China Supports Third-Generation Semiconductors for 2025 but Have Long Way to Go
The market shares of the top five equipment semiconductor equipment suppliers, Applied Materials, Lam Research, KLA, Tokyo Electron and ASML (
ASML),suppliers have 65% of the global equipment market of $59.5 billion. China currently has no noteworthy home-grown equipment companies that can match the technology offerings of these companies.
The next figure showing market share from 2013 to 2019, includes two lines for AMAT (black and gray). In general, except for growth in just one year (2016), market share has dropped for five or six years. In 2019 AMAT had $331 million from 2018 revenues and brought them into 2019. The company called it “REPROFILING REVENUE” - a change in accounting methods. Without reprofiling, 2019 revenues would be lower than 2018 (black line). However, with reprofiling, the $331 million deducted from 2018 and put into 2019 caused revenue to increase (gray line).
- ASML (yellow line) became the largest supplier of equipment in 2019, knocking AMAT from the No. 1 position for the first time in more than 20 years.
- LRCX has dropped in market share for two successive years.
- Japan’s TEL has shown growth in most years on the strength of its dominance in non-tube low pressure CVD (LPCVD).
- KLA’s share increased to 6.1% on the strength of the company’s acquisition of Orbotech. Otherwise, the company has more than a 50% share in the metrology/inspection equipment sector.
Figure 1: Top 5 Semiconductor Equipment Supplier’ Market Share
In 2019, there were $13.5 billion in imports of foreign equipment, but home-grown equipment sales were less than $250 million from leading companies AMEC and NAURA, and others including ACM Research, Mattson, and Shenyang Piotech, according to our marketing report. The next table shows the various types of equipment manufactured by Chinese suppliers and comparing them to the top foreign supplier and that supplier's market share.
Table 1: 2019 Market Shares: Chinese vs. ROW Semiconductor Equipment Revenues
Note that (1) there are few Chinese companies for each type of equipment and (2) the top foreign equipment supplier has significant market shares, a deep moat for Chinese suppliers.
As for customers:
- AMEC’s etch system is used in TSMC’s 5nm fab and is developing a high aspect ratio etcher and staircase etcher for 128-layer 3D NAND manufacturing at YMTC. Other customers include SMIC, Huahong, and Huali.
- NAURA has a large product offering, and its customers consist of SMIC, Hua Hong, YMTC, and GTA Semiconductors.
- Whereas NAURA sold 8 etch systems and 6 CVD and ALD deposition systems to Chinese semiconductor companies, the company sold 34 furnaces in 2019 as well as 16 cleaning systems.
- Shenyang Piotech received orders for 4 PECVD (for SiN, SiO2) systems from YMTC, and also is receiving repeat orders from Hua Hong and SMIC.
- ACMR competes in the cleaning system sector. They have been installed by YMTC and Hua Hong/Huali as well as SK Hynix (OTC:HXSCL).
NAURA is capable of producing chips at 5nm, comparable to those of AMAT and peers. NAURA is making equipment with 14nm capabilities but is developing etchers and deposition equipment for 7nm and 5nm nodes. It’s important to recognize three things:
- Technology nodes are not set in stone. For example, Intel’s 10nm is slightly denser than TSMC’s 7nm for SRAM. But TSMC’s 7nm is actually denser than Intel for logic.
- Although Chinese suppliers have 5nm capability, it is doubtful whether the 7nm node can be reached without EUV,
- Just 25% of China’s chip capacity is <20nm, technology about six years old
The previous table shows that in Q1 2020, just 1.3% of SMIC’s revenues were from chips made at 14nm.
Many Chinese chip equipment and materials makers have also gone public, and received massive financial support from the local capital market. The future may be bright, even though the scale of these companies is still small compared with market leaders. SMIC, the leading Chinese chip supplier is incented by the government to work with them and test local suppliers, but we don’t expect these companies to replace any of the leading suppliers soon. The next figure sums up the huge lead foreign equipment have over native Chinese companies. In 2019, Chinese suppliers sold just $200 million worth of equipment compared to imported equipment from foreign suppliers valued at $13.3 billion.
Figure 2: Semiconductor Equipment Revenues 2019 China vs. ROW
Although Chinese-made equipment has the ability to be used in the fabrication of state-of-the-art 5nm chips, there are numerous other factors that semiconductor manufacturers use to evaluate a supplier:
- Reliability
- Uptime
- Price/performance ratio
- Mean time between failures (MTBF)
- Equipment support
- Limited breadth of equipment offerings within a sector
But the Chinese government is preparing broad support for so-called third-generation semiconductors for the five years through 2025.
Semiconductor manufacturers typically take 9-12 months to evaluate a piece of equipment and make decisions on a "best-of-breed basis." However, the Chinese government is demanding that a portion of equipment used in a fab must be Chinese made. If Chinese made equipment is sitting side-by-side to a foreign-made system, how difficult would it be for Chinese equipment engineers to keep their eyes and ears open to discover features of the foreign equipment that could be implemented into their own.
If foreign engineers were not permitted by the Commerce Department to monitor equipment as occurred in October of 2018, when the Commerce effectively shut down Chinese semiconductor firm Fujian Jinhu by cutting off U.S. suppliers, including suppliers of semiconductor-making machines because the firm allegedly stole U.S. memory chip maker Micron’s (NASDAQ:
MU) technology, foreign equipment engineers picked up their tools and exited the building. Questions were raised as to what happened to that equipment and did the company reverse engineer the equipment already in the fab. Applied Materials would be most impacted by export restrictions of all foreign suppliers for several reasons:
- The company supplies more types of equipment to China and has a larger installed base of equipment than any foreign peer. AMAT makes every type of equipment except for lithography and resist processing.
- AMAT makes more variations of equipment within a sector than peers. For example, in the CVD sector, AMAT offers 12 different types of equipment compared to just 5 for LRCX and 4 for TEL. In the PVD (sputtering) sector, AMAT has 16 different variations of equipment while China's NAURA has just 6.
Commerce restrictions could halt AMAT's acquisition of Hitachi Kokusai Electric as Chinese regulators still need to approve the acquisition and so far, they have refused.
