Why does China develop memory chips?

Latest update time：2020-03-21

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Source: Content from From "Everbright Securities Electronic Research Team", thank you.

The necessity of developing memory chips lies in their importance. The importance of memory chips lies in the fact that they are the granary of electronic systems, the carrier of data, and are related to data security; the size of the market is large enough, accounting for about one-third of the total semiconductor market. Using the analogy of marching to war, the development of memory chips can be said to be the preparation of food and grass before the troops move.

Important: The granary of electronic systems

A basic electronic system mainly consists of the following parts: sensors, processors, memory chips and actuators. The sensor is responsible for acquiring data, the processor is responsible for processing data, the memory chip is responsible for storing data, and the actuator is responsible for executing the results of the processor.

We usually have more preferences for electronic products that run faster and can run larger application software. In addition to the processors we are familiar with, the core components that determine the performance of these electronic devices are the reading speed capabilities provided by the memory chips, which is also one of the important influencing factors.

Memory chips can be simply divided into flash memory and memory. Flash memory includes NAND FLASH and NOR FLASH, and memory is mainly DRAM. In order to more conveniently understand the role of memory chips, if the execution of a complete program is likened to the manufacture of a product, then the memory chip is equivalent to a warehouse, and the processor is equivalent to a processing workshop. In order to increase the speed of product manufacturing, improving the efficiency of the processing workshop is one way, that is, improving the performance of the processor; another way is to shorten the time from the warehouse to the processing workshop, set up a temporary small warehouse, and stack the raw materials of the products currently produced, which can greatly shorten the manufacturing time. The large warehouse is equivalent to the flash memory in the memory chip, and the small warehouse is equivalent to the memory in the memory chip. They are indispensable for the operation of electronic products, so they have a high degree of overlap in the application range of products.

Memory is different from flash memory. Although they are both carriers of data required by the processor, the role of memory is to provide a space for processing the data currently needed. Its space capacity is smaller than that of flash memory, but it reads data faster. Just like a VIP channel, it provides a fast channel for the data that needs to be processed most at the moment, allowing the processor to quickly obtain and execute this data.

The difference between NAND FLASH and NOR FLASH, both flash memories, lies in their different application fields. NAND FLASH is mainly used in high-end large-capacity products such as smart phones, SSDs, and SD cards, while NOR FLASH is mainly used in low-end products such as feature phones, MP3s, USB keys, and DVDs. In addition, NOR FLASH is also used in automotive electronics, TDDI, and AMOLED in smart phones.

As various applications become more and more complex, and various emerging scenarios are constantly being implemented, such as artificial intelligence, the Internet of Things, big data, and 5G, the data that needs to be stored is also increasing. At present, information data is no longer just a number, but an asset. The use of big data has made Internet companies a data processing center. The competition between Internet companies is a competition for traffic. Whoever has the data wins the world. For example, Tencent has built a complete industrial ecological chain by relying on its trump card to attract traffic: WeChat. Through the analysis and processing of big data, it can achieve accurate portraits of hundreds of millions of users, thereby conducting precision marketing.

Huge: The weathervane of the semiconductor industry

Judging from the year-on-year growth rate of global semiconductor sales, the global semiconductor industry has a cycle of roughly 4-6 years, and the boom cycle is closely related to factors such as the macro economy, downstream application demand, and its own production capacity and inventory. Since 2010, memory chips have gradually become the main driving force for the development of the semiconductor industry.

According to WSTS data, the global semiconductor market size in 2017 was US$408.691 billion, a year-on-year increase of 20.6%, breaking the US$400 billion mark for the first time and setting a new high in seven years (the annual increase was 31.8% in 2010).

Among them, the sales of integrated circuit products reached 340.189 billion U.S. dollars, a year-on-year increase of 22.9%, which was beyond the industry's expectations and accounted for 83.2% of the global semiconductor market. The sales of memory chip circuit products reached 122.918 billion U.S. dollars, a year-on-year increase of 60.1%, accounting for 30.1% of the global semiconductor market, surpassing the logic circuit with the largest share in history (101.413 billion U.S. dollars), which also confirmed the industry's saying that memory chips are the thermometer and weather vane of the integrated circuit industry.

Players: High market concentration

In the entire memory chip market, DRAM products account for about 53%, NAND Flash products account for about 42%, and Nor Flash accounts for only about 3%. DRAM is mainly divided into: standard (PC), server (Server), mobile (mobile), graphics (Graphic) and consumer electronics (Consumer) according to different downstream demands. NAND Flash is mainly divided into: memory card/UFD, SSD, embedded storage and others according to different downstream demands.

The memory chip market is highly concentrated, with DRAM, Nand Flash, and Nor Flash all showing an oligopolistic structure.

According to DRAMeXchange data, the DRAM market is mainly occupied by three manufacturers: Samsung, Hynix and Micron. Samsung's market share is about 48%, and the market share of Samsung + Hynix + Micron is as high as over 90%.

According to DRAMeXchange data, the major players in the NAND Flash market are Samsung, Toshiba, SanDisk, Micron, Hynix and Intel, with Samsung accounting for approximately 36% of the market share.

NOR Flash has undergone a major reshuffle in recent years. In 2016, Cypress had a market share of about 25%, Macronix had a market share of about 24%, Micron Technology had a market share of about 18%, Winbond had a market share of about 17%, and the mainland manufacturer GigaDevice ranked fifth, occupying a place. In 2017, Cypress and Micron announced their gradual withdrawal from the low-end NOR Flash market, focusing on self-production and self-use, high-gross-margin NOR Flash for automotive electronics and industrial control.

Supplement: The storage chip and the storage controller chip are two chips

This article mainly focuses on memory chips. Considering that memory chips and memory controller chips are easily confused, a brief introduction to memory controller chips is given here to help readers distinguish them.

Usually, the memory chips we refer to mainly refer to memory chips. In fact, the chips in the memory also include memory controller chips. Taking SSD products as an example, SSD usually includes PCB (including power supply circuit), memory chip NAND flash memory, main control chip, interface, etc., and a cache chip that is not necessary but still very important, that is, memory chip. If the memory chip is a warehouse, then the memory controller chip is the key to the warehouse, which is in charge of the safety of the granary. The memory controller chip controls the speed at which the processor reads and writes the information of the memory chip. Therefore, the memory controller chip contains the computer interface technology and the management technology of the memory chip, and plays a vital role in protecting the information security of the memory chip.

In terms of cost, NAND flash memory chips account for about 70% or more of the material cost of SSD hard disks. Memory chips are not necessary in SSD hard disks, which mainly depends on the type of main control, but equipping with cache can greatly improve the performance of SSD hard disks, especially write performance. The cost of the main control chip accounts for 10-15% of the SSD hard disk. It is not the most expensive component, but it is also very important.

In the early days, SSD storage controller chips were mainly produced by flash memory manufacturers, with Intel, Samsung and Micron in a three-way competition. With the development of independent storage controller chip manufacturers, the market has gradually developed into a situation of all-competing, with major manufacturers including Marvell, Silicon Motion, Phison, SandForce, Realtek, etc. In recent years, many SSD controller manufacturers have emerged in the field of domestic SSD controller chips, including Jiangbolong, Goke Micro, Yixin, Hualan Microelectronics, and companies that focus on the military and enterprise markets, such as Zhongbo and Yifang Information. In addition, there are subsidiaries established by Taiwanese manufacturers in the mainland, such as Phison established Zhaoxin Electronics in Hefei, and Hangzhou Lianyun Technology also has Taiwanese investment.

Why can mainland China develop memory chips?

Memory chips are a technology, capital, and talent-intensive industry. The adequacy of developing memory chips lies in the right time, right place, and right people. Right time: ① Low degree of branding; ② Moore's Law slows down; ③ Focus on IP and manufacturing. Right place: ① Manufacturing is shifting to China; ② Strong support from the state. Right people: ① Yangtze Memory, ① Hefei Changxin, and ③ Fujian Jinhua's three major storage projects are progressing smoothly. With the right time, right place, and right people, the development of memory chips in mainland China has entered an accelerated stage, and localization is just around the corner.

Time: Memory chip's own properties

1. Low branding

Memory chip products are different from most consumer products. They have typical commodity attributes, less differentiated competition, and the technical indicators of products produced by different companies are basically the same. They are highly standardized, so they are less branded and have low user stickiness.

Let’s take smartphones as an example. When purchasing smartphones, users will basically consider the brand and model of the processor, whether it is Qualcomm or MediaTek, but few people will consider whether the screen is LG or BOE, but only consider parameters such as screen size and resolution. This is similar to memory chips and panels. Users generally only consider the capacity of the memory chip, whether it is 64G or 128G, and few people will consider whether the memory chip is produced by Hynix or Toshiba. Therefore, for the memory chip industry, as long as the technical parameters meet the requirements, the substitutability rate of products from different brands is very high, which also provides the possibility for latecomers to overtake. The success of BOE in the panel industry also confirms this.

2. Moore’s Law is slowing down

Moore's Law states that if the price of integrated circuits remains unchanged, the number of transistors contained in them will double every 18-24 months, and the performance will also double. However, as the integrated circuit manufacturing process gradually approaches the physical limit, the development speed of advanced process chips has gradually slowed down, and Moore's Law is facing failure.

Currently, the advanced process of international giants has entered the mass production stage of 7 nanometers. Tech Insights predicts that it will reach 5 nanometers by 2020. However, the application of this cutting-edge technology is mainly concentrated in the manufacture of logic circuit processor chips.

Although the manufacturing process of memory chips is different from that of logic circuits, it also faces the bottleneck of Moore's Law approaching its limit, and even earlier than logic circuits. At present, it is difficult to further reduce the memory chip manufacturing process after it has developed to the 1x, 1y, and 1z (between 20nm and 10nm) stages, because with the improvement of the process technology, after reaching a certain level, the stability of the memory chip will decrease, and 10nm is generally considered to be the critical point. DRAM is still at the 1x and 1y levels and is expected to enter the 1z stage in 2020. The current NAND manufacturing process has basically reached its limit, and a new path has been taken to shift from 2D to 3D development. As Moore's Law slows down, the gap between domestic technology and international manufacturers is expected to gradually narrow. The current common 3D NAND in the world is 64 layers, while China's Yangtze Memory has achieved 32 layers, with only one generation of gap.

3. Focus on IP and manufacturing

The semiconductor industry has experienced a development from an integrated IDM model to today's design-manufacturing-packaging and testing foundry model. However, for memory chips, the current mainstream manufacturers still use the integrated IDM model, which is mainly determined by the characteristics of memory chips that focus on IP and manufacturing.

The difficulty of analog chips lies in their design, because analog chips cannot be verified through simulation like digital chips. They can only be improved through repeated tape-out and test results of finished products, and then feedback is given. Therefore, the R&D cycle of analog chips is long and the cost is high. The accumulation of experience of enterprises is very important. Major manufacturers TI and ADI have decades of history.

The difficulty of processors lies in architecture IP, ecosystem and manufacturing. Each of these is highly concentrated. The architectures are mainly X86 on the computer side and ARM on the mobile phone side, corresponding to Windows and Android systems respectively. Processor manufacturing is also the most advanced in semiconductor manufacturing. For CPUs and analog chips, the entry barrier is very high, and latecomers have obvious disadvantages.

The difficulty of memory chips lies in IP and manufacturing. In fact, any chip design must break through the IP blockade. The IP concentration of memory chips is lower than that of processors. It is slightly easier to obtain the IP of memory chips through a combination of cooperative licensing and independent research and development.

In terms of DRAM IP, domestic manufacturers started late, so their patent accumulation is relatively weak. However, as the DRAM field has become relatively mature, international capital investment has decreased. This provides an opportunity for China to continue to increase capital investment and achieve domestic substitution. Domestic manufacturers must accelerate technology iteration, make breakthroughs in higher technological fields and seize intellectual property rights as soon as possible, so as to gain stronger bargaining power with downstream manufacturers and increase product gross profit margins.

In terms of NAND IP, 3D NAND stacking technology is an upgrade from 2D planar technology. The gap between my country's 3D NAND stacking technology and major international manufacturers is relatively small compared to the DRAM field. The reason is that DRAM is relatively mature, while 3D NAND stacking technology is a new technology that has emerged in recent years. Therefore, the gap between my country's technology and the world's leading technology is not too big. However, in terms of IP reserves, domestic manufacturers are still at a disadvantage, and storage chip giants still have an overwhelming patent reserve advantage.

As mentioned above, memory chips have a low degree of branding and are standardized products with low dependence on the upper-level ecosystem. The main work of memory chip manufacturers is in the manufacturing link, and the scale advantage is very obvious. As Moore's Law slows down, the technological gap between China and foreign countries has narrowed, giving domestic manufacturers the opportunity to catch up.

Geographical advantage: domestic development opportunities

1. Manufacturing shifts to domestic markets

As semiconductors are shifting to China, international giants are setting up factories in mainland China or increasing the scale of their factories in China. According to SEMI data, it is estimated that between 2017 and 2020, there will be about 62 wafer fabs put into production worldwide, of which 26 are located in mainland China, accounting for 42% of the global total.

With the construction of a large number of wafer fabs in China, it will be conducive to promoting the development of domestic manufacturing, while driving the development of the entire industrial chain such as design, packaging and testing, materials, and equipment, and promoting the establishment of the domestic semiconductor industry ecosystem. Manufacturing is the most important link in memory chips, so the transfer of manufacturing to China will also be conducive to promoting the development of the domestic memory industry.

2. Strong national support

In June 2014, the State Council promulgated the "Outline for Promoting the Development of the National Integrated Circuit Industry", proposing the establishment of a national integrated circuit industry fund (referred to as the "Big Fund") to elevate the research and development of new technologies in the semiconductor industry to a national strategic level. It also clearly stated that by 2020, the gap between the integrated circuit industry and the international advanced level will gradually narrow, the average annual growth rate of sales revenue in the industry will exceed 20%, and the sustainable development capabilities of enterprises will be greatly enhanced; by 2030, the main links of the integrated circuit industry chain will reach the international advanced level, and a number of enterprises will enter the international first echelon and achieve leapfrog development.

According to TrendForce statistics, as of November 30, 2017, the Big Fund has made effective decisions on 62 projects involving 46 companies, with a cumulative effective commitment of 106.3 billion yuan and actual investment of 79.4 billion yuan, accounting for 77% and 57% of the total scale of the first phase, respectively, and the investment scope covers the upstream and downstream of the IC industry. The Big Fund has made full coverage of investment layout in all links of the industrial chain, including manufacturing, design, packaging and testing, equipment and materials, and the proportion of committed investment in each link to the total investment is 63%, 20%, 10%, and 7% respectively.

In addition to the National Integrated Circuit Industry Investment Fund, many provinces and cities have also established or are preparing to establish integrated circuit industry investment funds. Currently, more than a dozen provinces and cities, including Beijing, Shanghai, and Guangdong, have established local government funds specifically to support the development of the semiconductor industry. According to statistics from the National Integrated Circuit Industry Fund, as of June 2017, the local integrated circuit industry investment funds (including those under preparation) leveraged by the "Big Fund" reached 514.5 billion yuan.

At present, the second phase of the Big Fund has been launched, and the amount of funds raised is expected to exceed the first phase, which was 138.7 billion yuan. Ding Wenwu, general manager of the Big Fund, revealed that the Big Fund will increase the proportion of investment in the design industry, and will make investment plans around national strategies and emerging industries, such as smart cars, smart grids, artificial intelligence, the Internet of Things, 5G, etc., and try to support equipment and materials to promote their accelerated development. In addition, we expect that the second phase of the Big Fund will focus on areas such as memory chips, integrated circuit design and compound semiconductors.

Renhe: Three major projects progress smoothly with the gathering of talents

With the right timing, Moore's Law has slowed down and mainland manufacturers' technology has gradually caught up; with the right location, the country has strongly supported the storage industry and capital is no longer a bottleneck; and in terms of people, that is, talent, mainland projects have also made gratifying progress.

With the right time, right place and right people, the three major domestic storage projects, Yangtze Memory Technologies (NAND), Hefei Changxin (DRAM), and Fujian Jinhua (DRAM), are progressing smoothly and are expected to achieve mass production in the second half of 2018. 2018 is also expected to become the first year of mainstream development of domestic storage chips.

1. Yangtze Memory Technologies

Yangtze Memory Technologies Co., Ltd. is a national storage chip base project jointly established by Tsinghua Unigroup and Wuhan Xinxin, focusing on the research and development and manufacturing of 12-inch 3D NAND flash memory.

Renhe: Unigroup Guoxin Global Executive Vice President and Yangtze Memory Acting Chairman is Taiwan DRAM Godfather and former Inotera Chairman Kao Chi-Chuan. In April 2017, Kao Chi-Chuan said that 500 R&D personnel had gathered in Wuhan to invest in 3D NAND development, and also considered developing 20/18nm DRAM. In May 2018, Diao Shijing, former Director of the Electronic Information Department of the Ministry of Industry and Information Technology, joined Unigroup as Co-President. Prior to this, Peng Hongbing, former Deputy Director of the Electronic Information Department, had already served as Vice President of the Big Fund and Chairman of the Supervisory Board of Yangtze Memory.

Project progress: The initial investment exceeded US$24 billion, and an additional US$30 billion is expected in the future. In September 2017, the No. 1 production and power plant of the newly built National Storage Chip Base Project (Phase I) of Yangtze Memory was capped ahead of schedule. In February 2018, the clean room decoration and air conditioning, fire protection and other systems in the factory were installed. On April 11, 2018, Yangtze Memory officially launched the factory installation ceremony, and the equipment of North Huachuang has been successfully installed in the Yangtze Memory production line. In May 2018, a lithography machine ordered by Yangtze Memory from ASML of the Netherlands arrived in Wuhan. This lithography machine is worth up to US$72 million, or about RMB 460 million. In the next two years, Yangtze Memory's storage chip base will also import nearly 30,000 tons of precision instruments from all over the world to Wuhan.

Yangtze Memory announced in February 2017 that its 32-layer 3D NAND Flash chip had successfully passed the test and was expected to be put into production by the end of 2018, with a monthly production capacity of 300,000 pieces expected in 2020. At the same time, Yangtze Memory is also promoting 64-layer stacked 3D flash memory, striving to achieve large-scale mass production by the end of 2019, shortening the gap with the world's leading level to within 2 years.

Tsinghua Unigroup also plans to invest in two 12-inch production lines with a total capacity of 500,000 per month in Chengdu and Nanjing. It is also promoting the development of 20/18nm DRAM. The progress of DRAM is slower than that of NAND FLASH. It is expected that DRAM will be put into mass production as early as 2020.

2. Hefei Changxin

Hefei Changxin Memory was established by an agreement signed by GigaDevice, former SMIC CEO Wang Ningguo and Hefei Industrial Investment, with a project budget of RMB 18 billion.

Renhe: According to the introduction of Wang Ningguo, Chairman of Changxin Storage Technology Co., Ltd. and CEO of Ruili Integrated Circuit Co., Ltd. in the "National Integrated Circuit Major Project Entering Anhui Event" in April 2018, Ruili Integration, one of the implementation entities of the Hefei storage project, was established on July 13, 2016, with only one person at that time. After 21 months and 630 days, the current number of employees has reached 1,539, equivalent to 2.5 people reporting every day. This is a very fast growth in less than two years. Among the company's current employees, there are 447 Taiwanese compatriots and 1,013 employees from mainland China, accounting for two-thirds.

Project progress: GigaDevice is responsible for the development of 12-inch wafer mobile DRAM with 19nm process technology, with the goal of successfully developing it by the end of 2018 and achieving a product yield of no less than 10%. It is expected to be put into production in 2019. By then, Hefei Changxin will become China's first independent large-scale DRAM factory and the world's fourth company to break through the 20nm DRAM production technology. Hefei Changxin has completed the construction of the first plant in January 2018 and started equipment installation, and is expected to launch 19nm engineering samples by the end of the year.

The company's current technology level is about 5 years behind the world's leading level. If the company can achieve the development of 17nm technology as scheduled in 2021, the technology gap will be shortened to about 3 years.

3. Fujian Jinhua

Fujian Jinhua is mainly engaged in the research and development and production of niche DRAM, which is mainly used in the field of consumer electronics products. Although these industries have entered the stage of stock game, the market scale is huge.

Renhe: Chen Zhengkun, the helmsman of Fujian Jinhua, was originally the helmsman of Rexchip, a joint venture between Elpida and Taiwan Powerchip. After Elpida went bankrupt and was acquired by Micron, he moved from a Japanese semiconductor company to the American system. In terms of talent team, Jinhua Integrated Circuit adopts a combination of domestic and overseas talent recruitment and talent training. It is planned that the talent team will reach 1,200 people in 2018, and more than 800 people have been recruited so far. As the foundation of Jinjiang's integrated circuit industry is relatively weak, Jinjiang City takes the Jinhua project as the leader to build a "three parks and one zone" industrial development space carrier, and create an integrated circuit full industry chain ecosystem of design, manufacturing, packaging and testing, equipment and materials, and terminal applications. Its goal is to form an industry scale of 100 billion by 2025. It is reported that more than 20 industry chain projects such as Taiwan Siliconware, Taiwan G.SKILL, and Air Products and Chemicals of the United States have landed in Jinjiang, with a total investment of nearly 60 billion yuan, and the industry chain ecosystem is gradually taking shape. Taiwan Siliconware, which is under construction, is located opposite Jinhua Integrated Circuit and will focus on DRAM packaging and testing business.

Project progress: Fujian Jinhua's manufacturing technology work is mainly carried out by UMC. The process technology starts from 32 nanometers, with a planned production capacity of 60,000 pieces per month. Trial production is expected to start in September 2018. The company aims to eventually launch 20 nanometer products, and plans to complete the fourth phase by 2025 with a monthly production capacity of 240,000 pieces.

What impact does the development of memory chips in mainland China have?

Price: Price reduction may become an inevitable trend

The memory chip market is expected to continue to maintain high growth, driven by downstream applications such as smartphones, AI, data centers, automobiles, and the Internet of Things. Micron expects that from 2017 to 2021, the compound annual growth rate of DRAM demand will reach 20%, and the compound annual growth rate of NAND bit demand will reach 40-45%.

The price increase of memory chips started with the shortage of supply, and whether it will continue depends on supply and demand. Demand is growing slowly, while supply will increase suddenly. With the release of production capacity of international manufacturers and the steady progress of mainland storage projects, the price of memory chips may fall.

DRAM

Demand side: The continuous upgrade of running memory of downstream smartphones from 1G to 2G, 3G, and 4G has led to a rapid growth in demand for mobile DRAM. At the same time, the rapid development of data centers has promoted the growth of demand for server memory.

Supply side: DRAM is mainly controlled by Samsung, Hynix, Micron and other companies, showing an oligopoly pattern, with Samsung's market share of about 45%. Before Q3 2016, DRAM prices continued to fall, and all DRAM manufacturers did not dare to expand production rashly.

Price: The shortfall in supply has caused DRAM prices to soar since Q2/Q3 2016, with the DXI index rising from 6,000 points to 30,000 points. The DXI index was created by TrendForce in 2013 to reflect mainstream DRAM prices, and it remains high. From the spot price point of view, 4G product prices have fallen since Q1 2018, but 2G product prices remain strong.

In the short term, under the influence of the weak smartphone shipments in mainland China, the demand for mobile memory has declined. At the same time, the three major DRAM manufacturers will start to use 5-7% of the new production capacity in 2018 in the second half of the year. With the weakening demand and the increase in supply, the tension between supply and demand has been eased, and the price of mobile memory has fallen. However, with the development of global data centers, the demand for server memory is still strong. We expect that the price of server memory will continue to rise in 2018. According to the forecast of the Korea Industrial Technology Promotion Agency, without considering mainland manufacturers, the price of 4Gb DARM will drop from US$4.71 in 2017 to 4.39 yuan in 2018, a decrease of 6.8%.

In the long run, as the capacity of the three major manufacturers is released and the DRAM projects of Changxin in Hefei and Jinhua in Fujian are steadily advancing, the supply will increase rapidly after the capacity is opened, while the demand will grow slowly. At that time, oversupply may trigger a price war and cause a sharp drop in DRAM prices. According to the forecast of the Korea Industrial Technology Promotion Agency, the price of 4Gb DRAM will drop sharply to US$3.53 by 2019; due to the influence of mainland manufacturers, it is estimated that South Korea's DRAM revenue will decrease by US$6.7 billion in five years.

NAND Flash

Demand side: The continuous upgrade of downstream smartphone flash memory from 16G to 32G, 64G, 128G and even 256G has led to a rapid growth in demand for embedded storage. At the same time, with the increase in SSD penetration in PCs and the increase in the number of data center servers, the demand for SSDs has grown rapidly.

Supply side: The main NAND manufacturers are Samsung, Toshiba, Micron and Hynix. Samsung is also the industry leader with a market share of about 37%. 2016 and 2017 are the years of NAND Flash's transition from 2D to 3D NAND process. There is a gradual release of production capacity and a slow increase in supply.

Price: The short supply has caused NAND prices to soar since Q2/Q3 2016, with the highest increase exceeding 50%. As supply-side production capacity gradually increases, NAND prices have dropped by about 20% since H2 2017.

In the short term, the growth of smartphone sales is weak, and the demand for NAND in the first half of 2018 may be lower than expected. As 3D production capacity continues to increase, the market situation will turn into oversupply, resulting in a higher probability of NAND Flash prices continuing to fall. According to the forecast of the Korea Industrial Technology Agency, excluding mainland manufacturers, the price of 32Gb NAND will drop from US$2.8 in 2017 to 1.93 yuan in 2018, a drop of 31%.

In the long run, as international manufacturers release their production capacity and Yangtze Memory Technologies Co., Ltd.'s NAND project capacity is opened up, supply will increase rapidly, while demand will grow slowly. At that time, oversupply may trigger a price war, causing NAND prices to continue to fall sharply. According to the forecast of the Korea Industrial Technology Agency, the price of 32Gb NAND will drop sharply to US$0.65 in 2020; due to the influence of mainland manufacturers, it is estimated that South Korea's NAND revenue will decrease by US$1.1 billion in five years.

NOR Flash

Demand side: Although NOR FLASH has a small market share, it is still often used to store boot code and device drivers because the code can be executed in the chip. As manufacturers of the Internet of Things, smart applications (smart homes, smart cities, smart cars), drones, etc. introduce NOR Flash as a storage device and develop with microcontrollers, and smartphones equipped with OLED panels require external NOR Flash to store program code, the demand for NOR Flash continues to grow.

Supply side: On the one hand, upstream silicon wafer raw materials are in short supply and prices are rising; on the other hand, giants such as Micron and Cypress have announced their withdrawal and shut down of some production lines, resulting in a supply gap and price increases.

Price: In 2017, the NOR Flash market was in short supply and prices soared. In 2018Q1, as the smartphone production chain entered the inventory adjustment phase, the NOR Flash market supply and demand were balanced and prices were basically stable. Only some low-capacity NOR Flash markets saw price cuts due to the opening of production capacity in mainland China.

In the short term, Android smartphones will enter the peak season for component stocking in Q2 2018. With the increasing penetration of AMOLED panels in the market, the demand for NOR Flash has rebounded. In the eighth-generation Core processor platform, Intel has increased the capacity of NOR Flash for storing BIOS from 64Mb/128Mb to 256Mb, resulting in tight supply of medium and high-capacity NOR Flash. However, since 2017, international manufacturers have not expanded their production capacity on a large scale. As market demand shifts from the off-season to the peak season, the shortage problem has resurfaced, and prices may rise again.

In the long run, high-end NOR Flash will be in strong demand with the development of intelligent and electrified automobiles, and low-end NOR Flash will also be in strong demand with the development of new applications such as the Internet of Things (IoT), smart speakers, and AMOLED.

Safety: Gradually achieving autonomous control

The overall market share of the mainland industrial chain is low, and localization is imminent. The market share of domestic chips in my country is almost zero, such as CPUMPU in computer systems, FPGA/EPLD and DSP in general electronic systems, embedded MPU and DSP in communication equipment, DRAM and Nand Flash in storage devices, and Display Driver in display and video systems. In the manufacturing link, although the mainland has established a firm foothold in mature processes above 28nm, the market share of advanced processes and compound semiconductors of 28nm and below is still very low. The market share of high-end equipment, materials, EDA tools, core IP, etc. is also very low.

This situation is extremely unfavorable for both the country and enterprises. Whether from the perspective of national security or the development of the electronics industry, fully promoting the semiconductor industry has now become a consensus across the country, and the entire industry has sufficient development momentum.

With the steady progress of the three major storage projects, the mainland's self-sufficiency rate in storage chips is expected to gradually increase, thus achieving independent control.

Investment Advice

Memory chips are the vane of the semiconductor industry, and the global memory chip industry is booming. The three major storage projects in mainland China are progressing rapidly, and 2018 is expected to be the first year of development of the mainland's storage industry. We recommend GigaDevice, the leading domestic memory chip design company, and give it a "buy" rating for the first time. The construction of storage plants has increased the demand for upstream equipment. We recommend North China Huachuang, the leading domestic semiconductor manufacturing equipment company, and maintain a "buy" rating.

First coverage of GigaDevice: China's leading memory chip design company

1. High-growth memory chip design is a scarce target

The company is a leading enterprise in the field of domestic memory chip design, and its business model is a typical fabless model. The company's main products include memory chips and MCUs, of which memory chips account for about 85% of its revenue.

In terms of equity structure, the largest shareholder is the actual controller Zhu Yiming, with a shareholding ratio of 13.58%; the second largest shareholder is the Big Fund, with a shareholding ratio of 11.0%.

2. Revenue and net profit grow rapidly, and NOR Flash price increases are expected to continue

The company's performance has always maintained rapid growth. From 2011 to 2017, the company's operating income compound growth rate reached 35.92%, and the net profit compound growth rate reached 67.70%. In 2017, the company achieved operating income of 2.03 billion yuan, a year-on-year increase of 36.32%, and a net profit of 398 million yuan, a year-on-year increase of 127.56%; in the first quarter of 2018, the company achieved operating income of 542 million yuan, a year-on-year increase of 19.71%, and a net profit of 90 million yuan, a year-on-year increase of 28.65%.

The main reason for the company's rapid growth in performance in 2017 is that the NOR Flash market has been in short supply since the fourth quarter of 2016. On the supply side, Micron and Cypress announced their withdrawal from the low-capacity market and focused on the high-segment markets of automobiles, industry and IOT. On the demand side, AMOLED screens require a piece of NOR Flash for electrical compensation, and the penetration rate of AMOLED displays is accelerating, especially Apple's adoption has directly driven its demand.

In the second half of 2018, as Android phones entered the peak season for stocking, the market penetration rate of OLED panels further increased. In addition, the demand for NOR Flash in automotive electronics and the Internet of Things is also increasing. For example, the new cars launched by various manufacturers this year are equipped with ADAS systems such as LiDAR, automatic emergency braking system (AEB), tire pressure monitoring system (TPMS), and lane departure warning, which has led to a rapid increase in demand for automotive NOR Flash, and the price increase of NOR Flash is expected to continue.

At present, the company's NOR Flash high-capacity 256Mb products have been put into mass production, and the research and development of 55nm and 45nm technologies are being accelerated. In 2016, the company ranked fifth in the global NOR Flash market, with a market share of 7%. As Micron and Cypress gradually withdraw from the low-end market, we expect the company's market share to exceed 10% in 2017.

3. R&D investment continues to increase, NAND/DARM opens up broad new space

The company has significant barriers in technology and talent. At the end of 2017, the number of R&D personnel reached 253, an increase of 42.94% compared with the end of 2016. The main management and technical team came from advanced industrial regions such as the United States, Canada, and Taiwan, China. In 2017, the R&D expenditure was 167 million yuan, a year-on-year increase of 63.31%. The compound growth rate of R&D expenses from 2011 to 2017 reached 51.66%. The core technical R&D personnel came from top domestic microelectronics institutions such as Tsinghua University, Peking University, Fudan University, and the Chinese Academy of Sciences. By the end of 2017, the company had applied for 718 patents and obtained 261 patents, covering key chip technology fields such as NOR Flash, NAND Flash, and MCU.

At present, the company's NAND Flash product capacity can reach up to 32GB, the self-developed 38nm product has been put into mass production, and the 24nm research and development is progressing smoothly. In addition, the company signed an agreement with Hefei Industrial Investment in October 2017 to jointly develop DARM storage chips. The project budget is about 18 billion yuan, and the two parties raised it in a ratio of 1:4. The project research and development goal is to achieve a product yield of no less than 10% by the end of 2018. As mainstream memory, the global market size of NAND Flash and DRAM is about 20 times that of NOR Flash. At present, China is heavily dependent on imports, and there is huge room for domestic substitution in the future.

4. Investing in SMIC to form a virtual IDM and acquiring Silead to achieve collaborative development

For chip design companies, wafer foundries have high requirements for capital and scale, and their production capacity is relatively concentrated. The synergy between manufacturing processes and designs requires a long time to accumulate. At the same time, the coordination of process nodes directly determines the quality of products. Often, the cooperation between design companies and wafer manufacturers has become an important barrier to the development of their business. In November 2017, the company participated in the subscription of SMIC's issued and placed shares through its wholly-owned overseas subsidiary Xinzhi Jiayi, with a total investment of no more than US$70 million, further strengthening strategic relations and forming a virtual IDM, which is also conducive to ensuring the company's production capacity.

In July 2018, the company announced that it planned to acquire 100% of the equity of Shanghai Silead by issuing shares and paying cash. At the same time, it planned to raise supporting funds through a private placement of shares to pay for the cash consideration of this transaction, the 14nm process embedded heterogeneous AI inference signal processor chip R&D project, the 30MHz active ultrasonic CMEMS process and transducer sensor R&D project, the intelligent human-computer interaction R&D center construction project, and the agency fees related to this transaction.

Silead's products are mainly new generation smart mobile terminal sensor SoC chips such as touch chips and fingerprint chips. This transaction will to a certain extent complement the company's R&D technology in sensors, signal processing, algorithms and human-computer interaction, enhance the productization capabilities in related technical fields, and form a complete MCU+storage+interaction system solution as a whole, injecting momentum into the company's further rapid development.

*Disclaimer: This article is originally written by the author. The content of the article is the author's personal opinion. Semiconductor Industry Observer reprints it only to convey a different point of view. It does not mean that Semiconductor Industry Observer agrees or supports this point of view. If you have any objections, please contact Semiconductor Industry Observer.

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