Semiconductor equipment: It’s time to say goodbye to the past

Source | © Xinshiye Original Works

Author: © Kid

Recently, the Semiconductor Industry Association (SEMI) announced that the shipment value of North American semiconductor equipment manufacturers in October was US$2.06 billion, which not only fell for five consecutive months, but also reached a low point in nearly 11 months. SEMI warned that major semiconductor applications including personal computers, smartphones, servers, and memory have slowed down across the board, and the economy is expected to be conservative next year.

Previously, SEMI estimated that global semiconductor equipment sales this year will grow by about 10% and hit a record high, and the semiconductor equipment market size next year will continue to hit a new high after this year. However, now there are factors such as the US-China trade war. SEMI believes that depending on the investment adjustments of related companies, the global semiconductor equipment market next year may be the same as this year.

Compared with North America, China's semiconductor equipment market is more eye-catching. Affected by the Sino-US trade friction, the ZTE incident and the Jinhua incident, the United States restricted the export of key equipment, technology, materials, etc., prompting the call for semiconductor localization to remain high.

Since the Sino-US trade friction, ZTE and Jinhua have been sanctioned by the United States. Among them, ZTE finally paid a total of about 1.4 billion US dollars in fines to reach a settlement, which is the highest amount of fines received by a Chinese company from the US government. After learning from the pain, the domestic sentiment of strengthening "chips" has reached an unprecedented high, and "Chinese chips" have become a hot topic.

A few months later, Jinhua was sanctioned. The installation engineers left one after another, the technical support became a blank check, and even UMC announced that it would stop cooperating with Jinhua. The equipment imported from the United States could not be successfully assembled and operated without the assistance of American engineers. At the critical moment when Jinhua was about to go into mass production, the United States took a step to cut off the source of funds. The Jinhua incident highlights the urgency of the independence of domestic semiconductor equipment.

On the one hand, the United States has tried every possible means to suppress China's semiconductor industry, from banning chip exports to restricting materials, equipment, technology, and talent, in an attempt to prevent the development of China's semiconductor industry. On the other hand, China's rise is unstoppable, and the development of the semiconductor industry is particularly important. In the face of external obstacles, China's semiconductor equipment can only be forced to take the path of independence.

Since the semiconductor industry is capital-intensive and technology-intensive, it is also policy-driven. In recent years, my country has introduced a series of industrial policies to promote the independent development of the semiconductor industry. Among them, the "National Integrated Circuit Industry Development Promotion Outline" issued by the State Council in June 2014 proposed to break through the key equipment of integrated circuits, develop key equipment such as lithography machines and etching machines, and enhance the supporting capacity of the industry.

In March 2018, the Ministry of Finance and other three departments issued the "Corporate Income Tax Policy for Integrated Circuit Manufacturing Enterprises", which pointed out that targeted support should be given to the integrated circuit manufacturing industry. This policy will apply to newly established integrated circuit manufacturing enterprises or projects invested after January 1, 2018: ① For those with a line width of less than 130 nanometers and an operating period of more than 10 years, corporate income tax will be exempted in the first two years, and corporate income tax will be levied at half the statutory tax rate of 25% in the third to fifth years; ② For those with a line width of less than 65 nanometers or an investment of more than 15 billion yuan and an operating period of more than 15 years, corporate income tax will be exempted in the first five years, and corporate income tax will be levied at half the statutory tax rate of 25% in the sixth to tenth years.

On the one hand, this policy can significantly improve the profitability of domestic manufacturing companies through direct tax cuts; on the other hand, it is expected to further stimulate the enthusiasm of manufacturing companies to invest in production lines, strengthen upstream equipment demand, and expand the scale of the equipment market.

In terms of funding, the National Integrated Circuit Industry Investment Fund was officially established in September 2014 under the joint promotion of the Ministry of Finance and the Ministry of Industry and Information Technology, with the first phase raising funds of 138.7 billion yuan. Currently, the second phase of the National Integrated Circuit Industry Investment Fund has started fundraising, with an intended fundraising of 150-200 billion yuan. Industry insiders believe that at a leverage ratio of 1:3, the second phase can leverage social funds of 450-600 billion yuan. In addition to the first phase of the National Integrated Circuit Industry Investment Fund and the social funds it leveraged, the total fundraising scale of the National Integrated Circuit Industry Investment Fund is expected to reach 1 trillion yuan.

According to SEMI research, affected by the global demand for integrated circuits, by 2020, 62 semiconductor wafer fabs are expected to be put into production worldwide, 26 of which are located in China. Industry insiders predict that due to the increase in domestic semiconductor production lines, semiconductor equipment sales in mainland China will increase by 43.5% and 46.7% year-on-year in 2018/2019, a two-year growth rate that is far ahead of the rest, while the United States was only 3% in 2018.

Looking at the 23 12-inch wafer fabs that are currently under construction or planned in China, there are 13 domestic wafer fabs and 10 foreign wafer fabs. The process technology levels range from 14nm to 150nm. Applications include storage, drive, foundry and other fields, with extremely wide coverage. The new monthly production capacity totals 1.56 million pieces.

In order to estimate how much equipment demand the above expansion plan will bring, we make the following assumptions:

① Proportion of funds: Of the total investment amount, 85% is non-current funds for plant and equipment investment, and the remaining 15% is auxiliary current funds; 75% of the non-current funds are equipment investment amounts, and the remaining 25% are plant construction investment amounts.

② Time allocation: Plant construction will be carried out within one year after the commencement of construction, and equipment investment will begin in the second year after the commencement of construction. The proportion of equipment investment in the second to fourth years is 40%, 40% and 20% respectively.

Based on the above assumptions, it can be calculated that the equipment demand determined by the domestic production line planning from 2018 to 2020 is 160.5 billion, 171.2 billion and 105.6 billion yuan. In the first two years, the equipment demand increased because the production lines entered the equipment procurement stage one after another. In the third year, the equipment demand slowed down because some production line investments have been completed or are nearing completion. However, we believe that in the context of the overall industrial transfer, as more capacity expansion plans are disclosed in the future, the equipment demand will continue to grow.

According to data from China Industry Information, from 2000 to 2018, the semiconductor equipment market in mainland China grew the fastest, while South Korea and Taiwan ranked first and second all year round due to their developed packaging and testing manufacturing industries.

Source: China Industry Information

Source: China Industry Information

According to the 2018Q3 financial reports released by major domestic semiconductor equipment manufacturers, North Huachuang's operating income in Q3 2018 reached 2.101 billion yuan, a year-on-year increase of 35.59%; its net profit in Q3 2018 was 169 million yuan, a year-on-year increase of 110.12%. Changchuan Technology's 2018Q3 revenue was 172 million yuan, a year-on-year increase of 73.86%; its 2018Q3 net profit was 32 million yuan, a year-on-year increase of 27.32%. According to the 2018Q3 financial report of Shengmei Semiconductor, Q3 operating income was 23 million yuan, a year-on-year increase of 373.91%; its net profit was 4 million yuan, a year-on-year increase of 503.46%.

Conclusion:

Against the backdrop of Sino-US trade frictions and during the third transfer of the semiconductor industry, on the one hand, external obstacles have forced domestic semiconductor equipment to become self-reliant; on the other hand, the frenzy of factory construction has urgently required a large number of semiconductor equipment, which has created the most fertile soil for the development of domestic semiconductor equipment manufacturers.

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