USA: Although China’s semiconductor purchasing boom is cooling down, the nation’s demand for locally designed chips is heating up, with domestic consumption expected to rise by more than 60 percent from 2007 to 2012, according to iSuppli Corp. By 2012, $42.1 billion worth of Chinese-designed semiconductors will be purchased for use in electronic equipment made in the nation, up 63.4 percent from $25.8 billion in 2007.
 
The attached figure presents iSuppli’s forecast of purchases of locally designed semiconductors in China. These figures do not account for localized design work by foreign companies operating in China, including those based in Taiwan.
 

 
“The growth of China's semiconductor consumption has slowed since 2005,” said Kevin Wang, senior manager for China Research at iSuppli. “The main reason is that foreign electronic equipment makers have decelerated the pace of their manufacturing outsourcing to China. This is having a negative impact on China’s electronic equipment manufacturing and semiconductor industries. China’s semiconductor industry now is undergoing a transformation, with an increased focus on designing chips for electronic products that are popular in the nation.”
 
Demand for these locally designed chips is being driven mainly by China- and Hong Kong-based electronics OEMs and contract manufacturers. However, foreign Original Design Manufacturers (ODMs) that develop and manufacture goods for Chinese OEMs also are contributing to the growth.
 
“In the electronics industry, China often is seen simply as a low-cost manufacturing region,” Wang said. “However, the rise of the semiconductor design business in China shows that the nation’s high-tech future increasingly will reside in capitalizing on local brainpower to produce innovative products that appeal to the domestic audience.”
 
Domestic issues
Mobile handsets were the largest application for Chinese-designed semiconductors in 2007, consuming $4.4 billion worth of chips for the year. Portable Media Players (PMP)/MP3 players were the second-largest application, buying $2.2 billion worth of semiconductors.
 
Mobile handsets will remain the largest application through 2012, when the area will consume $9.8 billion worth of domestically designed chips. Notebook PCs by 2012 will become the second-largest area for domestically designed semiconductors, with $3.4 billion worth of consumption for the year.

The fastest-growing segment for domestically designed semiconductors over the next few years will be mobile communications infrastructure equipment, which will experience a 24.9 percent CAGR from 2007 to 2012. Next fastest will be LCD-TVs, which will achieve a 21.8 percent CAGR during the same period.
 
Chinese manufacturers that concentrate on other consumer electronics products, such as Digital Set-Top Boxes (D-STBs) and white-good appliances, also will increase their spending on domestically designed chips during the coming years. Other expanding application areas will include car infotainment products and security systems such as surveillance devices, smoke detectors and door security systems.
 
When the chips are down
The boom in locally designed semiconductor usage in China comes at a time of deceleration for the nation’s overall chip consumption.
 
China's consumption of all kinds of semiconductors is expected to expand to $81 billion in 2008, a 7 percent increase from $75 billion in 2007, iSuppli Corp. predicts. Consumption is expected to grow at a 7.7 percent CAGR from 2007 to 2012. In contrast, China’s overall semiconductor consumption grew at a CAGR of 27.7 percent from 2001 to 2006.
 
A year to forget
This year is a difficult one for Chinese electronic equipment producers, especially smaller manufacturers.
 
China’s central government has adopted a tight monetary policy to avoid overheating the economy, even while it reduced export tax rebates. Furthermore, the increasing value of the Chinese yuan is placing great pressure on domestic companies producing low-end electronic equipment.

Furthermore, operating and labor costs are still rising, along with prices for food, gasoline and electricity. Higher inflation, a weakened equity market and the devastating earthquake in Sichuan province negatively affected domestic market demand for electronic equipment in the first half of 2008.
 
iSuppli anticipates that the market will be in a readjustment period for the remainder of 2008 and in 2009. Small companies without strong R&D capabilities will exit the market. At the same time, many leading Chinese OEMs, such as Huawei and ZTE, will grow larger by aggressively targeting international markets. Meanwhile, Chinese Independent Design Houses (IDHs) are expected to acquire more international clients.
 
Source: iSuppli