TSMC, MediaTek in the Bull's Eye
China's Semiconductor Grab
China is staking out an industrial policy of unprecedented ambition, creating a 120 billion renminbi fund to build an unrivaled semiconductor industry. How can Taiwan's semiconductor leaders stave off this huge threat?
China's Semiconductor GrabBy Hsiao-Wen Wang
From CommonWealth Magazine (vol. 554 )
Control of a market is power, and China has recently shown its intentions to make that a reality in the semiconductor business.
In a rare show of cross-agency unity at the end of June, China's National Reform and Development Commission, Ministry of Science and Technology, Ministry of Finance and Ministry of Industry and Information Technology jointly issued a"National IC Industry Development Promotion Outline” that had already been approved by the State Council. At the heart of the plan is the creation of a 120 billion renminbi (US$19.5 billion) fund to support the Chinese semiconductor industry.
“This is the most powerful and the most flexible initiative in China's history to back its semiconductor industry,” says Nicky Lu, the managing director of the Taiwan Semiconductor Industry Association, in a tone of voice laced with anxiety.
China's Next Target: MediaTek
One industry insider suspects that after launching an investigation against Qualcomm Inc. for monopolistic practices in China in November 2013, the National Reform and Development Commission now has Taiwan's foremost IC design company in its sights.
“The next target identified for extermination is MediaTek,” the Taiwanese industry expert says.
Unlike in the past when its policies to build an industrial sector were based on incentives, the Chinese government has decided this time to make itself the main player, according to Wei Shaojun, Director of the Institute of Microelectronics of Tsinghua University in Beijing.
“Under the incentive-oriented policies of the past, the government was a bystander and enterprises were the main players. It was up to the companies to decide whether to accept the incentives. Under the 'IC Industry Promotion Outline,' the government is taking the lead. The responsible body is the government,” Wei tells CommonWealth Magazine. Wei was summoned on almost a weekly basis for meetings at the Ministry of Industry and Information Technology to help draft the new IC industry policy.
Though the government is playing the main role in the initiative, it no longer plans to use tax breaks or subsidies as policy tools because they can be attacked by foreign governments as violating World Trade Organization anti-subsidy agreements.
“This 120 billion renminbi is an 'investment fund,' not a 'development fund,'” Wei emphasizes. Previous policies did not involve shareholder equity, he explains, but under the new approach, the investment fund will take stakes in companies proportionate to the amount invested and insist on a rate of return. The ultimate goal is to leverage the ownership structure to change corporate and industry structures.
“Companies and the government, plans and the markets are to develop in step,” Wei says, pointing to the new thinking behind this initiative – having the visible hand of government join with the invisible hand of the market.
Coincidentally, as if echoing Wei's thoughts, a company in which Tsinghua University in Beijing has a 51 percent stake – Tsinghua Unigroup Ltd. – acquired Chinese IC design firm RDA Microelectronics for US$907 million on July 19. That follows Tsinghua Unigroup's US$1.78 billion acquisition of Chinese mobile-chip maker Spreadtrum Communications Inc. late last year. The combined annual sales of Spreadtrum and RDA, considered"true Chinese” of semiconductor vendors, amount to roughly one-third of MediaTek's.
“Thirty billion renminbi will be invested over five years to overtake MediaTek,” boasted Tsinghua Unigroup CEO and Chairman Zhao Weiguo to the Chinese media on Aug. 9.
Behind the Chinese government's big investment commitment and the mergers engineered by state-owned companies is China's realization that the semiconductor sector represents a country's true ace in the hole.
The High-tech Granary
“ICs are the 'food' of the high-tech industry. Their technical standard and scale of development have become important indicators of a country's overall power,” said Industry and Information Technology Minister Miao Wei at a recent conference.
Global powers are all engineering heavy deployments in the semiconductor field.
Despite Europe's fiscal struggles, the European Union decided in 2013 to invest US$6.4 billion over the next seven years in chip manufacturing, hoping to double chip production on the continent and grab a 20 percent share of global semiconductor output.
The high-tech sector loves to joke that"there's no silicon in Silicon Valley,” but it's widely known that American high-tech giants, from Google to Apple, have aggressively expanded their IC teams over the past five years to better integrate hardware and software and position themselves for Internet of Things opportunities.
“Samsung told me that Apple understands chips even more than Samsung,” says the semiconductor association's Lu.
As for China, although it became the world's biggest consumer of ICs 10 years ago, the development of its semiconductor sector has been controlled by outsiders. According to an estimate by market researcher IC Insights, China will remain dependent on imports for 70-80 percent of its semiconductor needs by 2017.
In 2012, the value of China's semiconductor imports (US$232.2 billion) even exceeded the amount it spent on crude oil (US$221 billion).
However, reducing the country's dependency on semiconductors may be difficult considering the scale and technological level of China's foundries and IC design houses.
The technology of Semiconductor Manufacturing International Corp. (SMIC), one of China's largest and most advanced semiconductor foundries, is two generations behind that of Taiwan Semiconductor Manufacturing Co. (TSMC), the world's largest contract chip maker.
SMIC's net profit is not even 1/30th of TSMC's, explaining why without government support China's semiconductor sector lacks the capital to compete in the battle over next-generation processes.
The more than 600 Chinese IC design companies that have sprung up may have combined annual sales exceeding NT$400 billion – beating Taiwan's IC design sector – but most of them are"one-generation champions” that are broken up by their founders after going public and lack staying power.
A Historic Opportunity
Despite these disadvantages, Tsinghua University's Wei sees the Chinese semiconductor industry as being on the precipice of a rare historic opportunity to get back into the game.
As Intel, Samsung and TSMC battle for supremacy in the more advanced 14/16 nanometer processes but face obstacles and bottlenecks along the way, China's lagging semiconductor could have a chance to overtake them.
If the advanced processes cannot be brought into mass production on schedule, a major shortage of chips using the 28nm process could emerge before 2017. That would give SMIC, which received 28nm orders this year from Qualcomm, a chance to vault to the front of the pack.
“By 2017, global demand for the 28nm process will be 4 million wafers a month. Right now, capacity hasn't even reached 3 million,” Wei says, reciting figures he seems to have memorized.
As chip production becomes increasingly sophisticated and expensive, the number of customers dedicated chip contractors can fully support will become increasingly limited, giving control of production capacity added importance.
“Capacity is king. If Chinese chip designers cannot squeeze into the global top 10, they will have trouble securing capacity,” Wei says bluntly. This predicament is of even greater concern to Chinese authorities than the high value of IC imports.
Road to Survival for Taiwan's IC Sector
China's semiconductor sector is mounting an invasion, and while Taiwan's semiconductor industry possesses a solid aircraft carrier in TSMC and an agile fighter jet in MediaTek, it has no room for hubris or complacency.
“We keep comforting ourselves by saying we have TSMC and Mediatek. That's a really scary way of thinking,” Nicky Lu says. Using a military analogy, Lu says China's semiconductor forces have already built an aircraft carrier, and the destroyer and cruiser escorting it are Samsung's NAND flash memory plant in Xian and SK Hynix Semiconductor's DRAM plant in Suzhou.
“With the help of Korean mercenaries, China has concentrated all of its energy on dealing with Taiwan's aircraft carrier and fighter jets. What happens when our fighter jets get shot down one after the other? I ask the government, what will we do?” a perturbed Lu asks.
Faced with this threat, and the loss of employee stock options as an incentive to mobilize young creativity, Taiwan's semiconductor industry can no longer rely solely on an entrepreneurial spirit and technological edge to stave off its competitors.
“Technology, marketing and talent. Whatever you do, you have to do it better. There's no need to be afraid,” says Genda Hu, CEO of Asia's leading touch controller IC maker FocalTech Systems Co., seeing China's new policy as a positive.
“Whether or not the sector gets off the ground is not really related to policy. You still have to see whether the companies themselves are strong or not,” says the former TSMC marketing vice president with conviction.
Hu, whose business is based in Shenzhen, has seen Chinese policies providing massive support to the solar cell and LED sectors, only to create global bubbles of excessive capacity.
China may soon negate the tangible advantages of Taiwan's semiconductor sector, such as its scale, technology and the flexibility of its supply chain. But it is the intangible advantages that once supported Taiwan's semiconductor rise – university education, engineering talent, corporate integrity and a country's intellectual property protection system – that will define and decide the competition between the two countries.
Amid the titanic collisions between global powers and big capital, the road to survival for Taiwan semiconductor players is becoming more arduous. But even the more difficult their road, the greater their spirit and sense of fight. The question is, will it be enough?
Translated from the Chinese by Luke Sabatier