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The 'chip disease' in integrated circuits eagerly awaits the 'good medicine' of policy.
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2013.11.18
If we compare electronic devices to a person, then integrated circuit chips are the heart of this person. As the world's second-largest economy, China's 'heart' industry has long been highly dependent on imports, severely constrained by others. However, in recent years, the trend of replacing high-tech imports has emerged, and achieving domestic production in the high-tech field has received significant attention. Recently, several industry insiders revealed to China Securities Journal that the state will soon introduce policies to support the chip industry, with support and determination far exceeding previous efforts. An industry insider stated that whether in the military, government, or civilian sectors, electronic devices are now very widespread, and achieving domestic production of this core component, chips, has significant practical significance.
The pain of internal 'chips'
According to authoritative data statistics, in 2012, China's chip import value exceeded $190 billion for the entire year. This is a shocking figure; the amount spent on chip imports is almost equivalent to that of crude oil imports, and in previous years, chip imports even surpassed those of crude oil.
"Currently, China's chip industry is heavily reliant on foreign sources; about 80% of chips need to be imported domestically, with almost all high-end chips needing to be imported. This has made our electronic products dependent on others to some extent," said an industry insider.
In all electronic products, chips are not only the core of the equipment but also account for a significant portion of costs. For the industry, the ripple effect of chips is very obvious. According to estimates by the International Monetary Fund, a value of 1 yuan from chips can drive a value of 10 yuan in related electronic information industries and contribute 100 yuan to GDP.
Because of this, developed countries in Europe and America have always attached great importance to the chip field. Since last century, giants like Intel, AMD, and ARM have emerged in the industry. The chip industry is also one that requires massive capital support; Intel's capital expenditure alone reached $13 billion in 2013, accounting for about 15% of its annual revenue.
Compared with developed countries in Europe and America, China's chip industry started late and has a weak foundation. Early large chips like Loongson have been slow to industrialize, and key equipment and raw materials have long relied on imports. From an industrial division perspective, most domestic companies engaged in chip business are mainly foundries with insufficient innovation capabilities; the scale of employment and research strength is severely mismatched with its status as the world's second-largest economy.
The difficulty of creating 'chips'
Since the new millennium, the state has gradually introduced policies to support China's chip industry. In June 2000, the State Council issued several policies encouraging the development of the software and integrated circuit industries, clearly stating two goals: striving to reach or approach international advanced levels in software research and development and production capabilities by 2010 and making China's integrated circuit industry one of the world's major development and production bases; after 5 to 10 years of effort, domestic software products should meet most domestic market demands and have substantial exports. In February 2011, the State Council issued further policies encouraging software and integrated circuit industries' development from multiple aspects including finance and taxation, investment and financing, research and development, talent acquisition, and intellectual property.
Analysts say that after more than a decade of development, China's chip industry has gone from non-existence to existence; many companies have emerged in both upstream and downstream sectors. However, most of the goals previously set by the state remain unachieved.
Currently, domestic electronic products have significantly proliferated compared to the early years of this century; however, domestic chips still cannot meet demand much less export needs. A striking example is that after 2007 when consumer electronics fully entered the smart era; currently used chips in smartphones and tablets are predominantly designed by British firm ARM while manufacturing is dominated by Apple, Qualcomm, Samsung, and MediaTek. Domestic R&D capabilities such as Spreadtrum and RDA Microelectronics can only capture very limited market shares from low-end and white-label markets.
In traditional PC fields, China already has Lenovo as the world's largest complete machine manufacturer; however, Intel still dominates in chips; while in server fields globally, chip discourse power is firmly held by giants like Intel and IBM.
The aforementioned analysts stated that currently China's integrated circuit chip field mainly faces two shortcomings: first is a shortage of talent; over time domestic research capabilities have gradually caught up. More importantly, the speed of technological advancement in the chip industry is very fast; even classic 'Moore's Law' has been broken. In this context, developing the chip industry requires continuous high capital investment which is not satisfactory domestically.
"Currently global barriers to entry for chips are becoming increasingly high; it has evolved into competition over capital investment and enterprise scale," said this individual. The annual investment from major national projects like '863' or 'Nuclear High Base' totals only several billion yuan while special funds for integrated circuit equipment do not exceed one hundred billion yuan—this is vastly different from top enterprises in Europe and America or even Japan and South Korea.
A senior executive from a domestic chip company who wished to remain anonymous told China Securities Journal that under dual pressure from international giants' technology and funding, China's chip industry has long been on the brink of loss. If current conditions do not change significantly it will be detrimental to future development of China's chip industry. There is already a consensus domestically on replacing core technology imports; there is an urgent need for more policy support within the industry.
The strong 'chip' remedy
In September this year, Vice Premier Ma Kai visited companies such as Baidu, Inspur Group, Datang Telecom (market inquiry), China Electronics Corporation, Qihoo Company, SMIC among others to investigate integrated circuit industry development and network information security situations. Ma Kai pointed out that the integrated circuit industry is core and foundational for cultivating strategic emerging industries as well as promoting deep integration between information technology and industrialization; it is an important guarantee for transforming economic development methods adjusting information industry structures expanding information consumption maintaining national security. Accelerating development of integrated circuit industries is an important yet urgent task at present and for future periods.
Market participants say this shows that issues regarding chip industry development have gained high-level attention. Several insiders revealed to China Securities Journal that policies will soon be introduced to support China's chip industry development with this round of policy support expected to exceed previous efforts.
Analysts point out that based on industrial nature and past policies this support plan still spans a considerable time frame. Since investment and industrial transformation require time if it becomes a short-term plan it will not benefit chip industry's development. In terms of support amounts logically there should be a significant increase expected. If ultimately annual support amounts can align with capital expenditures from giants like Intel it would be hugely significant for future development of domestic chip industries.
In terms of industry recently there have been waves within the relatively small circle of chip industries; two Nasdaq-listed chip design companies were successively acquired by Tsinghua Unigroup which has been interpreted within the industry as 'the return of overseas high-tech assets.' Industry insiders indicate that it can be anticipated that a new wave of consolidation will soon arrive within China's chip sector driven by policy support which may elevate the industry's status.
From the market perspective, some listed companies in the industry are expected to leverage the new round of acceleration in integrated circuit chips to achieve significant business growth. An industry analyst stated that since last year, starting from the relatively achievable field of financial IC cards, the country has been promoting chip localization. Driven by this expectation, companies in the industry have performed quite well in the market. However, from a macro perspective, this is merely a segmented and relatively low-end field. With the introduction of policies in the later stages, domestic chips are expected to gradually complete the transition from low-end to high-end development.
The analyst believes that the industrial chain of integrated circuit chips is quite long. Looking upstream, companies such as Shanghai Belling, Datang Telecom, Tongfang Guoxin, and Silan Microelectronics have a higher business proportion; in the mid-to-lower reaches of packaging, Changdian Technology and Tongfu Microelectronics are more involved; in terms of equipment, products from Qixing Electronics are important production materials for chip manufacturing. Based on the current situation, it is highly likely that Unisoc will push Spreadtrum and RDA Microelectronics to the capital market in the later stages. Considering that both companies are leaders in the upstream of the industry, their impact on the current A-share market will be significant.
"This year, the market seems very keen on going IOE-free; everyone thinks it's a good thing. But currently, going IOE-free is just a broad direction. Does using domestic brands mean that this is our own product?" said a senior executive from a chip company. He pointed out that currently, imported chips still dominate in military, communication, and smart terminal sectors. If one day chips can basically achieve localization, that would mark the final nail in the coffin for this import substitution cycle. Only then can we say we have grasped the 'lifeline' of the industry and eliminated the last 'chip' disease affecting our country's information industry security.
Key words:
Good medicine, chips, industry, development, domestic, integrated circuits, imports, indicate, policy, industry
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