China inside: Artificial intelligence will run on Chinese semiconductors

The key trends that Deloitte predicts for Chinese semiconductors:

• Revenues for semiconductors manufactured in China will grow by 25% to approximately £87 billion in 2019 from an estimated £67 billion in 2018.
• This increase is so the country can meet the increasing domestic demand for chipsets driven in part by the growing commercialization of Artificial Intelligence (AI).

What are the current conditions that make China’s future dominance in semiconductors more likely?

1. Domestic demand. China is the largest global consumer of semiconductors, importing about £158 billion worth each year. China’s economic growth and its population (which includes 800 million internet users) support strong domestic demand, which in turn drives the majority of foreign suppliers’ profits. While much of the developed world is nearing saturation for PCs and mobile devices, China’s demand for chips has continued to grow. Indeed, vendors have grown increasingly dependent on demand from China, and more global investors are underwriting its future. This shift has helped enable China to have more control over how foreign manufacturers can access its domestic market.
   
   
2. State support. China’s growth rate is higher than most developed countries, and it is the second largest economy in the world. This has enabled state and private companies to build significant reserves. The country is able to have much tighter market coordination as many of China’s largest companies are state controlled. There have also been many new government led initiatives that have supported the increase:
   • In 2014, the State Council of China announced the ‘National Guidelines for Development and Promotion of the Integrated Circuit Industry’. The plan addressed the technology gap between Chinese manufacturers and global leaders and was supported by a £17 billion fund led by government-backed businesses.
   • In 2015, China announced its ‘Made in China 2025’ plan, which aims to grow domestic production of core technological components—including semiconductors.
   • At the end of 2017, China had plans to build at least 14 new chip foundries.
   • In 2018, China is expected to spend £10 billion on fabrication equipment to become the world’s second-largest buyer.
3. Growing demand for Artificial Intelligence. In 2019, the global semiconductor industry will likely focus more support on the needs of AI. Advances in AI are one of the driving forces for the industry, with an anticipated 5–6% growth rate over the next two decades. These trends are coming together with China’s strategic efforts to develop semiconductor independence and move AI into the centre of its economic future. By 2018, the country led the world in patents for deep learning. China has declared that its future is to be driven by advanced technologies, with AI as a key ingredient.
   
   
4. Onshoring foreign operations and hiring foreign talent. In June 2018, Japan’s SoftBank Group announced that it would sell a majority stake in the Chinese operations of Arm Limited, a leading provider of semiconductor designs (including the Cortex line of chips for the iPhone), to a Chinese investment fund. Led by Hopu Investment Management Co. and backed by a Chinese sovereign wealth fund and Beijing’s Silk Road Fund, the group acquired 51% of Arm Limited’s Chinese business for £612 million. The move will give China more access to Arm’s designs. Notably, about a fifth of Arm’s 2017 earnings came from Chinese demand.
   
   Yangtze Memory Technologies has invested £19 billion to build China’s first advanced memory chip factory and has recruited thousands of engineers away from foreign chipmakers. The company recently announced progress on its 32-layer NAND memory chip - a good sign, though still behind the state-of-the-art 64-layer chip that other memory manufacturers are achieving. Similarly, to advance its 14 nm efforts, SMIC hired a senior executive from Taiwan’s TSMC, the world’s largest contract foundry and one that is considered to be two to three generations ahead of SMIC. Meanwhile, TSMC has begun constructing a foundry in Nanjing to gain a stronger foothold in the Chinese market.
   
   
5. Chip design and intellectual property (IP). Chinese designs and IP for chip architectures are now globally competitive. Huawei designed its new mobile chipset at 7 nm and claims that it performs better and uses less energy than its top competitor. The Huawei system-on-a-chip also boasts AI cores and claims to be the world’s fastest modem - in time for early 5G deployments. Although the chip is manufactured in Taiwan by TSMC, it signals that Chinese companies can produce specs at the bleeding edge of technology.