China's IC market and industry grew at a high speed in 2003 and the first half of 2004, according to an industry insiders report.

In the first half of this year, the demand of the IC market was 137 billion pieces, rising 36 percent year-on-year with sales reaching 23.65 billion yuan (US$2.86 billion), 57.5 percent higher than the same period of last year.

And growth rates were the strongest in recent years, according to China Integrated Circuit (IC) Market Analysis and Report by Analysys. This comes amid a recovery in the global semiconductor industry.

In the same period, growth in sales in North America was 30 percent, 29 percent in Europe and 26 percent in Japan. While China has become one of the fastest growing IC markets in the world.

From the development of different sectors of the IC industry in the first half, IC manufacturing was the most attractive area. Its sales from January to June were 7.38 billion yuan (US$891 million). The 182.4 percent growth rate is not only a record in China's IC manufacturing sector, but a rare thing in the world in recent years.

IC design business also saw significant growth in the first half, with sales amounting to 2.38 billion yuan (US$287 million) a rise of 64.9 percent. The IC assembly and testing sector maintained a steady pace with sales of 13.89 billion yuan (US$1.68 billion) and a growth rate of 26.8 percent.

With their different growth rates, the proportion of the total IC industry also changed and a trend developed where the ratio of assembly and testing shrank, while the ratios of IC design and manufacturing increased.

The industrial chain of China's IC industry has become more and more complete and the supporting sectors have grown stronger. There are over 650 IC companies in China, not including IC equipment vendors, and more than 110,000 people working in the industry. An industrial ecosystem with 46 key chipmakers, 108 assembly and testing firms and 367 IC design companies has been taking shape.

A significant characteristic of China's IC industry this year is that computer products have become the biggest consumer of the IC market. In the first half, 17.80 million computers were produced with a year-on-year growth of 38 percent and their technological levels simultaneously rose. Notebook computers were becoming mainstream products in the market.

On the other hand, liquefied crystal display (LCD) monitors were replacing traditional cathode ray tube (CRT) monitors and IC chips used in LCD monitors grew at a speed several times that of CRT monitors.

From January to June, 18 billion pieces of chips used in computers were sold, rising 39.2 percent over the same period of last year. The sales were 50.83 billion yuan (US$6.15 bullion) with a 44.5 percent growth, accounting for 37.1 percent of the whole IC market.

Despite the fast progress of China's IC industry, its overall level remains low, compared to developed countries. The sales of the IC industry in 2003 were only 3.9 percent of the world's total and China's production only satisfied 15.9 percent of domestic demand.

The low technological level of IC design also restricted the development of applications. IC design as the locomotive of the whole industry is the closest to market demands. Innovative development of high value-added products can lead to evolution of electronic products. However, China's IC design sector is at a primitive stage and a comparatively low technological level will severely hinder the healthy development of market applications.

The dominant manufacturing technique is still eight-inch 0.18-0.25 millimetre technology, which lags behind internationally advanced levels. The products mainly focus on low and middle-end consumer products.

Chinese manufacturers still cannot supply central processing units, digital signal processing, storage, and high-end telecommunications chips in a large quantities.

Regarding challenges that China's semiconductor industry faces, Analysys believes that domestic firms should focus on professional devices and new applications and avoid face-to-face competition with foreign companies in mature and mainstream applications. This is partly because China's enterprises are still small and do not have the capability. They should work closer with end-product makers to better understand their requirements. They should focus on ASIC chips and avoid the commercialized universal logic chip market.

In addition to electronics manufacturing, Chinese companies have a unique advantage in terms of the national defence electronics sector. They should exploit their advantage in terms of labor costs. Winning IC design and production outsourcing orders is a practical way to elevate their design and manufacturing capacity.

To foreign IC companies, Analysys advises they work with local partners to develop the market and transfer some technology to domestic companies. Cheap labor costs also makes it easier to set up research and development centers, and application design organizations. When they set up factories in China, they should use their advantage in terms of global expertise and focus on exports. They also need to better learn the demands of domestic customers and launch products suited to the Chinese market

(China Daily October 27, 2004)