Closing China's Chip Gap Offers Opportunity for Global Collaboration

Dongmin Chen, Ph.D., Chairman and President, Chinese American Semiconductor Professional Association

Earlier this year, the China Ministry of Industry and Information Technology publicly announced that in 2010 China's IC trade deficit topped US$100 billion for the first time. The deficit was more than 10 times the figure of 10 years ago. IC products have become the nation's number-one import—more than oil and steel imports combined. This finding was a wakeup call for key Chinese policy makers.

Figure 1. 2004-2010 China IC Imports vs. Domestic Sales

Since the release of the landmark #18 State Council Rule in 2000, which offers a slew of preferential policies to spur rapid growth in China's domestic semiconductor industry, China IC output has risen from US$2.4 billion (1.2 percent of global IC output) in 2000 to US$21.6 billion (8.5 percent of global IC output) in 2010—a compounded annual growth rate (CAGR) of more than 20 percent. This impressive record, however, has been outpaced by the rapid growth of domestic IC consumption as a result of the global relocation of electronics manufacturing into China in the past decade. Since 2006, China has surpassed the United States and Japan to become the number-one IC consumer worldwide. Today, about 50 percent of ICs produced worldwide is consumed in China.

Reversing the monumental deficit has become one of China's top priorities in its 12th Five Year Plan. In January 2011, the Chinese central government issued a new State Council Rule (#4 of 2011) to extend the #18 rule of 2000 and launched a "China Chip" initiative that calls for doubling IC production by 2015 with a significant increase in research and development (R&D) funding. The Chinese government points to the lack of domestic capability in design and production of high-end ICs such as microprocessors and systems-on-chip (SoCs) as the primary cause of the deficit. The renewed State Council Rule and R&D funding will serve as new catalysts to promote innovation and development of an infrastructure for advanced IC design and manufacturing.

In recent years, China's government has created various incentive polices to attract overseas talent to China. Almost every week there is a Chinese government delegation pitching China's local talent programs to Silicon Valley engineers, showing China's determination to get entrepreneurs from the U.S. and other parts of the world. Together, these policies have resulted in a surge of about 500 IC design houses spread throughout Shanghai, Beijing and the Pearl River Delta regions. While, collectively, they represent a sizable talent pool, most of these design houses are too small and lack the technical resources and capital necessary to have a significant impact.

The "China Chip" initiative, a key part of the 12th Five Year Plan, will focus not only on IC design, but also on building a well-balanced ecosystem for developing advanced chip technologies, including advanced fab capabilities, packaging processes and design tools. While Chinese policy makers recognize China's lack of innovation as the key inhibitor, they also partially blame the west for restricting the export of advanced processing equipment into China. During the 11th Five Year Plan, China enacted a special funding program distributing billions of dollars to stimulate domestic semiconductor equipment R&D as an effort to move away from its dependency on western technologies. Unfortunately, this money was invested in inventing "old wheels" for the purpose of catching up and fighting the war of "containment."

Innovation does not happen overnight. Mainstream IC technologies have been developed by companies in the U.S., Japan, Europe and Taiwan for several decades. Historically, China has been purely on the receiving end of technology development, and some may argue that restriction on the access of the most advanced technology is warranted. But the world is changing fast. Financial turmoil in the U.S. during 2008-2009, the tsunami in Japan in 2011 and the banking crisis in Europe today have accelerated the shift of the semiconductor landscape and have caused huge contraction in semiconductor investment in recent years. The number of start-up companies in all semiconductor sectors has drastically decreased which threatens western leadership in future innovations.

It is clear that China will do whatever it takes to close the "chip gap," leveraging its manufacturing scale and sheer volume of IC consumption, as well as its huge cash reserve. It is a matter of when, not if. China's desire to reverse its IC deficit offers an opportunity for global collaboration. The global semiconductor industry will be far better off if China's new investment is directed towards future technology innovation with the help of companies in the U.S. and other parts of the world.

Various regions in China are embracing the notion of investment and collaboration in innovation. Suzhou Industrial Park, one of the most successful technology parks in China, recently announced that it plans to invest 50 billion RMB to setup a new ecosystem called Nanopolis Suzhou (www.chinanosz.com) to facilitate the commercialization of nanotechnology research. The seed funding will be used for building R&D infrastructures, training engineers and establishing start-ups. In particular, it will invest 10 billion RMB towards a new state-of-the-art R&D fab to accommodate more start-ups. It actively seeks to collaborate with companies in Silicon Valley and other parts of the world. We live in a world of greater mutual dependency, and there is a common ground for global collaborative innovation. What is needed are open-minded and creative-thinking policy makers and business leaders to enable this paradigm shift.

About the Author

Dr. Dongmin Chen is a board member and 2010-2011 chairman and president of Chinese American Semiconductor Professional Association (CASPA). CASPA is the largest Chinese American semiconductor professional organization worldwide, and has more than 4,000 individual members and more than 100 corporate members. Its headquarters is located in Silicon Valley and has other chapters in Taiwan/HsinChu, Singapore, Beijing, Shanghai and Guangzhou. Dongmin Chen can be reached at dongmin.chen@gmail.com.