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Chinese companies are changing their interests from oil and gas resources to tiny microchips. As the global semiconductor industry remains in the doldrums and China is issuing various favorable policies， the Chinese chip industry is bracing significant opportunities for takeoff.
trendsetters
Since 2014， Chinese firms have been buying more foreign integrated circuit （IC）， or chip， companies.
In May 2014， STATS ChipPAC Ltd.， a leading service provider of advanced semiconductor packaging design， assembly， test and distribution solutions headquartered in Singapore， disclosed that some investors were offering to buy up the company， but didn’t specify the names of the buyers. When disclosed later， the buyers turned out to be two Chinese firms， Jiangsu Changjiang Electronics Technology Co. Ltd. and Tianshui Huatian Technology Co.
In August， California-based Omnivision Technologies Inc.， an image sensor chip supplier for iPhones， announced the receipt of a non-binding acquisition proposal worth of$1.67 billion from a Chinese consortium. The investment group was led by Beijing-based Hua Capital Management Ltd. and included Shanghai Pudong Science and Technology Investment Co. Ltd.
On December 23， Jiangsu Changjiang Electronics Technology Co. Ltd. announced it was entering into a co-investment agreement to form an investment consortium with Siltech Semiconductor （Shanghai） Co. Ltd. and National Integrated Circuit Industry Investment Fund Co. Ltd. in connection with the proposed acquisition of STATS ChipPAC Ltd.
Bloomberg reported on December 3， 2014 that Chinese companies had spent almost $5 billion in five major chip-related takeovers in the past 18 months.
According to an Economic Information Daily report， chips have been the most imported products by China for more than 10 years.
Serving as the heart of all electronic devices， microchips are widely used in computers， consumer electronics， network communications and automobile electronics. An IMF research shows that a semiconductor chip with production value of $1 translates into $10 in the growth for the related information industry， and adds$100 to a country’s GDP. The chip industry is crucial to both stimulating economic growth and ensuring information security and national security.
Some countries and regions， including the United States， Europe， Japan， South Korea， Singapore and Taiwan， regard chipmaking as a major strategic business and invest heavily in the industry， said the Economic Information Daily report. Policy support
A series of favorable policies issued by the State Council since 2014 have encouraged Chinese companies to make overseas acquisitions.
On June 24， 2014， the State Council published a set of rules known as the National Guidelines for the Development and Promotion of the Integrated Circuit Industry， proposing eight major measures， such as putting in place a special national industry investment fund， to stimulate the dynamism and creativity of domestic IC manufacturers and help them catch up with international leaders.
On October 14， 2014， the Ministry of Industry and Information Technology announced the establishment of a national IC industry investment fund worth 120 billion yuan （$20 billion）.
Acquiring powerful overseas chipmakers seems to put the Chinese IC industry on the fast track. A vice president from a Shanghai-based chip firm， who wished to remain anonymous， told Economic Information Daily that mergers and acquisitions represent the general trend. For instance， after merging， two IC industrial leaders in Taiwan—MediaTek and MStar Semiconductor—squeezed almost all the other companies out of the region. However， Chinese companies have frequently encountered “encirclement” by international giants leveraging patent.
“To be stronger， the best option for China’s chip industry is to acquire powerful foreign companies and their patented technologies，”the executive said.
Gu Wenjun， chief semiconductor analyst with market research agency iSuppli， said the global chip industry is now lagging， with more than 100 chip factories worldwide being closed. But in East Asia， about 60 chip factories are still in business. Robust market demand in Asia makes the region crucial to chipmakers. The global chip industry is shifting its focus to Asia， where China’s mainland is the focus of the regional market.
“In the past three decades， the global IC industry has experienced several cyclical recessions， and each round of industrial restructuring has brought opportunities to Asia，” said Gu.“Japan， South Korea and China’s Taiwan all have grasped such opportunities and contributed to the takeoff of the chip industry， and now， China is facing the same opportunities.”
Wang yanhui， Secretary General of Mobile China Alliance， said that recent years have witnessed frequent threats to national security， such as the Prism spying scandal and the leak of 2 million e-mails and documents from Britain’s offshore financial industry. China is now accelerating its pro- duction of information technologies， and chips form the cornerstone of the country’s information security. In the government’s future procurement， a large number of domestically produced chips will be purchased. This will increase the demand for China’s chip industry. According to Wang， China has made the chip industry part of its national strategy. The Central Government has issued several policies， while some local governments are adopting supporting measures to nurture large chipmakers through industry investment funds and overseas acquisitions.
Multiple challenges
Despite huge potential， China’s chip industry still faces severe challenges in terms of taxation and suppression by international giants.
Li Liyou， CEO of Spreadtrum Communications， Inc.， China’s biggest chip designer， told Economic Information Daily that domestic chip firms have to pay a 10-percent income tax and a 5-percent business tax， while their overseas rivals have much lower tax burdens. For instance， Taiwan’s MediaTek only pays a 2-percent tax， because according to local regulations， IC companies in Taiwan can deduct costs of research and development （R&D） as well as mergers and acquisitions from their income taxes.
Chipmakers on the Chinese mainland have called for more tax cuts and other supporting measures. A president of a Guangzhou-based chip company， who declined to be identified， suggested China also allow the chipmakers to deduct R&D costs， or give tax rebates to local chipmakers. He also proposed the government not directly reduce the tax rate， adding that deduction of income taxes with R&D costs will encourage chip firms to make innovations.
It is more challenging for Chinese chipmakers to compete with international giants. In the Chinese market， global giants and domestic companies have the same target clients， and foreign firms， with their monopoly in the market， often discourage Chinese clients from buying Chinese products.
Li cited an example that emerged after his company began negotiating a contract with Chinese electronics company TCL. Senior executives of Taiwan’s MediaTek soon required TCL to stop cooperation with Spreadtrum， threatening that it would stop supplying its products to TCL and offering an extra sum of marketing allowance as incentive for keeping their business.
Hostile takeovers present another challenge. In recent years， many foreign firms have acquired emerging Chinese chipmakers with independently developed technologies. For example， American global semiconductor company Qualcomm has been attempting to acquire Chinese industrial leader Spreadtrum.
Wang said some foreign companies are also participating in China’s industry investment funds， such as IC investment funds， established by governments at different levels. According to Wang， once overseas rivals successfully enter the government IC investment funds， they may use the funds to acquire emerging Chinese chip firms to consolidate their monopoly positions. Wang warned that the government must watch out against such possibilities.
trendsetters
Since 2014， Chinese firms have been buying more foreign integrated circuit （IC）， or chip， companies.
In May 2014， STATS ChipPAC Ltd.， a leading service provider of advanced semiconductor packaging design， assembly， test and distribution solutions headquartered in Singapore， disclosed that some investors were offering to buy up the company， but didn’t specify the names of the buyers. When disclosed later， the buyers turned out to be two Chinese firms， Jiangsu Changjiang Electronics Technology Co. Ltd. and Tianshui Huatian Technology Co.
In August， California-based Omnivision Technologies Inc.， an image sensor chip supplier for iPhones， announced the receipt of a non-binding acquisition proposal worth of$1.67 billion from a Chinese consortium. The investment group was led by Beijing-based Hua Capital Management Ltd. and included Shanghai Pudong Science and Technology Investment Co. Ltd.
On December 23， Jiangsu Changjiang Electronics Technology Co. Ltd. announced it was entering into a co-investment agreement to form an investment consortium with Siltech Semiconductor （Shanghai） Co. Ltd. and National Integrated Circuit Industry Investment Fund Co. Ltd. in connection with the proposed acquisition of STATS ChipPAC Ltd.
Bloomberg reported on December 3， 2014 that Chinese companies had spent almost $5 billion in five major chip-related takeovers in the past 18 months.
According to an Economic Information Daily report， chips have been the most imported products by China for more than 10 years.
Serving as the heart of all electronic devices， microchips are widely used in computers， consumer electronics， network communications and automobile electronics. An IMF research shows that a semiconductor chip with production value of $1 translates into $10 in the growth for the related information industry， and adds$100 to a country’s GDP. The chip industry is crucial to both stimulating economic growth and ensuring information security and national security.
Some countries and regions， including the United States， Europe， Japan， South Korea， Singapore and Taiwan， regard chipmaking as a major strategic business and invest heavily in the industry， said the Economic Information Daily report. Policy support
A series of favorable policies issued by the State Council since 2014 have encouraged Chinese companies to make overseas acquisitions.
On June 24， 2014， the State Council published a set of rules known as the National Guidelines for the Development and Promotion of the Integrated Circuit Industry， proposing eight major measures， such as putting in place a special national industry investment fund， to stimulate the dynamism and creativity of domestic IC manufacturers and help them catch up with international leaders.
On October 14， 2014， the Ministry of Industry and Information Technology announced the establishment of a national IC industry investment fund worth 120 billion yuan （$20 billion）.
Acquiring powerful overseas chipmakers seems to put the Chinese IC industry on the fast track. A vice president from a Shanghai-based chip firm， who wished to remain anonymous， told Economic Information Daily that mergers and acquisitions represent the general trend. For instance， after merging， two IC industrial leaders in Taiwan—MediaTek and MStar Semiconductor—squeezed almost all the other companies out of the region. However， Chinese companies have frequently encountered “encirclement” by international giants leveraging patent.
“To be stronger， the best option for China’s chip industry is to acquire powerful foreign companies and their patented technologies，”the executive said.
Gu Wenjun， chief semiconductor analyst with market research agency iSuppli， said the global chip industry is now lagging， with more than 100 chip factories worldwide being closed. But in East Asia， about 60 chip factories are still in business. Robust market demand in Asia makes the region crucial to chipmakers. The global chip industry is shifting its focus to Asia， where China’s mainland is the focus of the regional market.
“In the past three decades， the global IC industry has experienced several cyclical recessions， and each round of industrial restructuring has brought opportunities to Asia，” said Gu.“Japan， South Korea and China’s Taiwan all have grasped such opportunities and contributed to the takeoff of the chip industry， and now， China is facing the same opportunities.”
Wang yanhui， Secretary General of Mobile China Alliance， said that recent years have witnessed frequent threats to national security， such as the Prism spying scandal and the leak of 2 million e-mails and documents from Britain’s offshore financial industry. China is now accelerating its pro- duction of information technologies， and chips form the cornerstone of the country’s information security. In the government’s future procurement， a large number of domestically produced chips will be purchased. This will increase the demand for China’s chip industry. According to Wang， China has made the chip industry part of its national strategy. The Central Government has issued several policies， while some local governments are adopting supporting measures to nurture large chipmakers through industry investment funds and overseas acquisitions.
Multiple challenges
Despite huge potential， China’s chip industry still faces severe challenges in terms of taxation and suppression by international giants.
Li Liyou， CEO of Spreadtrum Communications， Inc.， China’s biggest chip designer， told Economic Information Daily that domestic chip firms have to pay a 10-percent income tax and a 5-percent business tax， while their overseas rivals have much lower tax burdens. For instance， Taiwan’s MediaTek only pays a 2-percent tax， because according to local regulations， IC companies in Taiwan can deduct costs of research and development （R&D） as well as mergers and acquisitions from their income taxes.
Chipmakers on the Chinese mainland have called for more tax cuts and other supporting measures. A president of a Guangzhou-based chip company， who declined to be identified， suggested China also allow the chipmakers to deduct R&D costs， or give tax rebates to local chipmakers. He also proposed the government not directly reduce the tax rate， adding that deduction of income taxes with R&D costs will encourage chip firms to make innovations.
It is more challenging for Chinese chipmakers to compete with international giants. In the Chinese market， global giants and domestic companies have the same target clients， and foreign firms， with their monopoly in the market， often discourage Chinese clients from buying Chinese products.
Li cited an example that emerged after his company began negotiating a contract with Chinese electronics company TCL. Senior executives of Taiwan’s MediaTek soon required TCL to stop cooperation with Spreadtrum， threatening that it would stop supplying its products to TCL and offering an extra sum of marketing allowance as incentive for keeping their business.
Hostile takeovers present another challenge. In recent years， many foreign firms have acquired emerging Chinese chipmakers with independently developed technologies. For example， American global semiconductor company Qualcomm has been attempting to acquire Chinese industrial leader Spreadtrum.
Wang said some foreign companies are also participating in China’s industry investment funds， such as IC investment funds， established by governments at different levels. According to Wang， once overseas rivals successfully enter the government IC investment funds， they may use the funds to acquire emerging Chinese chip firms to consolidate their monopoly positions. Wang warned that the government must watch out against such possibilities.