Tuesday, December 25, 2018

2018 review and 2019 outlook: How Taiwan ICT industry can regain ground - Digitimes

The US-China trade war, a key threat to the global economy in 2018, will continue to play a pivotal role in 2019. But what does it mean to the world's biggest manufacturer and market, and to the ICT industries in the neighboring tech-savvy island across the Taiwan Strait?

The trade war has added woes to China's maturing mobile phone market, where shipments have been shrinking, sending vendors seeking growth elsewhere. Global handset sales amounted to 380 million units in the third quarter of 2018, with China contributing 100 million units and India replacing the US as the world's second-largest handset market. And even Samsung Electronics has said that India is a key market for its handset sales.

The handset market in general is maturing to a point where even Apple is seeing lackluster sales for its new iPhones. Samsung has seen its market shares trending downward, with its memory-centric semiconductor business emerging as the company's main profit earner, replacing handset business which once earned 75% of its profits.

Samsung Semiconductor contributed up to 78% of Samsung Electronics Group's profits for the third quarter of 2018. But a South Korea government-funded research organization has predicted that China's semiconductor industry will start to undermine the profitability of South Korea's semiconductor industry in 2022.

But the trade war is threatening to disrupt the pace of China implementing a plan to build up a strong and self-sufficient semiconductor supply chain of its own.

Key developments in the semiconductor sector

The global semiconductor sector has experienced significant changes. On the foundry supply side, competition in 7nm process technology is now confined to among Taiwan Semiconductor Manufacturing Company (TSMC), Samsung and Intel following GlobalFoundries halting its 7nm chip development work. In terms of demand for foundry supply, Apple, Qualcomm and even MediaTek have been dominant clients, but now web giants Microsoft, Amazon and Google are also keen on developing chipsets on their own.

Already possessing 151 datacenters, Microsoft announced in October 2018 a partnership with TSMC, Synopsys and Cadence to provide cloud services. Microsoft is a major buyer of memory products in the world now. Will it be so in the logic IC segment?

The global semiconductor market scale soared past the level of US$400 billion for the first time in 2017, and is estimated by market research bodies to break the US$500 billion mark in 2018, prompting many more semiconductor firms to mull mergers and acquisitions to grab more business opportunities. In this regard, will Japan semiconductor firms, noted for vertical integrations, move to engage in more cross-industry, cross-nation cooperation projects with Taiwan businesses?

After TSMC beat Samsung to win orders for iPhone application processors from Apple by leveraging its advanced InFO (integrated fan-out) packaging technology, IC packaging and testing services have become a hotly contested sector.

From the global perspective, the emergence of MRAR (magnetoresistive random access memory) may provide a corner-overtaking opportunity for China. China's semiconductor businesses have been keen on investing in its semiconductor industry. But in its attempt to catch up with the US, Japan, Korea and Taiwan, China will see patent issues, and the leaderships of the US and Japan in the field of semiconductor materials and equipment constitute key hindrances.

The next decade

In the next decade or so, US and China enterprises will continue to play key roles in scrambling for global leaderships. Among US tech firms, Apple saw its market value exceed US$1 trillion in mid-2018 to be become the most valuable company in the world. But Microsoft dethroned Apple in late November.

Microsoft decided to terminate its Windows and Devices Group earlier in 2018, devoting more resources to its cloud service platform Azure. People familiar with Microsoft should be aware of the company's "no cloud, no talk" position. Whether it's tapping into the sectors of smart city, startup and even semiconductor, Microsoft always highlights its cloud services. Any chance that a China company would topple Microsoft or Apple from tech industry's pinnacle 10 years from now?

There are now close to 300 startup unicorns in the world, with almost half of them operating in the US and nearly 30% in China. That somewhat reflects the general picture of the tech world: the US is the "first world" and China the "second world," while Japan, Korea and Taiwan form the "third world." But the third world possesses a super-strong semiconductor industry allowing them to defend their place in the global scene. But will emerging countries in ASEAN, South Asia, and those in the Middle East and Africa have no chance to join the race?

Compared to the median age of 40.7 for Taiwan's population, Vietnam and the Philippines are much younger at only 30.4 and 24.1, respectively. The two countries have registered annual GDP increases of over 6% for several years in a row, likely to become "stars of tomorrow," just like India, already a certified future star.

The population of 2.25 billion around the Indian Ocean will bring huge business opportunities for current mobile communication and future Internet of Everything, smart city, smart mobility and smart healthcare sectors, marking a major change from the PC era featuring white-collar class as main consumer group.

AI and 5G

The Moore's Law may be reaching its limit, but there are at least 8-9 technologies advancing at a pace in line with that law. In fact, a new wave of diverse, volatile and fast-growing business opportunities are emerging from big data, AI, and integration of 4K/8K and AR/VR/MR technologies. This will usher in the fourth industrial revolution seen in human history.

Driven by AI, cloud services and 5G communications can allow people to conduct seamless cross-time, cross-border and cross-industry operations to generate multiple unlimited business opportunities. The key point is who can grasp the opportunities and turn them into business revenues. Many say that IoT robust business opportunities are rising rapidly, but who can manage to develop a preemptive presence and score first in the sector?

The world's largest IPC maker Advantech hosted a major IoT summit in Suzhou, China in early November 2018, attracting 5,000 attendees. Over 100 speakers focused their presentations on IoT-centric industrial transformations, and Advantech highlighted the idea of DFSI (Domain Focused System Integrators) as the core of its business deployments. Assuming that any single enterprise can hardly grab all business opportunities in different domains, Advantech hopes to solicit strategic partners from different domains of their competences to co-create IoT opportunities.

Firms leaving China

The Chinese currency has kept depreciating since the beginning of 2018. China's investment in fixed assets has been trending downward, and its retail sales growth has fallen under 10% for many months. The International Monetary Fund has projected China's GDP growth to slow down to 6.2% in 2019 and further to 5% in 2020. The China market is getting saturated, driving enterprises to go abroad.

In July 2018, the Trump administration imposed an extra tariff of 25% on US$34 billion in annual imports of 818 products from China, which added up to US$50 billion after including another US$16 billion of Chinese imports subject to the same additional tariff, officially igniting the US-China trade war. The figure of US$50 billion is around 15% of US$375 billion in US trade deficit with China. Such fields as aerospace, robotics and precision machinery targeted by the US for tariff retaliation are exactly the key segments highlighted in China's "Made in China 2025" project.

Despite analysts' general warning that the trade war will harm the economy of both the US and China, it has indeed seen some success in disrupting the Made in China program. Many Taiwan-based firms running manufacturing in China have started moving some of their operations out of China. Is this heralding the beginning of an exodus of manufacturers from China, where labor costs are rising, environmental laws are tightening, economic growth is slowing, and wrangling with the US is worsening? Even Foxconn Electronics, which employs hundreds of thousands of workers in China, is building a new LCD panel fab in the US.

Digitimes also believes that the US-China war will help Taiwan's domestic market gain more importance, especially in terms of business opportunities for IoT, software and innovation industries. And it is time that the Taiwan authority ease procurement regulations to let the government procurement market play a driving role in the innovative domains including smart city.

South Korea's population is 2.15 times that of Taiwan and GPD 2.75 times, but its central government budget is 4.5 times that of Taiwan. The annual IT budget set by the South Korea government comes to US$4.5 billion, but Taiwan's can hardly reach US$1 billion. In the mobile communications and IoT eras, informatization must be supported by ambitious budget plans.

While the wealthy Taiwan is conservative about spending, the debt-ridden South Korea has been much more aggressive - not just on IT. South Korea saw exports of its cultural and creative industries outstrip those of the semiconductor industry for the first time and break the level of US$100 billion in 2017. The enterprise creating the largest job opportunities in South Korea in 2017 was CJ Group dedicated to entertainment, cultural and creative businesses, instead of Samsung or SK Hynix earning handsome profits in the semiconductor market. The CJ Group hired a total of 5,300 new employees in 2017.

But for Taiwan, its economy still relies heavily on the ICT industries.

(This is part of a series of articles about the ICT industries in 2018 and their outlook in 2019 and beyond.)

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