Demand for innovation globally, and locally in China, has driven double digit growth in R&D spending in the country, totalling $228 in 2015. Demand is set to increase further, fuelling the growth of OEM China-based design centres. The countries increased focus on advanced electronics coupled with increased R&D activity through design centres, is projected to create a large boon for semiconductor core-component suppliers. The research shows that, over the coming five years, demand will increasingly favour suppliers from local suppliers in China.
The role of China as a key component in the global R&D development space has increased in recent years, as company choose to develop new products closer to their manufacturing base, engineering graduates continue to be graduated by their millions from universities and wider, fast paced economic growth in the region. A new report from McKinsey & Company considers the increased focus on R&D in China - globally estimated by Strategy& to be worth $680 billion in 2016 - as well as the effect it has on one of its key suppliers, the semiconductor and component sector.
The growth of R&D product development has seen more than double digit growth since 2007, fist at 27% CAGR between 2007 and 2012, from $49 billion to $163 billion, before jumping 12% CAGR between 2012 and 2015, to hit $228 billion. The firm’s analysis shows that the trend for investment within R&D is likely to continue at a double digit rate, increasing a further 12% CARG to hit $404 billion by 2020.
According to the consulting firm’s analysis, a number of factors are driving the continued double digit growth of R&D within China, including increased expectation within the local market for innovative design, proximity to emerging markets, as well as continued global demand for innovation as such.
The biggest supply side factors noted by the firm are improved capabilities within China, cited by 35% of MNC respondents as a main reason, while for local operators this came in at 39%. Government support was noted by 12% of respondents as a main reason.
On the demand side, increased domestic consumption was said by 23% of MNC centres to be a key driver, while for locally owned operators it came in at 21%. The second most cited demand-side factor, according to the firm, is MNCs wanting to lower production or design costs – at 21% for MNCs themselves and 18% for local operators.
The analysis shows a number of factors are affecting both MNCs and local suppliers. One key factor is government support, with 53% of respondents saying further support programmes are likely in the coming years.
The firm finds that semiconductor and component suppliers may well benefit from the continued increase in R&D activity at OEM China design centres as the country adds 10% points to its global share of product development by 2020. The firms analysis shows that design centres in the country could control around $500 billion in design-in decisions for critical end-product components, up from $350 billion in 2016.
In terms of the kinds of demand expected from design centres for core components, there is general agreement between MNCs and local operators. For MNCs the biggest factor is ‘technical performance’ and ‘quality, reliability and security of supply’, at 23% each, while for local operators that two factors come in at 24% and 22% respectively. The ‘total cost, including price and other costs of ownership’ are cited by both parties at 21%. The area of least concern is ‘being local’ at 11% for MNCs and 8% for local operators.
Some of the current trends in core-component selection are likely to shift over the next five years, the survey shows. In particular, MNC-owned design centres are projected to increase their sourcing from local core component suppliers, away from multinational component suppliers across global locations.
As it stands, around 44% of core components are supplied by multinational component suppliers across global locations, this is set to drop to 33% over the coming five years. The gain will largely be for china-headquartered supplies, whose total supply share increases 10 percentage points to 32%.
The total bill of materials is also set to shift considerably in favour of local supplies, with multinational component suppliers across global locations dropping from 38% to 28%, while china-headquartered suppliers increase their share from 30% to 40%.
According to the authors of the report, the changing face of OEM design centres in China as demand for innovation increases, will create considerable opportunities for core-component suppliers – particularly if they themselves are able to deliver innovative products. To achieve this, a new strategy may need to be formed: “The sheer scale of the opportunity to serve OEM China design centers, combined with the unique requirements of these customers, indicate that semiconductor suppliers cannot follow their traditional approach to the Chinese market. Instead, they must smartly and proactively build a new strategy that allows them to help OEM China design centers—especially the likely winners—meet their aspirations on the global stage. The stakes are huge.”