The US government has started to expand the ban on semiconductor equipment exports to China to include equipment under 14nm processing nodes and memory manufacturing tools in August, and required Chips Act subsidy recipients not to expand 25nm and below nodes process capacities in China. It is the US government's effort to direct companies to produce in America. In the process, the decoupling of technologies between the two superpowers may have been accelerated.
Though a Financial Times report cited an expert as saying that the US government is likely to expand the semiconductor equipment ban on NAND tools, the new restrictions may have greater impacts on equipment manufacturers than China itself. More export controls on mainstream American and Dutch semiconductor equipment would mean less adoption of their tools not only by Chinese fabs but also US, Korean and Taiwanese fabs operating in China.
In fact, international semiconductor companies including Intel, SK Hynix, Samsung, TSMC, and UMC will be hit besides local fabs such as Semiconductor Manufacturing International (SMIC), Hua Hong Semiconductor, Huali Microelectronics, and memory companies such as Yantz Memory Technology (YMTC).
"Chinese local capacity only accounts for 20% of the chips produced there in China so far," said DIGITIMES Research semiconductor analyst Eric Chen. "More than half of all IC wafer capacity in China is controlled by foreign companies such as SK Hynix, Samsung, Intel, TSMC, and UMC."
"The expansion of export ban will have short-term impact on China's semiconductor competitiveness for sure," said Eric Huang, vice president of DIGITIMES Asia. "But China is already fostering domestic alternatives for key supply chain processes, that (the export ban expansion) would quicken its speed for local adoption."
China's drive for local sufficiency
Chinese equipment manufacturers enjoyed double- to triple-digit revenues growth in 2021 due to Beijing's policy incentives for local chip manufacturers to prioritize procuring materials and equipment from local suppliers.
DIGITIMES Asia has also noticed the unusually rapid growth in 2021 revenues of Chinese semiconductor companies in its Asia IC 50 report published in July and the Asia Market Cap 100 report in January.
As China is encouraging its chip manufacturers to prioritize procurement from local suppliers to increase self-sufficiency, domestic semiconductor equipment's market share reached 9.8% in first-quarter 2022, up from 7.6% a year ago, according to the Information Network.
China's contribution to revenues of major semi equipment firms in 2021
Percentage of revenues by sales to China (%)
Source: The Information Network, compiled by DIGITIMES Asia, August 2022
According to China Customs statistics, the value of semiconductor equipment imports in January-July of 2022 totaled US$11.37 billion, down 10.3% from the same period a year ago. China's import of semiconductor equipment in 2021 increased by 56% to US$21.17 billion.
China semiconductor equipment import values since 2017
Import value (US$b)
Source: China Customs, compiled by DIGITIMES Asia, August 2022
Apparently, China was hoarding semiconductor equipment aggressively in 2021. ASML sold 81 DUV lithography machines to China in 2021, enjoying 95% of the market share there, according to a Bloomberg report, citing sources. The Dutch company continued to enjoy 61% growth in quarterly sales in second-quarter 2022, just before the export ban was widened.
SMIC, China's largest chip manufacturer, has already acquired 14nm equipment, and reportedly has used it to produce 7nm chips with multiple patterning processes for advanced applications.
The TechInsight's report on SMIC's 7nm chips made with 14nm equipment is believed to have been the main cause for further restrictions on semiconductor equipment, according to industry experts. China's OceanLight's exascale supercomputer SW26010-Pro CPUs are also produced by SMIC leveraging a 14nm process. It requires 40,260 units of SW26010-Pro CPU cores, according to EnGadget. OceanLight exascale has been listed in the global Top 500 list of supercomputers in the world, and is a finalist in the Gordon Bell Prize, which is commonly known as the Nobel Prize of Supercomputing.
Since most datacenter servers are already using 7nm chips for the computing power they need, a supercomputer that makes it to the global Top 500 list may have used chips having equivalent performance. "Making chips with 14nm process nodes for supercomputer chips is not as difficult as people would imagine," comments Eric Huang. "Even though yields may be low for mass production, let's say with 50% of good yield, you only need 8,192 units of 300mm silicon wafer to produce enough good chips for a supercomputer." Huang added that since a country only makes a handful of supercomputers, so the cost is not as high as one would imagine.
Foreign semiconductor equipment makers who have enjoyed robust sales growth over the past few years in China will have to buckle up when advanced equipment sales are banned. Applied Material, which has 39% of its revenues from China, is the main provider of equipment for advanced 3D DRAM equipment. KLA, Lam Research and ASML all have enjoyed more than 30% of its sales contributed by the China market.
China's share in wafer capacity has grown significantly, from 9% in 2011 to 16% in 2021, and is expected to reach 19% by 2024, according to Knometa Research.
"Whether China's plans for semiconductor supply chain self-sufficiency will succeed or not really lies with customers' willingness to adopt your products. The key to any semiconductor supply chain player's success is whether customers worldwide will use your products, and that will be a key indicator," said Huang.
Banning Chinese equipment and products are already weaponized by the US with the Material List. China remains the world's largest chip importing country today, purchasing US$230.16 billion worth of chips in the first seven months of 2022, up 5% year on year. China probably still is not capable of weaponizing its chip purchasing power in the short run, because it still relies heavily on imported chips for its electronic supply chains. But even when supply chain manufacturers are also relocating their production lines to India, Vietnam, and even Mexico, probably decoupling will eventually become a reality.
Wafer capacity shares by region (%)
Source: Knometa Research, compiled by DIGITIMES Asia, August 2022