China Market Growth Fueled by Government Spending during Industry Downturn

SEMI (1/6) – A massive infusion of government spending in the semiconductor sector will be driving significant growth in the industry to 2020. The China central and local governments have announced investment of up to $50 billion in China semiconductor-related projects, marking a major shift in the investment business model for the global semiconductor industry. Equipment and materials suppliers who can leverage their current China industry relationships, and expand their contacts to the next generation buyers will prosper in the next decade.

The most recent activity in investment strategy marks a new phase of industry development in China. In the first phase from 2000–2005, China invested in the foundry model as part of a comprehensive push to develop a complete chip design-production-packaging-test infrastructure. This phase—marked by fabs from SMIC, Grace, Huanhong, TSMC, and Hejian—was enabled by private sector investments supported government tax incentives. The next phase peaking in 2005–2006 supported international integrated device makers (IDM) such as Intel and Hynix supported by government incentives.

The current phase extending at least to 2010 introduces an unprecedented new business model: government owned “virtual” IDMs. A summary of these recent and planned investments are provided in Figure 1. Many of these projects are based on three pillars: investment from government or state-owned entities, fab operation expertise from established companies such as SMIC or other experienced team, and a marketing/product partner such as Elpida. This new business model underscores the growing role of China-based investment and the continued importance of China as a global center of semiconductor manufacturing.