US-China tech war: China's efforts to catch up in advanced chips on hold as country's attention turns to mature nodes

Asia's Tech News Daily

US-China tech war: China’s efforts to catch up in advanced chips on hold as country’s attention turns to mature nodes

China has been forced to make a course correction in its drive for semiconductor self-reliance, focusing instead on boosting production of mature technologies while putting the goal of catching up with the world’s most advanced chip makers on the back burner, according to analysts and industry insiders.

The shift offers a cautionary tale on Beijing’s quest to cut its reliance on American technologies. Despite strong political will from President Xi Jinping, generous financial support from the government, and the enthusiasm of domestic players, China is facing the harsh reality that its chances of becoming self-sufficient in advanced chips are remote.

On the one hand, China is able to ease the supply shortage by boosting production of lower end chips used in automobiles and home appliances, but on the other, it has to rely on wafer fabs such as Taiwan Semiconductor Manufacturing Co (TSMC) and Samsung Electronics for advanced chip manufacturing in the coming years, if not decades, even if China’s own IC design firms are able to design these high end chips.

“In the leading edge, it is going to become more difficult for Chinese companies to catch up,” Gokul Hariharan, co-head of Asia-Pacific TMT Research at US investment bank J.P. Morgan, said in an interview with the South China Morning Post. However, he added that the market for older generation technology remains promising and Chinese companies have potential there.

Shanghai-based Semiconductor Manufacturing International Corp (SMIC), the country’s most advanced fab, can produce 14nm node chips, and is building new plants in Beijing and Shenzhen for 28nm node technology chips. While demand for these more mature technology nodes is strong, SMIC is several generations behind advanced players when it comes to the leading edge.

Only three chip makers in the world – TSMC, Samsung and Intel – have stayed in the race below 10nm, meaning it makes sense for Chinese companies to focus their resources on mature technologies where there is a ready market and strong demand. SMIC has said most of its 2021 capital expenditure will be devoted to ramping up capacity in mature nodes.

“There is no realistic prospect of China being able to match the capabilities of the global leading-edge semiconductor manufacturers in the next few years,” Tilly Zhang, an analyst with research firm Gavekal Fathom China, wrote in a research note.

A key reason for this is China’s lack of access to extreme ultraviolet (EUV) lithography machines, the technology monopolised by Dutch firm ASML, which are required to produce chips at 7nm and below.

China’s domestic chip makers, as well as mainland plants operated by foreign firms like SK Hynix, are unable to source the sophisticated equipment due to US sanctions imposed over concerns that the technology will be used by the Chinese military.

US-China tech war: China’s efforts to catch up in advanced chips on hold as country’s attention turns to mature nodes

A semiconductor wafer containing chips is seen at Jiejie Semiconductor Company in Nantong, in eastern China’s Jiangsu province on March 17, 2021. Photo: AFP

The only Chinese lithography maker is state-backed Shanghai Micro Electronics Equipment (SMEE), whose equipment is only capable of making chips at the 90nm node. The market for lithography machines, which print highly complex circuit patterns onto silicon wafers, is 99 per cent controlled by ASML and Japanese companies Nikon and Canon – with the Dutch firm the only vendor producing machines for the 7nm node.

In critical equipment like lithography, chemical vapour deposition and ion implantation, “there are Chinese companies doing all of these tools, but it will take time,” said J.P. Morgan’s Hariharan. “They are several generations behind in most of these areas.”

Analysts said China should not be blamed for its failed attempts to produce such complex tools and components by itself, as few countries can.

For example, ASML relies on numerous suppliers for parts used in its lithography systems, with the all-important lenses coming from German optical systems expert Carl Zeiss, Alan Chou, ASML’s Shanghai-based sales operation leader, told the Post earlier.

In recent years Chinese suppliers have made some progress in developing high-end photoresists, the materials used in the lithography process, according to Xiang Wensheng, general manager at Jiangsu Aisen Semiconductor Material.

While EUV machines are restricted from sale to China under US pressure, the earlier generation deep ultraviolet (DUV) scanners are not, which means Chinese fabs are not under pressure to find substitutes amid their capacity expansion, according to a research note by Dongbei Electronics seen by the Post.

In fact, ASML said in November that demand for DUV and earlier generation scanners remained strong in China, amounting to around 2 billion euros (US$2.3 billion) in sales in 2021, according to a Reuters report.

Besides production equipment, China also relies on intellectual property (IP) and chip design tools known as electronic design automation software, another area dominated by the US, according to He Weiling, chairwoman of Shanghai-based CIP United, an IP provider.

Kristine Lau, an associate at research company Third Bridge, said the software dependency has been overlooked amid the focus on chip making equipment like EUV.

For example, British firm Arm has licensed its chip IP to more than 250 Chinese companies, including Huawei Technologies Co and T-Head, the chip design unit of Alibaba Group Holding, owner of the Post. More than 20 billion chips based on Arm architecture have been shipped by the Chinese licensees.

“For this software, you don’t even know if you can develop one that is similar as you need very close ties with the entire supply chain,” said Lau, adding that frequent software updates by the IP providers make it harder for Chinese companies to keep up.

Even without any immediate hope of mastering advanced chips, the output of China’s semiconductor industry has grown rapidly over the past few years thanks to government funding, a healthy domestic market, and the chip appetite of large tech companies such as Huawei.

US-China tech war: China’s efforts to catch up in advanced chips on hold as country’s attention turns to mature nodes

The Semiconductor Manufacturing International Corp. (SMIC) headquarters in Shanghai, China. Photo: Bloomberg

From 2015 to 2020, China’s integrated circuit (IC) industry – including design, manufacturing, packaging and testing – grew at an annual rate of 20 per cent to reach US$128 billion, according to the Chinese Semiconductor Industry Association.

Hariharan said Chinese firms stand a better chance of gaining market share in the commodity chips required in large volumes for use in power, analogue, microcontroller and automotive applications, as they can be produced with mature technology that is 10 to 15 years old.

“Those are areas I think we can potentially see Chinese competition come in and take market share,” he said. “They still have a lot more room to go, even if you think about it as purely localising domestic demand, that gives a lot of growth for those kinds of companies.”

The frenetic pace of fab expansion in China and around the world has led to some concerns that the industry could swing to an overcapacity situation in the next two to three years due to the cyclical nature of the semiconductor market.

But Hariharan said he does not expect a major downturn in 2023 because “the demand is still relatively healthy,” adding that a 2 per cent revenue decline is possible.

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