China has had a long history of supporting its semiconductor development with industrial policies. The "Outline for advancing the national IC industry" announced in 2014 upgraded semiconductors from a matter of industrial policy to national development strategy. In addition to capital subsidies, government industrial funds are also used to drive private capital into semiconductor development, set supports for manufacturing development goals and sales, and complete the overall semiconductor ecosystem.
Among them, the first phase of China's Big Fund, established in 2014, raised over CNY130 billion (US$18.858 billion) in total. It also drove over CNY5000 billion of local and private capital to invest in IC manufacturing, IC design, IC packaging/testing, and semiconductor material/equipment. In 2019, the second phase of the Big Fund raised CNY200 billion and aimed to reinforce the weaker sections of the semiconductor ecosystem. It has already invested in well-known companies like SMIC, YMTC, UNISOC, and Huatian Technology.
In addition, "Made in China 2025" even set self-sufficiency goals for key components like semiconductors. The plan is to bring self-sufficiency rates to 40% in 2020 and 70% in 2025. For the IC design sector, the goal is to have its output value reach US$40 billion in 2020, with a 25% global market share, and US$60 billion in 2030, with a 35% global market share. In terms of design capability, the plan is to achieve 14nm before 2025 and catch up to international standards before 2030.
Under the strong support of many policies, IC design houses in China have experienced rapid growth in recent years. According to data released by the China Semiconductor Industry Association (CSIA), in 2022, there were 3,243 IC design houses in China, 433 more than in 2021. The product applications are widespread, with consumer electronics, communication, analog, power, and computers as the top five sectors, having 1282, 635, 414, 395, and 236 companies active in each respective sector.
In addition, compared to Taiwanese suppliers, Chinese suppliers are more diverse in their target markets and market positioning. They're involved in high, mid, and low-tier IC products. They also have far more suppliers developing advanced process products compared to Taiwan, with most being AI and mining chip suppliers.
These include Hisilicon's Ascend 911, Baidu's Kunlun Xin Gen 2, Alibaba's Hanguang 800, Cambricon's MLU370, Iluvatar CoreX's Tiangai 100, and Biren's BR100, most of which use 7nm process technology. Although some of these products have relatively simple circuit designs and only require hundreds or thousands of repeated computing unit combinations, it's still a display of China's top IC design talents and capabilities.
Because China's rapid developments in high-end HPC chips and the AI sector have helped improve its technology and military capability, the US announced in October 2022 a series of export sanctions that targeted China's high-performance chips/systems/suppliers and advanced process chip equipment/products. It was an attempt to freeze China's progress in semiconductor manufacturing, HPC, and AI. These sanctions greatly affected the development of advanced chip processes, HPC/AI chips, and supercomputers in China.
The following is a summary of the impact of the US Department of Commerce's new export control policies on Chinese semiconductors, which was announced on October 7, 2022:
1. The US strategy: the US is taking a two-pronged approach by announcing relevant policies and jointly promote them with allies, while slowing down the pace of Chinese corporations. The sanctions mostly impacted China's advanced semiconductor process and memory industry. The sanctions aimed at the IC design sector are only focused on ultra-high-performance computing chips.
2. China's adjustments to its development strategies:
(1) Foundry and memory sector: Increase investment in developing mature processes, which help improve capital utilization efficiency.
(2) Most in the IC design sector are not affected. However, in the future, the massive amount of resources expected to be invested in the sanctioned sectors will be shifted to ones with lower capital expenditure requirements. More aid will be provided to help the IC design sector.
3. Impact on the global semiconductor sector:
(1) In some key areas and industries like semiconductor material/equipment and national defense/security-related chips, China will accelerate its efforts in using "non-US" technologies.
(2) Chinese IC corporations related to mature processes will obtain more resources and increase their competitiveness, which is bad news for other competitors.
(3)Industrial chains in each country could gradually move toward localization.
As the global IC chip design market reshuffles due to the new US sanctions, the following is a summary of the possible changes that could occur in the IC design industry in the future.
First, China will be shifting a lot of capital into building capacity for mature processes to speed up the development of IC design ecosystems above 28nm. With the import substitution policies, Chinese semiconductors' market share in China will increase.
Second, for Taiwanese and the global semiconductor industry, mature process technology will be under the most pressure, especially for 8-inch foundries. Due to the cost advantage and economic scale of China's 12-inch process, they will have to face the price reduction impact from Chinese fabs. Companies making consumer discrete low-tier semiconductors (e.g. MOSFET, IGBT) with relatively low gross profit will be the first to bear the brunt.
In addition, as China's panel industry is already in an advantageous position, relevant driver ICs could face the pressure of substitution as well. Furthermore, IC products based on mature process such as consumer IoT/analog/power/sensor IC will also face fierce competition due to more Chinese suppliers entering the sectors. On top of that, China will be increasing investment in automotive semiconductors, especially in ADAS and EV power semiconductors. Thus, those sectors will see increased competition as well.
In the long term, Chinese semiconductor companies will be under significant financial pressure. This could indirectly facilitate the trends of horizontal consolidation (giving rise to larger companies) and vertical consolidation (adopting IDM model) among Chinese semiconductor suppliers.
The October 2022 sanctions imposed by the US coincided with China's 20th National Congress. Perhaps due to the depth and width of the sanctions, China's Ministry of Foreign Affairs has not only issued severe protests and opposition but has also filed a complaint with WTO, stating that the US chip export sanctions violated international trade regulations. It's expected that in the future, China's retaliatory measures will be asymmetrical. It will also increase its efforts in building a fully autonomous semiconductor industry chain, enhance technology development in HPC and chiplet, and actively increase the self-sufficiency rate of IC products.
In addition, two types of companies are expected to receive the resources and stand out:
First, suppliers actively supported by the Chinese government at all costs, driven by national security and supply chain resilience needs.
Second, suppliers that stand out by virtue of their products or price competitiveness, especially those that produce ICs required in computers, communication products, and consumer electronics, and based on non-restricted mature process.
The three aforementioned sectors are precisely the main markets of Taiwanese IC design houses, catapulting Taiwan's IC design sector to the second largest in the world. Long-term speaking, the shift in China's IC design sector is extremely likely to crowd out the products, market share, and talent supply of Taiwan's IC design houses.
For future Taiwanese corporations, maintaining the competitiveness of existing products, finding new growth products when market share and profits are gradually being eroded, and ensuring that excellent and experienced engineers won't be improperly poached are all urgent developmental issues right now.
Editor's note: At the Taiwan IC Design Industrial Policy White Paper Presentation scheduled on March 28, Taiwan Semiconductor Industry Association (TSIA) will release its IC Design White Paper to guide Taiwan's semiconductor policy. As a co-organizer, DIGITIMES will publish a series of articles to summarize the document. The white paper will be available for download after the event.
