(CFP)

"To be stronger, the best option for China's chip industry is to acquire powerful foreign companies with patent technologies," the anonymous executive said.

Gu Wenjun, chief semiconductor analyst with market research agency iSuppli, said the global chip industry is now lagging, with more than 100 chip factories worldwide being closed. But in East Asia, about 60 chip factories are in business. Robust market demand in Asia makes the region crucial to chipmakers. The global chip industry is shifting its focus to Asia, where China is the focus of the Asian market.

"In the past three decades, the industry has experienced several cyclical recessions, and each time of industrial restructuring has brought opportunities to Asia," said Gu. "Japan, South Korea and China's Taiwan have grasped such opportunities and contributed to the takeoff of chip industry, and now, China is facing the same opportunities."

Wang Yanhui, Secretary General of Mobile China Alliance, said in recent years, there are frequent threats to national security, such as the Prism spying scandal and the leak of 2 million emails and documents from Britain's offshore financial industry. China is now accelerating its production of information technologies, and chips are the cornerstone of the country's information security. In the government's future procurement, a large amount of domestically produced chips will be purchased. This will increase the demand for China's chip industry.

According to Wang, China's top leadership has made the chip industry part of its national strategy, and vows to support its development. The Central Government has issued several policies, while various local governments are preparing supporting measures to nurture large makers of core competitiveness through industry investment funds and overseas acquisitions.

Multiple challenges

Despite huge potentials and bright prospects, China's chip industry still faces severe challenges in taxes and suppression of international giants.

Li Liyou, CEO of China's biggest chip designer Spreadtrum Communications, Inc., told Economic Information Daily that domestic chip firms have to pay a 10-percent income tax and a 5-percent business tax, while their overseas rivals have much lower tax burdens. For instance, Taiwan's MediaTek only pays a 2-percent tax, because according to Taiwan's Statute for Upgrading Industry, IC companies can deduct income taxes with costs of research and development (R&D) as well as mergers and acquisitions.

Chipmakers on the Chinese mainland call for more tax cuts and other supporting measures. An anonymous president of a Guangzhou-based chip company suggested China follow practice of other countries, allowing chipmakers to deduct income taxes with R&D costs, or give tax rebates to domestic chipmakers. He also suggested the government not directly reduce the tax rate, but deduction of income taxes with R&D costs will encourage chip firms to make innovations.

It is more challenging for Chinese chipmakers, who are competing with international giants. In the Chinese market, international giants and domestic companies have the same target clients, and foreign firms, with their monopoly-like position in the market, often discourage Chinese clients from buying Chinese products.

Li cites an example that after his company began negotiating a contract with Chinese electronics company TCL. Senior executives of Taiwan's MediaTek soon required TCL to stop the cooperation with Spreadtrum, threatening that it would stop supplying its products to TCL and offering an extra sum of marketing allowance as incentive for keeping their business.

Hostile takeover is also a challenge. In recent years, many foreign firms have acquired emerging Chinese chipmakers with independently developed technologies. For example, American global semiconductor company Qualcomm has been attempting to acquire Chinese industrial leader Spreadtrum.

Wang said some foreign companies are also participating in China's industry investment funds, such as IC investment funds, established by governments of different levels. According to Wang, once overseas rivals successfully enter the government IC investment funds, they may use the funds to acquire emerging Chinese chip firms to consolidate their monopoly positions in the market. Wang warned that the government must watch out for such possibilities.

Email us at: wangjun@bjreview.com