Ties That Bind - Bay Area Council Economic Institute
Ties That Bind - Bay Area Council Economic Institute
Ties That Bind - Bay Area Council Economic Institute
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126<br />
<strong>Ties</strong> <strong>That</strong> <strong>Bind</strong><br />
implemented, risk restricting the national technological<br />
level and preventing Chinese entrepreneurs from<br />
achieving success globally.<br />
� China’s current “chip craze” will eventually subside<br />
and the fragmented markets are expected to consolidate,<br />
leading to dominance by a few globally capable<br />
firms in each section of the semiconductor industry<br />
ecosystem. Minimum efficient scale may not be soon<br />
possible in some areas such as cutting edge CPUs<br />
and advanced fab equipment, leaving a choice between<br />
1) using legacy technology, 2) sourcing from<br />
international markets, or 3) paying heavy and perpetual<br />
subsidies to obtain a security and prestige benefit.<br />
� The low cost (labor and construction) environment in<br />
China is almost certainly temporary. Investments<br />
made today that are duplications, contribute to over<br />
capacity, or are made in firms that are not truly globally<br />
capable have the very real potential of limiting<br />
China’s future prosperity and prestige. There is a<br />
“window of semiconductor industry development opportunity”,<br />
and very limited funds to invest.<br />
� China’s internal barriers to growth, especially the desire<br />
by local governments to create and protect small<br />
“prestige” SI clusters, have the potential to handicap<br />
Chinese entrepreneurs in achieving global success.<br />
The provincial and even municipal customs inspections,<br />
regulations, licenses, and product certifications<br />
designed to exclude both foreign and intra-Chinese<br />
imports may very well reduce China’s global competitiveness<br />
in many industries, not just semiconductors.<br />
For multinational companies (MNCs), China’s environment<br />
again offers opportunities and risks. The institutional support for<br />
IP protection is still weak, which limits MNCs’ desire and ability<br />
to invest substantial resources in China. A second limiting factor<br />
is that the domestic market’s needs are far from typical of the<br />
world market, not only in the costs and price points of products<br />
(as in consumer electronics, for example), but also in the formats<br />
and standards that the world market requires.<br />
MNCs to date have utilized their China operations to gain access<br />
to the China market, and to establish an export platform to<br />
the rest of the world. These twin activities have been quite