A delegation from the China Semiconductor Industry Association (CSIA) headed by its president, Mr. Zhongyu Yu, visited Stanford University on November 5, 2005. As part of its visit on campus, the delegation was invited to speak at SPRIE's seminar series on the rise of China's innovation competence. Mr. Yu and his colleagues shared with the audience the latest developments in China's integrated circuit (IC) industry as well as their understanding of the underlying driving forces, the level of competency, the role of the government and China's integration into the global innovation system.
Phenomenal growth of China's IC industry
Mr. Yu first shared with the audience some striking data that clearly illustrated the growth of China's IC industry since 2000. In 2000-2004, the industry grew with a CAGR of 31% from $2.2 billion to $6.7 billion. In 2004, there were 670 IC companies employing a workforce of 130,000, of which 40,000 were engineers. The growth is pronounced throughout the value chain from IC design to IC manufacturing and IC packaging and assembly. In 2004, there were 476 IC design companies and their revenue reached $1 billion, an 81.5% increase from 2003. Domestic companies have made impressive inroads into the development and commercialization of a few specific IC products such as second generation ID cards, audio decode chips, third generation cell phone base band chips and MP3 chips. In IC manufacturing, there were a total of 39 fabrication plants by the end of 2004: one 12-inch plant, nine 8-inch plants and 29 4-inch to 6-inch plants. These plants generated a revenue of $2.24 billion in 2004, a 90% increase from 2003. Meanwhile, three more 12-inch plants are under consideration by SMIC, HHNEC and Hynix. IC packaging and assembly reached $3.49 billion in revenue in 2004.
Multiple forces drive the growth
What has been behind such phenomenal growth? Mr. Yu identified three major driving forces. First is the continuing growth of the domestic market that has provided new demand for outputs from the industry. China has become the largest manufacturing base for most consumer electronics products such as televisions, DVDs, personal computers and mobile phones. For example, in the year of 2004, China manufactured 74 million television sets and 230 million mobile phones. These consumer electronics products are fueling the growth of the China's domestic IC market. In 2004, the market reached $40 billion, making China the second largest IC market in the world with a global share of 22%. The second driving force has resulted from the reform of the financial system, which has substantially improved the investment environment--especially for foreign investment. Foreign investment now accounts for 80% of total investment in the IC industry, even when domestic bank loans are taken into account. Venture capital has become a considerable source of capital. $424 million was invested in 2004. The third driving force is the global recession of the IC industry after 2000. The recession exerted tremendous economic pressure for multinational corporations to relocate their manufacturing and R&D activities to China to take advantage of China's cost advantage.
China still weak in innovation in IC
While the growth of China's IC industry has been impressive, Mr. Yu also pointed out some noticeable weaknesses of the industry. The industry is dominated by low value-added IC packaging and assembly, which accounts for half of the industry's revenue. High value-added IC design work only generated 15% of the total revenue in 2004. Most of the 476 IC design companies are very small. In 2004, only 17 companies had revenues over 100 million RMB (which was about 12 million USD). Among them, only two had revenues over 500 million RMB (about 60 million USD). The technical competence of IC design companies is still very weak. Except for the few aforementioned emerging niches, IC design is very much lagging behind the cutting edge. Most domestic demand for IC is still met by import. As Mr. Yu pointed out, "all the micro components and memory [of domestically manufactured consumer electronics products] are imported."
The government is well aware of these shortfalls and policies have been put in place to support the next-phase growth of the industry. Factor inputs need to be boosted. In terms of capital, Mr. Yu estimated that a total of $30 billion investment will be needed in the coming five years to fuel the growth of the industry. Yet, the government will cede its role as a director investor in any IC programs while promoting investments from other sources, being it bank loans, domestic private investment, foreign direct investment or venture capital investment. Human resource is another prime area for improvement since there is a serious shortage of experienced IC engineers. The government has put in plans to "cultivate 40,000 IC designers and 10,000 IC processing technologists" over the coming 6-8 years. More importantly, however, indigenous competence needs to be built. "Independent innovation" has been identified as a priority for public policy in China's 11th five-year development plan. Mr. Yu declared, "our goal is not to copy others' chips but instead to have our own."
China's integration into the global innovation system
Looking into the future, as China's IC industry and market continue to grow, Mr. Yu articulated for the audience the importance of China being integrated into the global innovation system. In the coming five years, there will be plenty of opportunities for Chinese companies and universities to collaborate with innovators from abroad, whether it is to shape next-generation technologies and technical standards, for multinational corporations to set up research and development centers in China, or for universities to collaborate on cutting-edge research. As Mr. Yu declared, "China welcomes mutually beneficial cooperation with American industry and academia in the area of [IC] manufacturing and the innovative work of R&D."
Biography of Zhongyu Yu
Mr. Yu Zhongyu has been engaged in semiconductor research and management for many years and is one of the leaders of China's integrated circuit industry. He has engaged in research and design of IC products and was honored with the National Science and Technology Award. Having joined the government in 1988, he was responsible for organizing and leading the IC project during "7th five-year plan" and "8th five-year plan"; he acted as a member of the leading group for the National "908" project and headed the construction leading group of the Huahong factory in the "909" project. These projects made important contributions to China's IC industry development. Mr. Yu has been the President of the China Semiconductor Industry Association since 2001.