Jiwei Consulting: Opportunities and challenges for mainland manufacturers in the trend of high-end substrates

The rapid development of industries such as mobile terminals, 5G communications, data center construction, artificial intelligence, and automotive electronics is driving the continuous evolution of wafer manufacturing technology. While the market is putting forward higher requirements for wafer integration and various performances, it is also rapidly increasing the demand for high-performance IC substrates.

1. Overview of the Global IC Substrate Industry

According to Prismark data, the global PCB industry output value in 2019 was approximately US$61.34 billion, a slight year-on-year decline of 1.7%. It is expected that the global PCB industry output value will increase by 2% in 2020, and the compound growth rate from 2019 to 2024 will be approximately 4.3%. Although multilayer boards are still the main contributors to the output value of the PCB industry, IC substrates have grown at the fastest rate in recent years. The reason for the strong growth is mainly due to the significant improvement in the prosperity of the semiconductor industry.

According to ASIACHEM data, the IC substrate market size reached approximately US$7.4 billion in 2018 and is expected to exceed US$10 billion in 2022, with a five-year CAGR of nearly 8%, far exceeding the growth rate of the global PCB market.

Looking at the global IC substrate industry, the three Japanese industry leaders, Ibiden, Shinko Electric and Kyocera, basically occupy the high-end market such as FC-BGA, FC-CSP and embedded substrates, and their customers are mostly international giants such as Apple and Samsung. The IC substrate technology not only originated from Japan, but Japanese companies have also long played the role of technological pioneers in the industry.

Korean IC substrate companies such as Samsung Electro-Mechanics, Sintech, Daedeok, and Innotek have gradually grown under the nurturing of Korea's developed storage industry; Taiwanese companies such as Unimicron Electronics, Kinsus Technology, and Nanya Circuits have similar development paths to Korean companies, as the local prosperous wafer foundry industry has created a huge domestic demand market, which has created extremely favorable conditions for them. Compared with Japanese companies, Korean and Taiwanese substrate companies have more comprehensive coverage in terms of product lines and customer base.

In addition, according to the customer base of several manufacturers, it reflects the characteristics of high customer overlap and high demand concentration. However, in recent years, as an important region for the development of industries such as 5G communications and automotive electronics, the scale of the IC substrate market in mainland China has expanded significantly, which also means that the focus of demand is shifting to the mainland China market. As can be seen from the above figure, manufacturers in Japan, South Korea, and Taiwan are currently the absolute main suppliers of the global IC substrate market. The distribution of product lines also reflects that these companies have established high technical barriers in technology and process, and have established a high-quality customer system.

2. The domestic demand market is rapidly establishing

Jiwei Consulting pointed out that since 2016, the scale of the mainland China IC substrate market has increased significantly, which coincides with the golden period of China's semiconductor industry development. In the next few years, the mainland China IC substrate industry is expected to fully benefit from the dividends brought by the expansion of mainland China's wafer production capacity. Prismark predicts that by 2023, the scale of the mainland China packaging substrate market is expected to grow to US$1.372 billion.

As we all know, mainland companies represented by Tsinghua Unigroup and Hefei Changxin have been actively expanding their memory chip production capacity in recent years. According to statistics, by the end of 2018, the planned production capacity of the two companies alone exceeded 500,000 pieces per month, which is expected to bring more than 2 billion yuan of growth space to the IC substrate industry. Coupled with the demand brought by other types of chips, the market space that my country's wafer manufacturing industry can create is huge.

In addition to wafer manufacturing, the emerging display panel industry in mainland China is also a major pillar for establishing domestic demand in the IC substrate market.

Since 2019, manufacturers in the industry chain including Apple, TCL, Hisense, Asus, Innolux, AUO, BOE and others have launched terminal products such as TVs, monitors, VR and car displays with Mini LED backlight or similar technologies. Under the guidance of these industry giants, Mini LED is expected to be widely used.

According to Arizton data, as the upstream and downstream industries continue to promote the industrialization and application of Mini LED, the downstream demand for Mini LED is experiencing exponential growth. It is estimated that the global market size will expand to US$2.32 billion in 2024, with a compound annual growth rate of 147.88%; Gaogong LED Research Institute (GGII) pointed out that the Mini LED market in mainland China will grow to US$2.2 billion by 2020, with a compound annual growth rate of 175%, which is faster than the global average.

Since Mini LED places higher demands on PCB substrates when used as backlight, it has become a stage for mainland PCB manufacturers to vigorously develop high-end IC substrates.

Although they are on the cusp of the trend, it is still unclear whether mainland PCB manufacturers can ride the wave. It is undeniable that as "latecomers" in the field of IC substrates, mainland PCB manufacturers are slightly inferior in terms of technology, process and production capacity, and still face many challenges in gaining a foothold in the global market.

III. Three major challenges facing development

Currently, only a few PCB manufacturers in mainland China have invested in the IC substrate market, including Shenzhen South Circuit, Zhuhai Yueya, Xinsen Technology, Danbang Technology, Jingwang Electronics, Zhongjing Electronics, etc. Most of them are listed companies on the mainland A-share market. Among them, Shenzhen South Circuit, Zhuhai Yueya and Xinsen Technology have achieved mass production and made good progress in the market segment, but there is still a clear gap between them and the international first-tier manufacturers.

In order to narrow the gap with international giants, Chinese mainland panel manufacturers need to solve at least three problems.

Jiwei Consulting pointed out that from the development history of Taiwan-based substrate manufacturers, we can see that many large packaging and testing companies have not been able to replace Xinxing Electronics' absolute leading position in the local industry chain even though they have been deeply involved in this field for many years. The reasons can be summarized as the result of three aspects: "long investment return cycle, talent shortage, and lack of industry standards."

(1) Troubles with return on investment and yield

Since the manufacturing process of IC substrates cannot be completed by traditional packaging production lines, the equipment solutions required to build production lines must be completely re-planned and purchased. In addition, the process from the initial product development of IC substrates to the final mass production requires a lot of time and energy. If there are no customers to pay for it, it will bring great cost pressure to the company and increase the chance of failure.

Jiwei Consulting believes that it takes at least 6 to 7 years for a company to make IC substrates, and in the process of building production lines and improving yields, it needs to continuously inject large amounts of capital. It can be said to be a high-risk investment project with high capital consumption and a long payback period.

Because the cost of a single production line is too high, the industry generally adopts "one line, multiple jobs". Jiwei Consulting pointed out that since each customer's product size, material number and other aspects are different, the parameters need to be adjusted manually during mass production. Although this approach has controlled the risk at the cost level to a certain extent, it has also prevented many manufacturers from significantly improving their yields.

It is understood that the reason why Taiwan's leading IC substrate company Xinxing Electronics can meet the line width/line spacing of high-end products while also outperforming its peers in terms of mass production yield stability is that the company has achieved "dedicated line for dedicated use" on its production lines. Jiwei Consulting believes that the cost investment under this model is dozens of times higher than that of "one line for multiple uses", and companies need to have a huge amount of capital for long-term investment.

On May 28, Xinxing Electronics Co., Ltd. announced that its board of directors had approved a resolution to increase the capital budget for 2021 and the amount of pre-orders for long-delivery equipment. This year's capital budget will increase by approximately NT$7.385 billion from approximately NT$27.086 billion to NT$34.471 billion, and capital expenditure will set a new record high.

However, "whether investing dozens of times more cost can yield profits of the same size" is a question that has no fixed answer. Therefore, most companies are reluctant to use the "dedicated line for dedicated use" method to improve yield.

(2) Chaos caused by lack of industry standards

In addition, one of the main reasons why Xinxing Electronics has to improve its yield rate through dedicated lines is that the entire industry is currently lacking standards from the supply side to the demand side.

Jiwei Consulting pointed out that the current IC substrates have different sizes on the demand side, showing an overall trend of high customization. The demand side cannot be unified, which also leads to the supply side being unable to standardize during production. Taking Xinxing Electronics as an example, the equipment configuration of each product line in the factory is different. If there is no dedicated line, it is difficult to control the accuracy of parameters of each product during mass production by manpower adjustment alone.