China's nascent semiconductor industry may be decades away from overtaking rivals Europe, Japan or the US but its small size belies government ambitions to build the country's chipmakers into world-class companies.
Like oil and auto, the chip sector has been anointed with special status as one of China's key strategic industries seen as crucial to adding technological muscle to the country's increasing global economic clout.
"It's important for China to gain the advantage in this core industry which is related to the country's strategy," said Li Ke, a director with the China Semiconductor Industry Association.
"With such a big domestic market and so much [govern-ment] support, there's no reason that China can not surpass Taiwan and South Korea and have the world's third largest sales volume after the US and Japan," Li said.
China is already one of the largest consumers of semiconductors. Sales this year are expected to rise 31 percent to about 270 billion yuan (US$32 billion), according to CCID Consulting, a group attached to China's Ministry of Information Industry.
By the time the 2008 Beijing Olympic Games, sales are expected to more than double to 630 billion yuan, making China one of the world's major chip markets, according to the CCID.
Whether China will eventually surpass Taiwan and South Korea as major producer of chips is unclear but the government has laid out aims to turn the Chinese semiconductor industry into a major player by 2020, with investment of US$10 billion in the sector by next year alone.
"The decision by the Chinese government to support and develop the semiconductor industry will not be pushed back no matter what kind of fluctuations [occur in the market]," said Yang Xueming, senior advisor at the CCID.
"Without it, there would be no achievements in other fields such as genetics, space and bio-technology. It is the tool and the foundation of other industries," Yang said.
Like Taiwan, China has carved out a niche market in the contract manufacturing of chips, even though Chinese chipmakers are far from being able to match overseas rivals, said Byron Wu, an analyst at iSuppli, a technology research firm.
Also like Taiwan, China has coddled the industry by providing billions of dollars in funding and value-added tax (VAT) rebates on semiconductor products manufactured and sold within the country.
Foreign competition, meanwhile, has been charged the full 17 percent VAT on imported semiconductors, which last week led to the US lodging the first filing with the WTO against China since it joined in late 2001.
While the US filing is caught up in the electoral politics of this year's US presidential race, with China being the target for charges of unfair trade practices and restrictions, chip giants such as Intel are eager to capture a bigger slice of the burgeoning China market.
Foreign firms currently supply 80 percent of China's chip mar-ket, in part explaining the obvious desire of the authorities to boost the home-grown industry, and clearly want in on the country's economic boom. The blistering pace of growth of Chinese manufacturing means it could account for as much as one-third of the global electronics industry by next year, according to the information industry ministry.
That, according to research firm Gartner, translates into chip-using electronics markets worth some US$37 billion this year, jumping an additional 27 percent or US$10 billion by next year.
Chinese companies, meanwhile, are forecast to account for some US$4.18 billion or 2.5 percent of the world market, a fraction when compared to the US$166 billion global market predicted for next year.
Yang said China will aim for niche products so as to boost that to 6 percent or 8 percent by 2010 and then go much better.
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