Stewart Randall continues his series on China’s efforts to achieve independence from integrated circuits imports.
At the risk of sounding too negative, let’s discuss China’s semiconductor fab/foundry situation. Fabs are one of the big reasons it’s hard to imagine China getting completely independent from integrated circuit (IC) imports: there isn’t anywhere in China that can make cutting-edge chips. The semiconductor independence “Big Fund” has prioritized the area.
I promise I will write some positive articles on China’s semiconductor developments, but this is a hot topic now. Rumors—denied by TSMC—swirled last week about US pressure on fab leader TSMC to cut sales to Chinese companies. So let’s look at this key part of the IC industry: physically making the chips.
What’s a fab?
A fab or foundry is a factory where semiconductors are fabricated. In order to manufacture the most cutting-edge chips, fabs need capital equipment from all over the world, the most advanced of which are from Europe, US, and Japan.
What goes on inside fabs is akin to alchemy. In a sense, at least when discussing silicon chips, they are using equipment from companies such as ASML and LAM to turn sand into a chip. This is not an industry you get into on a whim. One ASML photolithography machine—a single part of the production line—costs about $100 million.
Integrated device manufacturers like Intel operate their own fabs, but today we’re looking at “pure play.” Pure play fabs do not design chips, although some work closely with design service partners. They generally make chips to order for “fabless” IC companies like HiSilicon or Qualcomm, receiving designs in the form of GDSII-type files.
How fab are China’s fabs?
The imaginatively named “Taiwan Semiconductor Manufacturing Corporation” (TSMC) dominates the global pure-play fab market with close to 50% market share. Samsung is a distant second at 18%. Third place Global Foundries from the US has only around 9% market share.
There are two main Chinese companies in this industry: the “Semiconductor Manufacturing Industry Corporation” (SMIC)—I think they were trying to beat TSMC in the imagination department—and Hua Hong. These two have 5% and 1.5% global market share respectively, with most of their sales within China. While these two fabs are broadly competitive in anything 28 nanometers (nm) and above, anything below is a struggle, and the smallest processes are where the high-end chips are.
Chinese fabs are behind, and it’s going to be very hard for them to catch up for a few reasons: access to the latest equipment, a lack of talent, and being late to the game.
It takes a long time for leading equipment companies to manufacture the latest equipment. Companies like ASML and LAM Research naturally put their biggest customers first in the queue. TSMC and then Samsung will always be first in line.
Further, equipment makers can’t easily expand production capacity to get Chinese fabs faster access to equipment like extreme ultraviolet photolithography (EUVL). The skills needed to make them are few and far between.
Geopolitics also gets in the way of delivering the latest equipment on time—or worse. A memory maker called Fujian Jinhua was cut off from this equipment in late 2018 by a US export ban. With no alternative to US and US-linked European suppliers, the company had to cancel plans for a $6 billion plant, and it appears is still not producing any chips. As of today, the company’s website is up, but its products page (in Chinese) is empty.
The best talent naturally goes to the best companies. If you are a fresh graduate looking at the industry you will want to go to TSMC or Samsung. Otherwise, you may even choose a different industry.
It’s rather anecdotal but every SMIC engineer (outside of management) I have ever spoken with has complained of low wages and extreme working hours—think 996, and sometimes even worse. The night shifts aren’t fun either. Now the extreme working hours may be similar at the likes of TSMC, but the wage situation is not.
To fill the talent gap SMIC and others have been targeting Taiwanese, South Korean, and Japanese engineers with large salaries and other perks. A lot of Big Fund money has gone into such talent recruitment, which has helped win some recruits—but could also cause even more dissatisfaction among local engineers who aren’t getting paid as much as their foreign peers. To date, the extra talent has not helped Chinese fabs catch up. The other hurdles are just too great.
Chinese fabs were late to the game, have always been behind technically, and as mentioned above, stand at the back of the line when it comes to purchasing equipment. It doesn’t work in every sector, but here it really has been first mover advantage. SMIC came into the industry 13 years behind TSMC, and 19 years later it is still behind technically, and far behind commercially.
For example, no Chinese fab was able to manufacture FinFET designs until this year. Without going into details, FinFET is the current highest end process, which can fit more transistors into a certain area using a 3D structure. TSMC has been producing FinFET since the early 2010s. After several delays, some of which were due to US pressure on ASML, SMIC finally announced that a 14nm FinFET production line was up and running a couple months ago, just starting low volume runs, and claims to be ramping up to mass production as we speak. Meanwhile, TSMC and Samsung are mature at 7nm, will have 5nm next year, and have begun construction of a 3nm fab.
China’s Semiconductor Big Fund invested in pure play fabs and memory fabs with little noticeable result in these two areas thus far, at least commercially. But watch this space. Big Fund Mark II, which raised RMB 200 billion (about $28 billion) in July, will likely continue to invest heavily in these areas, but there is only so much throwing money at the problem can do. Industry king makers like ASML are part owned by TSMC and Intel, making it difficult for Chinese fabs to get ahead of the queue for advanced equipment, and given the sensitivity of the technology Chinese investment or acquisition seems unlikely.
The only way out of this predicament is for Big Fund Mark II actually to invest its money into creating Chinese capital equipment players. It seems like this is a focus, especially plasma etching equipment. I imagine mainland plasma etching equipment maker Naura, will be receiving some of this money to push past its current 14nm limit, but there is still no sign of a strong Chinese player in high-end photolithography. Without one Chinese fabs will still rely on foreign technology. We all saw how Fujian Jinhua faired after foreign equipment suppliers all left.
While other countries are similarly dependent, China’s IC supply is at risk due to geopolitical reasons, and even with all the money in the world it will not have its own replacement equipment any time soon.