PricewaterhouseCoopers began the study series
China’s Impact on the Semiconductor Industry in 2004 in response to our clients’ interest in the rapid growth of the semiconductor industry in China. Specifically, clients wanted to find out whether China’s production volumes would contribute to worldwide overcapacity and a subsequent downturn. At the time, multinational integrated device manufacturers (IDMs) were closing down their fabs in North America, and foundries such as Grace Semiconductor Manufacturing Corporation, Hua Hong NEC, and SMIC were adding capacity. Some multinationals were transferring to joint ventures in China certain equipment and production activities focused on selected products. Many industry participants talked of significant future investments in wafer fabs.
Since then, it has become clear that market growth in China is a phenomenon at least as important as industry growth—if not more so. Electronics system vendors in China increased their consumption of semiconductors in 2005 by 31% over 2004 levels. The boom in electronics systems production in China has stood in direct contrast to flat or declining systems production in most other countries. In 2005, 24% of the worldwide semiconductor market was in China. On the production side, investment in Chinese wafer fabs has not materialized to the extent some industry observers thought it would, but Chinese semiconductor industry growth overall has been strong, at 35% in 2005. China accounted for 7% of worldwide semiconductor production in 2005.
One fact stands out above the others in this year’s report: China was responsible for 90% of growth in worldwide semiconductor consumption in 2005, continuing a trend we first observed beginning in 2003. All of the semiconductor executives we interviewed for this update believe the market in China will continue to grow at a much faster rate than the worldwide rate in 2005.
The Chinese operations of electronics manufacturing services (EMS) companies and original design manufacturers (ODMs), as well as China’s own original equipment manufacturers (OEMs), collectively caused nearly all of the growth in the worldwide market. The percentage of semiconductor sales for systems built in China for export increased to 64% in 2005,up from 60% in 2004. China exports these systems to such places as North America, Europe, and developed Asia.
One clear implication emerges: If semiconductor companies do not have a sufficient presence in China, they will not be able to supply the vast majority of new demand for chips in China. Therefore, our main recommendation in this report is that semiconductor companies assess their presence in China closely and take steps to remedy any deficiencies they note in the country. What are their relationships there? Are they calling on enough customers? Do they understand the requirements of the system vendors there? Are they designing to the vendors’ specifications? Do they have sufficient packaging, test, and assembly tailored to Chinese demand, and is it close enough to the demand? What else can they do to position themselves for demand growth in the country?
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