THIS YEAR, THE MAJOR PLAYERS of China's electronics industry will demonstrate an evolutionary trend of growing ever bigger, with the industry transforming itself from the phase of quantitative expansion to one of qualitative improvements powered by technological innovations. The 11th Five-Year Plan of China's IC industry also explicitly reflects its inclination to promote this "big fish" strategy.

The Chinese government plans to invest a total of 300 billion yuan($37.45 billion) during the 11th Five-Year Plan period, according to Wenwu Ding, vice director of the department of electronic and information products of the Ministry of Information Technology (MII). This figure will go toward developing five IC design companies, each worth 3 to 5 billion yuan ($374.5 to $624.2 million), and 10 companies, each worth 1 to 3 billion yuan ($124.8 to $374.5 million). Ten 200-millimeter and five 300-mm wafer foundry production lines are also planned during the same time period. In terms of semiconductor manufacturing equipment, the Chinese government plans to achieve self-supply of all equipment for the 150-mm production lines, commercialize mask aligners for the 200-mm production lines and attain technological breakthroughs in the development of 65-nanometer laser-etching equipment for the 300-mm production lines.

The 11th Five-Year Plan will see breakthrough IC product innovations and priority will be given to the introduction and re-innovation of imported technologies, according to Zhongyu Yu, director of the China Semiconductor Industry Association (CSIA) Over the next five years, the compound annual growth rate (CAGR) of China's IC industry will reach 28.1 percent. By 2010, China will become the largest semiconductor market, worth about $150 billion, according to the CSIA.

The goals for the Chinese electronics and information industry set this year by MII are to generate sales revenue of 4.66 trillion yuan($574.2 billion) in total, up 23.31 percent from 2005. But the effect of the new hot products market on China's electronics industry is still limited.

Regarding 3G, Xudong Wang, minister of MII, indicates that this year will see the formulation of services, tariffs and regulatory policies on 3G, as well as allocation of the frequency spectrum. A prediction against such a backdrop is that 3G will be only at its introductory stage before 2007, whereas large-scale commercialization won't be possible until 2008.

As for LCD TV, considering that the national digital television standards are not yet developed and launched, it is not easy for a product priced at about 10,000 yuan($1250) to enter average families' homes unless the prices of LCDs can quickly approach those of CRTs, which is quite unlikely, given that the LCD panel accounting for 70 percent of the total cost of a complete TV set is wholly imported.

MP3 players and GSM handsets are facing the problem of excessive supply. Digital video products such as MP4s and Portable Media Players (PMPs) are still in a market-nurturing stage, and before any substantial progress in the 3C integration policy can be achieved, Internet Protocol Television (IPTV) is not likely to be applied on a large scale. With the transformation from analog TVs to digital TVs, set-top boxes (STBs) are beginning to enter mainstream homes in larger quantities. However, the analog-to-digital transformation is usually financially supported by local governments, and certainly there are not yet many well-off cities in China.

It will be two to three years before the demand for these new products will reach the same penetration level as GSM handsets, DVDs and CRT TVs.

Except for the IC design segment-which saw continued rapid growth in 2005 growth in all the other segments of China's electronics industry showed a slowdown trend in 2005. China's electronics industry is experiencing the pain of the continued lack of self-owned core technologies. According to MII statistics, for roughly the top 100 Chinese electronics companies, the average profitability rate was merely 1.93 percent during the period of January to November 2005. Chinese companies' strategy of grabbing market share by lowering prices has come to an end. By contrast, however, companies driven by technological innovations have demonstrated strong competitiveness.

For example, in 2005, Zhuhai Actions Semiconductor realized sales revenue of 1.26 billion yuan($157.25 million), making it the largest IC design company in China, and net profit of the company rose to $73.1 million, up 176 percent over 2004. Hisilicon Technologies had only several dozen employees when it spun off from Huawei in 2005. That number has now grown to 870 and is expected to reach 1,500 by the end of this year. Although most local mobile phone manufacturers are struggling for survival, the sales of Lenovo mobile phones rose by 238 percent in the third quarter of 2005.

In December last year, MII signed an agreement with the Chinese State Development Bank, under which the bank would offer a credit line totaling 50 billion yuan ($6.24 billion) over the next five years to support the development of the electronics and information industry and the applications of IT. Local Chinese companies with technological capabilities will be the key targets for the Chinese government in supporting the electronics industry.

If the pioneering companies that emerged in the mid- to late 1990s, which together are called Ju Da Zhong Hua (for Ju Long, Datang, ZTE and Huawei), are seen as having been the first wave in the evolution of China's electronics industry, then Zhong Hua Lian Hai (ZTE, Huawei, Lenovo and Haier) have become the leading players in the second wave of the evolution over the first five years of the 21st century. The change from Ju Long and Datang to Lenovo and Haier not only reflects the industry's partial evolution from the manufacturing sector to a complete transformation-expanding from the communications market alone to the PC consumer electronics markets-but also objectively and vividly demonstrates that the industry is turning its eyes from the domestic market to the world market. Adopting such a development orientation, China's electronics industry is brewing the third evolutionary wave.

Yao Gang is a senior editor for EDN China and Electronic Business China.