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November 22, 2017

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When the chips are down, in supply, not price

SOME chip prices are rising faster than at any time in recent memory.

Chinese buyers of electronic devices, who comprise the world’s largest market, can expect to pay more for their favorite gadgets. Game fans and designers looking to upgrade titles already are paying triple the price of earlier this year for two bars of eight gigabytes of memory.

Prices of chips for memory, graphic and central controlling, which are used in computers, TVs, smartphones, home appliances and in the latest model cars, are also expected to jump. In the wider landscape, the wave will finally wash over the whole of China’s innovation-driven economic transformation. 

The rising cost contradicts Moore’s Law, an industry axiom that says chip capabilities double each 18 months with a corresponding decrease in prices. The reasons behind the unusual price hike for memory chips are simple: short supply and a high-tech threshold.

It has prompted some media to call semiconductor production “the best investment” of the year.

China is a global manufacturing center and top market of consumer electronics, from smartphones and TV to computers. All those devices operate on chips, and demand is surging. At the same time, local capacity in chip production, especially on the high-end of the industry, is squeezed, forcing China to depend more heavily on chip imports.

“High-end chip design and manufacture require ever more advanced technologies,” said Zhao Weiguo, chairman of Tsinghua Unigroup, one of China’s top semiconductor firms. “That is the diamond in the technology industry in all major countries.”

However, the US, South Korea and Taiwan ban the export of their most advanced chip technologies to the Chinese mainland.

Despite huge investment from government funds and companies, the situation in China’s mainland semiconductor market isn’t expected to change anytime soon.

Broadcom’s attempt to acquire Qualcomm in a deal valued US$130 billion is another signal reminding China of the necessity and urgency of strengthening its own integrated circuit industry.

Imported chips

Almost 95 percent of global production of DRAM (dynamic random access memory) chips is dominated by two South Korean giants and one US company.

In the third quarter, Samsung held a 45.8 percent share, followed by SK Hynix, with 28.7 percent, and US-based Micron with 21 percent, according to researcher TrendForce.

The price of DRAM memory is expected to surge about 10 percent in the fourth quarter because of booming demand from computer and smartphone makers, TrendForce predicted.

Meanwhile, the prices of graphic chip and CPU (central process unit) are also forecast to surge. Related core technologies are controlled by US-based firms like Intel and Nvidia.

According to the Chinese customs, chip imports hit US$227 billion in 2016, almost double the value of oil shipped in.

China is the world’s biggest chip consumption market, which was valued at US$159 billion in 2016 and accounted for 45.2 percent of the global take-up, according to research firm IHS.

Qualcomm’s US$12 billion deal for chip licenses with Chinese smartphone vendors Oppo, Vivo and Xiaomi is yet another example of how China needs to advance the development of its own chip technologies.

China’s efforts

China’s top officials have recognized that urgency, which is tied to national security issues.

In 2016, Chinese firms met only about 20 percent of the domestic chip demand. That ratio is expected to rise to 40 percent by 2020 and 70 percent by 2025, according to a national blueprint for the integrated circuit industry.

In 2014, China established a fund of 120 billion yuan (US$18 billion) to support local integrated circuit firms, especially in design and manufacture. To date, the majority of that so-called Big Fund has been utilized.

The financial assistance has been a boon to the development of giants like Beijing-based Unigroup and Shanghai-based SMIC, which is the mainland’s biggest made-to-order chipmaker.

Unigroup, whose chip design is shared with subsidiary Spreadtrum and whose storage and cloud capabilities are tied with provider H3C, has exported more than 2.5 billion chips globally, Unigroup’s Zhao told a CCTV broadcast interview on Sunday.

Wuhan-based Yangtze Memory Technologies Co, with initial investment of US$24 billion from investors such as the Big Fund and Unigroup, has developed a memory chip with 14-nanometer processing technology. It represents the country’s most advanced memory chip technology and “closes the gap” with overseas giants like Samsung and Intel, said Zhao, who is also the chairman of Yangtze Memory.

Semiconductor Manufacturing International Corp (SMIC) plans to begin volume production with 14-nanometer FinFET process technology in 2019.

That technology, already employed by firms like Taiwan-based TSMC, will help SMIC narrow the gap with major rivals, analysts said.

Telecommunications and smartphone giant Huawei has launched a smartphone with an artificial intelligence chip that was developed by a Shanghai-based startup. It’s even a little ahead of Apple’s eye-catching iPhone X, which has similar features.

The artificial intelligence smartphone reflects the ambition of Chinese consumer electronic brands, including Huawei, Xiaomi and Oppo, to tap opportunities for upstream expansion, mainly in chips and screen panels.

Although it may well improve their competitive edge and profitability, the benefits will take time to trickle through.

The share prices of listed chip-related firms reflect the industry prospects. Integrated circuitry has become one of the hottest stock sectors in the market this year, securities firms said.

“It’s a milestone industry,” Citic Securities said in a recent note. “It is facing a rebound of four to six years, starting last year, thanks to the booming demand for chips and investment.”

Shares in firms like SMIC have surged more than 50 percent in 2017.

Amalgamation trend

Broadcom’s attempt to acquire Qualcomm is a sign of coming integration in the chip industry. The merger of the world’s fourth and fifth biggest semiconductor vendors would create a giant dominating a wide range of businesses, including 5G, the Internet of Things and automotive electronics.

Chinese companies need to move fast if they don’t want to be left in the dust.

Intel, the world’s biggest computer chip maker, has unveiled new processors supporting 5G communications as it expands into telecommunications from its core chip business.

Both Nvidia and Intel are talking about processors supporting artificial intelligence that are “the future of IT.” Top Chinese dot-com firms, including Baidu, Alibaba, Tencent and iFlyteck, are using Nvidia devices and services to develop AI technologies, Nvidia recently told a Beijing conference.

The share price of Nvidia, the world’s graphic chip giant, has doubled this year.

Memory chip market leader Samsung is going to invest heavily to expand production capacity, including a US$7 billion investment in its Xi’an memory plant. It’s expected to be a challenge to China’s memory chip industry.

China’s Yangtze Memory is going to start production around 2019. In the chip industry, said Zhao, only top players survive and there’s no space for a No. 4.


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