New analysis from Bain & Company finds Chinese manufacturers are likely to partner with existing firms due to high barriers to entry, requiring international companies to adopt a mix of offensive and defensive strategies

Singapore – August 24, 2016 – China is planning to invest more than $100 billion in the semiconductor industry to reach its goal of playing a larger role in the global market. Its plans have left semiconductor executives from even the world’s most successful and innovative firms actively considering how to both capitalize on and guard against China’s growing ambitions. However, questions remain about whether the country is chasing false shadows or if it can succeed in capturing the market.

A new report from Bain & Company, China Chases Chip Leadership, estimates that by 2020 the quantity of silicon that is destined to flow to (or through) China will amount to nearly 55 percent of the world’s memory, logic and analog chips. China, however, produces only about 15 percent of these semiconductors. This is up from approximately 10 percent a few years ago, but silicon still represents the biggest gap in the country’s trade deficits –ahead of even oil – suggesting the country is a long way from closing the widening gap between supply and demand.

“China is making a run at capturing the semiconductor market globally by producing more of the microprocessors and memory chips that go into locally produced consumer devices and industrial equipment, both for domestic consumption and export,” said Kevin Meehan, who leads Bain’s Technology Practice in Asia-Pacific and co-authored the report. “But global market share is not something that can be reliably captured through deep pockets and long patience. To close the gap, China will need to work in tandem with established international players.”

China’s strategy for entering markets varies but, generally, the country seeks to control demand as much as possible and gain access to critical IP to improve its competitive position. However, in the semiconductor industry, quality, technology, value and brand all determine who leads the market; the government has limited control over end demand.

To gain a substantial share in the global market, Chinese semiconductor manufacturers need to catch up with foreign players in terms of technology and production costs. Yet, market requirements such as foundational IP and ongoing innovation make entry difficult even for the most well-funded challengers, and incumbents have few incentives for sharing their core IP with potential competitors from China or elsewhere.

Such high barriers to entry suggest that in most cases China is likely to partner with existing firms – a trend reflected in the country’s increased level of semiconductor M&A activity. Bain’s analysis finds that last year, deal value increased to nearly $10 billion, but the market has yet to reach the most advanced levels of technology.

For international players in the semiconductor industry, China’s ambitions may appear daunting.

Based on its research, Bain suggests four key steps to consider in deciding the right set of offensive and defensive actions to take:

• Take a scenario-based approach to anticipate and react to China’s potential moves based on its ambitions and the evolving competitive environment.
• Seek opportunities to invest in China and expand the company’s footprint through partnerships in sub-segments where your position lags and partnering with a challenger in China would improve prospects against market leaders.
• Keep in mind the lessons learned from other industries in which international players have developed healthy partnerships with Chinese companies.
• Understand that markets and industries in China are not monolithic. Given the time required to build a semiconductor capability, choosing the right partner may be more important than gaining first mover advantage in any particular segment.

“There’s no denying that China’s vast market, deep pockets and long patience in pursuing economic goals will require international companies to adopt a clear strategy to collaborate – and eventually compete – with Chinese semiconductor manufacturers,” said Florian Hoppe, co-author of the report and a partner in Bain’s Technology Practice. “Executives who understand China’s goals and adopt a mix of both offensive and defensive strategies stand to win as the market develops.”

Editor’s Note: To schedule an interview with Mr. Meehan or Mr. Hoppe, please contact: Nick Worley at nicholas.worley@bain.com or + 852 -2978-8830

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