China’s export restrictions on Ga and Ge shake global semiconductor industry: unveiling motivations and impending disruption.
China has announced its intention to implement restrictions on gallium, germanium, and their chemical compounds to safeguard Chinese national security starting from the first of August 2023. Exporters will be required to obtain licenses from the commerce ministry to continue shipping these materials out of the country. Additionally, they must provide comprehensive information about the overseas buyers and their applications. This recent implementation of stricter export rules on compound semiconductor materials has sent shockwaves through the global semiconductor industry. With China accounting for a significant share of global production in these materials, this decision has far-reaching implications for manufacturers, suppliers, and OEMs worldwide.
Gallium is a critical component in the production of GaAs, GaN, Ga2O3 and GaSb substrates, which find applications in various industries, including consumer electronics, automotive, military, RF, and optical communications. Germanium finds wide-ranging applications in various industries, including SiGe-based devices for fiber-optic communication, night-vision goggles, and space exploration. In fact, germanium-based solar cells power a significant number of satellites used in space missions. The export rules on gallium and germanium could lead to a potential disruption in the supply chain for these substrate manufacturers, causing uncertainty and challenges.
Unveiling the motivations
- Securing Domestic Demand and Fostering Industrial Growth: China’s insatiable appetite for cutting-edge electronics and semiconductors has propelled it to become the world’s largest consumer of compound semi materials. To maintain self-sufficiency and support its rapidly expanding industries, China seeks to safeguard its supply chain by controlling the export of gallium and germanium. By doing so, China aims to fortify its domestic industry and ensure a reliable flow of these critical materials.
- Accelerating Technological Advancements: China has been resolute in its pursuit of technological dominance, particularly in emerging sectors like 5G, electric vehicles (EVs), and renewable energy. These transformative fields rely heavily on compound semiconductors, including GaAs, Ge, GaN, Ga2O3 and GaSb substrates. By exercising export controls on gallium and germanium, China aims to bolster its domestic high-tech sectors, solidify its competitive edge, and establish itself as a global technological powerhouse.
- It is also important to consider the context of the ongoing trade war between the United States and China, which has likely played a role in China’s decision to implement export controls on gallium and germanium. As tension between the two global powers escalated over the last years, China has encountered challenges in procuring cutting-edge equipment and technology from certain European players for the manufacturing of compound semi materials. China’s decision to impose stricter export rules may be influenced by recent announcements from the Dutch government regarding ASML, a key supplier of advanced DUV lithography equipment. The proposed export restrictions on high-end lithography technology to China may have prompted China’s response to tighten its own export controls on critical semiconductor materials.
China currently holds a staggering more than 90% share of global gallium production, producing approximately 317,000 kg in 2020, according to a study published by the Hague Centre for Strategic Studies in May 2022. After China, Russia, Japan, and South Korea also contribute to global gallium production. Similarly, China accounts for 68% of global germanium production, with a production volume of 95,000 kg. Other countries like Germany, Belgium, Japan, and Canada make up the remaining 32%.
What could happen next?
China’s dominant position in the production of gallium and germanium allowed the country to lower prices, keeping a firm grip on the raw materials market. However, following the announcement of the export rules, the prices of these materials have already increased by 5%. This price surge has raised concerns for manufacturers, as it directly impacts the production costs of Ga- and Ge-based substrates.
Ali Jaffal Technology & Market Analyst, specialized in Compound Semiconductors and Emerging SubstratesIt is important to note that gallium raw materials comprise approximately 50% of the GaAs substrate price. With China’s dominant position in gallium production, the export restrictions have created uncertainty and potential price volatility in the GaAs substrate market. Similarly, the price of germanium substrates is also likely to be affected. On the other hand, the impact on GaN-on-Si and GaN-on-SiC wafers pricing, which are mainly used for power and RF applications, might not be as severe as the Ga-based and Ge substrates. This is because GaN epitaxy uses TMGa as a Ga source in low quantities, measured in µmoles and constituting a few micrometers in thickness.
The potential pricing impact further emphasizes the importance of supply chain diversification and exploring alternative sources for gallium and germanium to ensure stability and resilience in the semiconductor industry.
Companies like AXT (US), Freiberger (Germany), and Sumitomo Electric (Japan) are GaAs substrate suppliers. However, AXT stands out with its significant reliance on China. AXT manufactures all its products in China and partially owns Chinese raw material companies producing high-purity gallium. AXT’s Chinese subsidiary, Tongmei, is actively seeking permits to export GaAs and Ge substrates. AXT generated US$6.4 million in revenue from GaAs and Ge substrates, accounting for 32% of its total revenue in the first quarter of 2023, from exports of these substrates primarily used in consumer, automotive, display, and industrial applications.
The dependency of major Chinese smartphone manufacturers like Vivo, Oppo, Xiaomi, and Honor on foreign suppliers for GaAs-based devices highlights a fascinating paradox. Despite China’s position as a global leader in the semiconductor industry, it still lacks viable domestic suppliers for RF components and modules, specifically in the realm of GaAs-based technology. These companies rely heavily on overseas sources such as Broadcom, Skyworks, Qorvo, and Qualcomm to fulfill their demand. Interestingly, this situation intertwines with China’s recent export rules on gallium. While China strives to assert its dominance in the semiconductor market and safeguard its supply chain through stricter export regulations, it still depends on US and European companies for crucial RF applications. This means that US and European companies, especially the ones involved in the RF business, will still be able to source Ga from China. In our understanding, all Ga and Ge exporters have immediately applied for export licenses.
To mitigate the impact of the export rules, the industry may see an increase in the recycling of Ga-based and Ge substrates. Recycling can help alleviate the shortage of raw materials and reduce dependence on a single supplier. For instance, AXT, Freiberger, Vital, and Umicore are investing in recycling technologies for GaAs and Ge substrates, aiming to reduce reliance on raw material imports. The use of recycled gallium is a critical aspect of the supply chain for gallium, as it involves extracting and purifying gallium from waste streams generated during semiconductor manufacturing processes. This supply chain operates independently of China and plays a crucial role in meeting a significant portion of the global gallium demand. Recycled gallium helps reduce reliance on primary gallium sources and provides a sustainable solution for gallium supply, ensuring a stable and diverse supply chain for the semiconductor industry. Furthermore, the implementation of supply chain diversification strategies becomes crucial to ensure a stable and reliable supply of gallium and germanium, thereby reducing the vulnerability to export restrictions and market fluctuations.
In light of the rising prices and potential volatility of GaAs and germanium substrates, what strategies are companies like AXT, Freiberger, Vital, Sumitomo Electric and Umicore implementing to ensure a diversified and resilient supply chain, and how will the investments in recycling technologies contribute to mitigating the impact of the export rules?
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