Samsung has a far smaller share than TSMC in the wafer foundry sector, but Samsung's technologies built from its experience in memory and Exynos series AP production are as good as any other leading players. At the moment, Samsung's non-memory businesses together contribute only 7% of the company's revenues, but profits from its memory business are 3.2 times those of TSMC. However, in terms of profits from non-memory businesses, TSMC are 6.2 times Samsung's.As the business opportunities from smart city, smart home and IoV begin to rise, demand for APs is also expected to pick up dramatically. With sales of car-use semiconductor products expected to enjoy a CAGR of 18% for the next few years, Samsung's acquisition of Harman and its partnership with Audi for supplying car-use APs are both expected to bring in strong revenues: a conventional car may require around 200-300 ICs for its systems, but an autonomous driving vehiclemay need as many as 2,000.TSMC and Samsung have both announced plans to build their 3nm manufacturing capabilities, but market researchers estimate that the fee for designing an IC on 3nm node would be at least US$500 million. For a 28nm planar-type IC, the average design fee is about US$51.3 million, but one using 7nm FinFET process costs nearly US$300 million, almost six times as much because of all the expenses from related intellectual property (IP) and others. Most IC design houses would prefer to stick with foundries such as TSMC and Samsung that have technological advantages, but the high costs involved in making chips at the top-notch foundry houses will remain a problem for IC design houses.(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 semiconductor equipment market, which had a scale of US$60.5 billion in 2018, is controlled mostly by companies in the West. The development of China's semiconductor industry has been constantly threatened by possible US government bans on makers providing most advanced equipment to China's firms.In addition to local players that have been aggressively investing in China's semiconductor industry, multinational enterprises have also been doing the same. Of the worldwide semiconductor equipment market's scale of US$60.5 billion in 2018, China contributed US$12.2 billion or 20.2%. However, according to information from the upstream supply chain Digitimes has obtained, only less than 40% of the amount was from China-based firms. The rest was from demand from multinational enterprises such as Samsung, SK Hynix, Intel and TSMC, for their capacity expansions in China.Many market watchers originally expected the proportion of China-based semiconductor players' equipment purchases to rise on year in 2019, but have recently revised their views, estimating the percentage to slip in 2019. Meanwhile, semiconductor players in Taiwan who had been conservative about investing locally in the past few years, are expected to become more aggressive in planning their local capacity expansions in response to the US-China trade tensions.While SEMI has forecast that the worldwide semiconductor equipment market will decline in 2019, demand for semiconductor equipment from Taiwan is expected to rise back to US$11.4 billion in 2019, coming close to that from South Korea and China. In 2018, China had the second largest semiconductor equipment market, behind only South Korea. But China's demand for semiconductor equipment is estimated to slip from 2018's US$12.2 billion to US$11.96 billion in 2019 because of the US trade policies against China.(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 global IC packaging and testing market had a scale of US$28 billion in 2018 with the top-10 players commanding a combined 84% share. Three of the top-10 players are based in China. Of the four sectors in China's semiconductor industry, packaging and testing is the one with technologies closest to the worldwide level. This is because Jiangsu Changjiang Electronics Technology began its acquisition strategy early. Jiangsu Changjiang currently generates revenues of around US$3.64 billion a year, holding a global market share of 13%.Joining Jiangsu Changjiang in the global top-10 are Tongfu Microelectronics and Tianshui Huatian Technology. The three of them commanded over 20% of the worldwide packaging and testing orders.At the moment, Taiwan players are still the most competitive in the packaging and testing field. Taiwan-based Advanced Semiconductor Engineering (ASE), SPIL, Powertech Technology (PTI), King Yuan Electronics (KYEC) and Chipbond are all top-10 players. The five firms together are able to satisfy 44% of worldwide packaging and testing demand, and together with other Taiwan-based non-top-10 players such as Orient Semiconductor Electronics and Sigurd Microelectronics, they have controlled over half of the global packaging and testing market for the past 10 years.Taiwan players' control of the back-end process of the semiconductor industry, plus Taiwan's strength in IC distribution, forms a firm support for the competitiveness of Taiwan's IC ecosystem.(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.)

Within China's semiconductor industry, the IC design sector actually achieved the most progress in 2018. But how big exactly is China's IC design industry? There have been many versions of the story.According to IC Insights' figures, the global IC design industry had a scale of US$109.5 billion in 2018. Of the annual orders of US$57.73 billion for foundries, 18.5% came from China-based clients. Judging from the proportion, we can assume that China's IC design industry had a scale of US$20.2 billion in 2018, a level similar to that of Taiwan, but higher than those of Japan and South Korea.Orders for foundry services from China also went up sharply by 41% on year from 2017's US$7.57 billion to US$10.69 billion in 2018.TSMC also saw its orders from China-based clients rise dramatically from 2017's US$3.7 billion to 2018's US$6 billion, up 61% on year. Although TSMC did not process all these orders at its fabs in China, China's IC design houses saw their combined contribution to the worldwide foundry market rise from 2017's 13.8% to 2018's 18.5%, an impressive growth providing key incentives for many to invest in China's foundry sector.(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.)

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.)

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.)

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.)