Susan Mays, Ph.D., contact smays999@yahoo.com Globex Faculty Fellow, Peking University; Faculty, The University of Texas at Austin

China’s Economy: Growth and Global Connections July 2015 Case Study: SOE Evolution in the Semiconductor Industry

北京大学工学院 PKU College of Engineering Globex

President Jiang Zemin (served 1993-2003) Speaking in 1997:

“In reality, ...[history] shows that if a country has several group companies it will be assured of

maintaining a certain market share and position in the international economic order. America, for example,

relies on General Motors, Boeing, DuPont and a batch of other multinational companies. Japan relies on six large enterprise groups, and South Korea relies on ten large commercial groupings. ...Our nation’s position in the international economic order will be to a large extent

determined by the position of our nation’s large enterprises and groups.”

~~~~~~~~~ “Grasp the Large, Let Go of the Small”

SOE Reforms: Case Study in Semiconductor Industry PKU Globex

4

How did China move from central planning and state ownership to a mixed economy and global integration?

n  Specific industries are illustrative of industry changes �  5YP by industry �  Take-off by industry �  One industry may help us understand groups of industries

n Main findings: interplay of SLD and “enterprise-led development” in the 1990s �  SLD was initially one-off efforts, then enterprise-based learning, then industry-wide policies �  Different than general SOE reforms �  Results were significant, but behind the vanguard, incremental, and organizational (vs tech)

One-off State Investments

Enterprise-based Learning (in selected state-invested enterprises)

New Industry-wide Policies for ALL firms

1990s 2000s

5

China’s electronics and semiconductor industry, circa 1985, was enmeshed in a complex hierarchy

State Council

State Econ Comm State Planning Comm State S&T Comm State Education

Comm

National Defense, Science, T

echnology and Industries Comm

Leading Group for Science & Tech

Leading Group for the Revitalization of the Electronics Industry

Ministry of Posts and Telecommunications

Ministry of the Electronics Industry *

Ministry of the Space Industry

State MachineBuilding Commission

*

Ministry of Foreign Economic Relations

and Trade

International

Planning

Production

1. Bureau of Communication, Broa

dcast, and TV

2. Bureau of Systems Engineering

3. Bureau of Microelectronics

Administrative Departments

4. Bureau of Electronic Devices and Components

China Electronics Import/Export Corporation

5. Bureau of Computer and

Information Industry

Education

Science & Technology

Exchange Center

(Etc.)

Research and production units

Research and production units

Research and production units

Research and production units

Research and production units

*Simon notes that in 1985, the Ministry of the Electronics Industry oversaw some 2600 production units and 130 research institutes. In 1988, the State Machine Building Commission and the Ministry of the Electronics Industry merged to form the Ministry of Machine Building and Electronics Industry. Source: Denis Simon, Technological Innovation, page 54, from China's Ministry of the Electronics Industry, Beijing, July 1987.

6

Importantly, in parallel with general SOE reforms, a new leading group made plans to invest in specific electronics-related projects n  1982, new leading group, strategy of “Control Fragmentation, Control Chaos (治散，治乱）” �  Funds for 33 sites for new equip, but little success

n  1983, strategy of “Build 2 Bases and 1 Point”

n  1985, new guidelines �  Focus on applications, foreign tech, and whole industry chain, with mfg emphasis �  Use markets/competition, use national projects for large investments �  Get funding through competitive bids and foreign capital

n  1986, “divestiture” of production & research units

n  1989, �  Allocated RMB5b for 2 bases, 5 key enterprises �  The #742 Factory selected to anchor the South Base, pursue 1 micron production, and

(hopefully) be China’s “1st world-class IDM”

Officials hoped that one functioning IDM would attract a full industry chain, including both domestic and foreign firms

7

An overview of China’s major semiconductor projects and enterprises in the 1990s

Project 909 Huahong-NEC JV with Japan

IDM

Shanghai, est 1994

Project 908 HJ, Inst 24, ATT/CSMC

SOE (>JV)

IDM Wuxi, est 1989

SMIC WFOE, but “Chinese”

w/ Taiwanese Mgmt

Foundry Shanghai, est 1999

Foreign Firms bring PAT to China

Electronics OEMs and ODMs increase in China

While ramping up semiconductor production, China’s market for semiconductors was growing

3 Other Sino-Foreign JVs (w/ Alcatel, Philips, NEC)

8

An overview of the semiconductor and electronics industry

n  Semiconductor companies used to be “IDMs” (integrated device mfg, e.g., Intel, Samsung, etc.) n  But vertical integration gave way to sectors by late 1990s, e.g., Freescale from Motorola n  IC industry sectors:

n  The broader electronics supply chain

Manufacturing: Fabrication in a

Foundry Design

P.A.T.: Packaging,

Assembly, Test

EMS or ODM

(often in China)

Semiconductor Cos. (ICs or

discreet devices)

OEM (global brands,

e.g., Apple)

9

Project 908 at Huajing remained unfunded for over 5 years

Obstacles, 1989-1996 n  Funding

n  Timing

n  Technology and organization

n  Foreign challengers

n Management

Lacking funding, equipment, and production, Project 908 was called a failure, and locals protested the once renowned Huajing

10

Ultimately, Huajing’s managers made major operational changes

Enterprise Solutions at Huajing, 1997-2002 n  From old management to new

n  From enterprise to individual accounting units

n Using Taiwanese managers and tech (via JV) and the foundry model

n  From vertical integration to sectoral businesses

n  From central to municipal control, from debt to stock

n  From Huajing to China Resources

The lessons and changes at Huajing informed Project 909 and previewed transitions in the industry

11

Huajing’s revenues increased significantly from 1995, and it remains one of China’s largest semiconductor companies

China’s semiconductor industry take off is often attributed to post 2000 (post WTO) foreign investment

Estimates of Huajing-affiliated Organizations’ Revenues in US$ millions

These estimates are based on ratios of revenues among Huajing-affiliated organizations. Since 2008, Huajing-affiliated organizations have combined financial statements under CRM, but previous years are estimated based on Huajing data from earlier years.

Sources include: Zheng Shilong, Lu Zhixin and Tian Jingying ���, ��� � ���, ““Huajing Jingshen”: Ji Guoying Jiangnan Wuxiandian Qicaichang ���: ������ ��� (The Spirit of Huajing: Jiangnan State-owned Radio Equipment Factory),” Liaowang�� (Outlook), Period 22, 1986.

CRM (China Resources Microelectronics) annual reports. PWC, "China's Impact on the Semiconductor Industry," 2010 and 2011, data sources China Semiconductor Industry Association, CCID, and PwC analysis. !

0!

100!

200!

300!

400!

500!

600!

700!

800!

80! 85! 90! 95! 00! 01! 02! 03! 04! 05! 06! 07! 08! 09! 10!

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Chinese leaders instigated Project 909 in 1995 n Why a capital-intensive project in a rapidly advancing, competitive industry? �  Existing enterprises need to upgrade production, growing market, use shop-floor to

catch-up, no firms with necessary capital nor capital markets �  Not due to the performance of state firms nor import-substitution nor foreign exclusion

n Approval, funding, timing �  Leaders: Premier Li Peng, President Jiang Zemin, Minister Hu (MEI), and Mayor Xu �  US$2b, ~7% of 1995 military budget, initially US$500m �  MEI got money from Premier’s Fund, didn’t need multiple approvals �  In 4 months, State Council and National Planning Committee approved and funded 909

n  Lessons from 908 (with over 30 Huajing staff): �  Can’t merely import production lines, need expertise, maintenance, training, etc. �  Don’t pursue leading edge tech, it changes too fast, and China’s market is low and med �  Funding is not enough, need international talent and capital, need talent and designs

from start, “bring in any willing foreign partners for participation”

908 was production focused, but 909 would be production, design, talent, and market focused

13

Yet, 909 leaders had difficulty attracting a foreign partner n Goals: �  A functioning IDM would attract full industry chain, including domestic and foreign firms �  Serve China’s market, revenue for virtuous cycle of upgrading, market-led vs tech-led

n  Potential partners: �  Contacted 30-40 potential foreign partners �  Response: no business plan, no revenues, investment is loans, 908 “failed,” no management

team, 20 yrs behind global tech, making mostly discrete devices, difficult policy environment �  909 recruited from Huajing, across China, and CAS, but offered large comp to foreigners

n  Breakthrough: �  Connect negotiations and market: offer partners the newly state controlled IC card market �  5 firms negotiate for over a year, resulting in NEC as partner in 1997

n NEC would supply the GM, run sales & marketing, provide tech and market �  Producing in 1999, claimed profits in 2000 �  Adopted the foundry model (90% in ’03), developed IP with foreign partners

909 was more successful than 908, but China’s (1990s) policy environment

was a problem during negotiations and operations

14

These enterprise-based experiences of the 1990s ultimately led to industry-wide policy changes via “Document 18” in mid 2000

n  Enterprise obstacles in 1990s: �  Multi-step approval processes �  Inconsistent and high importation costs and tax policies �  Large black market for smuggled electronic components �  Limited access to foreign capital

n  “One-offs”: Enterprises got “one-off” preferential tax and tariff exemptions, subsidies, etc., but making such arrangements was not transparent nor predictable

n New industry-wide policies in 2000: “New Policies to Encourage Software and IC Industries,” Document 18, by the State Council for all enterprises (supported by 10th 5YP) �  Easing firm and branch formation �  Clarifying and decreasing taxation �  Encouraging foreign investment and trade �  Increasing capital sources and availability �  Protecting IP (?)

WTO agreements further improved policies by 2005, but production had been ramping up from 1995 and

ongoing Chinese enterprises were established

15

Semiconductor Market: China and Global, US$ Billions

Sources: 1) PWC, "China's Impact on the Semiconductor Industry, 2004, 2006, 2011 and 2012," data sources include China Semiconductor Industry Association, CCID, and PwC analysis. 2) Wang Yangyuan and Wang Yongwen�� and���, Wo Guo Jichengdianlu Chanye Fazhan Zhilu: cong Xiaofei Daguo Zouxiang Chanye Qiangguo���� ����������������� (China’s Integrated Circuit Industry Development Path: From a Big, Consuming Nation to a Strong, Industrial Nation), Kexue Chubanshe ���� (Science Press), 2008, page 123, per CSIA

!

0!

50,000!

100,000!

150,000!

200,000!

250,000!

300,000!

350,000!

1995! 2000! 2005! 2010!

China's Market!

Global Market!

China's market was approximately 25% of the global semiconductor market in 2005 and was largest

global market in 2008. China's market wasless than 2% of the

global semiconductor market in 1995.

16

China’s semiconductor production (blue) and market (red)

US$ millions

This graph is constructed from the following sources: 1) PWC, "China's Impact on the Semiconductor Industry, 2004, 2006, and 2012," data sources include China Semiconductor Industry Association, CCID, and PwC analysis. 2) Wang Yangyuan and Wang Yongwen�� and���, Wo Guo Jichengdianlu Chanye Fazhan Zhilu: cong Xiaofei Daguo Zouxiang Chanye Qiangguo�������������� ������� (China’s Integrated Circuit Industry Development Path: From a Big, Consuming Nation to a Strong, Industrial Nation), Kexue Chubanshe ���� (Science Press), 2008, page 123, per CSIA. Note: The PWC analyses uses data from CSIA and CCID, both assoicated with China's Ministry of the Information Industries. The data includes all enterprises operating in China, including foreign enterprises, not just Chinese owned or state owned enterprises.

!

$0!

$10,000!

$20,000!

$30,000!

$40,000!

$50,000!

$60,000!

1995! 2000! 2005!

China's market was approximately 25% of the global semiconductor

market in 2005, and China became the largest global market in 2008.

China's market was less than 2% of the

global semiconductor market in 1995.!

17

From 2000, the industry in China also moved up the value chain as more activity was concentrated in the design sector

Production Revenues in China, by Sector (RMB100 million), excluding Discrete Devices

Year 2000 2001 2002 2003 2004 2005

Design 9.8 14.8 21.6 44.9 81.8 124.3

1. Percent of industry 5 7 7 13 15 18

Fabrication (manufacturing) 48 27.7 33.6 60.5 180 232.9

2. Percent of industry 26 14 14 17 33 33

Packaging, Assembly, Testing (P.A.T.) 128.4 161.1 213.3 246 283.5 344.9

3. Percent of industry 69 79 79 70 52 49

Total 186.2 203.6 268.5 351.4 545.3 702.1 Source: National Burea of Statistics, 2001-2005, shown in Chen Ling and Xue Lan, "Global Production Networks," China and the World Economy, Volume18, Number 6, 2010, page 114, Table 1.

!

By 2000, China was home to 2.5% of global semiconductor revenues and by 2010, 10.8%

18

Industry growth and global integration resulted in thousands of personnel gaining valuable experience

n  Semiconductor-related university programs expanded n  By 2005, 18 of 25 of the world’s largest semiconductor firms had design groups in China

Continuing to grow | China’s impact on the semiconductor industry—2013 update | 13

Figure 10: China’s O-S-D industry revenue and growth

0%

10%

20%

30%

40%

US$bnRMBbn

Annual RMB growth

Annual US dollar growth

Fixed exchange rate

0.1%

26.7%

14.6%

34.3%

37.7%

35.9%

17.5%15.9%

12.3%

28.5%

-5.8%

22.3%

20.8% 21.5% 22.9%

29.7%

-4.1%

28.1%

2.823.1

2000

2.823.1

2001

3.529.3

2002

4.033.6

2003

5.445.1

2004

7.561.3

2005

9.072.1

2006

11.083.5

2007

13.593.8

2008

12.988.4

2009

16.8113.5

2010

21.5138.9

22.1139.0

0.1%

2.7%

2011 2012

Annual growth

Industry revenue

CSIA revised industry statistics

Source: CCID, CSIA

Figure 11: China’s semiconductor industry by sector 2003–2012

CSIA revised industry statistics

Integrated circuit design

Integrated circuit manufacturing

Integrated circuit packaging and testing

Optoelectronics,sensors and discrete devices

2004

$12.0

8.2%

18.2%

28.4%

45.3%

Yearly totals in US$bnSector market share as a percent

6.5%

9.1%

2003

$8.3

35.5%

48.9%

2005

9.5%

17.7%

26.2%

46.6%

$16.1

2006

10.8%

18.7%

28.8%

41.7%

$21.7

2007

10.8%

19.1%

30.1%

40.0%

$27.4

2009

13.5%

17.1%

25.0%

44.3%

$29.2

2008

18.0%

28.3%

42.9%

$31.4

10.8%

2010

$38.1

14.1%

17.4%

24.4%

44.1%

2011

$51.4

15.8%

16.1%

26.2%

44.8%

2012

17.5%

16.6%

26.7%

39.2%

$56.3

Source: CCID, CSIA . Also, Chart by PWC, 2013