Sunday, 25 July 2021

China’s semiconductor revolution: From crisis to self-sufficiency

by Harry Baldock, Total Telecom
Tuesday 15 June 21

“China’s domestic equipment and material vendors are developing faster and faster. We estimate that by the end of this year China can build an entirely self-sufficient production line of 28nm chips and, next year, 14nm chips,” said Omdia's Head of China Semiconductor Research, Hui He

The global semiconductor industry is currently embroiled in one of the most severe crises it has faced in the past 30 years. The upheaval of the coronavirus pandemic has seen the demand for chips surge, but production is struggling to keep up, causing long delays and seeing prices driven to new heights.    We spoke to Hui He, Associate Director and Head of China Semiconductor Research at Omdia, about the severity of the ongoing semiconductor supply crisis and how the industry is shifting to meet heightened demand.   “Demand has increased,” explained Hui. “Corona has changed a lot of our lives, creating a lot of new demand for the industry this year. Even for TSMC (Taiwan Semiconductor Manufacturing Company), the most advanced and biggest foundry in the world, income from hyperscale computing has grown to 33% of total revenue. So, this is a very big and high-speed growth market.”       One of the most obvious effects of the global pandemic has been a major boost in digital transformation, both in our personal and business lives. From a growing appetite for connected devices like laptops and tablets…

The global semiconductor industry is currently embroiled in one of the most severe crises it has faced in the past 30 years. The upheaval of the coronavirus pandemic has seen the demand for chips surge, but production is struggling to keep up, causing long delays and seeing prices driven to new heights. 
 
We spoke to Hui He, Associate Director and Head of China Semiconductor Research at Omdia, about the severity of the ongoing semiconductor supply crisis and how the industry is shifting to meet heightened demand.
 
“Demand has increased,” explained Hui. “Corona has changed a lot of our lives, creating a lot of new demand for the industry this year. Even for TSMC (Taiwan Semiconductor Manufacturing Company), the most advanced and biggest foundry in the world, income from hyperscale computing has grown to 33% of total revenue. So, this is a very big and high-speed growth market.”
 
 

 
One of the most obvious effects of the global pandemic has been a major boost in digital transformation, both in our personal and business lives. From a growing appetite for connected devices like laptops and tablets, to the recovery of the automotive electronics industry, which had slumped during the early stages of the pandemic, semiconductors are at the centre of this transformation process. Soaring demand for smartphones, which remain the biggest use case for these chips, is proving to be a major driver for growth for the semiconductor industry, with smartphone manufacturers increasing their quotas significantly in recent months, often paying a premium to do so.  
 
“The smartphone makers are ordering the components ahead of time, much more than before,” explained Hui. “They are ordering more – about 30% or 40%.” 
 
But with this soaring demand, the semiconductor manufacturers are struggling to keep the pace.
 
Put simply, this is not a situation that can be resolved quickly.
 
“The whole semiconductor industry is in a very tight situation,” said Hui. “We think this tight situation will continue for the next two or three years.”
 
 
China accelerating towards self sufficiency   
 
As this crisis deepens, all eyes are on China, the country that currently purchases around 40% of the semiconductors produced worldwide. This sizable consumer market presents China with an interesting opportunity for domestic growth during this period, potentially offering them the chance to build a self-reliant industry that other markets, like Europe, will struggle to match. In fact, over the past year, the Chinese government has been helping to facilitate such growth, offering tax breaks and financial incentives to semiconductor companies willing to invest.
 
The move, at least in part, is driven by the US sanctions which continue to disrupt China’s access to the global semiconductor supply chain. China is reliant on foreign companies, such as those based in the US, for its most advanced chips, and without access to these technologies it has little choice but to ramp up its own design and production industries as fast as possible.
 
It should be noted, however, that while China does not necessarily have access to the most advanced chips, this is not a major issue, at least in the short term. Most devices requiring chips currently rely on more mature chip technologies, such as 28nm, with the more advanced 5nm and 7nm chips reserved for only a handful of devices, like smartphones, and hyperscale computing. 
 
China’s largest semiconductor company, Semiconductor Manufacturing International Corporation (SMIC) is an excellent example of the kind of growth taking place in the Chinese market right now, having increased its domestic production rapidly over the last year. 
 
“SMIC has had 28nm mass production capacity for many years and has even moved to 14nm. In fact, they have some plans to expand their 28nm capacity because even though 28nm is a very mature technology it still has a lot of use cases, such as the IoT and edge computing,” said Hui. “Many available devices and industrial level components, even those for automotive components, don’t need such advanced technology chips. The mature technologies are enough.”
 
In fact, the scaling up of China’s industry is taking place at such a fast pace that self-sufficiency will soon be within reach.
 
“China’s domestic equipment and material vendors are developing faster and faster. We estimate that by the end of this year China can build an entirely self-sufficient production line of 28nm chips,” said Hui. She noted that this growth trajectory is expected to continue, with key equipment for the production of 14nm tech is set to be finished by the end of 2022.”
 
Naturally, the evolution of China’s semiconductor market will take time, but the gap between it and the US may not be as pronounced as previously believed. Recently, for example, TSMC’s chairman said that China’s design capability is just one year behind that of the US. If the industry continues to evolve at such a rapid pace, it will not be long before China can develop an entirely self-contained industry, cutting its reliance on overseas companies.
 
“China has strong design capability,” explained Hui. “If China can provide the local manufacturing capability as well, then it will be able to establish a healthy local supply chain.”
 
Exploding demand coupled with geopolitical tensions could well be merging to create the perfect storm for China’s semiconductor revolution. 
 
 
The challenge of digital sovereignty in a global industry       
 
As always when supply and demand prove irreconcilable within an industry, such as that of Europe and the US, the supply chains themselves inevitably falls under the microscope. One thing that has quickly become apparent during this shortage is the truly global nature of the international semiconductor industry, with each market playing an integral and highly specialised role. 
 
“In the last few years, electronics have developed into a global industry,” said Hui. “The US has advanced designs from the likes of Nvidia and Qualcomm; Europe and Japan have some advanced material and equipment vendors; in Taiwan and Korea they have the advanced manufacturing, like Samsung and TSMC; and, of course, China is the biggest market for semiconductors. So, it’s a very global supply chain.”
 
But however harmonious this global industry may be, the crisis has also exposed the various markets’ deep co-dependence, something which is becoming increasingly scrutinised by national governments, both for economic and geopolitical reasons. Many countries, such US and those within Europe, want to increase their domestic production and decrease their reliance on foreign production. Digital sovereignty has become a hot topic for legislators, who predict that an independent and competitive technology industry will be at the heart of national economies in the coming decades.
 
In fact, the European Commissioner, Thierry Breton recently met with executives from Intel and TSMC Europe to discuss the companies investing in the continent, particularly in form of launching European fabrication plants. He said that Europe had been ‘naïve’ in outsourcing its chip production, with Europe’s market share having fallen from 44% in 1990 to just 10% today. He hopes to double Europe’s market share over the next decade.  
 
However, convincing the likes of Intel to make such a major investment in Europe is a tall order, primarily since the continent does not have a major buy-side market for these chips once produced. 
 
“If you produce the products, you need the market,” explained Hui. “The final market will be at the device-end, such as smartphones and PCs, cloud and edge computing, or one of the hottest topics right now: automotive. In recent years, Europe is lacking the biggest consumers of these components.”
 
Efforts to transform the global semiconductor market are clearly underway, but much like semiconductor production itself, shifting the scope of international markets is inevitably a slow and laborious process, the results of which remain to be seen.
 
 
You can view our full interview with Hui He from our link above.
 
 
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