U.S. sanctions on Chinese technology are escalating, prompting China to overhaul its semiconductor industry.
show no signs of easing any time soon. Quite the contrary: is witnessing a ramp-up of these restrictions, both in extent and in a more subtle way, diplomatically: countries and entities such as South Korea, Japan and Taiwan are kindly “invited” to join the train of restrictions on China. Europe is not exempt either, with further limiting their sales of DUV lithography equipment to China last January.Yole Group extensively researches the semiconductor industry, focusing particularly on the Chinese market segment and its ecosystem, including the supply chain. Given the constantly evolving geopolitical context, which significantly impacts the semiconductor sector, Yole Group’s analysts continually monitor market changes. They provide valuable insights and a comprehensive understanding of technical challenges and market issues every quarter.
Explore the perspective presented by Yole Group’s Semiconductor Equipment team today. Data has been extracted from both Market Monitors: and .
These restrictions, on top of the past COVID-19 experience and the ensuing supply chain chaos, are causing China to completely rethink its semiconductor industry and associated supply chain, as they could have severe repercussions on future technological developments in China. The Chinese government and semiconductor players take these risks very seriously. Meanwhile, foundries such as , CXMT, and Huawei are continuing their work on advanced nodes, which is putting pressure on to find new solutions, which in turn is also adding pressure on subsystem suppliers.
At the same time, foreign equipment and subsystem suppliers are also obliged to rethink their exposure to the Chinese market by quietly withdrawing from China, adopting a “China +1” strategy, or seeking joint ventures.
Gaël Giusti, Ph.D., Senior Technology & Market Analyst, Semiconductor Equipment at Yole Group.
“This whole chain is completely realigning toward greater and greater reliance on domestic players. But let’s be clear here: Yole Group’s analysts do not perceive Chinese OEMs/foundries absolutely wanting to change to domestic suppliers for nationalistic reasons or the sake of “changing”; rather, they are forced to, at least to have a second source or second (local) solution just in case everything “closes down” with short notice. Yole Group has seen a complete change in the relationships between domestic chip makers, OEMs, and their respective suppliers from “simple” partners” to close allies in a tech war.”
As in many regions around the world (e.g., Japan, EU, USA), many Chinese chip and equipment makers, as well as their suppliers, are benefiting from large subsidies, but on an even larger level.
These policies create their share of issues and raise questions on how efficiently subsidies are being used to achieve faster and greater progress in the domestic Chinese semiconductor industry. For instance, it could encourage some companies to pretend to be working for applications dedicated to the semiconductor industry while not putting in all the necessary effort, or even worse, not initiating any work at all beyond “scratching” the surface. It might also negatively impact innovation, with companies tempted by a quick money grab while not really trying to innovate over the longer term. Nonetheless, so far, these efforts seem to be paying off: Yole Group has witnessed many new Chinese equipment and subsystem suppliers emerging since 2019/2020. These players mainly conduct business with Chinese OEMs and chip makers. They benefit from extremely rapid feedback from these very customers, enabling them to be competitive faster than ever versus non-domestic suppliers.
Taguhi Yeghoyan, Ph.D., Senior Technology & Market Analyst, Semiconductor Equipment at Yole Group.
“Subsidies at the national and provincial levels are adding up to offer significant advantages for some Chinese subsystem suppliers over their foreign competition, especially in terms of pricing. Several provinces outside Beijing and Zhejiang also want to attract their fair share of the semiconductor businesses and are willing to offer significant amounts of money for semiconductor companies to settle there.”
Indeed, market competition is taking place on three fronts: price, as alluded to earlier, performance, and responsiveness to any customer issue. On the latter front, domestic Chinese suppliers are scoring points. It is also clear that Chinese suppliers are starting to beat the competition on price, helped by both domestic subsidies and increased domestic competition: we can take the example of vacuum isolation valves or RF generators and matching networks.
John West, Deputy Director, Manufacturing & Global Supply Chain Business Line at Yole Group.
“As a result, foreign suppliers are already losing market share in China. Therefore, Yole Group’s analysts argue that in 2023, some market share losses were not, or at least not entirely due to a particular slowdown of the Chinese semiconductor industry, but a result of being gradually substituted by domestic Chinese companies. Yole Group fully expects this trend to carry on in the coming quarters.”
Yole Group expects this price competition will intensify and expand, sooner rather than later, to other types of subsystems, such as atmospheric and vacuum robots, vacuum pumps, and gas abatement systems. In terms of performance, leading suppliers, especially outside the USA, such as VAT, Horiba, or Inficon, and any other foreign suppliers offering subsystems physically close to anywhere where semiconductor processes take place, are still very solid in terms of performance and market positioning in China in the mid-term. Other subsystems, such as optical lenses, electrostatic chucks, mass flow controllers, and vacuum transfer valves compatible with the most advanced processes, are not easily found on the Chinese market for the time being. There is little doubt that domestic Chinese players will end up competing with these players in the coming years, but foreign suppliers will likely continue to dominate for the most advanced processes; China can rise in the foreseeable future: in 2024, Yole Group’s analysts estimate that 13.5% of subsystems used in domestic Chinese OEMs and foundries will come from Chinese subsystem suppliers, generating a total revenue of US$391 million. It might not seem “much”, but it is up from barely a few percents less than 6 years ago. Another unattended consequence of increasingly intense price competition between Chinese players is an expected consolidation around the larger players.
Yole Group’s experts will continue monitoring this fluid situation in the coming quarters through its Market Monitors: and . Suffice it to say for now that China has slowed its development of AI, memory, logic, and the corresponding semiconductor processes but has not stopped in any way.
Time will tell, but instead of weakening the Chinese semiconductor ecosystem, Yole Group’s analysts are witnessing the opposite: a strengthening of it. Will we witness a complete decoupling? Given the complexity of the global semiconductor supply chain, it is unlikely, but now, everything indicates a well-underway partial decoupling of the Chinese semiconductor industry from the international market.
