Semiconductor industry growth tied to the AP region’s evolution
08/01/2006
The Asia-Pacific region has played an integral part in the success of the semiconductor industry for over 35 years, and in turn has been transformed by it. California’s Silicon Valley would not have experienced such phenomenal success since the early 1970s without the supportive role played by the people, the economies, the industries, and the cultures in the Asia-Pacific region. Thus, North America and Asia Pacific are mutually and undeniably interdependent for continued growth in the global semiconductor industry. This article looks into this historical development over the last half-century; considers the industry dynamics, the people, and the cultures that made success possible; and examines how this mutual interdependence will impact the future global semiconductor market.
At an operational level, Asia Pacific-which in this article refers to Southeast Asia including China, but not industrial stalwarts Japan and Korea-has been constantly moving up in the value chain. Starting out as a low-tech factory producer, the region has matured to become a full-fledged elite market driver, while maintaining a pivotal role in keeping the supply chain efficient, responsive and dependable.
Many visitors to the Asia-Pacific region become intoxicated with the boundless energy in the business sectors and the endless construction and infrastructure development going on there. In many ways, cities such as Singapore, Hong Kong, Taipei, and Shanghai are much more modern than the famous industrial cities in the Western world. This did not happen overnight, but in reality was a result of three decades of steady advancement in the value chain that feeds the global market.
Starting out in the 1970s as centers of cheap but reliable manufacturing outlets for Western companies, this region has systematically become more financially and technologically independent, providing ever-greater value-added end solutions. Now, with India and China emerging as the two greatest markets of the world, the region has clearly become an exciting business place.
During the last decade or so, we have witnessed a disintegration of vertically integrated business entities into horizontally fragmented business centers, each with its own core competencies. The driving forces behind this historical shift are technological advances and economic developments. In the same period, there has been a huge global shift in the center of gravity for engineering education towards the Asia-Pacific region. The great universities of Asia are conducting leading-edge research, and the majority of engineering graduate students in the most prestigious US universities are now from Asia. Taken together, these trends have converged to cause a massive build-up of economic and technical momentum in the Asia-Pacific region. Evidence of this phenomenal growth is the fact that China’s 2005 GDP (gross domestic product) grew by 9.3% to over $8 trillion, and India’s grew by 7.6% to $3.7 trillion. (By comparison, the real growth of the US economy last year was 4.6% in a $12.4 trillion economy). The per capita GDP of Taiwan is $26,700; Singapore is $29,900; and the US is $42,000 [1].
While the region as a whole has been phenomenally successful in the last 35+ years, individual countries have shown strengths and weaknesses based on their cultural, historical, philosophical, and geographical differences. The role each major country has played and will play is discussed below.
Taiwan. Taiwan has been a prolific player in the last several decades, coming on strong in the late 1980s in the foundry business with the formation of TSMC and UMC, and disrupting the vertical model forever. By initially offering older, stable technologies to establish their credibility with Western companies, they systematically and steadily progressed in developing leading-edge process technologies to become a dominant fab source for burgeoning fabless start-ups worldwide.
The fabless model in fact has been so successful that we are now seeing established integrated device manufacturers (IDMs) moving towards this approach and relying on the services of Taiwanese foundries. At the same time, assembly and test suppliers like ASE and SPIL have emerged as formidable backend process providers for fabless companies and IDMs alike, making Taiwan the hub for semiconductor product manufacturing for the large and growing fabless sector of the industry.
Building on its success at the silicon level, Taiwan quickly established itself as a leader among original device manufacturers (ODMs), designing products for original equipment manufacturers (OEMs) worldwide. In the trend’s last phase, Taiwan now boasts several leading OEMs of its own. Taiwan’s emergence is not an accident. The island nation brought together the right chemistry of a supportive government with a sizable foreign reserve, a highly educated engineering talent pool, a strong entrepreneurial atmosphere, and close proximity among all the important segments of the value chain.
Singapore. Singapore has also been successful with foundries like Chartered Semiconductor and assembly and test businesses such as STATS ChipPAC, and is one of the world’s most active logistics hubs due to its central location and supportive government laws. Singapore, however, has not succeeded in developing a value-add industry going up the value chain toward ODM and OEM business. While the country enjoys some of the same attributes mentioned about Taiwan, Singapore probably lacks the critical mass for an internally developed industrial base due to its size. Hence, it depends heavily on Western companies setting up regional offices there.
Malaysia has been successful in the backend processes, including assembly and test and electronic manufacturing suppliers (EMS), but has not been as successful in its attempts at the foundry business, probably due to its educational and infrastructure limitations.
Countries such as Thailand, the Philippines, and Vietnam, add to the assembly and test capacity with manufacturing plants established by large Western and Asian companies. These countries still can offer relatively cheap labor for low-cost manufacturing.
China (including Hong Kong). China along with Hong Kong is now the most exciting and dynamic country in the region and is becoming both a major supplier as well as the world’s largest and most sought-after market. Despite its political background, China now enjoys most of the encouraging attributes that enabled Taiwan’s success and has also successfully employed the same business models for the foundry, assembly and test, and EMS sectors of the value chain.
India. Finally, India is gaining its rightful attention as an emerging power in the semiconductor and electronic industry. During the last 15 years, the country has established itself as the world’s premier software development center. Starting out as a low-end IT service provider, the country is now both a technical and economical powerhouse for the software industry. The country is experiencing tremendous growth in GDP and standard of living, and is emerging as one of the most promising markets for the global industry.
India has also been providing high-end design services to Western corporations and has developed a cadre of technical design leaders ready to put their entrepreneurial ambitions to the test. As a result, India is seeing a new focus on establishing advanced fabs and assembly and test houses. Most of the world’s leading EMS companies have already set up their presence in India. The country’s pool of highly educated technical leaders is expected to propel India up the value chain. The government is also becoming more supportive of the private sector, and is providing much-needed industry incentives.
A triumvirate emerges
What does all this mean for the prospects of this region and its emerging role in the global market? Three major countries in the Asia-Pacific region will obviously continue to play an important role in the global semiconductor market-Taiwan, China, and India. Taiwan has the most advantages in that it covers the whole value chain from chip design to systems implementation. All these core competencies are in close physical proximity, forming a critical mass-a “horizontal IDM.” And because Taiwan’s own market is small, Taiwan Inc. is fully focused on serving the global market.
China and India have different situations. Even though their respective entries into the semiconductor market happened from different vantage points-low-cost manufacturing in China, and high-end IT and design services in India-they are the world’s largest markets, with Western companies tripping over themselves to set up a presence in each. In the process, these companies are bringing leading-edge technologies to these countries and enriching their potential for developing into two major suppliers. However, they are not as far along as Taiwan, and all the spokes of the wheel are not in place yet. The infrastructure development and the breaking of cultural barriers will also take much longer in India and China. Nevertheless, the growth trend is clear.
India is not a new source of cheap, labor-based, low-cost production. Instead, its public and government institutions practice Western commercial laws, have similarities with Western political systems, and have an educated young workforce fluent in English. With these characteristics, India is now seeking and attracting foreign investment and getting ready to take advantage of serving its own huge market. While 60% of the Indian population is under the age of 26, the Chinese population is aging rapidly due to past controls on population growth. Also, many Chinese citizens are not as well educated and do not speak English, the language of global business.
Conclusion
The Asia-Pacific region has played an important role in the global semiconductor business over the last several decades, a situation which will only increase in the years ahead. Global fabless semiconductor manufacturing has succeeded due to the foundries and assembly and test houses located in this region. Countries such as Taiwan, China, and India are well along in the process of ascending the value chain toward providing end solutions.
The consumer market-the dominant market driver for semiconductors today-also happens to be most vibrant in this same region. As a result, Asia-Pacific is one of the most sought-after market sectors.
The West, by comparison, will have to remain strong in innovation and market branding if it hopes to remain competitive. The US needs to put a renewed priority on education (especially in math and science curricula) to sustain its leadership in innovation. The US must also rebuild a supportive economical, political, and cultural environment to bring back manufacturing. Entrepreneurship used to be almost exclusively an American advantage, but now it abounds all over Asia-Pacific, presenting tough competition for the US.
With increased interdependency and competition, each country and its people will have to learn how to maximize their inherent strengths-their competitive advantages-and work to overcome any inherent weaknesses. The result of all these efforts will be a vibrant global economy that may someday provide a rising tide of opportunity for the world’s poor and hungry millions.
Reference
1. The World Factbook 2005; http://www.infoplease.com/countries.html.
Ron Das received his PhD in electrical engineering from the U. of California, Santa Barbara, and is president and CEO of Siliconaire Inc., 1250 Oakmead Parkway, Suite 301, Sunnyvale, CA 94085; ph 408/524-2611, e-mail [email protected].