Resource Regions: China

With the rise of technology sovereignty, major economic regions are aggressively developing self-sufficient ICT industry supply chains with the semiconductor industry as a key focus area. To contain China’s development in semiconductors and technology, in addition to export control and enactment of the CHIPS Act, the United States has also joined forces with the Netherlands, Japan, etc. to restrict China’s acquisition of semiconductor equipment tools (e.g., EUV and DUV), materials, specialty chemicals, software (EDA and IP) capabilities.

Despite this restrictive environment, Chinese vendors continue to adapt, and IDC has observed these key trends that deserve special attention:

Mature Manufacturing Processes Development and Government Subsidy Policy Models Transformation

As China is unable to develop its advanced manufacturing processes because of export controls on equipment, mature processes have become its industrial development focus. In the past, to develop semiconductor autonomy, Chinese government subsidies were mostly on the expansion of wafer manufacturing capacity. However, due to the overall environmental impact and the inability to obtain more substantial orders, many plants have become idle, underutilized, and unable to produce sustainable benefits for industrial development. To remedy this, the current government subsidy model was changed. Now based on operating results, wafer factories must obtain orders first and have a certain degree of capacity utilization to obtain government subsidies. This shift has made Chinese wafer fabs more active in attracting customers through different strategies (e.g., low pricing, placing orders first and then returning part of the investment amount later, etc.). Compared with the previous subsidy model, this incentivizes local fabs and IC design companies to expand their business.

China’s wafer fabs are currently self-sufficient in 22/28nm and older process technologies (given the available equipment tools). In the future, through government policies and subsidies, coupled with the support of China’s huge domestic demand market, it is expected that China will have a mature process market in 2030 (≥ 22nm) and will reach nearly 40% share (30% in 2023). China’s influence on the global semiconductor production capacity will also increase as it puts pressure on International Device Manufacturers (IDMs) and foundries focusing on mature nodes.

Focus on Wide-Bandgap Semiconductors

Wide-bandgap semiconductors, such as silicon carbide and gallium nitride, have the characteristics of low power leakage, high power, high-temperature resistance, and high voltage resistance. They are especially suitable for high-voltage and high-current environments. Therefore, in the future, wide-bandgap semiconductors will play a key role in applications such as electric vehicles, high-frequency communications, 5G communications, and green energy. At present, Wide-bandgap semiconductors are mostly regarded as national security-level industries. These are also the projects regions are investing in, developing, protecting, and establishing policies to encourage investment and export controls.

Every region expects to maintain technological independence in wide-bandgap semiconductors. China has listed it as a development priority in its 14th Five-Year Plan and hopes to further develop the technology and use it rapidly in new energy vehicles, communication industries, etc. Under this initiative, related applications are the focus. In 2023, China’s capacity of silicon carbide (SiC) crystal growth continued to grow. In addition to joining hands with IDMs, China will also begin to enter the power components market. If the new production capacity is effectively produced in 2024, China SiC wafer’s market share will increase significantly, and its industrial influence cannot be ignored.

Actively Lay Out Chiplets

China is also using chiplets to connect chips with different functions and slow down the impact of the restricted development of high-end chips. China has established a chiplet alliance and produced their first chiplet technical standard. In the “Advanced Cost-driven Chiplet Interface(ACC 1.0)” drafted by China ChipLet League in 2023, more emphasis was also placed on optimizing China’s packaging and substrate supply chain through chiplets and expanding related packaging technologies. However, although China actively hopes to break through in this area, not all chips are suitable for chiplets. For example, chips used in consumer electronics, such as mobile phones and laptops, rarely require chiplet designs. In addition, chiplet design requires more IP and usually the use of advanced packaging technology which is costly and not China’s strength. It will take time to see whether chiplets can become a key driver of China’s semiconductor independence in the future.

Bigger Challenges Lie Ahead

In their efforts to further the development of their semiconductor industry, China has seen initial positive results in the mature processes and IC design fields. However, from a long-term development perspective, semiconductor equipment is still an important key. The market for semiconductor equipment and related components and materials is quite fragmented, and the certification process is complex and cyclical. This market is also currently highly concentrated in the United States, Netherlands, and Japan. Hence, it will remain a challenge for China to achieve full autonomy.

Currently, under the ban, China is no longer able to import high-end machines from ASML. How long the existing tools in the facilities supplied by ASML can maintain operation still needs to be evaluated. Although China actively supports local equipment manufacturers, and related manufacturers, such as Northern Huachuang, AMEC, and Shanghai Microelectronics (who are actively expanding their business), these manufacturers still lag by more than 5 generations compared to international first-tier tool manufacturers in terms of product accuracy and performance. Also, although China has invested in dry/wet etching, thin film deposition, and polishing and grinding equipment, there is still a gap in lithography tools. In the latest phase (the third phase) of China’s National Fund’s plan, related news mentioned that one of China’s areas of focus and development is in chip manufacturing equipment, highlighting the important correlation between semiconductor equipment and China’s semiconductor industry development.

China has actively maneuvered through the ban on semiconductor policies in the United States and other countries and has quickly adjusted its policies. However, as semiconductor equipment and related components are still heavily dependent on imports, it will not be easy to achieve full autonomy within five years. Relying on external advanced technology and equipment, we expect China’s semiconductor development will be a gradual process even with the strategy of upgrading technology and gradually increasing manufacturing experience.

On the other hand, China has gained the opportunity and motivation to develop mature processes despite the restrictions comprehensively. Their mature processes can still meet the requirements of current applications, including consumer electronics, automotive electronics, and industrial, among many other applications in the semiconductor market. Despite all these, China is still currently the second-largest semiconductor application market in the world. As their share of mature processes gradually expands in the future and related IC design capabilities gradually improve, China will still play a key role in the development of the global semiconductor industry.

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The China New Energy Vehicle (NEV) market has soared over the past two years and has become the most promising segment in the China passenger vehicle market. Amid a new round of industrial chain adjustments and upgrades centered around NEVs, Internet of Vehicles (IoV) and intelligentization, o rthe addition of AI to a system, NEVs have become new focal points among suppliers and car manufacturers.

The noteworthy emerging trends on China’s NEV include:

The realization of smart cockpits and smart driving functions as the demand for new energy passenger vehicle accelerates.
Autonomous driving and smart cockpits have become popular areas for IoV market development.
Rapid growth in the automotive cloud market given it is the infrastructure behind IoVs.

NEVs Drive the Intelligent Transformation of China Automotive Industry

The China NEV market size bucked the overall market fluctuations in the first quarter of 2023. Not only did the emerging brands maintain their overall development momentum, but traditional car manufacturers achieved phased progress in electrification.

The NEV market has grown over the past few years with increasing penetration. IDC predicts that the penetration rate of NEVs in the China passenger vehicle market will exceed 30% in 2023.

According to Bull Wang, Research Manager at IDC China, the electrification and intelligentization of passenger vehicles is a vital indicator of the development stage of the entire automotive market. Electrification makes the underlying architecture of vehicles more suitable for the realization of smart driving and smart cockpits technologies, the two pillars of vehicle intelligentization.

Research shows that autonomous driving technology is applied in the passenger vehicle market primarily in the form of assisted driving functions, especially for vehicles in the RMB 200,000–400,000 price segment. In terms of smart cockpits, breakthroughs have been made continuously in the dimensions of interaction between vehicles and users, expanding the use cases of cockpits.

In recent years, the industrial upgrading of IoV capabilities is an important support and driving force behind the rapid realization and development of smart driving and smart cockpit technologies.

Vehicle Market Shows the Trend of Electrification, Intelligentization, Networking, and Sharing

A car manufacturers’ launch of many functions is inseparable from the overall upgrading of upstream technologies and product systems in the automotive industry. The vendor led IoV market has formed as an organic combination of technology products for vehicles, roads, communications, cloud infrastructure and platforms, security, services, and solutions. It is now evolving toward electrification, intelligentization, networking, and sharing, among which electrification has been preliminarily completed. Intelligentization and networking are the current market hotspots, and sharing is an important trend in the future development.

Catherine Hong, Senior Research Analyst at IDC China, noted that IoV is an important direction for the integrated application of car manufacturing with software and communications.

With the continuous penetration of assisted driving functions, high-level autonomous driving products have become the mainstream direction with suppliers’ developments focused on technology upgrading and mass production.

Automotive Cloud Will Achieve a Compound Annual Growth Rate (CAGR) of 53.6% Over the Next Five Years

Automotive cloud refers to cloud computing infrastructure*, platforms, and use case solutions to meet the digitization and intelligent transformation of the automotive industry. This includes automotive industry suppliers, main engine manufacturers, and industry users of intelligent vehicles.

IDC predicts that the China automotive cloud market will continue to hit new highs in its growth, exceeding RMB 60 billion in 2027, at a five-year CAGR of 53.6%.

Yang Yang, Research Manager at IDC China, emphasized that the intelligent networking of vehicles has redefined the relationship between cloud and industry. The cloud is the production system, data and algorithms are competitive advantages, and software redefines products and services.

IDC Analyst Viewpoint

Looking ahead, with the further popularization of new energy vehicles, the rapid development of new technologies such as intelligentization, networking and autonomous driving, software-defined vehicles will drive the continuous transformation and upgrading of the automotive industry.

This will also reshape the vehicle industrial chain, leading to a new market competition landscape. How enterprises in the industrial chain will leverage their capabilities, make courageous transformations and seize market opportunities will become the top priority for automotive industry players.

Read more about IDC’s China research related to the smart vehicles and gain insights into future trends in the automotive market.

*Cloud computing infrastructure includes public cloud infrastructure services and private cloud infrastructure construction; cloud solutions include platforms and application solutions hosted on various types of cloud infrastructure.

As the digital development of enterprises globally begin to move from the digital transformation (DX) era to the digital business era, the government of China unveiled its plan for the country’s digital development. This further clarifies their goals for China’s overall digital development, sharing for the first time their framework of “2522”, complete with guarantees of implementation. The timely release of this plan, which also sets China’s development goals for 2025 and 2035, will help cope with the current economic downward pressure and safeguard the accelerated development of China’s digital economy. The Plan is expected to greatly promote industrial users’ DX and the development of digital businesses and provide huge business opportunities for ICT vendors.

Building the Road to Digital China

Implement new development concepts, accelerate the fostering of new development paradigms, and focus on promoting high-quality development.
Balance development and security, strengthen systems and worst-case scenario thinking, and enhance the overall layout of the plan.
Follow the strategic path of solidifying the foundation, empowering the whole system, strengthening capabilities, and optimizing the environment.
Improve the integrity, systematic approach, and collaboration in the construction of a digital China, and promote the deep integration of the digital economy in the real economy.
Drive the transformation of ways of production, living, and governance with digitalization to inject strong impetus into the drive of advancing the great rejuvenation of the Chinese nation on all fronts with Chinese modernization.

2025 and 2035 Development Goals

The Plan sets out to implement 13 key goals in two phases targeted to be completed by 2025 and 2035, respectively. These goals define the pattern and lay the foundation for the construction of Digital China, and are designed to be more reasonable and coordinated developments across all aspects to strongly support the building of a modern socialist country.

Layout

The construction of Digital China will be laid out according to the framework of “2522”, which provides a directional guide for the development of the economy and society, and makes a clearer plan for the future of China’s digital economy:

Guarantees of Implementation

Efforts must be made to strengthen the overall planning, coordination of progress, and execution of all tasks. Specific guarantee measures will focus on five aspects:

Strengthening organizational leadership
Improving institutional mechanisms
Ensuring investment
Strengthening talent support
Creating a good atmosphere.

Moreover, the Plan specifies that efforts must be made in building digital China as a reference for the evaluation of relevant Party and government leading officials, which guarantees the implementation of the Plan from the aspect of KPIs.  

The Plan’s Positive Impact on the China ICT Market

The Plan further highlights the value of digital technologies and strengthens the ICT industry’s development confidence. For the first time, the Plan proposes the promotion of the in-depth integration of digital technology with economic, political, cultural, social, and ecological progress. The Plan will help China promote a stronger digital economy, develop an efficient and coordinated digital government, build a digital culture with confidence and prosperity, create a digital society featuring inclusiveness and convenience, and shape a green and intelligent digital ecological civilization.
Faster than expected growth in digital infrastructure business opportunities, as well as big data and AI. In November 2022, the China National Development and Reform Commission issued a report on the development of China’s digital economy, which puts forward a plan to moderately deploy digital infrastructure construction in advance to lay a solid foundation for digital economic development. This Plan reaffirms the need to remove the barriers to balanced development of the digital infrastructure across the country and accelerate the construction of infrastructure such as 5G networks, gigabit optical networks, IPv6, mobile Internet of Things (IoT), BeiDou Navigation Satellite System, and national computing network to synergize east and west. The Plan also proposes to promote the big cycle of data resources, accelerate the aggregation and utilization of public data, unleash the potential value of commercial data, speed up the establishment of a system of property rights for data, carry out research on data asset pricing, and establish a mechanism for the participation of data elements in value distribution by contribution.
Digital sovereignty continues to be refined and deepened, and the cybersecurity market continues to grow rapidly. Digital sovereignty and cybersecurity are becoming increasingly important as the losses caused by geopolitics and insecurity intensify. The Plan sets forth to strengthen cybersecurity and data security and improve the data governance ecosystem and systems. It clearly proposes to improve laws, regulations, and policy systems related to cybersecurity, effectively maintain cybersecurity, enhance data security assurance capabilities, establish a basic system for hierarchical and classified data protection, and perfect the system for network data monitoring and early warning and emergency response with the aim of building a trusted and controllable digital security barrier.
The Plan promotes international cooperation and opening up to achieve win-win results and benefit the global deployment of Chinese ICT vendors. The Plan specifies to coordinate international cooperation in the digital field by establishing a system of international exchanges and cooperation with multilevel collaboration and support, and multi-entity participation; build a high-quality Digital Silk Road; and actively develop Silk Road ecommerce. China will expand international cooperation in the digital field, actively join digital cooperation platforms under the multilateral frameworks of the United Nations, the World Trade Organization, the G20, APEC, BRICS, and the SCO, and build new high-quality new platforms for open cooperation in the digital field.  

Learn more about the IDC China Digital Business Strategies research on the impact of government policies on digital business and the ICT market. Talk to IDC experts today.