For years, China has been building up its own semiconductor manufacturing equipment industry – it's maybe time for the country to make its presence heard.
The expansion of the semiconductor industry, driven by the burgeoning demand for consumer electronics, the ambitious plans of global semiconductor companies and support from the Chinese government, have together brought up lucrative opportunities for the mainland's semiconductor manufacturing equipment (SME) companies. According to a report by SEMI, China became the world's biggest semiconductor equipment buyer for the first time in 2020, spending USD 18.72 billion on SME that year; meanwhile, the global semiconductor manufacturing equipment sales rose by 19% year-on-year to a record high of USD 71.2 billion.
Bridging China's SME makers and fabs
In the semiconductor industry, manufacturing equipment takes years to transform a prototype into an equipment product with sufficient yield and volume. Furthermore, even if the quality and cost-performance of an equipment unit can satisfy the manufacturer, it still requires years of refinement and lots of minor tweaks to optimize the production process. Therefore, once an SME company meets chip manufacturers' requirements, they will bond together and develop a long-term collaboration.
For example, ASML, the leading lithography machine supplier, delivered the first extreme ultraviolet lithography (EUV) machine in 2010 and spent years working closely with top-tier chipmakers to amend its EUV machines until they reached sufficient yields and then rolled out for mass production in 2020. Working with world-class chipmakers helped ASML keep up with the latest technologies, enlarging its competitive advantage, which led to today's monopoly of the Dutch firm at the most advanced nodes.
Technologically, China's SME firms are still a long way behind their rivals; this is one reason why the top local chipmakers often have little interest in cooperating with them.
A way alternative to the simple buyer/seller relations is cooperating on R&D, which benefits both sides. The SME firms can be involved in the manufacturing processes to understand the practical needs further, thereafter refining their products. For the chipmakers, having local SMEs can offer a strong cost-benefit compared to purchasing equipment from overseas suppliers.
Investing activities in the local SME companies
Multiple investors have poured money into China's semiconductor industry to aid the government's self-sufficiency goals. The number of deals involving Chinese semiconductor companies tripled from 2019 to 2020, and in the first half of 2021 alone, VCs from both inside and outside China invested USD 3.85 billion in Chinese chip companies, according to a report by Deloitte.
In 2014, the Chinese government established the 'National Integrated Circuits Industry Development Investment Fund' (or the 'Big Fund') with USD 21 billion in state-backed capital. In 2019, the fund received second-round funding with more than USD 35 billion. As of today, the fund has invested around 70% for front-end manufacturing projects, intending to build an indigenous supply chain. Apart from the venture funding, favorable bank loans, tax breaks and the discount on the land used offer a significant cost benefit to the semiconductor-related firms in China.
With increasing funding in the semiconductor industry, China's SME companies will keep growing in the foreseeable future.
Local champions with the manufacturing tools on track
Amid the Sino-American standoff, subjected by the 'Entity List,' Chinese chipmakers changed their focus to the mature nodes to realize self-sufficiency, while the domestic materials and equipment providers are speeding up to develop wafer fab tools. Even though the mainland-made EUV machines are still behind those of ASML, the country leads the industry in segments like etching, deposition and cleaning.
Advanced Micro-Fabrication Equipment China (AMEC) is the country's notable SME maker specializing in etching tools. The company has been making equipment for process nodes as small as 5 nm, while cooperating with TSMC, among other fabs.
Another local champion, Naura Technology Group, produced the first-ever domestic atomic layer deposition system, supporting FinFET manufacturing processes. Naura is currently producing equipment with 14 nm capabilities and selling them to Chinese chipmakers.
There are more local champions producing equipment in several manufacturing processes in China. Proverbially (and truthfully) enough, 'necessity is the mother of invention,' and the need for a local equipment ecosystem may soon narrow the gap with the leading companies.