Revolutionizing China’s semiconductor supply chain: navigating restrictive challenges for innovation
U.S. sanctions on Chinese technology are escalating, prompting China to overhaul its semiconductor industry.
US export restrictions on China show no signs of easing any time soon. Quite the contrary: Yole Group 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 ASML 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.
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 SMIC, CXMT, and Huawei are continuing their work on advanced nodes, which is putting pressure on Chinese equipment makers to find new solutions, which in turn is also adding pressure on subsystem suppliers.
“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.”
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.
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.
“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.”
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.
Merle Zhao
Market researcher in the Manufacturing and Global Supply Chain Business Line at Yole Group.
“Importantly, an area where China did not have any suppliers until recently, such as for liquid and ozone gas generators, now has several. China is patching/filling voids and rapidly building an entire supply chain where Chinese suppliers will not only compete with foreign ones but also compete among themselves, fostering quicker innovation and a real price war.”
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: Semiconductor Equipment Subsystems Market Monitor and Wafer Fab Equipment Market Monitor. 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.
Stay tuned as Yole Group continues to track the semiconductor industry in China!
Gaël Giusti, Ph.D., is Senior Technology & Market Analyst, Semiconductor Equipment at Yole Group.
As part of the Manufacturing & Global Supply Chain activities at Yole Group, Gaël is focused on materials, equipment & parts, and manufacturing processes. He is involved daily in the production of technology & market products and custom consulting projects.
Prior to Yole Group, Gaël was an R&D engineer at Sil’Tronix Silicon Technologies for five years, where he was in charge of growing epitaxial AlN thin films on sapphire for RF applications.
Gaël holds a master’s degree from ENSICAEN (Caen, France) and a Ph.D. in Materials Science from the University of Birmingham (UK).
Taguhi Yeghoyan, Ph.D., is Senior Technology & Market Analyst, Semiconductor Equipment at Yole Group.
Taguhi closely follows the semiconductor industry and its evolution. Based on her expertise in this field, especially in the semiconductor supply chain (processes, materials, equipment, and related applications), Taguhi produces technology & market products and is engaged in relevant custom projects.
Prior to Yole Group, Taguhi worked in world-class European research centers and laboratories, including imec (Belgium), LMI (Lyon, France), and LTM at CEA Leti (Grenoble, France). During this time, Taguhi authored or co-authored two patents and more than ten papers.
Merle Zhao is a market researcher in the Manufacturing and Global Supply Chain Business Line at Yole Group.
Merle collects information on technical and market trends, customer opinions, and investments. His aim is to provide valuable data related to the Chinese market and contribute to the development of significant analyses focusing on semiconductor equipment, subsystems, tests, packaging, substrates and materials, and global semiconductors.
Prior to joining Yole Group, Merle accumulated five years of in-depth study and experience in the Chinese semiconductor industry. His expertise spans Chinese fabs, manufacturing processes, materials, tools, and compound semiconductors.
John West is Deputy Director, Manufacturing & Global Supply Chain Business Line at Yole Group. He has over 20 years of industry experience and a successful track record in various strategy and consulting projects. John has a bachelor’s degree in medical physics from King’s College London and an MBA from Cranfield School of Management.
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.”
