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2023 Analysis of China’s Semiconductor Industry

On 26th Jan, the National Development and Reform Commission and the Ministry of Commerce officially issued Opinions on Several Special Measures to Relax Market Access in Shenzhen’s Construction of the Pilot Demonstration Zone of Socialism with Chinese Characteristics (referred to as the Opinions) in which the first article pointed out that it would support Shenzhen to establish an international trading center for electronic components and integrated circuits with the market-oriented operation.

Shenzhen, as the leading demonstration area of socialism with Chinese characteristics and at the forefront of the reform and experiment in the future Guangdong-Hong Kong-Macao Greater Bay Area, is one of the largest integrated circuit application and circulation markets in China. Compared with the previous focus on supporting semiconductor design and manufacturing, the Opinions have increased support for distribution channels and supply chains, and formed a favorable situation for the supply chain of components in “deep water”.

Background analysis of policy introduction

In general, the trade dispute between China and the United States “exposed” the weak links of the domestic semiconductor industry, and “lack of core” revealed the asymmetry of information demand in the semiconductor supply chain. The epidemic situation repeatedly tested the stability of the semiconductor supply chain.

The reasons behind the introduction of the Opinions can be summarized as follows:

The global semiconductor and other component industries are accelerating their transfer to China. As the center of China’s component industry, the general trend is to set up a component trading center.

Since the birth of the global component industry, its industrial transfer has shown phased characteristics, successively from the United States to Japan and Europe, and then from the United States and Japan to South Korea and Taiwan, China, China, and then gradually transferred to the Chinese Mainland with the transfer of terminal industries.

With the transfer of the international manufacturing industry to China, the scale of the domestic electronic components industry is also growing. By 2021, the market size of electronic components was about 317 billion US dollars, and the average annual growth rate of the market in the past five years was more than 5%. It accounts for about 33% of the global market, ranking first in the world.

According to incomplete data statistics, the scale of Shenzhen’s information industry will reach 2.8 trillion yuan in 2020, ranking first in large and medium-sized cities in China.

21 enterprises were selected as China’s top 100 electronic information enterprises in 2020, with the number ranking first in the country.

11 enterprises were selected as the top 100 software companies in China in 2019, ranking second in the country in number.

The distributors of electronic components represented by CETCA Hong Kong and Shenzhen Huaqiang ranked among the top three in China.

In addition, Shenzhen has now formed a distribution center for spontaneous component trading, such as Huaqiangbei. 

This time, it is proposed to set up an international trading center for electronic components and integrated circuits with a market-oriented operation, which will help Shenzhen transform electronic component trading to standardization and regularization, improve the upstream and downstream synergy of the industrial chain, and comprehensively improve the supply security of electronic components. Under the new development pattern of “double circulation”.

Build a support and guarantee system for the development of the national digital economy industry.

Therefore, the Opinions support the establishment of an international trading center for electronic components and integrated circuits in Shenzhen, which is in line with the actual situation of domestic and Shenzhen component industry development in promoting the convergence and cluster development of upstream and downstream supply chains and industrial chains.

Expose supply chain weaknesses under epidemic situations and “lack of core” and accelerate the transformation of the e-commerce model in the distribution industry.

As we all know, electronic components generally need to be transferred from the original factory to authorized distributors and traders, and finally to end customers. 

The intermediate link involves multiple entities, and the industrial chain is long. 

Most manufacturers’ customers (Especially small and medium-sized enterprises) need to go through multiple circulation links to obtain electronic components, and the overall circulation efficiency is low.

Since 2020, affected by many factors such as epidemic situation and trade, the lack of core has created a global supply chain for the components industry.

Impact on semiconductor supply chain

As we all know, due to the resonance of multiple factors such as demand, supply, inventory, and price, the electronic industry represented by semiconductors presents certain cyclical development characteristics, and its final direct impact is reflected in supply chain problems such as supply and demand imbalance, price fluctuation, and shortage of some core goods, which forms unstable factors for the production and operation activities of electronic industry manufacturers.

From the perspective of the original factory, due to the long links involved in the semiconductor supply chain, the mismatch between supply and demand of electronic components (that is, the mismatch between supply and demand) often occurs in the mass production stage of enterprises. This mismatch between supply and demand is mainly caused by market demand fluctuations, customer order changes, and various emergencies (epidemic, trade friction, war, etc.), which ultimately lead to the failure of the original factory to deliver on time.

For example, since 2020, affected by the outbreak of the epidemic, the uncertainty of market changes has increased, further exacerbating the supply and demand mismatch of the original factory in the mass production stage, and affecting the normal production and operation activities of the industrial chain.

From the perspective of end customers, the traditional industrial structure and production and operation mode of components have been difficult to adapt to the needs of economic development in the new era, and “lack of core” is the specific manifestation.

How to ensure a high-quality procurement chain, reduce the uncertainty of the procurement process, and provide efficient and flexible solutions have become its development pain points.

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