China dominates worldwide productions of silicon. No one else is even close:
Source: Thomson One
But this is where the dominance stops for China regarding the semiconductor industry. Virtually all of the chips that China uses for its burgeoning domestic smartphone industry are are from foreign companies. Note that this does not mean that these foreign companies do not use China. In addition to selling up to half of their chips in the Middle Kingdom, they also have manufacturing facilities in China. Indeed, domestic NAND flash consumption is increasing with the rise of Chinese brands. The rise of Chinese brands is even more apparent in the smartphone scene. Seven of the world’s top ten smartphone vendors hail from China. Chinese smartphone vendors also consume greater amount of memory as majority of them produce Android devices, which require more mobile DRAM than Apple’s iOS devices.
Given that the Chinese people like their mobile devices more than even Americans (see graphic) the government wants the chips in more of these devices to be Chinese-made.
More specifically, China consumed US$12 billion worth of DRAM and US$6.5 billion worth of NAND Flash in 2015. These figures represent 22% and 29% of the global DRAM and NAND Flash industries’ total revenues for the year, respectively. In 2016, China’s NAND consumption is expected to increase to 33% of the world total. China views NAND Flash as key to localizing semiconductor production.
China plans to invest $55 billion in local chipmaking businesses by 2020 in an effort to curb reliance on foreign semiconductors. In mid-2015, state-owned Tsinghua Unigroup – the investment arm of Beijing’s Tsinghua University, offered a $23 billion deal to buy US semiconductor manufacturer Micron Technology, Inc. Micron turned down the offer ostensibly because the Committee on Foreign Investment in the United States (CFIUS) would never approve such a deal. CFIUS reviews the national security implications of foreign investments in U.S. companies, ensuring that deals do not give away valuable technology or place too much power in foreign hands. Lately, it has been analyzing Chinese deals with heightened scrutiny, and prevented China’s Huawei from buying a majority stake in networking company 3Com.
China's need for a home-grown semiconductor source has been even more heightened by the U.S. Commerce Department instituting export restrictions on Chinese telecom equipment maker ZTE Corp for alleged violations of U.S. export controls on Iran. The restrictions will make it difficult for the company to acquire U.S. products, including chips, by requiring ZTE's US suppliers to apply for an export license before shipping any American-made equipment or parts to ZTE. The Commerce Department has further stated that such export license applications will generally be denied. Although talks are ongoing between China and the US, such tactics highlight the need for China to have a broader domestic market for semiconductor suppliers.
China has a lot of ground to make up. Micron, for example, in 2015 obtained 41% of its revenue from China:
Micron is not alone. Qualcomm makes over half its revenue from China:
Also, Intel, Sandisk, Texas Instruments, and AMD all get a significant portion of their revenue from China:
China certainly has the bright minds, and also the money. What it needs is strategic guidance from experienced executives. Already Tsinghua Unigroup has hired Charles Kau, the chief of Micron Technology Inc's Taiwanese joint venture, as its global executive vice president.
More than simply business guidance, though, China and its new chip industry will need assistance in the intellectual property world -- specifically with patents. Although the capital investment is coming, and the great technical minds are already here in China, this only starts the business. The next step is market share. That is where the newly powerful Chinese patent system comes in. The new chip companies will need to quickly acquire meaningful Chinese portfolios, so they can quickly leverage their space in the market.
China has been a member of the World Trade Organization (WTO) since 2001. And the US and several other Western countries have been keen to accuse China of unfair treatment from time to time (despite the fact that the US President vetoed an injunction by Samsung ostensibly because domestic here Apple was on the other side). Now the chickens are coming home to roost, because the Chinese patent enforcement system will allow Chinese semiconductor companies to fairly -- and quickly -- move into a dominant position in not just the Chinese market, but also the world market. The Chinese companies will likely undercut their American, Japanese, and Korean counterparts. And although we will have to wait to see, if the recent past is any indication, the quality will also be top-notch, as the government and the market will demand as much.
It is an interesting time in China in the semi market. Given that the magical new part of Shanghai, Pudong, was built in around ten years, I would bet that China's impact and eventual dominance of the market will take much less time.
Welcome to the China Patent Blog by Erick Robinson. Erick Robinson's China Patent Blog discusses China's patent system and China's surprisingly effective procedures for enforcing patents. China is leading the world in growth in many areas. Patents are among them. So come along with Erick Robinson while he provides a map to the complicated and mysterious world of patents and patent litigation in China.
Erick Robinson is an experienced American trial lawyer and U.S. patent attorney based in Beijing. He is a Partner and Head of the Patent Practice at SIPS, a leading Hong Kong-based firm with offices in Beijing and Shanghai where he manages patent litigation, licensing, and prosecution throughout China.
The ideas and opinions at ChinaPatentBlog.com are my own as of the time of posting, have not been vetted with my firm or its clients, and do not necessarily represent the positions of the firm, its lawyers, or any of its clients. None of these posts is intended as legal advice and if you need a lawyer, you should hire one. Nothing in this blog creates an attorney-client relationship. If you make a comment on the post, the comment will become public and beyond your control to change or remove it.