Kevin Meehan, leader of Bain’s Technology, Media & Telecommunications practice in Asia-Pacific, discusses how semiconductors present a huge economic opportunity for China, if it can figure out how to close the gap between domestic supply and demand.

Transcript

China’s long played a key role in the electronics manufacturing industry and as you might expect with a maturing economy they are now trying to figure out a way to move up the value chain to higher value-added activities within that space. Specifically if we double-click on the electronics industry and focus a bit down on to semiconductors we’ve seen a lot of increased activity across the value chain today within China. Specifically they’ve made investments,  not just in the front end but also in the back end. So they’ve looked at NXP’s RF business that was spun out as a result of the Freescale and NXP merger. They’ve also made investments  in chipmos, power test, STATS chipPAC and others in the backend. One key trend underlying this move within China is a growing gap between the domestic supply and expected domestic demand going forward.  Right now China supplies about fifteen percent of the demand. We expect consumption within China to be at more than three times that by 2020 where they’ll be consuming over fifty percent of the worldwide demand for semiconductor chips and that creates a massive economic opportunity for China if they can figure out how to close that gap and supply more of that with with domestic suppliers.  Beyond the supply gap,  in the obvious economic benefits of closing that gap there’s also real concerns around IP and around security and the security of technology in general. This was exacerbated by the Snowden incident in the last several years and some geopolitical concerns then around both the west and for China sharing technology sharing IP and how do they make sure that their infrastructure is secure. As a result,  as part of China’s 13th five-year plan their specific calls for continued investment across the semi-conductor value chain, both at the national level as well as at the provincial level and in fact beyond some of the deals that i talked about earlier there’s been several attempts by companies in China to make investments in foreign firms both in the US and in Taiwan. Frequently those end up not going through either because of a perceived concerned that they’ll be blocked by the government or a real concern that they’ll be blocked by those governments. The outcome here is hard to predict of course but we do know a couple of things. We know that China’s had mixed success in the past for instance with high-speed rail they did a great job of gaining IP and supplying not just their domestic needs but also needs throughout the worldwide economy they’ve had less luck with aircraft and automotive where they’ve been manufacturing within china for years but have never really been able to break onto the world stage we also know that barriers to entry in the semiconductor industry are particularly high.  It is not just about money. There are many other firms and countries that have thrown a lot of money into the semiconductor industry and failed to really reach the success levels that they hoped for but it’s really about IP.. it’s about technology… it’s about engineering talent and those are things that generally can’t be fixed overnight. So if we flip the lens for a minute and think about this not from the perspective of China and the Chinese companies but of the IDM’s and the multinational competitors in the space, whether they be in the U.S., Western Europe, Japan, Korea, Taiwan we would recommend that they be proactive and how they think about the opportunities ahead of them and the challenges they may face as China enters more strongly into this market. For many this is a classic prisoner’s dilemma so taking the time to really do some game boarding and understand what are the moves China might make…. whatever moves your competitors might make and therefore what are your options  …. can help to inform whether /when / where and how to invest or partner with China.