How to build a nation

China's recently concluded 19th congress and Japan's seeming struggle with its semiconductor industry lead ASPENCORE to ask: just what does it take to build a technologically powerful nation?

Since the end of the summer I have been shuttling between ASPENCORE's many bureaux in America, Asia and EMEA in a deliberate process with our global editorial team to compile and configure a review of 2017 and a look-forward to 2018. Amid many late-night chats in the office kitchen, my editors and I couldn't help noticing the intense intrigue with which engineers, manufacturers, and supply chain companies from Huntsville to Silicon Valley to Zurich were watching the development of China's semiconductor industry.

After a first wave of manufacturing clusters formed around Shanghai, Suzhou and Beijing, in recent years metropolitan areas such as Chengdu, Shenzhen, Nanjing, Xi'an, Xiamen and Wuhan have committed mind-boggling amounts of capital, land, and human resource to the industry. As these investments begin to round out China's semiconductor manufacturing capabilities at scale, they may well trigger an upgrade of China's broader semiconductor ecosystem at large, including advanced materials research and manufacturing equipment technologies. A recently concluded congress in China has contributed a sense of inevitability as it articulated an ambitious and surprisingly detailed vision to build a prosperous nation by committing China's national policy to artificial intelligence, internet of things, autonomous driving, clean energy, and a smart, modern supply chain, among other levers of future economic growth and global technological leadership.

As I pen this note in Kumamoto prefecture, 900 kilometers east of Shanghai and one of Japan's post-WWII semiconductor clusters, the sentiment over the Japanese semiconductor industry cannot stand in greater contrast. While specific causes vary, an over-reliance on heavy industries and home appliances as well as an under-appreciation for the rise of software in electronic design have led giants such as Sharp, Sony and Toshiba to either put up much vaulted assets or the entire company for sale in recent years. According to ASPENCORE's European bureau chief Jürgen Hübner, in Germany, where Industrie 4.0 and autonomous driving are two of the top areas of research focus, Japanese suppliers have largely fallen out of the mindshare of engineers. In some circles, it has become vogue to write off Japan as a has-been.

But the truth is not as simple. As ASPENCORE's chief international correspondent Junko Yoshida reported from Kanagawa last month, any analysis of Japan's semiconductor sector must go beyond companies whose main business is semiconductor manufacturing. One of Junko's examples was Toray Industries, a textile company that started in the rayon business but is now one of the world's foremost leaders in advanced nanofiber, carbonfiber, and nanoalloy technologies. Another example was construction and mining equipment company Komatsu, whose Kelk division achived breakthroughs in optical communications and energy harvesting by leveraging its strengths in advanced materials, precision manufacturing and energy efficiency modules.

These seemingly conflicting data points in fact offer valuable lessons and forward-looking strategies for the two East Asian powers. For China, there must be an heightened awareness that the semiconductor industry is a broad ecosystem that goes far beyond manufacturing. Be it the upstream materials science and equipment technology or the downstream vertical applications and new user scenario development, only a holistic perspective on industry drivers, innovation hot spots, and human capital investment can infuse long-term sustainability into the growth of China's semiconductor industry. A significant advantage for Chinese companies that is much discussed but little understood in the Western tech media is the unique national conditions of the Chinese market: its almost unfathomable scale, its growth rate without peer, and its significant and yet untapped growth potential. In the internet sector, we have seen these advantages catalyze the emergence of Chinese mega platform companies such as Alibaba, Tencent, and Baidu. For example, as of April 2017, Ant Financial, a division of Alibaba, has seen one of its investment products reach $165 billion in assets under management, surpassing JP Morgan as the world's largest money market fund. ASPENCORE believes the Chinese semiconductor ecosystem enjoys similar advantages and should seek to achieve escape velocity sooner by fully exploiting these unique national conditions.

For Japan, hope is far from lost. While some companies have had to sell off well-known business units to survive financially, not all those businesses are crucial or even necessary for a corporate renewal. In fact, Renesas continues to dominate the automotive MCU sector, and Sony has succesfully pivoted to high-end optical sensors. And when Tesla looked for a battery cell partner for its Model 3, it chose to set up a gigafactory with Panasonic. More importantly, Japan's combination of demographics, geography and industrial history provides fertile ground for breakthrough in healthcare, power generation and harvesting, and consumer robotics. Whether it's an advanced service robot that can provide around-the-clock care assistance better than a human care provider, or exoskeleton suits that can improve the quality of life for aging seniors or veterans, the decline of Japan's semiconductor industry may be one of the most exaggerated story lines of our times, as the land of the rising sun may well prove to be a formidable semiconductor power for many more decades to come.

Lastly, I cannot end this month's note without a heartfelt thank-you. A few weeks ago, ASPENCORE convened the 2017 edition of our Global Distribution and Supply Chain Summit in Shenzhen, China. The event, chaired by ASPENCORE's Asia Pacific bureau chief Yorbe Zhang, attracted more than 600 in-person attendees and more than 10,000 unique viewers on live broadcast. Since then, many of our friends and colleagues from the industry have written in to tell us how much they enjoyed the summit's content and lively format. These words of praise are both a source of comfort and a reminder that at ASPENCORE we must continue to elevate the quality and diversity of our analysis and coverage. To our keynote speakers and panelists, many of whom are CEO's and captains of industry, we are grateful for your generosity in giving the audience your precious time and sharing your wisdom. To our attendees and broadcast viewers, many of whom listened and participated attentively and excitedly and some traveled long distances to reach Shenzhen, we are grateful for your trust. To our sponsors, many of whom are industry disruptors and thought leaders, we are grateful for your support and leadership in driving the growth of the industry. On behalf of the entire ASPENCORE staff around our global bureaux, I extend our sincerest appreciations to you and look forward to seeing you at our summit next year.

As ever, any questions or comments, please write me at victor@aspencore.com, or contact your favorite ASPENCORE editor directly. Thank you for your support.

W. Victor Gao | Publisher and Managing Director, ASPENCORE


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