Yole Group Viewpoint – Exploring semiconductor equipment during a geopolitically charged era

The semiconductor equipment market increased significantly in the 2019-2022 period, driven by end-market demand and the COVID-19 stay-at-home trend: the Wafer Fab Equipment Market almost doubled, increasing from $59B to $105B; the subsystems market also followed this trend, almost doubling from $11B to $20B over the same period.
During this time, the entire supply chain continued investing free cash in acquisitions, production capacity, or increased inventory. Meanwhile, subsystem suppliers worked flat out to keep up with the demand from OEMs and foundries. Some of this demand was driven by the stockpiling of critical parts and subsystems during the peak of the chip shortage crisis.

After such extraordinary growth, a significant WFE sales downturn was expected. Considering the overall WFE, no downturn occurred, and the market even grew by +0.6% YoY, remaining at $105B. Looking forward, the market should remain stable in 2024 and is even expected to grow moderately in 2025 by +5% YoY. Despite the overall stability of the WFE market size, the 2023 subsystem market shares were reshuffled at various levels, which will influence the market dynamics in 2024 and 2025. In contrast, the subsystems market went down significantly in 2023: 7.8% YoY and 7% if service & support revenues are included. This is mainly due to excessive inventory build-up during the period 2020 to early 2023, which led to unhealthy inventory levels, exceeding 40% to 50% of revenue for some segments, such as wafer handling and power or process monitoring. These high inventory levels, coupled with a decrease in demand, created the conditions for an amplified downturn in the subsystems market in 2023, though not for equipment.

The 2023 memory WFE decreased by -24% YoY, with a recovery possible in 2025, while 2024 is rather gloomy. For this application, deposition and etch actors such as Lam Research and Tokyo Electron suffered considerable losses, which were somewhat balanced by successful patterning tools sales to DRAM applications (ASML’s revenue increased). Moreover, the worldwide memory downturn was aggravated by the US-China ban, with U.S. companies prohibited from selling to YMTC or CXMT. Consequently, subsystem segments heavily exposed to memory – such as vacuum, power or gas management – were significantly impacted, with YoY declines in the 20% to 30% range. Optics fared much better with robust patterning tool sales, as stated previously, coupled with an equally robust Metrology & Inspection equipment market. It must be noted that domestic Chinese subsystem suppliers across all market segments were much less impacted by the U.S. export restrictions on some advanced tools, which instead spurred demand for domestic solutions.

The foundry/logic WFE market increased by +14% YoY, primarily driven by legacy logic, with demand coming principally from Mainland China. This allowed domestic equipment vendors to increase their market share significantly while international vendors were able to buffer memory-related losses. Among these, ASML’s DUV patterning equipment excelled, while Applied Materials was able to generate a stable YoY income. In 2024, we expect that Mainland China CapEx will remain stable for legacy nodes, with domestic suppliers slowly replacing international competitors. The 2025 market should increase, driven mainly by advanced logic investments worldwide. For subsystems, in particular, we expect the power and vacuum (pumps and valves) segment to be positively impacted by this trend.

The advanced packaging WFE used for packaging memory, logic, and specialty devices increased by +14% YoY, with sales generated by all sizes of equipment vendors. This segment is set to grow in 2024 and 2025, propelled by HBM investments. Interestingly, advanced packaging offers a lot of opportunities for subsystem suppliers: the vacuum and power content are increasing. There is also a need for finer process monitoring and more elaborate optical metrology & inspection tools, which will add pressure on demand for high-precision optics.

The specialty WFE market increased significantly by +11%, boosted principally by compound semiconductor device applications. The specialty WFE market is becoming increasingly important, allowing even the biggest equipment makers to diversify their application mix. Here again, significant demand is coming from Mainland China, where international WFE suppliers still have ample opportunities despite the vibrant local ecosystem building up. Not surprisingly, an increasing number of subsystem players are looking to enter the specialty and advanced packaging segments, which also act as differentiators and a potential buffer to any other memory and/or logic downturns further down the road.

Focusing now on WFE technologies. While the deposition and etch and clean segment market size and share decreased substantially due to the previously mentioned memory CapEx downturn, the patterning equipment market size increased by +33% YoY in absolute value while market share increased by +7% to 29%. Almost all these sales can be assigned to ASML, which became the market leader, pushing away Applied Materials. Historically, the patterning market share tended to increase during the downturns or at the introduction of subsequent exposure technology for a period of a year, after which deposition and etch took over. Currently, the large patterning market seems to have stabilized at a high level for at least three years.

Finally, an overview of the WFE market’s geographical breakdown: while more than 30% of WFE 2023 sales are destined for China, only 3% of the revenue is generated by domestic equipment vendors, mainly for legacy manufacturing nodes. In mainland China, there is a trend for domestic suppliers to replace international vendors. However, this significant discrepancy between imported and domestic WFE market size offers an enormous business opportunity for international vendors for at least ten more years.

Technological advancements in subsystems are driven by the need of chip makers to outperform their competition by offering more advanced processes at high yields and, therefore, better prices. This forces equipment makers to find solutions, whether internally or by working closely with their part suppliers, to find better, new, customized (or all of the above) solutions. Hence, subsystem suppliers, such as Edwards Vacuum, MKS Instruments, VAT, Advanced Energy, and many others, are playing an absolutely critical role in technological advancements in the semiconductor industry. A lot of research and IP are going into vacuum pumps and valves, RF generators, and residual analyzers, for instance.

The relentless node scaling down creates several challenges for subsystem suppliers but, in return, numerous opportunities. Typically, for memory, process steps become shorter and more numerous. This calls for longer process optimization periods, demanding more sensitive instruments and sensors.

RF power is an integral part of memory and logic processes: smaller physical features require faster and finer plasma control, which is not easy in highly dynamic processes such as dry etch.

Often overlooked until now, stricter environmental regulations and higher energy prices, especially in the EU, are creating the need for “greener” technologies and systems. Gas abatement system suppliers constantly innovate to offer higher breakdowns of dangerous gas molecules into harmless ones, along with vacuum pump suppliers offering lower power consumption pumps coupled with easily activated idle states without compromising on performance.