China’s Semiconductor market overview

China’s semiconductor market is the largest in the world in terms of consumption. Annually, China consumes more than 50 percent of all semiconductors, both for internal use and eventual export. China consumed USD143.4 billion worth of wafers in 2020, and just 5.9% of them were produced by companies headquartered in China. Therefore, to rebalance China’s reliance on external semiconductor demand, the Chinese government has urged its national champions and leading digital businesses to improve their domestic semiconductor manufacturing capabilities.

With Taiwan leading the foundry market, China is hot on Taiwan’s heels. China has placed the semiconductor in its sights with its premier placing his top lieutenant, Lui He to manage this sector. This work has seen the number of newly registered chip-related companies in China more than triple in the first five months this year compared to the same period in 2020 in a fresh sign that China is sparing no effort in its pursuit of self-sufficiency in semiconductors. Currently, the country relies heavily on imports and US technologies to satisfy domestic demand. With US sanctions in place, China must seek to overcome these issues.

As such, China has massively increased investment in semiconductors over the past two years. The central and local governments have launched hundreds of policy funds, or guidance funds, to support the industry. The private sector poured funds into the sector with venture capital investment tripling in 2020 from the previous year. China also tapped its massive private capital market by opening its financial market to let individual investors directly support high-tech firms that are not yet profitable. In 2020 alone, 32 chip companies went public on China’s A-share market, up from 18 in 2019.

The rapid rise in semiconductor investment came as China realizes that their dependency on foreign imported chips poses major risks as the country seeks to lead the world in high-tech areas such as artificial intelligence, supercomputers, and electric vehicles. Semiconductors are at the forefront of the US-China tech war as well. China’s top chip maker Semiconductor Manufacturing International Corporation (SMIC) and telecoms giant Huawei Technologies Co, among several Chinese tech companies, have been added to the US Entity List, restricting access to chips made with US tech.

Government support

China has formally created a?$29 billion state-backed fund?to invest in the semiconductor! The National Integrated Circuit Industry Investment Fund, known as the Big Fund, is the Chinese government’s main vehicle for semiconductor investment. The fund was first set up in 2014 by China’s Ministry of Finance and China Development Bank Capital, as well as several other state-owned enterprises, which together injected RMB138.7 billion (USD28.3 billion) into the fund. The Big Fund was established to invest in chip manufacturing and design, and promote mergers and acquisitions, according to China’s Ministry of Industry and Information Technology (MIIT), which supervises the fund.

The first Big Fund consisting of RMB138.7 billion (USD28.3 billion) closed all its investment projects at the end of 2019. Around 67% of its total investment went to semiconductor manufacturing firms, according to a report by Eastmoney Securities, a Chinese brokerage.

In June 2014, the Chinese government also issued the “National Guideline for the Development and Promotion of the IC Industry” aimed at promoting domestic production of semiconductor devices. Initially, the aim is for China to be a global leader in all segments of the semiconductor industry by 2030, and by 2025 the knowhow of advanced semiconductor manufacturing. The 2014 guideline aims specific policy efforts at 14nm semiconductor design and packaging for advanced chips. China’s 14th Five Year Plan (2021-25) released on March 11th, 2021 confirms that high-tech manufacturing and “self-reliance in science and technology” remain national priorities through 2035.

According to the Chinese manufacturing 2025 plan, an initiative which strives to secure China’s position a global powerhouse in high-tech industries, the Chinese government is fueling a "semiconductor boom" by investing 1 trillion yuan (USD154 billion) for next 10 years until 2025 and is preparing to start a full-scale mass production of memory semiconductors by supporting domestic manufacturers.

China has formally created a USD29 billion state-backed fund in 2019 to invest in the semiconductor industry, advancing its goal of reducing a dependency on U.S. technology. China is the world’s biggest chip importer, and the long-awaited RMB204 billion (USD28.9 billion) fund will fuel Beijing’s efforts to forge its own semiconductor supply chain from chip design to manufacturing. It will play a key role in steering the overall strategy and investment in the integrated circuit sector, which includes processors and storage chips used in smartphones and data centers.

Market share of China’s semiconductor industry

Chinese companies hold global share across the value chain at the following levels, according to data from IHS iSuppli:

·???????Approximately 20% of fabless chip designers (the companies that design their chips and then contract out their physical production);

·???????10% of global foundry plant capacity (the outsourced manufacturers that serve fabless chip designers);

·???????Less than 1% of global integrated device manufacturing capacity (the companies that both design and manufacturer their own chips);

·???????Less than 1% of electronic design software, semiconductor tools, and materials;

·???????A less than 1% share in the most important end-product categories, such as the logic chips that are the brains of the internet or the advanced memory chips that major cloud vendors use to store trillions of photos and videos.

Sharp Rise of the semiconductor industry in China

The number of newly registered chip-related companies in China more than tripled in the first five months of the year from the same period in 2020 in a fresh sign that China is sparing no effort in its pursuit of self-sufficiency in semiconductors, for which the country relies heavily on imports and US technologies to satisfy domestic demand.

In 2020, over 22,000 new semiconductor companies were registered in China, according to data firm Qichacha and in the first two months of 2021, there were 4,350 more new companies involved in everything from designing to manufacturing chips. The surge comes on the back of a wave of investment in the semiconductor industry thanks in part to Beijing’s generous subsidies and support.

China’s 2 main strengths in the sector lies in its relatively low labour costs in its assembly and packaging sub-sectors as well as having produced sophisticated dry etchers since the early 2000s. However, these 2 sub-sectors only comprise 4.9

% of the WFE market and should not be overstated.

In a study published by CSET, China is boosted by 5 main accelerants:

1.?????Government Subsidies

2.?????Equipment Component imports

3.?????Explicit knowledge transfer

4.?????Tacit know-how transfers

5.?????Collaboration between China’s WFE firms and fabs

Investments and expansion

Chinese telecoms equipment giant Huawei Technologies Co recently invested USUSD12.8 million in a Beijing-based company that makes excimer lasers for the lithography process, as reported by the state-owned Global Times earlier last month in June 2021. Carmakers such as BYD and handset maker Xiaomi have also announced ambitious plans to expand in the chip industry while SMIC, mainland China’s most advanced foundry, has grabbed a larger share of the global wafer foundry market during the ongoing chip shortage, with plans on increasing this share domestically.

Large prominent firms in China have also been actively seeking to include chip making in their business activities. In 2018, Alibaba bought a domestic chipmaker company, which later became PingTouGe Semiconductor. It has launched two AI chips since. Alibaba also has strategic investments in six other chip startups.

Tencent has invested in the chip startup Enflame for four rounds in a row, with a total investment of nearly USD279 million, and a subsidiary cloud computing company established in 2020 has included chipmaking in its business activities. ByteDance is also actively recruiting personnel with chipmaking experience, venturing into cloud AI chips and ARM server chips while Oppo and Xiaomi are working on their own in-house 5G chips.

This is in part due to the support of China’s government for the semiconductor industry to attain greater self-sufficiency in meeting local demands with the ongoing US-China trade wars, in addition to overall rising demand for semiconductors and shortage witnessed during the pandemic.

In 2020, 32 Chinese semiconductor companies have gone public. Another USD20 billion worth of investment has poured into private companies, four times higher than that of 2019, according to private equity firm Winsoul Capital. Investors include big names like Huawei, Xiaomi and major VC firms like Sequoia and Hillhouse Capital.

Other Chinese semiconductor startups to raise mega-rounds in recent months apart from Enflame are Ecarx and Iluvatar CoreX. Ecarx is a semiconductor startup that is focusing on technologies used in car chips, high-definition maps and smart vehicles, who plans to supply products with 7 nanometer (nm) chip as early as next year through its joint venture with Arm China.

There is also strong interest by foreign firms in the rising number of Chinese Semiconductor startups. Intel Capital, the venture arm of chipmaker Intel Corp INTC.O, has invested in two Chinese startups in the semiconductor sector in May 2020,

One of the startups, ProPlus, makes EDA software that chip makers use to design their products before manufacturing them. The current leaders in this field are Cadence Design Systems Inc CDNS.O, Mentor Graphics, and Synopsys Inc SNPS.O, which all hail from the United States.

Spectrum Materials is the other startup that Intel invested in. They make gases critical for semiconductor fabs to produce physical chips, a sector typically dominated by players in the United States, South Korea, and Japan.

?Conclusion and list of main fabs in china.

As we progress further into the digital era, many semiconductor companies are already benefiting from innovative technology, with the sector showing strong and rising profits over the past few years. But there may be challenges ahead since companies that want to remain industry leaders must continue to increase their R&D investments. With costs in labor and other areas rising, some semiconductor companies provide additional funds for innovation to cope with the ever-demanding challenges of the industry and follow Moore’s law. With increasing competition, companies are looking to improve productivity and yield. To achieve this, companies are looking to driving up yield improvements with smart data management and industry4.0 techniques.

With the aggressive increase in demand and support given by the Chinese government in ramping up local production of the semiconductor industry, with hopes of achieving 70% self-sufficiency in semiconductor wafer and chip production for the domestic market, SMIC, the largest and most promising local player is still two generations behind the much-smaller, cutting-edge chips produced in the foundries of TSMC, Samsung, and Intel. Despite this, we believe that China will be the next Japan in the semiconductor industry and will see a tremendous in growth in the coming years — especially in the WFE sub-sector.

As materials, equipment and process develop in this sector, huge amounts of R&D will have to be invested to produce cutting edge innovations. We are already seeing consolidation happening in this market with few companies taking a large market share, and this may continue to grow. Therefore, in terms of the global worldview, the up and coming semiconductor industry of China may drive competition in this sector and help increase the uptake of innovative discoveries. We are keen to see what will happen in the future of this industry and the rest of the world will only benefit with faster and better technologies are developed.

Overall, we foresee huge growth in this industry and its supply chain. Innovation is key to this sector and expensive, innovative technologies like Extreme Ultra-Violet (EUV) lithography can disrupt the CHINA industry and china will probably achieve this capability despite US efforts. Electronic spending will only increase as the world becomes increasingly digitalized and becomes more reliant on better, faster, and smaller chips. Like the oil and gas industry in the past, we believe that the semiconductor industry will continue to grow to become an economical heavyweight where few players fight on dominance and can drive the entire economical market up and down.

Semiconductor players in China

Of the semiconductor players in China, SMIC (Semiconductor Manufacturing International Corporation), HiSilicon Technologies CO. by Huawei and Tsinghua Unigroup stands to be the largest domestic player with SMIC leading, being the largest state-owned foundry with 9 fabrication facilities that produces 464,000 wafer per month.

Below is a table of the main semiconductor players in China.

Name / Description

Semiconductor Manufacturing International Corporation (SMIC), Founded: 2000, Shanghai- A state-owned publicly listed Chinese semiconductor foundry company.

It provides services mainly to Huawei HiSilicon and Qualcomm, with 8-inch wafer fabs (0.18μm) and low-end AP/SoC (28nm, 14nm) respectively. The company reported a record-high 27.5 billion yuan (USD4.2 billion) in revenue for 2020, representing 24.8 per cent year-on-year growth. Net profit grew a hefty 217 per cent to reach 4 billion yuan due to brisk chip demand last year.SMIC have 9 fabs in China in total. SMIC-Fab Information (smics.com)

HiSilicon Technologies CO., Ltd (Huawei)

Founded: 2004, Shenzhen -A fabless semiconductor company based in Shenzhen and fully owned by Huawei. It is mainly responsible for designing in monitoring chips, video-chips. It also offers manufacturing and technology solutions.

Since Huawei was put on the U.S. blacklist, HiSilicon has focused more on the domestic market.

Tsinghua Unigroup

Tsinghua Unigroup is a Chinese semiconductor manufacturer that also supplies digital infrastructure and services to domestic and global markets. Based in Beijing, it is among the country’s largest technology conglomerates; subsidiaries include UNISOC, China’s largest mobile phone chip designer, and Yangtze Memory Technologies Co, which owns a fab that can make both 3D NAND memory and logic.

YMTC (Yangtze memory technologies)

Yangtze Memory Technologies Co., Ltd. (“YMTC”), established in Wuhan, China in July 2016, is an IDM memory company focusing on the design, production, and sales of 3D NAND flash memory. YMTC provides 3D NAND wafer, die, and solutions including embedded memory, cSSD, and eSSD for a wide range of applications including mobile devices, PCs, and data centers.

YMTC is investing more than USD20 billion in its fab in Wuhan. It aims to double 300mm wafer processing capacity to 100,000 per month by the end of this year (2021).

SK Hynix Semiconductor (China) Co., Ltd.

SK Hynix (China) mainly offers 12-inch integrated circuit wafers which are used in DRAM product, such as PC-DRAM for PCs and server DRAM for large-capacity servers in data centers.

With the requisition of Intel NAND business, SK Hynix will have a market share of 23.2% in the global NAND market, and a more sufficient capacity of chips supply.

Samsung Electronics China Semiconductor Co., Ltd. (SESS)

The market leader in China’s semiconductor manufacturing industry since the 90s.

A broad product line of semiconductors such as flash memories, SRAMs and DRAMs.

Samsung’s smartphone factory in China shut down in 2019, there are only remaining two semiconductor manufacturing sites (Suzhou and Xi’an).

Xi’an – invested USD10.28billion in production facilities and technology research, employs >3300 people

Suzhou – invested USD2.11 billion in facilities, production and research, employs 2132 workers locally

Intel Semiconductor (Dalian) Ltd.

Founded: 2010, Dalian

In 2015, the brand started making processor chips on the 65nm process to make 3D NAND Flash chips. 70% of 3D NAND chips of Intel’s production was produced here.

Oct. 20, 2020, SK Hynix announced that they would acquire Intel’s NAND memory and storage business for USD9 billion, which includes the Dalian NAND memory manufacturing facility in China.

Manufactures semiconductors, wafer fab in Dalian, assembly and test in Chengdu

Taiwan Semiconductor Manufacturing Company (TSMC)

The world’s largest dedicated independent semiconductor foundry. Main customers are Apple and Huawei.

TSMC Nanjing reached CNNY 4 billion in 2019, becoming the third-largest foundry in China behind SMIC and HLMC.

A total of 2 fabs in China, the rest of the fabs are in Taiwan.

UMC (United semiconductor)

UMC has 2 fabs in China, one in Suzhou (originally, He Jian semiconductors that was acquired), and another one in Xiamen.

Xiamen: 25k wafers per month. USCXM 300mm wafer fab with 28-65 nm production

Suzhou: 76k wafers per month. 200mm wafer fab with 0.11-0.5um

(Microsoft PowerPoint - UMC20Q2 financial presentation-E)

Overview - UMC

NXP Semiconductors (Guangdong) Co., Ltd

Founded: 2000, Dongguan

NXP primarily serves the automotive, communication infrastructure and industrial markets.

It has worked with a variety of Chinese tech brands, such as Baidu in automotive and Xiaomi in mobile payments.

Infineon Technologies (China) Co., Ltd

Founded: 1996, Wuxi

One of the top players in the automotive, power semiconductor and security chips.

It has set up a complete industrial chain in China, including R&D, production, sales, and technical support.

ON Semiconductor Corporation (China)

Founded: 1999, Suzhou

Holds a 46% market share of CMOS sensors in the automotive active safety market.

ON semiconductor plans to put emphasis on automotive, solar, and 5G/cloud power in the future Chinese market.

2 manufacturing facilities in China

-???????Leshan: A high volume assembly and test factory with 185,000 square feet clean room space, located on a 28-acre campus with 434,000 square feet of building space. (Acquired a spin-off from Motorola in 1999)

-???????Shenzhen: Assembly and test factory with 80,000 square feet clean room, located on a 200,000 square feet site. (Acquired SANYO Semiconductor in 2011)

Acquired Fairchild semiconductor 2016

Texas Instruments

Has a fab in Chengdu.

The plant, located in Chengdu, China, includes an operating 120,000-square-foot fab that also has assembly, test, bump and probe operations all in one location.?It can support more than USD1 billion in annual revenue and a 134,000-square-foot fab reserved for future production needs, according to the company. Three R&D teams in Beijing, Shanghai and Shenzhen; sales and applications offices located in 17 cities; and two product distribution centers. Texas Instruments (TI) purchased the 200-mm manufacturing facility from Cension Semiconductor Manufacturing Co.

References:

-???????Deloitte on Semiconductors (https://www2.deloitte.com/content/dam/Deloitte/cn/Documents/technology-media-telecommunications/deloitte-cn-tmt-semiconductors-the-next-wave-en-190422.pdf)

-???????KPMG on Semiconductors (https://advisory.kpmg.us/articles/2021/global-semiconductor-industry-outlook-2021.html)

-???????Opportunities for the global semiconductor market - PwC (https://www.pwc.com/gx/en/industries/tmt/publications/global-tmt-semiconductor-report-2019.html)

-???????Google sets up Israel chip development center - Globes (https://en.globes.co.il/en/article-google-sets-up-israel-chip-development-center-1001364996)

-???????China’s Semiconductor Industry: 60% of the global semiconductor consumption –Daxueconsulting (https://daxueconsulting.com/chinas-semiconductor-industry/)

-???????Where China is investing in semiconductors, in charts – TechNode (https://technode.com/2021/03/04/where-china-is-investing-in-semiconductors-in-charts/)

-???????Eastmoneysecurities report 大基金一期投资硕果累累，二期蓄势待 发 (https://pdf.dfcfw.com/pdf/H3_AP201912311373119321_1.pdf?1577789587000.pdf)

-???????Lagging but motivated – Brookings (https://www.brookings.edu/techstream/lagging-but-motivated-the-state-of-chinas-semiconductor-industry/)

-???????Chinese companies are making their own semiconductors – Protocol (https://www.protocol.com/china/chinese-companies-make-own-semiconductors)

-???????UMC Quarterly Review (https://www.umc.com/upload/media/08_Investors/Financials/Quarterly_Results/Quarterly_2020-2029_English_pdf/2020/Q2_2020/UMC20Q2_financial_presentation-E.pdf)

-???????China’s Progress in Semiconductor Manufacturing Equipment – CSET (https://cset.georgetown.edu/wp-content/uploads/CSET-Chinas-Progress-in-Semiconductor-Manufacturing-Equipment.pdf)

-???????Conference: Semi-conductor Business Connect – Singapore Semiconductor Industry Association; July 2021 (https://www.youtube.com/watch?v=4vMKJkxbqo4)