1、6KIET Industrial Economic Review1.IntroductionIn 2019,the Moon Jae-in administration promulgated its“System semicon-ductor vision”as a new growth engine for the sustainable growth of Korea.To achieve this goal,fabless SMEs and a competitive semiconductor ecosystem are regarded as key elements in fos

2、tering the system semiconductor industry in Korea,and new policy directions and alternative policy measures need to be addressed.The Korean governments vision for making Korea a semiconductor power-house by 2030 is aimed at achieving the largest market share in foundry ser-vices and securing 10 perc

3、ent market share in the fabless sector while main-Cover Story The Status of Korean Fabless Firms and Their Cooperation with Set Makers1Shin Jongwon1 This article draws heavily on the research project,entitled Cooperation and Demand-based Innova-tion in the Korean System Semiconductor Industry,(in Ko

4、rean),2020,KIET.Cover Story 7May+June 2022|Vol.27 No.3taining Koreas leadership position in the memory semiconductor market.This vision for the Korean semiconductor industry reflects the current eco-nomic environment of the industry.In fact,the competitiveness of the Korean semiconductor industry is

5、 challenged by a number of factors,such as a high dependency on memory chip markets,sharply increasing demand for system semiconductors in emerging industries(for example,artificial intelligence,autonomous vehicles,robots and so on),the rapid growth of the Chinese semiconductor industry,the US-China

6、 semiconductor war and so on.This calls for a new vision and strategy that includes expanding government R&D investment,supporting fabless SMEs through public investment,and creating demand for system semiconductors in the public sector.In order to foster a competitive semiconductor ecosystem,an act

7、ive role for fabless SMEs is critical.This can be achieved by forging closer relationships with both set makers(for example,electronics companies)and foundries.To identify market demand for new product development,their growth strategies should focus on set makers demand,and this would be backed up

8、by closer cooperation with set makers.Policy directions and strategies need to be carefully prepared in order to encourage fabless SMEs to play a vital role in the system semiconductor eco-system.Unfortunately,in the extant literature,there is a dearth of discussion on fabless SMEs in Korea owing to

9、 a lack of accurate data.So for this article,we discuss the current status of Korean fabless SMEs and their cooperation with set makers using unique survey data collected from 81 fabless firms.Before we discuss the results of a survey of fabless SMEs,we frame the topic with a background discussion o

10、f the brief history of the semiconductor industry as a whole and the Korean semiconductor industry in particular.We conclude with suggestions for policies to foster a more com-petitive semiconductor ecosystem in Korea.2.The Evolution of the Semiconductor IndustrySince the invention of integrated cir

11、cuits(ICs)in the late 1950s,the semicon-ductor industry has evolved dramatically,and technological advances in the industry continue to change our daily lives.From consumer electronics such 8KIET Industrial Economic Reviewas smartphones,TVs,and computers to automobiles,medical devices and IT hardwar

12、e such as data storage devices and telecommunications hardware,semiconductors have become ubiquitous.In the meantime,the technological advances have also changed the land-scape of the industrys business model.Traditionally,integrated device manu-facturers(IDMs)such as Intel,Samsung and Texas Instrum

13、ents have been the dominant players in the industry.In the IDM model,a single firm is responsi-ble for the entire production process,from chip design to manufacturing.However,as technology has advanced,developing and manufacturing new chips has come to require an astronomical amount of money.This le

14、d to the emergence of the so-called“fabless”business model in the 1980s.While the IDM model pursues gains from vertical integration,in the fabless business model,each firm on the value chain in the semiconductor industry focuses on efficiencies from vertical specialization;fabless companies focus on

15、ly on chip design and innovation and avoid heavy investment costs that are required to set-up and operate fabrication facilities.Foundries specialized for chip pro-duction try to serve as many fabless firms as possible to achieve high capacity utilization and generate efficiencies.As fabless compani

16、es focus on chip design and lack fabrication facilities,their relationships with both set makers(electronics companies)and found-ries are essential for success.Through strategic partnerships with foundries,fabless firms outsource their manufacturing and avoid a major financial burden.Foundries meanw

17、hile are able to achieve the economies of scale and lower production costs,as they can produce a wider product mix by aggregating manufacturing contracts from numerous fabless companies.Without foundries,dozens of products IDM(Integrated Device Manufacture)ModelIDMs:Intel,Samsung,Micron,Texas Instru

18、mentsFabless-Foundry ModelDesign(Fabless)AMD,Broadcom,MediaTek,Spreadtrum,QualcommManufacturing(Foundries)TSMC,Global Foundries,UMC,SMIC,Tower JazzOutsourced Assembly and Testing(OST)Amkor,ASE,SPIL,JCET,ChipPAC,J-DevicesFigure 1.Business Models in the Semiconductor IndustrySource:Beyond Borders,SIA(

19、2016).Cover Story 9May+June 2022|Vol.27 No.3would have never achieved sufficient volumes for fabless firms to justify cre-ating their own dedicated manufacturing facilities.For fabless companies,strong and committed bilateral cooperation with set makers and demand-based innovation are also key eleme

20、nts to retain their competencies and to meet market demands and needs.As the design cycle for new chips has become shorter and product lifecycles and new market demand more uncertain,with closer cooperation with set makers,demand-based in-novation is essential for fabless companies to identify marke

21、t demand and introduce new products to markets.Indeed,the evolution of the semiconductor industry from the IDM business model to the fabless model is the consequence of the functional evolution in the semiconductor industry.In the fabless model,fostering a healthy semi-conductor ecosystem based on s

22、trong commitment and cooperation between firms on the semiconductor value chain is critical to the business success and firms competitiveness.On a certain segment of the value chain,a firm increases its competitiveness through specialization.And the overall com-petitiveness of the semiconductor ecos

23、ystem largely depends on both vertical specialization and efficient coordination.3.The Current Status of the Korean Semiconductor IndustryThe semiconductor industry was one of the most successful industries during the developmental phase of the Korean economy.Since 64K DDRAM was first developed in 1

24、983,Korean IDMs(and particularly Samsung)have rapid-ly caught up with and surpassed the frontier firms,now having achieved the largest market share in the world for DRAM and NAND flash memory.The fast-follower strategy has proven to be effective.For example,Sam-sung increased its market share in the

25、 memory chip market by aggressively investing its resources to catch up with frontier IDMs in the US and Japan.It went on to lower its production cost by achieving the economies of scale and use its price setting power in the world DRAM market in a game of chicken with its competitors.Armed with pri

26、ce competitiveness and a willingness to take risks,it could hold on to its number-one position in the world memory chip market.10KIET Industrial Economic ReviewAs the industry grows,the share of semiconductor exports of total Korean exports substantially increased as well.As of 2019,the semiconducto

27、r indus-try accounted for 17.3 percent of all exports,the highest of any industry.In particular,total exports of memory chips accounted for 67.1 percent of Ko-reas semiconductor exports(see Table 1).Table 1 provides a snapshot of the importance of the semiconductor indus-try in Korea.The figures in

28、Table 2 show us the competitiveness and strong position of the Korean semiconductor industry globally.Korea is home to sizable chip manufacturers such as Samsung and SK Hynix,and is the worlds top producer of memory chips,with a 62 percent market share.However,Koreas position and competitiveness in

29、the system semicon-ductor industry is far behind its rivals.As we can see from Table 2,Koreas market share in system semiconductor market is only about three percent.All this stems from the weakness of fabless businesses in Korea.In contrast,Tai-wan retains an advantageous position in the system sem

30、iconductor industry,with strong competitiveness in foundry services and the fabless industry.This is because the Taiwanese fabless industry has been growing with close rela-Table 1.The Share of Korean Semiconductor ExportsUnit:Billion USD,%200182019Total Exports(A)5,2684,9545,7376,0495,42

31、4Semiconductor Exports(B)6296229791,267939Ratio(1)(B/A)(11.9)(12.6)(17.1)(20.9)(17.3)-Memory Chip Exports(C)338352672941630-Ratio(2)(C/B)(53.7)(56.6)(68.6)(74.3)(67.1)Source:.Table 2.The Market Share of Korean Semiconductors:by Product TypeUnit:Billion USD,%200172018MemoryThe rest of the

32、world(A)827808 820 1,319 1,646 Korea(B)4384664728011,016ratio(B/A)(53.0)(57.7)(57.5)(60.7)(61.7)System(non-memory)The rest of the world(C)2,078 2,044 2,083 2,290 2,482 Korea(D)8074636876ratio(D/C)(3.8)(3.6)(3.0)(3.0)(3.1)Source:IHS.Cover Story 11May+June 2022|Vol.27 No.3tionships not only with local

33、 upstream industries(which include foundries,IC packaging and testing industries)but also with downstream industries(the electronics industry).Policymakers have voiced concerns about possible disruptions to the Ko-rean economy owing to limitations to the current growth paradigm of the Korean semicon

34、ductor industry.While demand for system semiconductors in emerging industries such as artificial intelligence,autonomous vehicles,and robots is sharply increasing,the industrial structure of the Korean semicon-ductor industry remains highly dependent on memory chip markets.According to the survey by

35、 SIA(2016),even though IDMs are expected to continue to play an important role and retain a significant role in the semi-conductor industry,the fabless model,which is proven to be more efficient for manufacturing system semiconductors,is gradually taking a larger share of the industry as technology

36、advances and market demands become more complex.2 For example,between 2009 and 2015,IDMs have posted only a 6.8 percent annual growth rate on average,but fabless firms and foundries have averaged 10.6 percent and 15 percent annual growth,respectively.Further,the highly cyclical nature of memory chip

37、 demand is another pos-sible drawback to the erstwhile success of the Korean semiconductor industry.As with other industries in Korea(for example,the shipbuilding,steel,au-tomotive and electronics industries),chaebols(large,dynastic business units spread across multiple industries)have played an imp

38、ortant role in the devel-opment of the semiconductor industry.Chaebol-dependent growth may in fact harm the industry,as well as the entire Korean economy;a crisis in the Korean semiconductor industry would be contagious enough to undermine and devastate the growth potential of the entire Korean econ

39、omy due to the pan-sectoral nature of the chaebols.4.The Current Status of Korean Fabless SMEsAs noted above,while there are growing concerns about the Korean semicon-ductor industry,there is little evidence about the current status of Korean fa-2 Beyond Borders,SIA(2016).12KIET Industrial Economic

40、Reviewbless SMEs.In this section,we will provide some characteristics of Korean fa-bless SMEs based on survey results.And we will discuss why close cooperation between fabless companies and set makers is critical.Then,based on survey data collected from 81 Korean fabless firms,we will discuss the su

41、rvey results and cooperation between Korean fabless companies and their set makers.(1)Overview of Korean Fabless SMEsCompared to other SMEs in Korea,fabless companies in Korea are very young and innovative,but most of them are very small in terms of the scope of their business.3As we can see from Ta

42、ble 3,the average revenue of 81 fabless firms is 27.3 billion KRW,and the average firm age is 10 years.But the median revenue in only 3.2 billion KRW.This implies that revenues are highly polarized by firm size;top companies record strong revenues but most others do not.Similar trends can be observe

43、d in other data(for example,total assets and the total number of employees).The small scale of Korean fabless companies can also be observed in export records.For example,in 2019 51 of 81 fabless companies recorded exports,but 80 percent of those firms exported less than 10 million USD worth of prod

44、uct.Only four fabless companies in Korea had exports valued at more than 50 million USD in 2019(see Table 4).However,we can also observe some evidence of the innovativeness of Ko-rean fabless companies.For example,from Table 3,average R&D expenditure 3 The survey results are based on detailed respon

45、ses received from senior managers and/or CEOs.4 There is no official record of the exact number of fabless companies in Korea.But many industry experts said that there are about 150 active fabless firms in the industry.Table 3.Key Figures:Korean Fabless Companies(2019)4Unit:Million KRW,yearRevenueTo

46、tal AssetsR&D Expend.Firm Age#of EmployeeMean27,319.4423,136.024,465.0210.2753.09Median3,205.326,086.761,443.321023S.D.101,946.9551,537.479,708.847.699.55Source:Korean Fabless Survey(2020).Cover Story 13May+June 2022|Vol.27 No.3at Korean fabless firms is 16.3 percent of all expenditure,a relatively

47、high figures compared to other SMEs in Korea.5 And 21 fabless companies(25.9 percent)that have succeeded in fundraising from venture capital investors.Most notably,there are 58 fabless companies(71.6 percent)that have suc-ceeded in product innovation in the period from 2017 to 2019.This percent-age

48、is very high compared to other firms in Korea.For example,according to the Korean Innovation Survey(2018),the average percentage of Korean manufacturing firms which were successful in product innovation was 21.4 percent and,for other Korean SMEs in manufacturing sector,the percentage was 16.4 percen

49、t.6(2)The Importance of Demandbased Innovation for Fabless FirmsTargeting specific final markets,fabless companies are specialized in the design of semiconductor chips.Except for giant fabless companies such as Qualcomm,Broadcom,and MediaTek,firm sizes are relatively small and they do not have the c

50、apital to build and operate their own fabrication facilities.As technology advances,demand for semiconductors has become more heterogeneous.In the early stage of semiconductor development,most semi-conductor demand was for computers and simple consumer electronics(digital watches and calculators,for

51、 example).But,today,in addition to computers,other demand for chips comes from sectors as varied as the communications,mobile phone,automotive,defense industries.In terms of product require-ments,these types of demand greatly differ from one another.Demand has Table 4.The Distribution of Export Reve

52、nue of Korean Fabless Companies(2019)Unit:Million USD,year#of firms w/export record51211974100%41.2%37.3%13.7%7.8%Source:Korean Fabless Survey(2020).Note:The percentages are calculated only for fabless companies with export records.5 According to the survey of Korean SMEs,the average percentage of R

53、&D expenditure of Korean SMEs in manufacturing sector is 1.59%.6 According to the same survey,the average percentage of Korean large firms in manufacturing sec-tor was 48.9%.14KIET Industrial Economic Reviewincreased for different types of semiconductors;some products or industries need standard chi

54、ps but others need application-specific ICs(ASICs)or cus-tom designed chips,and occasionally need specific semiconductor technol-ogies.Given the expansion of chips use and market segments,the varied demand for semiconductors has changed the landscape of technological and product development across i

55、ndustries.Active interaction and cooperation between fabless companies and set makers is critical in new product development.Set makers act as a bridge to consumers and provide market information and feedback to fabless compa-nies.They also identify new market trends and new requirements.In forging

56、closer relationships,set makers can innovate and co-developing new products together with fabless companies.Indeed,with closer cooperation with their customers,demand-based innovation is essential for fabless companies.This is particularly important now as the design cycle for new ships has become s

57、horter,and product lifecycles and new market demand more uncertain than ever amid the emergence of new industries.(3)Cooperation with Set MakersIn this subsection,we discuss the results of a survey on cooperation between Korean fabless companies and set makers.We first review the extent of fab-less

58、firms cooperation with their key customers.Fifty-six fabless companies(69.1 percent)reported cooperation with their key customers in the period from 2017 to 2019.Fifty-two fabless companies(64.2 percent)reported cooperating with their key customers in R&D,either by forming consultative groups or sha

59、ring in-formation,sharing research facilities,sharing technology or intellectual prop-erties(IPs),providing and/or receiving technical guidance and/or support,and conducting pilot product production or providing a test-bed.However,in the other areas,such as production,sales and marketing,hu-man reso

60、urces,and management,only a small number of fabless companies reported engaging in cooperative activities with their key customers.Only 14 fabless companies(17.3 percent)said that they had cooperated with their key customers in production,and just 19 firms(23.5 percent)indicated that they Cover Stor

61、y 15May+June 2022|Vol.27 No.3had cooperated with their major clients in sales and marketing.One could be led to believe that Korean fabless companies are actively involved with their key customers in R&D,given that nearly 70 percent of fabless firms answered that they cooperated in R&D areas.But,thi

62、s is not al-ways true.As we can see from Table 5,cooperation with their key customers focused forming consultative groups or sharing information(48.2 percent)and conducting pilot product production or providing test-bed(45.7 percent),which are lower forms of cooperation compared to sharing technolog

63、ies or IPs(24.7 percent)or the sharing of research facilities(24.7 percent).A similar result can be found in Table 6.As noted above,there are 58 fabless companies(71.6 percent)that have succeeded in product innovation in the period from 2017 to 2019.But only eight fabless firms developed new prod-uc

64、ts in cooperation with their key customers in the same period.In addition,only six firms surveyed responded that the main sources of information for innovation were their key customers.Yet,20 fabless firms reported cooperat-ing with other firms or institutions other than their key customers.But,if b

65、oth fabless companies and set makers are not active in their cooperation in new product development,fabless companies cannot gain access to critical market information and feedback.If this cycle continues,both fabless companies and set makers will lose their competitiveness in the market,as the desi

66、gn cycle Table 5.Cooperation with Key Customers(Set-makers)Unit:#of firms#of Obs.Ratio(%)Total#of fabless companies that cooperated with their key customers5669.1(1)The#of fabless that cooperated in R&D areas5264.2 -Cooperation in R&D:forming consultative groups or sharing information3948.2 -Coopera

67、tion in R&D:sharing research facilities2024.7 -Cooperation in R&D:sharing technologies or IPs2024.7 -Cooperation in R&D:providing and/or receiving technical guidance and/or support2530.9 -Cooperation in R&D:conducting pilot product production and/or providing a test-bed3745.7(2)The#of fabless that c

68、ooperated in Production areas1417.3(3)The#of fabless that cooperated in Sales&Marketing areas1923.5(4)The#of fabless that cooperated in Humane Resources1012.4(5)The#of fabless that cooperated in Management67.4Source:Korean Fabless Survey(2020).16KIET Industrial Economic Reviewfor new chips becomes e

69、ver-shorter,and product lifecycles and new market demand becomes ever more uncertain amid the emergence of new industries.“Time-to-market”is key to success for both fabless firms and set makers.One reason for the low level of cooperation between fabless firms and their main customers is the monopoli

70、stic market environment in Korea.As in other major industries(for example,the automotive sector),most fabless firms pro-vide their products to a very small number of contractors,and in order to sur-vive,most of these firms suffer small profit margins.This will ultimately dull their competitiveness,s

71、ince such small earnings will not be enough to cover their R&D expenditures.This cycle might also come to harm the competitive-ness of their key customers as well.5.ConclusionIn this article,we discussed the current status of Korean fabless companies and their cooperation with set makers using uniqu

72、e survey data collected from 81 fabless SMEs.Our findings suggest that although Korean fabless companies are innovative compared to other Korean SMEs,they also compete in a highly monopsonis-tic market,in which contractor-subcontractor relationships prevail.To foster and secure competitiveness in th

73、e fabless industry,demand-based innova-tion based on committed bilateral cooperation with set makers is of crucial importance.But only about 10 percent of fabless companies have developed new products in cooperation with their key customers over the past three years,and their profit margins are thin

74、 due to their weak bargaining positions in the monopsonistic market.Table 6.Sources of Product InnovationUnit:#of firms#of Obs.Ratio(%)Total#of fabless companies that have succeeded in product innovation5871.6 -Cooperation partner in product innovation:other institutions and/or firms2024.7 -Cooperat

75、ion partner in product innovation:key customers89.9The source of information for innovations:other institutions and/or firms1214.8 -The source of information for innovations:key customers67.4Source:Korean Fabless Survey(2020).Cover Story 17May+June 2022|Vol.27 No.3To this end,we recommend the follow

76、ing directions for policy as follows.First,to reduce transactions costs and information asymmetry between set makers and fabless firms,the government should perform a more active as a matching platform.Second,and most importantly,in order to achieve destructive innovation in emerging industries(arti

77、ficial intelligence and autonomous vehicles,in par-ticular),an alliance program with set makers and fabless firms should be more carefully designed in consideration of their incentives and the profit-sharing rules of joint projects.We should note how the Taiwanese fabless industry is closely allied

78、to lo-cal upstream and downstream industries.Taiwan solved the manufacturing issues and eliminated the heavy financial burden by having a giant foundry,TSMC,in their ecosystem.Furthermore,the downstream industries provide a sufficiently large market to sell through the ICs.This could be possible be-

79、cause many of Taiwanese IT companies,engaging in ODM businesses,offer Taiwan fabless companies the opportunity to cooperate with local compa-nies to phase in their ICs in new product development,the most important aspect given enormous quantities involved.These vast quantities allow fab-less companies to offer a lower price and also enhances their counterparts competitiveness.Shin Jongwon|Research Fellow|Center for SMEs and Venture Business Research|jwshinkiet.re.kr