Chinese semiconductor industry

Weaasel said:

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ASML manufacturers lithography equipment and its main competitors in that sector are Japan’s Canon (CAJ) and Nikon (OTCPK:NINOY). If we compare Lithography imports to China in Table 3 with ASML’s exports to China, we see that ASML’s share was 51% in Q1 2021 dropping to 48% in Q2 2021. This is significantly lower than ASML’s global share of 85%.

ASML faces strong competition against China’s Shanghai Micro Electronics Equipment (SMEE), which, as I pointed out in several previous Seeking Alpha articles, also has a DUV lithography system (along with Nikon) and will soon be producing a system capable of pattering at the 14nm node.

Cleaning is included in the “others” segment. Screen is the global leader and competes against LRCX and TEL (among others). It also competes against China’s Naura and ACM Research (ACMR).

An important observation is the large ramp in China revenues to Japanese equipment companies Tokyo Electron and Screen Semiconductor jumped 8%-11% between 2020 and Q1 2021 and then another 16%-19% between Q1 and Q2 2021.

This raises an important issue and warrants further analysis. Are Chinese companies purchasing Japanese equipment instead of U.S. equipment because of U.S. sanctions?

However, Chart 1 shows Q2 2021 over Q1 2021 growth of revenues to China by top equipment suppliers.

Import growth for all equipment was 38%, which I show below, any growth by equipment vendors under that figure demonstrates underperformance. AMAT exhibited growth of just 22.3% while LRCX was slightly above at 25.6%. ASML significantly underperformed with QoQ growth of just 6.8%.

KLAC exhibited equipment (system only – no service or spare parts) growth of 72.4% over the period, ahead of TEL with QoQ growth of 45.6%.

Q2 vs Q1 2021 revenue growth to China
Chart 1

Growth in China
Chart 2 shows semiconductor equipment sales to China. Equipment sales in China rose from $5.96 billion in Q1 2021 to $8.22 billion in Q2 2021. That’s an increase of 37.9%.

Semiconductor equipment revenues mainland China by quarter
Chart 2

Chart 3 shows the QoQ growth of equipment purchases between Q1 2021 and Q2 2021 in China compared to revenue change for other geographic regions, according to our report “Global Semiconductor Equipment: Markets, Market Share, Market Forecast.”

China led growth at 37.9% compared to 25.4% for North America and 22.4% in Europe. Korea's change of -9.4% represents a pause in equipment purchases for the company, which had exhibited YoY growth of 62.5% in 2020.

Q2 2021 / Q1 2021 semiconductor equipment change by region
Chart 3

Investor Takeaway
Chart 3 shows stock performance for the past one year for these top equipment companies and exporters to China.

stock performance for top equipment companies and exporters to China
Chart 3

Interestingly, AMAT (yellow line) and ASML (purple line), which exhibited the poorest QoQ growth shown in Chart 1 had the greatest growth in stock performance.

Why is this important? China, despite U.S. sanctions, continues to make equipment purchases. I had noted in a previous Semiconductor Deep Dive Marketplace newsletter entitled “SMIC – Still My Top China Stock Pick Despite Short-Term Headwinds” that SMIC increased capex spend in 2020 in anticipation of sanctions, which did happen.

With China as an important center for equipment purchases, and with the push by the Chinese to increase its home-grown equipment infrastructure, investors need to look forward that if for some reason a company is underperforming competitors, this will accelerate continued revenue degradation.

How does this happen? It’s the same scenario when I have spoken in previous articles why market share is important. Semiconductor manufacturers evaluate a supplier based on “best of breed” equipment performance. If a purchase is made to one supplier, it means (1) its equipment is deemed best-of-breed and (2) its share increase against competitors. This is the same issue with China imports. If AMAT is underperforming against competitors (Chart 1), further degradation will continue as buyers of that equipment make additional purchases to increase capacity and output.

ASML is a critical case in point. EUV represents a significant share of its revenues and is embargoed to China. That means ASML can only sell i-line and DUV systems to China. That’s not a problem because the minimum resolution of a DUV system is about 7nm with expensive multi-patterning processes. Since the U.S. restrictions are at the 10nm node, ASML’s DUV is not a resolution bottleneck. However, as I mentioned above, China’s SMEE is making technical advances in its DUV system, which could significantly affect future ASML sales.

EPS shown in Chart 4 is closer to the 2Q 2021 QoQ shown in Chart 1, with TEL and KLAC as top performers, and a significant drop in ASML EPS.

EPS performance for top equipment companies and exporters to China
Chart 4

In summary, China represents 33% of equipment purchases in Q2 2021. Investors need to continue to monitor revenues of equipment companies with a China presence rather than globally. I see continued negative impact on ASML and positive impact on KLAC.

One area requiring continuous monitoring is revenue changes of equipment suppliers based on country of origin to see if there are any consequences of U.S. sanctions on U.S. vendors.

This free article presents my analysis of this semiconductor equipment sector. A more detailed analysis is available on my Marketplace newsletter site Semiconductor Deep Dive. You can learn more about it here and start a risk free 2 week trial now.

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horse said:

Hey brother, don't bother with it.

The Americans putting TSMC and Samsung down, that is Taiwan's problem, and South Korea's problem. They were too slow to protect themselves, and diversify their risks.

Maybe TSMC did something about it, try to protect themselves, since they are Chinese, then they can pretend they do not understand English. The Koreans don't have that luxury. TSMC executives can run to China and hide with all the Taiwanese people there. Korean executives probably just wind up arrested.


The facts are the facts.

90% or more of the world's semiconductors production are 14nm and 28nm and higher. That is the chip market. The entire market can only change slowly over time.

China is very close to having the tech know-how on supplying the vast majority of chips that China Inc. consumes. 14nm, the entire supply chain to fab that, will be domesticated relatively soon (according to reports), then build out the fabs.

I don't believe that this should be 100% domestic this IC equipment, should leave some space for friendly competitors.

But that window is closing.

Taiwan IC and Korean IC must think of their own survival. The Americans want to hijack their know-how right now. Then the Americans will build fabs and processes with this hijacked know-how, not in Taiwan or Korea, but in America. Then the US House of Congress and corruption will demand that America buys American. Anyone who at any time was involve in business can see this coming a mile away.

So I am not thinking what you are suggesting.

This is not a battle between China and America.

America is trying to build a separate IC supply chain that does not involve China. China is already doing this.

The word here is exclusivity. America wants to exclude China from its chip industry. China is more or less doing the same. One person's self-sufficiency is another person's exclusion. But this will be slow.

In the meantime, the output still gets sold into China, the actual chips.

Taiwan and Korea are just collateral damage.

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WTAN said:

Gigaphoton uses a 27KW Drive Laser to achieve LPP EUVL Source Power of 250W.

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xypher said:

They did, but they will be primarily working on restoring the "Angstrom-T" fab in Zelenograd, which was 65 nm as well. There are big talks about funding EUV and all that crap, but there are zero chances it is going to amount to anything because Russia is also under similar sanctions.

65 nm is sufficient for most military chips, but the person was talking about "playing significant role in semiconductor supply chain", which is not true. Russia fabs primarily work for the domestic market, are low tech and low volume. Russia does produce some optical parts for the lithographic equipment, but that's about it. Not really significant.

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Weaasel said:

They should have made efforts much earlier at producing their IC chip and semiconductor manufacturing equipment, and stated components and materials for such equipment. South Korea must be cursing not just Japan, for having greatly exposed their vulnerability to their dependence on Japanese materials, equipment, and components, and the United States for placing the pressure that it is doing on South Korea right now to share confidential secrets, but especially themselves for having been so content on being so heavily focused on just producing chips, and especially memory chips, for decades, instead of having made an effort to comprehensively have significant capabilities across the entire market chain. Does anyone know if South Korea has any prominent producers of IC chip manufacturing equipment in such areas as vapour deposition and etching? To my knowledge, they are heavily dependent on foreign sources, especially from Japan for such equipment. Does South Korea produce lithographic equipment or has it done so at least experimentally? And if so down to which nm resolutions?

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tokenanalyst said:

Money has never been a problem in the Chinese semiconductor industry, the problem lies in its semiconductor ecosystem and it is not because they are not capable but because the ecosystem is disconnected and trapped in a vicious circle before the sanctions.
The semiconductor ecosystem is like a pyramid where you have consumers -> Electronic manufacturers-> Chips companies, IC design companies and IP providers-> Semiconductor manufacturers-> EDA, equipment and materials providers. And that ecosystem has to work in unison.
To give credit to the Chinese, they have the most complete semiconductor ecosystem in the world, they have it covered almost everything from equipment to electronics along with the largest consumer market in the world, something incredible for a single country, SMEE maybe small but it is the third company in the world capable of creating an Arf system and AMEC and Naura products compete with foreign companies. Small to medium size companies with a lot of room to grow and more after the US sanctions.
Where did they fail? Before the sanctions, the system was disconnected in several points: OEM-chip suppliers, chip suppliers-EDA companies, Chips suppliers - FABs, FABs-EDA, Equipment, Materials suppliers. The top participants in the supply chain allowed American companies and other foreign companies to monopolize the bottom of the chain, creating a vicious circle in which the bottom companies do not advance. Instead of investing and collaborating with these companies to force them to produce competitive products. In the same way as Intel, Samsung, TSMC collaborate with ASML, Carl Zeiss, Cymer to produce lithography machines.
Taking into account Huawei's size and capacity and that SMIC is one of the world's largest semiconductor manufacturers, it would not have been impossible for them to force SMEE to produce more advanced lithography machines. Something strange because it has always been common knowledge that China is susceptible to sanctions by western countries and mainly the United States with its jealous hawkish politicians. I don't think the Chinese should become completely independent but I think they should invest to create local competition to create pressure on these foreign companies and governments, to say that if they try to sanction any company they will lose more. But i also think there is no excuse why the less advanced 45nm + nodes could not be made with 100% Chinese technology.​

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Weaasel said:

You seem to be well informed about Russia's semiconductor and IC chips and chip equipment manufacturing capabilities. Are you well informed about South Korea's with regards to equipment, and components for such equipment, and materials and substances for the necessary manufacturing processes?

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