China Wounded In The Semiconductor Upheaval
The world watches how the United States tries means and ways to undermine China’s efforts to claim its place in the semiconductor industry. However, the latter still has a fighting chance.
The United States imposed a sweeping set of restrictions, including a measure to cut China off from chips made with US technology anywhere in the world. In March, the Guardian noted the Netherlands confirmed is joint agreement with the US and Japan to restrict the export of advanced chip-making technology. The strategy resulted in China’s chip imports plunging 23% in Q1 2023, compared with the same period in the previous year.
At a SEMICON China 2023, Wei Shaojun from Tsinghua University and Vice-Chairman of China Semiconductor Industry Association indicated “suppression” against the semiconductor industry will definitely halt the pace of globalisation, and lead to fragmentation of global supply chain.
As Chinese semiconductor industry development pursues the typical separation between design, manufacturing and packaging, the “real biggest challenge” confronting Chinese semiconductor industry, according to Wei, is to change this familiar model.
China’s Position Still Unsteady
Compared to integrated device manufacturer (IDM) dominated countries like the US, Europe, Japan, and South Korea, China’s IDMs remain small. Data gathered by DIGITIMES Research indicated, in 2022 Chinese IDMs only accounted for approximately 2% of global IDM revenues. In contrast, American IDMs accounted for approximately 42%.
This was confirmed by Wei, who noted China’s relatively small domestic semiconductor industry: in terms of chip manufacturing. Despite the high compound annual growth rate (CAGR) of the sector, non-Chinese companies operating in China still plays an outsized role.
Since 2016, the average CAGR of Chinese semiconductor manufacturing companies owned by Chinese investors is 14.7%. However, that of non-Chinese wafer manufacturing companies from Taiwan, South Korea, and other countries is higher at 30%.
Citing data, Wei noted China’s contract manufacturing capacity is also severely insufficient. 2021’s findings showed the monthly production capacity for 12-inch wafers is only around 440,000 units. From the demand perspective, there is a gap of one million units as the required capacity is 1.5 million units.
Stepping Up On Innovation
Lastly, Chinese semiconductor industry also faces a serious lack of innovation. Analysis of the 62 chip design companies listed on China’s STAR Market reveals an average gross profit margin of only 34.2%.
According to Wei , this indicates that Chinese products are still not good enough to secure a high gross profit margin. That might have just be the smoking gun explaining China’s laggard position in the semiconductor race.
In terms of R&D, Wei pointed to Chinese semiconductor industry’s under investment: in 2022, the combined R&D expenditure of the 62 chip design companies listed on STAR Market is only US$2.91 billion.
“In other words, if we concentrate this US$2.9 billion to develop 5nm chips, we would be able to produce approximately 10 chips,” said Wei, “This level of R&D investment is far from sufficient.”
Chen Nanxiang, CEO of leading Chinese memory maker YMTC, also made similar observations. Chen remarked 80% of China’s semiconductor market is attributed to foreign companies, and similarly, 60% of the US market is also reliant on non-US companies.
“This implies that China’s market not only belongs to its domestic semiconductor industry but also to the global market. The same is true for the United States,” said Chen.
As many countries are targeting high-end chip manufacturing capabilities, the YMTC CEO was also concerned that there may be an oversupply of high-end chips in a few years, while low-end products may be neglected, leading to potential shortages. Where would that leave China then?
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