Semiconductors, Technology
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Decades away? Advanced Semiconductor Foundry in China

For background posts on semiconductors, read US-China Semiconductor Rivalry: The next 5 years are everything, the US, China race for Semiconductor Self-sufficiency, and Semiconductor Industry: Is China a super-vulnerable Superpower?

China’s current position in semiconductor manufacturing is characterized by growth. In the 2000 to 2010 period, China’s new foundry capacity amounted to only 18% of the global total, increasing to 21% in the period until 2020.  Projections suggest that by 2030, China will develop between 30-42% of new manufacturing capacity – resulting in 25% of the total global manufacturing capacity.[1] But two points are important to note.  First, much of the manufacturing industry in China belongs to multinational companies, who are effectively the owners of 60% of the industry. Second, the major concern for China’s position is inability to produce advanced logic and memory semiconductors with low prospects of catching up.  With regard to sales, China’s market currently accounts for 34% of global sales for semiconductors and demand is growing[2]. With regard to imports, the General Administration of Customs reported that China’s imports of semiconductors in 2019 were up 19.8% over 2018 for a near total of $312 billion.[3]

China relies on imported chips and materials

China’s semiconductor industry relies on import of key components, chemical materials, tools, high-end equipment, and design software (EDA/ECAD), resulting in what Deloitte (a private consulting firm) research assesses as a “self-sufficiency rate of less than 20%.”[4] China’s recent troubles include a shortage of supplies due to a rapid increase in global demand for supplies and, relatedly, China’s inability to compete as a purchaser with large foundries such as TSMC, Intel, Samsung, and SK Hynix who altogether purchase 90% of (2018) supply. Nevertheless, we cannot strictly consider such shortages to be long-term hindrances since punitive US policies against China have in some cases fueled domestic innovation. The shortage of silicon wafers, for example, became a positive pressure and lead to a surge in China’s domestic wafer industry; currently 150mm, 200mm and 300mm wafers are domestically available, although the 300mm wafers have not reached volume production. Moreover, intense demand pressure in China results in government policies to assist R&D.[5]

Out of Reach EUV

The foremost concern about equipment concerns extreme ultraviolet lithography technology (EUV).  EUV is a process of “painting” transistors on silicon wafers, a critical process of advanced logic and memory semiconductor manufacturing.  The US has access to EUV, as well as the global economic and political leverage to prevent China’s access.  Only one company located in the Netherlands, ASML, manufactures and sells EUV machines at a cost of $120 million per machine. In 2018, several rounds of US talks with the Dutch government apparently resulted in the Dutch government’s denial of ASML’s export license to sell machines to China on the grounds of dual-use technology and shared security concern.[6] Only machines and technology to produce sizes >10nm can be sold to China.[7] 

Inside the EUV lithography machine

Currently, China’s domestically developed deep ultraviolet lithography (DUV) is only capable of 28 nm chip painting. To put this into temporal perspective, DUV was first used by Intel and TSMC in 2004 and is one protracted “generation” behind EUV.  Moreover, China’s DUV capability is still only theoretical since the actual delivery of machines, produced by Shanghai Micro Electronic Equipment, is proposed late 2021.[8]  These facts suggest the impossibility of China’s catching up in advanced semiconductor manufacturing without help from foreign technology. Unfortunately for China, its most promising companies, including SMIC (semiconductors), SZ DJI Technology (drones), ZTE and Huawei (telecommunications), are among dozens on the US Commerce Department’s blacklist of entities for alleged connections to China’s military. Potential sellers of high-tech supplies from most OECD countries require government licenses to export to China, and moreover, US investors have been banned from buying their shares, depriving them of funding.[9],[10]

Abated up-and-comer?

China tends to become unsurpassable in its mature industries, and therefore China’s self-sufficiency, if achieved, will certainly threaten the US’s global position. Nonetheless, the lack of EUV, an underdeveloped supply chain, and a reliance on foreign design technologies still means that China’s catch up could still be decades away.

[1] Antonio Varas, Antonio, Raj Varadarajan, Jimmy Goodrich, and Falan Yinug. “Government Incentives and US Competitiveness in Semiconductor Manufacturing.” BCG Global. March 28, 2021. Accessed April 09, 2021., p.12.

[2] SIA, “2019 Factbook”, p.15.

[3] Xinhua. “Software and Chip Firms Get More Support.” The State Council The People’s Republic of China, May 14, 2019.

[4] Deloitte, pg.9.

[5] Shanshan Du. “China Semiconductor Silicon Wafer Outlook Report.” SEMI, January 19, 2019.  Accessed April 15, 2021., p.2.

.[6] OECD. “Measuring Distortions in International Markets.” OECD Trade Policy Papers, 2019., p.39-40.

[7] Reuters. “U.S. Blacklists Dozens of Chinese Firms Including SMIC, DJI.” CNBC. CNBC, December 19, 2020. Accessed April 11, 2021.

[8] Anton Shilov. “China’s 28nm-Capable Chip Fabbing Tool on Track Amid Trade War.” Tom’s Hardware. Tom’s Hardware, December 6, 2020.

[9] Reuters.

[10] Alexandra Alper and Humeyra Pamuk. “United States Adds China’s SMIC and CNOOC to Defense Blacklist.” Reuters. Thomson Reuters, December 3, 2020.

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