The US Department of Commerce and the semiconductor foundry TSMC jointly announced on Monday that they have reached a preliminary agreement to provide the Taiwanese manufacturer with up to $6.6 billion in subsidies under the US CHIPS Act to support the construction of advanced semiconductor manufacturing facilities in Phoenix, Arizona. As part of the agreement, TSMC will also construct its third fab in Phoenix, bringing its total investment in the US to over $65 billion.

Why it matters: The agreement supports TSMC’s expansion in the US while also demonstrating a strategic partnership to strengthen advanced semiconductor manufacturing in the country as it concurrently looks to limit China’s development in the field.

Details: Following the subsidy announcement, TSMC revealed plans for a third fab in Arizona to introduce 2nm process chip technology or more advanced processes, with production beginning by the end of the decade.

• TSMC Arizona’s first fab is set to gear up for production of 4nm chips by the first half of 2025, while the second fab will produce both 2nm and 3nm chips in 2028.
• TSMC Arizona will establish a cutting-edge cluster, generating 6,000 direct manufacturing roles, over 20,000 construction jobs, and tens of thousands indirect employment opportunities in the next decade, according to the US Department of Commerce.
• With this new funding, TSMC’s total investment in the US has increased from $40 billion to $65 billion. This investment represents the largest foreign direct investment in Arizona history, and the largest foreign direct investment in a greenfield project in US history, TSMC said in the statement.
• “Our US operations allow us to better support our US customers, which include several of the world’s leading technology companies. Our US operations will also expand our capability to trailblaze future advancements in semiconductor technology,” said TSMC Chairman Dr. Mark Liu. 
• TSMC is the fifth company to receive public subsidies from the US government since the enactment of the CHIPS Act in 2022, and the only foreign entity to date, according to Chinese media outlet Jiemian. The other four companies are BAE Systems, Micron, Qualcomm, and Intel, which received subsidies of $35 million, $162 million, $1.5 billion, and $8.5 billion respectively.
• TSMC holds over 60% of the global orders for advanced process chip manufacturing, with nearly 70% of its clients coming from the US, the same Jiemian report said. According to TSMC’s previous financial conference calls, the focus of the Arizona factory is to serve clients in the US.

Context: The current construction of two fabs by TSMC in Phoenix is experiencing delays due to issues such as a shortage of skilled workers, as revealed by Chinese media outlet Icsmart.

• Fab 1’s production of 4nm technology has been delayed from 2024 to 2025, while Fab 2’s 3nm production, initially planned for 2026, is now scheduled for 2028. The two fabs are intended to produce over 600,000 wafers per year, potentially generating a market value exceeding $40 billion annually.

Semicon is a series of exhibitions run by SEMI and focused on semiconductor manufacturing. It has everything, from materials to equipment to fabrication. I say series of events because virtually every region in the semiconductor ecosystem gets one – Semicon China, Semicon Europa, Semicon India, Semicon SEA, Semicon Japan, Semicon Korea, Semicon West (USA), and of course Semicon Taiwan, all throughout the year. 

The show this year

Chen Nanxiang, the Chairman of both Yangtze Memory Technologies Corp (YMTC) and the China Semiconductor Industry Association (CSIA) said in the opening keynote, “China’s semiconductor market belongs to the world, while the world’s semiconductor market also belongs to Chinese companies”. He and the China Electronics Chamber of Commerce’s Wang Ning also praised Nvidia’s progress, highlighting generative AI as a key growth driver for the industry, and were very bullish on the industry’s goals to become a $1 trillion market by 2030. Working together globally is key to reaching these goals, they said. This was a very positive and inclusive message, one that representatives of SEMI shared (albeit via video as none seemed to be present in person), but seemed at odds with the language coming from Beijing, which recently banned Intel and AMD chips from government computers, and from Washington, which continues to restrict semiconductor technology exports to China.

I have been attending Semicon China and Semicon Taiwan for several years. Semicon Taiwan last September felt like the largest show I’d ever been to, but Semicon China felt larger again, albeit simultaneously less international. It has grown every year I have attended and this time was no different. Over 35,000 visitors, 1,000-plus exhibitors, and still a number of foreign firms taking up some of the largest booths. Japanese firms were especially present, with the likes of Sumitomo, Canon, Tokyo Electron, Disco, and many more having the largest booths at the show. Korea, Taiwan, and Europe both had a large showing, with Korea and Taiwan having their own pavilions.

When speaking with exhibitors though, not everything was as rosy. Exhibitors at the Korean pavilion did admit the Chinese market was tough for them right now, but did not want to go into details. Surprisingly, despite this, they claimed Semicon China was the only Semicon where they planned on having a specific Korean pavilion this year. Such a decision can be interpreted in several ways, either negative or positive. Another Chinese exhibitor working for an outsourced semiconductor assembly and test (OSAT) vendor admitted that the entire industry was witnessing involution. Like other industries in China, too many players had entered, no one had any clear differentiation, and decent margins were rare.

There was also a clear lack of US companies, just 22 in total, and no household names such as AMAT or LAM. This may not be surprising, but compared to other foreign countries it did feel strange. Cadence’s CEO did appear in person, however, and gave a very informative speech about how AI is driving Cadence’s product development and industry growth.

Power electronics and compound semiconductors were another key theme of the show, having a large area set out just for compound semiconductor companies and also a two-day conference. China now accounts for around 40% of the global power semiconductor market, driven in part by explosive EV sales growth over the past few years. In 2023, BYD Semi overtook Infineon in the Chinese market, and now five of the top ten companies in China are domestic. BorgWarner and Hitachi are no longer in the top ten within China.

Conclusions

The current state of affairs is somewhat contradictory. On one hand, Semicon China and Beijing seem to be welcoming foreign semiconductor companies with open arms. On the other they are pushing companies, especially SOEs, to buy made in China technologies and products. They complain about being blocked from foreign technology, but then proceed to block themselves even further. The conference remarks were very positive, but on the ground, many booths were still pushing the made in China message.

Despite all of this, China remains the largest semiconductor market in the world, and foreign firms, whether they like it or not, need to find ways to tackle it. Chinese firms themselves are facing intense competition domestically so are looking to expand into foreign markets where they hope to find better margins. My impression though is that many foreign semiconductor companies have significant technological advantages over their Chinese competitors and being present in China helps them not only keep an eye on competitor progress but also take away some revenue from these firms that could be spent on R&D to catch up from a technical perspective, or be spent on foreign market expansion.

China may not be the easiest market, but the size and scope of Semicon China, despite everything, shows that there are ways to deal with it.

Chip giant TSMC is seeing increasing orders from its three major clients – Apple, Intel, and AMD – for its 3nm chips, according to Taiwanese media outlet Economic Daily News. TSMC launched its 3nm process in late 2022, but up until the fourth quarter of 2023, Apple was its only customer for the technology, as the foundry slowly ramped up its production. As that situation changes, TSMC’s revenue share from 3nm chips is expected to surpass 20% of its total this year, positioning them as the company’s second-largest revenue contributor after its 5nm chips according to the Economic Daily News report.

Why it matters: With orders for its 3nm chips from major clients continuing to rise, TSMC is expected to experience significant short-term revenue growth and cement its dominance in the advanced semiconductor manufacturing sector.

Details: The Economic Daily News has analyzed the order status of TSMC 3nm chips from three key clients: Apple, Intel, and AMD.

• The upcoming iPhone 16 series by Apple will feature the new A18 series processor, while its new Mac processor (the M4 series) is expected to launch in the first quarter of 2025. Both are 3nm chips scheduled for production by TSMC starting in the second quarter of this year.
• In the second quarter of 2024, Intel will start the mass production of Lunar Lake CPUs (central processing units), GPUs (graphics processing units), and high-speed Input/Output chips at TSMC. This marks the first time that Intel has outsourced its complete range of chips for mainstream consumer platforms to TSMC. The CPU/GPU cores may also adopt 3nm technology, representing a new source of orders for TSMC’s 3nm process this year.
• AMD this year will unveil its new Zen 5 architecture platform, which is expected to greatly enhance AI applications. The report suggests that AMD’s Zen 5 architecture utilizing TSMC’s 3nm process is scheduled for a release in the second half of 2024.
• In the fourth quarter of last year, TSMC’s revenue contribution from 3nm chips already rose to about 15%, driven by the order of the 3nm A17 Pro processor for the Apple iPhone 15 series, according to TSMC’s financial reports.

Context: TSMC has secured over 90% of the total global AI chip foundry orders, as tech giants such as Nvidia, Google, Intel, Qualcomm, Microsoft, and AMD compete fiercely in the AI chip market, Economic Daily News reported.

• Driven by the high demand for AI chips, the high utilization rates of advanced processes of 6nm, 5nm, 4nm, or 3nm will further improve TSMC’s performance, a company insider told Economic Daily News. TSMC’s revenue in 2024 may increase by 24% to 26% year-on-year, the source claimed.

Semiconductor giant TSMC has revealed that subsidies obtained from the Japanese and Chinese governments reached NT$47.545 billion ($1.51 billion) in 2023, marking a 5.74-fold increase year-on-year, according to Taiwanese media outlet Economic Daily News. With its ongoing expansion of overseas facilities, TSMC anticipates further subsidies from Japan this year, along with potential new subsidies from the US and Germany.

Why it matters: As nations compete to enhance their domestic semiconductor manufacturing sectors via subsidies, TSMC has become a key target for government investment in local facilities.

Details: In 2023, TSMC’s Japanese subsidiary JASM and its mainland Chinese counterpart in Nanjing secured subsidies from the respective governments of Japan and China, which primarily for real estate, building factories, purchasing equipment, and funding production facility costs.

• In 2022, subsidies from the Japanese and Chinese governments reached around NT$7.051 billion ($220 million), soaring 574% to NT$47.545 billion ($1.51 billion) in 2023. Although TSMC did not specify the exact breakdown of the subsidies, previous data indicates that the Japanese government decided to grant TSMC’s Kumamoto Fab 1 JPY 476 billion ($3.2 billion) in phased subsidies, as reported by Chinese media outlet Icsmart. 
• TSMC’s 2023 subsidies from mainland China primarily originated from the expansion project at its Nanjing plant, the Icsmart report added. In April 2021, TSMC announced a plan to invest $2.88 billion in expanding its 28nm process manufacturing at the Nanjing facility, to meet a rising demand for automotive chips and the global chip shortage.
• TSMC is currently investing $40 billion to construct a semiconductor fab in Arizona, with plans to manufacture 4nm and 3nm chips. A recent Bloomberg report suggests that Intel may receive around $10 billion in subsidies under the US’s CHIPS Act. According to analysis by Icsmart, using Intel’s investment and estimated subsidy amount as a reference point, TSMC could potentially receive nearly $10 billion in subsidies as well.
• TSMC is also collaborating with Infineon, NXP Semiconductors, and Bosch to invest €10 billion in constructing a semiconductor factory in Dresden, a city in eastern Germany. The German government is also expected to give about €5 billion in subsidies, according to news agency Focus Taiwan.

Context：TSMC’s Kumamoto Fab 1 started operations on Feb. 24 and is aiming to mass-produce 28/16/12nm chips in the fourth quarter of 2024. By the end of this year, TSMC plans to establish a second fab in Kumamoto, targeting production by late 2027, with a focus on 7/6nm processes.

• After the opening ceremony of Kumamoto Fab 1, Japan’s Minister of Economy, Trade and Industry, Ken Saito, announced that the government will subsidize TSMC with JPY 732 billion ($4.94 billion) for the construction of Kumamoto Fab 2 on the site.

Traditionally, packaging has been considered a low-end non-critical part of a semiconductor’s design. In the past, it wasn’t overly complicated and keeping it low-cost was key. This led to the growth of back-end packaging plants across Asia. Most large packaging companies are either Mainland Chinese, Taiwanese, or American, and have operations throughout Asia.

But moving towards ever smaller process nodes is increasingly expensive and difficult, so new ways are being developed to continue performance increases year-on-year. Since China has faced certain restrictions on the tools and equipment it can import it has even more reason to place extra focus on methods to improve chip performance without moving to ever smaller process nodes.

What is packaging?

Put simply, a package is a container that holds a semiconductor die. It protects the die, can help dissipate heat, and connects the chip to a printed circuit board (PCB) or other chips. Packaging work is often done through a separate vendor known as an outsourced semiconductor assembly and test (OSAT), although many leading foundries like TSMC are now expanding their packaging capabilities.

Advanced packaging comes in many flavours. It is a general term used to describe many new techniques: 2.5D/3D, fan-out wafer-level packaging, chip scale package, antenna-in-package, and system-in-package, among others. Often the goal is to be able to stack, for example, two 7nm chips to reach the performance of a 3nm chip.

How does China stack up?

When looking at the industry as a whole, Mainland China has around 38% of the global packaging market, the only part of the semiconductor value chain that it leads in, and three of the top ten companies globally. Taiwan has six companies, and the US has one. Mainland China’s leading company JCET has an 11.3% market share and locations in China, Singapore, and Korea. Other Chinese players include TFME and Huatian.

The world’s largest and second largest OSATs, Taiwan’s ASE and the US’s Amkor, are heavily involved in advanced packaging, but as mentioned previously, it isn’t just OSATs involved in packaging, foundries like Intel, TSMC, and Samsung are also more and more involved.

As mentioned, JCET is China’s largest packaging firm. Its HQ is in Wuxi, which has the most packaging plants out of any city in China, and is in Jiangsu Province, which has more than any other province. TFME’s HQ is also in this province, as are plants from major international players such as ASE and Amkor.

JCET’s focus for the past few years and into the future is on nothing but advanced packaging. It often emphasizes that China’s green energy development in areas like electric vehicles and solar power creates opportunities for advanced packaging, as it can be used to ensure the reliable performance of the wide-bandgap semiconductors used in these applications. As well as help improve signal transmission in wireless technologies such as 5G and WiFi.

On the government funding front, in the summer of 2023, the National Natural Science Foundation announced a plan to fund 10-20 small scale research projects focused on chiplets and advanced packaging; committing RMB 800,000 per project, about $110,000, and 7-10 larger projects, committing RMB 3,000,000 each. Resulting in a funding package of around $4m-$6.4m over the next four years. Perhaps this isn’t a lot of money compared to what we hear the Chinese government investing elsewhere. But this isn’t research that requires buying billions of dollars worth of semiconductor manufacturing equipment. These are focused research projects on key aspects of advanced packaging like 2.5D/3D technology, interconnect architecture and optical technologies, and bonding. The final goal of this research is to help improve chip performance by one to two times and create internationally recognized research teams. It is likely breakthroughs from such research can be moved into firms like JCET with relative ease given the strong connections between government, universities, and industry.

Such research is also important to China from a patent perspective. As of 2021, Korea, Taiwan, and the US all led Mainland China when it came to advanced packaging patent applications globally, but China is not standing still, and is now ahead of Japan by quite some margin. It does still have work to do though as even within Mainland China, Taiwanese firms hold more patents than Mainland Chinese, 34% to 23%, and even US firms have 16%.

Despite this industry facing no US restrictions yet, Chinese design firms are still concerned. It has been reported that Chinese design firms are looking to use packaging plants in Southeast Asia, such as ASE’s plant in Malaysia out of concern for future restrictions Chinese packaging suppliers may face. Chinese packaging companies should do more to set up and invest in plants in Southeast Asia as part of their strategy. There will be little use in having the latest advanced packaging lines if even Chinese design firms fear using them.

Conclusions

While I find it unlikely Chinese OSATs and foundries will be cut off from imported equipment as it is much easier to replace locally than front-end lithography equipment. It is still telling that the very thought of this as a possibility has led to Chinese design firms choosing factories based in Malaysia rather than back home in China. As SEA nations fight for semiconductor investment from foreign firms this could be something they can play on. They are attracting not just investment from the likes of Samsung, Intel, and Amkor, but also Chinese packaging firms.

With regard to advanced packaging itself, I see no reason why China cannot be on a par with the rest of the world, however, does being on a par really help? Advanced packaging can, in some cases, get more performance from a chip without having to go to a lower process node, but if your competitors have access to both the latest process nodes and advanced packaging, then one is still playing catch up. Advanced packaging helps Mainland China stay within touching distance, and does provide it with part of the semiconductor value chain where it can say it is at the forefront with peers in Taiwan and the US, but it is not going to provide China with a way out of the lithography bind it finds itself in. Maybe that isn’t the goal though. Sure, as AI applications get ever more taxing it helps to have ever more powerful chips, but if one can achieve the same as your competitors albeit by taking up more physical area and more power, does that matter from a national security perspective as long as the result is the same?

TSMC’s first Japanese plant began operations in the southern prefecture of Kumamoto on Feb. 24, as the company confirmed plans for a second factory in the country within the year. TSMC’s 92-year-old founder, Morris Chang, attended the opening ceremony in Kumamoto, and Japan’s Prime Minister Fumio Kishida sent a congratulatory video message.

Why it matters: TSMC’s decision to build factories in Japan was hastened by incentives provided by the Japanese government, aiming to accelerate the growth of the local semiconductor industry by fostering collaborations with international foundries. Additionally, TSMC was enticed by Japan’s abundance of water resources and concentration of related tech companies that the firm needs to thrive in the sector, as suggested by industry analysis.

Details: TSMC founder Morris Chang, Chairman Mark Liu, CEO C.C. Wei, and other senior executives attended the opening ceremony of its majority-owned subsidiary JASM (Japan Advanced Semiconductor Manufacturing), according to a company announcement.

• Japan’s Prime Minister Kishida said in his video message broadcast at the event that the Japanese government has chosen to support the expansion of JASM in the context of the Domestic Investment Promotion Package announced in December 2023. Other distinguished attendees included Japanese Minister of Economy, Trade and Industry Ken Saito, and Chairman of the Liberal Democratic Party’s group on semiconductor strategy Akira Amari.
• Representatives from key partners such as Sony CEO Kenichiro Yoshida, Denso President Shinnosuke Hayashi, Toyota Chairman Akio Toyoda, and Kajima President Hiromasa Amano also leant their support to the chip-maker’s Japanese subsidiary by attending the factory opening.
• In his speech, TSMC founder Morris Chang recalled being invited to establish the chip factory in Japan back in 2019. Five years later, he said, the factory was a reality, with JASM expected to enhance the resilience of the chip supply chain and contribute to the revitalization of the local semiconductor industry, he said.
• The first plant, backed by a JPY 476 billion ($3.16 billion) subsidy from the Japanese government, will produce chips using 28/16/12-nanometer processes, while the second plant will specialize in 7/6-nanometer processes, according to Taiwanese media outlet Economic Daily News. JASM is expected to start construction of the second plant by the end of this year and be making chips there from the end of 2027.
• TSMC claims that the Japanese government’s investment in JASM will surpass $20 billion, and the establishment of the two fabs will provide at least 3,400 jobs.

Context: Sony, Denso, and Toyota also invested in JASM. Building of the first plant in Kumamoto began in April 2022, as reported by the media outlet Jiwei. 

• TSMC holds around a 70% stake in JASM, with Sony, Denso and Toyota as secondary investors. The plant expects to ramp up to a planned monthly production capacity of 55,000 12-inch chips.

Get ready for the annual insights from TechNode Content Team! The year 2023 can be considered a groundbreaking year in the field of technology. As wrapping up this year, we gathered different insights from our content team. We’ll be presenting nine Q&As, with timely updates every Wednesday and Friday in the following weeks!

Our first Q&A comes from Jessie Wu, our reporter at TechNode. Jessie is a tech reporter based in Shanghai. She covers consumer electronics, semiconductors, and the gaming industry for TechNode. 

1. Which company has impressed you the most in 2023?

Huawei introduced the Mate60 series featuring the cutting-edge Kirin 9000S chip, manufactured in China by Semiconductor Manufacturing International Corporation (SMIC). This chip marks a significant advancement as it is the first chip from the Chinese manufacturer to be built on a 7nm node process.

2. Which company has surprised you the most in 2023?

ByteDance has scaled down its gaming business following reports of significant job cuts. ByteDance currently struggled to deliver high-grossing games and grab gaming market share, despite entering the gaming market in 2019 to challenge the domestic industry leaders like Tencent and NetEase.

3. Which industry professional/entrepreneur/startup founder has left the most profound impression on you in 2023?

Xiaomi CEO Lei Jun set a record by making a cash donation of RMB 1.3 billion ($183 million) to his alma mater, Wuhan University. This contribution, the largest ever from an alumnus to a Chinese university, is expected to support computer science innovations, students’ development, and research across six fundamental disciplines.

4. What is the most memorable overseas event for you in 2023?

ChatGPT can generate unique images based on a conversation. If users describe the vision, ChatGPT will provide related visuals and further revisions within the chat.

5. If you were to recommend one significant industry trend for everyone to follow, what would it be?

In June 2023, the Dutch government implemented additional export controls on specific advanced semiconductor production equipment. Consequently, ASML needs to apply for licenses for selling advanced chip-making machines to China due to this ban.

6. What industry buzzword have you encountered the most in 2023?

AI is being employed by companies to enhance employee productivity. AI can manage repetitive tasks throughout an organization, allowing employees to concentrate on innovative solutions, complex problem-solving, and meaningful work.

7. Which phrase or sentence best summarizes your perspective on the field you’ve been following in 2023?

Challenge. Huawei and Xiaomi are focusing on creating their own operating systems for devices, as domestic tech companies may face potential restrictions on accessing crucial hardware or software of US origin.

8. What product/company/technology/industry are you most looking forward to next year?

Black Myth: Wukong is an upcoming action role-playing game by Chinese developer Game Science, based on the classical 16th-century Chinese novel Journey to the West. This martial arts title might be China’s very first AAA game.

9. Do you believe AI has the potential to threaten humanity?

Currently, I think that AI is not a threat for humans. Because we are currently in the stage of capitalist society, and the essence of capitalist society is built on consumption. However, AI itself cannot consume, which means it is destined to be unable to fully replace humans.

Chinese-owned semiconductor company Nexperia announced on Monday that the Dutch government has approved its acquisition of Nowi, a Dutch semiconductor startup. Previously, the Dutch government had been investigating the transaction on the grounds of national security.

Why it matters: In June, the Dutch government introduced the Act on Security Screening of Investments, Mergers and Acquisitions (Vifo Act), which includes the scrutiny of sensitive technologies such as photonics, quantum technology, and semiconductors. However, despite the influence of export sanctions led by the US, the Dutch government’s approval of Nexperia’s acquisition indicates that the Netherlands may still be open to business with China.

Details: The Dutch Minister of Economic Affairs Micky Adriaansens stated in a letter to the Dutch parliament on Nov. 27 that there are no legal objections to the acquisition of Nowi by Nexperia, according to Bloomberg. 

• Established in 2016, Nowi, is a semiconductor startup based in Delft, in the western Netherlands. The company specializes in manufacturing power management chips capable of harnessing ambient energy sources such as light or vibrations, offering a promising solution to eliminate the reliance on batteries in basic electronic devices. In November 2022, the company announced that it would be acquired by Nexperia. 
• In June of this year, the Dutch government initiated an investigation into the Chinese firm’s takeover of Nowi, based on the Vifo Act that came into effect on June 1. The Dutch government stated at the time that it would order the cancellation of the transaction if the deal was found to affect national security.
• On Monday, Nexperia issued an announcement in response to the Dutch government’s final decision. The retrospective effect of the Vifo Act is applicable only to military or dual-use items, and it is evident from the government’s assessment that Nowi’s products do not fall within this category, the company said. After a “period of uncertainty,” Nexperia and Nowi are “able to further realize their ambitions in the Dutch chip ecosystem,” the announcement added.
• In the current climate, it is crucial to establish a well-defined policy that enhances the investment environment in the Netherlands, said Charles Smit, director of Nexperia Netherlands. A transparent and fact-based communication channel between the government and businesses is essential during these times, he asserted.
• Having access to the production, sales and marketing infrastructure of a leading chip manufacturer allows Nowi to bring products to market faster and therefore have a greater impact, according to Simon van der Jagt, co-founder and former CEO of Nowi.

Context: Based in the Netherlands, Nexperia is a subsidiary of the partially state-owned Chinese company Wingtech Technology. The semiconductor firm has a workforce of over 15,000 spread across Europe, Asia, and the US. Nexperia’s components are used in automotive, industrial, mobile, and consumer industries.

In the third quarter of 2023, the import of chip-making equipment by China surged by 93% compared to the same period last year, reaching a total value of RMB 63.4 billion ($8.75 billion), according to data from China’s customs authorities, as reported by Japanese media outlet Nikkei. In terms of product categories, the import of lithography equipment, a key part of the chip-making process, skyrocketed nearly fourfold.

Why it matters: The US began attempts to control the export of advanced chip-making equipment to China last October, with Japan and the Netherlands following suit this year, but these new figures show the issues with enforcing such controls rapidly. As the lead time for chip-making equipment from order placement to delivery is between six months to one year, many Chinese manufacturers had already placed a large number of orders for chip-making equipment from the latter two countries last year, likely in anticipation of a ban.

Details: Although the Netherlands has implemented policies restricting the export of advanced semiconductor equipment to China, imports of semiconductor equipment by China from the country in the third quarter nevertheless increased rapidly. 

• According to data presented by Nikkei, the US accounted for only 9% of semiconductor equipment imported into China in the third quarter, significantly lower than its 17% share during the same period in 2021. Japan’s share also decreased from 32% to 25%, while the Netherlands saw an increase from around 15% to 30%.
• The data from China’s customs authorities reveals that the import value from the Netherlands skyrocketed by over six times in the third quarter compared to the same period last year, rising to 2.44 billion euros. A significant portion of this increase is attributed to lithography machines produced by Dutch market leader ASML. Imports of these machines from Japan grew by approximately 40%, while lithography equipment imports from the US increased by 20%.
• Compared with the second quarter of 2023, ASML’s sales revenue from China doubled from 24% to 46% of the firm’s total in the third quarter, amounting to 2.44 billion euros, according to the company’s financial report. In the first quarter of this year, ASML’s proportion of sales revenue generated by China was only 8%.

Context: According to the Netherlands’ new regulations on semiconductor exports, ASML’s lithography systems require an export license from the Dutch government for shipment. However, a statement from ASML indicated that the company believes its existing licenses still allow it to continue delivering lithography machines to China until the end of 2023, despite the export restrictions taking effect in September.

• ASML dominates the lithography market with an 82.9% market share followed by Canon and Nikon. It holds a market share that is over eight times greater than second-place Canon.

The CEO of Chinese GPU (graphics processing unit) maker Moore Threads, Zhang Jianzhong, sent an open letter to staff on Monday, stating that the company would begin layoffs within a week, according to a report by local media outlet Icsmart. In the letter, which comes just weeks after the company was added to the US government’s restricted Entity List, Zhang also said “There are no darkest hours for Chinese GPU makers, only boundless possibilities.” 

Why it matters: On Oct. 17, the US government implemented a series of new restrictions, limiting the export of more advanced AI chips and semiconductor equipment to China. As one of 13 Chinese companies now added to the Entity List, Moore Threads and its subsidiaries have been substantially impacted by the policy.

Details: In his letter, Zhang directly blamed the impact of US sanctions on Moore Threads’ personnel cuts. The company will now undergo a restructuring, with plans to establish two new divisions: an AI strategy group and a metaverse computing strategy group.

• The exact number of employees facing layoffs at Moore Threads has not been disclosed, and the size of the company’s total workforce before the job cuts remains unknown. However, the company’s LinkedIn page shows a range of 500 to 1,000 employees.
• In the open letter, Zhang claimed that the entire domestic GPU and AI chip industry has been severely impacted by the new limits, but that nothing could deter the company’s determination to move forward. Moore Threads will continue to build high-quality GPUs in China at the juncture between challenges and opportunities, he stated.
• To address the challenges brought by the external environment and policy changes, Zhang announced a three-year plan. The company will focus on four key areas: accelerating independent research and innovation, refining high-quality products, promoting application implementation, and building efficient teams.
• On Oct. 31, the spokesperson for the China Council for the Promotion of International Trade, Zhang Xin, stated that the US measures violate market economic principles and international trade rules, exacerbating fragmentation and risks in the global semiconductor supply chain. 

Context: Established by Zhang, the former global vice-president of Nvidia and general manager of Nvidia China, in October 2020, Moore Threads is a Chinese technology company specializing in graphics processing unit design. The firm has developed two consumer-grade cards for China’s domestic gaming segment, including the MTT S80 and the MTT S70. 

• Chinese retailers are currently offering promotions for the annual 11.11 Singles’ Day shopping festival. Among these deals, the MTT S80 and MTT S70 GPUs are available at their lowest prices ever. The MTT S80 has been reduced from RMB 2,999 ($412) to RMB 1,199 ($165), while the company has cut the original price of the MTT S70 from RMB 2,499 ($343) to RMB 899 ($124).

Apple is set to become TSMC’s largest customer for the N3E process, with plans to integrate the upgraded 3nm chip technology into its forthcoming iPhone 16 models next year, as revealed by DigiTimes on October 13. The report also mentions that the sales of 3nm chips is expected to account for 4% to 6% of TSMC’s 2023 revenue, amounting to a total value of $3.4 billion.

Why it matters: The development of advanced chips incurs significant costs, particularly in initial stages where 3nm process technology is still maturing and yield rates are low. While most companies cannot afford the high manufacturing costs of TSMC’s 3nm chips, Apple stands out with the capability to drive TSMC’s advanced chip technology forward.

Details: TSMC aims to promote mass production of the second generation of 3nm chips (N3E process) in 2024, with the iPhone 16 series slated to be the first smartphone using N3E technology, according to the exclusive DigiTimes report.

• TSMC’s second generation 3nm node, N3E, offers improved affordability and higher yield rate compared to its predecessor, N3, featured in the A17 Pro chip of Apple’s iPhone 15 Pro models launched in September 2023. The N3E process is specifically designed to enhance chip performance and reduce power consumption in devices.
• TSMC has initiated large-scale production of N3E, with plans to replace the N3 entirely with the upgraded version by 2024, according to insider information from DigiTimes. All major chip manufacturers, except Samsung, are set to adopt the second generation N3E. TSMC has secured orders from various clients, with Apple being the largest among them.
• TSMC is anticipated to gain 4% to 6% of its total revenues in 2023 from 3nm manufacturing, primarily due to substantial orders from Apple for N3 chips powering the iPhone 15 Pro models. Apple’s orders alone are projected to account for up to $3.4 billion in sales for TSMC this year.
• Jeff Pu, an analyst covering companies in Apple’s supply chain, claims that all four iPhone 16 models will feature A18-branded chips. The A17 Pro processor in the iPhone 15 Pro models is a transitional design, and the upcoming iPhone 16 models will all incorporate A18 chips, leveraging TSMC’s N3E technology, he said.

Contexts: In July, TSMC faced efficiency challenges with its new 3nm manufacturing process, achieving a yield rate of only 55%, well below the expected standard. Due to this low yield, Apple opted to pay for qualified wafer batches instead of entering into a fixed rate agreement with TSMC.

• TSMC is expected to further enhance the transistor density of the N3 family with N3P following N3E, according to TSMC. N3P, an advanced process node, will empower chip designers to enhance performance by 5% without increasing leakage, or alternatively, achieve a 5% to 10% reduction in power consumption while maintaining the same speed.

Aito, a Chinese electric vehicle brand backed by Huawei, has received more than 50,000 non-refundable orders for its redesigned M7 in less than a month. The orders follow the Sept. 12 public launch of the sports utility vehicle, which features Huawei’s Harmony operating system and assisted driving technologies. 

Why it matters: The latest sales figures, as revealed by a senior executive at Huawei, show tentative signs of a bounce-back for Aito from a months-long slump and could be a boost to the confidence of Huawei’s car manufacturing partners. 

• Aito has also been buoyed by Huawei’s comeback in the smartphone market with the recent launch of its Mate 60 Pro series, following the US ban on exports of advanced semiconductor technology to the Chinese technology giant. 

Details: The revamped M7 crossover has racked up more than 50,000 pre-orders with non-refundable deposits of RMB 5,000 ($685) as of Friday, Richard Yu, the chief executive of Huawei’s consumer business group, said in a post on Chinese social media app WeChat. 

• Yu described the growth momentum of the new M7 as “a miracle,” adding that more than 10,000 customers placed their orders over the past two days. He called on sales employees to ramp up delivery to meet the growing demand (our translation). 
• Accumulative orders per store averaged more than 80 following the launch on Sept. 12, according to figures posted Saturday by Sun Shaojun, founder of consumer behavior research agency CarFans. Aito said in June it operated a network of around 1,000 retail locations and service centers in 230 Chinese cities. 
• Sun added that a surge in store traffic for Huawei’s new smartphones has boosted the sales of the Aito-branded EVs, produced by Chinese manufacturer Seres, over the recent National Day holiday season. Huawei began selling EVs with its little-known partner via its retail network in 2021.
• Roughly 40-50% of the M7’s buyers are Huawei smartphone users and were coming to the stores for the Mate 60 handsets, Jefferies analysts wrote in an Oct. 5 note, citing an executive of a Chinese auto dealership. Customers compare the six-seater with Li Auto’s L7, BYD’s Tang, and the Ford Edge, analysts said.

Context: Huawei on Sept. 12 unveiled the redesigned version of the M7 SUV, featuring Huawei’s Harmony operating system at a starting price of RMB 249,800 ($34,299), which is around RMB 70,000 lower than the initial version launched a year earlier.

• The vehicle also comes with Huawei’s latest assisted driving software, ADS 2.0, which will allow it to travel by itself on busy urban streets nationwide as early as December, making it one of the most ambitious players in the Chinese self-driving car space.
• Huawei has offered future owners of the new large-sized plug-in hybrid early access to purchase its Mate 60 smartphones. The Mate 60 Pro flagship handset reportedly incorporates a self-developed 5G processor, a breakthrough for the Chinese tech giant following US sanctions in 2019. 
• Two-year-old Aito has seen sales slump during most of 2023 amid fierce competition from more established rivals such as BYD and Tesla. Seres, which produces Aito-branded EVs, recorded sales of around 33,000 units for the first eight months of this year, representing a 15.6% decline year-on-year. 
• Meanwhile, Huawei has partnered with several other domestic automakers including Changan and BAIC. It is also on track to launch the S7 with carmaker Chery in November, the first sedan under a new marque called Zhijie in Chinese that will compete against Tesla’s Model S.

Chinese premium electric vehicle brand Denza on Tuesday revealed a cheaper version of its advanced driver assistance system (ADAS) in collaboration with US chipmaker Nvidia, as the BYD affiliate ramps up efforts to compete against leading self-driving players such as Xpeng Motors and Huawei. 

Denza is also eyeing overseas expansion, having established its presence in the China market with year-to-date deliveries of nearly 80,000 EVs as of August. The company expects overseas sales to begin as early as next year, including in Australia, Southeast Asia, the Middle East, and Europe. 

Why it matters: The companies said the launch of the affordable assisted driving technology could reduce the barrier to a transition to intelligent mobility. The system facilitates Denza’s vehicles to navigate most highways in China as well as some busy urban streets in major domestic cities. 

• BYD launched the N7 crossover under the Denza marque in July, with the top-end version powered by Nvidia’s ​​DRIVE Orin processor, which offers 254 trillion operations per second (or TOPS). Now all N7 models can be equipped with Nvidia’s DRIVE Orin chips for automated driving, according to a Wednesday statement. 

Details: The new autonomous driving system will enable on-ramp to off-ramp driving, as well as automatic lane changing on Chinese highways, for Denza’s flagship N7 SUV. It has a price tag of RMB 15,000 ($2,053) and is powered by Nvidia’s DRIVE Orin processor, which can handle up to 84 TOPS. The N7 SUVs that feature the technology will have two lidar sensors removed to reduce costs. 

• The companies say that the higher-end version, priced at RMB 23,000, will allow the vehicles to function by themselves on bustling city streets for the daily commute, using a feature named City NOA (Navigate On Autopilot). Denza’s general manager Zhao Changjiang said the company would release its Highway NOA feature to N7 owners starting in December, followed by an over-the-air update of the City NOA early next year. 
• Tong Liu, vice president and general manager of China auto business at Nvidia, said that he was “impressed” by the efforts made by BYD in developing intelligent cars over the course of their three-year collaboration, calling BYD/Denza a “strong advocate” of commercializing self-driving technology (our translation). BYD’s Dynasty and Ocean lineups are also using Nvidia’s semiconductor. 

Context: Several Chinese auto and tech companies have announced ambitious plans for the adoption of assisted driving technologies for urban driving, akin to Tesla’s full self-driving (FSD) function that has yet to be made available in the country. 

• Volkswagen-backed Xpeng Motors in June launched its City Navigation Guided Pilot feature in Beijing and is on track to expand the capability in at least 50 domestic cities by the end of this year, while Great Wall Motor has set a target of covering 100 cities by 2024.
• In the meantime, Li Auto vehicles will be able to navigate on fixed routes for daily commuters in 100 major Chinese cities by year-end, following weeks of training with its collection of datasets. Rivals Nio and Geely’s Zeekr are also planning to roll out similar features later this year. 
• Huawei is by far the most ambitious company in the field in China, with its head of consumer business Richard Yu stating on Sept. 12 that Huawei’s self-driving system would be applicable nationwide for both highway and urban driving with Aito-branded EVs by December, Caixin reported. 
• BYD has made a series of moves in recent months to enhance its research and development capacity, especially for autonomous driving, including organizational restructuring and talent hiring. More than 80% of the 30,000 fresh graduates recruited by the company this year were research personnel. 

READ MORE: Baidu and Huawei take on global giants with new in-car software offerings at Auto Shanghai 2023

TSMC is urgently seeking equipment suppliers from whom it can buy CoWoS (Chip on Wafer on Substrate) machines, as Nvidia, AMD, and Amazon expand orders for AI chips, local media outlet Economic Daily News exclusively reported on Monday. TSMC has increased its equipment orders for CoWoS by 30% to meet growing AI-fueled demand, the report claimed.

Why it matters: The AI boom has reshaped the semiconductor landscape, positioning chip-making companies as critical enablers of the tech revolution while presenting complex challenges related to supply chain resilience and technological advancement. 

Details: CoWoS is a high-density advanced packaging technology developed by TSMC for high-performance chips. The current shortage of CoWoS packaging capacity has become the main bottleneck in the production chain for AI chip orders.

• Nvidia is TSMC’s largest customer of CoWoS advanced packaging, accounting for 60% of the production capacity, according to the report. Recently, in response to the strong demand for AI computing, Nvidia has increased its orders from TSMC, while AMD, Amazon, and Broadcom have also been placing urgent orders.
• Due to its shortage of CoWoS machines, TSMC has sought the assistance of local equipment suppliers including Scientech Corporation, AllRing-Tech, Grand Process Technology, E&R Engineering Corporation, and Group Up Industrial. TSMC has increased its original equipment orders by up to 30%, with delivery expected in the first half of 2024. Mass production will commence in the second half of 2024.
• Currently, TSMC’s monthly capacity of CoWoS advanced packaging is approximately 12,000 units, sources familiar with the matter told Economic Daily News. To accommodate the proposed production expansion, the monthly capacity of CoWoS will be increased to between 25,000 and 30,000 units.
• Major customers such as Nvidia and AMD have increased their orders of TSMC wafers in the third quarter, boosting TSMC’s 7nm and 5nm advanced process capacity utilization.
• Pressure on CoWoS production capacity is expected to ease after next summer, TSMC’s president C. C. Wei stated during a recent earnings call. The Economic Daily News report revealed that TSMC has been expanding its facilities at plants including Zhuke, Zhongke, Nanke, and Longtan, so as to increase CoWoS production capacity.

Context: On September 24, Chinese media outlet IThome reported that Qualcomm’s next generation Snapdragon 8 Gen 4 may have been manufactured using TSMC’s N3E process technology, as indicated by leaked documents from Qualcomm.

• On September 8, TSMC announced net revenue for August 2023 of approximately NT$188.69 billion ($5.87 billion), representing an increase of 6.2% from the previous month.

In June, news emerged that Huawei will potentially come back into the 5G smartphone space by the end of 2023. This information apparently was provided to research firms anonymously from “industry sources including Huawei’s suppliers”. Huawei would not comment on the news, and neither would SMIC, the fab Huawei is using.

But what would a 5G phone using SMIC N+1 7nm process look like? Could Huawei reach its 2019 peak again? Who would buy such a phone? Is there any hope for Huawei’s handset future?

The past

In the not-so-distant past, Huawei handsets were the second best-selling brand in the market. In 2019, Huawei handsets accounted for roughly 15.6% of global handset sales, beating Apple but falling just short of Samsung. This amounted to nearly 241 million Huawei phones being sold that year.

Most of these phones – not all, but definitely the high-end phones – used Huawei’s own Kirin application processor chips. They were 5G enabled, ran Android, were fabricated at TSMC on the latest process nodes, and very rarely got anything but positive reviews. At the time, Huawei and HiSilicon had access to the latest EDA tools from Synopsys and Cadence, the latest IP from Arm among many many others, and full access to the Google ecosystem for the export market.

The present

Since 2019, Huawei and HiSilicon have lost access to all these suppliers to varying degrees. No access to properly supported EDA tools and foreign fabs has meant it has moved flagship phones over to Qualcomm as it can no longer manufacture its Kirin AP. Restrictions have also meant its phones are now limited to 4G as it is not allowed to buy 5G-enabled chips and is not able to produce them either. Using Qualcomm chips still means Huawei sells capable phones like the Mate 50, but it is the lack of Google services that means its products are now difficult to recommend in Western markets, even if they do take nice pictures of the moon. 

Even in China, where Google services do not exist, Huawei’s phone sales plummeted in 2020 and 2021, with the brand dropping out of China’s top five. But now, in 2023, Huawei’s sales have increased by 76% year-on-year in Q2 bringing the brand into joint fifth place with Xiaomi at around 13% of the China market. In a market where all other brands (other than Apple) are losing sales, Huawei is somehow managing to increase its own at the expense of BBK, its previous subsidiary Honor, and Xiaomi. 

Why anyone would buy a worse phone at the same or more expensive price can only be down to marketing and a sense of national pride, as although its phones are good, so are Oppo’s and Vivo’s – and they have 5G. Whatever it may be, Huawei has obviously done a great job at reviving its phone brand in the last year within China. Maybe aftermarket 5G enabling Huawei smartphone cases have helped.

The future

So let’s say the rumors are true. Huawei will have its 5G phone by the end of the year using its own chip. Unlike TSMC EUV 7nm, SMIC has only been able to achieve its 7nm through multi-patterning, basically doing multiple lithographic exposures to get the desired resolution. I expect SMIC’s approach will result in low yields and have limited capacity, meaning the resulting chips could potentially be more expensive. This could be compounded by the fact that Huawei handset APs are usually for internal use, not to be sold to other phone brands, so there is limited scale compared to Qualcomm or MediaTek. One could envision Huawei allowing other brands to use it to help SMIC scale up, but how would its performance compare to Qualcomm and MediaTek? Would other brands even want to buy it if it cost more and performed worse?

This is clearly very strategic for China, and would be a big win, but it puts SMIC in a difficult position. Historically it has always kept its head down, but announcing such a feat could put it in the spotlight for further sanctions and equipment it needs to expand its mature node capacity.

Perhaps the chip isn’t the key factor to Huawei’s future global success. I feel it will certainly become a successful brand in China. China-designed chips, China-manufactured chips, and a China-made OS are all very potent selling points in the market. From a global perspective,  it would still have a worse chip, even compared to other Chinese brands, but more importantly, no Google services, which is a killer for most of the rest of the world.

This will be a win for Huawei and for China, but Huawei won’t become the Huawei of 2019 any time soon. In my experience, HiSilicon has always had a great chip design team, but now apparently using its own EDA tools – and I suspect still some Western tools (supported or not) – along with a new process at SMIC rather than TSMC, means this chip won’t be world beating and potentially not commercially viable unless yields and scale are improved. For now, this will be a domestic play.

Xingji Meizu, a smartphone company controlled by Geely founder Eric Li, has decided to discontinue its chip development business for cost-saving reasons. The move is expected to result in layoffs of dozens of staff members, including some fresh graduates, local media outlet Meiren Auto reported on Tuesday.

Why it matters: Xingji Meizu is the latest company to abandon its pursuit of critical and emerging technologies in the Chinese auto and tech industries, reflecting the challenges of a faltering economy and intensifying competition. 

• The news comes just days after electric vehicle maker Nio delayed the development of its own batteries to ease cashflow constraints. Similarly, in May, rival phone maker Oppo announced the closure of its chip design unit Zeku after five years of operations.

Details: In a statement sent to financial media publication CLS on Tuesday, Xingji Meizu said the company is closing down its in-house chip design program in the face of global economic uncertainties, and will instead sharpen its focus on product innovation and user experience.

• Xingji added that it will offer compensation as required by law, along with internal job transfer opportunities, to ensure the rights and interests of employees, especially fresh graduates, without revealing further details. Geely did not respond to TechNode’s request for comment. 
• The company’s chipmaking institute employs approximately 200 people, and dozens of recent graduates are likely to be impacted by the layoffs, according to Meiren Auto. “[The news] came just three weeks into the job,” one of the new employees told the outlet. 
• Development has mostly stalled since the launch of the institute, according to a person with direct insight into the company’s operations. Chief executive Shen Ziyu told Chinese reporters in March that emerging technologies, including chipmaking, were at the center of Xingji’s strategic efforts, alongside smartphones and in-car systems.

Context: Geely’s other affiliates have reported progress in semiconductor technology. The most recent example is the Lynk & Co 08 SUV featuring an in-car operating system built upon a supercomputing platform provided by Ecarx, another auto tech firm founded by Shen Ziyu and Geely’s Eric Li. 

• Siengine, Ecarx’s joint venture with Arm China, was responsible for designing seven-nanometer chips intended for use in computers in partnership with leading global chipmaker TSMC, Shen told Reuters back in March 2021.
• Xingji Technology, a company established by Li, acquired nearly 80% shares in beleaguered smartphone maker Meizu last summer, which preceded the establishment of Xingji Meizu and the release of Meizu’s first high-end handset series in two years this March.
• Xingji Meizu is also leading the business development of Geely-owned Swedish automaker Polestar in the Chinese market, having set up a joint venture with the EV maker in June. 
• Geely founder Li first revealed his plans to enter the smartphone market back in 2021.

The semiconductor industry can, on a basic level, be split into parts based on function — sense, transmission, computing, and storage. We tend to focus on news and developments on the latest processor, CPU, or communications chip, but what about the simpler chips at the very edge like MEMS (Micro-Electro-Mechanical Systems) sensors instead of advanced AI edge processors? Not all sensors are MEMS and not all MEMS are sensors, but MEMS sensors are everywhere from smartphones to cars, from smart factories to medical apps. So, what are they, how is China progressing in them, and are US sanctions playing a role?

MEMS involves the miniaturization of mechanical and electro-mechanical devices, with dimensions ranging from micrometers to millimeters. MEMS devices are created using microfabrication techniques like those employed in the semiconductor industry. The devices contain tiny moving parts that sense, measure, and control things such as acceleration, pressure, temperature, and light.

China’s MEMS market

China is the largest MEMS market in the world, worth as much as $14.4 billion in 2022, and potentially as much as $24.6 billion by 2025. Today most MEMS feed into the consumer electronics and automotive electronics industries, almost 77% of sales. There is one problem though: foreign companies dominate the Chinese market, as most Chinese players are extremely small. Over 60% of MEMS are imported, with the figure moving above 80% when just counting high-end MEMS products.

Goertek, at 2%, is the only Chinese company with any significant market share. Broadcom (11%), Bosch (8%), STMicro (4%) are some of the larger players in the Chinese market. The industry as a whole is rather fragmented though, with 54% being ‘other’ companies that are too small to make up even 1% of the market share.

I have counted at least 70 Chinese MEMS companies, ranging from design, to IDM, to manufacturing. Products range from audio, MEMS mirrors, microfluidics, optical, radio frequency MEMS, gas sensors, pressure sensors, and more. Most of these companies are found in Shanghai, Jiangsu, and Zhejiang, with Suzhou in Jiangsu province as a major production base.

Investments in MEMS grow every year, from 43 different investments in 2017 to 144 investments in 2022. Investments focus on consumer electronics MEMS, automotive MEMS, bio-medical MEMS, and industrial MEMS. Bio-medical MEMS companies have seen the most investments but consumer electronics have brought in the most in monetary terms.

So why the growth in MEMS imports and how is it going with boosting domestic know-how and production? First, let’s consider market drivers, and second, government policy.

Market drivers and policy

The need for high-end imported sensors has constantly increased along with growth in China’s consumer electronics assembly industry, as this has started to flatten out, new industries have stepped in to help continue this growth in demand for MEMS sensors. Big data coupled with IoT means more and more sensors are being used to gather data for processing. These sensors may be applied to smart cities and factories and become prevalent in EVs. In EVs some of the most common sensors are inertial sensors like accelerometers and gyroscopes; optical MEMS like mirrors for driverless solutions, pressure sensors for airbag deployment or inside batteries; and thermal sensors to monitor subsystems like BMS. More than 100 MEMS sensors are now used in every car, and this figure will increase.

Automation and safety, whether it be in a vehicle, a factory, or a city, require these sensors.

China’s 14th Five-Year Plan, the 2021 Development Plan for Basic Electronic Components, and the 2021 Three-Year Action Plan for IoT Infrastructure all mention MEMS, the second of which even calls for targeted support of temperature, gas, motion, photoelectric, velocity, and biochemical sensors. The private industry has taken note, and that’s why we are seeing more and more companies entering the field, and local governments adding support initiatives of their own.

US sanctions

While the majority of US sanctions have focused on high-performance semiconductor manufacturing equipment and computing chips, sensors have been caught in the political crosshairs, and the February China balloon incident might mean the sector comes under more scrutiny. Since 2018, I can count at least six MEMS-specific companies that have been placed under some form of US sanction. Including sensors in general this may be over 16 companies. Chinese companies that directly describe themselves as MEMS companies include, MTMicrosystems, Shanghai Nova Instruments, North (Tianjin) Microsystems, Shenyang Institute of Instrumentation Science, Beijing Yanjing Electronics, and Hangzhou Haikang Micro Image Sensor. Only one company sanctioned after the balloon incident is sensor-focused, Dongguan Lingkong, specializing in long-range sensors. Further information is hard to find because its website seems to be down, as is the website of its major 80% controlling shareholder Eagles Men Aviation, also on the list.

Conclusions

Despite these sanctions, most Chinese MEMS companies face no restrictions. The market is dominated by foreign players, but I see no technical reason why Chinese firms can’t compete with the big boys. Right now, though, most lack the economies of scale to compete globally. Government interest in this area could help but we seem to see more local help, from municipalities like Suzhou, rather than central government help, as there are fewer barriers in this space compared to other parts of the semiconductor industry. I expect in the coming years we will see China’s larger players like GoerTek, SMEI, and MEMSRight gradually grow, even into foreign markets, while foreign firms continue to dominate in the foreseeable future. Automotive, bio-medical, and industrial sectors all show strong growth potential in China, which is good for the MEMS industry, and despite a weaker consumer electronics industry and some factories moving away from China, the fact is it is still the largest electronics manufacturing center in the world, and so China’s appetite for MEMS solutions in this space will stay strong.

One of the bright spots when it comes to China’s semiconductor industry is its design capabilities. Yes, these companies mostly rely on US design tools, and when designing leading-edge designs, need to use outside fabs such as TSMC and Samsung, but from a pure design point of view, there is some very skilled talent in China. It’s good enough to get sanctioned at least, with notable examples being Biren Tech and YMTC.

So, how was 2022 for China’s chip design industry then? Is it growing? What problems does it face?

The 2022 Numbers

Last year, 433 new chip design companies were established, bringing the total in China to 3,243, an increase of 15.4%, but the first growth rate drop in four years. Surprisingly, despite talk of companies struggling and sometimes failing, the total number of design companies continues to grow.

Total sales have also increased to roughly RMB 534.6 billion (USD 79 billion). Despite this, given the increase in the number of companies, this works out at sales of around RMB 165 million (USD 24 million) per company, the same as in 2021.

The Yangtze River Delta still accounts for over 50% of design industry revenue but central and western China, despite still only accounting for 15% of revenue, is growing at 49%. Cities like Wuhan, Xi’an, and Chengdu are playing ever more important roles in the industry as they have good universities and lower labor costs. It’s more cost-effective for a lot of these new companies to set up there, compared with the east coast.

Most of these design companies are very small though. Only 566 of them have revenues over RMB 100 million (USD 15 million). In fact, the total revenue of these 566 companies reached RMB 494 billion, meaning they account for roughly 92% of industry revenue with only 8% or RMB 41 billion remaining for the other 2,677 companies, leaving approximately RMB 1.5 million (USD 224,000) each. Suffice to say, the majority of semiconductor design firms in China are making close to zero revenue, have less than 100 employees, and are likely relying on venture capital and government money to survive.

In 2022, we continued to see design firms look to the stock market to raise capital. In total 25 such firms listed publicly, with a combined value of RMB 472 billion.

Overall, the year was a mixed bag, but from a macro perspective at least, Chinese firms are doing a bit better than I expected. However, consolidation would be preferable to having a large number of small firms.

The Problem

Despite COVID-19 and sanctions, officially at least the Chinese design industry continues to grow. In some cases, sanctions have helped firms. Losing access to foreign technology means some Chinese design firms must either find ways around sanctions or buy local. The same can be said of their customers who now may buy local designs to have a more secure supply chain. Of course, it isn’t all rosy in this regard. Just recently, we saw Biren Tech lay off workers and simplify its product to survive. YMTC laid off 10% of its workforce directly due to the sanctions placed upon it. Being forced to buy local, either through necessity or because of orders from on high, can result in a worse end product, slower TTM, more bugs, or lower yields. There are silver linings for certain firms, but overall I’d say Chinese companies would prefer it if there were no sanctions.

Most of China’s chip companies and their revenues still come from the consumer electronics chips sector as well as from telecommunications. Many of these are simpler chips that are designed for mature process nodes. The problem China’s industry needs to overcome is how to move up the chip value chain while avoiding sanctions. At this moment, the design capability is there, but why should companies like Biren Tech bother designing for the leading-edge if they are still going to lose access to TSMC or Samsung? That would entail doing a lot of design work with no way to manufacture it. Recently, a now-blocked article written by a China industry veteran went viral in China. It outlined how China will take until 2030 at the earliest to be competitive at even 28nm for lithography, etching, deposition, and other semiconductor manufacturing equipment. The author also concluded that it would take until 2053 to fully catch up, admitting this was a conservative estimate.

This is the crux of the problem now for Chinese design firms and the Chinese government. They are fully capable of designing powerful high-end chips, but if they risk losing access to the ability to manufacture a design after spending millions creating it, why go to all the effort? On the other hand, if Chinese firms stop perusing such designs altogether, the talent will either go elsewhere or be used to work on things that can actually go to market. China needs to somehow find a way to continue funding such projects to maintain its high-level design capabilities despite being aware that there is a high likelihood of zero returns on investment, while simultaneously looking to find ways to speed up its equipment R&D. This is easier said than done, and in my opinion impossible to achieve during this decade, especially since its own equipment firms are sanctioned, corruption is common, big-fund bosses are under investigation, and private firms are unlikely to continue working on designs without the promise of returns.

Recent joint sanctions from the US, Japan, and the Netherlands only serve to exacerbate and compound the problem. While previous sanctions mainly affected firms working at 14nm and below, and focused on US equipment, new sanctions mean China loses access to Dutch and Japanese equipment that could affect China’s fab expansion for mature nodes. Some DUV machines from companies like ASML and Tokyo Electron are to be banned because they can still be used to create 7nm or even 5nm designs. If this were to be expanded to all DUV machines, it would affect mature node fab expansion in China as well and affect China’s ability to be self-sufficient even when it comes to simpler mature node designs. It will be interesting to see how far these bans go and how well they are enforced. China’s response so far has been rather tame compared to years gone by. The coming year and the rest of the decade will be an interesting watch. Personally, I can’t see any easy route out of this for China in the current climate.

Editor’s note: China is on holiday for the Lunar New Year, or Spring Festival, from Jan. 21 to Jan. 27. For the week, TechNode has prepared three yearly summary reports. They include a list of the most-read articles, an in-depth feature on the rising Chinese EV sector, and an analysis of the growth of China’s overseas shopping apps. 

In 2022, many Chinese tech companies struggled to keep growing amid slowing demand, drastic Covid control policy changes, and heightened geopolitical tensions. 

TechNode looked back on articles published in this tumultuous time and saw readers gravitate toward several topics: new Chinese consumer tech products, the rise of Douyin and Shein in e-commerce, the US’s chip sanctions on the entire Chinese semiconductor sector, and key moves from China’s tech giants. 

Below are the 10 articles read the most by TechNode readers in 2022: 

1- A guide teaching programmers “to live longer” goes viral on GitHub among Chinese tech workers

A Chinese-language guide on GitHub entitled “HowToLiveLonger” was trending within the Chinese tech community in late April. Despite its serious and scientific tone, the new “guide” appeared to be a pointed joke, taking aim at ongoing overwork practices in China’s tech industry and their impact on employees’ mental and physical well-being. Its popular reception in Chinese tech circles reflected the community’s mood. 

2- ByteDance acquires two new entertainment companies

Chinese tech unicorn ByteDance acquired cinema ticketing platform Yingtuobang and online comics service Yizhikan Comics to further ramp up its push into the entertainment market, Chinese media outlet Tech Planet reported in mid-January. 

With the new acquisitions, the Beijing-based TikTok developer further expanded the reach of its entertainment empire, which already consisted of short video apps, short- and long-form video platforms, news aggregation services, online novels, gaming, music streaming, idol management, and virtual idols.

3- Tencent reported to be cutting 20% of its workforce

Chinese tech giant Tencent reportedly planned to lay off around 20% of its staff in mid-March, joining a lengthy list of tech firms trimming their workforces since 2021. 

Deep-pocketed tech titans such as Tencent and Alibaba, which are generally less vulnerable to small market fluctuations, have largely maintained their headcount until recently. The two giants have not been immune to China’s ongoing economic downturn, regulatory curbs, and international trade tensions.

4- China’s NFT market: Who are the major players, and what makes them different?

In China, the NFT digital art market is bustling with new players and projects. That may come as a surprise for people familiar with China’s strict approach to cryptocurrency, with the country having fully banned crypto trading and mining in 2021. However, China has also embraced controlled versions of blockchain technology, such as the digital yuan, encouraging its growth in various sectors. So far, China has allowed NFTs but banned people from speculating and trading them. 

NFTs are viewed more as a derivative of blockchain technology rather than a tradable asset in China. Tech majors such as Alibaba, Tencent, and JD have built their own platforms where users can buy and collect NFTs but are prohibited from trading or reselling their purchases. Most Chinese tech giants don’t even use the term NFT, hoping to stay on regulators’ good side and avoid association with the global crypto market. Instead, they use the term “digital collectible.” 

5- The US’s moves to contain China’s semiconductor industry: a timeline from July

In early October, the US announced a new set of semiconductor export restrictions aimed at cutting China off from accessing certain high-end chips and further limiting the country’s ability to make advanced chips themselves. 

The US Department of Commerce’s Bureau of Industry and Security issued nine new rules, imposing export controls on advanced chips, transactions for supercomputer centers, and transactions involving certain entities on the Entity List. The rules also imposed new controls on certain semiconductor manufacturing equipment and on transactions for certain integrated circuit end uses. 

6- Chinese semiconductor firms bear heavy fallout of US chip sanctions

After the US issued one of the broadest export controls on semiconductor technology to China in a decade in October, China’s semiconductor industry saw its market value tumble. At least 13 China-listed semiconductor firms saw their market value decline more than 10% in less than a week, and five saw a more than 20% decline. 

Issued by the US commerce department, the comprehensive restriction bars companies from shipping advanced chips and chipmaking tools to China unless they obtain a special license. More specifically, the restrictions aim to cut off China’s access to and ability to make advanced chips under 16nm or 14nm, DRAM memory chips of 18nm or more advanced, and NAND flash memory chips of 128 layers or more. These technologies are essential to supercomputing and artificial intelligence. 

7- Gadget review | Oppo Watch 3 Pro: a high-end Android watch that lasts for days

Chinese phone maker Oppo released its new generation of smartwatches, the Watch 3 series, in August with a price tag of RMB 1,599 – RMB 2,099 ($228 – $300). The company first entered the watch market in 2020, updating its range annually since then.  

The latest series has a new look and offers more premium features such as long battery life, and an always-on feature supported by a LTPO OLED display. 

The version TechNode tested, the Watch 3 Pro, is currently only available in mainland China and Oppo has yet to reveal any plans regarding overseas markets, but there is an expectation that it will eventually be sold internationally. 

8- Gadget review | Xiaomi 12S Pro review: Flagship made for photographers and gamers

Xiaomi launched the 12S Pro in China in early July. The phone is the mid-range offering in Xiaomi’s new 12S lineup (including the 12S, 12S Pro, and 12S Ultra), which updates annually and targets a broad range of mid-end to high-end users. The series is also the first set of Xiaomi phones to use Leica lenses. TechNode got a hold of the 12S Pro and spent a week using and testing it. 

The phone is a solid choice as a primary daily device. The Leica-branded cameras can lure photography lovers, and the 12S Pro’s specs offer a quality entertainment experience. We would also recommend it to avid gamers and video watchers.

9- Douyin sees e-commerce sales more than triple in the past year

TikTok’s Chinese version Douyin announced in late May that its online sales had more than tripled for the year ending in April 2022, an impressive growth rate for the e-commerce up-and-comer when other majors were slowing down due to an economic downturn in China.

Chinese short-video platforms such as ByteDance-backed Douyin and Kuaishou are quickly eating into the market shares of e-commerce giants such as Alibaba, JD, and Pinduoduo, thanks to their widely popular social content.

10- How Shein became China’s ‘TikTok for e-commerce’

Shein was among hundreds of thousands of Chinese startups that tapped into the country’s emerging cross-border e-commerce industry when it was founded in 2008 in the eastern city of Nanjing. 

More than a decade later, it’s a Chinese fast fashion decacorn (a private technology company worth more than $10 billion) with a market cap of $100 billion. Only three other tech juggernauts — ByteDance, Alibaba’s Ant Group, and SpaceX — have surpassed that benchmark, according to Crunchbase’s private unicorn list.

Shein is a much lesser-known name than its local peers, such as Alibaba and JD. Its relative anonymity is largely due to its unusually low profile, typified by the lack of public information on its mysterious founder Xu Yangtian, also known as Chris Xu. However, Shein is a name that is increasingly difficult to ignore, as its extraordinary growth has people comparing it with big-name rivals like Amazon and Zara.

The article was first published on Global Corporate Venturing.

Politicians in the White House and Europe want to bring tech manufacturing back to its home turf. But while tech companies like Apple are slowly moving manufacturing operations away from China, they’re shifting them over to India, Vietnam, and Mexico – not the US.

The reality is that bringing manufacturing back to the US or Europe is more complex than it seems because of the deeply embedded chains built over decades of East-West collaboration.

We believe that Western re-shoring will be a long struggle and that Chinese hardware businesses will continue to make excellent investment targets in the meantime.

Rebuilding industrial value chains will take time

The US offshored a significant amount of production, such as electronics, in the 70s, which extended into IT and communications in the 90s. Restoring these abilities requires significant time, investment, and effort. Even the most basic of necessities – the humble N95 face mask – required navigating a complex maze of obstacles to have it manufactured back in the US. The irony was US companies had to import materials and production equipment from China to make it possible to manufacture the masks locally. Building a resilient supply chain is expensive as well, just to ensure there are alternative sources and resources. And knowing the bureaucracies of US politics, there’s the challenge of getting all regulatory agencies to work together.

Capital markets aren’t supporting manufacturing

Known as the smile curve and the ‘Manufacturing Gap,’ where the return on capital is too low for capital markets to invest in, the smile curve hypothesis shows that the manufacturing stage is the least valuable in the entire industrial value chain.

This is very much true: chip designers enjoy gross margins as high as 60%, while companies that produce and assemble the chips average just 17%, according to Bloomberg Intelligence. Currently, chip design is dominated by the US market at 68% of the market share. But the US possesses just 3% of the outsourced semiconductor assembly and testing market.

In the West, labor is expensive, energy is costly, and companies struggle to find banks to finance their new factories, especially if it takes up to two decades to pay off.

If we look at NASDAQ to see where capital flows, less than a quarter goes to hard tech. Assuming most of it is R&D, design, and marketing, we can expect even less going into the actual manufacturing of the product. However, more than half of all the market capital is invested in software, and the rest is laid across a broad variety of services and fundamentals.

The Chips Act and the Inflation Reduction Act will not benefit smaller startups

The Chips Act and the Inflation Reduction Act were passed to encourage bringing manufacturing back to the US, creating more jobs, and protecting intellectual property. Subsidies and tax cuts are in place, but we see these mostly benefiting the large conglomerates such as Intel or Texas Instruments. From a WACC (weighted average cost of capital) standpoint, expected returns range from 10% to 15%. For smaller startups backed by venture capital funds, that only makes sense at a 30% internal rate of return. Yet small companies make up the bulk of the market.

And as S&P Global Market Intelligence reports, “there are also plenty of challenges that the Chips Act can’t directly address — a complex brew of economic factors, logistical bottlenecks and disruptions, trade wars, shifting geopolitics and (not least) technical barriers — that could mitigate any positive impacts attributable to the Act.”

Learnings from the clean tech bust a decade ago

The 2011 Solyndra bankruptcy was a valuable lesson for many tech investors, a spectacular failure in the clean tech bust at the beginning of the 2010s. In total, government grants worth $1 billion went up in smoke — it was quite exceptional that a single clean tech company could receive so much in grants. The concept of solar energy drawn from a revolving tube of alternative solar-sensitive materials was interesting, but the delivery and execution left much to be desired. This can be attributed to 3 primary reasons:

(a) Extremely high cost

From R&D to manufacturing to distribution, several teething issues weren’t resolved. Solyndra invested in a costly custom machine that couldn’t reach its expected output. In the end, a Solyndra module’s production cost 30% more than a traditional solar panel.

(b) Slow ramp-up

Poor timing. In 2008, polysilicon prices, a key element for solar panel production, was $300/kg. By the time the federal government approved Solyndra’s loan, the prices fell to $50/kg. Natural gas prices fell as well, contributing to lower energy prices. At the same time, a flood of Chinese-made solar panels became a much more viable option.

(c) Slow revenue

Private venture capital funds typically work on three to five-year horizons. Energy and environmental technology initial offerings on traditional exchanges take an average of 8.3 years.

As TechCrunch reports, “Solyndra had the innovations, but it didn’t get to the price point where it could compete, not only with other energy sources but even with the conventional solar panels it was trying to disrupt.” 

The combination of factors – the 2008 financial crisis, cheaper natural gas, and China’s affordable quality solar panels – formed the perfect storm for Solyndra to fall.

We’re starting to see the same thing happening today. Remember Nikola, touted as the global leader in zero-emissions transportation, energy supply, and infrastructure solutions? The stock (NKLA) price is down 70% today. And chip plants aren’t cheap or easy. Building a chip plant in the US is several times what it costs in Taiwan and Asia. Just an entry-level plant in the US will cost $10 billion to $20 billion, and up to five years to build. Let’s not forget operational costs. A chip plant requires an average of 4.7 million gallons of water daily – unable to meet today’s ESG requirements. A semiconductor engineer’s salary in the US is $118,300 a year, while the same engineer in the Taiwan region is paid $32,500 a year. If we do the math, many of these costs will be passed on to our pockets: the consumers.

“One of the big reasons for this is that the cost of labor is lower, and it’s just far cheaper to produce at a very massive scale, integrated circuits and chips, in those parts of the world (Asia),” says Columbia Business School professor Dan Wang. 

Morris Chang, the founder of TSMC, said that it costs 50% more to manufacture chips in the U.S. than in the Taiwan region.

Difficult to replicate Tesla’s success 

Of course, many will cite Tesla as the most obvious, successful, hard tech company out of the US. It is worth noting that aside from the US, Tesla has built factories globally in markets where they are popular: Germany and China. Two crucial points stand behind its success:

(a) Tesla is a direct-to-consumer company. There are no middlemen costs in between. Even more so with their factories located in customer countries.

(b) The founder, wealthy from his sale of Paypal and eBay, assumed Tesla’s earliest startup risks heavily with his personal funds.

We can safely assume that most startups in materials or hard tech don’t have, or can, afford that model.

When bringing tech manufacturing back to shore is motivated by politics, it inevitably increases costs for everyone, due to the lack of consideration for economic fundamentals. Even with a substantial investment of capital and resources, a clear and present risk of failure remains. While there is a resurgence of hard-tech startups in the market, we prefer to remain cautious – as we, like all capital investors – must look at the hard economics first.

We believe in this because our investment philosophy centers around not just the science behind the tech, but also the macro and microeconomics behind it. It is one of the reasons our investments regularly deliver positive results.

In conclusion, we can expect this to be a long value chain struggle. While there are plans and steps in place to close that manufacturing gap in the West, it will be years, possibly decades, before that becomes a common reality. Until Western manufacturing costs fall to a level that can beat Chinese manufacturing outputs, the advantage of Chinese manufacturing cost, quality and experience remain our preferred reality for now.

The UK government required the semiconductor firm Nexperia BV to sell most of its acquired Welsh wafer fab due to “risk to national security” on Wednesday. Nexperia BV is a Dutch subsidiary of China’s Wingtech technology. 

The Welsh wafer fab, named Nexperia Newport Limited (formerly Newport Wafer Fab), is the largest fab in the UK, according to CNBC’s reporting. It has been fully acquired by Wingtech since last year.

Why it matters: This is a stronger move to stop China from acquiring critical semiconductor tech from the UK. Previously, the UK government just declined such acquisitions as it did in the case of a Chinese company trying to acquire electronic design automation (EDA) firm Pulsic.

• UK officials could now push harder to ask Chinese firms to lose control of formerly UK-owned entities related to semiconductor tech. 

Details: The acquisition began in 2018, when Wingtech obtained 79.97% of Nexperia’s shares, becoming its largest shareholder. Wingtech then bought the rest of Nexperia’s shares in 2020. During the previous year, Nexperia also invested in Nexperia Newport Limited (then Newport Wafer Fab) and became the company’s second-largest shareholder.

• In July 2021, Wingtech obtained full control of Nexperia Newport Limited when Nexperia acquired the remaining 86% of Nexperia Newport Limited’s shares, according to the UK’s notice. The deal closed in August 2021, according to Chinese media outlet Caixin.
• According to the “notice of Final Order” from the UK Department for Business, Energy and Industrial Strategy (BEIS), the acquisition met the criteria of a risk to national security. Specifically, the stated risk related to “technology and know-how that could result from a potential reintroduction of compound semiconductor activities at the Newport site and the potential for those activities to undermine UK capabilities.”
• The notice also suggested that Nexperia Newport Limited could serve as a block of a local industry alliance called the South Wales Cluster, for national security purposes.
• The notice requires Nexperia BV to sell at least 86% of Nexperia Newport Limited during a specified period and through a specified process, which is almost equal to an undoing of the acquisition.
• Nexperia made an announcement on the same day, saying the firm is “shocked by the Secretary of State’s order to divest Newport Wafer Fab.” The announcement stated that the acquisition was cleared by two previous security reviews and the company expressed disappointment in the UK government’s inconsiderable actions without proper negotiation with the firm.
• In addition to the complaint, the firm claimed that it would “prioritize looking after the impacted employees at Nexperia Newport and reducing the negative impact on its customers.”

Context: Wingtech is a Shanghai-listed firm focusing on integrated device manufacturing, imaging module, and communication product integration, according to its official website.

• Headquartered in the Netherlands, Nexperia has over 500 employees in Newport, UK, according to its Wednesday announcement. In addition to the two wafer fabs in the UK (Manchester and Newport), Nexperia also has one in Germany.

The China International Import Expo (CIIE) 2022 was held in Shanghai from Nov. 5-10, with primary chip manufacturing tool makers such as ASML, Lam Research, Canon, and Nikon among those in attendance.

The presence of the latter two was especially significant this year. ASML, a vendor for the most critical chipmaking equipment photolithography, has stopped serving Chinese clients due to American engineers being unable to work for advanced Chinese chip houses without a license under the US’s new chip export control measures released on Oct. 7. Although ASML dominates the photolithography market with a 90% share, according to Reuters, traditional Japanese optical giants Canon and Nikon are increasingly fighting for a foothold in the sector – and now have an opportunity to make in-roads in the Chinese market.

Canon entered China in the semiconductor manufacturing tools business in the 1980s, shipping photolithography and other chipmaking tools to local clients. Today, Canon provides equipment to major Chinese firms including SMIC, YMTC, and BOE, according to the firm’s brochure at CIIE.

In a group interview at the expo on Nov. 7, Akira Makino, chairman and president of Canon Optical Industrial Equipment (Shanghai) Inc., talked about the company’s lithography equipment and his views on the Chinese market. He also spoke of his optimism despite the recent downturn in consumer markets.

Below are selected highlights from the interview relevant to the Chinese market. The text has been translated, condensed, and edited for clarity.

On Canon’s competitive advantages

The most advanced equipment we have built in mass volume is krypton fluoride (KrF) lithography, the wavelength of which is 248nm. The minimum linewidth it can cope with is 90nm.  

Chipmaking can require multiple layers and the process is quite long, but not all layers need the most dedicated equipment. For these “rough layers,” our KrF photolithography could handle the work. We are also working on some new equipment, thought this is not yet ready for mass production.

From the technique perspective, our product is fundamentally different to our major rivals in pattern making. Nanoimprint lithography (NIL), the technology we contribute to, is expected to reduce production costs as extreme ultraviolet lithography (EUV) costs are presently quite high. If we manage to get the equipment ready for mass production, it will be revolutionary, largely reducing the spending on advanced chipmaking.

Secondly, our equipment is overwhelmingly more power efficient compared to EUV, another big cost advantage. 

Finally, nano-printed patterns are printed once for each layer, unlike traditional lithography, which uses complex processes such as self-aligned double patterning and self-aligned quadruple patterning (SADP/SAQP), with which a single layer of patterns may require more than two exposures, so we think there can also be a productivity advantage.

On sales of Canon lithography in China

Specific sales numbers and the unit amount that our clients possess are classified. But according to the publicly available data, the Chinese market became Canon’s largest market in 2020. Of course, this is not only the case Canon; for many semiconductor manufacturers, China is likely to be their biggest market.

Relatively speaking, our flat panel display (FPD) lithography and display panel manufacturing industries are concentrated in Asia. In this region, China’s share is the highest: China has contributed the largest share of Canon FPD business in FPD lithography equipment and OLED display manufacturing equipment.

On the Chinese semiconductor market’s development in the next five years

For Canon, relationships with our customers and partners are of great importance to us. I have been in charge of the lithography business in China for 17 or 18 years. During this period, I have built good partnerships with customers in China. Some of them are domestic firms and others are from regions like Korea, Europe, and the US.

Of course, there are many factors that may not be controlled by enterprises or individuals. But for Canon and I personally, we have always adhered to the policy of “the relationship with clients is the most important.” We will continue to provide quality products and services to our clients and contribute to their growth in the future.

I believe that the [Chinese] market will definitely grow in the next five years, no matter whether it’s in semiconductors or fields related to displays. The display panel market has seen a downturn as smartphone sales are less promising, but such declines are relative to an over-performance last year. And generally speaking, I don’t think the growth trend is going to change. 

There is a characteristic of the semiconductor market – customers hear more information about its application in CPU and storage cards, but semiconductors actually have broad applications, for example in sensors, power control, and telecom devices. And new applications keep emerging. The variety of semiconductors and broad range of applications is a potential growth point.

Another point is that China has its own potential. China has a large population, which makes it a large market and it is still in a developing phase, so the consumption capability is growing – people can afford mid- and high-end products.

So there are two aspects: first, China has a lot of potential in its own equipment manufacturing; second, there is a strong consumption capacity in the market. For us, our perception is that this market will keep growing. As for recent trends, we believe they are just some adjustments along the way.

South Korean memory chip maker SK Hynix reported less promising than expected quarterly results on Oct. 25, with net profits dropping 67% year-on-year in the third quarter of 2022. Comments from a senior executive during a subsequent earnings call demonstrated concern for the firm’s business in China.

Why it matters: US authorities issued new export controls on Oct. 7, aiming to limit China’s semiconductor industry, measures that have had a ripple effect on international firms like SK Hynix operating plants in mainland China.

• SK Hynix’s factory in Wuxi comprises 13% of the global DRAM production capacity, according to an October report from Taiwanese consultancy TrendForce.

Details: On a Tuesday earnings call, Kevin Noh, chief marketing officer at SK Hynix, expressed concern over the firm’s plants in China and said the company could “face difficulties” in operating fabrication plants in the country when the one-year exemption from US restrictions authorized by the American Department of Commerce comes to an end.

• Noh indicated that SK Hynix could have difficulty equipping cutting-edge extreme ultraviolet lithography (EUV) for its fab in Wuxi. 
• One extreme outcome, Noh suggested, would be the possibility that the firm has to sell its China-based equipment or ship it back to South Korea.
• However, he also said that the firm doesn’t expect major disruption at the plant until the late 2020s unless the US refuses to extend its exemptions for shipping chipmaking equipment to Chinese plants.
• SK Hynix claimed that its plants in mainland China are in operation “without issue” and it hopes their operation will continue, according to a statement the firm sent to Chinese media outlet Caixin on Wednesday.
• The statement also said that “comments on the possible transfer of the Chinese facilities are based on extreme cases with low possibilities” and that it hasn’t “reviewed such options in detail and seriously.”

Context: China is an important market for SK Hynix. It had invested more than $20.3 billion in Wuxi by the end of 2020, and the firm has four factories and seven offices in China, according to Caixin.

• In addition to SK Hynix, international primary memory chip makers such as Samsung and Intel also have fabrication plants in China. Samsung, for example, has two plants for NADA storage chips operating in Xi’an, contributing 42.5% of the firm’s production capacity and 15.3% of the world’s total, according to a report released in late 2021 by TrendForce.
• The US’ new chip export controls on China target a broad range of operations. For example, equipment for making 128 layers of NADA chips, 18nm DRAM chips, and 14nm logic chips or more advanced chips can not be shipped to plants in mainland China under the new restrictions without a license from the American Department of Commerce.

Chip manufacturer TSMC sees a declining utilization in 6nm and 7nm processes as people buy fewer smartphones and PCs amid a global economic slowdown. It expects to cut utilization of certain chips in the next three quarters.

Why it matters: The market downturn will not see a recovery in the next six to nine months due to the “gloomy economic outlook,” according to market analysis firm Canalys. Chip contractors like TSMC, which had a high capacity utilization rate, now face vacancies in certain tech nodes.

• Such issues could worsen the situation for TSMC, which is already facing the loss of orders from mainland China due to the latest US chip export controls. For example, Biren’s BR100 GPU has adopted TSMC’s 7nm process, but the chipmaker has put its work with the firm on hold due to the ban.
• In more positive news, the development could help to relieve chip shortages in other fields such as gaming consoles. Steam Deck, Xbox Series X, and Playstation 5 all use AMD customized processors built with TSMC’s 7nm tech.

Details: TSMC released its financial results for the third quarter of this year on Oct. 13 and gave conservative guidance of 0.4% quarterly revenue growth for the next quarter. The company also said its 6nm and 7nm production could remain affected until next year.

• C. C. Wei, TSMC’s CEO of the firm, stated that the firm’s 7nm production capacity utilization was affected as a result of the weak demands of personal computers and smartphones and semiconductor inventory adjustments, which will be relieved in the second half of 2023.
• 6nm and 7nm nodes comprised 26% of TSMC’s revenues in the third quarter of 2022, according to a report from Counterpoint. Smartphones and high-performance computing (HPC) devices, like CPU and GPU for PCs and servers, made up 32% and 38% of TSMC’s total wafer shipment volume in 2022, respectively.
• The report also pointed out that “the global foundry industry’s utilization rate has reached its peak level in mid-2022 [and] the downtick will bring down business in all aspects in the next few quarters before any signs of improvement emerge in inventory levels across the semiconductor supply chain.” 
• TSMC’s utilization rate of 6nm and 7nm could drop to 80% to 90% in the next three quarters, and it would be unlikely to recover until clients such as Intel deliver more orders.
• Counterpoint’s report does however agree with TSMC that there could be “positive drivers” via new products such as Wi-Fi, radio-frequency (RF), and solid-state drive controller chips migrating onto 6nm or 7nm when the inventory cycle ends in 2023.

Context: TSMC is a top chipmaker worldwide, dominating 56% of the market by revenue in the second quarter of this year, according to Counterpoint. The chipmaker generated a revenue of $20.23 billion for the third quarter this year, a yearly growth rate of 35.9%.

• 7nm and 6nm are important tech nodes, contributing 17% of the global chip foundry revenues in the second quarter of 2022.

Apple has paused its plans to use storage chips from Chinese supplier Yangtze Memory Technologies (YMTC) due to mounting geopolitical pressure and criticism from US policymakers, sources told Nikkei Asia on Monday.

Why it matters: Apple’s reported move comes a week after the US announced sweeping export controls on China’s semiconductor industry, largely cutting the country off from accessing advanced chips and parts to make them. Apple’s decision to put the brakes on its deal with YMTC is a major blow to China’s most promising chip maker in NAND flash memory, as well as to Apple itself, which favored YMTC’s offering as it was 20% cheaper than that of its rivals. 

READ MORE: Chinese semiconductor firms bear heavy fallout of US chip sanctions

Details: Apple initially planned to use YMTC’s storage chips as early as this year and had already completed the process to verify the supplier’s 128-layer 3D NAND flash memory to use for iPhones, supply chain executives told Nikkei Asia.

• In April this year, YMTC passed Apple’s verification process to become the American tech giant’s third storage chip supplier alongside US-based Kioxia and Korea-based SK Hynix, according to DigiTimes.
• Apple was planning to use YMTC’s chip in iPhones sold in the Chinese market, Nikkei Asia’s report said, adding that the firm was originally considering buying up to 40% of the storage chips needed for all iPhones from YMTC.
• Now, even if Apple was able to secure a license to use YMTC’s 128-layer storage chip, the Chinese firm may not be able to produce advanced chips due to the US’s newly-introduced export bans affecting its production process, analysts told Nikkei Asia.
• Apple’s plans to work with YMTC were abruptly changed after US authorities announced comprehensive export bans on advanced chips in China Oct. 7. These measures included putting various Chinese firms on an Unverified List, which indicates that US officials cannot verify who the firms’ end users are; YMTC was one of those added to the list. US companies are barred from sharing any designs, technology, documents, or specifications with companies on the list without a license.
• Apple first began talking to YMTC as early as 2018 for cheaper storage chips according to Nikkei Asia. 
• The discussions between Apple and YMTC drew US officials’ attention in September of this year, when the US government reportedly began to consider putting YMTC on a blacklist and starting an investigation into the Chinese company, the Financial Times reported.

Context: Founded in 2016, YMTC is a leading Chinese semiconductor firm focusing on storage chips with self-developed Xtacking architecture. Storage chips are a critical component in devices such as smartphones and personal computers. 

• The state-owned firm receives funds from China’s semiconductor “Big Fund,” according to the Chinese enterprise database Qichacha.
• Since 2018, YMTC has seen significant advances in its storage chip technology, as it has skipped ahead twice in the critical field of nodes of chip layers – from 64 to 128 and from 128 to 232, according to the firm and Chinese state media Global Times.

Since the US issued one of the broadest export controls on semiconductor technology to China in a decade last Friday, China’s semiconductor industry has seen its market value tumble for days in a row. At least 13 China-listed semiconductor firms saw market value decline more than 10% since Monday, and five saw a more than 20% decline. 

Issued by the US commerce department, the comprehensive restriction bars companies from shipping advanced chips and chipmaking tools to China unless they obtain a special license. More specifically, the restrictions aim to cut off China’s access to and ability to make advanced chips under 16nm or 14nm, DRAM memory chips of 18nm or more advanced, and NAND flash memory chips of 128 layers or more. Those technologies are essential to supercomputing and artificial intelligence. 

The Biden Administration cites China’s advances in military systems as part of the reasons for the measure. In mid-September, US National Security Advisor Jake Sullivan emphasized the importance of “preserving our edge in science and technology” at a speech and said the US must “maintain as large of a lead as possible” on certain technologies like “advanced logic and memory chips.”

A day after the US issued the restriction, China’s foreign ministry spokesperson Mao Ning said the measure “runs counter to the principle of fair competition and international trade rules” and “deal a blow to global industrial and supply chains and world economic recovery” at a press conference. China Semiconductor Industry Association (CSIA) made an announcement on Thursday, saying they are “troubled with applying the concept of national security and foreign policy interest to each action of the discriminating trade policy.”

To assess the immediate damage of the US’s measure, TechNode selected five Chinese semiconductor firms that took a major hit, including three chipmakers, a chip gear vendor, and a server provider.

READ MORE: The US’s moves to contain China’s semiconductor industry: a timeline from July

Storage chip maker Yangtze Memory Technologies (YMTC)

• Major Chinese memory chip maker YMTC saw its essential US suppliers, KLA and Lam Research, withdrawing supporting units, according to the Wall Street Journal and Chinese media outlet Caixin. The two suppliers have paused support for the installed equipment, sources told Wall Street Journal.
• Applied Materials, a chipmaking equipment supplier of YMTC, which generated 27% of its sales from China in the second quarter of this year, said it was applying for export licenses.
• YMTC managed to ship 128-layer storage chips last year and just released more advanced chips this year that could be built with 232-layer tech, according to Chinese state media Global Times.
• Founded in 2016, YMTC is a state-owned firm with major funding from China’s semiconductor “Big Fund.”

Server vendor Sugon

• Sugon, a major Chinese high-performance computing servers vendor, has been on the US Entity List since 2019 and is one of the 28 entities affected by the new bans.
• Under the new ban, chips with a processing performance of 4,800 or above TOPS will be restricted. The firm has turned to AMD for authorized chips due to the previous CPU ban, which could be cut off by the new ban, according to a Wednesday report from TrendForce, a Taiwan-headquartered intelligence provider. The report also mentioned that major Korean memory chip providers Samsung and SK Hynix have stopped supplying to the firm, which is also important for machine learning.
• The firm’s history can be traced back to 1993, when its first computing system, Shuguang-1, came out. In 2019, the firm has launched servers with domestic Loongson chips in 2019. Its stock price has shrunk by 38.4% from the peak in August to its lowest point the day after the new bans were released, with stock price recovering slightly as of Tuesday.

Chip manufacturer SMIC 

• Semiconductor Manufacturing International Corporation (SMIC), a major Chinese chip maker, was previously banned from acquiring chipmaking tools for 14 nm or more advanced ones.
• The new measure now expanded the ban to 16 nm, a mature tech node, which could slow down SMIC’s strong growth.
• “SMIC’s revenue could grow at a 50% slower pace vs. our expectations in 2023 on the US’s stricter equipment export license requirements, as 48% of its new capacity to be installed by next year is in 28- or smaller nanometer node advanced chip manufacturing,” analyst Charles Shum told Bloomberg.
• The firm has seen a 10.8% stock price decline since Monday.

Memory maker CXMT

• ChangXin Memory Technologies (CXMT) is a major Chinese dynamic random-access memory (DRAM) maker that has shipped double data rate 4 (DDR4) chips built with 19 nm tech.
• The firm planned to make 17 nm DDR5 samples in the second quarter of this year, according to DigiTimes. Such a plan could be hobbled by the new measure, which bans export to Chinese facilities that make DRAM chips below 18 nm. As a result, CXMT may be unable to obtain new chipmaking tools.
• Similar to YMTC, CXMT is the “hope” of China’s memory chips as it managed to ship mid-end memory chips for devices like smartphones, watches, VR headsets, and servers, according to its product list.
• The firm’s stock saw over a 20% fall within a month. Since Monday, its stock price is down 9%.

Chipmaking equipment vendor AMEC

• Advanced Micro-Fabrication Equipment China (AMEC), a major equipment vendor for chipmaking, could also take a hit from the ban as it doesn’t allow “US persons” to support development or production.
• Gerald Yin, founding chairman and CEO of the firm, as well as many senior executives of the firm, are US citizens, according to Nikkei Asia. These people meet the ban criteria mentioned above and might need to leave the firm.
• AMEC’s stock prices have fallen by 26% since the release of the new bans.
• Founded in 2004 in Shanghai, AMEC has seen a focus in etch tech and shipped dielectric etch for producing 7 nm chips in 2016, according to its website.
• Another local rival, Naura, is also stuck in a similar situation, as the firm has informed US employees to stop taking part in component and machinery development, according to SCMP.

Major Chinese EV makers – Nio, Xpeng, and Li Auto – are all making moves in producing their own chips for vehicles, as the former two focus on AI chips for autonomous driving and the latter works on more basic semiconductor components, according to Chinese media outlet LatePost.

Why it matters: The move reflects a growing trend among Chinese EV automakers to bring some chip production in-house, as an ongoing global semiconductor shortage continues to hinder vehicle production.

• Globally, automakers have been forced to cut more than 3.4 million vehicles from their production schedules so far this year, according to the latest estimate by AutoForecast Solutions.

Nio looks to autonomous driving and lidar chips: 

• LatePost reported that Nio has formed a team of 300 people to work on chips. The team focuses on developing chips for autonomous driving and lidar. The direct leader of the team joined from Huawei’s chip arm Hisilicon last year.
• Nio first formed a chip unit in the second half of 2020, attached to the autonomous driving arm of the company led by Bai Jian, vice president of the firm’s hardware department. Bai was previously head of chip development at major Chinese phone vendors Xiaomi and Oppo.
• However, Nio has yet to reveal when the chips will reach the mass production phase or be used in their vehicles.

Xpeng develops NPUs for autonomous driving chips: 

• Having formed a chip unit of fewer than 200 employees, Xpeng is developing autonomous chips as alternatives to Tesla FSD chips with a computing capacity of over 100 trillion operations per second (TOPS), people related to the firm told LatePost.
• For comparison, the computing capacity of the Tesla chip Xpeng currently adopts in their vehicles has 144 TOPS and Nvidia’s newly released Thor hits 2,000 TOPS.
• However, according to the LatePost report, Xpeng is focused more on network processing units (NPUs), which can be used to accelerate AI and machine learning.
• For other modules like GPU and CPU on car processors, the firm plans to buy well-designed IP from partners such as Arm. The final design and composition work has been handed to US firm Marvell.
• A source related to Xpeng told LatePost that chip development has been slow due to Marvell’s relative lack of experience.

Li Auto focuses on power semiconductor devices: 

• Li Auto is less aggressive on the chip-making front. The company is still in the early stages of the process, researching markets with a unit of a few dozen employees. 
• The firm has opened some positions for AI and system-on-chip (SoC) architect engineers and AI/NPU sub-system designers with yearly salaries ranging from RMB 3 million to RMB 5 million ($420,000 – $700,000). The firm has yet to amass a large team, with its chip unit currently having about 10 people
• Li Auto has been working on more fundamental semiconductor components that power EVs and launched a product line for power semiconductor devices in March this year. Collaborating with domestic partner Sanan Semiconductor, the product line is under development and is due to be put into production in 2024.

Context: Multiple Chinese automakers have been looking to move into chip manufacturing, having been hit by the ongoing chip shortage amid growing uncertainty caused by multiple supply challenges, including the US chip export ban to China.

• BYD is by far the country’s biggest maker of automotive microcontroller chips and has recently begun trial operations at a new chip plant in the central Chinese city of Changsha, in addition to operating two existing facilities in the eastern cities of Jinan and Ningbo.
• Geely-backed Ecarx Holdings last May showcased its in-house developed seven-nanometer processors with plans to begin shipment as early as next year with partner Arm China. Potential clients include Lotus, Lynk & Co, and Volvo, all owned or associated with Geely, Reuters reported.
• EV startup Leapmotor in August began delivering its first electric crossover the C11, equipped with two proprietary AI chips dubbed “Lingxin 01,” with each delivering 4.2 TOPS at about four watts of power consumption.

On Friday, the US announced a new set of semiconductor export restrictions aiming at cutting China off from accessing certain high-end chips and further limiting the country’s ability to try to make advanced chips themselves.

The Department of Commerce’s Bureau of Industry and Security of the US issued nine new rules, detailing that new rules aims to impose export controls on advanced chips, transactions for supercomputer centers, and transactions involving certain entities on the Entity List. In addition, the new rules also impose new controls on certain semiconductor manufacturing equipment and on transactions for certain integrated circuit end uses. 

These rules will be less strict on firms “owned by multinationals,” according to the file. Twenty-eight Chinese entities on the US’s Entity List are affected by the expanded rules, most of which are supercomputer institutions and AI firms. Some new rules take effect immediately, with others effective before Oct. 21.

The US’s Bureau of Industry and Security adds 31 new Chinese entities to an “Unverified List,” including major Chinese memory chip maker YMTC. Firms that tend to export or transit products listed on the Commerce Control List to China now have to ask permission from the US. Entities listed on the Unverified List are one step away from being added to the Entity List if they do not meet the US’s requirements within 60 days.

These new rules follow a months-long effort of the US trying to contain China’s ability to obtain advanced chips and chipmaking tools. Since July, the Biden administration has barred Chinese chipmaking firms from acquiring tools for 14 nm and more advanced chips, focusing heavily on central logic chips like CPUs and GPUs. Since August, the US has also considered broader restorations in fields such as memory chips as major Chinese chipmakers YMTC and SMIC continue to develop their own chips. 

Below, TechNode summarizes the key moments from the US’s attempts to hobble China’s semiconductor industry since July.

July 6 – Lithography machinery

• US authorities talked to their Dutch counterparts to ban the Netherlands-based chip equipment supplier ASML from selling older deep ultraviolet (DUV) lithography machinery to China (the equipment can be used to make chips as advanced as 5 nm), people familiar with the matter told Bloomberg.
• The US also pressured Japan to stop shipping lithography equipment to China, Bloomberg cites an unnamed source as saying.

July 30 – Tools to make 14 nm chips

• The US further restricted China’s access to chipmaking equipment, expanding from previous restrictions of tools that make 10 nm chips to those involved in producing 14 nm chips.
• Two primary semiconductor suppliers – Lam Research and KLA Corporation – said that the US Department of Commerce had notified them not to ship products to mainland China for making 14 nm or more advanced chip nodes.
• People familiar with the matter told Bloomberg that all US equipment makers had received notification of the ban in the past two weeks.

August 2 – Memory chips

• The US was considering containing Chinese memory chipmaker YMTC by banning exports of equipment to make storage chips with more than 128 layers, Reuters reported. 
• Unnamed sources from two leading US-based chip firms, Research Corp and Applied Materials, told Reuters that the ban could also affect other chipmakers like Samsung and SK Hynix, which operate factories in mainland China.
• According to the sources, discussions were still in the early stages, and no draft regulations have yet been filed.
• Layer number in storage chips is as essential a metric as logic chips’ build processes. YMTC managed to develop 128-layer storage chips in 2020 and put them into volume production a year later. 

August 12 – EDA software

• The US announced a new export ban on electronics design automation (EDA) software for China’s advanced chipmaking. 
• The ban specified that US firms should not provide EDA for 3 nm or more advanced chips to mainland China.
• The ban’s immediate effect on China was limited but might curb further development in the future, an analyst told Caixin.

August 31 – High-performance GPU chips

• US officials issued a new ban on the export of high-performance GPU chips to China, concerned at their apparent use by the Chinese military, according to GPU giant Nvidia’s SEC filing.
• Nvidia’s major rival AMD told Reuters that the firm has also been notified of the new ban and a computing card produced by the firm will be affected.

September 21 – Nvidia looked to bypass US ban, providing alternative GPU to China

• Major GPU maker Nvidia told Caixin and other media outlets that they will supply alternative GPU products with their latest Hopper architecture to Chinese clients, bypassing the US ban and ensuring the product can meet the new regulations.
• The firm claimed that the new alternatives can fulfill most of the needs in the Chinese market and that they will try to apply for a license from the US if Chinese clients need the banned products.

Top GPU maker Nvidia told Caixin (in Chinese) on Wednesday that they will provide alternative GPU products to Chinese clients as many of them face imminent supply issues after the US government recently announced export bans on cutting-edge chips. 

Why it matters: The export ban from the US was aimed at limiting China’s expansion in AI and other tech fields that need high-performance GPU chips. 

• California-headquartered Nvidia is one of two major GPU makers (the other being AMD) that are particularly affected by the ban. 

Details: Jensen Huang, CEO of Nvidia, told Caixin and other media outlets that the alternative GPU chips will be built with their new Hopper architecture for Chinese clients, which enables them to sell the hardware without violating the export ban.

• The Hopper architecture is adopted in the coming 4nm H100 GPU, which is nine times more powerful in large-scale training than the previous generation, the A100, according to Nvidia. However, the company has yet to reveal what it will do to bypass the ban and ensure the product can meet the new regulations.
• The alternative chips can “fulfill most of the needs in China,” while for those clients who absolutely need the banned products, Nvidia could attempt to apply for licenses, Huang added.
• Huang emphasized that China is an important market to Nvidia and many important partners and clients are based in the country, saying he believed “the market will still bring increased opportunities to the firm.”

Context: The mainland Chinese market accounted for 26% – or $7.11 billion – of Nvidia’s global revenue during its 2022 financial year, which ended on Jan. 30, 2022.

• Nvidia’s revenue from the mainland Chinese market is more than 1.5 times that of the US market during the same period.
• Last week, Taiwanese media outlet UDN reported that Nvidia had sent urgent orders to TSMC for banned GPU chips, including A100 and H100.

Chip manufacturer TSMC will use chip design software from US firms to produce 2nm chips and expect to reach volume production of 2nm chips in 2025. The chipmaker increased its revenue growth target from between 24% and 29% to between 34% and 36% this year due to high utilization of production capacity.

Why it matters: TSMC and Samsung have been racing to reach volume production of 3nm chips first. On Aug. 30, TSMC claimed the 3nm chip will be put into volume production this month, despite encountering difficulties. As a result, the 2nm node is becoming the next competitive point for top chip makers.

Details: TSMC said they would achieve volume production of 2nm chips in 2025 and will use electronic design automation (EDA) software from the US to produce 2nm chips, according to UDN.

• The firm also revealed that the EDA software for advanced procession chips involves collaboration with US firms. In addition, American and European firms also lead other key sub-sectors in chip making, including IP, EUV lithography, and process monitoring equipment.
• A legal representative of TSMC estimated that US EDA software and IP will be at the core of the chip design industry in the next five to ten years, the report said.
• C.C. Wei, chief executive officer of TSMC, said on Aug. 30 that their leading 2nm tech will adopt a new nanosheet architecture, creating chips with stronger performance and endurance, and withstand higher currents.
• Wei also emphasized that TSMC is capable of designing chips itself but chose instead to focus on producing chips for clients.

Context: Last month, the US banned mainland China from accessing EDA software for advanced chipmaking. Meanwhile, the UK declined an acquisition of a local EDA firm by a Chinese company last month due to concerns about potential use by China’s military.

• American EDA firms control over 77% of EDA market shares in China in 2020, according to China’s CCID Consulting.
• Chinese local EDA providers like Primarius Technologies claimed the firm had “formed core key tools that can support advanced process nodes such as 7nm, 5nm, and 3nm,” according to their website.

Update: We have updated TSMC CEO’s name from Wei Zhejia to C.C. Wei.

Major Chinese chip maker SMIC announced on August 26 that it will invest $7.5 billion to build a new plant in Tianjin, the neighboring city of Beijing, to produce 12-inch silicon wafers at a rate of 100,000 pieces per month.

The new factory will focus on mature nodes, ranging from 28nm to 180nm, widely used in fields like electric vehicles.

Why it matters: As a major contract chip maker in China, SMIC could help northern Chinese regions develop in the semiconductor industry by building a new factory in the area. The eastern city of Shanghai and its adjacent Yangtze River Delta region traditionally have a strong advantage in semiconductor supply chain and talents. 

Details: SMIC reached an agreement with Tianjin authorities to build the 12-inch wafer factory, a primary size for chipmaking. 

• According to the agreement, SMIC will set up a new sub-firm in the development area of Tianjin, with registered assets of $5 billion. Following the agreement, the new firm will buy land for factory construction.
• SMIC stated in an announcement on the Hong Kong exchange’s website on August 26 that the newly invested project caters to the firm’s development plan and will benefit the firm in the long term. The firm also said all funding for the new plant comes from SMIC or was raised by the firm, and that the investment won’t have a notable impact on SMIC’s financial condition or hurt shareholder benefits.
• SMIC has not revealed when the new factory will start production, according to Nikkei Asia.
• For the plant, the company worked with Tianjin’s Xiqing Economic-Technological Development Management Committee and a state-owned developing firm in Tianjin — Tianjin Xiqing Economic Development Group. These local partners will also support SMIC in talents, land, infrastructure, and others.

Context: SMIC has three 12-inch wafer factories under construction in Shanghai, Beijing, and Shenzhen. The company also has four 12-inch fabrication facilities under construction in Tianjin, Shanghai, Beijing, and Shenzhen, according to the firm’s website.

• Beijing’s factory is estimated to begin operation in 2024, while the Shenzhen factory will be completed by the end of this year, according to SCMP.
• According to its financial report, the utilization rate of the firm’s production volume was 97.1% in the second quarter of this year. The figure fell slightly due to the building of new factories that count towards capacity but need time to contribute to production, according to Zhao Haijun, CEO of the firm.

Regional authorities in China’s central province of Sichuan said they will cut power supply to industrial factories for six days as the region suffers from heatwaves unseen in 60 years. The province saw a 25% surge in power consumption this year. 

Why it matters: More than a dozen notable electronics and semiconductor manufacturing firms, including BOE, Foxconn, CATL, and Texas Instruments, have factories in Sichuan. The power cut will directly impact their production, affecting downstream firms like Apple, Tesla, and Nio.

Details: The power cut will go into effect from Monday to Saturday, with all factories in the 19 cities of Sichuan province asked to suspend production, including those listed on the so-called “protected whitelist.” But the level of impact seems to vary between companies.

• Major Chinese display maker BOE confirmed that their factories based in Chengdu and Mianyang would “reduce their power usage to a minimum level” during the period, according to an announcement from the firm yesterday.
• Foxconn also shut down its factories in Sichuan temporarily. Ming-Chi Kuo, an analyst at TF International Securities, said the cut would “affect iPad assembly plants in Chengdu.” He added that “impacts should be limited if the power outage can end on August 20” and that flexible production scheduling would help to lower the effects.
• However, some semiconductor firms, including Chengdu Silan Semiconductor Manufacturing, Chengdu CORPRO Technology, and Square Route’s Chengdu sub-firm, told 21st Century Business Herald they are less affected by the policy.
• CATL, a major Chinese battery maker, also paused production in its Sichuan-based factory yesterday, sources familiar with the matter told Jiemian.

Context: Sichuan is a top area for producing electronics in China’s midwestern region. It brought in RMB 1.5 trillion ($215.6 billion) in revenue in 2021, according to 21st Century Business Herald.

• There are currently 717 registered firms in Sichuan focusing on hardware and smart devices, according to Qichacha.

Editor’s note: China’s semiconductor industry has been on edge since mid-July. This time, the threat comes from within. China’s corruption regulator has launched a series of investigations into some of the country’s leading figures in the semiconductor industry. Many work directly or indirectly with the state-backed China National Integrated Circuit Industry Investment Fund, also known as the “Big Fund.” 

Established in September 2014, the fund has been instrumental in nurturing China’s homegrown chipmakers, including successful examples like SMIC and YMTC. The fund runs on a market-orientated model and has more than a quarter of its equity held by the Ministry of Finance. These investigations could reshape the country’s most influential backer in the field and have implications for years to come. Below is an opinion piece looking at what we know so far, why it matters – and where things may go next. 

Leaders under investigation

Xiao Yaqing, head of MIIT; Ding Wenwu, President of China’s National IC Industry Investment Fund (Big Fund); Lu Jun, Chief Executive of Sino IC Capital and asset manager for the Big Fund; Wang Wenzhong, a partner at Hongtai Fund in Shenzhen and asset manager for the Big Fund; Yang Zhengfan, Deputy Head of an investment division of Sino IC Capital; Zhao Weiguo, ousted CEO of Unigroup, one of the largest beneficiaries of the Big Fund. These people may not be household names or even familiar to those who follow the China tech industry but they have all played a key role in government efforts to become self-sufficient in semiconductors. And all of them have now been placed under investigation by China’s corruption watchdog, the Central Commission for Discipline Inspection (CCDI).

What is the Big Fund? How successful has it been? And what problems does it have?

The Big Fund(s)

So, what is the Big Fund? Or perhaps we should say “What are they?” because there are officially two phases of the fund.

Big Fund I raised a total of RMB 98.72 billion in 2014. Its major shareholders are central governmental institutions and leading state-owned enterprises (SOEs). The majority of Fund I went to increasing the capacity and design capabilities of China’s semiconductor industry. For example, approximately RMB 30 billion went to foundry expansion, RMB 20 billion to IC design companies, RMB 19 billion to memory, and RMB 10 billion to assembly, test, and packaging (ATP). Equipment only received RMB 2 billion. The focus is clear: expand the capacity of logic and memory foundries, grow China’s design firms and solidify the country’s strong packaging industry. Most investments from Big Fund I took place between 2014 and 2019 – it planned to exit from these investments between 2019 and 2024 but may remain invested in some after this period.

The top recipients of Big Fund I money include YMTC (RMB 13.5 billion to RMB 19 billion, most that was invested into memory), HLMC (RMB 11.6 billion), SMIC North (RMB 10.4 billion), SMIC South (RMB 6.3 billion), San’an Optoelectronics (RMB 4.7 billion), and JCET (RMB 4.6 billion). 

When we look at how these companies are doing today, we can conclude these investments have been a success. YMTC is beginning to become a respectable competitor to Micron, SK Hynix, and Samsung; SMIC, despite limitations thrust upon it, is experimenting with multi-patterning techniques to create simple 7nm chips; San’an Optoelectronics is China’s leading compound semiconductor IDM; and JCET remains mainland China’s leading ATP firm, perhaps as good as rivals from Taiwan. Chip maker HLMC is maybe less of a success.

Phase two of the fund, Big Fund II, started in 2019 and will finish in 2024. It has similar shareholders but sees more SOEs participating. The total amount raised to date is roughly RMB 204 billion. While a large part of the fund still goes to the capital-intensive foundry sector, Big Fund II aims to focus on large investments to fewer companies in design and materials, though investments don’t seem to follow this stated goal. 

Different from Big Fund I, Big Fund II helps develop key companies through investing in their upstream suppliers and downstream suppliers, usually coinciding with the establishment of an industrial park. Big Fund II also aims to promote downstream applications in key sectors like automotive, big data, and communications. Big Fund II has only invested RMB 86.9 billion to date and expects future investments to focus on key sectors outlined in the 14th Five-Year Plan (2021 to 2025).

To date RMB 55 billion of Big Fund II has been invested in foundry expansion, RMB 18 billion in design, and RMB 13 billion in ATP. Very little has gone into equipment or materials. While this could be more related to the costs involved in chip manufacturing, which far outweigh the cost needed for equipment research, one would think this key bottleneck would have more focus. To date only around RMB 500 million seems to have been invested into equipment. For comparison, Dutch semiconductor equipment maker ASML spent 2.55 billion euros (RMB 17.67 billion) alone on research and development in 2021.

Nevertheless, the Big Funds have helped to drive private capital into areas the government wants. From 2015 to 2019, private capital driven by Big Fund I raised up to RMB 500 billion. It is estimated that Big Fund II might drive as much as RMB 600 billion. This brings the total raised capital from 2014 to the present to approximately RMB 1.1 trillion to RMB 1.4 trillion, to be invested over the next decade. 

Big Fund Problems

While I think there have been some successes, such as YMTC, Changxin Memory, and SMIC (despite more board departures) among others, the funds haven’t always been spent wisely, and this is especially true at the local level. Local government funds have perhaps wasted billions of yuan in the semiconductor industry since 2019.

It is not uncommon for local governments to blindly rush into popular industries, especially those that are key parts of the central government’s Five-Year Plan. This can create room for scams, which we’ve seen in several provincially funded projects due to corruption and poor due diligence. One good example is Wuhan Hongxin (HSMC), which aimed to produce chips from 90nm to 7nm. None of its founding members had any semiconductor experience yet they managed to entice a leading TSMC veteran to join as CEO, convince the Wuhan government to invest, and even managed to purchase some lower-end equipment from ASML.

It is common for the managing company to invest very little or even nothing in such projects, while most money comes from the local government. The Nanjing Huaiyin District government for instance invested more than RMB 2 billion in Dehuai Semiconductor in 2017, while its own annual public budget was only RMB 2.56 billion. More financing rounds followed, with most funds coming from the Huaiyin District government. Before mid-2020, it was common for local governments to conduct such billion yuan investments, and there are many more examples of wasted investments and unnecessarily large industrial parks that remain mostly empty. Phytium’s large 30-story building in Tianjin with only two floors used springs to mind, although this may have started to fill since my last visit in 2019.

In my experience, local investment decisions are often made by rooms filled with politicians and only one or two industry experts whose views may get crowded out. Such a trend was also criticized by the State Council in October 2020, but such investments have continued albeit in a more hidden manner.

Conclusions

We must remember the original goal of these funds: reducing foreign dependency on semiconductors. Yet China is importing more chips than ever. Despite its local production growing, imports have too, and the deficit has grown from a pure monetary perspective. 

In its updated ‘Made in China 2025’ plan revised in 2019, China explicitly states that it is targeting 58% of the chips it uses to be made in China by 2020 and 80% by 2030. In 2021, chips manufactured within China’s borders only accounted for 16% of the chips the country was using. It has massively failed at reaching this goal. Moving from the unrealistic goal of 40% by 2020 to 58% by 2020 really highlights to me just how out of touch with the industry Beijing is. Even the head of the Big Fund, Ding Wenwu, who is now under investigation, once warned it was “unrealistic” to cut corners. Well, it seems that is what was expected.

Chinese investment into the semiconductor industry in my view has faced the following problems:

1. Unrealistic targets set by people with little knowledge of the industry – some of the timelines and goals were way too ambitious – which lead to inefficient investments a lot of the time.

2. Lack of industry experts making decisions or being listened to. 

3. Tens of thousands of “semiconductor” companies appeared overnight to scam government cash; local and central government have a hard time telling which businesses are serious and which aren’t. Once they do get their hands burnt the process to get funds becomes harder for legitimate businesses as they are fighting against imposters.

4. Money is spread out among many companies, a lot is wasted, and a lack of investible ideas also means money often goes to companies that are unsuitable.

5. With this amount of money flowing, not having any corruption would be a big surprise.

In my opinion, China needs to realize the semiconductor industry is a global industry – no single country can be self-sufficient and such goals lead to spreading oneself too thin. Investments should focus on where China is strong: ATP, design, memory, and mature process nodes. YMTC’s success is a positive sign for Beijing. Becoming strong in memory first is a path Korea and Japan took, and perhaps Beijing can learn from them. Right now though, it risks becoming a jack of all trades. 

And with the US CHIPs Act passing, China may well feel more threatened than ever, so doubling down on its current path and investigating some executives to be scapegoats for any potential failures may be what it has decided is its best course of action. One has to ask oneself though, would the CHIPs Act even be a thing if China had not so aggressively pushed for the self-sufficiency dream?

The US has stepped up its restriction on China’s access to chipmaking equipment, expanding it from tools that make chips of 10 nm to 14 nm process technology, effectively cutting China’s ability to produce advanced chips.

Why it matters: A further ban on the Chinese chips industry would disrupt the supply chains of semiconductor producers worldwide, as the country is an essential part of the global semiconductor industry, according to Peter Wennink, the CEO of semiconductor giant AMSL.

Details: On July 29, Bloomberg cited sources from two primary semiconductor suppliers, Lam Research and KLA Corporation, saying that the US Department of Commerce had informed them to stop supplying products to mainland China for making chips under 14 nm in the past two weeks.

• In early June, the US talked ASML and Nikon into not supplying devices, including deep ultraviolet (DUV) lithography machines, for advanced chip making to mainland China.
• SMIC, a major Chinese chip contract maker, was previously able to import devices that can produce chips above 10nm, including DUV machines from ASML, with a license from the US authorities. 
• Although the measures are targeted at limiting the ability of China to produce advanced chips, they could have a major impact on non-Chinese-owned foundries on the Chinese mainland, such as those run by Samsung and TSMC.
• The tightening regulations are unlikely to affect storage chip makers, as these firms typically require less advanced processes. For instance, YMTC’s new storage chip launched this April uses a 20 nm process, according to Tech Insights.
• DUV can potentially make chips of up to 5 nm with multiple exposure technology, but the costs are often prohibitive. The more advanced extreme ultraviolet (EUV) machine can produce chips under 7nm with only a single exposure, Netherlands-based media outlet Bits&Chips wrote in a 2021 report.

Context: The US has been restricting the sale of equipment to Chinese firms to develop chips since 2020 and has sped up its effort in recent months. Last week, the two branches of the US congress passed the $280 billion Chips and Science Act. In addition, the bill will subsidize US semiconductor manufacturers and innovation and hope to strengthen its competitiveness in the crown jewel of modern technology. 

• The bill will provide $52 billion in subsidies for US chip makers and more than $100 billion in related technology investments. 
• Firms that receive funds from the bill are forbidden from building or expanding factories in mainland China.

Chinese auto chip startup Horizon Robotics on Monday announced that it has secured a new round of funding from state-owned automaker FAW Group, the latest example of local automakers upping their investment in the domestic semiconductor sector to cope with a prolonged global chip shortage.

Why it matters: The investment reflects Chinese automakers’ growing anxiety about the ongoing semiconductor constraints that have crippled them for more than a year and show no signs of abating amid recent Covid-19 outbreaks in the country.

New money influx: Horizon Robotics plans to use the proceeds to speed up the development of new auto chips for artificial intelligence computing and its software development, the company said in an announcement (in Chinese) on Monday. The funding amount remains undisclosed.

• Founded by Yu Kai, a former head of Baidu’s artificial intelligence unit, the seven-year-old startup said that the company’s Journey chips, which could enable rapid processing with vehicles’ advanced driver assistance systems, have shipped more than 1 million units as of last year.
• The company added that it has formed partnerships with more than 20 car manufacturers, including SAIC and Changan, making it the country’s largest producer of automotive-grade AI chips. Its existing investors include SAIC, BYD, and GAC Capital, the venture capital unit of the namesake automaker.

Persistent chip shortages: Last year, China only made 5% of the auto chips it consumed, according to figures published by US research company IC Insights and obtained by Caixin (in Chinese). Chinese automakers’ production has been hit by the low self-sufficiency in auto chips and an ongoing chip shortage, creating more demand for building more domestic auto chip firms to fill in the growing demand. 

• GAC is among a string of automakers being hit by ongoing supply chain issues, with production cut by 160,000 vehicles, equivalent to RMB 20 billion ($2.98 billion), in the first half of this year, chairman Zeng Qinghong said on June 25 at a semiconductor conference in Guangzhou.
• GAC, Toyota’s manufacturing partner in China, expects chip shortages will continue into 2024 and is thus looking for home-produced substitutes to ensure supply. The Guangzhou-based automaker has also invested in local chip foundry CanSemi to develop microchips for future vehicle models on 12-inch wafers.
• GAC is not alone. At the same conference, Bosch China’s president Chen Yudong called for more investment to increase domestic production of semiconductors in the country, estimating that production in China has fallen by 1 million vehicles during the first six months of 2022 because of supply issues.
• Struggling to recover from a lengthy Covid lockdown affecting several of its China plants, Bosch currently meets around one-third of the total demand for its car parts in the country but expects an improvement from July when it thinks supply could meet 60% at most of the market demand.

Context: China has for years been building an independent domestic chip supply chain, reporting a 33.3% year-on-year increase in domestic output of integrated circuits (ICs) last year, according to data released by China’s National Bureau of Statistics.

• The central government recently promised to take more measures to help domestic makers expand capacity and boost innovation, China Securities Journal reported Tuesday, citing Guo Shougang, a deputy director at the Ministry of Industry and Information Technology.

Revenues at Taiwan-based chip foundry TSMC are expected to overtake those of semiconductor giant Intel in the second quarter, according to Yahoo Finance estimates. Such a development would make TSMC the second-largest firm in the semiconductor industry, just behind Samsung.

Why it matters: TSMC’s rise in some ways indicates the rise of the foundry business model compared to Intel’s integrated device manufacturer (IDM) model. IDMs design and fabricate chips, whereas foundries focus only on fabrication and leave design work to other companies.

• The firm’s growth has also precipitated Intel accelerating its moves away from less advanced processes toward adopting more advanced techniques to stay competitive. 

Details: Since 2021, TSMC has quickly closed the revenue gap with Intel. 

• TSMC has enjoyed an average 8% quarterly growth since the first quarter of 2021. The firm’s quarterly revenue is projected to grow 43% in the second quarter this year, compared to the same period in 2021, according to Yahoo Finance’s data.
• Intel largely plateaued in 2021 and saw revenue drastically decline by 11% quarter-over-quarter in the fourth quarter of 2021. Yahoo Finance projected a 2% quarterly decline for the second quarter of 2022 for the firm.  
• Taiwan media outlet UDN cited sources from the semiconductor industry, saying that TSMC’s overtaking of Intel was due to structural changes in the sector. Nowadays, more chip firms prefer to design chips and hand them to foundries like TSMC and Samsung to produce.

Context: As one of the world’s top foundries, TSMC plays an essential part in this industry. The firm’s production capacity broadly affects its upstream chip designers like Qualcomm and downstream device makers such as Apple and Xiaomi.

• Since 2020, TSMC has been planning the construction of 18 factories around the world. The firm plans to build five new factories this year, including three in Taiwan, one in Nanjing, and another in Japan, UDN reported on Monday.

The semiconductor supply chain faces a new problem: the Shanghai lockdown. Shanghai is an important center for the semiconductor industry in China holding a complete supply chain of design, fabrication, and ATP (assembly, test, and packaging). In each of these verticals, Shanghai accounts for roughly 20% to 25% of China’s sales. The city is also famous for SMIC, China’s premier chip fabrication company.

In addition, Shanghai’s semiconductor industry is connected to its own electronics industry as well as nearby tech zones in Kunshan and Suzhou, which house electronics manufacturers such as Luxshare, Wistron, Pegatron, Foxconn, Logitech, Bosch, and Plantronics, among others. Many of these companies are customers of the semiconductor companies and also have operations or factories in Shanghai linked with the international ports there.

Closed loops and working from home

The center of Shanghai’s chip industry, and indeed China’s high-end semiconductor manufacturing industry, is Zhangjiang High-Tech Park in the city’s eastern Pudong district. While there are supporting areas in Shanghai and a strong ATP industry in Suzhou, Zhangjiang is the core where companies such as SMIC, ASE, and Huahong can be found.

To maintain production, Shanghai’s fabs have created closed-loop systems. The majority of employees are working on-site. Huahong is the most publicized of these. It has over 6,000 employees working and living at its Shanghai facility, converting meeting rooms and corridors into bedrooms, even making shower rooms. SMIC and TSMC Shanghai operations claim to be maintaining full production through similar closed-loop systems with some teams working from home but most on-site.

Shanghai is also a center for semiconductor materials such as polishing liquids and photoresist removers from companies such as Shanghai Xinyang and Anji Technology. Sales of these materials to fabs are said to be ongoing but experiencing some problems with “pandemic-related delays and customer production line conditions”. This suggests things might not be fully up to speed at fabs and ATP facilities in Shanghai.

Semiconductor equipment is also experiencing logistics delays, meaning fab expansion plans could be delayed too. For example, SMIC is one key company expanding its capacity and is experiencing hold-ups receiving equipment. Logistics in neighboring Jiangsu and Zhejiang provinces are reportedly experiencing setbacks and congestion. The main issue seems to be getting equipment or other supplies from the port to the fab or from neighboring provinces. Despite the fact that ports and customs clearance seem to be running smoothly, and online portals using WeChat have been set up to help semiconductor companies get goods through as fast as possible, equipment deliveries are still struggling to get from the port to the customer. If such delays become frequent it could increase the time new lines aren’t making money for fabs and are a burden. 

Equipment is still being manufactured though. Like the fabs, equipment companies like AMEC, an etch equipment company, have also implemented a closed-loop system to maintain operations.

It’s a different situation for chip design companies, however. Roughly half of China’s major chip design companies are in Shanghai, and it is home to most large international players’ R&D offices. HiSilicon, Unisoc, Nvidia, and NXP are among the numerous firms to all have operations in Shanghai. For the most part, these integrated circuit (IC) design companies can carry on working from home but there are limitations. A small number like Espressif Systems, therefore, have staff including its CEO working and living in their offices. 

Where chip design companies are working from home, there may be further disruption. Company workstations may not have been able to be brought home so employees may be using their own computers to VPN into office workstations. Many companies will have limited VPN access or none at all though, and even with a VPN there could be security issues they would not face otherwise. Using home connections may also result in limited bandwidth and a slowing down in the amount of work that can be completed each day. If any hardware expansion is required, this also isn’t possible – no one can visit the equipment room to install a new server or storage rack. Many companies have multiple locations around China or even the world, but at best this means there will still be delays as part of their team is working from home. There is potential for global projects to be held up, including for foreign companies; of course, many companies don’t even have this luxury, with their whole team in Shanghai. Finally, some work just can’t be done from home: how does one go about contacting upstream companies, testing wafers in labs, getting them to ATP facilities, and then to electronics companies? Working from home and with the current logistics situation, this seems like a difficult task.

Conclusions

While semiconductor manufacturers and design companies have found ways to carry on their work, we can expect significant delays. Working and living in the same space in unfavorable conditions isn’t consistent with good work morale and high efficiency, especially when there is no clear end date in sight. A single Covid case in any of these facilities could spell temporary closure; we have already even seen one key oxygen facility stop production after staff tested positive for Covid, despite them producing something you’d think would be essential to many of the patients in the city, so there is no reason to think semiconductor plants couldn’t also be closed if one experienced an outbreak.

While working on-site in a closed loop is a good idea to keep production moving under China’s Covid policies, it’s no good if the fabricated chips cannot get to downstream industries or if production line expansion is held up due to equipment shipping delays. OnSemi recently stated its China distribution center was forced to shutdown due to Covid – the product may be there but there is no way to get it to customers. In a best-case scenario, we see lags in getting chips to customers and delays in capacity expansion; in the worst case, there is a complete stopping of production. Chip design industries, while coping better than fabs, will also face design delays and security issues. Cloud-based electronic design automation (EDA) solutions may help with some of these bottlenecks, but they seem unlikely to solve all of the current issues. These design setbacks could add to chip production lead times for the next year or two.

Chinese fabs and fabless companies potentially face the most delays in getting products to market. Overall, this means downstream industries like consumer electronics devices and automotive could face shortages and price hikes; the consumer and economy will therefore suffer.

The real solution is a policy one. Working from home keeps chip design going but naturally incurs delays. For chip manufacturing, it is impossible in the long-term; living in the fab can only be temporary. Only policy change therefore can get the industry back to where it needs to be. A band-aid approach simply won’t cut it.

As the Russia-Ukraine war drags on, the market for rare gasses has seen greater volatility. High purity rare gasses used in semiconductor production have seen a rapid price surge, with neon gas prices growing tenfold and krypton gas up by almost half since the conflict. 

Rare gasses are primarily inert and gaseous elements of neon, argon, krypton, xenon, and others. They are key raw materials used in semiconductor productions. 

Until the war broke out in late February, Ukraine supplied nearly 70% of the world’s neon gas, the rare gas used in chip production, according to Trendforce, a semiconductor consultancy based in Taiwan. On March 11, three weeks into the conflict, two major Ukrainian neon gas suppliers, Ingas and Cryoin, were forced to halt their operations. The two companies together make up almost half of the global neon production, according to Reuters. 

TechNode looks at China’s rare gas industry and how it might influence the country’s reaction to the rising rare gas prices. 

Rare gas: veins of semiconductor

Rare gasses like neon play a vital part in the semiconductor manufacturing process. Neon gas is the main gas used in excimer laser, a production device used in the chip-making process called photolithography, which uses lasers to “print” circuits onto silicon wafers, the foundation of a semiconductor. 

Rare gasses, when energized, emit light, which makes them essential in electronic lumination units. Rare gas mixtures are also used as filling materials to produce lasers, with such devices needed to be replenished routinely. And neon discharges are the most efficient of all rare gasses in producing visible light.

Rare gasses or noble gasses are so named because they are rare compared to other elements. Helium, neon, argon, krypton, and xenon comprise these rare gasses listed in the rightmost column of the periodic table of the elements. These elements cause almost no chemical reaction with others, and, for this reason, are regularly used as shielding gasses in industrial production.

How surging market price for rare gasses has affected China

The price of neon has risen more than 10 times since the Russia-Ukraine war, while krypton price rose more than 44% since mid-February.

Ren Lu, an industrial gas expert, told the state media Global Times in mid-February that China has achieved a breakthrough in rare gas productions, and the country can now purify rare gas. Ren added that the Russia-Ukraine war would only lead to a short-term price rise.

Rare gasses like neon, krypton, and xenon are also a side product of the steel industry. Being a top global steel producer, China can expand its rare gas production to fill in gaps that Ukrainian producers have left.

China produced 1.06 billion tons of raw steel in 2020, ranking first worldwide, 10 times the amount produced by India, the second-largest steel producer in the world. Russia ranked fifth place, with raw steel production of 71.6 million tons.

On Feb. 17, Chinese gas company Yingde Gases announced a plan to expand its xenon and krypton production, while the Hangzhou Oxygen plant group stated that its new xenon and krypton production devices will be used later this year.

The local market and major players in China’s rare gas industry

China doesn’t provide a detailed breakdown of its rare gas industry, but a look at China’s electronic gas industry offers clues. Electronic gas is a category that looks at gases used in the production of electronics, consisting of high purity rare gasses and other compound gasses.

China’s production of gasses used for electronic production grew 23% year-on-year in 2021, reaching a market size of RMB 21.6 billion. 62% of China’s electronic gas is used to produce semiconductors, of which 43% are used in integrated circuits, and the rest goes to make photovoltaic and LED circuits, according to Yidu Data. 

The country’s electronic gas market is also highly concentrated and controlled by foreign companies, with the top five firms taking an 85% share of the entire market in 2020. They are US-based Airproducts, US-based Praxair, France-based Airliquide, Japan-based Taiyo Nippon Sanso, and German-based Linde. 

There are four main electronic gas producers in China: Huate Gas, Jinhong Gas, Nata Opto-electronic Material, and Yoke Technology. Huate Gas provides neon to ASML, the global lithography giant from the Netherlands. Jinhong Gas is capable of producing Xenon, as noted on its official website. Jinhong will start supplying electronic gas to China’s top chipmaker Semiconductor Manufacturing International Corporation in April. However, these four companies only accounted for a tiny fraction of the market share, accounting for only 6.27% of China’s total special gas supply. Special gas is a broader category that includes electronic gas, which includes rare gas.  

In addition, Kaimeite Gasses, a neon gas supplier based in the central Chinese province of Hunan, announced last week that they are in talks with ASML and expediting the process.

Self-driving startup QCraft will equip the next generation of its autonomous driving system with Nvidia’s Drive Orin processing chip. The chip can be deployed to both self-driving prototypes and mass-produced vehicles.

Why it matters: Nvidia claims the Drive Orin system-on-a-chip (SoC), unveiled in late 2019 and scheduled for shipping in 2022, is by far the “world’s highest-performance, most-advanced” processor for use in autonomous vehicles (AVs). Its use will allow QCraft to develop driverless vehicles for road testing and partially automated cars for the consumer market.

Details: Nvidia’s Drive Orin chipsets will underpin the hardware suite that will be fitted as standard for QCraft’s next-generation self-driving car fleet, the two companies announced as they unveiled the deal at an event on Tuesday.

• Capable of performing 254 trillion operations per second (TOPS), the Orin supercomputer will be the brain of QCraft’s vehicles, providing the necessary power to process inputs from multiple sensors as well as GPS and mapping data, according to a statement released Tuesday.
• QCraft will begin testing its AVs with the Nvidia-assisted computing platforms by the end of next month, given that it already has experience in adopting the chipmaker’s technology, chief technology officer Hou Cong told reporters during an online conference on Wednesday.
• The self-driving startup, backed by tech giants Bytedance and Meituan, on Wednesday also unveiled its third-generation hardware system, including nine cameras, five lidar units, and four millimeter-wave radar units, claiming a lower production cost and improved sensing capabilities.
• The technology costs of installing an array of sensors in vehicles will be lowered to between RMB 100,000 and RMB 150,000 ($15,620 to $23,430) in the next two years, chief executive Yu Qian told Chinese media last month. A testing AV reportedly costs at least $130,000 in sensors and computers, according to John Krafcik, former CEO of Google’s self-driving subsidiary Waymo.

Context: Nvidia has also signed a series of deals with Chinese electric vehicle upstarts (including Nio, Li Auto, and WM Motor), supplying their upcoming vehicle models with the chipmaker’s SoCs.

• QCraft has been operating a self-driving test fleet of nearly 100 vehicles for public transit and ride-hailing pilot services in nine domestic cities, including Shenzhen and Wuhan. It is also developing assisted driving technologies for several automakers, chief scientist Da Fang told TechNode in September.
• In August, it raised $100 million in a Series A+ led by YF Capital (the investment firm founded by Jack Ma) and participated in by Longzhu Capital, a venture capital fund of Chinese on-demand service giant Meituan.

The US Commerce Department issued Monday new rules expanding restrictions on Huawei, in a move that will further narrow the Chinese telecommunications equipment maker’s access to crucial chips.

Why it matters: The move could further close what some US officials call “loopholes” in Huawei’s chip supply chain, forcing non-US companies to apply for a license to sell chips made using American technology to Huawei.

• The Trump administration has already banned US companies from shipping components and technology to Huawei, and cut it off from overseas semiconductor manufacturers that use American software and technology.
• Monday’s new rules mean Huawei can’t circumvent the ban by purchasing commercially available chips it needs from third-party vendors.

Details: The US Commerce Department added another 38 Huawei subsidiaries into the so-called “Entity List” and imposed license requirements on any transactions involving items subject to US export controls, it said in a statement on Monday.

• This means vendors of chips made with US technology will have to apply for a license in transactions where Huawei or other companies on the Entity List act as a “purchaser, intermediate, or end user,” according to the statement.
• “These actions, effective immediately, prevent Huawei’s attempts to circumvent US export controls to obtain electronic components developed or produced using US technology,” the Commerce Department said in the statement.
• The US President Donald Trump reinforced his concern that Huawei equipment could be used to spy on Americans. During an interview on Monday on “Fox & Friends,” Trump called the Chinese company “Spy-Wei.”
• A representative of Huawei declined to comment to a request from TechNode on Tuesday.

Context: A series of US restrictions on critical chips has taken a toll on Huawei’s business, especially in the smartphone segment.

• Chinese media Caixin reported earlier this month that Huawei will stop making its flagship Kirin chipsets after Sept. 15 due to US pressure on suppliers. 
• Huawei’s high-end Mate 40 handsets, which will debut this fall, will be the last smartphones featuring the Kirin 9000 processor, company’s most advanced processor, said Yu Chengdong, head of Huawei’s consumer business, who called it a “huge loss” to the company, according to Caixin.
• Huawei’s in-house chip designer Hisilicon relies on software from US companies such as Cadence Design Systems and Synopsys to design its chips. It outsources the production of its chip designs to Taiwan Semiconductor Manufacturing Company, but the collaboration is under pressure because of new US export regulations announced in May.
• Mediatek, a Taiwanese chip designer, is widely seen as a possible alternative to Huawei’s Hisilicon. The company told Chinese business media Yicai Tuesday that it is evaluating the US export rule changes to make sure it complies with relative regulations.

In recent years, handsets have been key to semiconductor industry growth. So when analysts predicted a grim 2020 for the handset markets, things didn’t look great for semiconductor companies either. In December 2019, analysts expected handset sales to drop 2% to 270 million units in 2020.

Predictions for the rest of the year are weaker, but still miles ahead of the handset market. Some analysts expect a 5-10% drop in global chip sales for 2020 as wireless, automotive, industrial, and general consumer electronics sales all fall. Others predict 3.3% growth for the whole year. It might not be huge growth, but it’s growth nonetheless.

If consumer electronics sales are in freefall, what’s keeping the semiconductor industry from dropping further, even giving it hope of growth—and is this the opportunity Chinese chip makers have been waiting for to make their mark on the industry?

TSMC saw sales of every chip it manufactures drop in volume in H1 2020 growth. Except for one, which grew by 12%: high-end server computer chips.

Less phones, more laptops

While the Covid-19 pandemic accentuated the trend of falling handset sales, it put fuel on the fire of cloud computing.

Cloud services were already moving data storage and processing from edge devices, like phones and laptops, to data centers. But then the pandemic and lockdowns made work from home the norm around the world.

This has not only led to an increase in PC and laptop sales, which grew 11.2% year-on-year globally in Q2 2020, but also an increase in the use of video conferencing, distance learning, and video streaming services.

In China, up to 300 million people were working from home in the first quarter of 2020—and tech companies jumped at the opportunity. Virtually every major internet company brought out new apps to deal with this demand.

Baidu brought out its collaboration tool Baidu Hi. Alibaba released DingTalk 5.0. Bytedance created Feishu. Tencent pushed Tencent Meeting (which it had luckily just released in December 2019). Even Sohu and Pinduoduo got in on the action with Little E and Knock. 

This surge in remote working services has led to a surge in internet traffic, which demands more processing power from cloud providers. More processing power needs more servers, and servers are made of chips: general-purpose CPUs and accelerators like graphics processing units (GPUs) and field-programmable gate arrays (FPGAs).

READ MORE:  SILICON | China’s progress on homegrown CPUs

I don’t believe we will see internet usage drop back to pre-pandemic levels. The amount of data collected by individuals and companies has been exploding for a while now, and it will only grow.

The sudden change in human behavior brought by Covid-19, along with increasing workloads and 5G connectivity, represents an opportunity for Chinese companies to break into a market dominated by Intel, AMD, and Nvidia.

Do one thing, do it well

More people working from home doesn’t just mean more servers; it means a greater mix of servers to cater to the varying needs of different applications. Some servers need to be flexible; some need to be low-cost, and some need to have specific accelerators designed for specific applications.

Not only will the world need more chips, but it will need a greater variety of them. This gives Chinese companies the chance to pick a market and develop a product.

Different types of chips have made their way into the server space in recent years and ever increasingly so. General purpose Central Processing Units (CPUs) aren’t suitable for some applications, so they need help from various different kinds of accelerators.

Accelerators are processors to which the main general-purpose CPU offloads some workload. Graphics processing units (GPUs), used for image and video processing, and more flexible field-programmable gate arrays (FPGAs), and application specific integrated circuits (ASICs) are the main types of accelerators in use.

In 2012, Nvidia found that its GPUs, normally used for processing images and video, were great for AI applications. It has ridden the AI wave to now be worth more than Intel. Some applications have required more flexibility, so FPGAs from Xilinx and Intel have also made their way into data centers.

Chinese Jingjia Micro, and recently Zhaoxin, are working on GPUs, but at this stage they are low-end laptop/PC offerings that don’t meet the demands of servers. The same can be said for Gowin, Anlogic, Pango, and others doing FPGAs; Chinese players are still far behind the likes of Intel, Xilinx, and Achronix.

READ MORE: China’s first homegrown x86 PCs are here, but don’t get too excited

Sometimes it makes sense to create a chip for a specific purpose and to do that one thing really well. Enter Application-Specific Integrated Circuits (ASICs).

China’s chip sector has proven to hold its own in at least one type of server ASIC: cryptocurrency mining rigs. Bitmain and Canaan are the world’s top producers of crypto mining equipment. This suggests that it is possible for China to lead innovation in at least one kind of server chip.

But many companies have popped up in China looking to ride the AI server ASIC wave in recent years, and none have found great success yet. Like most industries in China, lots of people jump on the bandwagon and make large profits difficult for one another. Many will die, but a few will survive and prosper.

The old ISA conundrum?

While ASICs are probably the best opening, Chinese companies in the server space now are focused on general-purpose CPUs. Companies working on both types of chips have chosen a variety of Instruction Set Architectures (ISAs).

Instruction set architectures (ISAs) are a set of instructions that control communication between software and hardware in processors. They are owned and licensed by western companies, which means Chinese chipmakers rely on deals with IP licensing firms like the UK’s Arm.

Can Chinese companies even begin to make inroads into a market that is 98% x86 architecture, of which almost 90% is Intel and 10% AMD?

It’s difficult, for all the same reasons why Chinese companies can’t wrangle US superiority in semiconductors.

Whether because of luck, economic planning, or market forces, a couple of companies have emerged around each ISA, spreading China’s bets. Huawei and Phytium are using Arm; Zhaoxin and Montage are using x86 (I consider Hygon defunct); Loongson is using MIPS; and Sunway, something else altogether, possibly developed in-house.

Huawei’s Hisilicon has been by far the most successful in the server CPU space. Some Chinese analysts say it may sell 1.5 to 2 million of its Kunpeng server chips this year. Its Taishan server chip might see its market share grow to 3% share globally by the end of 2021. We all know Huawei’s current troubles, so such predictions aren’t exactly watertight.

One way out of the ISA conundrum, as I’ve written before, is using the RISC-V open-source architecture. Huawei and others are jumping on the bandwagon, trying to develop high-performing chips using the free-to-use architecture, and should continue to. It won’t be a fast transition.

READ MORE: China’s chipmakers could use RISC-V to reduce impact of US sanctions

But when it happens, it will remove one key weapon from the US arsenal. The US won’t be able to block Huawei and other Chinese companies from getting their hands on the fundamental architecture.

However, even if one of them created a CPU, based on any of these ISAs, that was superior in power, performance, and area, there are other barriers to entry.

Snatching some of the global market share is not just about having a great performing chip. The software, applications, standards bodies, etc. create an entire ecosystem that can help customers integrate, optimize, and get to market faster.

Huawei has tried to create such an ecosystem by opening up OS source code, compilers, tools, etc. it has done better than any other Chinese company, but still relies on the Arm ecosystem.

Too many cooks

Whether we like it or not China is looking to design and manufacture homegrown chips to replace US imports, and server chips are key to this. The stability and growth in this market means it’s ripe for investment, even if barriers to entry are high.

Making server chips is a long and painful process. But the Chinese companies listed above have identified the cloud as an opportunity and have been investing in it.

One extreme example of trends in China’s server chips industry came from Tencent earlier this year. The Shenzhen company announced it would buy 1 million servers over the next five years, spending around $70 billion.

Domestic demand for server chips will only grow in the coming years. With government preference for domestic chips in this industry and a need for custom accelerators, it could be one of the better semiconductor verticals for Chinese companies to build a customer base in.

However, like many industries in China, there is increasing risk of over-fragmentation, which will make it difficult for everyone to make solid profits. Inspur and Sugon, two leading Chinese server companies, recently set up their own chip divisions, adding to market fragmentation. While I doubt they will start with CPU design as their first foray, it might be coming in later years.

It remains to be seen if Chinese chip makers can compete internationally. But increasing revenues from China will give them better footing to go about global business development, especially in China-friendly countries.

Chinese companies need to pick their fights. Competing in the general-purpose CPU space is an uphill battle. RISC-V could provide a long-term self-reliant option, but dominant players Intel and AMD are strong competition.

Custom ASICs for specific tasks is where China already has plenty of talent and companies that are up to the task. While it would be nice to see extra competition in the GPU and FPGA space, Chinese companies here face the same barriers as those creating general-purpose CPUs.

Most importantly, ecosystems need to be built. It is a difficult and time-consuming endeavor. Even a recent SOE I met with preferred to use Intel, simply because he understood it; it works, it’s mature.

With this mindset, even grabbing the domestic market is a far cry from where we are now. The government needs to step in and use “Made in China” incentives.

China has talented engineers in the ASIC and FPGA design space, but there are simply too many companies for any one of them to have the economies of scale and R&D spend to truly compete. Consolidation and collaboration are needed if Chinese design companies are going to seize the server opportunity.

A high-level executive of Huawei said Monday the company will find a solution to a new rule announced by the Trump administration that effectively cuts the Chinese telecommunications equipment maker off from global chip suppliers.

Why it matters: This is Huawei’s first official response to the new rule change made public on Friday. The company said it is still evaluating the impact of the new restrictions.

• The rule, announced by the US Commerce Department, requires companies around the world to obtain licenses for sales to Huawei of semiconductors made with US technology.

Details: The Commerce Department’s rule would “inevitably” harm Huawei’s business to a great extent, said Guo Ping, the rotating chairman of Huawei, in a press conference Monday at the company’s headquarters in Shenzhen. He added that the company is confident that it would find a solution soon.

“The US believes being in the lead in technology is a base of its global supremacy, and that any country with advance technology would pose a threat to its supremacy. Unfortunately, Huawei is taking a lead in the information and communications technology (ICT) sector.”

Guo Ping, rotating chairman

• The world’s largest telecoms equipment maker described the new rule as “arbitrary” and “pernicious,” warning that it would “undermine the entire industry worldwide.”

“Huawei categorically opposes the amendments made by the US Department of Commerce to its foreign direct product rule that target Huawei specifically. This new rule will impact the expansion, maintenance, and continuous operations of networks worth hundreds of billions of dollars that we have rolled out in more than 170 countries”

Huawei spokesman Joe Kelly, reading from a company statement during the press conference.

• The company, which was also added to a Commerce Department “Entity List” a year ago that bars it from sourcing components and technology from US companies, said the new rule would damage international companies’ trust in US technology.

“Ultimately, this will harm US interests.”

Huawei in the published statement

Context: The Trump administration’s new rule, effective Friday but with a 120-day grace period, will block companies around the world from using American-originated equipment and software to design or produce chips that are supplied to Huawei or its subsidiaries.

• Companies can apply for a license to continue shipping those products to Huawei, but the Commerce Department had said the presumption would be to reject those requests.
• Nikkei Asian Review reported Monday that Taiwan Semiconductor Manufacturing Co Ltd (TSMC), the world’s largest contract semiconductor maker and a key manufacturer of chips designed by Huawei’s Hisilicon, has halted new orders from Huawei in response to Washington’s new rule change.

China’s state-backed funds injected more than $2 billion into domestic chip maker Semiconductor Manufacturing International Corp. (SMIC) as the country pushes for semiconductor independence from the US.

Why it matters: China has stepped up efforts to build a chip designing and making ecosystem inside the country with the help of massive state-based investment schemes and a financial market that allows more private capital to access.

• The move came as the Trump administration announced new rules Friday that will bar Chinese telecommunications equipment maker Huawei and its suppliers from using American technology and software.

Details: Shanghai-based SMIC said Friday that the China National Integrated Circuit Industry Investment Fund and the Shanghai Integrated Circuit Industry Investment Fund would invest $1.7 billion and $750 million respectively into one of its wafer plants.

• The plant’s registered capital would rise from $3.5 billion to $6.5 billion after the investment while SMIC’s stake in the plant would drop from 50.1% to 38.5%, the chip maker said.
• The national fund and the Shanghai-based fund will own 23.08% and 11.54%, respectively, of the semiconductor fabrication plant.
• The plant mainly produces 14-nanometer wafers.

Context: The Trump administration announced Friday a new rule that will block companies around the world from using American-made components and technology to design or produce chips for Huawei or its subsidiaries.

• China National Integrated Circuit Industry Investment Fund, also known as the “Big Fund,” raised RMB 200 billion (around $28.1 billion) in its second financing round in July.
• The state-backed fund was set up to invest in chip manufacturing and designing in 2014 and is backed by China’s Ministry of Finance, the China Development Bank Capital, as well as several other state-backed enterprises.
• Hong Kong-listed SMIC said earlier this month it is seeking to list on Shanghai’s Nasdaq-like STAR Market and raise around RMB 1.69 billion.
• Reuters reported last month that Huawei is shifting production of its in-house designed chips away from Taiwan Semiconductor Manufacturing Co Ltd (TSMC) to SMIC.
• TSMC, the world’s largest contract chip maker, has halted new orders from Huawei in response to Washington’s new rule change, Nikkei Asian Review reported Monday.

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On April 16, 2018, the United States almost killed China telecommunications champion, ZTE, by banning US from supplying exports to the company. For China, this was a wake-up call: no longer could they rely on technology created in other countries.

As tensions have mounted between the US and China over trade, semiconductors have become one of many flashpoints and China is not content to continue business as usual. Instead, the government has quickly provided policy and financial support in a bid to create its own chip industry. Most recently, Yangtze Memory Technologies Corp (YMTC) revealed a memory chip that competes with Samsung and Semiconductor Manufacturing International Corp (SMIC) announced plans for a dual listing on the STAR Market.

All signs point to positive developments for China’s chip makers, but there are still many barriers in the way and they’re not all political. 

Join us on May 28 at 8 pm (GMT+8) to discuss when, if ever, China can achieve chip reliance and what that future may look like.

Panelists:

Jan-Peter Kleinhans

Project Director “IT security in the Internet of Things” at Stiftung N-V

Jan-Peter Kleinhans is director of the project IT Security in the Internet of Things (IoT). Currently his work focuses on the intersection of global semiconductor supply chains, IT security, and geopolitics. He has a special interest in the security and resilience of our future mobile networks – 5G.
After joining SNV in 2014 Jan-Peter analyzed why the market failed to produce reasonably trustworthy consumer IoT devices. He explored if and how standardization, certification, and market surveillance can create economic incentives for IoT manufacturers to produce secure and trustworthy IoT devices.

Stewart Randall

Director of operations and head of embedded software at intralink

Stewart was born in the UK but has lived in China for many years and is a fluent Mandarin speaker. He has worked in business development and market analysis roles for clients in ICT and cleantech, including mobile comms (networks and smartphones), CE (smart TVs, IoT), internet/e-commerce, semiconductor (IP and IC design services), solar and green composites. He has closed licensing deals on behalf of companies providing NoSQL databases, UI, embedded software/IP, LTE protocol stacks, and EDA tools. He’s also a TechNode contributor and has written a couple of insights include “Silicon | Can China make chips?” and “Silicon | China’s progress on homegrown CPUs“.

Facilitator:

Wei Sheng

Technode reporter

Wei Sheng is a Beijing-based reporter covering hardware, smartphone, and telecommunications, along with regulations and policies related to the China tech scene. Before joining TechNode, he wrote about China’s cyberculture, Internet privacy, and social media for various Chinese publications. 

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Shenzhen-based Yingzhong Technologies released China’s first x86 computers with a homegrown central processing unit (CPU) on Saturday. But the CPU technology by fabless Zhaoxin Semiconductors is at least three years behind other players’.

Why it matters: The PCs announced are the first to integrate Zhaoxin’s x86 CPUs, which in turn are China’s first homegrown microprocessors based on the x86 architecture.

• Market on a plate: Beijing wants to replace all foreign-made hardware with domestic alternatives in government agencies.
• No gaming: The CPUs’ performance is far behind Intel and AMD models in terms of speed and graphics processing. Zhaoxin is unlikely to compete with them in the gaming and high-performance computing markets.
• Official use only: Zhaoxin’s processors are better suited for government work pertaining to document processing and presentations, an industry insider said.

Details: In their first common product launch, the two companies released more than 50 new products, from desktops to notebooks.

• The computers run on Zhaoxin’s series of 16nanometer KX-6000 processors, their response to Intel’s x86 line, which dominates the market.
• The KX-6000 series includes quad-core and 8-core microprocessors that promise processing speed ranging from 2.6GHz to 3GHz. Released in February 2020, KX-6000 chips include an integrated graphics processing unit (GPU) that supports 4K video decoding.
• Hardware rating site Geekbench gave the KX-6000 a score of 363 for the single core iteration and 2091 for the multi-core. Intel’s 2017 i5-7400 3.5GHz model rakes in 884 and 2793 respectively in the same categories.
• Project 2021: Zhaoxin aims to be on par with industry leaders by 2021, when it reportedly will release a 7nm CPU.

Read more: SILICON | China’s progress on homegrown CPUs

Context: Founded in 2013, Zhaoxin is a joint venture between Taiwanese VIA Technologies and the Shanghai government. VIA Technologies is one of three companies around the world with a license to produce x86 processors, along with US-based AMD and Intel.

• VIA’s involvement in the JV allows Zhaoxin to pump out x86 CPUs without violating licensing agreements.
• AMD has a JV with two Chinese companies, meant to design x86 for the Chinese market.
• Zhaoxin works with Taiwan Semiconductor manufacturing Corporation’s fabs to manufacture the chips, unlike Intel which runs its own production.
• Playing catchup: CPUs are some of the most complicated chips to manufacture—and where China is significantly behind its global competition.
• Huawei’s HiSilicon has had better luck with the Kunpeng 920. Released in January 2019, the 7nm CPU is based off licensed ARM architecture and integrates 64 cores with a maximum speed of 2.6GHz. The microprocessor is intended for big data and cloud applications.

In a milestone for China’s semiconductor industry, Yangtze Memory Technologies (YMTC) announced last week that it has developed a 128-layer NAND flash memory chip (128L) in-house. The company expects mass production to start sometime between the end of 2020 and mid-2021, a spokesperson for YMTC told TechNode. 

The Wuhan-based firm hit this milestone while fighting to continue production during the lockdown of its home city.

Read more: What industry can’t stop? Semiconductors 

As wafers hit surface area limits, space on them is like downtown real estate: it comes at a premium. Layering circuits allows chipmakers to fit more memory into the same space—building up instead of out. 128L puts YMTC on the cutting edge of flash memory, but scaling up to mass production to match its competitors will be challenging.

Flash memory is used in products from “entry-level” USB and memory cards, to more complicated solid-state hard drives. YMTC’s current generation of 64L memory has its foot on the lowest rung of this ladder.

Samsung, Micron and SK Hynix hit the initial production milestone in 2019, and started selling their in-class chips in early 2020. YMTC’s product could compete with them, but comes six months to a year behind the competition. 

It is an important step on China’s path to semiconductor independence, but the fact that YMTC has managed to stack 128 layers of circuits on a wafer won’t necessarily make it a big player in the global semiconductor industry, experts said. There are several hurdles that YMTC needs to jump through in order to compete with incumbents in quality, scale, and price. 

Analysts said that YMTC’s previous NAND chip was hardly a wild success. “Because YMTC has just begun selling 64L NAND products, and because of the impact from COVID-19, the actual sales figure remains low at this point,” Avril Wu, a semiconductor analyst at Taiwanese market research firm TrendForce, told TechNode. 

YMTC has not released any information as to how many units of the 64-layer memory chip it has sold, and did not reply to TechNode’s request for data. TrendForce expects YMTC to account for 8% of the global flash memory market in 2021.

The timing is right for YMTC to launch the 128L chip, as innovation from some competitors is likely to slow. The price of NAND Flash fell by an average of 46% in 2019, leading to losses, conservative capital expenditures, and record-low output growth expectations, TrendForce said.

Manufacturing difficulties

For YMTC to compete with international peers, memory chip production standards will matter as much as design. One measure used in the industry to gauge quality is yield: the proportion of chips on a wafer that work properly. 

In the best case, YMTC will become a big player in the global flash memory chip game. In the worst case, Randall said, its clients won’t evolve past China.

“YMTC lags behind other mainstream memory manufacturers in terms of yield and product stability,” Wu said. She added that “it is actively bridging this competitive gap.” More than a matter of design, yield is affected by the production process. Companies refine the manufacturing process as engineers gain know-how in making a particular design. 

Market analyst Wu said the “primary hurdle” is the procurement of manufacturing equipment. The billion dollar machines that are used to produce chips are made by few companies in the US and Europe, like Dutch ASML and American LAM Research. They take months to produce and have long waiting lists, which is why usually there is a months-long lag between announcing a product and bringing it to market.

“In the future, if the US government prohibits European and US equipment suppliers from shipping to YMTC, it will negatively affect the company’s capacity expansion schedules,” Wu said.

The issue of experience and know-how is important for scaling production as well, James Lewis, Senior Vice President and Director of the Technology Policy Program at US think tank Center for Strategic and International studies, told TechNode. 

“It’s not foreign sources for semiconductor manufacturing equipment that is the obstacle,” he said. 

The 64L’s yield was reportedly “good enough,” said Stewart Randall who heads the electronics and embedded software department at Intralink, a consultancy that provides market entry services to China, told TechNode. This is a positive sign for the 128L’s yield, but its production is harder. “Let’s see how the 128L does,” he said.

With a little help from a friend 

In all likelihood YMTC will manage to scale up capacity and mass produce its 128L flash chip in 2021, analysts said. But the scale at which this production happens is crucial to the economies of scale that allow companies to offer competitive prices. Given the lack of know-how and equipment, it will take time for YMTC to match the offers of incumbents in price and quality. 

But the Wuhan memory chip-maker has a powerful friend holding its hand. It is funded by government-backed conglomerate Tsinghua Unigroup. Beijing’s Big Fund, focused on promoting the development of homegrown semiconductors, raised $29 billion last summer. Tsinghua Unigroup received the most state funding out of all semiconductor players in the world between 2014 and 2018 in a December report published by the Organization for Economic Construction and Development.

As a strategic company that isn’t listed, YMTC and Tsinghua Unigroup don’t need to churn profits the same way that its competitors do. The state-owned company is likely willing to bankroll losses in order to help a Chinese semiconductor company establish itself in the market

“Neither financial nor human resource factors are issues for YMTC,” Wu said. Backed by Tsinghua Unigroup, all it needs is time to make a dent in the flash memory market. TrendForce said that YMTC’s mass production of 128L is likely to drive down prices for the industry overall. 

Beijing has other ways to help YMTC, but it must strike the right balance. “The temptation will be for the Chinese government to press companies to give YMTC preference, but this works only if the chips are competitive in price and performance,” Lewis said. 

Foreign companies could relocate rather than buy an inferior product from YMTC, Lewis said. This policy is “a bit touchy now, as the government doesn’t want to encourage foreign companies in China to leave” during the Covid-19 pandemic, he said. 

YMTC’s clientele is overwhelmingly made up of Chinese companies, but it also works with Phison Electronics, a Taiwanese company that packs flash memory chips into controllers for USBs, memory cards, and SSDs, sources told TechNode.

A big step for YMTC, a small step for China

The development of the 128L flash memory chip is an accomplishment. Founded in 2016, the company has managed to come head-to-head with decades-old players like Samsung on one  crucial aspect of semiconductor design: stacking circuits on a wafer. It is big news for the Wuhan-based firm, but it is only a small step in China’s efforts to achieve self-reliance in semiconductor production and manufacturing. 

The 128L wafer will allow YMTC to up its game, from memory cards and USBs into solid-state drives for computers. The fact that it has developed its own chip architecture, called Xtacking, bodes well for future intellectual property conflicts, Wu said.

But memory chips are some of the easiest integrated circuits to produce, the “low end of semiconductor technology,” Lewis said. Chinese companies have yet to make significant progress in designing more advanced chips, like graphic processing units, and rely on western companies. China’s semiconductor industry might soon be supplying memory components to the globe, but it will continue to import all the other chips that computers are made of from the rest of the world. 

As EU and US authorities are trying to protect their most valued assets from Chinese money, China made what could be a goodwill gesture: The country’s antitrust regulator approved the acquisition of Israeli Mellanox Technologies by California-based Nvidia for $6.9 billion. The deal is expected to boost Nvidia’s edge in artificial intelligence computing.

Why it matters: China’s green light comes at a time of heightened tensions between Beijing and the Western world. Analysts speculate that there could be multiple reasons behind the approval: an attempt to defuse tensions, a sign that China doesn’t plan to fight every single battle, or that they simply don’t care.

• The powers of the Committee on Foreign Investment in the United States (CFIUS) were expanded on Feb. 13, 2020. The committee can now block deals of non-controlling interests.
• EU lawmakers are looking to expand the bloc’s and member-states’ power to scrutinize and block Chinese investments. The EU’s competition chief encouraged EU governments to buy shares of tech companies they deem strategically important.

Details: The Mellanox deal was announced in March 2019 and was first cleared by US and EU authorities.

• Chinese law requires that the State Administration for Market Regulation (SAMR) approves mergers or acquisitions between companies with combined sales over $56 million in China and $282 million globally.
• The companies had to refile their application with China’s antitrust regulator because it expired.
• Competition in the graphics processing units market is heating up, with AMD and Intel closing in on Nvidia’s market share.
• The chipmaker has made strides in AI, catering to the needs of big tech like Alibaba and Microsoft with deep learning chips.
• Mellanox is a leader in low-latency, high-bandwidth interconnect solutions.
• The Mellanox acquisition gives Nvidia the potential of a world-leading stack of solutions in deep learning and big data analytics.

Context: The Imagination Technologies boardroom takeover that never took place has caused a stir in US and European circles. The UK chipmaker’s CEO, CPO and CTO resigned, unconvinced that the company was safe from a takeover.

• The SMRA blocked Qualcomm’s $44 billion acquisition of NXP Semiconductors in July. The US had lifted sanctions on telco vendor ZTE just a few weeks before.
• Mellanox is Nvidia’s biggest-ever spending on an acquisition. In 2011, Nvidia acquired Icera for $267 million, a spokesperson for the GPU maker told the Wall Street Journal.

Chinese telecommunications firm Huawei is shifting production of its in-house designed chips away from a major Taiwanese chipmaker.

Details: The Shenzhen-based telecommunications company is moving its chip production towards Shanghai-based Semiconductor Manufacturing International Corp (SMIC) from Taiwan Semiconductor Manufacturing Co Ltd (TSMC), said a report by Reuters, citing sources familiar with the matter.

• HiSilicon, their chip design subsidiary, has already started telling its engineers to design for SMIC instead of TSMC in late 2019, according to one of Reuters’ sources.
• The company said in a statement the shift was “common industry practice” and that the company “considers carefully issues such as capacity, technology and delivery when choosing semiconductor fabrication plants.”

Context: A federal ban by the Trump administration last May barred American companies from exporting components and technology to Huawei without government approvals.

• The Trump administration is considering to expand the ban to more foreign companies that use US technology, including Taiwan’s TSMC.
• Huawei warned last month of retaliation by the Chinese government if the US ban upgrades.
• “The Chinese government will not just stand by and watch Huawei be slaughtered on the chopping board,” Eric Xu, Huawei rotating chairman, said at a press event last month.

There appears to be a fight on for control of UK semiconductor IP company Imagination Technologies.

The April 4, Sky News headline “State-owned Chinese investor to seize control of chip designer Imagination,” might have sounded scary depending on your geopolitics. But only two days later, the plans were reportedly scrapped, with Chief Revenue Officer David McBrien officially stating “With regards to recent media speculation about the future of Imagination Technologies, we can confirm that there are no changes being made to the Board, which remains Imagination CEO Ron Black and the three Canyon Bridge partners, or the Executive Management of the company.”

With these people gone, at least for now, the company’s interim CEO is Ray Bingham, Chairman and co-founder of Canyon Bridge. Joining him are Canyon Bridge partners Jon Kao and Peter Kuo. It’s hard to say which way this one will fall. Chinese companies have failed before when taking over foreign semiconductor firms, but the UK government has also failed to block such moves before as well. A capitalist would say Imagination is already Chinese and the UK government shouldn’t interfere; a nationalist might say the opposite.

What’s at stake here? Would such a move change much, given Imagination is already technically owned by a Beijing backed company? What does China want with Imagination anyway?

What is Imagination Technologies? What does it do?

The UK has two major semiconductor IP powerhouses. One is Softbank-owned Arm; the second is Imagination Technologies. The original company was founded in 1985. I won’t go into its entire history here (we have Wikipedia for that), but traditionally it has been famed for two things: its PowerVR GPU technology, and the MIPS CPU technology it acquired in 2012.

The company has had a rocky time since 2016 though when Apple stopped using its GPUs in its phones. When Apple makes up half of your revenue, this is a problem. Imagination’s share price plummeted, and the company was removed from the London Stock Exchange. It sold off MIPS to US AI company Wave Computing the next year. This is where its China connection began.

The China connection

In November 2017, the entire company was sold to Canyon Bridge. While this private equity fund is Cayman Island-based, it is part funded by China’s central government. The US has previously blocked Canyon from acquiring US Lattice Semiconductor for this very reason.

However, the fund was able to purchase Imagination. The Daily Mail reports that “ministers nodded through the deal after assurances that China Reform would be a passive investor and that Imagination’s intellectual property and business would stay in the UK.” It helped that Canyon Bridge was bound by US law—that is, until it moved from its US HQ to the Cayman Islands.

After acquiring Imagination, Canyon almost immediately placed Leo Li, who had been an executive at Chinese companies Spreadtrum and Tsinghua Unigroup, as CEO. Leo was a US citizen at the time, but this was already a clear sign of the direction Imagination could be heading. Li lasted only around eight months before returning to China. Imagination’s China office also began describing the firm as a “Chinese company.”

This brings us to the news from this past week. Sky News reported that China Reform Holdings, a state-owned investment holding company, was looking to “take control” of Imagination by placing four representatives as directors onto Imagination’s board. China Reform Holdings is the largest investor in Canyon Bridge.

It was rumored that the new board would look to redomicile Imagination to China. While ownership would not have changed, the move seemed aggressive to some and may have worried some people at Imagination and in the UK government for reasons of technology transfer and potential job losses.

Why is Imagination attractive to China?

I can think of two reasons, although there could be more. Imagination is on a stronger business footing than in previous years, and IP is an area China needs to improve on its path to semiconductor independence.

In January 2020 Imagination won back its business with Apple, signing a new multi-year, multi-use license agreement. The size of the deal was not disclosed, but such an all-encompassing deal would provide an extremely strong footing for Imagination to grow its business. Such a deal usually includes a large up-front license fee, as well as ongoing royalty payments based off Apple phone sales. Owning and controlling a company Apple relies on is definitely an attractive position to be in and could potentially force Apple to go back to developing its own GPU, when it clearly had decided to move away from this strategy. Of course, owning and controlling a successful company is attractive in its own right as well, despite its recent rocky history, Imagination is now in a strong position, licensing its A-series GPU not just to Apple, but also to other companies in the mobile and automotive markets.

Meanwhile, transferring IP using Imagination Technologies would be by far the fastest way to get world-class GPU technology into China.

IP is an aspect of semiconductor independence in which China really struggles. The core CPU IP is all foreign, although RISC-V is helping out in this regard. But it’s not just CPU core IP. Whether its memory, DRAM controllers, communication IP, DSPs, on-chip monitoring, or security, none of the key global players are Chinese, and in some cases, there aren’t any Chinese companies. Chinese GPU makers exist, but not major ones.

Becoming more independent means innovating yourself or acquiring from abroad. RISC-V may fill the CPU gap in the long run and controlling Imagination could be key to filling the GPU gap. While VeriSilicon’s Vivante GPU range fills some of the gap, it isn’t a globally recognized consumer device GPU brand yet, whereas Imagination can fill the handset, tablet, automotive GPU gap with ease. Whether the world is going to license a GPU from a completely mask-off Chinese SOE is another matter.

What now?

Chinese companies have been rebuffed in previous efforts to gain control of IP in the semiconductor industry, usually at acquisition or investment stages, be it Lattice Semi as mentioned above, or Tsinghua’s previous attempts to acquire or invest in Micron, Western Digital, and several Taiwanese chip assemblers. But of all governments, the UK is usually the least likely to push back.

With the UK distracted by Covid-19 and Prime Minister Boris Johnson recovering from Covid-19, one might expect London to be focusing on other, more important things. But once the board fight made headlines, politicians made time.

It’s not clear what the state of play is now, but expect strong US pressure against the Imagination move, as it directly effects Apple, coupled with growing skepticism toward China in the UK government itself. There are rumors that GCHQ objected, and that the UK government and even Boris himself are angry at China over the virus situation. With this change in attitude, Huawei’s access to the UK’s 5G network is also uncertain.

It will be interesting to see how this plays out, but I expect China to continue to acquire key technologies going forwards, whether they fail with this takeover or not, in addition to innovation efforts. Since the fast track to control is always to acquire, I can’t see it stopping.

For companies like Imagination independence is key. It is always a difficult balancing act between looking to investors to scale up the company faster and making sure that investment doesn’t lead to loss of control to one player in the geopolitical tug-of-war that the semiconductor world has become. Winning one country increasingly leads to friction with another.

Two executives at Imagination Technologies, a UK semiconductor design and manufacturing firm, have quit their positions following a postponed boardroom takeover from Chinese investors, Sky News reported citing people familiar with the matter.

Why it matters: The semiconductor firm is one of the UK’s most prolific tech assets with over 30 years worth of patents. UK Members of Parliament got involved due to the company’s business and strategic importance to the UK.

• In 2017, Imagination Technologies shares plunged after Apple announced it would no longer use its products. A Cayman Islands private equity firm called Canyon Bridge acquired the firm for £550 million ($688 million) in the same year. A Chinese state-owned fund, China Reform Holdings, is the investor’s main backer.
• The venture capital firm behind Canyon Bridge wants to redomicile Imagination Technologies to China, bringing all its intellectual property along, Sky News said.
• Executives worried that the move would hinder the company’s ability to do business in the US, including their star client, Apple.

Read more: Imagination Technologies: What’s at stake in the fight over control

Details: The two executives, Steve Evans, Chief Product Officer, and John Rayfield, Chief Technical Officer could change their minds. But only if they are assured that the “proposed change of control” does not take place, Sky News said.

• Evans refuses to be part of a company that is “effectively controlled by the Chinese government,” the news channel said.
• The takeover was cancelled, but the chief executives seem to think that it was merely postponed. They haven’t seen enough “assurances” the control of the company will not be moved to China.
• The company’s Chief Executive Officer, Ron Black, resigned on Friday.
• The interim Chief Executive and Executive Chairman of the firm, Ray Bingham, is trying to convince the two C-level executives to stay. Bingham happens to be a co-founder and partner of the Canyon Bridge private equity firm.

Context: Last week, Imagination Technologies would have discussed the appointment of four representatives of state-owned China Reform Holdings as directors in an emergency meeting.

• After a campaign from prominent Conservative MPs, the UK’s culture secretary called Imagination Technologies and asked for an urgent meeting with Bingham. The emergency meeting was then cancelled.
• A few days after the takeover was put to bed, the Trump administration decided to investigate the matter. The Committee on Foreign Investment in the US (CFIUS) wants to find out if there is a risk of US-made tech being moved to China. Imagination Technologies had acquired a US company that designs artificial intelligence chips prior to the Canyon Bridge acquisition.
• The UK government is seeking increased powers to stop mergers and acquisitions that could threaten British national interests, Sky News reported.
• The timing of the takeover seems perfect. In January, Imagination Technologies rekindled its relationship with Apple in a new deal. The agreement gives Apple “access to a wider range of Imagination’s intellectual property in exchange for licensing fees.”
• One person told Sky News that the timing was to ensure that British authorities were distracted by the Covid-19 pandemic.
• About 30% of the world’s mobile phones, or 11 billion devices, and 40% of cars use Imagination Technologies’ graphics chips, Sky News said.

Ongoing trade tensions and a technology cold war between the US and China may spur a “de-Americanization” of global supply chains, according to a report by global trade nonprofit Hinrich Foundation.

Why it matters: US export restrictions on major Chinese tech companies such as Huawei will force global semiconductor companies to source non-American parts, causing a reconfiguration of supply chains to meet thresholds set by the US government, according to the report.

• To ship to companies on the US commerce department’s Entity List, suppliers around the world must ensure their products contain less than 10% of US technology if they are made in the US and 25% for non-US made products.
• China is currently the largest importer of integrated circuits in the world with $300 billion worth of microchip technology being imported to the country in 2018, said the report.

Details: The methods by which global suppliers legally circumvent export controls by moving parts of the value chain to workable locations will determine whether the US trade restrictions have the desired effect, Alexander Capri, research fellow at Hong Kong-based Hinrich Foundation and author of the report, told TechNode.

• “Efforts to circumvent US export controls will increase” unless export restrictions on core technologies are lowered or removed altogether, the report said, though “the semiconductor industry is taking a wait-and-see posture regarding large-scale reshoring operations” for the moment.
• Huawei has more than 13,000 suppliers globally and it purchased some $70 billion in components and parts in 2018, according to the report, citing company rotating chairman Ken Hu.
• Huawei’s legal team began an analysis to determine whether the company could legally circumvent US export controls by instructing its suppliers to lower American technology in its value chain when the company was placed on the US government’s Restricted Entities List in 2018.
• In order to meet de minimis exclusion, semiconductor companies would either have to reduce the value of the US content or increase the value of non-US made components, according to the report.

Context: The Trump administration placed Huawei on a trade blacklist in May, effectively barring the Chinese telecommunications equipment maker from buying US components and technology without government approval.

• The US government added to the trade black list in Oct. 28 other entities including Chinese government agencies and private companies, such as video surveillance gear maker Hikvision and artificial intelligence firms SenseTime and Megvii.

Investors are running scared after China’s semiconductor-focused investment fund announced Friday plans to cut its stake in three chipmakers. Shares of three chipmakers fell by up to almost 8% when the market opened on Monday.

Why it matters: The move came after the National Integrated Circuitry Investment Fund, dubbed the “Big Fund,” closed a new mass-fundraising in October amid China’s pushes to mobilize public and private funds into the sector.

• The fund is backed by China’s Ministry of Finance and state-owned enterprises such as China National Tobacco and the country’s three major telecom operators.
• Experts believe that state-backed funds targeting specific sectors act as a vote of confidence from the government, and help lure private capital to invest in those sectors.

Details: Shares of Beijing-based flash memory designer Gigadevice Semiconductor, fingerprint identification chips maker Shenzhen Goodix, and Hunan Goke Microelectronics tumbled during the weekend. On Friday night the Big Fund announced it would reduce stakes in them by around 1% each during the next three months.

• The fund currently holds 9.7%, 6.6%, and 15.6 % in the three companies respectively.
• Share prices of the three companies had dropped by 5.9%, 7.8%, and 7.9% respectively as stock markets opened on Monday morning.
• The state fund said the purpose of the offloading was to “realize better returns” for shareholders, according to one of the filings.
• Analysts at China Merchants Securities, a broker, said (in Chinese) the move was a “routine operation” and won’t change the Chinese government’s strategy to support the technology sector.

Chinese chip makers speed up plans to list on the STAR Market: report

Context: The “Big Fund” raised RMB 204 billion (around $29.1 billion) in October in its second financing round.

• The fund was set up in 2014, rasing RMB 138.7 billion from the finance ministry, China Development Bank Capital, as well as several other state-backed enterprises.
• The first fund has so far invested in 23 semiconductor firms ranging from chipmakers to chip designers and semiconductor material makers, according to data from securities firm Changfeng Securities (in Chinese).
• Last month, China set up another state-backed fund focusing on the manufacturing industry, which raised $21 billion.

Chinese semiconductor companies receive the most government support of any of their global peers proportionately to their revenue, states a report from the Organization for Economic Construction and Development (OECD). The report describes not only the enormous size of the Chinese apparatus supporting the local integrated circuit (IC) industry, but the unique role of government equity and cheap loans in the Chinese IC ecosystem.

Some non-Chinese companies like Samsung and Intel receive similar amounts of state funding, but because of higher revenues, the government funds support a significantly smaller proportion of their operations.

The OECD in collaboration with moorcroft debt recovery looked into public financial records of 21 international chipmakers which represent two-thirds of the global market. They found that Chinese companies receive higher government support relative to their revenues on average than their global peers. This support comes by way of cheap loans, investments at below market price, and direct budgetary support.

Tsinghua Unigroup, a semiconductor developer 51% owned by a leading state university in Beijing, is the largest recipient of government support in the sample. The Semiconductor Manufacturing International Corporation (SMIC), China’s largest chip manufacturer, is the largest recipient of funding as a proportion of revenue, getting government help equal to over 40% of its revenue.

In terms of Chinese semiconductor companies, only privately-held HiSilicon, owned by Huawei, made it into the global top 20 by revenue in 2018, in sixteenth place.

Disproportionate government ownership

Chinese firms received 86% of all below-market-equity investments among the firms surveyed. These take place via the Integrated Circuit Fund, a government company set up in 2014 to invest $23 billion in the industry, as well as through state-owned enterprises and local governments that acquiring stakes in chipmakers.

Semiconductor plants, known as fabs, are subject to a complex ownership structure in China, involving different levels of government in different parts of the company structure. One of these facilities costs around $20 billion to construct, the OECD said.

The government owns 95% of equity in fab Shanghai Huali, the OECD said. It is supported by a $1.8 billion injection from the national IC fund and $316 million from the Shanghai government. In addition, it is owned by the SASAC and Hua Hong Group, a state-owned semiconductor agency. Other examples in the report include 75% government equity in a fab in Wuhan, the provincial capital of central Hubei, and 57% in a Beijing fab.

But these investments have yet to produce significant returns, as profits remain low. Chinese firms’ assets doubled in the period 2014 to 2018, after the national IC fund was set up, but average profit margins were one-fifth of their global peers as of 2018.

Chinese IC firms lack their own chip designs, and usually act as manufacturers for overseas companies, which keeps profit margins low. In September, two Chinese companies announced plans to start making homegrown memory chips, but experts remain skeptical on if they can compete with incumbents.

“New NAND flash and DRAM players like Changxin Memory and Yangtze Memory are entering markets full of incumbents,” Stewart Randall, head of electronics and embedded software at Intralink, a consultancy that provides market entry services to China, told TechNode. “It will be extremely hard to gain market share. selling at a loss to gain market share may be necessary, but government funding can keep them going,” he added.

Better loans, budgetary help

The three largest recipients of below-market loans between 2014 and 2018 were Chinese; Tsinghua Unigroup at $3.14 billion, SMIC at $695 million and JCET at $688 million, the OECD said. State-owned Hua Hong Group also received a $71 million loan in that period, the report states.

These loans typically include better terms than those from commercial lenders, with lower interest rates and longer repayment periods. The loans came from state-owned banks, namely the Bank of China, China Development Bank, and China Construction Bank.

All other firms in the sample received little or no funding. The next largest non-Chinese recipient on the list was Korea’s SK Hynix, which borrowed $34 million from various lenders, including the Korean Development Bank.

Beijing is also helping China’s chip industry through direct cash injections, subsidized inputs and tax deductions. SMIC and Hua Hong were the greatest beneficiaries of such budgetary support, proportionately to their revenue, according to the report. SMIC receives fiscal help from the government equivalent to almost 7% of revenue and Hua Hong’s budget receives assistance equivalent to 5% of revenue.

The US-dominated semiconductor firm acquisitions from 1998 to 2018. But with the creation of the national IC fund, international buyouts from Chinese players boomed. Nearly three-quarters of all IC firm buyers were Chinese in 2016. Activity has since slowed as restrictions on capital outflows intensified.

Several top Chinese chip makers are accelerating their timelines to list on China’s new Nasdaq-style high-tech board, with plans to list within one year in response to Beijing’s push for complete self-reliance in semiconductors, Nikkei Asian Review reported on Wednesday.

Why it matters: China is accelerating public listings particularly for chip companies on the domestic STAR Market to speed the development of its high-priority semiconductor industry in the wake of US technology sanctions.

• The STAR Market, a high-tech board on the Shanghai Stock Exchange, was established to provide venture capitalists with a smooth exit option and stimulate more funds to flow into the high-tech sectors, including the nationally important semiconductor industry.
• “The semiconductor industry is part of the new generation of the information technology sector, which ranks first on the China Securities Regulatory Commission’s list of recommended sectors for the STIB,” Fang Jing, an analyst at the China Merchants Securities, told TechNode in a March interview.

Details: Horizon Robotics, an autonomous driving-focused artificial intelligence chip unicorn, plans to list on the STAR Market as soon as 2020, said Nikkei, citing people familiar with the matter.

• The companies planning to list also include Bestechnic, a Bluetooth and wireless audio chip startup backed by Xiaomi and Alibaba, and National Silicon Industry Group, a Beijing-sponsored semiconductor material and chip wafer provider, said the report.
• UNISOC Communications, China’s second-largest mobile chip developer, has also said it will file to begin the initial public offering (IPO) process with the tech board next year.
• Semiconductor Manufacturing International Co., China’s top contract chip maker, is also expected to list on the STAR Market after delisting from the New York Stock Exchange in May.

Context: The STAR Market was first announced by Chinese President Xi Jinping in his keynote speech at the opening of the first China International Import Expo in Shanghai in November.

• The tech board is an experiment with a registration-based IPO system.
• It opened for trading in July with 10 semiconductor firms debuting out of the 25 companies offering shares. Anji Microelectronics, a Shanghai-based electronic chemicals producer, saw its shares rise as much as 448% an hour after the market opening.

UK chip designer Arm confirmed on Wednesday that it will continue to supply Huawei and its semiconductor subsidiary HiSilicon. US trade restrictions had called the pair’s ties into question after Arm previously told staff to stop working with Huawei, the BBC reported citing internal documents.

Why it matters: Arm’s chip-designing architecture are used in HiSilicon’s chipsets found in many of Huawei’s smartphones and mobile devices, and the severed business ties had forced Hisilicon to find alternatives.

• The UK-based company, which is owned by Japanese telecom giant Softbank, licenses its semiconductor technologies such as the Arm architecture to chip makers.
• Most in-house chips developed by Huawei’s HiSilicon, including its Kirin chip, as well as those used in servers, cameras, and routers, are based on the Arm architecture.
• The company reportedly suspended business with Huawei in May after the US put Huawei on an “entity list” barring it from buying American technology.
• The company previously said in an internal memo that its designs contained “US origin technology.”

Details: Arm China, a joint venture set up by Arm and a Chinese investment consortium last year, said in a news conference in Shenzhen on Wednesday that the company, along with its UK parent, never suspended supplies to Huawei after the US trade ban took effect, Chinese media outlet Semiconductor Industry Observation reported on Wednesday.

• “The technologies provided by Arm come from the UK, and they are not affected [by the US trade restrictions],” Diao Yanqiu, chief information officer at HiSilicon, said at the conference.
• Huawei will have access to the company’s latest Armv9 architecture that may come out in the next few years, and its usage of the current Armv8 architecture is also not affected, said Liang Quan, marketing director at Arm China.
• Speakers at the conference also included Rene Haas, the president of Arm’s IP products group and Wu Angxiong, CEO of Arm China.

“After the [the US trade ban on Huawei], Arm and Arm China started communication with Huawei and HiSilicon, actively looking for solutions…We can definitely say that we have never suspended supplies to Huawei.”

—Liang Quan, marketing director Arm China, told reporters on Wednesday

Context: Many Huawei’s suppliers, including Intel and Google, have cut ties with the company as a result of the US trade restrictions, which has already brought huge damage to Huawei’s global supply chain.

• The US government extended a reprieve that permits Huawei to buy components from existing US suppliers last month.

This story has been updated to correctly attribute the direct quote in the Details section to Diao Yanqiu, not Liang Quan as was originally written.

A Chinese state-backed semiconductor startup said it has started mass production of the country’s first locally designed dynamic random-access memory (DRAM) chip, China Securities Journal reported on Monday.

Why it matters: The move marks a major step for China’s push for complete self-reliance in semiconductors amid an ongoing trade war with the United States, but experts are skeptical about whether homegrown players can challenge memory chip giants such as Samsung and Micron in the $100 billion-per-year market.

• DRAM chips are widely used for storage in personal computers, servers, and mobile devices.
• The global DRAM chip market was worth some $99.65 billion in 2018 and is dominated by South Korea’s Samsung, which held 42.7% of the market in the first quarter. SK Hynix held 29.9% and US firm Micron 23.0% share of the market during the same time period, according to data from market researcher Trendforce.
• In an effort to boost the country’s semiconductor industry, the Chinese government will encourage domestic companies to use locally designed DRAM chips, Stewart Randall, head of electronics and embedded software of Shanghai-based consultancy Intralink, told TechNode on Monday.
• Locally designed and produced DRAM chips may sell well in the Chinese market, but face obstacles in the overseas market because their technology still lags foreign competitors, Randall said.

Details: Changxin Memory Technology, a semiconductor startup founded in 2016 in the eastern Chinese city of Hefei, has started to mass produce its own DRAM chips, the company’s chairman and CEO Zhu Yiming said Friday at the World Manufacturing Convention in the city.

• The company has invested around RMB 150 billion (around $21.1 billion) in the chip project, including $2.5 billion spent on research and development, as well as capital facilities, according to Zhu.
• The company calls its new memory the 10-nanometer class, where circuits are 10nm to 19 nm wide. The DRAM chip is 18nm, while those from foreign competitors fall between 12nm and 16 nm.
• The company said it has forecasted production capacity of 120,000 wafers per month in the initial phase, and expects to deliver them by the end of this year.

Context: Changxin is widely seen as the next potential target for Washington’s campaign to block Chinese firms’ access to crucial American technology, Nikkei Asian Review reported in June.

• The company has taken extra steps to avoid infringing on US patents, said Nikkei, citing sources familiar with the matter.
• The US has already blocked Fujian Jinhua Integrated Circuit, another Chinese state-backed semiconductor manufacturer, from buying American components in October on the grounds of national security.

Huawei has invested in two domestic semiconductor firms focused on materials and chip design as the Chinese telecommunications equipment maker seeks to boost self-reliance amid US sanctions, National Business Daily reported on Tuesday.

Why it matters: Unlike Huawei’s previous strategy of investing in integrated circuit manufacturing, the deals indicate that Huawei is eyeing core semiconductor technology.

• US restrictions on Huawei not only bar exports of the country’s technology and components to the Shenzhen firm, but also apply to products in which at least 25% of technology or materials originate in the States.
• Huawei’s chipmaking affiliate HiSilicon produces most of Huawei’s smartphone components, but the company also relies on material and chip design tool imports from other countries.

Details: Huawei’s wholly-owned investment firm Hubble Technologies has invested in Shandong province-based Tianyue Advanced Material Technology and Hangzhou’s Joulwatt Micro-Electronic.

• Tianyue Advanced Material is a manufacturer of silicon carbides used in semiconductors, while chip designer Joulwatt Micro-Electronic specializes in battery management ICs.
• Hubble has taken a 10% stake in Tianyue Advanced Material, while its stake in Joulwatt Micro-Electronic was not revealed, said the newspaper.
• Hubble was set up in April and is led by Bai Yi, the president of Huawei’s global financial risks control center.

Huawei declined to comment on the investments when contacted by TechNode on Wednesday.

Context: Huawei announced in July that it would invest RMB 120 billion (around $16.8 billion) in research and development (R & D) this year to bolster its technical self-reliance.

• Huawei’s R & D spending was $15.3 billion in 2018, surpassing those of Microsoft, Apple, and Intel, to rank the 4th among global tech companies, according to China Daily.

RISC-V, the instruction-set architecture out of UC Berkeley, has been making waves in the semiconductor sector. Some even say that it could threaten industry heavyweight ARM in the long run.

The key difference between the pair’s respective products, which basically define the way in which software talks to a processor, is that RISC-V is open-source. It is this aspect that could be of particular interest to Chinese companies as such products are not directly subjected to US sanctions.

The RISC-V Foundation, which promotes the ISA’s use, features leading global players including Microchip, Western Digital, Google, Nvidia, and Qualcomm, to name just a few. Through collaborative and independent projects, several members are working to create RISC-V based designs.

China’s growing interest

Over the past few years, and especially in 2019, I have witnessed a huge increase in Chinese interest in RISC-V. Three years ago when mentioning the ISA, most engineers would look at me puzzled. Then, two years ago, they had at least heard of it though most would mispronounce it (it’s Risk-Five by the way).

Fast-forward to today and not only does every company I meet know of it, but the majority are actively researching it. Whether they have taped out an actual RISC-V based chip or are currently designing one, the interest is clearly there.

Today the foundation includes more than 25 Chinese companies, and what’s more, as of last year China now has two of its own RISC-V industry alliances with more than 185 members. Some of the most well-known Chinese members include Huawei, Sanechips from ZTE, Bitmain, Alibaba, and Xiaomi’s wearables partner Huami.

So, what’s all the fuss about? Why are so many large global companies jumping on the bandwagon, and what does RISC-V mean for China?

RISC-V provides an open-source ISA which users can build upon. As its a frozen ISA, software designed to run on one RISC-V processor will run on any other. It also provides a processor business model similar to that of Linux. Commercial vendors can build on the open-source ISA, or open-source cores to create their own IP to license and support.

It is important to note that whilst RISC-V is open-source, any serious product is probably going to want to license a commercial RISC-V core. Alternatively, companies with the resources and expertise can design their own. Often people may misunderstand RISC-V to be free. It isn’t but it is cheaper. Some commercial core suppliers do not ask for royalties, and license fees can be low, especially as these suppliers try to gain market share.

The main barrier to entry in the RISC processor world has been less technical and more ecosystem-related. Whilst ARM has a much more mature and sizeable ecosystem, that of RISC-V is growing fast and within these short few years, there are already products based on the ISA in the market and a supporting ecosystem.

While India has adopted more of a central government approach, China’s local authorities appear to actively compete in the semiconductor space, and we are now seeing RISC-V specific investments in the form of grants from the Shanghai and Nanjing governments among others. While what the Indian government is doing is great, China and its large number of semiconductor designers and household names are much better placed to take advantage of opportunities presented by RISC-V.

Sanction-proof

An interesting aspect of RISC-V to China is that it is not covered by the US Entity list as it is open-source. This means Chinese companies can use it without any fear of losing access in the future. Even SiFive, the first commercial RISC-V core company, and from the US, can still license to Chinese players. The Chinese unit is a completely separate entity that has allowed them to circumvent any export restrictions.

Even if somehow SiFive was prevented from licensing to certain Chinese firms, there are several non-US alternatives, even some domestic players. These include Andes, PTG from Alibaba, Syntacore, and Nucleisys. There are also free open-source cores available online.

We have seen that the entity list has the potential to limit ARM’s cooperation with Huawei’s HiSilicon despite it being a UK company owned by Softbank. With RISC-V, such risks are eliminated for Chinese firms. Additionally, it provides a globally recognized open-source standard for the country’s chip designers to latch onto. This removes any trust issues that would undoubtedly arise if China were to push its own closed ISA globally to compete with ARM or Intel.

This year I expect to see several Chinese companies taping out RISC-V based IoT chips as well as AI chips which include the ISA’s cores somewhere in the design. Whilst RISC-V has started with simpler IoT designs or low-power chips like Greenwaves’ GAP8 or the Chinese Kendryte, over the coming years I expect larger, more powerful versions to emerge.

Similar to how ARM boasts a range of cores covering low-power IoT to servers, RISC-V has the potential to do the same. I understand that many RISC-V cores struggle in terms of design size compared with ARM equivalents. However, there is no denying the benefits of this open-source, more customizable ISA that is also more cost-effective. The ecosystem is growing, results are improving, and the competitors are beginning to sweat, even if it is just a little.

Nine out of the first 25 Chinese firms to list on Shanghai’s Nasdaq-style STAR market announced their share offerings on Tuesday. Investors can sign up tomorrow ahead of the start of trading on July 22.

Why it matters: This is the most offerings announced in a single day in China since June 2015. The new listings could turn around the fortunes of the Shanghai market after a poor first half.

• The nine plan to raise a total RMB18.8 billion ($2.7 billion) in funding.
• China Railway Signal & Communication is looking for RMB10.5 billion, which would be China’s biggest IPO this year.

“Investor enthusiasm seems very strong for these new shares, but if the stock market keeps falling, investors will likely price in some negative sentiment on them.”

Jiang Liangqing, an investment manager at Beijing’s Ruisen Capital Management told Bloomberg.

Details: Four companies have already finished preparing their offerings. The remaining 21 are expected to start taking subscriptions this week.

• Valuations vary. While China Railway Signal & Communication is looking for 18.18 times its 2018 earnings, AMEC, a semiconductor company, will be selling for 170.8 times its 2018 earnings.

Context: The new tech board was announced only eight months ago and Chinese authorities hope it will keep homegrown tech firms from listing abroad, as well as attract foreign companies. To this end, the STAR market will trade under loosened -by Chinese standards- rules, even admitting a loss-making semiconductor firm.

• This year, the Shanghai Composite Index has performed the worst out of all major Asian equity gauges.