According to a report by the South China Morning Post on April 18th, encouraged by official support and continuous industry investment in expansion, China’s total chip production in the first quarter of 2024 reportedly surged by 40% to reach 98.1 billion units. This further highlights China’s shift towards ramping up mature processes in semiconductor development, especially amidst the export restrictions. Additionally, chip production capacity is rapidly expanding.

Recent data released by China’s National Bureau of Statistics shows that chip production grew by 28.4% in March alone, reaching a record high of 36.2 billion units.

Reportedly, the substantial growth in chip production in China is partly attributed to strong demand from downstream industries such as new energy vehicles. Data shows that in the full year of 2023, China’s production of new energy vehicles reached 9.587 million units, a year-on-year increase of 35.8%. In the first quarter of this year, the production of new energy vehicles increased by 29.2% to 2.08 million units. Additionally, in the first quarter of this year, China’s smartphone production increased by 16.7%.

In recent years, with semiconductor plants emerging across various regions, China’s chip production capacity has been continuously expanding. The chip production volume in the first three months of this year is nearly double that of the same period in 2019.

The International Semiconductor Industry Association (SEMI) released a global fab forecast report at the end of last year, indicating that China’s share of global semiconductor capacity will continue to expand, attributed to local government funding injections and other incentive measures. Chinese chip manufacturers may add 18 new fabs in 2024, with wafer annual capacity rising from 7.6 million units in 2023 to 8.6 million units this year.

A report from the American think tank, the Center for Strategic and International Studies (CSIS), also noted that due to U.S. restrictions on advanced chip technology and equipment to China, new investment projects in China’s semiconductor production are focusing on mature process chips.

Data from TrendForce indicates that China’s fabs hits 77, mainly targeting on the mature process.

Researchers cited in the report suggest that the unintended consequence of U.S. export controls on advanced chip technology to China may result in a wave of state-supported investments, leading to overproduction and potentially allowing China to dominate global traditional chip production.

The same reports also indicate that despite China’s strong push for chip self-sufficiency, the country still heavily relies on chip imports. Data from the General Administration of Customs of China shows that in the first quarter of this year, chip imports to China increased by 12.7% year-on-year, reaching 121.5 billion units, while chip exports grew modestly by 3% to 62.4 billion units. Chips remained China’s largest imported commodity in 2023, surpassing crude oil.

However, it’s important to note that a significant portion of the chips imported into China are designed by Chinese chip design firms but manufactured by overseas foundries.

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The US Department of Commerce has added leading Chinese solution provider Sitonholy, who primarily sells processors from Intel and NVIDIA, to its Entity List. This inclusion on the Entity List undoubtedly impacts Sitonholy but also has significant implications for American companies like Intel and NVIDIA.

According to reports from the South China Morning Post and Reuters, Sitonholy sells hardware based on Intel and NVIDIA technologies and also provides cloud services. As a result, US companies engaging in business with Sitonholy require export licenses from the Department of Commerce, but these license applications are presumed to be denied during the review process.

This development is a significant blow to Sitonholy and American companies alike. Kevin Kurland, a US export enforcement official, stated during a hearing of the US Senate subcommittee that the US government has placed four Chinese companies on an export blacklist for assisting the Chinese military in obtaining AI chips. The four Chinese companies are Linkzol Technology, Xi’an Like Innovative Information Technology, Beijing Anwise Technology, and Sitonholy.

A Chinese Foreign Ministry spokesperson criticized the United States for unfairly targeting Chinese companies through export controls and demanded that the US stop politicizing trade and technology issues.

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According to a report from Nikkei Asia, Chinese tech giant Huawei is building a semiconductor equipment research and development center in Shanghai to navigate U.S. export controls and strengthen its chip supply chain.

As per the same report from Nikkei Asia, Huawei is offering salaries double that of its competitors to recruit experienced talent. However, industry sources cited by the same report suggest that Huawei’s demanding work culture may make retaining talent challenging, despite the attractive pay.

The report further highlights the center’s crucial role in developing photolithography machines, essential for advanced chip production. U.S. export controls have made it difficult for Huawei to access such equipment, which is primarily manufactured by three global leaders: ASML from the Netherlands, Nikon, and Canon from Japan.

Sources cited in the report has revealed that Huawei’s new research center is located in the western Qingpu district of Shanghai, featuring spacious grounds housing the main chip development center and the new headquarters of HiSilicon, Huawei’s semiconductor design division.

The area also hosts wireless technology and smartphone development centers. As per the Qingpu District People’s Government in Shanghai, once completed, the park will accommodate over 35,000 high-tech workers.

To attract talent, Huawei reportedly offers salaries twice that of local chip manufacturers. Industry sources cited in the report further noted that Huawei has recruited engineers with experience collaborating with top global semiconductor equipment manufacturers like Applied Materials, Lam Research, KLA, and ASML. Engineers with over 15 years of experience at chip manufacturers such as TSMC, Intel, and Micron are also on Huawei’s potential recruitment list.

The export control measures implemented by the United States in recent years have made it more difficult for Chinese citizens to work for global chip companies in China. This has left Huawei and other Chinese semiconductor enterprises with a larger pool of top chip talent to choose from.

Regarding the matter, TrendForce has addressed the export restrictions on semiconductor equipment by the US and its allies present significant hurdles for Chinese foundries in obtaining essential tools. To counter these challenges, the Chinese government, alongside local suppliers, is intensifying R&D efforts to produce domestic semiconductor equipment, especially for 16/12nm processes and smaller.

This has led to increased collaboration between Chinese foundries and local suppliers in both R&D and qualification processes. Despite these efforts, China’s progress in lithography tools is limited to the 90nm node, which remains a significant obstacle in achieving complete self-sufficiency in semiconductor equipment.

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(Photo credit: Huawei)

The demand for Dutch semiconductor equipment manufacturer ASML serves as a trend indicator for the industry. The company optimistically stated in its annual report that the chip industry has hit rock bottom and is beginning to show signs of recovery. However, it also cautioned that geopolitical tensions and the potential expansion of US export controls on China remain operational risks.

ASML’s Chief Financial Officer, Roger Dassen, stated in the annual report for 2023 released on the 14th, “We believe that the market has now reached the lowest point of the dip, and although we cannot predict the exact nature of the slope ahead, the recovery is nascent.”

He further pointed out, “The longer-term trends are unmistakable – artificial intelligence, electrification, and the energy transition are happening,” which bodes well for ASML’s business.

However, the ASML annual report mentioned, “The list of Chinese entities impacted by export control restrictions has increased since 2022,” and “The list of restricted customers and the scope of the restrictions were subject to change.”

According to TrendForce’s analysis, while Chinese semiconductor fabs will be unable to purchase NXT:2000i series tools and newer from 2024 onwards, they will still have access to older models like the NXT1980i. This allows them to continue expanding their capacity for manufacturing processes of 28nm and above.

In last month’s financial report announcement, ASML indicated that it anticipates export controls from both the United States and the Netherlands to result in a decrease of approximately 10% to 15% in sales of its mid-range DUV equipment to China this year.

Regarding the 2023 record of ASML’s DUV sales, Dassen also explained in the interview accompanying the financial report that the strong performance in China’s business in 2023 actually stemmed from orders placed at the end of 2022, with the execution of these orders taking place in 2023.

In 2023, China surpassed South Korea to become ASML’s second-largest market, accounting for 26.3% of sales, while Taiwan maintained its leading position with sales accounting for 29.3%.

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(Photo credit: ASML)

After the U.S. authorities strengthens export restrictions on high-end processors, reports have emerged that Chinese companies are actively changing the purpose of PC gaming chips and utilizing them for the development of AI tools.

According to a report from the Financial Times on January 10, factory managers and chip buyers familiar with the details disclosed that every month, thousands of NVIDIA gaming cards are being disassembled in factories and workstations. The core components are then installed onto new circuit boards.

A factory manager further indicated that in December 2023 alone, their workers disassembled over 4,000 NVIDIA gaming cards, more than four times the quantity of November.

These modified components are primarily supplied to listed companies and small AI laboratories. They are rushing to accumulate a sufficient supply of NVIDIA server chips before the export controls take effect in the United States.

Industry sources have reportedly warned that modifying NVIDIA products would violate the company’s intellectual property rights, and certain gaming cards could be subject to bans at any time.

NVIDIA’s most powerful gaming card, the “GeForce RTX 4090,” is a popular choice for modification, but it is now prohibited from being sold in China. In December 2023, NVIDIA released a throttled-down version for China, the “GeForce RTX 4090 D,” which is 5% slower than versions available in other regions.

A factory manager has indicated a “significant” performance difference between the 4090 D and the regular 4090, suggesting that the downgraded version may not be suitable for training large language models (LLMs).

Although NVIDIA has developed three versions of AI chips specifically designed for China (expected to be launched in March), they face reluctance from Chinese customers due to weaker performance compared to the previously available versions in China, coupled with pricing that is almost similar to the more powerful but banned versions.

The recent report from The Wall Street Journal also addressed the lack of interest in NVIDIA’s downgraded models by Chinese customers. According to the data from TrendForce, currently, around 80% of the high-end AI chips used by Chinese cloud computing companies are sourced from NVIDIA. However, in the next five years, this proportion may decrease to 50% to 60%.

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(Photo credit: NVIDIA)