MACRO SEMICONDUCTOR INDUSTRY PERSPECTIVES
ATREG recently had the opportunity to spend quality time with a group of senior executives from leading semiconductor companies and discuss some key industry topics, issues, and concerns. As strategic planning gets under way in coming weeks, I thought I would share a quick recap of these discussions in this column.
Europe and Asia
Europeans are realizing they have a fundamental problem – social reform has begun and every country has moved up retirement ages and reduced social benefits. Having said that, a high level of talent can be found in Europe and two bright spots are working in the region’s favor – the growth of the IP industry led by ARM, as well as ASML’s success as the undisputed market leader for advanced lithography equipment. Europe is also pursuing impressive investment initiatives around 450mm production, arguably the last scale-up for the industry. So while volume manufacturing is on the decline, Europe remains a provider of important technology advancements.
Like Europe, the Japanese recognize they have a problem and there is an awareness of their former insular activities – stemming from having been part of large, vertically integrated electronics companies for many years. There is a need for globalization and expansion outside Japan as well as the need to accelerate the decision-making process within Japanese companies. It is not possible to restructure the entire Japanese semiconductor industry – there is a need to focus on the parts that work while shedding those that don’t.
With regards to China, the country has the labor, capital, and infrastructure to succeed in front-end IC manufacturing and closing the production / consumption gap is a monumental opportunity for domestic suppliers. However, the Chinese semiconductor industry has failed to execute and has not taken full advantage of its market. Reasons for this discrepancy include an opaque business environment, antitrust and regulatory barriers, import / export controls, a lack of process and product technology, and, most importantly, a lack of sufficient IP protection.
Given the current market’s stagnant growth, M&A can offer a way for companies to grow. However, data shows that there has been a major reduction in M&A activity over the last couple of years, with 85 deals comprising $24.1 billion in 2011 to 18 deals comprising $3.2 billion in 2013 (year to date,source: ATREG data). The reduction in M&A may be pointing to a maturing market that is forcing start-ups to have a well-developed plan to leverage their products in the market. From an investor perspective, many semiconductor start-ups don’t provide good returns due to the $100+ million that it costs to simply get a product into any sort of production phase. In addition, the time to develop and get a product to market makes semiconductor investments relatively risky. In terms of M&A between mature companies, decisions are made on technology, customer base, and size. If products can be integrated to offer customers a better or more complete solution and expand an existing market, M&A becomes very appealing to companies. Large super-platform OEMs will increasingly integrate silicon and customize products for system efficiency and optimized performance.
When tablets and smartphones are taken out of the equation, annual industry growth of consumer electronics has been negative for several years. With tablets heading towards maturity as the number of laptops and desktops they replace dwindle, the new question is – what will drive silicon demand in the future? Connected technology, driven by sensor-related devices, will be the market to watch. The rising levels of information intensity and connectedness are building momentum and will form a synergistic effect resulting in unbounded business model innovations that will impact all industries and social institutions.
ATREG’s long-term view is that the next wave of consolidation will further blur the traditional demarcation lines in the industry as growth slows, further functionality is embedded onto ICs, and OEMs such as Apple and Samsung pursue greater vertical integration. As TSMC gains even greater manufacturing dominance through increased market share, companies will seek to establish alternative manufacturing models to gain greater control and access to IC capacity while mitigating the high cost of manufacturing at leading-edge technology nodes. ATREG expects to see at least one significant collaborative, shared-capacity manufacturing deal to take place in the next 12 months.
President / Managing Principal
EXECUTIVE Q&A: ALLEN LU, PRESIDENT, SEMI CHINA
Perspectives on the future of China’s IC manufacturing
With offices in both Shanghai and Beijing, SEMI China serves more than 50,000 local people from the semiconductor, flat panel display, and PV industries. Over the past two decades, the organization has kept a finger on the pulse of China’s explosive development and helped advance the growth of local companies. ATREG recently sat down with Allen Lu, SEMI China’s President, to discuss his perspectives on the future of China’s IC manufacturing.
Revenue growth for the global semiconductor industry has been flat since 2010. How does that compare with China?
Since 2010, China’s overall semiconductor industry has been growing at a healthy CAGR of about 30%, with the IC design segment leading the way at a CAGR of 44% over the last 10 years. In 2012, the revenue from China’s semiconductor industry reached the following by segments – $9.9 billion for IC design, $9.4 billion for front-end manufacturing, and $15 billion for assembly & test. I think there were two main factors that contributed to this growth. First, the emergence of China’s electronics manufacturing industry brought enormous market demand, especially in mobile computing and consumer electronics. Second, the establishment of such foundries as SMIC, Grace, and HHNEC, combined with fabless companies and end-product OEMs, formed a complete ecosystem. In 2012, 35% of SMIC’s capacity was utilized by domestic fabless design houses.
Chinese companies such as ZTE, Huawei, and Lenovo have emerged as electronics powerhouses. What impact have these domestic OEMs had on China’s semiconductor industry?
China’s electronic manufacturing industries provide an important ecosystem for the semiconductor industry – a huge market! Together with contractor manufacturers such as Foxconn, system houses such as ZTE, Huawei, and Lenovo consume large quantities of ICs. They also have a more significant impact because their products are designed in China which requires more intimate collaborations among IC designers, manufacturers, and end-product makers. For example, China’s fabless design houses, including Spreadtrum, RDA, Leadcore, Hisilicon, and Galaxycore, hugely benefited from the fast-growing IC market of mobile phones and consumer electronics created by OEM companies.
Tsinghua Unigroup, a state-owned entity, recently announced plans to acquire Spreadtrum, one of China’s most prominent fabless companies. Is there a growing appetite for M&A within China’s semiconductor industry?
China’s semiconductor industry is dynamic and full of opportunities. M&A activity is and will continue to be part of the landscape. In Spreadtrum’s case, the acquisition paved way for it to be listed on China’s stock market where higher valuation might be achieved. Under the new state-owned parent company, it will be easier for Spreadtrum to access domestic markets where the government has a strong influence. As China’s economy puts more emphasis on moving up the value chain and sustainable growth, we may see more and more players not only from the OEM arena, but also from traditional industries investing in high-tech industries, such as commodity manufacturing, resources, and real estate. New players will bring in more working capital and could also drive up semiconductor applications in new sectors such as energy and infrastructure. We will likely continue to see more M&A deals driven by the market, capital, and strategic partnerships.
What percentage of annual IC production does China represent today? And, of the chips being built in China, what portion is being produced by foreign IC companies vs. indigenous Chinese companies?
China’s annual IC production accounts for about 10% of global output. In recent years, about a third of all IC production has been imported into China as part of various electronic products. The annual imported value of ICs reached a level comparable to the import of strategic commodities such as petroleum. It certainly suggests a strong mandate to China’s government and industry leaders to set developing the semiconductor industry as a high priority. In IC manufacturing (both front- and back-end), both domestic companies (SMIC, HH, and JCET) and global companies (Intel, SK-Hynix, TI, Freescale, Panasonic, Renesas, Infineon, ASE) significantly contributed to the output. However, the design sectors are dominated by China’s homegrown players.
With additional foreign investment such as Samsung’s 300mm fab under construction in Xi’an, do you expect the percentage of indigenous China’s IC production to decrease?
We expect both multinationals and local Chinese companies to expand in the foreseeable future. Besides Samsung’s Xi’an NAND flash fab, SMIC has just announced the expansion of their Beijing 300mm fab for the next five years with the support of Beijing’s municipal government. Huali in Shanghai and XMC in Wuhan are also expected to ramp up capacity. Recently, we have also sees specially focused IC fabs backed by state-owned conglomerates coming into play, such as Sky Silicon in Chongqing and ACSMC in Zhuzhou. I worked for Intel’s manufacturing expansion in China between 2003 and 2009. My personal observation is that five to 10 years ago, the prevailing model for multinational companies was direct investment. As China’s semiconductor market and industry ecosystem continue to grow, combined with consolidation and tighter funding for semiconductor manufacturing in mature economies, as well as more investments from China’s traditional industry sectors encouraged by government, we will likely see increased collaboration among China and global companies to fully take advantage of new market opportunities.
About Allen Lu
As President of SEMI China and Vice President of Global SEMI, Dr. Lu is responsible for the association’s programs, products, and services in China covering the PV, LED, display, and semiconductor industry sectors. He oversees relationships with SEMI members, government, and academia in the region, supports SEMI international programs, and serves SEMI members from all regions who have interests in China.
Under Dr. Lu’s leadership, SEMI provides China’s industry and regional developments with a full range of services, including expositions, high-end conferences, consulting, industry advocacy, business development, and global collaboration. Dr. Lu has access to a vast network of government leaders and industry decision-makers, advising such regional governments as Beijing, Chonging, Shanghai, Sichuan, Xinjiang, and Inner Mongolia in high-tech industry development.
Prior to joining SEMI as Regional President, he served as the China Fab Program Manager of Intel’s Technology Manufacturing & Engineering Group. He was Director of Intel’s China Public Affairs in Shanghai for four years, during which he built Intel’s first public affairs organization in China as well as managed government affairs, community relations, as well as industry and university collaborations for Intel’s expanding manufacturing and R&D operations in China. Dr. Lu was a key member of the management team that led Intel’s major investments in China, including an assembly and test facility in Chendu, Intel’s China regional headquarters and APAC R&D Center in Shanghai, and the first Intel 300mm fab in Asia established in Dalian.
Before that, Dr. Lu had many years of technology, management, and supply chain development experience in Silicon Valley where he worked at Intel’s California Technology & Manufacturing Group as well as Applied Materials. He began his semiconductor career as a Research Scientist at Northwestern University and North Carolina State University. He holds a B.Sc. from the University of Science & Technology of China and a Ph.D. in Solid State Physics from the University of Virginia. He also holds four U.S. patents.
Dr. Lu is Vice Chairman of the Chongqing IC Industry Alliance, an Executive Member of the Council, China Liquid Crystal Display Association, an Executive Member of the Council, Shanghai IC Industry Association, a Special Advisor to the Sichuan Government on Investment Promotion, a Senior Advisor to the Municipal Government of Huhhot, and a Shanghai Government Honorary Ambassador of International Conferences. He has served as the President of the North America Chinese Semiconductor Association in 2001-2002.
ATREG INVITED TO SPEAK AT TWO SEMI EVENTS THIS FALL
ATREG is pleased to announce it has been invited to speak at two SEMI events this fall:
SEMICON Europa, October 7, Messe Dresden, Germany: Senior Vice President & Principal Barney Silver will deliver the keynote for the Business Models: Foundry, Fabless, IDM session, part of the International MEMS / MST Industry Forum examining how to take MEMS sensors to the next level. His presentation entitled The inflection point: Macro forces & emerging trends that will reshape the semiconductor industry through 2016 looks at the macro themes leading to three outcomes that will reshape the industry and competitive landscape in a dramatic new fashion during the next three to four years: A less attractive fabless operating model, the rise of the branded original equipment manufacturers (OEMs), and increasing vertical re-integration. Other speakers in this session feature Tapani Koivukangas (Lewel Group), Stephan Louwers (Tronics), and Iain Rutherford (X-FAB).
SEMICON Japan, December 4, Chiba, Japan: President & Managing Principal Stephen Rothrock will participate in The GSA Forum, a panel hosted for the first time by GSA in conjunction with SEMI Japan to discuss the importance of win-win partnership and collaboration for ecosystem optimization. Moderated by Shozo Saito-san of Toshiba, the Forum is open to the public and expected to draw over 300 participants.
We look forward to seeing you there! Email us to receive a copy of our presentation.