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Difficulties to haunt China's IC industry

Posted: 25 Feb 2009 ?? ?Print Version ?Bookmark and Share

Keywords:China industry IC? 2009 IC industry? growth export?

The year 2008 saw significant changes in China's IC industry.

As the worldwide semiconductor market plunged into recession with the deepening global financial crisis, China's economic growth and exports gradually slowed down as well, according to CCID Consulting. This contributed to the decline in the growth rate of the domestic semiconductor market.

Affected by these factors, the development pace of China's ICs industry slowed down on a quarter-by-quarter basis, with the annual scale of overall sales in the industry around RMB 130 billion and the growth rate of only 5 percent, a dramatic decline from the 24.3 percent growth rate in 2007.

In 2008, the chip manufacturing, packaging and the testing sectors were affected by the market downturn, with chip manufacturing getting the heaviest blow.

The annual growth of the scale of domestic chip manufacturing industry is only 1 percent, and various manufacturers have more or less experienced idle production capabilities and declined performance. Despite a decrease in orders and under-capacity operation in general, the packaging and testing sectors are comparatively sound with the industrywide annual growth rate at around 7 percent.

IC innovation
Although the IC design sector is affected by the slowdown in the domestic market demand, the efforts in technological upgrade and product innovation made by major enterprises in this sector have to some extent overcome the difficulties and recovered some market demands. The annual growth rate of the sector will remain at around 7.5 percent, much higher than the sector's overall growth.

When it comes to the major factors that affect China's IC industry development, apart from domestic market demands, industry investment, exports and RMB exchange rates are also the crucial factors that have impact on the industry's operation. Today, more than 70 percent of sales volume in the domestic IC industry comes from exports, and the export environment directly determine the industry' performance. The fact that domestic IC exports decrease with each passing month this year is a good testimony to this. Given that the global semiconductor market in 2009 is likely to experience a negative growth for the first time in eight years, the export situation of IC products next year is anything but optimistic, and it will have negative impact on the industry's performance to a further step.

Given that exports account for a very large proportion in the sales volume of the industry, RMB exchange rate fluctuations also have a huge impact on the performance of the domestic IC industry. Due to the rapid appreciation of RMB in recent years, the domestic IC enterprises have all incurred exchange losses to some extent. It is estimated that every 1 percent appreciation of RMB to U.S. dollar would cause 1.2 percent to 1.4 percent decrease of the domestic IC industry's overall sales volume. Currently, the exchange rate of RMB to U.S. dollar basically stabilizes at the level 6.8:1, and RMB tends to depreciate further. In 2009, the impact of exchange rate fluctuations on the domestic IC industry will be significantly reduced.

Driving force
Investment has long been the major force driving the scale expansion of the domestic IC industry. Analysis of the changes in investment and industry scales in the domestic IC industry over the years indicates that the investment scale reached its peak in 2004, and that the growth rate of industry scale in 2006 was also on the high end of the spectrum. (An IC project usually takes one and a half years to two years, from its development to operation.)

In the three years that followed (2005, 2006 and 2007), the industry's investment scales decreased year by year, and the industry growth rate in 2007 and 2008 also showed the tendency of decrease year by year. Given that the industry investment again decreased in 2007 as opposed to 2006, correspondingly, the growth rate of the domestic IC industry is expected to drop further in 2009 compared with 2008.

Sluggish sales
Considering other factors, CCID expects 2009 to be a year of unprecedented difficulties for China's IC industry. On the one hand, the sagging domestic and international market would lead to sluggish internal sales and declined exports.

On the other hand, there are few new projects to spur the market. Although the stability and expected depreciation of RMB exchange rate is good news to the industry, it is still hard-pressed to offset the market-level negative impact. Taken as a whole, the domestic IC industry in 2009 is expected to maintain its growth momentum, yet the growth rate will continue to drop. It is predicted that the overall growth rate of the industry will be about 4 percent next year. The growth rate for the IC design sector will remain at around 7 percent, and the growth rate for the chip manufacturing, packaging and testing sectors will decline to some extent compared with 2007. Meanwhile, economic profits in the domestic IC industry will erode significantly, and it is very likely that the industry as a whole will incur loss.

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