China at the moment has as many as 30 semiconductor fabs under construction - the most ambitious investment plan the global semiconductor industry has ever seen. China's memory industry was originally meant to be a key growth driver, but it has lost momentum after the US ban on exports to China-based DRAM maker JHICC. On the other hand, China's wafer foundry sector continues seeing expansions with at least 13 local fabs eyeing business opportunities in the sector.Of the existing foundry houses in China, SMIC's capacity is the largest, followed by Shanghai Huahong Grace Semiconductor Manufacturing and then Taiwan-based TSMC. However, SMIC's business focus is on the 28nm node, which is a very competitive market segment that offers low profits. However, SMIC has recently obtained a US$10 billion fund for it to invest in 14nm process development. SMIC is now aiming to have its 14nm process begin mass production by the end of 2019 in a bid to break free from the fierce competition in the 28nm segment.TSMC's 200mm fab in Shanghai was not a major production facility for the maker. But the establishment of a new 16nm fab in Nanjing in 2018 helped advance China's semiconductor process. And TSMC's revenues from its China production are expected to grow from 2018's US$950 million to US$1.8 billion in 2023.TSMC originally planned to expand its Nanjing factory with new 7nm capacity, but may switch the expansion plan to a 12nm node due to the US-China trade tensions.(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.)

If data collected from production process can be well concatenated, then problems affecting production efficiency can be quickly spotted through big data analysis, according to Alex Hsu, CEO of TAO Info, a Taiwan startup dedicated to offering data analytics to help manufacturers diagnose their production lines and optimize production process.In achieving smart production, Hsu said, data collection and analysis is crucial preparatory work, but Taiwan manufacturers still have much room for improvement in this aspect as many of them are just starting to use data analysis for single purpose such as defect image analysis or predictive equipment maintenance.Hsu stressed that the final purpose of smart production is not to enhance the performance of any single system but to optimize the entire production process and boost yield rates through AI-based analysis of concatenated data.Hsu, who used to engage in the semiconductor sector, said it is a thorny problem for IC engineers to locate production-affecting factors from among thousands of frontend processes, just like looking for a needle in a haystack. But in analyzing big data, he continued, algorithms can be used to define problems through a huge amount of parameters concerning machinery, material, formula, operator and environment and quickly sort out key factors affecting production in accordance with correlation among the parameters. Such a practice is aimed at narrowing the range of possible factors.Hsu continued that most AI or neural network analysis technologies can now be applied to deal with correlation rather than the cause-and-effect relation between process parameters and production problems, and therefore his company can use a search engine to sort out the most likely relevant parameters by conducting a correlation-based sequencing of all the parameters, allowing engineers to quickly address problems.Manufacturers can also incorporate AI to achieve smart product traceability in addition to smart production, Hsu noted, furthering that many consumer electronics vendors including Lenovo, Huawei and Dell have asked their supporting partners to actualize "digital twin" applications, so as to concatenate all the production processes of the entire supply chains.TAO Info CEO Alex HsuPhoto: Chloe Liao, Digitimes, May 2019

The different sectors of the semiconductor industry are clearly defined with specific work, and therefore each sector's self-sufficiency rate must be looked at in their own right. The meaning of "Made in China" would mean little if seen in a confusing perspective. Lumping together the production values of IC design, manufacturing, and packaging and testing can only provide a clue to the entire scale of the semiconductor industry, not to its self-sufficiency.According to IC Insights' numbers, the production value of wafer manufacturing at fabs in China - including those run by local and foreign investors - was US$23.7 billion in 2018. Compared to the worldwide semiconductor market's amount of US$430.8 billion, China's semiconductor industry only had a global market share of 5.5%. Compared to China's overall demand for semiconductor of US$251.1 billion, the local production accounted for only 9.4%. But if only demand from local players such as Huawei, Lenovo and Xiaomi is taken into consideration, the local production's contribution will rise to 15.2%.As the government of China has been aggressively pushing its semiconductor development, the local industry's production value is expected to rise to US$47 billion by 2023 if no major external influences get involved. Compared to the worldwide semiconductor industry's US$571.4 billion, China's share will pick up to 8.23%. However, the research firm indicates that the growths will be driven by Wuhan Xinxin Semiconductor Manufacturing as well as companies in the "Others" section in its findings, and it does not mention how the US-China trade tensions could affect China's semiconductor industry, which suggests that the outcome is still unpredictable.As for China's Made in China 2025 project, which sets the goal of achieving a self-sufficiency manufacturing rate of 40% by 2020 for its semiconductor industry and 70% by 2025, it would be rather difficult to accomplish judging from the current developments.(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.)

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.)