The U.S. Department of Commerce announced new semiconductor restrictions on October 7 in the United States. In addition to existing restrictions on the logic IC sector, this new update extends to the memory category. In addition to Chinese-funded enterprises, the extent of these restrictions stipulates foreign-owned production centers located in China will also need to apply for approval on a case-by-case basis in order to continue to obtain manufacturing-related equipment. The US ban has far-reaching effects and may extend to the global chip industry.

U.S. ban hobbles China’s semiconductor industry, affecting foundry and memory industries

The U.S. Department of Commerce announced a series of chip export control measures on the 7th, which mainly restrict China’s ability to obtain advanced computing chips, develop supercomputers, and manufacture advanced semiconductors.

However, relevant restrictions also prohibit third-country companies such as TSMC from using US-made equipment to service Chinese customers without U.S. approval in some cases. According to TrendForce, a market research agency, the ban will expand the scope of these restrictions. In the future, it will target American companies, including CPUs, GPUs, and AI accelerators, used in HPC fields such as datacenters, AI, and supercomputers. All of these items will require review before export to China. In addition, foundries may no longer be able to manufacture any of the above-mentioned HPC-related chips for any Chinese IC design house.

TrendForce believes, regardless of whether the client is a Chinese or American IC design house, most HPC-related chips are currently manufactured by TSMC with mainstream processes at the 7nm, 5nm, or certain 12nm nodes. In the future, whether the situation is American factories no longer being able to export to the Chinese market or Chinese factories being unable to initiate projects and mass produce wafer starts, it will all have a negative impact on the future purchase order status of TSMC’s 7nm and 5nm processes.

In terms of memory, according to the new specifications announced by the U.S. Department of Commerce, the DRAM portion of sanctions will be limited to the 18nm process (inclusive) and equipment must be reviewed by the Department before import. This move will greatly restrict or delay the sustainable development of China’s DRAM sector and China’s memory manufacturers will be the first to bear the brunt of these sanctions.

TrendForce indicates that CXMT possesses the largest memory market share for a Chinese company in the domestic Chinese market. Since 2Q22, the company has been committed to moving from the 19nm process into the 17nm process. Although the purchase of machinery to fulfill future needs had been accelerated before the ban, volume is still insufficient. CXMT continues to build new plants, including Phase 2 in Hefei and SMBC (SMIC Jingcheng), which is in discussion with SMIC. All of these projects will face difficulties in obtaining equipment in the future.

The C2 plant of SK hynix’s DRAM production center in Wuxi is also affected by the restriction order. The factory accounts for approximately 13% of the world’s total DRAM production capacity and its process has evolved to 1Ynm and more advanced nodes.

In terms of NAND Flash, TrendForce indicates that the import of NAND production equipment into China will be further restricted in the future, especially for equipment used in the manufacture of product of 128 layers and above (inclusive), requiring prior approval before import. It is estimated that this ban will significantly impact the long-term plans of China’s YMTC to upgrade its factory campuses, restrict YMTC from further expanding its customer base as the ban may will greatly limit non-Chinese customers’ adoption and consideration of YMTC products, and impact Samsung’s Xi’an plant and Solidigm’s process migration plan in Dalian.

U.S. temporarily exempts several suppliers as ban disrupts supply chains

In order to mitigate excessive impact of the U.S. imposed China chip ban on the semiconductor industry, the U.S. recently exempted several semiconductor companies (including in the United States, Taiwan, and South Korea) from certain restrictions.

According to Wall Street Jounal, Intel, SK Hynix, and Samsung have all received one-year exemptions. SK Hynix also issued a statement stating that the company has completed negotiations with the U.S. Department of Commerce and has obtained approval to provide equipment and items required for the development and production of DRAM semiconductors in Chinese manufacturing plants without additional licensing requirements. The authorization period is one year.

In addition, Nikkei Asia News also quoted sources as saying that TSMC has also received a one-year exemption to continue ordering U.S. chip manufacturing equipment to expand its Chinese plant. According to people familiar with the matter, the U.S. government has assured TSMC that the equipment will be shipped to its Nanjing fab, which means the company’s China’s development plan remains unchanged and is progressing smoothly.

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According to TrendForce, as the United States continues to expand the content of various lists, successively pass anti-China bills, and explicitly prohibit the export of certain products to China, the two countries have gradually drifted apart and this antagonistic relationship will continue if no drastic changes occur between the two parties in the next 6-8 years.

In the face of U.S. encroachment, all sectors in China must continue to look for escape routes if the country wishes to tear down the many walls built by the U.S. and move towards industrial autonomy. China’s top priority is to make breakthroughs in the semiconductor field. As far as current development is concerned, there are still many companies in China’s domestic IC design industry moving towards advanced manufacturing processes even after leading manufacturers such as Huawei, Changsha Jingjia Microelectronics, and Goke Microelectronics were placed on the entity list. At the same time, semiconductor manufacturers such as SMIC, CXMT, and Yangtze Memory Technologies have repeatedly developed advanced process technologies while Hua Hong Group has gradually expanded in the field of mature processes. If this trend continues, it will not be difficult for China to realize semiconductor autonomy in processes above 10nm.

If U.S. effectively enforces EDA ban and does not expand controls, impact on China will emerge in 2025

The U.S. Department of Commerce’s export restrictions on Chinese manufacturers are escalating but the autonomy of China’s domestic semiconductor industry is also gradually increasing. As the confrontation between the United States and China intensifies, the United States has launched a new wave of export control measures. On August 12, 2022, the U.S. Department of Commerce announced that it will restrict the export to China of EDA software required to design integrated circuits with GAAFET structure. Since GAAFET is a structure that is used in processes below 3nm, this move is equivalent to setting an advanced threshold for China’s semiconductor development.

Domestic Chinese IC designers who are committed to the development of SoCs, cloud computing chips, and GPUs are destined to move to more advanced manufacturing processes in order to meet the iterative needs of product upgrades and are expected to move toward the 4nm manufacturing process in the next 2 to 4 years. If the U.S. effectively implements the EDA software ban and does not expand the scope of EDA software restrictions, the impact of the ban on China’s semiconductor industry is expected to gradually emerge in 2025, not only delaying the development schedule of some domestic Chinese IC designers but even causing developmental stagnation.

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Undaunted by deadlocked US-Sino relations, the great pandemic of 2020, and the US Department of Commerce’s ban on Huawei’s use of software and equipment produced by US manufacturers in the same year, China’s packaging and testing industry has, instead, used these factors as stimulus get back on track. Faced with these three major challenges, the Chinese government has responded with policies such as domestically producing both equipment and semiconductors, allowing China’s packaging and testing industry to buck the trends set in 2020. According to TrendForce statistics, industry revenue in 2020 reached US$7.02 billion and approximately US$9.53 billion in 2021.

A brief summary of China’s packaging and testing industry in recent years is as follows: the US-Sino trade war has been raging since 2018 and, due to tariff issues and the gradual rise in personnel salaries, terminal manufacturers whom had already established plants or subsidiaries in China were forced to gradually relocate relevant factories to SE Asia and India in order to avoid growing overhead costs, moreover impacting the revenue performance of China’s packaging and testing industry. As of June 2019, the tariff issue remained unresolved due to dubious US.-Sino relations but this issue could no longer impede the revenue recovery momentum of China’s packaging and testing industry.

Packaging and testing and localized equipment skirts bans and a moderate threshold for technology research and development attracts overseas manufacturers

After the U.S. Department of Commerce imposed export control bans on Huawei, HiSilicon, and SMIC, the market mostly predicted that China’s packaging and testing industry would be hit next but this did not happen. According to TrendForce, the primary reason for this is that the nature of current back-end packaging and testing technology is relatively crude compared to front-end wafer manufacturing and, considering Chinese government’s recent policy of localizing equipment and the degree of substitutability of non-US equipment manufacturers, even if the U.S. Department of Commerce proposes further bans against the industry, its effects will be limited.

In response to the US-Sino trade conflict, the Chinese government has proposed relevant measures such as semiconductor autonomy which has driven a gradual mainstreaming of domestic equipment production plans. In addition, national funds have been continuously injected into semiconductor equipment manufacturers, even though the level of technological development at this stage remains inferior to major manufacturers in Europe, the United States, and Japan. However, for those with modest requirements for back-end process conditions, testing, and testing equipment, China’s domestic packaging and testing equipment does have a certain proportion and scale.

For example, relevant companies such as Hangzhou Changchuan and Shanghai Raintree have invested in the automatic optical inspection instruments (AOI) and testing equipment that are required in the latter stage of packaging and testing. On the other hand, due to the relatively low threshold for research and development of back-end packaging and testing equipment, many international companies such as Japan’s Advantest and Singapore’s Besi have also set up shops in China. Chinese packaging and testing and their equipment manufacturers are essentially unaffected by relevant export bans, so the industry can still anticipate technological and revenue performance in the next few years.

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TrendForce’s investigations show that, among the three categories in the upstream semiconductor supply chain, which consist of semiconductor manufacturing equipment, materials, and EDA, China made the most progress regarding self-sufficiency in semiconductor equipment, followed by materials, with EDA coming in last, in 2020. In other words, Chinese companies are relatively slow to develop EDA solutions.

The EDA market is relatively oligopolistic and involves two US companies. That means once the US implements more stringent controls over the export of EDA technologies and products to China, China’s development of semiconductor self-sufficiency will most likely suffer dire consequences as a result. Even if Chinese domestic companies are able to supply semiconductor equipment for mature process nodes as well as technologies for chip design, manufacturing, and packaging/testing, these things are essentially inoperable without EDA software and technical support. That is to say, the EDA industry remains the final piece of the puzzle for China’s quest for semiconductor self-sufficiency. Since China’s new IC policies (termed the Policies for Promoting the High-Quality Development of the Integrated Circuit Industry and the Software Industry in the New Era) place more emphasis on semiconductor equipment, materials, and software, compared to past policies, EDA (for which China’s self-sufficiency rate is lower than 10%) will likely become the top developmental priority within the software category in the new IC policies.

Chinese EDA suppliers are likely to provide domestic substitute solutions for mature process nodes

As the Chinese semiconductor design and manufacturing industries continue to expand, the Chinese EDA software market is expected to grow at a 15.1% CAGR across 2020-2024, which is faster than the global average of 10.3%. Although Synopsys, Cadence, and Siemens still account for an approximately 80% share in the Chinese EDA market, domestic companies in China have been accelerating their pace of development in recent years. For instance, companies that have more than 10 years of experience developing EDA software, including S2C, Empyrean, Primarius, Xpeedic, NineCube, and Cellixsoft, are gradually making waves in the industry, while many other emerging companies, such as X-EPIC, Arcas, LEDA, and AMEDAC have also been attracting more attention in the EDA market recently. Now that China-US trade tensions have yet to be resolved, and China continues to proceed with its new IC policies, Chinese EDA suppliers will likely experience rapid growth going forward, especially in their attempt to create domestic substitutes for 28nm and other mature process technologies.

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TrendForce’s latest investigations indicate that China has recently announced two additional investments funded via phase two of the CICF (China Integrated Circuit Industry Investment Fund, better known as the “Big Fund”). The first of these investments was announced on June 8, 2021 and totaled CN¥1.65 billion, which has been used to establish a joint venture called Runxi Microelectronics, co-funded with CR Micro and the Xiyong Micro-Electronics Industrial Park.

Runxi will operate a semiconductor fab specializing in 12-inch wafer fabrication, with a production capacity of 30K/M (that is, 30,000 wafer starts per month). The second investment, announced on July 2, 2021, will total about CN¥2.5 billion and be put towards AMEC’s efforts to raise capital for establishing an industrial center, a headquarter located in the Shanghai Lin-Gang Special Area, and an R&D headquarter.

Now that the Big Fund Phase 2 has invested in semiconductor equipment for the first time, more equipment suppliers are expected to receive investment capital from Big Fund Phase 2 going forward

Established in October 2019, Phase 2 of the Big Fund consists of CN¥204.15 billion in capital, some of which was subsequently invested into 12 companies across the IC design, IC fabrication, package testing, and equipment sectors, as of July 5, 2021. In terms of funding allocation, IC fabrication take the lion’s share with 78.2% of the aforementioned investment, followed by IC design at 11.6%, equipment at 7.7%, and package testing at 2.6%. To date, about CN¥36.6 billion of the Big Fund Phase 2 has been invested.

Investment in AMEC marks the first time that the Big Fund Phase 2 has purchased shares in domestic suppliers of semiconductor fabrication equipment. As fabrication equipment is the key determinant of whether China can achieve its goal of semiconductor independence, suppliers that previously received Phase 1 funding (including Naura, ACM Research, Piotech, Sky Technology Development, and Shanghai Wanye Enterprises), as well as those that have yet to receive investment from the Big Fund (including SMEE and Hwatsing), are likely to receive Phase 2 funding for their expansion projects going forward.

China’s Big Fund provides the domestic semiconductor industry considerable leverage against US sanctions as AMEC receives financing unaffected by US blacklist

As a major supplier of semiconductor etching equipment in domestic China, AMEC specializes in substrate etching technologies. The company provides products which are used for 8-inch/12-inch wafer fabrication and are compatible with 65nm-5nm process technologies. In addition, AMEC has also been actively developing CVD (chemical vapor deposition) equipment, making it an indispensable part of the Chinese semiconductor supply chain.

AMEC effectively had its overseas financing sources cut off after being blacklisted by the US Department of Defense in January 2021. Now that the Big Fund Phase 2 has infused AMEC with CN¥8.207 billion of investment capital, the company is no longer threatened by its inclusion on the economic blacklist. Hence, the substantial Big Fund Phase 2 has also become an important instrument in China’s fight against US sanctions amidst a persistent trade war currently taking place between the two countries.

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