CHINA: RIDING THE SILICON OX? - Allianz
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Photo by Rodion Kutsaev on Unsplash ALLIANZ RESEARCH CHINA: RIDING THE SILICON OX? 09 February 2021 04 Semiconductors: powering the wider IT industry 06 China’s success in product assembly, marketing and design relies on huge chip imports 09 How far, how fast? Make-or-break factors deciding China’s quest for autonomy
Allianz Research
The recent shortages of chips used in the automotive industry highlight
the growing ubiquity and critical nature of semiconductors, which are the
EXECUTIVE
essential components that power the USD3,000bn IT industry.
Semiconductors have been identified as a priority target for China’s Dual
Circulation strategy introduced in 2020. Drawing on the Made in China
SUMMARY 2025 plan introduced in 2015, the country’s 15th five-year plan (2021-
2026), due to be presented in March, will seek to accelerate its transfor-
mation into a major high-tech manufacturing hub.
China’s ambitions are the continuation of a successful strategy initiated
decades ago that saw it emerge as the world’s factory for consumer elec-
tronics goods in the 2000s. After joining the WTO in 2001, China generat-
ed a cumulated USD3,700bn trade surplus from computers, televisions
sets and telephones over the next two decades. Chinese brands then
emerged in the 2010s as strong challengers to well-established US, South
Aurélien Duthoit, Sector Advisor Korean and Japanese consumer electronics brands, featuring prominently
+33 (0) 1 84 11 45 04 across all major product markets. More than 60% of the 1.3bn
aurelien.duthoit@eulerhermes.com smartphones sold in the world in 2020 were designed and marketed by
China-based companies.
China’s rise as a top assembler and designer of consumer electronics has
come along with a trade deficit oscillating around USD200bn per year for
semiconductors. The country has fallen short of its objective to cover 40%
of its domestic semiconductor needs by 2020 and cannot realistically
hope to reach the 70% target assigned for 2025. No Chinese company
has yet emerged as a strong challenger to the American, South Korean
and Taiwanese companies that dominate the semiconductor value chain.
However, it would be misleading to judge China’s progress by only look-
ing at its capacity to reach targets that were puzzling from the start. The
past examples of South Korea and Taiwan show that strong positions in
key segments of the semiconductor industry take decades to build.
Quite the contrary, Chinese semiconductor companies have broadly out-
performed global competition in terms of growth in the past few years.
Because they started from a too distant position, with a very significant
technological lag, and because progress has been patchy across seg-
ments, they do not show up yet in the leaders ranking. Very tangible pro-
gress has also been made in the acquisition of more advanced capabili-
ties in semiconductor design and manufacturing or the US would not have
taken measures aimed at slowing down China’s emerging champions in
the first place.
2
09 February 2021
The Chinese market for semiconductors and semiconductor manufactur-
ing equipment will generate opportunities close to USD1,000bn by 2025.
While Chinese authorities will double down on efforts to promote domes-
tic companies, we also anticipate renewed incentives aimed at stimulating
foreign investment in the semiconductor sector – China is just not in a posi-
tion yet to rely exclusively on homegrown technologies.
Irrespective of its exact outcome, China’s strategy will create a risk of im-
port substitution by local production for countries exporting chips relying
on mature technologies and serving well-established industries. It is also
likely to create additional significant credit incidents among Chinese com-
panies because of the high stake, high risk nature of breakneck expansion
in such a R&D and capital-intensive industry. Because China’s strategy is
intended to boost both supply and demand, it could also reinforce volatili-
ty in an industry seeing one recession every four to five years on average.
Last, there is also higher risk of the US starting a new trade dispute with
China over worries of the use of advanced chips in critical industries
(defense, aerospace etc.) and the idea of its leadership in semiconductor
technology being threatened.
USD200bn
China's annual semiconductor trade deficit.
Photo by Laura Ockel on Unsplash
3Allianz Research
SEMICONDUCTORS:
POWERING THE WIDER IT INDUSTRY
Semiconductors are a thriving every industry has propelled global from its 2019 slump with global reve-
USD430bn industry that has powered revenue by about +7.5% per annum nues up +5.9%, driven by a recovery in
the wider USD3,000bn IT sector and over the past 30 years, more than twice prices and the launch of new genera-
everything electronic since the inven- global GDP growth (Figure 1). Defying tion chips.
tion of the transistor in 1947. The the global sanitary and economic crisis
growing use of electronics in virtually of 2020, the industry bounced back
Figure 1: Global semiconductor sales
Semiconductor sales (USD bn, LHS) % change (RHS)
500 50%
450 40%
400 30%
350
20%
300
10%
250
0%
200
-10%
150
100 -20%
50 -30%
- -40%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Sources: WSTS, Euler Hermes, Allianz Research
409 February 2021
2000s: China becomes the world’s Industry Investment Fund. This develop- China’s comparative advantage in the
factory for consumer electronics ment was at the time the latest step in assembly of consumer electronics re-
China’s 30-year-long march in the elec- lied on a mix of abundant and cheap
China’s growing attention to the semi- tronics industry, which is important to labor in a particularly labor-intensive
conductor industry materialized in the understand the country’s current ambi- industry, improving transport infrastruc-
form of specific provisions in the 2015 tions. China first established itself as the ture, proximity with leading electronic
Made in China 2025 plan. China was, world’s factory for consumer electronics technology providers (Japan, Taiwan,
at the time, capable of supplying an in the 2000s, following its entry to the South Korea), capacity to design and
estimated 15% of its domestic semicon- WTO. It share of world exports of iconic execute supply chains at an un-
ductor needs (i.e. excluding semicon- consumer electronics products matched scale and a fast-growing do-
ductors used in exported goods) and (computers, mobile phones, TV sets) mestic market. chips.
set an ambitious 70% autonomy target grew from 5-10% to 35-45% (Figure 2). China’s share in global consumer elec-
by 2025. Measures aimed at stimula- Between 2001 and 2019, those three tronics exports already peaked in 2015.
ting the local semiconductor ecosystem product lines generated a cumulated Production has been more scattered
included, among others, lower income trade surplus in excess of USD3,700bn. ever since, with no single clear big win-
taxes on semiconductor companies, Taking into account production for do- ner but many small wins for countries
lower import tariffs on semiconductor mestic needs to exported goods gives like Vietnam, Thailand or Mexico.
material and equipment, a fast-track China a share of global consumer elec-
access to equity markets and funding tronics production of between 60- 70%.
from the National Integrated Circuit
Figure 2: China’s share in world exports (%) Figure 3: Global smartphone shipments by vendor (%)
Computers Telephones Television Sets 2010 Q3 2020
Nokia (FI) Samsung (KR) LG (KR) Samsung (KR) Huawei (CN) Xiaomi (CN)
60%
RIM (CA) Apple (US) Others Apple (US) Oppo (CN) Others
50%
22%
40% 29% 33%
41%
30%
20% 14%
10% 18% 8%
12%
3% 11%
0% 3% 7%
2001200220032004200520062007200820092010201120122013201420152016201720182019
Sources: : Intracen, Euler Hermes, Allianz Research Source: Gartner
2010s: Chinese brands drive foreign 2010 with the exit of once dominant Chinese companies among top five
competition out of business firms, including Nokia, Sony, Research players and another three among top
in Motion (BlackBerry), Ericsson, NEC, 10 players (Figure 3). The success of
China’s growing importance as an as- Fujitsu or Toshiba, which were driven Chinese brands is generally attributed
sembly hub was followed by the rise of out of competition by the likes of to a mix of good value-for-money,
homegrown brands, first serving the Huawei, Xiaomi, Oppo, Vivo etc. These good performance in key features
domestic then international markets have not only taken a commanding (camera quality, memory capacity) and
and capturing higher value added acti- share of their domestic market (84% for innovative marketing (reliance on digi-
vities such as product design and mar- these four companies only) but also tal distribution channels, presence in
keting with some success. The largest grabbed a significant share of other social media etc.).
segment of the consumer electronics large markets (France, Germany, UK,
industry, smartphones are a good re- India etc.). In 10 years, the competitive
flection of the rise of Chinese players. landscape in the segment has been
Competition has been heating up since completely transformed, with three
5Allianz Research
CHINA’S SUCCESS IN PRODUCT
ASSEMBLY, MARKETING AND DESIGN
RELIES ON HUGE CHIP IMPORTS
For all its success, China’s strategy to trade surplus in finished goods tells a ductors was undoubtedly in mind for
move up the value chain has come at different story, with the overall balance policymakers during the preparation of
the price of a huge increase in imports standing at “only” USD135bn for 2019 the Made in China 2025 plan and the
of the semiconductors used in the and significantly down from its 2014 country’s so-called “Dual Circulation
smartphones, computers, televisions peak. Together with the growing matu- Strategy” outlined in 2020, due to ma-
sets and servers it assembles. Subtrac- rity of the consumer electronics market terialize in the country’s next five-year
ting China’s USD195bn trade deficit in and China’s slow decline as a manufac- plan.
semiconductors from its USD330bn turing hub, its large deficit in semicon-
Figure 4: China’s trade balance (USDbn)
Trade surplus (mobile phones, TVs, computers) Trade surplus, including semiconductors
400
350
300
250
200
150
100
50
-
2001200220032004200520062007200820092010201120122013201420152016201720182019
- 50
Sources: Intracen, Euler Hermes, Allianz Research
609 February 2021
Growing autonomy in semiconductors suppliers of critical silicon material and only company, together with Sam-
would serve three main targets semiconductor manufacturing equip- sung, to master the industry’s most
ment, to assess China’s current position advanced manufacturing stand-
The Made in China 2015 provisions for and its capacity to reach its semicon- ard. Two significant foundry com-
the semiconductor industry were actu- ductor autonomy targets. The overall panies are Chinese: SMIC and Hua
ally more a confirmation than a revela- picture is pretty straightforward: no Hong Grace. SMIC joined the same
tion of the country’s growing ambitions Chinese company has yet emerged as trade blacklist as Huawei in late
in high-technology components, remi- a heavyweight. 2020, making it more difficult for
niscent of both Taiwan and South Ko- Silicon wafer production is an oli- the company to buy US equipment
rea’s strategies to rise as semiconductor gopoly dominated by Asian play- and technologies.
powerhouses, initiated in the 1980s. ers, with Shin Etsu and Sumco of Fabless companies, i.e. companies
Chinese ambitions in semiconductors Japan accounting for more than designing chips while leaving man-
would serve three objectives: half of global segment revenues. ufacturing to foundries, often have
Help the Chinese electronic ecosys- Of note, Globalwafers of Taiwan little in common and specialize in a
tem find new growth opportunities has reached an agreement to ac- limited number of semiconductor
and anticipate further erosion of quire Siltronic of Germany, mean- applications (power, memory, tele-
the country’s market share in glob- ing four companies will control com etc. chips). The biggest players
al exports. about 90% of the market. Emerging are mostly American or Taiwanese,
Support China’s broader ambition Chinese wafer manufacturers have but it is definitely in this segment
to transition to a more knowledge- a combined market share inferior that China’s progress is the most
oriented economy with the devel- to 5%. tangible, with many small yet fast-
opment of high valued added Semiconductor manufacturing growing players
manufacturing and services, and equipment is similarly a collection Integrated design manufacturers,
help reduce the country’s largest of oligopolies with a handful of engaged in both chip design and
trade deficit source. companies dominating the ma- manufacturing, also operate across
Reduce reliance on foreign parties chine tools specific to each step of diverse industries and applications.
for the manufacturing of chips with semiconductor manufacturing The leaders are mostly American
potentially strategic purposes (deposition, lithography, etching and European companies.
(surveillance, aerospace, defense). etc.). American firms and technolo-
gies are ubiquitous and have been A striking feature of the industry is the
Chinese players are nowhere close to used as powerful leverage in the high degree of specialization of com-
industry leaders… US-China tech and trade dispute. panies and countries: no country can
Foundry capacities are dominated claim a dominant position all along the
Figure 5 provides an overview of the by Taiwanese firms, with TSMC value chain.
leading listed companies of the wider alone accounting for more than
semiconductor ecosystem, including the half of global capacities and the
Figure 5: Leading players in the semiconductor value chain
Sources: Euler Hermes, Allianz Research, Gartner, TrendForce, company information.
Figures are for semiconductor operations only wherever possible 7Allianz Research
… but are growing at a very fast pace Rankings also fail to capture the While China strived to provide for 70%
activity of foreign firms in China. of its domestic semiconductor con-
The absence of Chinese players among Industry leaders including Intel, sumption by 2025 in the Made in China
top tier companies all along the value Samsung, SK Hynix, Micron, Texas 2025 plan, consultancy IC Insights be-
chain does not mean that China is not Instruments, Infineon, NXP, UMC lieves this share has only marginally
moving up the value chain: and TSMC manufacture semicon- improved from 15% in 2015 to 16% in
Looking at a sample of 25 leading ductors in the country and play in 2019, and forecasts a 20% share by
listed Chinese semiconductor com- important role in training the coun- 2025. This pace of progress would be
panies since 2010 (Figure 6), we try’s labor force and reducing its consistent with the cases of South Ko-
observe a more than fourfold in- reliance on imported components. rea and Taiwan, two of the industry’s
crease in combined revenue, or Their local capacities, however, leading designers and manufacturers
about +18% per annum, vs about generally play a secondary role in of semiconductors, whose success must
4% per annum for the wider in- their manufacturing mix and rely be traced back to government plans
dustry over the same period. This on mature technologies. initiated in the 1980s. It was only in the
means China is definitely winning They also cannot account for the mid-2000s that both countries started
market shares, but from such a growth of private and/or diversi- to generate recurring trade surpluses in
minor and distant position compa- fied and/or state-run companies, semiconductors, and with a clear focus
red to industry leaders that it gene- some of which, such as Tsinghua on a narrower set of segments compa-
rally does not appear yet in ran- Unigroup or HiSilicon, are among red to China’s very broad approach.
kings. This is made more acute by China’s largest semiconductor
the fact that China targets growing companies.
autonomy across all segments,
rather than focusing efforts on se-
lected activities.
Figure 6: Listed Chinese semiconductor companies’ turnover index (2010=100)
Turnover index % change (RHS)
500 35%
450
30%
400
350 25%
300
20%
250
15%
200
150 10%
100
5%
50
- 0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Sources: Euler Hermes, Allianz Research, Thomson Reuters Eikon
809 February 2021
HOW FAR, HOW FAST?
MAKE-OR-BREAK FACTORS DECIDING
CHINA’S QUEST FOR AUTONOMY
While China’s progress has fallen short 2020, Chinese ambitions in semi- companies such as Huawei (which
of its own targets, there is little doubt conductors will most likely materi- faces restrictions for its chips manu-
that its support to domestic companies alize into new provisions in the factured by a third-party company
will continue to translate into dynamic country’s 15th five-year plan for the using US technologies) or SMIC
growth and slow but steady gains in 2021-2026 period. (which can no longer buy state-of-
market shares in the next decades. The Investors’ confidence in the capaci- the-art US machine tools) are
exact timing at which it will reach au- ty of Chinese companies to eventu- effectively slowing down China’s
tonomy or technological parity is far ally turn a profit, especially in the capacity to manufacture and de-
too uncertain and remote to be precise- most R&D and capex-intensive seg- sign advanced chips. This leverage
ly assessed, but a few factors will play a ments of the industry such as comes at a price for US equipment
crucial role in shaping the country’s foundries. SMIC, China’s largest makers: China is the world’s largest
future progress: foundry player, has alone burnt market for semiconductor manu-
The magnitude of the country’s about USD6.9bn of cash over the facturing equipment, generating
efforts to fund and channel private past 10 years. an estimated 26% of a USD70bn
capital to its 50,000 company-rich Beijing’s patience as regards the industry (Figure 7). Lasting re-
semiconductor ecosystem and fur- progress made by state-owned strictions could result in US firms’
ther attract foreign manufacturers. semiconductor companies. The losing market shares to foreign
The country’s financial arm for the decision to let Tsinghua Unigroup, competitors and stir retaliation
support of its semiconductor indus- a holding company with ownership targeting US tech firms operating
try, the China Integrated Circuit of some of China’s largest and in China. As of February 2021, the
Investment Industry Fund (CICIIF, most advanced semiconductor newly elected Biden administration
also known as “The Big Fund”) was companies, go insolvent in 2020 has not committed to clear actions
able to invest an estimated has sent a signal that the country regarding the future of the sanc-
RMB340bn (about USD50bn) in may not be ready to fund its cham- tions targeting Chinese companies
Chinese semiconductor companies pions at all costs. inherited from the previous admin-
in its first two rounds (2014 and The state of the US-China relation- istration.
2019). Following the introduction ship on technology and trade, be-
of the new Dual Circulation doxa in cause current restrictions placed on
9Allianz Research
Figure 7: Semiconductor manufacturing equipment sales by region, 2020 (%)
China Taiwan Korea Japan North America ROW Europe
4% 3%
9%
26%
11%
23% 24%
Source: SEMI
What does this mean for companies? skilled labor force can be trained, expe- ders means that gains in market shares
rience can be accumulated and trust are slow, and that China’s march to-
China’s case shows that progress can can be built in an industry where tight wards greater semiconductor autono-
only be sped up to a certain extent: cooperation is crucial between my will be a matter of decades. But
substantial investment has proven effi- upstream and downstream companies, irrespective of their exact outcome,
cient to help domestic companies gain chip designers and manufacturers, the China’s efforts to become more self-
momentum in their semiconductor de- public and the private sectors, universi- sufficient in semiconductors will have a
sign and manufacturing capabilities. ties and companies and across coun- strong impact on the industry in the
But it cannot make miracles in terms of tries. Growing fast in a fast-growing next five years (Figure 8).
the pace at which a large and highly industry dominated by undisputed lea-
Figure 8: Risk and opportunity matrix – China’s impact on the industry by 2025
Sources: Euler Hermes, Allianz Research
1009 February 2021
Plotting the main risks and opportuni- ment. Foreign companies will have 2010). Those countries are known
ties depending on their likelihood and to strike the right balance between as local manufacturing hubs for
impact on the industry, we anticipate reaping the benefits granted by international players that could
the following developments for the Chinese authorities (typically typically consider growing their
years to come: grants and tax breaks) and the risk presence in China.
As discussed above, the semicon- of accelerating China’s progress New developments in the trade
ductor industry’s powerful long- along the learning curve. Domestic and technology war between Chi-
term growth drivers, combined with companies will most likely see a na and the US could also tip the
China’s efforts to capture a grow- new round of support measures in scale in one direction or another.
ing share of global revenues, will the next five-year plan. Rather than As discussed previously, US
create substantial opportunities by playing catch-up in markets where measures preventing Chinese com-
2025. Assuming the same com- domestic companies are small and panies from using advanced US
pound annual growth rate ob- late, Chinese authorities could technologies are slowing Chinese
served over the 2010-2020 period, adopt more of a “leapfrogging” progress, but hurting US equipment
and keeping China’s share in reve- stance by which more emphasis makers and leaving opportunities
nues constant at 35%, the Chinese would be placed on product mar- to competitors. Should the situation
market would reach at least kets that are still emerging and worsen, China could retaliate by
USD185bn in annual sales by 2025 whose competitive positions can targeting US semiconductor firms
and generate more than still be disputed (typically, artificial generating the majority of their
USD850bn in revenues by then. As intelligence). revenues in the country with little
regards semiconductor manufac- Turning to the risk side, we do not contribution to the local ecosystem.
turing equipment, China’s ambition see how a global Chinese champi- The increasing share of China in
to have more chips made domesti- on could emerge within five years both demand and supply could
cally has already translated into a in any of the major segments dis- also reinforce the volatility of the
3.5 times increase in sales to China cussed previously. We do see, how- sector, known for its boom-and-
between 2015 and 2020; assuming ever, how progress made in domes- bust cycles with a recession every
softer sales growth because of US tic chip design and manufacturing four to five years on average. The
sanctions but still strong govern- capabilities could reduce the need fact that Chinese players enjoy
ment support to local foundries, for imported components with generous public support could, in
cumulated sales to China could comparatively lower value added. periods of downturn, slow down
represent somewhere between The risk of import substitution is the necessary cuts in supply that
USD70bn and 100bn by 2025. obviously higher in product mar- allow prices to recover.
For all its desire for greater autono- kets relying on mature technology Last, as evidenced by the default of
my in semiconductors, China will nodes and serving well-established Tsinghua Unigroup in late 2020,
necessarily rely on domestic invest- industries. We find hints of coun- Chinese authorities will not support
ment by foreign leaders to move tries facing growing Chinese com- their domestic players at all costs
up the technology ladder and cut petition by looking at trade data: and could let market mechanisms
its huge deficit in chips. Its current among China’s top suppliers of decide the fate of non-performing
competitive positions along the semiconductors, Malaysia, the Phil- companies as a way to consolidate
value chains are too weak and its ippines, Singapore and Thailand the domestic industry, translating
distance from leaders too im- have been losing market shares into a higher risk of payment inci-
portant for the country to realisti- nearly continuously in the past few dents or defaults.
cally reach its autonomy targets years (16% of Chinese semiconduc-
without further international invest- tor imports combined, vs 24% in
11Allianz Research
APPENDIX - Glossary
Silicon wafer companies manufacture the round silicon substrate known as wafers used by foundries and integrated design
manufacturers. Standard wafer diameters include 150, 200 and 300mm.
Semiconductor manufacturing equipment companies provide foundries and integrated design manufacturers with the
necessary machine tools to turn silicon wafers into chips.
Fabless companies focus on designing semiconductors whose production is outsourced to foundry companies.
Foundries are companies focusing on manufacturing semiconductors for third-party clients.
An integrated design manufacturer (IDM) is a company both designing and manufacturing semiconductors. They may out-
source part of their production to foundries.
A process node can be broadly defined as a generation of manufacturing process. An advanced process node can, on a
given surface of silicon, have a higher density of transistors than an older process node because it uses smaller transistors .
The feature size of a transistor is measured in nanometers (nm). Today’s most advanced manufacturers use 5nm process
nodes.
Semiconductor companies form a very heterogeneous sector made of hundreds of different product markets that only have
in common the use of silicon for the production of integrated circuits. Product markets can be loosely divided according to:
The process node used. Not all product markets require semiconductors made using the most advanced technologies.
The wafer size used. Much like for process nodes, there is no ideal wafer size.
The application or purpose of the chips (memory, telecommunications, computing, power etc.)
The end-use industry (smartphones, computers, automotive, industrials, etc.).
Trade data
Data for trade are based on HS4 product codes and include, depending on the indicators, one or more of the following
items:
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FORWARD-LOOKING STATEMENTS
The statements contained herein may include prospects, statements of future expectations and other forward -looking
statements that are based on management's current views and assumptions and involve known and unknown risks and
uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such forward -
looking statements.
Such deviations may arise due to, without limitation, (i) changes of the general economic conditions and competitive situa-
tion, particularly in the Allianz Group's core business and core markets, (ii) performance of financial markets (particularly
market volatility, liquidity and credit events), (iii) frequency and severity of insured loss events, including from natural ca-
tastrophes, and the development of loss expenses, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi )
particularly in the banking business, the extent of credit defaults, (vii) interest rate levels, (viii) currency exchange rat es
including the EUR/USD exchange rate, (ix) changes in laws and regulations, including tax regulations, (x) the impact of
acquisitions, including related integration issues, and reorganization measures, and (xi) general competitive factors, in
each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more
pronounced, as a result of terrorist activities and their consequences.
NO DUTY TO UPDATE
The company assumes no obligation to update any information or forward -looking statement contained herein, save for
any information required to be disclosed by law.
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