From the Entity List in 2020 to the Chips and Science Act of 2022, the US government has been tightening its grip on China’s semiconductor industry by blocking the export of advanced semiconductor manufacturing equipment. The pressing question on everyone’s mind is: Will China’s semiconductor industry crumble under this pressure?

The answer, based on recent market reactions, is a resounding no.

Riding the Waves through Headwinds

Despite international semiconductor equipment manufacturers facing production cutbacks, China’s semiconductor equipment industry is thriving. In the first quarter, Naura, the leading semiconductor equipment manufacturer, reported a whopping 68.56%-87.29% increase in revenue, with a 171.24% to 200.3% increase in net profit. This has spurred growth across the entire Chinese A-share market for semiconductor equipment concept stocks such as Piotech, PNC process System, Advanced Micro, ACM Research and Hwatsing Technology.

This growth highlights a great leap forward in semiconductor process technology. Despite the adverse effects of the US’s broad-based restrictions, they have nonetheless created a favorable environment for testing and substitution opportunities. This, in turn, has enabled Chinese manufacturers of semiconductor equipment to increase their market share in the area of established semiconductor processes.

Full Speed Ahead: Aiming High for 5nm

In key semiconductor manufacturing processes such as thin film deposition, etching, ion implantation, CMP, and cleaning, Chinese manufacturers have already moved beyond traditional equipment development cycles and are progressing towards advanced process technology at full speed.

According to TrendForce, Chinese semiconductor equipment companies such as Naura and Advanced Micro(AMEC) are capable of supporting 28/14 nm in some process steps, and have even tentatively established their presence in 5 nm process technology.

Our summary identifies the main players to watch in thin film deposition, etching, and EUV:

• Thin film deposition: Naura

Naura has achieved full coverage of PVD, CVD, and ALD product lines, with product lines matching international leaders such as Applied Materials, Lam, and Tokyo Electron. Naura has unique competitive advantages in the PVD field, with over 20% of its PVD equipment being supplied to Chinese 12-inch production lines such as YMTC(Yangtze Memory Technologies Co., Ltd), making it the second-largest PVD equipment supplier after Applied Materials.

Additionally, since 2012, Naura has sold over 200 PVD equipment, gradually achieving their goals for equipment substitution.

• Etching: AMEC and Naura

As the leading CCP etching machine, AMEC has successfully penetrated TSMC’s 5nm production line, becoming the first domestic etching equipment to break through in the advanced process area. AMEC has also achieved large-scale adoption in 64-layer, 128-layer 3D NAND process, and 1x DRAM process. These main product portfolios contributed to the company’s 47.3% YoY revenue growth rate in the first half of 2022. In addition, AMEC’s etching equipment also enjoys a high gross profit margin of 46.02%.

On the other hand, Naura is at the forefront of ICP silicon etching equipment. Its first-generation 12-inch etching equipment underwent certification for 90-65nm at the SMIC’s fab in Beijing in 2008. In addition, with the support of national research projects, Naura’s ICP etching machine has also broken through 14nm barriers and been adopted by mainstream foundries.

• Photolithography: Shanghai MicroElectronics Equipment(SMEE)

Photolithography is a critical process that China is strategically including in their semiconductor industry plans. They’re aiming to develop 28nm immersion exposure machines and core components through collaborative efforts: SMEE will lead the overall design and integration, with five or more companies providing key components.

Although SMEE has preliminary DUV exposure machine technology, it’s limited to more mature processes on 8-inch and 12-inch wafers at 90nm, 110nm, and 280nm, leaving a significant gap with international leaders.

From Toddler to Major Player

Although China’s equipment manufacturers are still at their toddler stage, the increasing momentum suggests that they will continue to make significant progress. Assuming that China’s policy support towards the development of 14nm and below semiconductor processes remains unchanged in the coming years, it is highly likely that the country’s market will fundamentally experience a transformation.

At this point, China’s semiconductor industry will enter a new era of high-speed growth, paving the way for the country to become a major player at global level. As China’s domestic market grasps the technology and commercial logic along the way, it will potentially have more influence over the global supply chain, as a result triggering a shift in the worldwide semiconductor industry in the long run.

The compound semiconductor market has been flourishing in recent years thanks to the strong demand from markets such as electric vehicles and renewable energy. This has led to an increase in M&A as companies race to establish their position in the industry.

The market has seen a significant surge in M&A deals over the last few years: from 2006 to 2017, there was only one deal every two years, but since 2018, there have been six deals annually, surpassing historical data.

While SiC and GaN are the top categories for M&A, 21 of the transactions are directly related to SiC. This is because after its development over 20 years, SiC has been able to be mass-produced for market demands, particularly in the automotive industry where SiC has become the mainstream technology.

Vertical Integration driven by Industry Titans

Industry leaders in the US and Europe, such as Wolfspeed, On Semi, II-VI, ST, and Infineon, have started accelerating vertical integration in recent years, as reflected in the frequency of M&A.

The United States has led 12 M&A deals, with only four of them occurring before 2018, and Wolfspeed contributed to three of them. Over the past three years, On-Semi, II-VI, and Macom have led several deals with a focus on SiC’s vertical integration to meet market demands.

In Europe, there were eight M&A deals in total, all of which took place in 2018 and beyond, with ST and Infineon being the major players. Both companies have been accumulating technical strength through strategic acquisition to maintain their leading ground in the SiC power device market.

In 2019 and 2020, ST acquired Norstel AB to bolster its SiC wafer manufacturing capabilities and Exgan to improve the GaN power device design expertise. Similarly, Infineon acquired Siltectra GMbH in 2018 to gain control of the crucial SiC wafer cold split process technology and recently acquired GaN Systems to reinforce its presence in the GaN market.

It’s evident from the cases that the high frequency of M&As in the US and Europe is mainly driven by leading companies in the industry, gradually defining the landscape of the market.

Wolfspeed, which has grown into a leading company after a long period of time, has accumulated enough capital for M&A and gradually been transforming into a platform-type company. Meanwhile, Onsemi, ST, and Infineon, which have traditionally been platform-type companies with established expertise in the field of compound semiconductors, are now ramping up their M&A activities to expand market presence and generate strong growth momentum.

Market Landscape Continues to Change

M&A deals among semiconductor equipment companies are also receiving attention. Recently, ASM and Veeco have successively acquired LPE and Epiluvac, indicating that equipment manufacturers have also realized the huge potential of the SiC market and are accelerating their investment.

Given the rapid technology breakthroughs, the overall SiC power device market is predicted to grow at an annual rate of 41.4% to reach $2.28 billion by 2023 and $5.33 billion by 2026 at 35% annual growth, according to TrendForce’s latest report.

However, with the current market boom comes a new challenge – the supply shortage. One of the biggest obstacles to industry growth is the scarcity of SiC substrate material, despite efforts from companies like STM and Onsemi to ramp up their production.

Manufacturers are now on the hunt for both internal and external sources to keep the supply flowing. While most of the SiC substrate suppliers are expanding, only a few, like Wolfspeed, are controlling the manufacturing capacity for high-end SiC substrates used in automotive main inverters, which worsens the bottleneck in SiC devices’ production for cars.

With that being said, major players must quickly address technology hurdles and supply issues to bridge the market gap. This will inevitably drive intense competition and industry consolidation, and only the ones that can adapt quickly will be thriving in the long run.

Read more:

• SiC vs. Silicon Debate: Will the Winner Take All?
• Chinese Players Rally for Demand Surge in MOSFET, IGBT, and SiC

According to a recent report by TrendForce, automotive applications are expected to become the main growth driver of the CIS market, with its share of terminal applications projected to increase from around 9% in 2023 to approximately 15% in 2026.

As self-driving systems become more widespread, the demand for CIS in the automotive industry will continue to increase. Trendforce estimates that the average number of CIS used per car will increase from 3-4 in 2022 to 6-7 in 2026, with the overall market size growing from $1.8 billion in 2023 to over $3 billion in 2026 at a CAGR of over 20%.

On the other hand, due to the stagnation in the number of camera modules, the growth of the smartphone CIS market is expected to be in the low single digits. By 2026, CIS terminal applications in smartphones are predicted to decrease from 63% in 2023 to 51%, while automotive applications are projected to increase from 9% to 15%.

The report offers the following insights into the CIS market for smartphones:

• 10.5% decline in smartphone production in 2022: Due to factors such as war, pandemics, inflation, and inventory adjustments, global smartphone production in 2022 declined by 10.5% to 1.193 billion units, resulting in a 6.7% decline in the shipment of camera modules to 4.46 billion units and a 4% decline in the overall CIS market size to $18.9 billion.
• 5% growth in the CIS market size in 2023: The report predicts that the global smartphone production will increase by 0.9% to 1.203 billion units in 2023, with the shipment of camera modules reaching 4.62 billion units, up 3.6% YoY, driving the overall CIS market size to grow by 5% to $19.8 billion.
• Stagnation in the number of smartphone camera modules: From 2021 onwards, the proportion of shipments of smartphones with four and more rear camera modules has remained at 21%, slightly lower than the 23% in 2020, and is expected to remain at the same level in 2023.
• The trend towards large size and high-resolution CIS: In 2021, Samsung launched the world’s first 200-megapixel CIS, the ISOCELL HP1, while Sony introduced the IMX989 in 2022, marking the official entry of high-end smartphones into the one-inch era.

Additionally, driven by new features such as night photography, it is anticipated that the image quality of smartphone cameras may surpass that of single-lens reflex cameras (SLR) by 2024, resulting in the increase of market size and ASP of CIS.

The latest study by TrendForce shows that demand for large-size and mobile driver ICs will steadily grow as various applications recover. However, the speed of capacity supply adjustment and competition among different technologies will remain the key focus in the next few quarters.

Another thing worth noting is that the US chip ban has led to a trend of independent development between Chinese and non-Chinese supply chains. While this may increase production time and cost, it also presents opportunities for individual Chinese domestic suppliers and Taiwanese wafer foundries to acquire fresh orders.

Observations by TrendForce on each sector of driver ICs are summarized below-

• Large-size panel driver ICs: demand is expected to recover gradually and stabilize prices, but suppliers are cautious about inventory, which could lead to a supply shortage if demand surges too quickly.
• TDDI for mobile devices: prices and inventory have reached a low point, with a small rebound expected. In the long run, AMOLED panels are expected to dominate, so IC suppliers will need to explore new applications for medium-sized panels.
• AMOLED driver ICs: UMC’s 28nm high-voltage process is producing AMOLED driver ICs. If Apple shifts all 40nm AMOLED driver IC production to 28nm, TSMC’s 28nm capacity availability will be crucial to the market’s supply-demand balance.
• RAM-Less AMOLED driver ICs: RAM-Less AMOLED driver ICs with Chinese flexible AMOLED panels are gradually taking shape due to China’s domestic policy. However, the rapid price drop of Full-Ram AMOLED has caused brands to hesitate on adopting Ram-Less AMOLED.

As the struggle between China and the United States continues, in order to avoid upcoming geopolitical risks, not only have Taiwanese ODM manufacturers begun to shift some production locations, but market research firm TrendForce has also observed that American OEM companies have started to take action, discussing with partners how to reduce the proportion of Chinese supply chains and components.

TrendForce points out that, at present, American cloud service providers (CSPs) and OEM manufacturers have not yet been able to completely cut ties with Chinese-produced components. Among these, passive components and mechanical assemblies are more difficult to relocate due to factors such as cost and yield. However, other components (such as PCBs and power management control ICs) have plans to move out of China.

But where will these component manufacturers go if they want to move out of China? According to TrendForce’s analysis, PCB manufacturers are currently eyeing shifts to Thailand, Malaysia, Vietnam, and India; power management ICs and control ICs have already moved out of China and relocated to Taiwanese factories; mechanical assemblies and MLCC capacities still mainly come from China, with the former being requested to move but facing challenges due to cost and yield considerations.

TrendForce notes that the aforementioned production line and material shifts are primarily led by American CSPs. The overall server supply chain’s subsequent changes still need to be observed. For example, major players like Google, AWS, and Meta have not only moved most of their L6 production lines to Taiwan but also plan to establish bases in Southeast Asia after 2024 to handle cases within the United States, and reserve flexible production lines along the US-Mexico border, which will significantly increase utilization within this year.