The China Factor

Many U.S. companies depend on China for their growth and this is particularly true of the semiconductor industry. Concerns regarding growth have unsettled the semiconductor industry and shares only reached an uneasy balance following the announcement of stimulus measures.

Semiconductors are a core component of microprocessor chips and transistors, meaning that any device that is computerized or uses radio waves relies on semiconductors. China consumes more chips than any other country and its consumption is on the rise. Most of these chips are imported from international players, which has been a drain on China’s economy, leading to government policy that focuses on reducing dependence on overseas vendors and strengthening local suppliers.

Since 2000, China’s financial planning has supported local semiconductor players. Benefits have ranged from duty concessions to tax holidays. The government has also funded infrastructure development and helped the establishment of startup companies, leading to the development of foundries like Semiconductor Manufacturing International (SMI – Snapshot Report), Hejian, Grace and Taiwan Semiconductor’s (TSMC) SongJiang Operations, facilities that could be used by US operators in order to reduce costs via their simpler operations.

The Chinese government has restricted the import of advanced technologies in order to spur domestic development. One of the results of this, however, was the limiting of the sector’s prospects. With the gap between Chinese production and consumption continuing to widen, the government promoted M&A and funded the construction of R&D capabilities.

If the government’s recent activities turn out to be a trend, it is likely to collaborate in order to milk US players and to develop local talent. The US would benefit from cheaper Chinese engineers. Microsoft and Intel have already set off along this route. Another bonus to the US is that locally-developed IP will raise the government’s concerns regarding IP protection.

A potential negative to consider, however, is the possibility of aggressive acquisition of US companies with the aim of rapidly acquiring IP. It is also worth considering that the government’s development of the sector might lead to global over production, which would affect prices, especially at the trailing edge.

With the difficulty of setting up, driving efficiencies at advanced nodes and seeking profit for Chinese operations, it looks like US tech with leading edge capabilities and IP will maintain a lead over China for a few more years. Intel’s action of extending its 14nm process and its tick-tock cadence for new architecture from 2 to 2.5 years suggested that it will be tough to continue with Moore’s law for long without alternative technology or material innovation.