The prosperity and hidden worries of China's semiconductor manufacturing

In recent years, with the government's attention and policy support, as well as the influx of industrial capital, my country's semiconductor manufacturing industry has flourished. In particular, driven by the rapid development of the IC design industry, more demands have been placed on manufacturing, leading to the launch of related projects, including semiconductor materials (such as silicon wafers), manufacturing equipment, and wafer foundries.

It is a good thing that the market is full of vitality. However, there are also hidden worries under the prosperity. We need to avoid risks as much as possible during development to ensure the healthier development of the industry.

Below we will analyze our achievements and shortcomings in four areas: IC design, silicon wafer production, wafer foundry, and semiconductor equipment.

IC design traction

China's semiconductor industry has continued its growth momentum in recent years, with the industry growing at a rate of 22.4% from January to September 2018. In 2018, my country's integrated circuit industry still achieved good results despite the increasing uncertainty, especially due to the impact of the "ZTE incident". The IC design industry continues to maintain its leading position.

At the ICCAD 2018 Summit, Professor Wei Shaojun, Chairman of the Integrated Design Branch of the China Semiconductor Industry Association, introduced that in 2018, the number of IC design companies in mainland my country increased significantly again, with a total of 1,698 companies nationwide, 318 more than the 1,380 in 2017, an increase of 23%. This is the second time that the number of design companies has increased significantly after the number of design companies increased by more than 600 in 2016.

From a statistical perspective, in addition to traditional design company clusters such as Beijing, Shanghai, and Shenzhen, the number of design companies in cities such as Wuxi, Chengdu, Suzhou, and Hefei exceeds 100, the number of design companies in cities such as Xi'an, Nanjing, and Xiamen is close to 100, and the number of design companies in Tianjin, Hangzhou, Wuhan, Changsha and other places has also increased significantly.

The industry's sales in 2018 are expected to be 257.696 billion yuan, up 32.42% from 194.598 billion yuan in 2017, and 4.27 percentage points higher than the 28.15% in the previous year. Based on the exchange rate of 1:6.8 between the US dollar and the RMB, the annual sales reached 37.896 billion US dollars, and the share of the global IC design industry increased again.

At the same time, my country's IC design industry is still facing great challenges, mainly reflected in: 1. The products provided by my country's chip design industry cannot meet market demand, account for a small proportion in the world, and the year-on-year growth is not obvious (China's integrated circuit products represented by the IC design industry account for 7.94% of the world, which is only about 0.16 percentage points higher than the 7.78% in the previous year); 2. The mainstream design technology of my country's IC design industry has not made much progress. The overall technical route has not yet gotten rid of following others, and the current situation of following others has not fundamentally changed, and the product innovation ability needs to be improved. The phenomenon that Chinese companies rely on process and EDA tool progress to achieve product upgrades has not changed. Companies that can define their own design processes based on process and use COT design methods for product development are still rare; 3. In the field of high-end general-purpose chips such as CPUs, due to the large gap, they are still unable to compete with major international players.

Wafer supply side

On January 8, SEMI released the "2018 China Semiconductor Silicon Wafer Outlook" report, which pointed out that China has the largest number of planned new wafer fabs in the world between 2017 and 2020. It is expected that by 2020, the installed capacity of wafer fabs in mainland China will reach 4 million pieces (WPM) of 8-inch equivalent wafers per month, compared with 2.3 million pieces in 2015, with an annual compound growth rate (CAGR) of 12%, which is much higher than all other regions.

Against this backdrop, both Chinese and foreign companies have plans to build new foundry or memory factories in China, and overall wafer fab capacity is expanding at an accelerated pace.

However, challenges also come with it, that is, the supply of silicon wafers is becoming increasingly tight. Since wafers are in an oligopolistic state worldwide, the total revenue of the top five silicon wafer manufacturers accounts for more than 90% of the market share. With these manufacturers strictly controlling global production, wafers are in short supply. In response to this dilemma, the central and local governments of mainland China have made the development of domestic wafer supply chains a top priority, and related projects, especially 12-inch large silicon wafer factories, have been launched one after another.

在众多硅片生产企业中，中环股份和上海新昇是两家典型代表。

上海新昇是一家初创企业，以生产12英寸晶圆为主业。2014年，上海新阳与兴森科技、新傲科技等合资创立了上海新昇半导体，是国家02专项300mm大硅片项目的承担主体，第一大股东国家大基金旗下的上海硅产业投资有限公司持股62.82%，上海新阳为第二大股东，持股27.56%。

据悉，上海新昇项目总投资68亿元，一期总投资23亿元。新昇半导体一期投入后，预计最终将形成60万片/月的12英寸硅片产能，年产值达到60亿元。项目第一期的正常建设周期为3年，原计划2017年底实现15万片/月的产能，但由于关键设备采购困难等问题，进展不及预期。目前产能为6万片/月。

The company's main customers for its 12-inch large silicon wafers are SMIC, Huali Microelectronics, etc. In addition, the certification work for the company's large silicon wafers at Wuhan Xinxin is also in progress.

Tianjin Zhonghuan Semiconductor is another important force in wafer production. On January 7, the company announced that it would issue a total of no more than RMB 5 billion in funds. According to their plan, this fund will be mainly used for the construction of 8-12 inch silicon wafer production line projects. The goal is to build a production line with a monthly production capacity of 750,000 8-inch polished wafers and 150,000 12-inch polished wafers within three years.

Zhonghuan said that after the fundraising project reaches full production, it will help consolidate and expand the company's competitive advantage in the field of semiconductor silicon wafers, and will be conducive to the company's continuous, rapid and healthy development. They also revealed in the announcement that among the company's existing semiconductor materials, the production and sales of 5- to 6-inch silicon wafers have increased rapidly, and 8-inch silicon wafers have achieved mass production. After the fundraising project is put into production, the production capacity of 8-inch silicon wafers will be further increased, and mass production of 12-inch silicon wafers will be achieved.

Although mainland China's wafer production companies have invested heavily in the past two years, most of them are still in the early stages of development and it is difficult for them to pose a threat to the five international manufacturers in the short term. It will take several years for these new suppliers to reach the production capacity and yield levels required by the large-size silicon wafer market.

Wafer foundry demand surges

With the rapid development of my country's IC design industry, especially the emergence of IC design companies, the demand for foundry services is also increasing. According to IC insights, in 2017, the sales of pure-play foundries in China increased by 30% to US$7.6 billion, three times the 9% growth of the entire pure-play foundry market that year. In 2018, pure-play foundries' sales to China increased by 41%, eight times the 5% growth of the entire pure-play foundry market throughout the year.

As China's pure wafer foundry market grew by 41% in 2018, its share of the global total increased by 5 percentage points year-on-year to 19%, exceeding the share of the Asia-Pacific region. Overall, China basically accounted for all the growth in the pure wafer foundry market in 2018.

In 2018, all major pure-play foundries achieved double-digit revenue growth in China, with TSMC benefiting the most. Following a 44% increase in 2017, TSMC's sales in mainland China soared again by 61% in 2018 to $6 billion. The mainland market was also basically the main source of TSMC's sales growth last year, with sales increasing from 9% in 2016 to 18% in 2018.

As China's share of the pure-play foundry market has grown rapidly (from 11% in 2015 to 19% in 2018), it has attracted many pure-play foundries to expand IC production in China. Each of the world's seven largest pure-play foundries plans to increase wafer manufacturing output in China, including TSMC, GlobalFoundries, UMC, Powerchip and TowerJazz, the five non-mainland Chinese foundries.

Semiconductor Equipment

SEMI pointed out that due to the surge in wafer fab investment in 2018, mainland China surpassed Taiwan to become the world's second largest semiconductor equipment consumer market, second only to South Korea.

On the supply side, although my country's semiconductor equipment has a certain industrial foundation, there is still a big gap in technical strength compared with foreign countries. Even in the field of IC packaging and testing, which has a relatively high level of development, there is still a big gap between my country and the advanced international level. In particular, the market for equipment such as single crystal furnaces, oxidation furnaces, CVD equipment, magnetron sputtering coating equipment, CMP equipment, photolithography machines, coating/development equipment, ICP plasma etching systems, and probe stations is almost dominated by foreign companies. In addition, the number of domestic semiconductor equipment companies in my country is not small, but they are not strong overall.

At present, domestic semiconductor equipment has made some breakthroughs in some areas, but is generally lagging behind. Especially compared with Applied Materials, ASML, etc., the strength of domestic semiconductor equipment companies is still relatively weak. Most companies cannot reach the 10nm process that has been mass-produced internationally. Some companies have made breakthroughs to 28nm or 14nm processes, but the stability of use is far behind that of international giants.

The Chinese mainland market has a huge demand for semiconductor equipment. However, in such a large market, the share that Chinese mainland IC equipment manufacturers can occupy is at most 5%. This huge market capacity forms a sharp contrast with the extremely limited equipment output level. As a result, we have to spend a lot of foreign exchange to purchase advanced equipment from American, Japanese and European manufacturers, making trade deficits and industrial security issues difficult to avoid.

The degree of mainland China's thirst for semiconductor equipment can also be seen from the figure below. In the past decade (the figure starts from 2004), the global IC and component manufacturing, packaging and testing factories have steadily increased their investment in equipment year by year. In 2017, global related manufacturers invested a total of US$56 billion in purchasing various equipment, which is a 38% increase from US$40 billion in 2016. This increase is very large.

The reason for such a large increase in 2017 is that the global semiconductor industry has recovered slowly and grown at a low speed before 2014 (due to the economic crisis in 2008, the semiconductor industry was sluggish for several years and did not resume positive growth until 2011, but the annual growth rate was only about 1%). Since 2015, the growth rate has increased rapidly, making the global semiconductor industry hot again. Against this background, global semiconductor equipment spending in 2017 increased by 38% year-on-year.

The above are the global driving factors. In addition, there is another huge driving force, which is the rapid follow-up of the semiconductor industry in mainland China. In 2014, the integrated circuit industry development outline was launched, and the "Big Fund" was established in the same year. With the strong promotion and support of the central and local governments, a number of wafer foundry projects were launched and planned. Currently, about 30 have been built and planned. This also led to the rise of IC design and related service industries. In 2018, there were nearly 1,700 IC design companies in mainland China. In addition, it also boosted the enthusiasm of packaging and testing companies in the downstream of the industry chain to expand production lines and purchase advanced equipment to cope with the explosive growth of upstream companies and potential customers.

Faced with this situation in which a large amount of funds poured in and many large projects were quickly launched in a relatively short period of time, some people call it the Great Leap Forward in the semiconductor industry. Regardless of whether it is a Great Leap Forward or not, the objective situation requires us to vigorously develop the semiconductor industry. However, while seeking leapfrog development, the issue of industrial safety should not be ignored: due to the huge demand for semiconductor equipment in mainland China, and this demand is still increasing, and correspondingly, as mentioned above, in the next few years, the equipment of local manufacturers in my country will account for no more than 5% of the global market share, and it is mainly low-end and mid-range equipment. If this situation continues, industrial safety will face challenges.

Conclusion

In summary, driven by the IC design industry, my country's semiconductor manufacturing is booming. However, behind the bustle, there are also hidden worries. We need to proceed steadily, lay a solid foundation, and develop step by step.

By Zhang Jian, Semiconductor Industry Observer

*This article was originally created by the public account Semiconductor Industry Observation (ID: icbank). If you need to reprint, please add WeChat ID: icbank_kf01, or reply to the keyword "reprint" in the background of the public account, thank you.

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