TrendForce estimates that China’s capital expenditures on wafer fabs from the start 2015 to the present has reached around RMB 480 billion, of which 86.5% or about RMB 435 billion came from state-backed funds (including the National IC Fund and local funds for IC ventures).

The number of fabless IC design companies in China has almost doubled from 736 at the beginning of 2015 to the current 1,362. TrendForce expects that the National IC Fund’s investment strategy in this area will be about supporting targets that fits the future trends of the industry. Specifically, the fund will provide capital to domestic design houses as to improve their innovative capacities and help them in making overseas mergers and acquisitions.

Industry deals involving target companies working in niche applications may provide enormous benefits to the Chinese semiconductor sector. Chinese IC design companies in particular can strengthen themselves by developing markets for specialized products such as NOR Flash. These markets have valuable resources, but they are small and are sometimes overlooked by major international suppliers.

China’s National IC Fund will not just support the expansion of the domestic fabless IC design industry but also spur the consolidation of this industry. Merging smaller home-grown design houses that are equal in strength and in direct competition with each other will reduce competitive pressure in the home market. Mergers of domestic companies will also pool resources such talents and technologies. Additionally, mergers can help IC design companies reduce product overlaps, which in turn can lower their expenditures on multi-project wafer (MPW) services provided by foundries.

In addition to increasing investments in fabless IC design, the National IC Fund will divert more capital to two other sections of the domestic IC supply chain: the material and equipment industry and the packaging and testing industry. China’s packaging and testing industry has been steadily improving its technological capabilities and expanding its global market share since Jiangsu Chanjiang Electronics Technology (JCET) acquired STATS ChipPAC in 2015. JCET has grown to become the fourth-largest packaging and testing company in the world by market share.

Under this context, the National IC Fund’s long-term strategy will be to support the leading domestic companies so that they can compete in an environment where technological advantages are very important and market share concentration will continue to increase. At the same time, Chinese packaging and testing industry will be encouraged to consolidate by merging smaller companies even as it expands.

The market for materials and equipment presents the highest technological barriers for Chinese entrants. Currently, Chinese equipment manufacturers are much behind their international competitors. In the short term, the National IC Fund can back efforts to acquire targets and pool resources within the industry. The long-term strategy on the other hand would be to support local equipment providers in their R&D efforts so that they can close the technology gap with international competitors.