Chinese semiconductor industry

Bro a brief history regarding SMIC expansion plan and growth strategy.

SMIC: On the "core" technology of the leader​

2022-09-09 16:46 HKT

In 2020, SMIC will take advantage of the sci-tech innovation board to return to the big A listing. As the most well-known wafer manufacturing company in mainland China, SMIC has leading production capacity and process capability. While carrying the expectations and vision of the semiconductor industry, it also puts the company at the forefront of Sino-US technological friction.
In recent years, "China-US frictions" and "US sanctions" have frequently appeared in the public eye, and Huawei and SMIC are in the front line.
First, Huawei. On May 15, 2020, the U.S. Department of Commerce conducted licensing controls on the supply of Huawei chips; then on August 17, the purchase of Huawei chips was restricted, and it became effective on September 15.

For SMIC, the Trump administration added it to the list of entities, specifically restricting the purchase of equipment required for advanced processes of 10nm and below; the Biden administration signed an executive order to continue the identification of SMIC restricted entities.
After several rounds of international competitions, SMIC's performance has been significantly damaged, which has suppressed the performance of the capital market. For example, in terms of performance, Huawei was previously a major customer of the company and contributed more than 20% of SMIC's revenue.
With the entry into force of Huawei's restriction order in mid-September last year, Huawei rushed to substantially increase its purchases before the effective date. Corresponding to SMIC's performance, the company's 14/28nm (Huawei's main procurement process segment) revenue accounted for a significant increase in the third quarter, and then severely declined in the following quarter, and gross profit margin also experienced a significant decline in Q4.

Affected by the US entity list, SMIC's customers and production capacity structure have been adjusted.



In terms of capital market trends, SMIC is strongly related to sanctions and international relations expectations (see below). In June of this year, Biden continued his predecessor's policy with certainty and implemented double-list restrictions on SMIC. , SMIC did not reflect the upward flexibility that its domestic counterparts should have, and its overall performance continued to be sluggish.

As for Dolphin's series of researches on SMIC, he hopes to try to understand that SMIC will continue to "lie on his stomach" through analysis of the industry situation, SMIC's position and competitive outlook, and there is still a chance for reversal.

In order to answer this question, Mr. Dolphin is mainly concerned with the following questions:

• Where is SMIC's competitive advantage?
• How much is the input and output of wafer manufacturing expansion?
• How to judge the investment value and valuation of SMIC?

, SMIC: SMIC's fire is gradually gaining momentum​

SMIC was founded in adversity, from the mass production of the first 8-inch line in 2002 to the first 12-inch line in 2005, and then to the current production of multiple 8-inch/12-inch wafers in Shanghai, Shenzhen, and Beijing. line.
1) After 20 years, in terms of process technology, it has laid out 14nm-0.35um node process;

2) Three 8-inch wafer fabs and four 12-inch wafer fabs have been built in terms of production capacity. Among them, the 8-inch production capacity totals about 270,000 pieces/month, the 12-inch production capacity totals about 118,000 pieces/month, and the total production capacity exceeds 540,000 pieces/month (equivalent to 8 inches).
3) In the global wafer foundry revenue of 2021Q1, SMIC achieved US$1.104 billion, ranking No. 5 in the world and No. 1 in Mainland China.
As a whole, whether it is the layout of nodes, the volume of production capacity or the scale of income generation, it is a well-deserved domestic industry brother.

In terms of specific revenue composition: SMIC's core is the wafer business, with additional wafer-related mask manufacturing & wafer testing and other revenue components.
The wafer business covers 8-inch wafer production lines, 12-inch wafer production lines and advanced process wafer production lines. Mask manufacturing, wafer testing and other revenues cover design services and IP support, photomask manufacturing, and bump processing and testing.


In the current business structure, the wafer business accounts for around 90%, and the revenue from photomask manufacturing, wafer testing and other revenues account for a relatively small proportion.
In the wafer business segmented by size, although 8-inch wafers accounted for more than 40% of their revenues, although they declined, 12-inch wafers benefited from the advancement of domestic customer cooperation, accounting for 54%; advanced process end realization A breakthrough in mass production.
1) 8-inch wafer production lines mainly include Shanghai Fab S1, Tianjin Fab7 and Shenzhen Fab15 production lines, and their products are mainly oriented to 0.11/0.13um, 0.15/0.18um and 0.25um/0.35um.

The application areas of 8-inch wafers mainly include power devices (usually used in automotive and industrial applications), analog ICs such as PMIC and LED drivers, smart card chips and other fields;
2) The 12-inch wafer production lines mainly include Shanghai Fab S2, Beijing Fab B1, Shenzhen Fab16 and SMIC Fab B2 and B3. The products are mainly for 90nm and below process processes.
12-inch wafers are mainly applicable to radio frequency ICs such as Nor Flash, CIS, WiFi Bluetooth chips, set-top box chips, and wearable APs;

3) Advanced process production lines are mainly deployed in SMIC South, mainly for process nodes of 14nm and below. The main application areas of advanced process wafer products are GPU, FPGA, mining machine ASIC, flat AP and other fields.

Many people may still find it difficult to understand the meaning behind the above industrial layout. Dolphin here introduces the evolution path of wafer size.

From the perspective of product evolution path, under the influence of Moore's Law, the integration of integrated circuits will only go on the road. The main ways to improve the integration of integrated circuits are to increase the chip area, reduce the feature size of the device, and improve the circuit and structural design.
1) Increasing the chip area: The continuous increase in the diameter of silicon wafers used in the production of circuits has led to a substantial increase in production efficiency. The diameter of mainstream silicon wafers has reached 12 inches;
2) Reduce the feature size of the device: the processing accuracy, the degree of automation and the reliability are improved.
3) The expansion of wafer size improves production efficiency: Due to the unevenness and defects on the periphery of the silicon wafer, the middle part of the wafer is mainly used. The diameter of the silicon wafer ranges from 200mm (8-inch wafer) to 300mm (12-inch). The available area on the silicon wafer is larger, and the more chips can be produced on a wafer, the efficiency can be improved and the cost can be reduced.

henrik said:

Since SMIC can now make 7nm chips with their N+1 technology, does that mean they can make a similar chip as the AMD Ryzen 5600 which is also based on 7nm process? But Intel's i5 11700 chip is based on 14 nm process, but can produce similar performance.

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You are conflating fabrication and design parts of the chip creation process. If a Chinese company designs a chip comparable to AMD Ryzen 5600, then yes, it can fab its product on SMIC's 7 nm lines. SMIC itself is a foundry business like TSMC.

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At the same time, equipment cost and time cost slowed the pace of wafer size to 18 inches. Although the area of a 450mm wafer is more than twice that of 300mm, the production time is much longer than twice.
SEMI had predicted that each 450mm wafer fab would cost 10 billion U.S. dollars, but the chip cost per unit area would only drop by 8%. High capital pressure, as well as insignificant yield and efficiency improvements, have slowed the industry's progress towards 450mm.

2. How can SMIC afford its "industry brother"?​

The above can clearly see the status of SMIC in China from the production line, process layout and revenue volume.

But how this status is formed is crucial to our understanding of the continuity of SMIC's status in the future. To answer this question, we first look at the current domestic semiconductor industry situation.
1. Domestic market: severely in short supply
Demand side: China sits on the world's largest semiconductor sales market for semiconductors. In 2021Q1, China's semiconductor sales reached US$43.4 billion, accounting for 35% of the global share. Since 2016, China's semiconductor sales market has a long-term share of more than 30%;
Supply side: In the wafer manufacturing market, the proportion of China is increasing year by year, from less than 10% in 2015 to 15% in 2020. Although China's global share of wafer manufacturing has increased, it is still lower than China's Taiwan, South Korea, Japan and other regions, ranking only fourth.

In the 35% of the global semiconductor sales market, China only supplies 15% of the world's wafers, and there is a huge gap between supply and demand in the Chinese market.
What's more, even for wafers manufactured in China, more than 60% of the production capacity is actually contributed by foreign investment in domestic factories, and the production capacity of Chinese local companies only accounts for less than 40%.



2. Industry barriers to build a leading domestic advantage
1) Process end of wafer process
The process technology of global fabs is directly led by Intel, TSMC, Samsung and other line manufacturers. SMIC first began to produce 90nm process production in 2006, and Intel and UMC had already produced 65nm chips in the previous year.
Since then, SMIC began to catch up with the process. After breaking through the 65nm/45nm/28nm process nodes one after another, the company achieved successful mass production of 14nm in 2019, and it continues to catch up with the pace of line manufacturers in process research and development.

Currently, there are only three fabs that can perform processes below 10nm. UMC announced in 2018 that it would abandon investments in 12nm and below. In 2020, SMIC completed the N+1 advanced process chip tapeout and testing.
Comparing SMIC's N+1 process with 14nm, the performance is improved by 20%, power consumption is reduced by 57%, logic area is reduced by 63%, and SoC area is reduced by 55%. The market benchmark of 7nm performance is approximately 35% higher than that of 14nm, and the N+1 process is lower than the market benchmark, which is approximately similar to TSMC and Samsung's 10nm .

SMIC is the first foundry company in mainland China to provide 14nm technology nodes, and it is also the most technologically advanced foundry company in mainland China with the widest coverage of technology nodes.

In the evolution of wafer manufacturing technology in mainland China, SMIC has led the entire industry directly, achieving breakthroughs in mainland China at 0.18/0.15um, 0.13/0.11um, 90nm, 65/55nm, 45/40nm and 28nm. .
The second domestic Hua Hong Group broke through the 28nm process node in mass production in 2019, lagging behind SMIC in terms of time. The gap between the two in process research and development is about 3 years.
Judging from the catch-up history of SMIC and global line manufacturers, SMIC's leadership in process technology has built a technical barrier for foundry in mainland China.
2) Capacity end

Since the establishment of the first 8-inch line in 2002, SMIC started the expansion of production capacity. In less than 20 years of development, SMIC's monthly production capacity has grown from 30,000 (equivalent to 8-inch wafers) to 540,000 (equivalent to 8-inch wafers) in 2021Q1, and its production capacity has increased by nearly 20 Times.
The company's production capacity is far ahead of other domestic manufacturers and has become the benchmark leader in the foundry industry in mainland China.

After years of technology research and development and capacity expansion, SMIC's position has risen rapidly. Among the global foundries in this quarter, SMIC ranked among the top five and opened a significant gap in the sixth place.

In terms of scale, TSMC and Samsung are in the second echelon of foundries, while SMIC, UMC and GF have market share of 5%, 7% and 6%, respectively, in the second echelon , constantly catching up with wafer manufacturing. Leading manufacturer.
In mainland China, SMIC's scale is far ahead. Similarly, in the quarterly wafer foundry revenue, only 2 manufacturers in mainland China entered the top 10 of the list, SMIC and Hua Hong Semiconductor. Among them, SMIC's revenue is more than three times that of Hua Hong Semiconductor. .
Judging from the production capacity of major domestic wafer foundries, SMIC's production capacity is only 12-inch and 8-inch, and the proportion of 12-inch wafers has reached more than 50%. Although Hua Hong Semiconductor also has 12-inch wafers, its production capacity is still relatively small. The advanced production capacity of China Resources Micro and Shanghai is concentrated on 8-inch and 6-inch wafers.

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In terms of equivalent 8-inch wafers, SMIC's total wafer production capacity is greater than the sum of Hua Hong Semiconductor, China Resources Micro, and Shanghai Advanced, and its production capacity is absolutely leading in mainland China.



3) End of capital barriers
The wafer manufacturing industry also has obvious characteristics of high capital barriers. SMIC and Hua Hong Semiconductor currently mass-produce 12-inch wafers in major domestic foundries.

12-inch wafers are mainly used for process processes below 90nm. Even for a 90nm process production line, the equipment investment corresponding to the production capacity of 50,000 pieces requires US$2.134 billion , which creates a high capital threshold for other companies in the industry. At the same time, as the process technology evolves, the more advanced wafer production lines have a higher demand for equipment investment in the production line.
At present, SMIC is far ahead of other wafer foundries in mainland China in terms of process technology, and it is also at least three years ahead of Hua Hong in advanced process research and development. The investment in 14/16nm bears huge equipment investment, and the equipment investment required for every 50,000 wafers production capacity will reach 6.272 billion US dollars .

Leading process technology, absolute advantage in production capacity, and high capital barriers have built SMIC's leading position in mainland China.
At present, most of the 12-inch wafer capacity of wafer foundries in mainland China comes from SMIC. If other manufacturers want to enter or expand their production, they will face equipment investment of 3 billion US dollars for every 50,000 wafers . Capital barriers have slowed the entry of other manufacturers and built the dominant position of the first foundry in mainland China.
Through nearly 20 years of process research and development and capacity expansion, SMIC has formed a mass production capacity from 14nm-0.35um process nodes, and the proportion of 90nm and below process processes is gradually increasing.
Relative to the increase in the proportion of advanced technology and the corresponding increase in the capital threshold, SMIC has consolidated its leading position in the development.

Third, the expansion of wafer production​

The expansion of the wafer production line is about 2 years , which generally involves the preparation of a feasibility report, determination of a fund-raising plan, equipment layout engineering design, equipment procurement, personnel technical training, production equipment moving in, production line installation and commissioning, and preparation for production And trial production and mass production links.
"Huahong No. 7 Factory started construction in March 2018, and achieved the topping of the main plant structure in the same year. The first batch of lithography machines were successfully moved in in June 2019. The equipment installation and commissioning required for the production capacity of 10,000 pieces have been completed in September, 2019. Mass production will be realized within the year. Similarly, the implementation period of Silan Jixin's 8-inch integrated circuit chip period is from January 2019 to December 2020."
Combining these two situations, it is reasonable to judge that the construction of the factory to mass production will take at least one year to one and a half years, plus the preliminary planning, design, and procurement.
According to data from IBS, to expand the production of 1,000 wafers, 14nm requires an investment of $1.2; 28-90nm requires approximately $65 million, and above 90nm requires approximately $10 million.
The extremely long construction period and the extremely high capital investment have led to high entry barriers and catch-up barriers in this industry, and the production capacity expansion period and the demand expansion period are prone to mismatch, resulting in a typical cyclicality in the entire industry.
From the perspective of input-output ratio, combined with the average shipment price of products above 14nm, 28-90nm, and 90nm, it is estimated that the input-output ratio for capacity expansion above 14nm/28-90nm/90nm is about 40%/30, respectively. %/60%.
Even if it is a relatively mature manufacturing process, it does not count other costs such as material manual manufacturing, and the payback cycle of the equipment alone is as long as 2-4 years. This kind of investment is not only a financial issue, but also requires foresight and judgment .

SMIC's prospectus includes the company's “12-inch chip SN1 project”, with a total investment of US$9.059 billion and a planned monthly production capacity of 35,000 pieces. Since the SN1 project is geared towards advanced processes of 14nm and below, the company's N+1 technology has been roughly compared to the market's 10nm technology before.
Due to the higher technical requirements of 10nm, the required equipment investment and other expenditures will increase. Assuming a shipment price of 4,000 US dollars per piece, the corresponding annual output after 35,000 pieces reaches production is about 1.68 billion US dollars, and the corresponding input-output ratio is about 18.54%.
Expansion of advanced technology processes may have a higher input-output ratio. At the same time, the company's depreciation will increase due to new expansion, which will affect the company's current gross profit margin. However, the production capacity expansion of more advanced processes has significantly improved the company's wafer shipment ASP level, paving the way for the company's future medium and long-term development.
After excluding the effect of depreciation, the gross profit level (average shipment price-other manufacturing expenses), the production capacity of more advanced processes is significantly higher than the original production capacity, and lays the foundation for the company's medium and long-term gross profit improvement.
SMIC is ahead of Hua Hong Semiconductor in terms of process layout. From the data in the fourth quarter of 2020, SMIC's gross profit margin is significantly higher than that of Hua Hong Semiconductor after depreciation is excluded.

Four, summary​

This article, Dolphins, mainly takes you to sort out the situation of SMIC's various business lines, the high barriers to build SMIC's dominant position, and the input and output of wafer manufacturing expansion.
SMIC's revenue sources mainly come from wafer manufacturing, of which both 8-inch wafers and 12-inch wafers account for about 50%. In terms of 12 inches, SMIC's investment in advanced manufacturing processes has achieved breakthroughs in mass production in recent years.
Leading process technology, absolute advantage in production capacity, and high capital barriers have built SMIC's leading advantage in mainland China:
a. SMIC's N+1 process has made a breakthrough in tapeout, closely following the world's echelon manufacturers in process technology, and is far ahead of other manufacturers in mainland China.
b. The production capacity of SMIC has reached the second echelon in the world, which is greater than the total production capacity of major foundries in mainland China.
c. The high expenditure on the 12-inch wafer manufacturing side has created a high capital barrier and consolidated SMIC's long-term leading position in mainland China.
d. The expansion of wafer manufacturing often takes 2 years. The more advanced the production line, the higher the capital expenditure. For a production line with the same capacity, the capital investment for 14nm is more than 10 times that for a production line above 90nm.
From the perspective of input-output ratio, the input-output ratio of 14nm and advanced process production lines is not outstanding, but it lays the foundation for the company's mid- to long-term development and profitability improvement.
In the next article, Dolphin will mainly solve the third problem SMIC's investment value and valuation judgment.

100% ban is coming.
When their mouthpiece, Demetri Sevatopulo , reports this then you know what's coming

US lawmakers warn Apple on using Chinese group’s chips in new iPhone​

Tech company accused of ‘playing with fire’ if it buys data storage components from YMTC

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Republican lawmakers have warned Apple that it will face intense scrutiny from Congress if the California company procures memory chips from a controversial Chinese semiconductor manufacturer for the new iPhone 14.

Marco Rubio, Republican vice-chair of the Senate intelligence committee, and Michael McCaul, the top Republican on the House foreign affairs committee, said they were alarmed following a media report that Apple would add Yangtze Memory Technologies Co to its list of suppliers for Nand flash memory chips that are used to store data on smartphones.

Click to expand...

“Apple is playing with fire,” Rubio told the Financial Times. “It knows the security risks posed by YMTC. If it moves forward, it will be subject to scrutiny like it has never seen from the federal government. We cannot allow Chinese companies beholden to the Communist party into our telecommunications networks and millions of Americans’ iPhones.”

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Asked about the congressional concerns, Apple told the FT it did not use YMTC chips in any products but said it was “evaluating sourcing from YMTC for Nand chips to be used in some iPhones sold in China”.

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Apple said it was not considering using YMTC chips in phones for sale outside China.

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Overbom said:

100% ban is coming.
When their mouthpiece, Demetri Sevatopulo , reports this then you know what's coming

Please, Log in or Register to view URLs content!

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Apple is just using YMTC for Chinese iPhone sales. YMTC should be exporting like crazy, so that the competition will be hit hard.

ansy1968 said:

Bro I can see ASML (with either Gigaphoton or RS laser), TSMC , Samsung (IF SMEE do deliver an EUVL) and even Intel do the same. Right now the CCP is letting the market forces decide, using the invisible hand to point where the future policy direction is going as they prepare the necessary tools and infrastructure to support. The US are panicking as both the Semiconductor and aircraft engine tech are within China grasp as it points to 2025 as the year of achieving self sufficiency.

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Bro I see that the real help should be given to SMEE, it is by far the weakest link and the most critical at the moment

All the other actors / technologies are more or less in acceptable or even good shape: manufacturing skills, semi equipment, IC design and even software and the corresponding firms will grow naturally with the growth of the Chinese market, government doesn't need to do anything special here.

But lithography is THE problem at the moment. Maybe there are already some SMEE machine in pre-production or something similar, but there is no any official confirmation from SMEE or from any of its customers.

SMIC N+1 is a stop gap today, is not a stable and reliable solution, because at any moment could arrive the news that ASML is banned from SMIC and N+1 remains just a technology achievement. To own the technology is very important of course, but is nothing if you don't have the production capacity, and to increase capacity, SMIC needs new equipment and specifically new ASML machines.

There are still many arrows at US's quiver. Only when SMEE will start producing litho machines for advanced nodes, that will be the real game changer and will mark the end of this tech war: at that point China will be officially self-sufficienct in semiconductors and digital economy.

henrik said:

Apple is just using YMTC for Chinese iPhone sales. YMTC should be exporting like crazy, so that the competition will be hit hard.

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Export to whom ? US companies like apple, Google's pixel won't use it in the market outside of china. Similarly samsung would go for their own and then you end up with Chinese phone company but they are not popular in high end range. People would still buy high end range of iphone, Samsung . Chinese phones are popular among low to mid range only but among mid range also many are buying low end iphones.

Overlord said:

Export to whom ? US companies like apple, Google's pixel won't use it in the market outside of china. Similarly samsung would go for their own and then you end up with Chinese phone company but they are not popular in high end range. People would still buy high end range of iphone, Samsung . Chinese phones are popular among low to mid range only but among mid range also many are buying low end iphones.

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The majority of phone sold are mid to low range, which Chinese phones are highly dominating

For high end, yes I agree iPhone is the king ... but Chinese high end (Xiaomi, Oppo, etc) are not far away from Samsung high end

US lawmakers warn Apple will face intense scrutiny if uses memory chips from China’s YMTC