Over the past few years, the US Department of Commerce has imposed export restrictions and the CHIPS Act, causing political tensions to rise between China and the US. To mitigate geopolitical risks, customers are beginning to diversify the proportion of Chinese and non-Chinese suppliers, with Taiwanese foundries expected to benefit.
Industry sources claim that one of the world’s top three CMOS image sensor manufacturers, which previously produced CIS chips for laptops at Hua Hong, has reportedly shifted its orders to PSMC at the request of its customers. Another major power discrete manufacturer is also reportedly considering discussions with PSMC for related cooperation due to geopolitical concerns.
The subsidy regulations of the CHIPS Act prohibit subsidy recipients from transferring funds to related foreign entities, expanding semiconductor manufacturing capacity in “related countries” within 10 years, or engaging in any form of joint research or technology licensing with foreign entities involved in sensitive technology or products.
China’s advanced process capacity will only account for 1% in 2025
TrendForce predicts that the CHIPS Act may further reduce the willingness of multinational semiconductor companies to invest in China. Japan and the Netherlands have also joined the sanctions, which may hinder the expansion plans of both Chinese and multinational foundries in China. Chinese foundries are more active in expanding mature process capacity, with a projected growth of 27% from 2022~2025, but the advanced process has only 1% in 2025. However, the US is expected to have the highest growth rate in advanced processes (7nm and below), reaching 12% by 2025.
China’s memory production capacity will decline annually
SK hynix is the only one of the top three DRAM manufacturers with a production facility in China’s Wuxi. Due to factors such as oversupply and geopolitics, Wuxi’s DRAM production has decreased from 48% to 44%. The company’s new plant is expected to be located in Korea. Meanwhile, Samsung and Micron have no DRAM production in China, and their expansion plans will focus on Korea and the United States respectively. According to TrendForce, as DRAM production in Korea continues to rise, China’s global share of DRAM production capacity will gradually decline from 14% to 12% between 2023 and 2025.
Samsung and SK Hynix are reportedly unlikely to expand their legacy-process production lines for NAND flash memory as they approach manufacturing of 200-layer and higher products, making sub-128-layer processes uncompetitive. Instead, they are planning to establish new production facilities in South Korea or other regions. This move could restrict China’s NAND flash production capacity expansion and process upgrades, causing its global market share to drop from an estimated 31% to 18% between 2023 and 2025.
(Image credit: SMIC)
The risks associated with the United States’ suppression of China’s semiconductor industry and the ongoing tension in China-US relations continue to permeate the supply chain. However, most customers of foundries are adopting a cautious approach, either maintaining a wait-and-see attitude or gradually introducing second sources to mitigate risks.
The operational conditions and challenges faced by China’s two major foundries, SMIC and HuaHong, differ to some extent. In the case of SMIC, despite being added to the U.S. Entity List as early as 2020, most of its customers continue to place orders with SMIC due to concerns about the time-consuming and costly nature of verification.
According to a survey by TrendForce, only one U.S.-based brand is actively pursuing a decoupling strategy in response to U.S. government bids, while other brands are mostly conducting risk assessments of their supply chains without fully implementing a complete decoupling strategy.
In particular, SMIC still maintains a competitive edge in terms of lower prices and the advantage of the domestic Chinese market, which keeps most of its customers placing orders and prevents a significant drop in overall capacity utilization rate compared to other foundries. Its utilization rate in 1Q23 was approximately 65-70%, and it is expected to slightly increase to nearly 70% in 2Q23.
HuaHong, on the other hand, is taking a cautious approach to address the risks arising from the China-US tension. HuaHong’s subsidiary, ICRD, primarily focuses on process technology R&D, with a particular emphasis on the 28/14nm process nodes.
It is currently setting up a specialized 28nm production line, which uses photolithography equipment from two major international manufacturers, ASML and Nikon. For all other equipment, Chinese domestically manufactured machines are being used as substitutes.
The planned total production capacity for this production line is 40Kwspm ( wafer starts per month). Considering the possibility of both Japan and the Netherlands potentially joining trade sanctions later this year, the future expansion plans for HuaHong’s production capacity are uncertain.
(Photo Credit: SMIC)
In recent years, China’s IC sales have been increasing year over year. Although sales have been suppressed by the United States and the impact of the pandemic, China’s IC sales still increased by 17% in 2020. Benefiting from the development of terminal applications such as 5G, online office, and smart cars, China’s IC sales grew by 18.2% in 2021 and it is expected to rise by 11.21% in 2022.
Currently, China’s 12-inch foundries are primarily owned by SMIC and Hua Hong Semiconductor. SMIC’s 12-inch fabs are located in Beijing and Shanghai while Hua Hong’s 12-inch fab is located in Wuxi. SMIC’s annual sales revenue in 2021 was US$5.44 billion, growing 39% YoY, and it posted net profit of US$1.775 billion, growing 147.76% YoY. From the perspective of revenue structure, 12-inch products contributed approximately 60% of SMIC’s revenue in the past year.
From the perspective of production capacity, SMIC’s capacity utilization rate has hovered around 100% in the past year. In 1Q22, SMIC’s capacity utilization rate was 100.4%, with a monthly production capacity of 613,400 units of 8-inch equivalent. . In 2021, new production capacity was 100,000 units/month (converted to 8 inches), of which 45,000 units/month was added as 8-inch wafers. At present, SMIC is still accelerating production expansion. Its project in Lingang, Shanghai has broken ground and its two projects in Beijing and Shenzhen are progressing steadily. Production is expected at these fabs by the end of 2022, mainly as 12-inch capacity.
Hua Hong Semiconductor posted operating income of US$1.631 billion in 2021, a YoY increase of 69.64%. From the perspective of revenue structure, Hua Hong Group primarily focused on 8-inch production capacity before 2020. As production commenced at Hua Hong Wuxi’s 12-inch project, Hua Hong completed the leap from 8 inches to 12 inch wafers. In the past year, Hua Hong’s average monthly production capacity of 8-inch wafers was 194,000 units and revenue was US$1.15 billion, accounting for 70.55% of total revenue. The average monthly production capacity of 12-inch wafers was 56,000 wafers and revenue was US$480 million, accounting for 29.45% of revenue, and the proportion of 12-inch revenue is increasing. In 1Q22, Hua Hong Semiconductor’s 12-inch revenue accounted for 44.1% of total revenue, an increase of 5 percentage points from the previous quarter. With the completion of the second phase of the Wuxi project, 12-inch revenue is expected to, once again, achieve substantial growth.
It is worth noting that since the Sino-US trade war, China’s substitution of domestic products has become mainstream, especially in the foundry and packaging and testing portions of the manufacturing process. In addition, the tense relationship between supply and demand and hobbled logistics caused by the pandemic has also catalyzed an increase in the proportion of fab revenue coming from China. From the perspective of wafer foundries, Hua Hong Semiconductor’s China revenue will account for 76% of total revenue in 1Q22. In terms of SMIC, although 4Q20 was categorized by an inability to manufacture Huawei orders and the proportion of revenue from China and Hong Kong fell from 69.7% in 3Q20 to 56.1% in 4Q20, as tension rose between supply and demand, lost Huawei orders have been taken up by other Chinese IC designers. In 1Q22, SMIC’s revenue from China and Hong Kong accounted for 68.4% of total revenue, a return to its peak level in 3Q20.
Behind record high sales of semiconductors is an unrelenting spike in demand. In order to alleviate the imbalance between supply and demand, the world’s major fabs are accelerating new production capacity and China’s fabs represented by SMIC and Hua Hong are also stepping up production expansion. From the perspective of the expansion structure, the current focus of fabs is still on the expansion of 12-inch wafers. The primary reason for this is that 12-inch wafers are characterized by higher production efficiency and lower unit consumables, with a comprehensive equipment supply chain. In the past two years, China has built a total of 11 projects involving 12-inch wafers. However, due to factors such as the pandemic, tide of production expansion, and lack of chips for equipment, the lead time of semiconductor equipment has been continuously drawn out, resulting in a slowdown in fab expansion. In addition, 8-inch capacity expansion is relatively slow due to equipment constraints. From the perspective of China’s foundry market, among new wafer production capacity (8 inch equivalent) from 2020 to 2021, 12 inch capacity accounted for 58.17%, 8 inch capacity accounted for 22%, and 6 inch capacity accounted for 19.83%.
According to TrendForce research, driven by strong demand for 5G mobile phones, base stations, automobiles, and HPCs, the global output value of packaging and testing (including foundry and IDM) reached US$82.139 billion in 2021, or 25.83% YoY. This upward momentum is forecast to continue in 2022, taking output value to US$101.185 billion in 2022, or 23.19% YoY. From the perspective of regional distribution, China’s IC packaging and testing output value in 2021 was approximately US$39.443 billion, increasing 31.7% compared with US$29.941 billion in 2020, becoming the world’s fastest-growing major market in terms of packaging and testing output value.
Shanghai pandemic lengthens overall lead time, hinders China’s packaging and testing growth in 2Q22
In 2Q22, Shanghai was locked down due to the COVID-19 pandemic. Although wafer fabs and packaging and testing plants were still operating normally, the pandemic hindered logistics and the materials required for packaging could not be effectively shipped from Shanghai, affecting transportation efficiency and logistics costs to a certain degree. Overall, China’s packaging and testing industry was not significantly affected by the pandemic in 1Q22 but, in 2Q22, the industry will bear the brunt of the COVID-19 situation, with packaging and testing companies experiencing prolonged overall lead times and sluggish revenue growth.
NEVs and HPCs to become new growth drivers, fabs and packaging and testing companies accelerate deployment
The growth rate of smartphones, a core driving force behind IC packaging and testing output value, is slowing down. Since smartphone shipments peaked at 14.575 million units in 2017, volume has not surpassed this number in the ensuing years. Even though the upgrade from 4G to 5G brought about a wave of replacements, the overall smartphone market has reached maturity, with slowing growth or even negative growth, so its demand on wafer manufacturing and packaging and testing is likewise slowing down.
Aside from mobile phones, growth in HPC and new energy vehicles (NEV) is becoming a new revenue engine. At present, the world’s major automobile production countries are accelerating the penetration rate of NEVs, and packaging and testing companies are also accelerating their investment in the automotive and HPC sectors. From the perspective of fabs, TSMC’s HPC revenue accounted for 41% of total packaging and testing revenue in 1Q22, surpassing mobile phones for the first time and becoming the largest source of the company’s packaging and testing revenue.
（Image credit: Unsplash）
With the continuous deterioration of the global environment and the exhaustion of fossil fuel energy, countries around the world are looking for new energy sources suitable for human survival and development. The construction of photovoltaic energy storage projects is an important measure to implement energy transformation. Third-generation semiconductors have the characteristics of high frequency, high power, high voltage resistance, high temperature resistance, and radiation resistance, which can promote highly efficient, highly reliably, and low cost of photovoltaic energy storage inverters and the green and low-carbon development of energy.
SiC will be widely used in high-power string/central inverters, while GaN is more suitable for household micro-inverters
As the photovoltaic industry enters the era of “large components, large inverters, large-span brackets, and large strings,” the voltage level of photovoltaic power plants has increased from 1000V to over 1500V and high-voltage SiC power components will be used extensively in string and centralized inverters. For residential micro-inverters with a power of up to 5kW, GaN power components have more advantages. Not only can they significantly improve overall conversion efficiency, effectively reduce the levelized cost of energy (LCOE), but also allow users to easily build smaller, lighter, and more reliable inverters.
Key SiC substrates are crucial to the development of third-generation semiconductors and major manufacturers are competing to get to market
SiC substrate is regarded as the core raw material of third-generation semiconductors. Its crystal growth is slow and process technology complex. Mass production is not easy. Conductive substrates can produce SiC power electronic components while semi-insulating substrates can be used for the fabrication of GaN microwave radio frequency components. In addition, due to the high difficulty of substrate preparation, its value is relatively high. The cost of SiC substrate accounts for approximately 50% of the total cost of components which demonstrates its importance in the industrial chain.
At present, the supply of the global SiC market is firmly in the hands of substrate manufacturers. Wolfspeed, II-VI and SiCrystal (subsidiary of ROHM) together account for nearly 90% of shipments. IDM manufacturers such as Infineon, STM, and Onsemi are actively developing upstream SiC substrates and expect to take full advantage of the supply chain to strengthen their competitiveness. Everyone wants to get a piece of the pie, so the battle for SiC substrates will become more and more fierce, but the wait will not be long to see where the industry eventually goes in coming years.
（Image credit: Pixabay ）