China’s Semiconductor Industry: Current Development and Complications

November 9, 2022

Circuit board with semiconductor

 

In 2022, the global semiconductor industry suffered greatly, following shortages in 2021. While the technology sector stocks lost over 30% year-to-year, semiconductor stocks have seen a decline of more than 40%. At the same time, leading chip manufacturers such as Intel, SK, and Samsung, announced production reduction plans for the products.

The global semiconductor industry is indeed an interesting topic and where China plays an important role. In this article, we take a greater look at the Chinese semiconductor market and what we can expect.

The Segments of the Semiconductor Supply Chain

The semiconductor supply chain includes the supply of upstream semiconductor raw materials and equipment, the manufacturing of midstream semiconductor products, and downstream applications.

A wide range of materials included in the manufacturing process can be divided into front-end manufacturing and back-end packaging materials. In thousands of chip processing procedures, the main types of equipment used are lithography machines, etching machines, film deposition equipment, ion implantation machines, testing machines, sorting machines, and probe stations. Downstream applications of the semiconductor industry include network communications, computers, consumer electronics, industrial control, automotive electronics, and so on.

The below chart gives a better overview of the semiconductor supply chain.

Chart showing semiconductor supply chain structure

The Competitive Landscape in the Global Semiconductor Industry

Thanks to strong research and innovation capabilities, the US maintains a strong competitive advantage in the semiconductor industry globally, especially in electronics automation design, core intellectual property, logic devices, and manufacturing equipment. Noticeably, however, its absolute competitiveness has weakened while other countries’ semiconductor industries are experiencing continuous upgrades. From 2013 to 2021, local US companies’ market shares fell from 56.7% to 43.2%, as exports from other countries squeezed sales.

It’s worth noting that the entire East Asian region accounts for 73% of the world’s semiconductor capacity, corresponding to 83.85% of the global chipmaking semiconductor equipment demand. China mainland’s comparative strengths are in packaging testing, wafer manufacturing, and raw materials. South Korea, Japan, and Taiwan region are dominant in raw materials, memory chips, and wafer manufacturing. Currently, China mainland and Taiwan together account for 37 % of global chip production capacity while South Korea 21 %, and Japan 18% respectively.

In each segmented semiconductor area, the core technology is often mastered by enterprises with oligopolies. In the silicon wafer and electronic technology market, the former is mainly occupied by Shin Etsu Chemical (Japan), Global Wafer (Taiwan), Stiebel Eltron (Germany), and SK (Korea), while the latter is led by the APD (US), Air Liquide (France), Dayolic (Japan), and Linde (Germany). Among semiconductor photoresist suppliers, Japanese companies dominate with 72% of the global market share. The same goes for the lithography equipment supply status where ASML, the Dutch giant, has a market monopoly with 83.3% of the high-end global lithography equipment market.

Export Restrictions and the Impact on China’s Semiconductor Market

On October 7th, 2022, the Department of Commerce Bureau of Industry and Security (BIS) released the Imposition of New Export Controls on Advanced Computing and Semiconductor Manufacturing Items Exported to China, significantly escalating US sanctions on China’s semiconductor industry since 2018. In the new export control rules, BIS added restrictions on the export of chips and related production tools to China for national security issues:

  1.  Restrict Chinese companies’ access to high-performance chips and advanced computers.
  2.  Restrict U.S. support for specific semiconductor activities that involve China.
  3.  Restrict China’s access to advanced semiconductor manufacturing items and equipment.
  4.  31 more Chinese entities and research institutions were added to the UVL list.

Challenges for China’s Semiconductor Industry

The restriction of US high-performance chip exports may directly hinder the development of AI technology and the IT industry in China. Chip designers and fabs that design supercomputing chips in mainland China, as well as overseas fabs that use US technology to make chips for Chinese supercomputing chip designers, will all be subject to US export controls.

In addition, the US has extended restrictions on 28 entities and artificial intelligence technologies related to high-performance computing, including Haiguang, Jingjiawei, and Chinese supercomputing centers. As a result, the manufacturing of high-performance CPUs, GPUs, and AI chip in China will be blocked. Meanwhile, many foundries such as TSMC, Samsung, Intel, UMC, and Global Foundries will no longer be able to contract manufacture chips for such Chinese chip designers.

The ban also included certain semiconductor manufacturing equipment and related items, which can be used in advanced chip manufacturing, into the Commercial Control List (CCL). All mainland Chinese chipmakers are subject to the restrictions, which have gone straight from “focused crackdown” to “full crackdown”. The scope of the restrictions has been expanded from 10nm to 16nm chips, targeting China’s domestic memory chip manufacturing industry. Export bans on 18 nm chips, used for the smaller DRAM memory chips, and on more than 128 layer NAND flash memory chips, used for semiconductor manufacturing equipment and storage, will significantly impact mainland China’s manufacturing industry and impede subsequent technology development.

A new license is now required for exports of assembly components of semiconductor equipment by the Chinese mainland. That is to say, semiconductor equipment manufacturers in mainland China will be greatly hampered in making their own equipment.

Europe’s Response to US Restrictions

China’s market is especially important for the development of the global semiconductor industry. In recent years, China has increased investment in the semiconductor industry, especially in the rapid development of the semiconductor manufacturing industry, and has purchased a large amount of high-tech equipment. As a result, the revenue of foreign semiconductor factories from China continued to increase, climbing up to around 30% of their total revenue.

In 2021, according to its financial reports, Pan Lin Group’s revenue from the Chinese mainland reached 33% of its total revenue, while Kolei generated 27%. European firms such as STMicroelectronics, Infineon, and NXP also rely heavily on Chinese buyers.

Many companies have stated that they do not want to give up sales in China for political reasons. The Dutch government has, of the date we are writing this article, not agreed to impose any additional restrictions on ASML’s DUV equipment, essential production equipment in chips, exports to China, arguing that the measures could damage its normal trade relationship with China.

Making China’s Semiconductor Industry Less Reliant on the US

Among four major aspects of semiconductor manufacturing, including design, manufacturing, packaging, and testing, manufacturing is the bottleneck of China’s semiconductor industry. China also experiences a large technology gap in equipment production.

Although China’s R&D is continuously developing, there is no doubt that a great mass of time and capital investments will be needed for development in the semiconductor industry. China may proactively seek cooperation with Dutch, Japanese, Korean, and other manufacturers to secure the Chinese semiconductor supply chain.

Summary

The semiconductor industry is of strategic importance to China, especially in the context of the international competitive environment. At present, the development of the global semiconductor industry depends on efforts and resources from all over the world. Due to the high technical entry barriers and uneven patent distribution around the world, a stable supply chain requires sound business relationships among all countries.

China now has faced unprecedented challenges in its semiconductor market growth as US restrictions on China’s semiconductor industry have deepened into an all-around block. According to China officials, China will continue expanding its industry.


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