Although China's fabless industry has a low share, it has the fastest growth rate.
China experts must utilize local or localized personnel

As the Chinese semiconductor industry grows rapidly due to recent large-scale investments, opportunities for domestic fabless companies to enter the Chinese market are also increasing.

The Chinese semiconductor industry is developing remarkably as the government actively supports it through the "Initiative to Promote Semiconductor Industry Development." Consequently, the consumer market is growing rapidly due to the increase in electronic device production and manufacturing facilities. How, then, should domestic fabless companies prepare to enter the Chinese market to avoid missing out on these opportunities?

When looking at China's semiconductor industry by sector, the fabless industry accounts for a relatively small share but has the fastest growth rate. Both consumption and domestic production are increasing, and a key point to note is that half of the total consumption is produced in China. According to the China Software Industry Association (CSIA), domestic production is accelerating, and it is projected that more than 60% of total consumption will be produced in China by 2018.

Due to the impact of the Chinese government's tax incentives, the number of fabless companies increased from 681 in 2014 to 715 in 2015. Among these, 20% of the companies recorded revenues ranging from $16 million to $2.3 billion. Not only quantitative growth but also qualitative growth is taking place rapidly.

Looking at device market share in the second quarter of 2017, Huawei (11.3%), OPPO (8.1%), and Xiaomi (6.2%) ranked from third to fifth in the smartphone market. While Samsung (23.3%) maintained the top spot, its growth rate remained in the 1% range, whereas Chinese companies demonstrated double-digit growth. China accounts for approximately 70% of the global smartphone market, which remains largely comprised of China and India. Although the tablet PC market declined by 3.4% year-on-year, Huawei recorded a growth of 47.1%. In the wearable market, Xiaomi took the top spot, surpassing Fitbit and Apple.

Kim Hee-cheol, Vice President of Roa Consulting, stated, “The structure of devices such as PCs, smartphones, wearables, drones, and TVs is increasingly becoming a battle of price. It is a difficult time to surpass China, which puts forward low-cost products.” He pointed out that to enter the Chinese market, the perception of being a lagging nation must be abandoned, noting, “While brands are highly important in Korea, if you look at Africa, Latin America, and Europe, brand value is not yet high, yet there is no resistance to Chinese brands.” Vice President Kim added, “The foundry business is a game of facility investment.” "Although Samsung and SK Hynix are also making significant investments, the Chinese government is investing 200 trillion won over five years," he explained, adding, "If things continue this way, it may be difficult to maintain a competitive advantage in the memory business."

He advised that to enter the Chinese market, one must identify areas where China cannot match and build technological capabilities, emphasizing the need to specialize in infrastructure and technology where the country still holds an advantage.

Entering the Chinese Market 1. Strive for Localization

Regarding the points that domestic fabless companies should consider when entering the Chinese market, Lee Byung-in, Director of the Korea-China System IC Cooperation Research Institute, emphasized efforts toward localization, stating, “In China, value chains vary by manufacturing company. It is important to understand the supply chain system,” and adding, “Efforts must be made to utilize local or localized personnel.”

Entering the Chinese Market 2. Don't rush, ensure sufficient lead time.

The next factor to consider after localization is time. It can be said that virtually no Korea-China SoC platform projects have generated large-scale revenue in the same year. Sufficient lead time is required for the commercialization of development projects to expect results exceeding domestic standards.

Entry into China 3. Do not try to establish a direct supply relationship.

Customer relationship management is also crucial. To enter the market for major manufacturers, there must be trust in both the supplied products and the company itself. If establishing direct supply relationships is difficult, utilizing channels among resident companies within the research institute is an option. It is also necessary to communicate in a manner preferred by Chinese customers and representatives.

Although China is known as the world's IT manufacturing hub, there are product categories that are not available domestically. These include older products, regionally specialized items, and products for which domestic manufacturing has not yet been established. For instance, in the case of AI speakers, there is potential not only for hardware production but also for the growth of killer apps and the production of new IoT products. Currently, numerous design houses in China are competitively participating in development and production. Furthermore, there is room to consider products such as drones, tablets, small robots, OTT (Over The Top) set-top boxes, and mid-to-low-priced 2-in-1 laptops.

Director Lee stated, "While making good hardware is fundamental for AI speakers, voice recognition technology, deep learning support, and recognition rates in actual apps are becoming increasingly important given limited resources. There are still opportunities for domestic fabless companies," adding, "Whether for components or finished products, global commercialization through China is possible, so this point should be kept in mind."