On August 7th, HuaHong Group officially went public on the Sci-Tech Innovation Board Market, Shanghai Stock Exchange (STAR Market, SSE). Combined with the return of SMIC to A-shares (China’s domestic shares) in the past two years and Nexchip’s listing in May, it brings together the three major players in China’s foundry sector on the STAR Market. Additionally, SMEC, closely linked to SMIC, also went public on the STAR Market without turning a profit. Overall, China’s foundry industry is steadily gaining strength.

As per TrendForce’s latest research, challenges in the economic outlook and ongoing inventory issues this year have led to a slowdown in demand. This is particularly noticeable in the automotive and industrial control, where inventory has been piling up after short-term fulfillment. Fabless and other IDM inventory digestion have faced severe restrictions. IDM foundries, launching new capacities, are consolidating outsourced orders and once again reducing orders to foundries. In 2024, given the expected unfavorable economic environment, the overall recovery of capacity utilization poses challenges.

While Chinese foundries have not been immune to these challenges, the losses have been mitigated thanks to the boost in China’s import substitution policies on semiconductors. According to TrendForce, the global ratio of mature (>28nm) to advanced (<16nm) processes is projected to hover around 7:3 from 2023 to 2027. Propelled by policies and incentives promoting local production and domestic IC development, China’s mature process capacity is anticipated to grow from 29% this year to 33% by 2027. Leading the charge are giants like SMIC, HuaHong Group, and Nexchip.

Exploring China’s Wafer Foundries Landscape

According to TrendForce, excluding 7 temporarily suspended fabs, China currently operates 44 fabs (25 fabs in 12-inch, 4 fabs in 6-inch wafers, and 15 in 8-inch fabs and production lines), additionally, 22 fabs are under construction (15 fabs in 12-inch, and 8 fabs in 8-inch). In the future, SMIC, Nexchip, CXMT, and Silan plan to construct 10 fabs (9 fabs in 12-inch, and 1 fab in 8-inch). Overall, by the end of 2024, China aims to establish 32 large fabs, and all of them are about to focus on mature processes.

Reviewing the distribution of wafer foundries across China, the Yangtze Delta region hosts nearly half of the total, with significant concentrations in provinces like Shanghai, Wuxi, Beijing, Hefei, Chengdu, and Shenzhen.

Nearly 4.14 million wafer capacity in 12-inch will be ongoing per month in China until 2026

In terms of capacity, the statistics showed that China currently operates 31 fabs in 12-inch, including those under construction with fixed capacity for 12-inch. The total monthly capacity is approximately 1.189 million wafer capacity. Compared to the planned monthly capacity of 2.17 million wafer capacity, the capacity utilization of these fabs is close to 54.48%, still a significant room for expansion.

Considering construction and future planning, it is anticipated that China will add 24 fabs in 12-inch in the next five years, with a planned monthly capacity of 2.223 million wafer capacity. Assuming all planned 12-inch wafer foundries achieve full production, by the end of 2026, the total monthly capacity of 12-inch in China will exceed 4.14 million wafer capacity, marking a 248.19% increase compared to the current capacity utilization rate.

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• TrendForce Foresees China’s Mature Wafer Processes to Expand to 33% by 2027, Japan Secures Advanced Processes

On October 31, 2023, Apple held a product launch event for its M3 chips. Reports suggest that Foxconn has secured a portion of existing MacBook Pro and iMac orders from Quanta. This marks the first time Foxconn has taken orders for higher-end MacBook Pro models.

The order distribution between Foxconn and Quanta has shifted, resulting in a more balanced competition. Quanta may need to expedite the introduction of new factory automation projects and relocate production facilities to reduce labor costs and regain its share of MacBook Pro and iMac orders.

TrendForce’s Insights:

1. Foxconn’s Notebook Factories Excel in Materials, Automation, and Factory Management

Up until 2022, Apple’s computer assembly supply chain was primarily served by two Taiwanese companies, Foxconn and Quanta. In the second half of 2022, Chinese company Wingtech Technology entered the Apple computer assembly supply chain for the first time, initially securing a small portion of orders for MacBook Air products. While they currently hold only a fraction of the orders, they will undoubtedly pose a significant challenge to Foxconn and Quanta in the future.

Quanta, favored by Apple for its tech-oriented approach, faces tough competition from Foxconn, known for its high degree of factory management and production line automation.

The reason for Quanta losing a portion of its high-end notebook orders might be linked to the minimal design differences between the new models featuring the M3 chip and their predecessors.

Moreover, their assembly, testing, and packaging processes remain alike. Hence, Apple adjusts order proportions in its supply chain according to the production yield and quotes from assembly factories as part of risk management. Material costs, labor expenses, and production-related costs are the main elements in the product cost structure. At this stage, labor costs in Shanghai are higher than in Chengdu.

Additionally, Foxconn is one of Apple’s computer case suppliers, giving it priority in material usage. Given Foxconn’s extensive projects for production line automation, their acquisition of Apple’s high-end M3 chip orders for the MacBook Pro has significantly bolstered their standing.

In the future, as long as Apple’s computer designs undergo minimal changes, Foxconn can enhance its output by accelerating the replication of similar production lines. This strategy aims to satisfy customer demands across production volume, costs, quality, and delivery time. Consequently, Foxconn’s aim to capture a share of Quanta’s orders is just a matter of time.

2. Quanta Needs to Accelerate Factory Automation and Establish Vietnam Facilities

Quanta’s factory in Shanghai, producing computer goods, operates within a labor-intensive industry. With the continual rise in local labor costs, recruiting in Shanghai, primarily an area with a service and finance-oriented workforce, becomes increasingly challenging. This scenario significantly impacts the overall workforce deployment in the production line.

Despite having facilities in Chongqing, the company’s strong presence of Apple repair centers in Shanghai anchors its focus there. Moreover, the ongoing establishment of Quanta’s Vietnamese facilities abroad will take time to address production capacity. Hence, Quanta might need to expedite factory automation in Shanghai to reduce labor usage, effectively cutting costs, and potentially regaining Apple orders.

Apple’s computer assembly has long been centered around China, but due to geopolitical influences, Quanta has ultimately shifted to establish production facilities in Vietnam

Vietnam has emerged as an electronic industry hub in the “China+1” strategy. Quanta should leverage local resources to transfer small-scale production lines to Vietnam for manufacturing. By obtaining brand verification for these products beforehand, they aim to shorten the preparation time before mass production, with the goal of reducing costs, improving yields, and regaining customer confidence.

Read more

• [News] Apple’s Exclusive AI Order Boosts Revenue via Foxconn’s FII Vietnam Plant
• Why Laptops Are Speeding Up the Rise of Vietnam?

(Photo credit: Pixabay)

NVIDIA and Intel are adapting to the latest U.S. chip export restrictions by introducing downgraded AI chips specifically tailored for the Chinese market, UDN News said.

According to insider from the China Star Market, a Chinese media, NVIDIA has developed three downgraded AI chip models for the Chinese market. Intel also plans to release downgraded Gaudi 2 chip with an aim to US restriction.

NVIDIA’s latest downgraded AI chips, including HGX H20, L20 PCle, and L2 PCle, are anticipated to be unveiled after November 16th. Chinese companies are likely to receive samples in the coming days. These three chips, derived from the modification of NVIDIA H100, will align their performance with parameters below the new U.S. regulations. Ongoing communication with NVIDIA suggests mass production is slated for the year-end, said by industry sources.

Besides, Yicai also confirms from multiple NVIDIA supply chain sources. The three AI chip products are designed for cloud training, cloud inference, and edge inference, with specific launch times pending confirmation. Sampling is projected between November and December this year, followed by mass production from December this year to January next year.

On the Intel front, there are rumors of a response plan. As reported by The Paper, Intel is planning to release an improved version of its Gaudi 2 chip. Although the rumor exists, specific details are yet to be disclosed.

Since the U.S. government introduced chip export control to China last year, NVIDIA initially designed downgraded AI chips A800 and H800 for Chinese companies. However, new regulations in October this year by the U.S. Department of Commerce brought A800, H800, L40S, and other chips under control. Failure to secure export permission may necessitate order cancellations for NVIDIA.

(Image: Nvidia)

On October 17, 2023, the U.S. government once again expanded its restrictions on the export of semiconductor devices and products to China. The newly added control conditions now encompass NVIDIA’s L40S, A100, H100H800, as well as general-purpose AI server GPUs tailored for the Chinese market, such as A800 and H800. Additionally, AMD’s MI200 series, MI300 series GPUs, and Intel’s Habana Labs’ Gaudi 2, Gaudi 3 GPUs fall under the regulatory framework.

Recalling the U.S. government’s export restrictions on AI chips issued to IC design firms in September 2022, at that time, only A100, H100, and MI200 series were subjected to control, and the U.S. Department of Commerce granted NVIDIA and AMD a one-year buffer period.

In contrast, the recent regulations not only cover all mainstream AI server GPUs but also eliminate the buffer period for these chip companies. In essence, companies or institutions in countries not permitted for export can only acquire AI server chips with performance potentially inferior to NVIDIA L40S or AMD MI200 series for the next few years.

Furthermore, stricter control thresholds for lithography equipment have led to the inclusion of ASML’s DUV, the 1980Di, in the control list. This equipment is primarily used in the 28 ~ 7nm process. Previously controlled products were focused on the EUV 3000 series for 7nm and below processes and the DUV 2000 series for 16/14 ~ 5nm processes.

This move indicates that the U.S. government’s desire to control semiconductor process technology has officially extended to mature processes of 28nm.

The expanded U.S. controls on AI chips and semiconductor manufacturing devices not only target China but also countries that might collaborate with Chinese institutions and businesses in AI development.

In this scenario, China is left with only two viable options to establish efficient AI computing resources: (1) designing and mass-producing AI server chips itself or (2) utilizing the computing resources of cloud service providers.

As the U.S. is also discussing the potential inclusion of cloud service providers in semiconductor control policies and currently formulating relevant countermeasures, this path remains unreliable for China. Therefore, the only dependable option is to independently design and manufacture AI server chips.

Read more

• [News] Nvidia says US speeded up new export restrictions on AI chips
• [News] Chinese Chip Equipment Rises Amid U.S. Restrictions

According to IThome’ report, Alibaba Group CEO Eddie Wu, speaking at the 2023 World Internet Conference Wuzhen Summit today, announced that Alibaba is gearing up to open-source a massive model with 72 billion parameters. This model is set to become the largest-scale open-source model in China.

Wu expressed that with AI becoming a crucial breakthrough in China’s digital economy innovation, Alibaba aims to evolve into an open technology platform. The goal is to provide foundational infrastructure for AI innovation and transformation across various industries.

It’s reported that Alibaba has, up to this point, open-sourced Tongyi Qianwen’s Qwen-14B model with 14 billion parameters and the Qwen-7B model with 7 billion parameters.

According to guandian’s report, Eddie Wu mentioned at the 2023 World Internet Conference Wuzhen Summit that AI technology will fundamentally transform the ways knowledge iteration and social collaboration occur, creating a profound impact on productivity, production relationships, the digital world, and the physical world.

He emphasized that society is currently at a turning point from traditional computing to AI computing, with AI eventually taking over all computing resources. The dual drive of AI and cloud computing is the underlying capability that Alibaba Cloud relies on to provide services for the future AI infrastructure.

In addition, on October 31st, Alibaba Cloud announced the release of the large-scale model Tongyi Qianwen 2.0 at the Apsara Conference. On the same day, the Tongyi Qianwen app was officially launched on major mobile application markets. Compared to the 1.0 version released in April, Tongyi Qianwen 2.0 has shown improvements in capabilities such as complex instruction understanding, literary creation, general mathematics, knowledge retention, and illusion resistance.

(Photo credit: Alibaba)