If Broadcom successfully acquires Qualcomm, it may cast a shadow on China's semiconductor industry's pursuit of the United States

The global semiconductor industry is accelerating into a period of integration, and mergers and acquisitions are becoming the thermal underwear for giants to maintain their industry status and welcome the future. However, the Chinese semiconductor industry may miss this wave of mergers and acquisitions, which will lead to a further widening gap with its American counterparts in the future.

Broadcom's invitation to acquire Qualcomm is a continuation of the global semiconductor mergers and acquisitions since 2016

On November 6, U.S. time, Broadcom proposed to acquire Qualcomm for approximately $130 billion, or $70 per share, which shocked the industry. First, the two major semiconductor companies are giants that rank fifth and fourth respectively among the top 20 semiconductor companies in the world (2016 IC Insights research report). If the deal is really reached, it will mean a disruptive change in the semiconductor industry. Second, as Qualcomm is a company with a very peculiar business model, people will expect that if it is acquired, it will bring new changes to the downstream smartphone/automobile/and other hardware manufacturing industries, such as canceling the model of charging patent fees based on the sales of the entire machine.

The latest news yesterday was that Qualcomm's board of directors formally rejected Broadcom's acquisition offer on the grounds that its stock price was undervalued, but this does not mean that the offer will not become a reality. Broadcom can continue to increase the acquisition target, so there is still room for growth in this century-long merger and acquisition in the semiconductor industry.

半导体行业作为电子信息行业的基础行业，其显著性的特点是资本密集/智力密集以及需要长期性的投入，尤其是要忍受因市场需求波动带来的短期利润大幅度亏损的痛苦。

Therefore, the semiconductor industry's development process is a history of continuous mergers and acquisitions, because only by sticking together can they keep warm through the winter, while also improving their bargaining power with downstream companies.

In 2016, the global mergers and acquisitions in the semiconductor industry entered a new stage. Among the top ten companies in terms of global semiconductor revenue in 2016, 40% were involved in mergers and acquisitions. Data from a research institute showed that the total revenue of the top 25 semiconductor manufacturers in 2016 increased by 10.5%, accounting for 74.9% of the overall market, while the total revenue of the remaining manufacturers fell by 15.6%.

The monopoly concentration in the semiconductor industry continues to increase.

In terms of M&A amount, the global M&A amount exceeded 140 billion in 2016, with more than 40 M&A cases.

In 2017, public data from the first half of the year also showed that mergers and acquisitions continued, with 20 mergers and acquisitions taking place within half a year, including South Korea's SK's acquisition of South Korea's semiconductor silicon wafer professional manufacturer LG Siltron, Broadcom's acquisition of Cosemi's optoelectronics business, and Amkor, the world's second largest integrated circuit packaging and testing supplier, reaching an acquisition agreement with NANIUM SA.

Broadcom's offer to acquire Qualcomm is a continuation of this major trend.

The weakening of the global IT industry and the increase in industry concentration are the main reasons for mergers and acquisitions in the semiconductor industry

The global semiconductor industry has been growing rapidly since 1996, mainly driven by the growth of three major areas: personal computers, the Internet, and smartphones. Statistics show that global semiconductor sales were only $132 billion in 1996, but reached $338.9 billion in 2016.

However, since 2016, the downstream industries of the semiconductor industry have undergone three structural changes:

First, the growth of global smartphones has entered a bottleneck period, and annual shipments have remained relatively stable. In particular, in 2016, the annual growth rate of global smartphones was only 2.5%, the lowest growth rate ever experienced by the global mobile phone market.

You know, mobile devices represented by smartphones are the largest demand side in the semiconductor industry, and the growth shadow of smartphones has increased the survival pressure of the semiconductor industry.

Second, the global IT industry has become soft, that is, technologies represented by cloud computing/big data/software have rapidly spread and expanded, especially cloud computing technology, which has become the main way to meet the information needs of governments/enterprises, which has affected server shipments. According to Gartner data, in the first quarter of 2017, global server revenue fell 4.5% year-on-year, and shipments fell 4.2% from the first quarter of 2016.

Third, and most importantly, the concentration of downstream industries, represented by smartphones and cloud computing, has increased rapidly. In the smartphone industry, Apple, Samsung, Huawei, Xiaomi, and OV account for the majority of global shipments, and Alibaba/Amazon/Microsoft have become major cloud computing service providers.

These three structural changes have undoubtedly reduced the bargaining power of the semiconductor industry. At the same time, as Huawei, Samsung and Apple are actively investing in semiconductor research and development, this has put pressure on other semiconductor manufacturers.

Then for the semiconductor industry, continuing to work together for warmth becomes an inevitable choice.

If the merger between Qualcomm and Broadcom is successful, it will bring severe challenges to the development of China's semiconductor industry

According to China's development plan for integrated circuits, by 2030, the main links of the integrated circuit industry chain will reach the international advanced level, and a number of companies will enter the international first echelon.

To enter the first echelon, it is not just about sales volume, but more importantly, it is about being able to match the international giants in terms of technology level in key areas of the semiconductor industry.

However, if the merger of Qualcomm and Broadcom is successful, it will undoubtedly create an insurmountable gap between China's semiconductor industry and its American counterparts. The two companies will form a huge siphon effect and synergy advantages in terms of patents, capital, and talents in the semiconductor industry, and will have a stronger control over the downstream electronic information manufacturing industry.

Especially in the wireless field, with the arrival of 5G, Qualcomm and Broadcom's competitive advantages will become more obvious, and their voice in the field of mobile smart devices will be greater.

China's semiconductor industry faces tremendous competitive pressure in terms of talent, capital and customers.

At the same time, in the high-tech field of semiconductors, Chinese capital faces adverse effects from political factors when making overseas acquisitions. Therefore, the situation of fragmented competition must be changed for the Chinese semiconductor industry. In this regard, capital mergers and acquisitions have already occurred in China, but in terms of both quantity and scale, they cannot be compared with international semiconductor giants.

However, China's semiconductor industry is not without its own advantages, such as the world's largest smartphone market, rapidly growing smart manufacturing and smart cities, and the connected car market, especially the telecommunications sector's investment in 5G and the Internet of Things.

The only question is, how do technology and the market work together?

Source | Boiled Communications