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.

（Image credit: iStock）

In recent years, China’s IC sales have been increasing year over year. Although sales have been suppressed by the United States and the impact of the pandemic, China’s IC sales still increased by 17% in 2020. Benefiting from the development of terminal applications such as 5G, online office, and smart cars, China’s IC sales grew by 18.2% in 2021 and it is expected to rise by 11.21% in 2022.

Currently, China’s 12-inch foundries are primarily owned by SMIC and Hua Hong Semiconductor. SMIC’s 12-inch fabs are located in Beijing and Shanghai while Hua Hong’s 12-inch fab is located in Wuxi. SMIC’s annual sales revenue in 2021 was US$5.44 billion, growing 39% YoY, and it posted net profit of US$1.775 billion, growing 147.76% YoY. From the perspective of revenue structure, 12-inch products contributed approximately 60% of SMIC’s revenue in the past year.

From the perspective of production capacity, SMIC’s capacity utilization rate has hovered around 100% in the past year. In 1Q22, SMIC’s capacity utilization rate was 100.4%, with a monthly production capacity of 613,400 units of 8-inch equivalent. . In 2021, new production capacity was 100,000 units/month (converted to 8 inches), of which 45,000 units/month was added as 8-inch wafers. At present, SMIC is still accelerating production expansion. Its project in Lingang, Shanghai has broken ground and its two projects in Beijing and Shenzhen are progressing steadily. Production is expected at these fabs by the end of 2022, mainly as 12-inch capacity.

Hua Hong Semiconductor posted operating income of US$1.631 billion in 2021, a YoY increase of 69.64%. From the perspective of revenue structure, Hua Hong Group primarily focused on 8-inch production capacity before 2020. As production commenced at Hua Hong Wuxi’s 12-inch project, Hua Hong completed the leap from 8 inches to 12 inch wafers. In the past year, Hua Hong’s average monthly production capacity of 8-inch wafers was 194,000 units and revenue was US$1.15 billion, accounting for 70.55% of total revenue. The average monthly production capacity of 12-inch wafers was 56,000 wafers and revenue was US$480 million, accounting for 29.45% of revenue, and the proportion of 12-inch revenue is increasing. In 1Q22, Hua Hong Semiconductor’s 12-inch revenue accounted for 44.1% of total revenue, an increase of 5 percentage points from the previous quarter. With the completion of the second phase of the Wuxi project, 12-inch revenue is expected to, once again, achieve substantial growth.

It is worth noting that since the Sino-US trade war, China’s substitution of domestic products has become mainstream, especially in the foundry and packaging and testing portions of the manufacturing process. In addition, the tense relationship between supply and demand and hobbled logistics caused by the pandemic has also catalyzed an increase in the proportion of fab revenue coming from China. From the perspective of wafer foundries, Hua Hong Semiconductor’s China revenue will account for 76% of total revenue in 1Q22. In terms of SMIC, although 4Q20 was categorized by an inability to manufacture Huawei orders and the proportion of revenue from China and Hong Kong fell from 69.7% in 3Q20 to 56.1% in 4Q20, as tension rose between supply and demand, lost Huawei orders have been taken up by other Chinese IC designers. In 1Q22, SMIC’s revenue from China and Hong Kong accounted for 68.4% of total revenue, a return to its peak level in 3Q20.

Behind record high sales of semiconductors is an unrelenting spike in demand. In order to alleviate the imbalance between supply and demand, the world’s major fabs are accelerating new production capacity and China’s fabs represented by SMIC and Hua Hong are also stepping up production expansion. From the perspective of the expansion structure, the current focus of fabs is still on the expansion of 12-inch wafers. The primary reason for this is that 12-inch wafers are characterized by higher production efficiency and lower unit consumables, with a comprehensive equipment supply chain. In the past two years, China has built a total of 11 projects involving 12-inch wafers. However, due to factors such as the pandemic, tide of production expansion, and lack of chips for equipment, the lead time of semiconductor equipment has been continuously drawn out, resulting in a slowdown in fab expansion. In addition, 8-inch capacity expansion is relatively slow due to equipment constraints. From the perspective of China’s foundry market, among new wafer production capacity (8 inch equivalent) from 2020 to 2021, 12 inch capacity accounted for 58.17%, 8 inch capacity accounted for 22%, and 6 inch capacity accounted for 19.83%.

According to TrendForce, Taiwan is crucial to the global semiconductor supply chain, accounting for a 26% market share of semiconductor revenue in 2021, ranking second in the world. Its IC design and packaging & testing industries also account for a 27% and 20% global market share, ranking second and first in the world, respectively. Firmly in the pole position, Taiwan accounts for 64% of the foundry market. In addition to TSMC possessing the most advanced process technology at this stage, foundries including UMC, Vanguard, and PSMC also have their own process advantages. Under the looming shadow of chip shortages caused by the pandemic and geopolitical turmoil in the past two years, various governments have quickly awakened to the fact that localization of chip manufacturing is necessary to avoid being cut off from chip acquisition due to logistics difficulties or cross-border shipment bans. Taiwanese companies have ridden this wave to become partners that governments around the world are eager to invite to set up factories in various locales.

Currently, 8-inch and 12-inch foundries are dominated by 24 fabs in Taiwan, followed by China, South Korea, and the United States. Looking at new factories plans post 2021, Taiwan still accounts for the largest number of new fabs, including six new plants in progress, followed in activity by China and the United States, with plans for four and three new fabs, respectively. Due to the advantages and uniqueness of Taiwanese fabs in terms of advanced processes and certain special processes, they accepted invitations to set up plants in various countries, unlike non-Taiwanese foundries who largely still build fabs locally. Therefore, Taiwanese manufacturers have successively announced factory expansions at locations including the United States, China, Japan, and Singapore in addition to Taiwan in consideration of local client needs and technical cooperation.

The focus of Taiwan’s key technologies and production expansion remains in Taiwan, accounting for 44% of global wafer production capacity by 2025

In 2022, Taiwan will account for approximately 48% of global 12-inch equivalent wafer foundry production capacity. Only looking at 12-inch wafer production capacity with more than 50% market share, the market share of advanced processes below 16nm (inclusive) will be as high as 61%. However, as Taiwanese manufacturers expand their production globally, TrendForce estimates that the market share held by Taiwan’s local foundry capacity will drop slightly to 44% in 2025, of which the market share of 12-inch wafer capacity will fall to 47% and advanced manufacturing processes to approximately 58%. However, Taiwanese foundries’ recent production expansion plans remain focused on Taiwan including TSMC’s most advanced N3 and N2 nodes, while companies such as UMC, Vanguard, and PSMC retain several new factory projects in Hsinchu, Miaoli, and Tainan.

TrendForce believes, since Taiwanese foundries have announced plans to build fabs in China, the United States, Japan, and Singapore, and foundries in numerous countries are also actively expanding production, Taiwan’s market share of foundry capacity will drop slightly in 2025. However, semiconductor enclaves do not come together quickly. The integrity of a supply chain relies on the synergy among upstream (raw materials, equipment, and wafers), midstream (IP design services, IC design, manufacturing, and packaging and testing), and downstream (brands and distributors) sectors. Taiwan has advantages in talent, geographical convenience and industrial enclaves. Therefore, Taiwanese foundries still tend to focus on Taiwan for R&D and production expansion. Looking at the existing blueprint for production expansion, Taiwan will still control 44% of the world’s foundry capacity by 2025 and as much as 58% of the world’s capacity for advanced processes, continuing its dominance of the global semiconductor industry.

(AmCham Taiwan｜Associate Editor: Julia Bergström) As more countries look to diversify their supply chains, Taiwan has a chance to strengthen its position in the global economy. But is its infrastructure robust enough to support expanded business?

Over the past few years, the U.S. and Taiwan have intensified their efforts to reduce reliance on China in their supply chains as a way to increase resilience. First came the U.S.-China trade dispute, in which American companies were encouraged to leave or decrease operations in China, followed by the Tsai Ing-wen administration’s reshoring initiative to bring investment from China back to Taiwan.

At the onset of the global pandemic, the flow of critical products halted, global supply chains were disrupted, and supply chain resilience became a priority for all industries. Then, just as commerce began to bounce back, Russia launched an attack on Ukraine, giving rise to new worries of geopolitically induced shortages and inflationary effects.

Meanwhile, China is pushing to indigenize its supply chains, most notably with its Made in China 2025 plan, which aims to upgrade Chinese industries’ manufacturing capabilities into more technology-intensive powerhouses and achieve independence from foreign suppliers.

Although the U.S. and Taiwan are not decoupling from China, they have significantly changed the flow of goods and investments, says Rupert Hammond-Chambers, managing director of BowerGroupAsia, a consultancy.

“Instead of 10 dollars flowing into China, you’re seeing five going to China and the other five to the Southeast Asia region, or even Taiwan,” he says. However, there is no certainty that Taiwan will gain some of China’s lost business. Rather, achieving that goal will require significant policy changes and government efforts.

For Taiwan, strengthening its role in global supply chains is more than an effort to ensure economic stability – it also has political and security implications. Hammond-Chambers sees Taiwan’s role in the semiconductor industry in particular as a “geostrategic lever that focuses other countries on the importance of Taiwan and peace and security in the Taiwan Strait.”

Taiwan accounts for over 60% of the global chip foundry market, and the island plays a pivotal role in many high-tech industries, a trend expected to continue despite pushes from the U.S. and EU to revitalize their semiconductor industries.

In fact, says Joanne Chiao, senior analyst at Taiwanese market research firm TrendForce, her organization “expects Taiwan’s market share [in the chip foundry sector] will further increase to 66% in 2022,” as some of the newly added capacity will enter mass production by the end of 2022.

Although Taiwan leads in semiconductors, domestic expansion has its limits. During a discussion on Taiwan’s role in global supply chains organized by Washington, D.C.-based public policy organization The Brookings Institution, Taiwan Semiconductor Manufacturing Co. (TSMC) Vice President of Global Government Affairs Peter Cleveland noted that the company operates “at such a massive scale that it’s mind-blowing to people. [Production] takes over 4 million gallons of water per day, the power requirements are enormous, and STEM talent is critical.”

Cleveland said he sees geographic dispersion as an advantage for the company, and the expansion of Taiwan semiconductor operations in the U.S. as a way to strengthen supply chains while alleviating chip manufacturing’s strain on Taiwan’s resources. TSMC is constructing a US$12 billion fab in Phoenix, Arizona, which is scheduled to start producing chips in 2024. It is also building a plant in Japan and is in early discussions regarding a possible fab in Germany.

Apart from expanding manufacturing abroad, Taiwan also needs to implement policies that strengthen its infrastructure, according to BowerGroupAsia’s Hammond-Chambers. Of what has been termed the island’s “five shortages” (land, power, water, labor, and talent), he refers to labor, talent, and electricity as the most critical areas for government scrutiny of existing policies.

“The energy policy of Taiwan is just not working at the moment,” he says, adding that “there’s no time to waste” when it comes to improving the power grid. “It’s a strategic issue, military issue, social issue, and economic issue – it ticks every single major box.”

Jason Hsu, a former Taiwan legislator and currently senior research fellow at the Harvard Kennedy School, stressed at the Brookings seminar that the shortage of semiconductor talent is already noticeable in both the U.S. and Taiwan. The island’s recent establishment of a Semiconductor Research Institute is a step in the right direction, but not enough to fill the gap, he said.

“There needs to be a comprehensive program that links U.S. and Taiwan talent development and ensures that Taiwan can continue to develop its manufacturing capability and talent,” with innovation shared between the U.S. and Taiwan, Hsu noted.

Taiwan has relaxed immigration laws to attract foreign talent, particularly from Southeast Asia, and developed work and study programs for university students, said Minister Without Portfolio John Deng during the Brookings event.

But considering that the island is on track to become a super-aged society, Taiwan could and should implement a much more robust and open immigration policy that attracts more people to make up for the shrinking labor pool. The island’s decreasing population could pose an existential threat to Taiwan if not managed, says Hammond-Chambers.

Meanwhile, Taiwan could take advantage of what some scholars have dubbed “brain circulation” to strengthen economic ties with the U.S., according to Michael Nelson, senior fellow in the Carnegie Endowment For International Peace’s Technology and International Affairs Program.

“A lot of people from Taiwan have studied overseas, and some of them bring that knowledge back to Taiwan and start companies or teach the next generation,” he says, citing the founders of TSMC and the Industrial Technology Research Institute (ITRI) as two examples. “But a lot of them are still working overseas, and they’re part of this diaspora that forms a built-in advantage for Taiwan.”

Cloud opportunities

As the world undergoes the Fourth Industrial Revolution, digital supply chain technologies such as artificial intelligence (AI), algorithms, and machine learning can be used to analyze and learn from big data, which powers intelligent automation and provides supply chain managers with real-time insights that can assist quick responses to disruptions.

“When we think about how to boost our competitiveness, it doesn’t all have to be about manufacturing,” said Meriya Solis, Director of the Center for East Asia Policy Studies at Brookings. “We need to be mindful of the fact that we’re moving toward a digital economy.”

But while smart tools will mitigate human error, they pose a supply chain risk if they are not backed up by robust cybersecurity systems. Carnegie’s Nelson says that improving cybersecurity and investing in the Cloud of Things – integrated Internet of Things and Cloud Computing technology – would not only benefit biotech and other high-tech industries, but also create more robust supply chains for traditional industries. “It could help us do a better job of tracking fishing ports, ensuring the quality of food, and making sure cold chains are not broken,” he says.

The current global software infrastructure, notes Nelson, is built on a precarious system. Commercial software products tend to rely on complex open-source software repositories, and vulnerability in a single aspect of these repositories could compromise every commercial product that uses it.

Following an increase in cyberattacks, Taiwan’s government declared cybersecurity to be a national security issue in 2018 and proceeded to implement its Cyber Security Management Act in January 2019. The law stipulates obligations for providers of critical infrastructure, including water, energy, ICT production, and financial and healthcare services. The U.S. and Taiwan held their first joint Cyber Offensive and Defense Exercise (CODE), hosted by the American Institute in Taiwan (AIT) and the Executive Yuan’s Department of Cyber Security, in 2019.

In the past, Chinese tech seemed like it was on a steady path to market domination. But due to a high incidence of poorly written Chinese software and concerns that state actors could impel companies to embed security backdoors into their products, trust in its software is now generally low among global users. Nelson sees a lucrative opportunity for Taiwan to increase its involvement in data supply chains by establishing itself as a trusted source for more secure and better-tested software.

“Through the hardware sector and the semiconductor industry, you have all these links to all the major players,” he says. “By leveraging those links and showing that Taiwan can ensure that the software running on the chips they built is doing the job it’s advertised to do, Taiwan can help integrate different pieces of software from different companies and gain a reputation for being a trusted integrator.”

But to establish such a competitive advantage, Taiwan’s government will need to implement mechanisms that encourage local IT companies to uncover security vulnerabilities and adopt quality verification tools.

Intel officially confirmed on February 15 that it will acquire Israeli foundry Tower Semiconductor for nearly US$6 billion, and the deal will likely contribute to the growth of Intel’s foundry business if it reaches a successful conclusion, according to TrendForce’s latest investigations. Tower was 9th place in the global ranking of foundries by revenue for 4Q21 and operates a total of seven production sites across Israel, the US, and Japan. Tower’s foundry capacity in 12-inch wafer equivalents accounts for about 3% of the global total. The majority share of Tower’s foundry capacity is for 8-inch wafers, and Tower’s share of the global 8-inch wafer foundry capacity is around 6.2%. Regarding manufacturing process platforms, Tower offers nodes ranging from 0.8µm to 65nm. It has a diverse range of specialty process technologies for manufacturing products in relatively small quantities. Products that Tower has been contracted to manufacture are mostly RF-SOI components, PMICs, CMOS sensors, discretes, etc. As such, the Tower acquisition is expected to help Intel expand its presence in the smartphone, industrial equipment, and automotive electronics markets.

Although Intel undertook a series of business strategies to compete with TSMC and Samsung, IFS (Intel Foundry Services) has historically manufactured with platform technologies for processors such as CPUs and GPUs. Furthermore, competition still persists between Intel and certain foundry clients that require advanced processes below the 10nm node, such as AMD and Nvidia, which have long histories of developing server products, PC CPUs, GPUs, or other HPC-related chips. Intel’s preexisting competitive relationship with these companies may become a barrier to IFS’ future expansion because IFS will be relatively unlikely to attract them as customers.

Taking the aforementioned factors into account, TrendForce believes that the Tower acquisition will likely expand IFS’ business presence in the foundry industry through two considerations. First of all, the acquisition will help Intel both diversify its mature process technologies and expand its clientele. Thanks to advancements in communication technologies and an increase in demand for new energy vehicles, there has been a recent surge in demand for RF-SOI components and PMICs. Tower’s long-term focus on the diverse mature process technologies used to manufacture these products means it also possesses a long-term collaborative relationship with clients in such markets. By acquiring Tower, Intel is therefore able to address IFS’ limited foundry capabilities and limited clientele. The second consideration pertains to the indigenization of semiconductor manufacturing and supply allocations, which have become increasingly important issues in light of current geopolitical situations. As Tower operates fabs in Asia, EMEA, and North America, the acquisition is in line with Intel’s current strategic aim to reduce the disproportionate concentration of the foundry industry’s supply chain in Asia. As well, Intel holds long-term investments and operates fabs in both the US and Israel, so the Tower acquisition will give Intel more flexibility in allocating production capacities, thereby further mitigating risks of potential supply chain disruptions arising from geopolitical conflicts.

In addition to the aforementioned synergy derived from acquiring Tower, it should also be pointed out that Intel is set to welcome an upcoming partnership with Nuvoton. Tower’s three Japan-based fabs were previously operated under TowerJazz Panasonic Semiconductor, a joint venture created by Tower and Panasonic in 2014, with Tower and Panasonic each possessing 51% and 49% ownership, respectively. After Nuvoton acquired PSCS (Panasonic Semiconductor Solutions Co.) in 2020, Panasonic’s 49% ownership of the three fabs was subsequently transferred to Nuvoton. Following Intel’s Tower acquisition, Intel will now possess the 51% majority ownership of the fabs and jointly operate their production lines for industrial MCUs, automotive MCUs, and PMICs along with Nuvoton. Notably, these production lines also span the range of CIS, MCU, and MOSFET technologies previously developed by Panasonic.

For more information on reports and market data from TrendForce’s Department of Semiconductor Research, please click here, or email Ms. Latte Chung from the Sales Department at lattechung@trendforce.com