From catching up to forging ahead? China's prospects in semiconductors

Abstract

China's new strategy to upgrade its semiconductor industry (outlined in the "Guidelines to Promote National Integrated Circuit Industry Development," June 24, 2014), seeks to move from catching-up to forging ahead in semiconductors, by strengthening simultaneously China's integrated circuit (IC) design industry and domestic IC foundry services. This study explores how China's new semiconductor strategy seeks to benefit from four global transformations in semiconductor markets and technology: a) the demand pull from mobile devices; b) new opportunities for China's foundries in trailing-node semiconductor technologies; c) changes in the IC foundry industry landscape; and d) a new interest in strategic partnerships and mergers and acquisitions (M&A). A second contribution of the study is to examine two Policy Initiatives of the new strategy: (a) the IC Industry Support Small Leading Group to enhance strategy coordination; and (b) IC Industry Equity Investment Funds to improve investment allocation, and to enhance firm size and capabilities through strategic partnerships, joint ventures and mergers and acquisitions, involving both foreign firms and domestic firms. The implementation of both policies signals a genuine effort to experiment with a bottom-up, market-led approach to industrial policy. In the Leading Group for instance, experts play an active role in policy formulation and implementation who are well connected in the global semiconductor industry and who know what policies might work in this knowledge-intensive and highly globalized industry. The use of professional investment fund managers, as opposed to government subsidies or investment, signals the emergence of a hybrid model that seeks to combine the logic of equity investment fund management with the objectives of China's IC development strategy. An important, largely unresolved challenge for China's industrial upgrading scenario in semiconductors is the possible impact on exports of China's electronics final products. The study concludes that, despite movements in the right direction, the new Semiconductor Strategy's capacity for flexible policy adjustments remains limited, and that multi-layered industrial dialogues among key stakeholders in the industry are still at an early stage. To exploit the tailwinds from the market, China needs to experiment further with new more market-driven approaches to industrial policy.