Competitiveness and Outlook for TV/Mobile Phone/Semiconductor Industries

Transcription

1 Competitiveness and Outlook for TV/Mobile Phone/Semiconductor Industries February 29, 2012 Prepared by: JANG Sung-Won & LIM Tae-Yun & Park Sung-Bae Executive Summary 1

2 I. TV Industry Since the mid-2000s, China s TV industry has grown into the world s largest TV market. Its rapid growth has been supported by the wide spread of TVs in rural areas and government subsidies. China s local TV brands have taken advantage of the rapid growth in the domestic market to develop the next generation product and core technologies, and accelerate its advance into overseas markets, especially emerging markets. China s TV industry is likely to increase the percentage of parts manufactured within China, narrow the gap in core technology with counterparts in advanced countries, nurture next generation display technologies, and strengthen its effort to jump into the global market. For their part, Korea s TV manufacturers will face stiff competition from Chinese TV brands in a battle to grab a bigger share in the global markets. Therefore, they need to come up with diversified countermeasures. II. Mobile Phone Industry Although China is the world s largest mobile phone producer and has the potential to become the largest smartphone market in two to three years, Chinese mobile phone makers are much less competitive than global leaders. For global makers including Korean companies, China s mobile phone market will present an opportunity to increase sales. However, there are also threats, as competition intensifies and Chinese mobile phone makers are becoming more competitive. Therefore, Korean companies should respond proactively to opportunities and threats in China s mobile phone market. III. Semiconductor Industry Although China rose to become the world s largest semiconductor market as of 2010, the nation s chip production is much smaller in comparison. China s semiconductor industry is still far behind their advanced counterparts in terms of both manufacturing and design. Certainly, the competitiveness of China s chip industry, especially the design sector, will be strengthened. Korean chip makers should come up with measures to tap into the everexpanding Chinese chip market, taking advantage of their strengths and making up for the weaknesses of its chip industry. 2

3 I. TV Industry 1. The TV Industry in China Emerging as the World s Largest TV Market Since the 2000s, China s TV industry has gone through three phases of development. During the first phase ( ), cathode ray tube (CRT) TVs, mostly produced by local brands, were popularized and flat-screen TVs were first released in the market. During the second phase ( ), the flat-screen TV market, mostly supported by global brands, grew significantly. In the third phase (since 2009), the Chinese government s subsidies have helped flat-screen TVs to spread further and the Chinese market was dominated by liquid crystal display (LCD) and light-emitting diode (LED) TVs mainly produced by Chinese brands. From 2000, TV penetration has jumped in Chinese rural areas, and increasingly more people have either bought new TVs or replaced their old TV sets with new ones. In 2008, the Chinese government implemented subsidy policies to spur the demand for TVs; the two most prominent subsidy policies being subsidies for rural areas and subsidies for the replacement of TVs. As a result, China accounted for 21% of the world s LCD TV market and emerged as the world s largest TV market in 2011, surpassing the US and Western Europe. At the same time, China has risen as the world s largest production base, manufacturing 40% of the world s LCD TVs including those made by original equipment manufacturers as well as local and foreign brands. Local Brands Dominate China s Domestic Market Since 2009, China s local brands have grabbed more than 60% of China s LCD TV market share in terms of the units sold and 50% of the market in terms of sales revenue. With regard to the number of TVs sold, Korean companies had a market share of 15-17% before Since then, however, the figure has dropped to 13-14%. Similarly, Japanese companies market share plunged from 27% in 2008 to 21% in China s local brands have been able to dominate the nation s TV market mainly due to their price advantage. For example, the price of a 55-inch smart TVs, one of the latest TV models from Hisense, China s premium electronics brand, is about 20% cheaper than that of rival Samsung. The price gap between local brands and global brands is due to overhead costs, labor costs, marketing expenses, and financial support from the Chinese government. 3

4 Price competitiveness has enabled China s local brands to dominate small and mediumsized cities and rural areas. In the first half of 2010, global brands with strong brand power grabbed 31% of the TV market in China s cities. On the other hand, local brands dominated an eye-popping 90% of the market in China s price-sensitive rural areas. China s local brands have prioritized small and medium-sized cities and rural areas, while taking advantage of a variety of service networks and distribution channels such as stateowned chain stores, local chain stores, department stores, electronics retailers, and wholesale stores. In advanced LCD markets such as the US, Western Europe and Japan, however, Chinese brands market share is a mere 3%. Nevertheless, it has been on the increase in emerging markets such as Eastern Europe, Asia-Pacific, Latin America, the Middle East, and Africa, jumping from 3% in 2008 to 6% in Figure 1. Market Share in LCD TV Market by Region (in terms of units sold) Advanced markets Emerging markets Chinese market 66 million Korean companies Japanese companies Chinese companies Others 2. Strategies of China s Major TV Makers From a Domestic Market-Oriented Strategy to Global Market- and Technology- Oriented Strategy China s LCD TV market has been led by Chinese local brands since 2009, with all top five sellers being domestic brands. These top five manufacturers, namely Hisense, Skyworth, TCL, Konka, and Changhong, have seized more than 55% of the nation s LCD 4

5 market, and are further strengthening their market leadership. However, their overseas sales revenue of most local brands account for only 13% of their gross sales revenue, because they are too focused on the domestic market except for some export-oriented companies such as TCL and Haier. Also, competition has intensified between local brands and global brands, and among local brands. Therefore, local brands are making efforts to develop next generation products and core technologies, while strengthening their overseas operations, especially in emerging markets. Table 1. Features of Chinese Brands Overseas Business Percentage of overseas sales revenue in gross sales revenue of TVs (2010) Export destination Features Domestic market-oriented Hisense 21%, Skyworth 6% The Middle East, Asia-Pacific Put a priority on their competitiveness in the domestic market and take advantage of their prowess in the domestic market to advance into overseas markets Overseas business TCL 31%, Haier 44%, Xoceco 58% Latin America, Asia-Pacific, the Middle East, Africa, Western Europe Put a stronger emphasis on overseas operations than their domestic market-oriented counterparts Hisense, the top performer in China s domestic TV market, is spearheading the development of next generation products and global competition. Hisense has strengthened its control on costs, expanding its LCD module business and raising the share of LCD panels made in China. Also, the company has emphasized the development of core technologies, and the next generation products such as 3-dimension (3D) and smart TVs. It aims to increase its exports and open up major overseas markets. For its part, domestic market-oriented Skyworth has beefed up its efforts to make inroads into the overseas markets and strengthen vertical integration. Considering that 90% of its TV sales revenue comes from China s domestic market and 60% from rural areas, it urgently needs to jump into the global market. As 2011 was the first year in stepping up 5

6 efforts to enter the global TV market, Skyworth aggressively released its brand and introduced increasingly more premium products by strengthening its technological capacity to develop core parts and materials. 3. Opportunities and Threats to Korea s TV Markets More Core Parts Manufactured in China China s TV industry has strengthened its competitiveness, which has, in turn, posed a big threat to Korean TV makers. China s TV industry has aggressively increased the percentage of core parts manufactured within China. As one of the world s largest manufacturing bases for LCD related products, China aims to take the leadership in the global TV industry by strengthening its capacity to produce LCD panels and LED chips domestically. Currently, the goal is to become 100% self-sufficient in LCD panel supply at home and account for 20% of the global supply by Also, it plans to raise tariffs on imported LCD panels in an effort to protect Chinese LCD panel manufacturers, and has increased investment in LED, a core part of LED TVs since Chinese TV makers have also narrowed the gap in core technologies with their advanced counterparts. At present, Chinese companies release new TV models at least three months after advanced electronics companies have introduced their new models. But the gap is likely to narrow further as China acquires LCD panels more easily (oversupply due to an increase in LCD panels made in China), manufactures increasingly more general-purpose parts domestically, improves its overall technologies in manufacturing and assembling, and strengthens its capability to copy the design of products released by their competitors. As for the Chinese government, it has nurtured the next generation display industry. Under the 12th Five-year Plan, the government plans to support core technologies for 8- and 8.5-generation LCD panels and active matrix organic light emitting diode (AMOLED) screens larger than 20 inches. Also, it aims to generate synergy by building a LCD industry cluster, while fostering manufacturers of parts like glass panels, Polaroid film and liquid crystal. Finally, Chinese TV makers are strengthening their global operations. Chinese companies consider emerging markets as key strategic markets and are making aggressive efforts to 6

7 export products and establish overseas manufacturing bases. They are also likely to take advantage of their price competitiveness to develop their own global brands. Figure 2. Percentage of LCD Products Manufactured in China Rest of the world China Rest of the world China Rest of the world China 80% of the world s LCD monitors are manufactured in China 50% of the world s laptop computers are manufactured in China 40% of the world s LCD TVs are manufactured in China Source: Danaka Naoki (October 17, 2011). Government Stirred by Flat-panel Display Industry: Ideal and Reality. Nikkei Electronics. Figure 3. Major Investment Plans for LCD Panels in China Generation Location Operation Plan Note BOE 8 Beijing 4Q 2011 Manufacturing BOE 8 Hefei 4Q 2013 Being established TCL (CSCOT) 8 Shenzhen 4Q 2011 Manufacturing IVO 8 Kunshan 1Q 2013 Stakes of AOU (Taiwan s LCD maker) Samsung 7.5/8 Suzhou 1H 2013 Being established LG 8 Guangzhou Not decided Beginning of construction delayed Growth Potential of China s TV Market The growth of China s TV industry has also provided Korean companies with valuable opportunities. Above all, China is a big TV market with great growth potential. China s LCD TV market is expected to grow at an annual average of 10.3% from 2011 to

8 and account for 23% of the global TV market, exceeding the world s annual average growth rate of 7.4%. On the other hand, TV markets are projected to experience a fall in growth in advanced markets. The market is expected to grow a mere 3.3% and 3.4% in the US and Western Europe, respectively. Worse still, Japan s TV market is expected to decline by 10.4%. As China emerges as the world s leading market, the nation s TV market is embracing new innovative products almost as fast as advanced markets. As a representative market leading global coupling in the TV market, China s role as a leading TV market will further increase. 4. Response of Korean Companies Responses to the Growth of the Chinese Market and Intensifying Global Competition In order to increase their influence in the global market, Korean TV makers must strengthen their competitiveness and grab a larger market share in China. However, armed with price competitiveness, not only are China s TV makers dominant in the domestic market, they are also aggressively advancing into the overseas markets, especially emerging markets. Therefore, Korea s TV manufacturers must devise diverse solutions, taking into consideration that China poses both a threat and an opportunity. Korea must be prepared to deal with strategically important markets. In other words, they should consider China as a strategic market which is as important as Europe and the US in terms of market volume and competition. To this end, they need to improve business functions ranging from R&D to operation, marketing, distribution, and service. They also need to expand organizations, hire more employees, strengthen R&D networks, establish distribution channels in small and medium-sized cities and rural areas, and enhance brand image. More efforts must be made to develop business models specifically designed for the Chinese market and establish a business ecosystem fit for China s TV industry. In line with this effort, they need to continue to develop new products with features such as color, design, and functions preferred by Chinese consumers. Chinese developers must also be encouraged to participate in the development of new products and providing contents and services that appeal to Chinese consumers. In addition, strategic alliances must also be 8

9 formed with local Internet service providers, portal sites and contents providers to offer Chinese customers attractive smart TV contents. Last but not least, Korean companies must efficiently cope with the intensifying global competition by improving product quality while developing various product lineups. To this end, they should preemptively deal with Chinese TV makers strategy to take advantage of their price competitiveness by advancing into newly emerging markets in China and establishing global manufacturing networks. Finally, they should establish diversified product lineups ranging from low-priced to premium products, while improving product quality and strengthening price competitiveness. 9

10 II. Mobile Phone Industry 1. The Mobile Phone Industry in China In 2010, China s share in the world s mobile phone production surpassed 70% at 1 billion units, surging from 10% in the early 2000s. This remarkable growth is attributable to two reasons. In 2005, the Chinese government abolished the mobile phone manufacturing license, which had been in place since 1999, prompting more companies to enter the market. And, in the wake of the 2008 global financial crisis, global mobile phone manufacturers such as Nokia and Sony Ericsson increased their outsourcing. The growth of China s mobile phone industry has been powered mainly by exports more than domestic consumption. At least 75% of mobile phones produced in 2010 were exported both to advanced countries including the US and Japan and developing countries including India and the Middle East. Figure 1. China s Mobile Phone Production & the Share in the World Mobile phone production in China (1 million units) The share in the world (%) Source: Paul Budde Communication (June 12, 2011). China Mobile Market. Nevertheless, not only is the country emerging as the world s biggest market in terms of domestic consumption, China also has the world s largest mobile phone subscriber base, with the number of subscribers amounting to 860 million in The number has risen exponentially since 2000 and surpassed that for landlines in The distribution of cheap or used phones and introduction of affordable prepayment systems played a critical role and as the penetration rate per capita was at only 64% in 2010, there is still huge 10

11 growth potential. The market size of the domestic mobile phone market was 320 million units in 2010, one-fifth of the world s market. The figure is estimated to climb to above 400 million, with China s share in the world market reaching one-fourth. However, Chinese mobile phone makers still lag far behind global leaders like Samsung and Apple. Although Chinese companies such as ZTE and Huawei were ranked fourth and sixth, respectively, in terms of global market penetration, there are still many challenges to overcome. First, improvements in brand image and popularity should be carried out as both are low not only in the global market but also in the domestic market. Second, technological obstacles must be overcome. Chinese mobile phone makers lack the technology to produce high-end products and thus have had no option but to concentrate on the low price market. Therefore, to expand their presence in the mid- and high-priced markets, Chinese mobile phone makers should improve their technological competitiveness in hardware, software, user interface and design. Third, they must seek ways to raise their profit rates, which are much lower than global companies. Intensifying price competition is expected to push the price of smartphones to as low as below US$ Opportunities and Threats to Korean Makers China s mobile phone industry will pose both opportunities and threats to global mobile phone makers including those in Korea. China s rapidly growing mobile phone market, especially the smartphone market, will present a good opportunity to increase sales. In addition, the high popularity of global brands among Chinese consumers will work favorably to global players. However, intensified competition in the Chinese market and the strengthening competitiveness of Chinese mobile phone makers will pose a threat. Opportunity 1: Explosive Growth of China s SmartPhone Market China s smartphone market has shown the most rapid growth and is expected to outpace the US to rank no.1 by As in the 2G mobile phone market, China s smartphone market is also expected to grow based mostly on affordable phones, as decisions to purchase smartphones in China are based more on the price of the device and service than the features or network speed. 11

12 Table 1. Market Prospects of Each Region (1 million units) (e) 2012 (e) 2013 (e) CAGR (2010~13) Asia (excl. China) % Western Europe % North America % China % Latin America % Others % Total % Note: CAGR is compounded annual growth rate. (e) means estimation. Source: Nomura (October 18, 2011). Asia Handset and Handset Chips. Opportunity 2: Popularity of Global Brands among Chinese Consumers Chinese consumers regard mobile phones as a symbol of social status. Therefore, preference for global brands is especially prominent in the mobile phone market than in the auto, television and PC markets. And such a trend has also been noticed in the rapidly growing smartphone market. Popularity of global brands such as Nokia, Samsung and Apple is high at above 10% while that of local brands such as ZTE, Huawei and Lenovo is at around 5%. The reason is attributable to the strengths of global brands in technology and design. (%) Figure 2. Brand Preference of Smartphones (2011) Jan. Feb. Mar. Apr. May June July Aug. Sep. Oct. Nokia Samsung HTC Motorola Apple Sony Ericsson Huawei Lenovo ZTE Source: Internet consumption research firm (ZDC.zol.com.cn) 12

13 Threat 1: Intensified Competition in China s Mobile Phone Market Competition among mobile phone makers has intensified due to the high potential of the Chinese mobile phone market. Also, to dominate the global mobile phone market, increasing market share in the world s largest market is essential. Global makers are determined to raise their share in the Chinese market. Nokia, for example, is struggling to defend its market share in China, releasing its new Windows phone, after witnessing a decrease in its global market share. Chinese phone makers are also bent on seizing the smartphone market, harnessing advantages as domestic players. In particular, the competition is forecast to be most fierce in the mid-priced smartphone market for phones priced US$ 300 or less. Global mobile phone makers are now entering the cheaper market while Chinese makers, who have the lion s share of the low-end market, are broadening their bases, producing more mid-priced smartphones at about US$ 300. The competition in China s smartphone market is also expected to become more complicated, as Chinese Internet companies enter the market. With the rapid rise of mobile Internet services via smartphones, Internet companies such as Baidu and Tencent QQ (generally known as QQ), are increasingly raising their presence. Their goal is to increase the sale of services by selling smartphones optimized for their services. Table 2. Chinese Internet Companies Entry into the Smartphone Market Company Name Alibaba Baidu Activities - The largest e-commerce company in China, Alibaba developed its own mobile operating system (OS) Aliyun. - The OS was first introduced to smartphones made by Tianyu. And Alibaba is seeking to optimize it for its cloud services. - The largest Chinese search engine company, Baidu developed its own Android-based OS Ease. - The OS supports search engine Baidu, map, e-books and cloud. Dell plans to introduce it via its China-bound smartphones. 13

14 Tencent - Tencent released smartphones with the QQ logo on them in cooperation with Huawei, ZTE and Tianyu. - It has included instant messaging and social networking services in HTC smartphones. Threat 2: Higher Competitiveness of Chinese Mobile Phone Companies Higher competitiveness of Chinese mobile phone makers will pose a threat to global mobile phone makers. Prime examples are ZTE and Huawei who are assessed to have especially high growth potential. In the first half of 2011, ZTE enjoyed strong performance with its flagship product Blade with sales reaching 5 million units, a 400% rise year-on-year. Chinese mobile phone makers are expected to grow based on the advantage they can enjoy as domestic players in the world s biggest single market, as Chinese mobile carriers strengthen strategic cooperation with Chinese mobile phone makers to produce affordable smartphones. In October 2011, China Unicom signed a deal with four Chinese mobile phone manufacturers (ZTE, Huawei, Lenovo and Coolpad) to be supplied with 8 million smartphones priced at about 1,000 yuan. A supply contract of such a size will contribute largely to increasing the sales and margin of Chinese mobile phone manufacturers. In addition, the technologies and product competitiveness of Chinese mobile phone makers are expected to improve significantly. ZTE and Huawei already seem to have created a virtuous cycle of R&D investment sales growth reinforcement of R&D. According to Jefferies 1, ZTE has 6% of the essential patents for Long Term Evolution (LTE), a mobile communication standard for the next generation. China s mobile phone makers initiated expansions of their investments in global marketing to overcome low brand recognition. Huawei sponsors the Supercoppa Italiana (Italian Super Cup) exclusively and ZTE is increasingly exposing its logo in advanced markets including Europe. 3. Implications 1 Jefferies (September 21, 2011). Smartphone patent wars far from over. 14

15 Those who become dominant players in China, the largest and most competitive market, will emerge as leaders of the global mobile phone industry. Therefore, mobile phone makers should be more proactive in seizing opportunities in China and responding to Chinese players growing competitiveness. Increased Competitiveness in All Product Lines In terms of products, mobile phone manufacturers need to improve their competitiveness in all product lines. Competition among global brands is intensifying in the high-end market while there are Chinese rivals to compete against such as ZTE and Huawei in the low-end market. Therefore, in the high-end market, they need to build up a premium image by leading technology innovation and differentiating their designs and user interface. In the low-end market, they need to secure price competitiveness to compete against Chinese companies and develop affordable products customized to Chinese consumers. Establish a Localized Smartphone Ecosystem As applications and contents are more important than voice calls in smartphones, mobile phone makers should establish and vitalize an ecosystem customized to China. They should attract local developers with a reasonable profit distribution system and develop localized applications. In addition, they should cooperate with service companies to develop various mobile services, securing smartphone contents. Completely Localize the Management System A completely localized management system is necessary to succeed in the world s largest smartphone market. Localization should be achieved in every process from planning, research and development, procurement, and production to sales. In particular, local characteristics and culture should be reflected in customized products by manufacturing the products entirely in China. In addition, manufacturers should employ more Chinese R&D personnel. 15

16 III. Semiconductor Industry 1. The Semiconductor Industry in China China, which has long been the world s production base for IT goods such as personal computers, home appliances, mobile phones, and cameras, emerged as the world s largest semiconductor market in China s chip market grew an average of 23% year-onyear from 2001 to 2010 to exceed US$100 billion and its share in the global chip market also grew rapidly from 10.7% to 43.9% during the same period. In spite of its status, China s chip production capacity, which has grown 24% year-onyear in the past decade, lags far behind the domestic demand. Although chip production skyrocketed from 20.3 billion yuan (3.6 trillion won) in 2001 to 144 billion yuan (25.5 trillion won) in 2010, China s chip making capacity satisfies only 20% of the domestic chip consumption. Facing a severe lack in supply, China has heavily depended on imports to meet the domestic demand for semiconductors. Accordingly, its chip import has been on the rise, increasing 14% from 2005 to 2010 on annual average. Figure 1. Consumption vs. Production of Semiconductors in China (Unit: 100 million yuan) Consumption Production Source: National Bureau of Statistics of China (2010). China s Statistics Yearbook 2010.; MIIT DB; CSIA DB; Samsung Economic Research Institute (estimated figure) 16

17 China s semiconductor industry still far lags behind its advanced counterparts in terms of manufacturing and design. China s chip manufacturing facilities were mostly established after 2005 but technologies used in those facilities remain out-of-date. Currently, advanced semiconductor manufacturers have made assertive efforts to develop micro process technologies and apply them to mass manufacturing. But Chinese chip makers are several years behind their advanced counterparts since they are dependent on imported technologies. As of 2009, processes designed to manufacture circuits of 80 nanometers or less accounted for 46% of all processes used by the global semiconductor industry. But, the figure amounted to a mere 25% in China for the same year. China s semiconductor producers also fall behind their advanced competitors, in terms of wafer size. For example, the share of 12-inch (300mm) wafers represents 45% of the world s wafer production. In China, however, the figure also stood at only 27%. Similarly, China s competitiveness is also weak in semiconductor design since the nation s chip makers have focused on the production of low value-added products. Chinese chip design companies tend to develop similar products, instead of differentiating themselves. As a result, they aim at a small market base and have generated low profit due to relentless price competition, though many chip design companies have emerged in China. The combined amount of sales revenue by China s top ten chip design companies is equivalent to the amount recorded by the world s ninth largest chip design company and one-fifth of the sales revenue of Qualcomm, the world s biggest semiconductor design company. Even when the per capita sales revenue, a productivity index to Chinese chip design companies, is considered, the current situation does not look any better with the per-capita sales revenue at less than one-third of the global average. Spreadtrum, the largest chip design company in China, a member of Global Semiconductor Alliance (GSA), recorded a per-capita sales revenue of US$160,000 in In contrast, the average per-capita sales revenue of 183 GSA companies was set at US$470,000 for the same year. 2. Prospects for Competitiveness of China s Semiconductor Industry in 2015 The competitiveness of China s semiconductor industry is expected to strengthen as government policies place a higher priority on high-tech industries and China s strong domestic market supports the growth of the country s chip design companies and 17

18 semiconductor foundries. The Chinese government is also promoting technological development throughout the value chain of the semiconductor industry. For their part, China s foundries are attempting to grow as partners of global semiconductor manufacturers and chip design companies are making efforts to expand their business volume. In addition, investment by Taiwanese chip makers in China is likely to further strengthen its semiconductor industry. Figure 2. Prospects for Chinese Semiconductor Industry s Growth Manufacturing: Growth of Chinese foundries as strategic partners of global companies Competition to develop the latest technologies has intensified in the global semiconductor industry. For example, technologies to produce 450mm wafers and circuits with widths of 10 nanometers are expected to be introduced by As micro process technologies heighten the need for further investment, global semiconductor companies such as Texas Instruments (TI), Freescale, Sony, and Toshiba are aggressively embracing Fab-Lite strategies under which the production of certain chip products are outsourced to foundry companies or less advanced chip companies. China s chip makers including foundries will accelerate their efforts to narrow their technological gap with advanced companies by forging partnerships with global companies currently struggling to minimize their investments. Semiconductor Manufacturing International Corporation (SMIC), one of China s most well-known 18

19 semiconductor foundries, plans to utilize the process for producing circuit widths of 45 nanometers to mass manufacture chip products from It also plans to invest US$12 billion to strengthen its production capacity and develop next generation technologies over the coming five years. With that, the gap is expected to contract to less than 2 years in terms of the process for circuit widths of 45 nanometers. The proportion of Chinese foundries in the world s chip production capacity will jump to 22% by And three out of 14 newly built (or planned for establishment) 300mm wafer fab lines will be constructed in China. Design: Strengthening Chip Makers Competitiveness by Expanding Business Scale The Chinese government plans to nurture 30 chip design companies with an annual sales revenue of more than US$200 million. It has set aside a portion of its US$586 million economic stimulus fund to encourage entrepreneurs to establish chip design companies. The fund will also be used to provide subsidies, loans and equipment for newly established chip design companies. The Chinese government also plans to develop system semiconductor technologies (system semiconductor encompasses application specific standard products, application-specific integrated circuit and logic chips) via such support. By doing so, it aims to provide support for large-scale electronics companies such as Huawei and ZTE in the communications industry, Lenovo in the computer industry, and Konka and TCL in the electronics industry, directly and indirectly. Recently, China s chip design companies have expanded their business volume via alliances or joint ventures as well as attempting to expand their business scale by collaborating with Chinese chip manufacturers. They also plan to strengthen their technologies and market competitiveness via global M&As. Furthermore, foreign-funded companies such as Qualcomm and Omnivision are aggressively acquiring Chinese chip design companies. Such efforts will help Chinese chip design companies to expand their business scale, improve profitability and strengthen development capacity, which, in turn, will beef up the competitiveness of China s semiconductor design sector in general. Sharpening Technologies via China-Taiwan Cooperation In February 2010, the Taiwanese government announced it would allow private investment into the Chinese semiconductor industry, which had been partly prohibited. Since then, Taiwan s representative foundries such as Taiwan Semiconductor Manufacturing Company (TSMC) and United Micro Electronics (UMC) have gained 19

20 approval from the government and expanded their investment in China, in an effort to find new growth engines. For example, TSMC acquired 8% of SMIC s shares and UMC plans to increase its stake in HeJian, a Suzhou-based Chinese foundry, from the current 15% to 30%. Supported by the advancement of Taiwanese foundries into China and cross-strait cooperation, China s chip manufacturing capacity is expected to rapidly improve. Crossstrait cooperation partly frees Taiwanese foundries from the burden of heavy investment since it allows them to transfer used equipment to China. It also helps them to acquire outstanding talents at a low cost and provide on-time/on-site support for finished goods companies in China, increasing their competitiveness. In turn, Taiwanese foundries will help Chinese companies to strengthen their competitiveness by providing valuable resources such as design libraries for China s specialized chip design companies. China s semiconductor design companies will also have strengthened competitiveness through stable and cooperative relations with TSMC and UMC, the world s largest foundries. Severe competition against Taiwan s semiconductor design companies such as Media Tek will also contribute to raising competitiveness. For example, China s chip design company Spreadtrum is set to take on the dominant market leader Media Tek s share by providing technological support as actively as Media Tek but at a lower price. Under the strategy, Spreadtrum has gradually made inroads into the Chinese mobile phone chip market, which has long been dominated by Media Tek. In 2010, Spreadtrum s sales revenue jumped 31.5% from a year ago to US$127 million 3. Suggestions From the perspective of Korea s semiconductor companies, China s ever-growing semiconductor market cuts both ways. On the one hand, it provides them with a valuable opportunity to expand market reach. On the other, it poses a threat as Korean chip companies would have to face intensifying competition from their Chinese counterparts. Therefore, the Korean semiconductor industry needs to utilize its strengths which include Korea s advanced manufacturing technologies, while developing solutions to overcome the limits of the business scale of chip design companies. 20

21 Figure 3. SWOT Analysis of Korea s Semiconductor Industry Maintaining a Technological Edge by Taking Advantage of the Strong Competitiveness of Korean Finished Goods Companies in the Global Market Korean chip makers need to lead the development of semiconductor technologies for high-end products via close cooperation with finished goods companies that produce displays, TVs, mobile phones, and cars as they are continuously in need of the latest chips. This means that there is a high possibility that they will welcome cooperation with semiconductor companies to develop new technologies. Demand for semiconductor products is also rising not only in the IT industry but other industries including the automobile and ship industries to become smart, use less electricity, and produce lighter products. As a result, the demand for chip products equipped with outstanding functions and high-end features will rapidly grow. Korea s semiconductor industry, which has the world s most advanced chip manufacturing technologies, is able to use its technological prowess to differentiate itself. And as one of the world s leaders in the memory chip market, Korea now also boasts the latest chip manufacturing technologies including those designed to narrow circuit widths, accelerate the processing speed of chips, and support three-dimensional (3D) features. In particular, Korean semiconductor companies can use these advanced manufacturing technologies to produce chips for mobile devices in which small size and efficiency are vital. Increasing the Clout on General-Purpose Market via Cooperation with Chinese Finished Goods Companies Korean chip companies can establish stable business relations with Chinese companies by providing customized services in accordance to the technological competence and product features of China s finished goods companies. Considering that popular products in China are suitable for other emerging markets with similar market conditions, Korean 21

22 chip makers should develop chip products required by Chinese finished goods companies. They can also learn from Media Tek, which has grown to become a globally renowned chip design company by providing system semiconductors for Chinese mobile phone companies. Media Tek s supply of system semiconductors helped Chinese companies who lacked the capacity to develop mobile phones by themselves, to produce high-priced mobile phones. In particular, Korean chip makers should establish stable business relations with giants such as Haier, Lenovo, and Huawei who have significant influence on the nation s IT, electronics, and communications markets. Strengthening Competitiveness in Chip Design via Volume Expansion and Talent Development Korean chip design companies must strive to achieve economies of scale and reduce manufacturing costs via M&As, joint development, or partnerships. Currently, chip design companies are facing an ever-growing burden to release new products more frequently and develop processes for narrower circuit widths. The cost to produce chip prototypes was set at US$200, ,000 for the 180 nanometer process however this has now jumped five to seven times to US$1.4 million with the introduction of the 65 nanometer process. Therefore, Korean chip design companies, who are smaller than globally renowned chip design companies, who independently develop and mass manufacture products are at a cost disadvantage. Measures to nurture talents who are able to design semiconductors used in a variety of sectors are also needed. Considering that semiconductors have infiltrated all industries, Korea s chip design companies must now find semiconductor designers who have expertise in the relevant sectors. For their part, Korea s universities and graduate schools also need to include chip design studies among its regular courses and develop customized curricula fit for the needs of the semiconductor industry. 22