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China's WTO Entry Adds Diversity to Chip Industry
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Dorothy Lai, Senior Analyst, Asia-Pacific Semiconductor Group, Gartner Dataquest
According to Gartner Dataquest, China was less affected by the global semiconductor industry downturn in 2001, and a recovery is expected from the third quarter of this year. China's accession to the WTO is also expected to boost the recovery. With the import tax exemption, foreign products will be more competitive on the local market. Foreign companies will also be able to sell their products to China more easily, and will have more flexibility in dealing with sales and production in the country.
Dorothy Lai, senior analyst for the Asia-Pacific Semiconductor Group at Gartner Dataquest, has been following the development of China's semiconductor industry, market and manufacturing. In this interview, Lai discusses China's major semiconductor sectors, as well as the impact of China's WTO entry.
NEA: How was the performance of China's semiconductor industry in 2001, and what is your projection for this year?
Lai: We estimate that China's semiconductor industry fell 24.3% in 2001. During the year, sales of most multinational semiconductor companies in China dropped 15-25%, with the exception of a few companies which managed positive growth or a marginal decline during this difficult time; these included STMicroelectronics, because its products were targeted mainly at the digital consumer markets which showed sustained growth in the year. By comparison, most Japanese companies suffered a higher decline because their products were targeted at consumer electronic appliances. Generally speaking, there was (and is) an inventory problem with consumer electronic appliances, and because of the low selling prices of their products, the semiconductor companies would not have made any money even if there had been an increase in unit sales.
This year, we expect the growth rate of China's semiconductor industry to be 4%, compared with 2.5% for the Asia-Pacific region. The industry should pick up from the third quarter of this year. Although there will be some increase in domestic sales, the growth will be driven mainly by electronics exports.
NEA:How was China's performance last year compared with other major Asia-Pacific countries/regions?
Lai:In 2001, the semiconductor industry in the Asia-Pacific region is estimated to have fallen by 33%. Taiwan's semiconductor industry fell by 39%, Singapore's fell by 40%, and Korea's fell by 29%. So the drop in China was not so severe compared with other Asia-Pacific markets. Countries/regions like Taiwan and Singapore depend mainly on electronics exports to the US, Europe and Japan. When the economy is not so good, there is less demand from those countries. The reason that China was less affected was because of a sustained domestic demand.
NEA:How did the different semiconductor sectors perform last year, and what is your forecast for the coming years?
Lai:The performance of consumer electronic appliances was relatively weaker because the market was a little saturated by the large number of manufacturers in the market. In China, most electronics companies started out as consumer electronic appliance makers. As they acquired new technology, they turned out more new products. In addition, foreign makers such as Philips and Samsung have been pushing their products on the local market.
In the PC sector, although the penetration rate is still low, many people in urban areas such as Beijing and Shanghai have already bought computers if they have been able to afford them. So growth in the coming years will come mainly from the Western regions and the rural areas. For this reason, we forecast that in the next few years, the annual growth rate will be around 19%, compared with 40% between 1996 and 2001.
We see digital products as having the best potential for growth in the coming years. Chinese companies should seek ways to develop more digital products such as set-top boxes, digital cameras, and DVD players. Networking products also have good potential for growth.
For cell phones, although Chinese makers increased their market share from just 0.1% in 1999 to 10% in 2000, further growth will depend on whether they can come up with more advanced products. The cell phones market has been dominated by a handful of large foreign companies such as Motorola, Nokia and Ericsson. As these companies increase their production in China, they can lower their product prices further to compete with local products.
NEA:What major changes will China's accession to the WTO bring to the semiconductor industry?
Lai:With regard to the semiconductor industry, the most important change to be brought about by China's WTO entry will be tax exemption. For example, the import tax on most ICs will be reduced from 6% to zero in 2002 --which will also help solve the smuggling problem.
WTO entry will have a major impact on sales and distribution channels as well. In the past, foreign companies couldn't sell anything to China that was produced outside the country. Now they can sell directly to customers. But this will take some time because at present most of the distribution channels are still controlled by the state-owned enterprises. If they want to sell their products to Chinese customers, they will still need to work with the state-owned enterprises.
NEA:How will China's WTO entry affect local companies?
Lai:The Chinese government has been helping local companies to compete with foreign companies. For example, in the cell phone sector, the government has invited foreign companies to work with local companies, so they become partners and not competitors.
With their current technology levels, most of the local companies simply can't survive on their own. When more foreign companies come in as a result of China's WTO entry, these local companies will lose out on business. So the government needs to help them survive the competition.
NEA:Does that mean more cooperation opportunities will be opening up to foreign companies?
Lai:Yes, but these are no longer mandatory. In the past, if you wanted to invest in China, you would have had to transfer your technology to local companies, but since China's admission to the WTO, there have been no such requirements on paper.
The Chinese government has realized that the semiconductor industry needs foreign investment in order to develop further; it has therefore been offering various tax incentives and tax holidays to attract more investment.
NEA:In what way will China's WTO entry affect the business strategies undertaken by foreign semiconductor companies?
Lai:In the past, in order to sell their products in China, foreign companies were required to make all or parts of their products in the country. For example, for some products there were local content requirements, which meant that companies had to source some of the parts within the country. With WTO entry, there is no longer any such policy. Companies are able to source the parts from outside if they can get them at cheaper prices; they can even produce the products outside China and ship them into China.
In the past, some companies were reluctant to sell to China, fearing that the high tax rates would make their products unattractive on the local market. Now, with the exemption of import tax, perhaps they can consider selling a small portion of their products on the local market to test the water. So now foreign companies can have different choices, depending on how confident they are within the China market.
by Keith Chan, Hong Kong
(March 2002 Issue, Nikkei Electronics Asia)
According to Gartner Dataquest, China was less affected by the global semiconductor industry downturn in 2001, and a recovery is expected from the third quarter of this year. China's accession to the WTO is also expected to boost the recovery. With the import tax exemption, foreign products will be more competitive on the local market. Foreign companies will also be able to sell their products to China more easily, and will have more flexibility in dealing with sales and production in the country.
Dorothy Lai, senior analyst for the Asia-Pacific Semiconductor Group at Gartner Dataquest, has been following the development of China's semiconductor industry, market and manufacturing. In this interview, Lai discusses China's major semiconductor sectors, as well as the impact of China's WTO entry.
NEA: How was the performance of China's semiconductor industry in 2001, and what is your projection for this year?
Lai: We estimate that China's semiconductor industry fell 24.3% in 2001. During the year, sales of most multinational semiconductor companies in China dropped 15-25%, with the exception of a few companies which managed positive growth or a marginal decline during this difficult time; these included STMicroelectronics, because its products were targeted mainly at the digital consumer markets which showed sustained growth in the year. By comparison, most Japanese companies suffered a higher decline because their products were targeted at consumer electronic appliances. Generally speaking, there was (and is) an inventory problem with consumer electronic appliances, and because of the low selling prices of their products, the semiconductor companies would not have made any money even if there had been an increase in unit sales.
This year, we expect the growth rate of China's semiconductor industry to be 4%, compared with 2.5% for the Asia-Pacific region. The industry should pick up from the third quarter of this year. Although there will be some increase in domestic sales, the growth will be driven mainly by electronics exports.
NEA:How was China's performance last year compared with other major Asia-Pacific countries/regions?
Lai:In 2001, the semiconductor industry in the Asia-Pacific region is estimated to have fallen by 33%. Taiwan's semiconductor industry fell by 39%, Singapore's fell by 40%, and Korea's fell by 29%. So the drop in China was not so severe compared with other Asia-Pacific markets. Countries/regions like Taiwan and Singapore depend mainly on electronics exports to the US, Europe and Japan. When the economy is not so good, there is less demand from those countries. The reason that China was less affected was because of a sustained domestic demand.
NEA:How did the different semiconductor sectors perform last year, and what is your forecast for the coming years?
Lai:The performance of consumer electronic appliances was relatively weaker because the market was a little saturated by the large number of manufacturers in the market. In China, most electronics companies started out as consumer electronic appliance makers. As they acquired new technology, they turned out more new products. In addition, foreign makers such as Philips and Samsung have been pushing their products on the local market.
In the PC sector, although the penetration rate is still low, many people in urban areas such as Beijing and Shanghai have already bought computers if they have been able to afford them. So growth in the coming years will come mainly from the Western regions and the rural areas. For this reason, we forecast that in the next few years, the annual growth rate will be around 19%, compared with 40% between 1996 and 2001.
We see digital products as having the best potential for growth in the coming years. Chinese companies should seek ways to develop more digital products such as set-top boxes, digital cameras, and DVD players. Networking products also have good potential for growth.
For cell phones, although Chinese makers increased their market share from just 0.1% in 1999 to 10% in 2000, further growth will depend on whether they can come up with more advanced products. The cell phones market has been dominated by a handful of large foreign companies such as Motorola, Nokia and Ericsson. As these companies increase their production in China, they can lower their product prices further to compete with local products.
NEA:What major changes will China's accession to the WTO bring to the semiconductor industry?
Lai:With regard to the semiconductor industry, the most important change to be brought about by China's WTO entry will be tax exemption. For example, the import tax on most ICs will be reduced from 6% to zero in 2002 --which will also help solve the smuggling problem.
WTO entry will have a major impact on sales and distribution channels as well. In the past, foreign companies couldn't sell anything to China that was produced outside the country. Now they can sell directly to customers. But this will take some time because at present most of the distribution channels are still controlled by the state-owned enterprises. If they want to sell their products to Chinese customers, they will still need to work with the state-owned enterprises.
NEA:How will China's WTO entry affect local companies?
Lai:The Chinese government has been helping local companies to compete with foreign companies. For example, in the cell phone sector, the government has invited foreign companies to work with local companies, so they become partners and not competitors.
With their current technology levels, most of the local companies simply can't survive on their own. When more foreign companies come in as a result of China's WTO entry, these local companies will lose out on business. So the government needs to help them survive the competition.
NEA:Does that mean more cooperation opportunities will be opening up to foreign companies?
Lai:Yes, but these are no longer mandatory. In the past, if you wanted to invest in China, you would have had to transfer your technology to local companies, but since China's admission to the WTO, there have been no such requirements on paper.
The Chinese government has realized that the semiconductor industry needs foreign investment in order to develop further; it has therefore been offering various tax incentives and tax holidays to attract more investment.
NEA:In what way will China's WTO entry affect the business strategies undertaken by foreign semiconductor companies?
Lai:In the past, in order to sell their products in China, foreign companies were required to make all or parts of their products in the country. For example, for some products there were local content requirements, which meant that companies had to source some of the parts within the country. With WTO entry, there is no longer any such policy. Companies are able to source the parts from outside if they can get them at cheaper prices; they can even produce the products outside China and ship them into China.
In the past, some companies were reluctant to sell to China, fearing that the high tax rates would make their products unattractive on the local market. Now, with the exemption of import tax, perhaps they can consider selling a small portion of their products on the local market to test the water. So now foreign companies can have different choices, depending on how confident they are within the China market.
by Keith Chan, Hong Kong
(March 2002 Issue, Nikkei Electronics Asia)
