Undoubtedly the semiconductor industry is a key factor underlying the US-China trade war. However, when we try to understand the strength and progress of China's semiconductor industry, we discover that all the figures seem connected and yet cannot be compared directly. The production value of the wafer manufacturing industry should not be combined with that of IC design, as the two sectors have completely different business structures. Reading the semiconductor industry's figures is like viewing a country's budget plan, both filled with hidden, curious and unanswerable parts.Basically, the semiconductor industry can be categorized into four major areas: wafer manufacturing, IC design, packaging and testing, and upstream equipment and materials. China has been aggressively pushing developments in all four fields, but what the country lacks is also quite obvious.Figures from major research firms were all different, but were not too far from each other. IC Insights estimates that worldwide IC demand was US$430.8 billion in 2018 and will rise to US$571.4 billion in 2023. Meanwhile, China imported US$312 billion worth of semiconductor products in 2018, and its trade deficit in semiconductors amounted to US$227.4 billion in the year. If China's local IC manufacturing industry's production value of US$23.7 billion is included, China's demand for semiconductor totaled US$251.1 billion in 2018, accounting for 58.3% of the worldwide semiconductor consumption.However, the amount should still be divided in terms of usages: consumption by the local semiconductor industries and markets, and by production for foreign clients. Domestic consumption accounted for around 30% of worldwide demand from 2013-2016, but the percentage already increased to 36% in 2018 or an amount of US$155 billion due to the aggressive expansions of China's smartphone vendors globally, according to IC Insights. The four major China-based smartphone vendors, Huawei, Lenovo, Xiaomi and BBK were all in the top-10 rankings in terms of semiconductor purchasing in 2018, together spending as much as US$60 billion.Semiconductor demand mainly coming from Taiwan and non-China ICT players including Foxconn, Pegatron, Wistron, Quanta Computer, Inventec, Sony, Samsung and LG contributed a total of US$96.1 billion. That means, of China's US$155 billion semiconductor demand in 2018, 62% came from local players and 38% from non-China players.(Note: This is part of a series of articles by Digitimes president Colley Hwang on the latest developments of the IT industry in the wake of the US-China trade war.)

Prior to 2000, the majority of China's industry was basically manufacturing businesses expanding from the Pearl River Delta to the Yangtze River Delta, and then onto Chengdu and Chongqing. However, with the production ecosystem growing mature, many of the supporting sectors also started to take shape, giving a new outlet for China's industry.In 2000, SMIC was founded in Shanghai, becoming the pioneer of China's semiconductor manufacturing industry. In 2002, BOE announced its advancement into the LCD panel manufacturing industry. The two firms were the pioneers of China's key components sectors.The two companies primarily relied on domestic clients initially. With investments from local governments, the two makers were able to quickly expand their production and business model to help local panel and semiconductor industries reach where they are now.China's handset industry that began to develop rapidly around 2000 was initially a sector that focused mainly on copycat feature phones. After going through waves of elimination and innovation, it was able to establish its own ecosystem and competitiveness, forming the foundation of China's dominance in today's smartphone market.South Korea fell victim to the rise of China. Its dominance in the steel industry was broken by China in 2003, and its petrochemical industry was also caught up by China's in 2004. In 2009, South Korea's shipbuilding and car industries both lost out to China. South Korea's shipbuilding industry faced huge losses and pressure to lay off workers. With an economy only one eighth of China's, South Korea could barely fight back.China then surpassed South Korea in the smartphone manufacturing and panel industries. And now South Korea's memory industry - its last lifeline - may also be in danger due to competition from China. In 2018, South Korea's semiconductor exports totaled US$108.9 billion and of Samsung's profit of US$52.7 billion in the year, around US$40 billion was contributed by its semiconductor business.Amid the US-China trade tensions, China is seeking to expand its memory manufacturing and the move will significantly affect Samsung's profitability, which may be halved to only US$20 billion in 2019, according to forecast from South Korea.(Note: This is part of a series of articles by Digitimes president Colley Hwang on the latest developments of the IT industry in the wake of the US-China trade war.)

Shipments of large-size (9-inch and above) LCD panels by Taiwan's makers (excluding Sharp) are set to expand 4.9% sequentially in the second quarter of 2019 despite intensive competition from China-based rivals, Digitimes Research estimates.The sequential gains will come after Taiwan makers saw their shipments shrink 12.8% sequentially to 54.4 million units in the first quarter, affected by annual maintenance by some makers during slow season and reduced shipments from Chunghwa Picture Tubes (CPT).Additionally, increased TV panel shipments from China-based players, including BOE Technology, CEC-Panda LCD Technology and Irico Electronics, also weighed on the shipment performance of Taiwan's panel makers in the first quarter.Looking ahead, some device brands are likely to step up their purchases of panels in advance on concerns that current shortages of COF substrates for production of 4K TVs and high-end smartphones could worsen in the second half of the year, therefore pushing up Taiwan's shipments of large-size panels in the second quarter.Meanwhile, Digitimes Research believes that the squeezing effect of increasing large-size panels from China's makers will also weigh on Taiwan's shipments of monitor and notebook panels over the long term in addition to the current impacts on TV panels.

Shipments of small- to medium-size LCD panels by Taiwan makers fell 23.6% sequentially to 184 million units in the first quarter of 2019, reflecting factors including seasonality and significant reduction in shipments by financially-battered Chunghwa Picture Tubes (CPT), according to Digitimes Research.CPT saw its shipments tumble 68.7% sequentially in the first quarter as its production was disrupted by its financial woes. Fellow company HannStar Display suffered a less severe drop of 25.5% as it managed to receive more windfall orders for smartphone panels while reducing those models for feature phones.Innolux experienced the least sequential decline of 2.5% in the first quarter, thanks to strong demand for automotive and tablet panels.Taiwan's shipments of small- to medium-size panels are expected to rebound 6.7% on quarter in the second quarter, buoyed by a pick-up in seasonal demand and a gradual resumption of panel production at CPT.But such shipments are likely to plunge 37.3% on a yearly basis, as CPT will not be able to resume production of panels for feature phones, and HannStar plans to ramp up automotive and smartphone panels, while reducing those for feature phones.Shipments of medium-size panels for consumer electronics applications, which suffered a severe sequential drop of 49.1% in the first quarter due to seasonal inventory adjustments, are expected to rebound 29.5% in the second quarter, Digitimes Research estimates.For individual companies, CPT is expected to see its shipments expand 75.2% on quarter in the second quarter thanks to a gradual recovery of its production capacity, while HannStar is likely to be the sole panel producer that will see its panel shipments continue to fall in the second quarter as it aims to ramp up smartphone panels and medium-size models.

Apple, Microsoft, Google, Amazon and Facebook are five major Internet service providers of the US. Their relationships with China have gradually turned from collaborations to confrontations, as the country has been citing national security or the need to grow local enterprises to bar the US firms from the China market.Apple's smartphone application processors are made by TSMC. Google has installed datacenters in Taiwan, has recently activated one in South Korea, and has acquired HTC's smartphone team.Currently, there are over 400 datacenters worldwide, of which 147 are equipped with over 5,000 servers each and owned by Amazon, Microsoft or Google. In addition to North America and Europe, the three Internet service providers have also constructed 28 datacenters in East Asia - in Japan, South Korea and Taiwan.Their competitions against China-based Internet service providers are being undermined by the US IT industry's structural disadvantage: over reliance on demand from Western countries. Google, Amazon and Apple are all facing the same issue and for markets such as India and emerging countries in the Asia Pacific area, they lack the appropriate personnel and the determination to actually go deep into those markets.In Apple's case, the company has 41% of its revenues coming from North America and 23% from Europe. If Japan's 9% is included, the US smartphone vendor has nearly three fourths of its revenues generated from advanced economies. Meanwhile, Apple's revenues have been heavily relying on its smartphone sales, which account for over 60%. The company's iPads and iPods are already not seeing much growth.With Apple's failure to achieve good sales for its new smartphones and its strategy focusing on promoting entry-level and mid-range smartphones in China and India not working as intended, Apple's hardware business apparently has reached a bottleneck.For business opportunities from smart city and smart home in Asia Pacific's emerging markets, China-based makers, which have a lot of experience in making deployments in the rural area, are expected to have advantage over US-based makers. The China government's Belt and Road Initiative (BRI) is also expected to help its makers tap into the emerging markets in Asia Pacific.(Note: This is part of a series of articles by Digitimes president Colley Hwang on the latest developments of the IT industry in the wake of the US-China trade war.)

Nvidia CEO Jen-Hsun Huang has claimed that software is eating the world, but AI is going to eat software. The concept of machine learning has somehow infinitely expanded people's imagination about software. The biggest difference compared to hardware is that software offers high added value that incurs very low cost in making copies of the software. But each software developer needs to develop its own unique business model.Hardware is a different story. The costs for copying hardware are very high, but its business models can be easily duplicated. Products with different specifications and prices can all find their own business opportunities. Since hardware manufacturing requires a lot of manpower, hardware's connection with the manual labor market remains very high though many of the production processes have already been automated.At the end of 2018, Foxconn still had a total of over one million workers worldwide. For governments worldwide, how to create non-technical job openings for their citizens has always been one of their major challenges and is also the reason behind Taiwan manufacturers' strong popularity among governments around the world.In addition to China, India and countries in ASEAN have also been keen on seeking foreign investments into their hardware manufacturing industry to create more jobs. The governments of Taiwan, South Korea and Japan have also been keen on preventing their existing manufacturing industries from moving out and affecting employment.On the other hand, with the rapid advancement of semiconductor technologies, the need to allocate huge sums of capex has created high barriers for many firms in the semiconductor sector. This is clearly seen from Japan, Taiwan and South Korea semiconductor players' heavy spending in the equipment market. The semiconductor industry is capital intensive and carries very high technological barriers, which makes it prohibitive for many countries. We think hard tech may still become hot tech in the future.(Note: This is part of a series of articles by Digitimes president Colley Hwang on the latest developments of the IT industry in the wake of the US-China trade war.)

During the Industrial Age, the US was the world's leader in the automotive industry, but that is no longer the case now. In 2018, 370,000 units of electric cars were sold in the US, but the sales in China were as high as 1.255 million units.In addition to the market, China-based Tencent, despite having investments in Tesla, saw its affiliate Xiaopeng Motors Technology launch an electric car with a price/performance ratio far better than that of the US-based car maker.Sharing a similar fate to that of the smartphone industry, the electric car industry will not be dominated by US-based makers, as China-based ones have been expanding their presence.Xiaopeng's release of an electric car priced a lot lower than Tesla's at the end of 2018 prompted Tesla to significantly cut its price to compete. However, trying to compete against China makers in pricing where they have the most advantages is like walking a tightrope. Even if Tesla managed to win at the end, it would not be unscathed.It is not just about the competitiveness of the two countries' automakers alone. Of the worldwide top-10 car-use battery makers, six of them are based in China. These makers are not only producing batteries locally, they also have production lines in Europe to cater to Mercedes-Benz and BMW. China-based electric car and battery makers also have entered South Korea and have been competing fiercely against local automotive and battery makers.Since 2012, Korea-based automotive maker Hyundai has seen its operating profits slip every year. The company had profits of nearly US$8 billion in 2012, but the amount dropped to a record low at US$2.4 billion in 2018. If the car making industry does not see a new business model, second-tier automakers will all suffer.The electric car and Internet of Vehicle (IoV) markets seem promising, and most of Japan's first-tier component makers are focusing on China as their main target. However, there are risks in the China market. In January 2019, China's car sales slumped 15.8% on year as a result of an economic downturn.Whether China's economy is able to grow steadily will significantly affect sales in the local car market. The stronger China's spending power is, the faster it can become the leader worldwide.(Note: This is part of a series of articles by Digitimes president Colley Hwang on the latest developments of the IT industry in the wake of the US-China trade war.)

The PC market used to cater mainly to white-collar workers, with manufacturers relying mostly on HP and Dell. The traditional PC and handset assembly sector remains a stable supply chain with the US still being the largest market. Currently, Taiwan still accounts for 80% of the worldwide notebook manufacturing, and for servers, the percentage is even higher at 94%. With the business opportunity of datacenter growing rapidly, Taiwan makers' manufacturing bases in Taiwan are still the best places for their Internet service provider partners.If the US-China trade war worsens, more ICT product manufacturing in China is expected to shift back to Taiwan or elesewhere.Apple's smartphones are all manufactured by Taiwan-based companies such as Foxconn, Pegatron and Wistron, while smartphones from Samsung and Huawei also see some of their components supplied by Taiwan makers. Wistron has even cooperated with Apple to establish a new factory in India.With the rise of the mobile communication era, demand was coming from every industry and consumers of all ages, generating more business opportunities and expanding the market beyond white-collar workers. However, the market was starting to see domination by a few brands with Apple taking over two thirds of all profits from the market. Samsung at its peak had 75% of profits coming from the smartphone business. For the other smaller vendors, the struggle was to keep operations from incurring losses.The situation began to change in 2018 as Apple and Samsung were unable to come up with more innovations for their smartphones. China-based brands started to take center stage. At the moment, seven of the worldwide top-10 smartphone brands are based in China and these players have dominated the smartphone markets in emerging countries by flooding them with multiple models.China brands' strategy focuses on expanding market share, which is expected to give Huawei a chance to surpass Samsung to become the largest smartphone brand worldwide in the second half of 2019.Huawei and Xiaomi are both expected to become leading players in the upcoming 5G era. In addition to launching its 5G smartphones at about the same time as its top-tier competitors, such as Samsung, Huawei is also a major force in the 5G base station sector. Huawei is considered a necessary partner for almost any country deploying 5G networks.Since 5G technologies not only present business opportunities, but also fuel data security concerns, the US government believes 5G would provide the best chance for China to break its global dominance, and therefore has been taking rather aggressive actions such as banning supply to ZTE and having Huawei CFO Meng Wanzhou arrested. Apparently the US will not sit idly in the face of China's growing ambition to fully control the 5G market.In December 2018, South Korea claimed to have become the first nation in the world running a commercialized 5G network. The president of Korea-based telecom carrier LG Uplus, which has been the fastest in making 5G base station deployments in the country, previously stated that using Huawei's 5G base stations would not jeopardize national security. But its competitor, Korea Telecom (KT), responded by announcing that it would follow the US government's suggestions and would not adopt any 5G solutions from Huawei.The two carriers' completely different attitudes about Huawei's equipment show that telecom carriers in South Korea, Taiwan and Japan will all also need to take sides at some point when it comes to buying 5G equipment.In addition to the concerns about data security, some companies in the West are also wary of Huawei's strong patent portfolios for 5G technologies. US companies have relied on patents to dominate business opportunities, but the tide may be turning as China grows bigger and bigger in terms intellectual property.(Note: This is part of a series of articles by Digitimes president Colley Hwang on the latest developments of the IT industry in the wake of the US-China trade war.)

The worldwide ICT industry is formed by supply chains that cooperate with each other. Prior to 2000, the ecosystem was structured simply in linear partnerships between upstream and downstream sectors with US-based first-tier vendors dictating the standards and specifications, and outsourcing manufacturing orders to their Taiwan- and Korea-based partners. At present, the ICT supply chain that has worked for 30 years continues to serve as the key foundation of the global ICT industry.Of the worldwide top-10 ICT companies that Digitimes identifies, six of them are from the US, two from China, one from South Korea (Samsung Electronics) and one from Taiwan (TSMC). In the world of connectivity, Metcalfe's Law tells us that the more nodes a network has, the higher its value. China's demographic dividend and the US leadership both show us the applicability of Metcalfe's Law in the ICT world.TSMC, which has a market value of US$177 billion, and Samsung, which has a value of US$223 billion, both have been deeply influenced by Moore's Law that many argue will become irrelevant. The two firms have often faced the question of whether they will also become irrelevant or continue to play leadership roles in the future. However, we can expect Samsung and TSMC to remain important and irreplaceable for the next 10 years. As for the others in the present top-10, with the fast and unpredictable changes in the era of the Internet, none of them can be certain to be staying at the forefront for long.Meanwhile, the worldwide network market can be divided into two areas: one is China and the other is beyond China. China has been keen competitors in various sectors worldwide, investing in the telecommunication industries of its neighbors and in US electric vehicle firms, and many others.However, China's local network, telecommunication and cloud computing services have all been strictly controlled by the government citing national security concerns. As a result, China is a closed market that has managed to create its home-grown networking giants such as Alibaba and Tencent.But China's ICT industry is now facing all types of challenges in its attempt to reach the pinnacle. Not only does it need to catch up with the current step of the semiconductor industry, it also faces an onslaught by the US in the upcoming 5G era. None of the global top-15 semiconductor suppliers is from China, which imported a total of US$312 billion of semiconductors in 2018, and exported a much smaller amount that resulted in a trade deficit of US$227.4 billion in the year. The semiconductor sector remains the weakest link in the superpower's tech industry. And related upstream semiconductor equipment and design tools are also being controlled by US-based firms.China is known as the world's factory, but its industry prowess is not as strong as imagined. Still far from the peak, China is at a critical point in the development of its ICT industry and its national strengths in general.(Note: This is part of a series of articles by Digitimes president Colley Hwang on the latest developments of the IT industry in the wake of the US-China trade war.)

I call the first island chain in East Asia the "Asian Edge," which carries a double reference: cutting-edge technologies in an IT context, and the peripheral in geopolitics. In the ICT market, the US is the first superpower, while China, which has been catching up fast, comes in second. Following the two dominating forces, Japan, South Korea and Taiwan that feature cutting-edge technologies form the third camp of superpowers lurking on the geopolitical edge of the top-two superpowers.Apple's application processors (APs) are completely outsourced to Taiwan Semiconductor Manufacturing Company (TSMC), while its demand for memory and OLED is met by Samsung Electronics. Apart from the iPhone vendor, most of the other US-based top-notch ICT firms including Intel, Microsoft, Qualcomm, Nvidia, AMD, Synopsys, Texas Instruments (TI) and Xilinx heavily depend on Asia's supply chain.The operation of the ICT industry, which used to simply follow traditional business practices, has changed in response to the rising of China. The trade war waged by US president Donald Trump may even become the beginning of a revolution for Asia's ICT industry and permanently change the global supply/demand relationships.For the key trends of the global ICT industry in the next 10 years, we should not just monitor the tech giants in the US and China, such as Apple, Amazon, Microsoft, Google, Alibaba and Tencent. The roles of Taiwan, Japan and South Korea in semiconductor and 5G applications will also be important. Because of the enormous investment amounts and the intricate links between existing and emerging technologies, I believe hardware technologies that have been written off for so long may stage a comeback.Taiwan is situated at the very front of the first island chain. It is a major player in the worldwide ICT supply chain, but is also the weakest link from a geopolitical perspective. The rise of China has sent Taiwan makers relying more on production in China, boosting their competitiveness on the one hand and yet putting Taiwan's ICT industry in an awkward position on the other.If China were to take over Taiwan politically, not only would it give the superpower direct access to the Pacific Ocean, it would also be able to leverage Taiwan's ICT prowess and resources, fixing the chink of its armor – namely the semiconductor sector – turning the country into a true manufacturing power worldwide.Taiwan's over 100 semiconductor firms together contributed US$92 billion in production value in 2018, while South Korea's semiconductor industry generates a value of around US$100 billion a year. Currently, Taiwan's and South Korea's semiconductor industries run a coopetition relationship. They form the very first obstacle that China needs to remove in order to develop its own semiconductor industry.(Note: This is part of a series of articles by Digitimes president Colley Hwang on the latest developments of the IT industry in the wake of the US-China trade war.)