China's analog ICs usher in new development opportunities

Source: Content from "GF Securities", analysts Xu Xingjun/Wang Lu, thank you.

Analog IC is an integrated circuit that processes analog signals. Analog IC is a sub-category of integrated circuits. According to the different forms of processed signals, integrated circuits can be divided into analog IC and digital IC.

Among them, analog ICs account for about 15% of the integrated circuit market size, and the market size in 2017 was approximately US$53.1 billion.

Although analog ICs and digital ICs are both integrated circuits, they have significant differences in the types of signals they process and their industry characteristics. Integrated circuits can be divided into analog ICs and digital ICs based on the signals they process. Integrated circuits that process analog signals can be defined as analog ICs.

▪Analog IC: Integrated circuits that process continuous natural analog signals such as sound, light, electricity, electromagnetic waves, speed and temperature are usually analog ICs. Product types are mainly divided into two categories according to their functions: signal link chips and power management chips. Representative companies include Texas Instruments, ADI, etc.

▪ Digital IC: An integrated circuit that processes digital signals of discrete electrical "1" and "0" signals is a digital IC in the usual sense. Product types are mainly divided into memory, logic IC and micro components according to their functions. Representative companies include Intel, Qualcomm, Micron, etc.

Analog IC consists of two modules: power management and signal link. The "0 and 1" characteristics of digital signals give digital circuits powerful logical calculation capabilities and convenient storage capabilities.

Analog signal potentials are relatively polymorphic, making it difficult to store and perform addition, subtraction, and logical calculations. Therefore, unlike digital ICs that store and provide computing power, analog ICs have two main uses:

Power Management:

Chips, components, and circuit systems require different normal operating voltages. Analog ICs can boost and reduce the fixed voltage provided by batteries and power supplies, and stabilize the voltage. Systems that require power supply basically require power management chips, so the market space is relatively large. At the same time, since the technical indicators are basically stable and the technology is updated and iterated slowly, the barriers are relatively low, and domestic companies have more layouts.

Signal link:

A bridge connecting the real world and the digital world, it converts actual natural signals such as electromagnetic waves, sound, temperature, and light signals received by antennas or sensors into multi-bit digital signals for subsequent processing by digital signal processors.

The RF front-end chips need to keep pace with the advancement of communication technology, and the technology is updated and iterated at a high speed, with high barriers.

Power management chips account for the majority of analog ICs. Since almost all electronic systems require power supply, power management chips account for a relatively high proportion of the overall analog IC market, accounting for approximately 53% in 2017 (standard power ICs and power ICs for analog ASSPs), with a market size of approximately US$28.14 billion.

The application of power management in home appliances and industrial applications is relatively mature, the technology updates and iterations are slow, and the technical barriers are relatively low. There are many domestic manufacturers, including Shengbang Electronics, Silergy, Will Semiconductor, Fuman Electronics, and Zhongying Electronics.

Signal link chips can be subdivided into non-powerIC analog ASSP, amplifiers, comparators, data conversion chips, etc., which accounted for 47% in 2017. There are relatively few domestic manufacturers, mainly Huawei HiSilicon and Shengbang Shares.

▌ Analog ICs have unique properties compared to digital ICs

Although digital ICs and analog ICs belong to the category of integrated circuits, their basic working principles are completely different. The difference in basic working principles determines the different product characteristics, design ideas, process selection and market distribution of digital ICs and analog ICs.

The analog integrated circuit industry has the following four characteristics: Demand side: downstream demand is dispersed and the product life cycle is long. Supply side: tends to be mature and special processes, with eight-inch production lines as the main supply.

Competitive side: The competitive landscape is fragmented, and there is little competitive pressure between manufacturers. Technical side: The industry has high technical barriers and focuses on experience and people.

This chapter will elaborate on the above four characteristics of analog integrated circuits in more detail by comparing them with digital ICs.

Demand is dispersed, differentiation is superimposed on the weak competition market with a long life cycle

Analog IC products are divided into two major modules: signal link and power management. They are basically used in major electronic systems, involving downstream applications such as communications, automobiles, industrial control and medical, and consumer home appliances.

In digital circuit systems, power management, voltage regulation and other functions are also provided.

Therefore, analog IC applications are more widely dispersed. In terms of product layout, digital enterprises mainly focus on the "star downstream" to achieve rapid growth of the company. The scale of the single downstream market of analog is relatively small, so enterprises achieve revenue and market share growth through a wide range of layouts.

There are multiple performance parameter compromises in the design process, and product indicators in a single field are still diverse. Strictly speaking, the overlap rate of manufacturers' products is low. Digital IC functions mainly provide three functions: storage, logic, and computing power. Except for the logic function, the performance evaluation indicators are relatively clear, that is, to achieve the maximum storage space and computing power at a lower cost.

Therefore, digital enterprises can continuously increase their market share by improving product performance. However, analog products are different. They have diverse functions and numerous evaluation indicators. There is no analog chip with superior performance in the strict sense.

For the low-noise amplifier chip in the RF front-end circuit, there are multiple evaluation indicators such as noise figure, power consumption, linearity, operating bandwidth, and cost. This also leads to low product overlap and less competition among manufacturers.

Analog IC products have a long life cycle, and once they are introduced into the product market, stable chip shipments can be achieved.

Demand level:

The downstream automotive and industrial uses of analog products mainly require reliability and safety, and prefer products with mature and stable performance. At the same time, the qualification certification is relatively strict, generally not less than one and a half years.

Supply level:

Advanced processes have little driving effect on analog products and are basically not driven by Moore's Law. Therefore, the performance updates and iterations of analog products are slow.

Therefore, the life cycle of analog products is relatively long, generally not less than 10 years. The famous audio amplifier chip NE5532 has a life cycle of up to 30 years and is still the standard chip for many audio equipment.

Weak competition:

Competition pressure among analog manufacturers is relatively small, and gross profit margins are stable. The downstream demand of the analog integrated circuit industry is dispersed, the overlap rate of manufacturers' products is low, and the chip life cycle is long.

Therefore, unlike digital companies that rely on process advances to improve product performance and seize "star downstream" to increase market share through heavy capital strategy, the competitive pressure among analog companies is relatively small, the competitive landscape is relatively fragmented, and manufacturers have a wide range of products (Texas Instruments has 100,000 analog integrated circuit chips). They rely on huge and fragmented downstream demand to achieve revenue growth, and at the same time, the manufacturers' gross profit margin level is characterized by long-term stability.

It tends to be mature and has special technology, mainly 8-inch production lines.

Process:

Digital prefers CMOS advanced processes to achieve performance improvements, and analog IC processes are diverse. Its mature processes and special processes lead to analog IC production lines being dominated by 8-inch wafers.

Digital IC:

Advanced processes bring performance improvements and economies of scale. Digital advanced CMOS processes can bring less parasitic capacitance and faster charging and discharging speeds to digital circuit design.

This will provide greater computing power. At the same time, the cost of advanced process technology is relatively high, and the output of 12-inch wafers needs to be increased to achieve economies of scale and share costs.

Analog ICs:

Using mature processes or special technologies, the supply is mainly based on 8-inch production lines.

Analog designs below 65nm CMOS process face the problems of being unable to achieve high gain and excessive process mismatch.

Therefore, in the current design scenario where there is no need for integration with digital circuit SOC, the use of large-size CMOS process or high-gain and low-noise III-V semiconductor process is still the mainstream choice for analog process. Among them, the famous RDA6212 GSM-PA chip uses GaAs process to achieve high efficiency and low power consumption.

Foundry wafers are mainly produced on 8-inch production lines, and TI is the only company in the world that has two 12-inch wafer production lines.

The industry has high barriers and is people-oriented.

Both digital ICs and analog ICs are integrated circuits. The process from polysilicon to application in the whole machine is complicated and tedious. Each step will affect the final product performance. Integrated circuits themselves belong to an industry with relatively high barriers.

The gap between analog IC and digital IC processes is mainly reflected in the design stage.

▌ Looking at the current development opportunities of analog IC from the upstream and downstream

Downstream demand: Demand for automobiles and communications has increased, and the industry has entered the fast lane

According to ICinsights' forecast, among the downstream applications of analog circuits, communication analog chips and automotive electronics will show the fastest CAGRs of 7.4% and 7.0% respectively until 2020. The overall market size of analog circuits will show an annual CAGR of 6.6% from 2017 to 2022, which is higher than the annual CAGR of 5.1% for integrated circuits.

We believe that the downstream demand of the analog circuit industry is dispersed and less affected by a single downstream industry. Therefore, against the backdrop of the gradual maturity of smartphones, the market size can still rise against the trend.

In the short term, the market will benefit from the increase in the number of base stations and structural changes in the RF front-end links of smartphones under the 5G communication revolution, and in the long term, it will benefit from the general trend of automotive electrification.

The analog circuit industry still has high growth potential and investment value.

According to McKinsey's forecast, analog IC products will account for approximately 29% of automotive semiconductors in 2020, with a market size of approximately US$11.43 billion.

According to estimates by market research firm Gartner, the global automotive semiconductor market was approximately US$40 billion in 2018 and showed a rapid growth trend.

We are optimistic about the potential of automobiles to replace mobile phones and become the next generation of important electronic terminals. Semiconductors and electronic products will continue to transform and penetrate the automotive market. The two major trends of automobile electrification and intelligence are clearly certain.

Domestic new energy vehicles and autonomous driving started early, and the number of related companies is gradually increasing, which is expected to drive the rapid development of the domestic upstream automotive semiconductor industry.

Upstream supply

In the short term, the upstream capacity is sufficient, and there is no need to worry about the increase in analog IC volume. Eight-inch wafers are the main supply, and the impact of the order transfer trend is still small. From the perspective of upstream supply, the upstream raw materials of integrated circuits are mainly wafer materials, and wafers are divided into 6-inch, 8-inch and 12-inch.

Since analog ICs prefer mature processes with lower process costs, the current wafer supply mainly uses 8-inch wafers. According to SEMI data, if the foundry capacity is counted, analog capacity accounts for about 11% of the overall capacity. After converting the foundry capacity, analog products account for about 22% of the capacity.

IDM companies are transforming into Fablite, capital expenditure is slowing down, and global 8-inch production capacity is stabilizing.

According to SEMI statistics, most of the global 8-inch wafer production capacity is owned by IDM companies, accounting for about 53% in 2016. After 2012, the world's major 8-inch IDM factories reduced capital expenditures and outsourced part of the process to foundry companies (such as TSMC), resulting in a slowdown in the growth rate of global 8-inch production capacity. In 2016, the 8-inch wafer production capacity was 5151kwpm. Between 2012 and 2016, the wafer production capacity only increased by 2.2%, and the proportion of 8-inch wafer production capacity tended to stabilize at about 30%.

There is still room for improvement in analog capacity, and the industry recognizes that demand is improving and capacity utilization is increasing

Unlike storage products and discrete device products, the capacity utilization rate of analog products is still relatively low.

Assuming that analog production capacity is fully released, a production capacity supply of 1,355 kwpm can be achieved. If the analog products grow at a compound annual growth rate of 6.6% from 2017 to 2022, the production capacity will be sufficient until the end of 2019.

The domestic analog dual-line is expected to be put into production before 2020, and production capacity will continue to be boosted.

The construction of domestic 8-inch wafer fabs is still ongoing. It usually takes two years from construction to completion. Therefore, 2018 and 2019 will see a small peak in the production of domestic 8-inch wafer foundries.

Its newly added 8-inch production lines in mainland China are mainly for analog products. SMIC's Tianjin 8-inch plant - T2/T3 is expected to have a monthly production capacity of 150,000 pieces, mainly used for the production of fingerprint recognition, power management chips and image sensors.

Tacoma's Nanjing 8-inch plant 1 has a monthly production capacity of 40,000 pieces, of which 50% are used for OEM of analog products.

Dalian Universe Dalian 8-inch Factory and Yandong Beijing 8-inch Factory are mainly engaged in the production of power semiconductors, with monthly production capacities of 20,000 and 50,000 pieces respectively.

Therefore, with the full production of SMIC's Tianjin 8-inch line (T2/T3) and Tacoma's Nanjing 8-inch plant, the monthly analog chip production capacity will be no less than 95,000 pieces. It is expected that the wafer supply will remain sufficient in 2020.

▌ Supply and demand shift eastward, and the domestic analog IC industry is entering a golden age of growth

Huge demand and low self-sufficiency rate, the current situation is mixed

The trade deficit in semiconductors continues to widen, and domestic demand for integrated circuits is strong. The integrated circuit industry is a strategic and basic industry for national economic and social development, and an important driving force for China's information technology development and industrial transformation.

According to ICinsights statistics, the demand for integrated circuit industry in mainland China reached US$35.1 billion in 2017, accounting for 44.8% of the global market size. The value of integrated circuit imports to mainland China exceeded US$200 billion for the first time in 2013 and hit a new high of approximately US$260.1 billion in 2017, with a trade deficit of US$193.2 billion.

The low self-sufficiency rate situation still exists, and the replacement space for analog ICs is expected to be US$27.3 billion in 2020.

At present, the domestic self-sufficiency rate of integrated circuits was less than 13% in 2015, which is still a long way from the goal of 40% to be achieved by 2020. ICinsights predicts that the self-sufficiency rate of integrated circuits in mainland China is expected to reach 20.9% in 2020.

In 2017, the domestic self-sufficiency rate of analog integrated circuits was less than 10%. According to HIS's forecast, the domestic analog IC market size is expected to reach US$3.3 billion in 2020. If full self-sufficiency is achieved, the replacement space will be approximately US$27.3 billion.

Policies, funds and talents create a three-dimensional resonance, and domestic marginal improvements are obvious

The long-term low self-sufficiency rate and huge trade deficit have forced the introduction of intensive policies. In 2015, three national policies were launched, among which "Made in China 2025" clearly set a goal: to achieve a self-sufficiency rate of 40% for integrated IC design in 2020 and 70% in 2025.

It is expected that integrated circuit-related support policies will continue to be introduced in the future. The policies will help improve the industry's supporting resources and facilities, and continue to drive the growth of the domestic integrated circuit industry.

The capital intervention continues to be effective, the first phase seed effect is obvious, and the second phase fundraising will help a new round of growth.

The National Integrated Circuit Industry Investment Fund (referred to as the "Big Fund") was established in September 2014. The first phase of the fund raised 138.7 billion yuan. At the same time, driven by the Big Fund, various regions proposed or established sub-funds with a total scale of over 300 billion yuan.

The big fund mainly invests in leading enterprises and does not make angel or venture capital investments.

According to the official WeChat public account of Huaxin Investment, the second phase of the Big Fund is under preparation and will once again play a role in promoting the domestic integrated circuit industry.

The reform of the talent supply side is gradually taking effect, driving the continuous improvement of domestic academic research capabilities.

In 2017, there were approximately 140,000 people employed in integrated circuit design in my country, with an average output value of approximately US$209,000 per person.

Assuming that the domestic integrated circuit industry is in a relatively early stage, and based on the average annual revenue of US$209,000 per employee, if the domestic integrated circuit design industry maintains an average annual high growth rate of 30%, the domestic integrated circuit output value in 2020 will be 427.5 billion yuan (with a self-sufficiency rate of approximately 40%), and approximately 310,000 employees will be needed.

Data from 2015 showed that there were 19,192 undergraduate graduates, 8,084 masters, and 679 doctoral students in microelectronics at universities across the country, totaling about 28,000 people. By 2020, the talent gap will still be large.

Semiconductor industry in Europe and the United States is losing its vitality, and mergers and acquisitions are accelerating

From the perspective of venture capital: the number of new companies in Europe and the United States is gradually decreasing, while domestic integrated circuit design companies are growing rapidly.

In the early days of the semiconductor industry, it was extremely expensive to purchase EDA tools. Often, the first few rounds of investment were invested in the purchase of EDA design tools. At the same time, the product development cycle was long and had a certain failure rate. Therefore, foreign investment enthusiasm in the semiconductor industry was not high.

There are fewer new entrants in the overall market, and the market players are still the original old semiconductor companies, and the market structure is becoming mature.

The situation in China is the opposite. Venture capital companies still recognize the early investment value of domestic integrated circuit start-ups. The number of domestic integrated circuit design companies is showing a rapid growth trend. Currently, the world's newly established Fabless design companies are mainly in China.

Market size perspective:

The European and American fabless design industry market is showing an overall trend of maturity, with the growth rate slowing down significantly after 2014.

After 2012, due to the shift in downstream market demand, the entire semiconductor manufacturing and design industry also showed a trend of shifting to Asia, especially mainland China. The scale of the European and American integrated circuit design market has gradually stabilized, and the overall market is basically in a state of zero growth. China is currently the fastest growing market for integrated circuit design, with a growth rate of more than 20%.

The demand for analog circuits is widespread and the competitive pressure is relatively low. In the future, with the rapid growth of domestic downstream and the gradual overcoming of technical difficulties, domestic analog IC design is also expected to enter a rapid growth stage.

The downward phase of the semiconductor industry cycle in Europe and the United States has led to mergers and acquisitions in the industry, indicating that the industry is gradually maturing and the future market growth rate is in mainland China.

From 2011 to 2016, the semiconductor industry was in the rapid decline phase of its fifth major cycle. Except for 2014, when it achieved positive growth, the growth rates in the remaining years were either zero or negative.

At the same time, the gradual failure of Moore's Law hit industry sentiment, and the sluggish market accelerated industry integration, triggering a wave of mergers and acquisitions in Europe and the United States in 2015 and 2016.

The semiconductor industry and analog IC industry in Europe and the United States are gradually developing into a monopoly pattern with strong companies and becoming more mature. In contrast, domestic semiconductor startups are constantly being established, market demand is constantly growing, and the market is still highly dynamic.

Evidence of Taiwan's analog IC growth trajectory:

Downstream demand is the core driving force. As a latecomer, Taiwan's IC growth trajectory is of great significance for reference. The integrated circuit industry in Taiwan started from the packaging link in the 1970s, developed into wafer foundry in the 1980s, and gradually became an important force in the global integrated circuit industry.

In 2017, there were 240 fabless integrated circuit design companies in Taiwan, China. It is estimated that the IC design industry in Taiwan will achieve revenue of NT$653.8 billion (approximately US$21.79 billion, excluding storage business) in 2017, accounting for 19% of the global IC design market size and ranking second in the world.

Taiwan's integrated circuit industry started late, and its targeted rather than generalized layout led to Taiwan's IC surpassing attributes significantly during the period of rapid development of the downstream market.

In 2016, Taiwan's IC design revenue was US$20.2 billion, accounting for 19.4% of the global IC design revenue. Taiwan's analog IC industry started relatively late, and initially focused on the rapidly developing downstream market (mainly PC power management chip and display driver chip manufacturers).

Taiwan and mainland China are both latecomers in the semiconductor industry. The rapid development of Taiwan's semiconductors has important reference significance for the development and early layout of my country's integrated circuits.

In the early days, Taiwan's analog industry was mainly focused on 3C products, mainly mid- and low-end power management chips and LCD driver chips.

Taiwan's analog IC companies mainly make targeted layout in the 3C market. In 2006, Taiwan's analog IC companies (Peihen Semiconductor, Richtek, Analog Technology (AAT), Motech Technology, Aimtron and GMT) obtained about 90% of their revenue from the technology terminal market, and 10% came from general-purpose analog IC products.

The largest applications include notebook computers (36%) and LCD display driver products (15%). Power management products are mainly DC-DC converters and voltage regulators (LDO) chips in 3C electronic systems.

Directed layout is the trend-setter in the PC era, and the disadvantages of single layout are prominent after the economic downturn

The rapid rise of Taiwan in the PC era has led to rapid growth in the overall technology industry and the semiconductor industry.

Taiwan's integrated circuit industry started from the packaging stage in the 1970s and developed into wafer foundries in the 1980s.

In the 1990s, with the trend of economic globalization and increasingly fierce corporate competition, international brand computer manufacturers such as Dell, IBM, and HP gradually outsourced their production and R&D to Taiwan, China.

Mainland PC companies in Taiwan, such as Asus, Acer, MSI and a series of other computer manufacturers were established between 1985 and 1989. Catching up with the wave of PC development, Taiwan's semiconductor industry has risen rapidly to meet the rapidly growing downstream demand.

The electronics industry shifted to mainland China, the PC industry gradually matured, the disadvantages of downstream-oriented layout gradually became apparent, and Taiwan's analog IC design industry gradually matured and declined.

In the decade from 2000 to 2010, Taiwan's manufacturers achieved rapid growth with an annual compound growth rate of no less than 15% through targeted layout of power management and display driver chips for the fast-growing downstream PC products.

After 2010, global PC shipments gradually matured. With the transfer of the PC industry to mainland China, domestic Lenovo computers gradually rose, and Taiwan's analog IC manufacturers no longer achieved high growth rates.

The golden decade in which downstream localization of analog circuits in Taiwan brought upstream analog opportunities proved that where downstream demand is, there are opportunities for analog integrated circuits.

▌ Mainland China is the only way for the third semiconductor transfer

The localization of the black-and-white electronics industry chain led to the first transfer of global semiconductors to Japan.

The global semiconductor industry originated in the United States. In the early days, it was mainly used in the military field. Later, with the gradual miniaturization and cost reduction of chips under Moore's Law, it began to be used in civilian fields.

Before and after World War II, the United States was the most important semiconductor manufacturing region, mainly for military purposes (TI focused on defense system electronics in 1940, and Fairchild Semiconductor's silicon transistor orders in 1956 were mainly used for the XB-70 bomber).

In the 1980s, Japan was the world's major home appliance (mainly black appliances) production region, with Sony, Sharp, Panasonic and Toshiba as the four major representatives (in 2011, the four major brands still accounted for 31% of the global market share). At the same time, Japan's semiconductor policies and financial support were in place, and between 1986 and 1991, it achieved a global market share that surpassed that of the United States.

The downstream localization of PC and mobile phones shifted to South Korea and Taiwan for the second time.

The rapid growth of the PC industry and the mobile phone industry has driven the rapid growth of the semiconductor industry in Taiwan, China and South Korea after 2000. ASUS and Acer, two major localized downstream companies, have driven Taiwan to become the second largest region for integrated circuit design and the largest region for foundry manufacturing (ASUS + Acer had market shares of 14.7% and 14.1% respectively in 2012, ranking the top two in the world).

Samsung Semiconductor has benefited even more from the era of feature phones and smartphones (Samsung's global mobile phone market share was 40% in 2012, ranking first in the world).

As the home appliance industry gradually matured, the global semiconductor industry gradually shifted to Asian regions such as South Korea and Taiwan.

Currently, mainland China has long been the largest electronic system manufacturing and production area, with extensive downstream demand.

The market share of various types of domestic electronic products in mainland China has reached a certain scale. The four major domestic smartphone brands (HOVM) have a global market share of 40%, the market share of the video surveillance industry is no less than 40%, and the market share of tablet computers and LCD TVs is about 35%.

The market share of domestic notebook computers is no less than 25%. In the long run, under the background of the general trend of domestic substitution, domestic integrated circuit companies are expected to benefit from the vigorous development of local downstream. At the same time, since power management and signal links are basically used in various electronic products, the demand is broad, and the performance indicators are relatively mature and stable, the competitive pressure from foreign countries is relatively small, and they are expected to be the first to achieve rapid development.

*The content of the article represents the author’s personal opinion and does not represent Semiconductor Industry Observer’s agreement or support for that opinion.

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