit industry. Driven by the national fund, local funds, social capital, financial institutions, etc. have paid more attention to the integrated circuit industry, and the financing difficulties of the industry have been initially alleviated.

Relevant experts said that the shortcomings of the integrated circuit industry, such as being dependent on others for core technology, lagging behind in innovation, research and development and design capabilities, and insufficient chip design and manufacturing capabilities, need to be addressed urgently.

From the current situation, China's integrated circuit market accounts for about 2/3 of the global market share. It is the largest chip consumer, but it is also the largest chip importer, with chip imports reaching 230 billion to 260 billion US dollars each year. my country is working hard to improve its independent innovation capabilities in chip technology, but the gap is still obvious. The situation of "shortage of chips", "lack of chips" and being controlled by others still exists. The overall strength of Chinese chip companies is not strong. Even the leading domestic companies have not entered the top ten in the world.

Although the development of my country's integrated circuit industry has greatly improved compared with the past, it still faces the problem of high external dependence, and key core technologies are still monopolized by foreign companies. Take the growth and silicon wafer manufacturing of large-size IC-grade single-crystal silicon with a diameter of 300 mm/200 mm as an example. Due to the complex technical process, most of them are highly monopolized by Japanese and other companies.

However, it is worth affirming that the IC design industry has developed very rapidly in recent years. According to data from the China Semiconductor Industry Association (CSIA), the IC design industry achieved a growth rate of 24.1% in 2016, 4 percentage points higher than the national IC industry and 11.8 percentage points higher than the global design industry. The sales scale reached 164.43 billion yuan, which not only surpassed the sales revenue of 156.43 billion yuan of the mainland my country packaging and testing industry for the first time, but also accounted for the largest proportion in the IC industry and exceeded the sales of the IC design industry in Taiwan.

Among them, the operating scale of design companies has increased significantly.

According to the statistics of CSIA Design Branch, there are 161 enterprises with sales exceeding RMB 100 million, 18 more than in 2015, an increase of 12.59%, accounting for 11.9% of the total number of enterprises in the industry during the same period. Among them, there are not only Shenzhen HiSilicon and Unisoc, which are among the top ten IC design companies in the world, but also a number of backbone enterprises such as Huada Semiconductor, Shenzhen ZTE Microelectronics and Beijing Zhixin. The total number of design companies in my country increased from 736 in 2015 to 1,362 in 2016, with 626 new start-up companies in one year, an increase of 85.05%, and the number of people employed in IC design reached 130,000.

In terms of innovative R&D and design capabilities, the vast majority of my country's integrated circuit companies lag far behind the world's leading manufacturers. The semiconductor industry is ultimately a high-tech industry, and maintaining sufficient R&D investment is the fundamental means to maintain competitiveness. Due to the weak foundation of my country's semiconductor industry, there is a huge gap in R&D investment with international giants.

Intel's R&D expenditure in 2016 reached $12.7 billion, continuing to dominate the list of global semiconductor companies in terms of R&D investment. The threshold for the top 10 semiconductor R&D expenditure in 2016 was set at an annual investment of more than $1.5 billion. However, the annual R&D investment of HiSilicon Semiconductor, China's largest semiconductor company, is still some distance away from $1 billion. Therefore, from the R&D expenditure, it can be seen that my country's semiconductor industry still has a long and arduous road to catch up.

The industry believes that the rapid development of the chip manufacturing industry is the result of the release of major national science and technology projects, and this high growth shows the lack of investment in chip manufacturing in the past period of time.

At present, my country's annual chip imports amount to as much as US$230 billion, and the local chip industry cannot yet meet domestic demand.

According to industry insiders, in 2013, my country's local market consumed 80.8 billion US dollars of integrated circuit products, and local production accounted for 50% or 40.4 billion US dollars. Assuming that the gross profit of the chip design industry is 40%, the output value of the manufacturing industry is 28.9 billion US dollars. If the price of each 12-inch wafer is 2,890 US dollars, it is necessary to produce 10 million wafers per year, that is, the monthly production capacity must reach 830,000 wafers. If the capacity utilization rate is 90%, the monthly production capacity needs to reach about 930,000 wafers, while the actual production capacity of my country is about 200,000 wafers per month, and the monthly capacity gap reaches 730,000 wafers.

However, the development of China's integrated circuits is showing a positive side.

First, the development of the wafer manufacturing industry has also continued to improve. SMIC's advanced process shipments have increased, Huali Microelectronics' production line technology has improved, and the 8-inch production lines of Huahong Grace and China Resources Microelectronics are running at full capacity. In 2016, the domestic wafer manufacturing industry continued to maintain a high growth trend, reaching 25.1%, with an industrial scale of 112.69 billion yuan, the highest growth rate among the three industries of design, manufacturing and packaging and testing, and the technical level continued to improve.

Secondly, the domestic packaging and testing industry has also maintained a steady growth trend. In 2016, driven by a substantial increase in domestic design orders and overseas orders, its scale reached 156.43 billion yuan, a year-on-year growth rate of 13%.

The integrated circuit industry places extremely high demands on the technical and technological foresight capabilities of leading talents. They must not only be aware of the technological complexity in the integrated circuit industry, but also have the ability to cross technology and management, and to integrate technology and the market.

At the same time, the development and manufacturing of semiconductors also require teamwork of a certain scale to advance. From the perspective of the relatively well-developed domestic semiconductor companies, basically, a returnee leader leads a supporting team to start a business, and with the funding of relevant government-driven projects, they have basically achieved breakthroughs in technology, production and market within a certain period of time and filled the domestic gap.

The development of the integrated circuit industry requires a large number of senior leading talents and long-term and profound technological accumulation. If my country wants to develop the chip industry, it is far from enough to rely solely on its own talents and accumulation. Merging and reorganizing leading international companies is a better way to quickly obtain senior talents and advanced technologies.

Although China's integrated circuit industry has made great progress in recent years with the intervention of large funds and local funds, we still have a huge gap in R&D innovation, chip manufacturing, equipment supply and talent reserves.

Facing the backward situation, introducing and digesting foreign advanced technologies has become an important way for my country to catch up in the chip field. Chinese chip companies have achieved good results through overseas mergers and acquisitions, international cooperation, and collaborative innovation, and the industry level has been significantly improved. For example, Tsinghua Unigroup acquired Spreadtrum Communications, and Intel made equity investment and technology authorization to Unigroup Spreadtrum after withdrawing from the mobile chip industry, enabling domestic companies to independently develop mid-to-high-end chips based on the original low-end baseband chips.

Text/Semiconductor Industry Observer Liu Yi

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