China firms supercharged in revenue growth, thanks to chip crunch

Chinese companies in IC 50 2022 ranking attracted attention over their surprisingly high revenue growth in 2021, which are much higher than the growth of their peers in South Korea, Japan, and Taiwan, due to chip crunch and the nationalistic “buy China” campaign.

Among the 10 Chinese companies in IC 50 2022, there are two IC design firms, with an average of 53.6% growth in 2021, one equipment maker (59.9%), 2 foundry makers (53.7%), 2 IDMs (12.7%), and 3 packaging and testing companies (35.3%).

“The double-digit growth looks like the result of chip crunch and subsequent price hikes,” said Eric Chen, DIGITIMES semiconductor industry analyst. China’s semiconductor industry also has enjoyed remarkable growth thanks to policy instructions requiring electronic device firms to prioritize local procurements since the US-China trade tension.

But the government’s instruction for local tech companies to prioritize procuring from local companies also helped. For example, the domestic market becomes more and more important to SMIC, as the local market’s contribution to its revenues increased quarter by quarter, standing at 68.4% as of Q1 2022, up from 55.6% in Q1 2021. China’s largest OSAT firm JCET revealed in its financial report that despite the fact that its domestic sales are nearly one-third of overseas sales, the gross profit of the domestic business is 28.5%, double that in the overseas markets.

The case of Well Semiconductor, the world’s No.3 CMOS image sensor supplier, is different. Both its overseas revenues and profit margin are double that in the domestic market, due to the fact that it has obtained overseas customers by acquiring the world’s third-largest CMOS visual sensor supplier, OmniVision in 2019, significantly improving its competitiveness in international markets.

State funds and subsidies
It does not take long for one to notice that among the 10 Chinese companies in the IC 50 2022 list, eight are portfolio companies of China’s state semiconductor investment funds. They are SMIC, JCET, Gigadevice Semiconductor Beijing, NAURA Technology Group, Hua Hong Semiconductor, China Resources Microelectronics, Tianshui Huatian Technology and TongFu Microelectronics.

The China Integrated Circuit Industry Investment Fund (CICF), or the so-called “Big Fund”, is a state fund established in 2014, raising CNY 98.72 billion to prop up the value chain of China’s integrated circuit industry, which involves chip design, production, packaging, and testing. The Big Fund raised another CNY200 billion in 2019 to focus more on semiconductor equipment and materials with an aim to develop local production capability of the upstream suppliers in the semiconductor industry.

The majority of the Chinese companies that made it to IC 50 got the support of the Big Fund, which financed their successful cross-border acquisitions to increase their competitiveness. Sometimes the scale of the targets was much bigger than the acquirers before the deal.

For example, JCET successfully completed two acquisitions in 6 years and aggressively expanded its capacity, largely benefiting from the support of China’s state funds. JCET acquired STATS ChipPAC in 2015, which was the world’s fourth-largest OSAT company. In 2016, JCET established a new plant in South Korea and completed the deal to acquire ADI’s OSAT factory in Singapore in 2021.

JCET’s largest shareholder (with a shareholding of 13.31%) is a subsidiary of SMIC. The close collaboration between the two companies secured stable demand for its service. Tongfu Microelectronics was originally Nantong Fujitsu Microelectronics. After the state-run company, Huada Microelectronics acquired the majority shares, Tongfu Microelectronics got the support of the Big Fund.

Tonfu Microelectronics also enjoys a large portion of revenues from overseas, as it has been serving AMD as a major customer after it acquired AMD’s packaging and testing plants in Suzhou and Penang, Malaysia, in 2015. Tianshui Huatian Technology acquired US flip chip company FCI, and subsequently in 2018 acquired UNISEM, the Malaysian OSAT firm that serves big clients such as Broadcom, Qorvo and Skyworks.

Subsidies are also quite prevalent. According to public information,129 public listed semiconductor companies in China have disclosed they have received “government grants” of sorts every year. Will Semiconductor, which is not a CICF portfolio company, also disclosed subsidies from the government every year since 2016. Will Semiconductor started as a semiconductor distribution business, but it managed to complete the acquisition of OmniVision through direct and indirect share acquisitions during 2018~2019, making it the world’s third-largest CMOS image Sensor supplier after Sony and Samsung. Will Semiconductor’s market value ballooned 58 times over the past 5 years.

Although China Semiconductor Industry Association claimed that in 2021, for the first time, the sales revenue of the integrated circuit or IC industry in the Chinese mainland exceeded CNY1 trillion (US$157.3 billion), up 18% year-on-year, many industry experts have questioned the accuracy of the data. “The CNY1 trillion data probably have included foreign companies’ outputs in China, such as Samsung and SK Hynix’s factories in China,” said Eric Huang. The 10 Chinese IC 50 semiconductor companies aggregated revenues in 2021 totaled US$25.93 billion, accounting for 41.3% of the local semiconductor industry’s US$62.7 billion output (foreign companies excluded) in 2021, estimated by DIGITIMES research .

Self-sufficiency remains a long shot
It is no longer a secret that China’s semiconductor companies have been propped up by government subsidies and investments. Although “self-sufficiency” is the goal of China’s “MIC 2025 Plan,” chips made by local companies were not “that popular” among local consumer electronic manufacturers, according to industry sources.

Colley Hwang, president of DIGITIMES, estimated that revenues from Chinese IC design houses that are outsourcing chip production with meaningful sales volumes were US$25 billion. And US$9 billion are from the IDM sector. All these made China the sixth-largest semiconductor supplier next to Japan in 2021, with a global market share of 6.1%.

“That is a figure close to what SMIC president Zhao Haijun had described as China’s chip self-sufficiency status,” wrote Hwang in a recent article. In another word, around 94% of the chips used in China were still imported.

Although self-sufficiency for chips is still a long shot for China, it is certainly trying to put together a portfolio of local companies in each semiconductor industry sector to form a complete supply chain to reach that goal.

As the US has implemented Entity List to thwart the export of advanced semiconductor technologies and products to China, Beijing has wielded a nationalistic campaign galvanizing local capital and talents to develop its domestic semiconductor ecosystem since 2019, when Huawei and its affiliates were put on the Entity List.

Since then, IC design, foundry, and semiconductor equipment have become the darlings of Chinese investors. And companies such as Alibaba, Tencent, Baidu, Huawei, Xiaomi,….etc., started to design their chips in-house. During the chip crunch, when supplies of power management ICs become so short all over the world, local fabs were instructed by Beijing to manufacture chips for local fabless customers. Executives from SMIC also has reiterated on various occasions that they will prioritize procurement from local semiconductor material and equipment producers.

Meanwhile, municipal governments in China are racing to build their own semiconductor industry hubs. The IC design, packaging, and testing, as well as manufacturing activities, used to be concentrated in the area surrounding Shanghai, where SMIC is headquartered. Right now, the Beijing-Tianjin-Hebei area and the Pearl River Delta area also have established their own semiconductor hubs, while the cities such as Wuhan and Hefei in central China are also attracting semiconductor companies to establish fabs there.

In a conference held in Guangzhou recently, Wei Shaojun, a semiconductor industry expert teaching at Tsinghua University said, even though the missing pieces, such as memory manufacturing, are getting fulfilled, China’s semiconductor industry remains big but not strong in terms of global competitiveness.

“Processing used to be the focus of our industrial development, but it is not sustainable,…” said Wei, emphasizing that a “product-centered” transformation is needed for the semiconductor industry in China.

Building up its own semiconductor supply chain
Besides blossoming semiconductor companies in sectors such as foundry, outsourced semiconductor assembly and testing (OSAT), materials (such as silicon wafers and chemicals), and semiconductor processing equipment, China already has its first semiconductor EDA software company. Empyrean Technology has made the headlines of Chinese newspapers by getting the approval of Beijing to go public in Shenzhen, aiming to raise US$381 million from the market. Again, Empyrean is also invested by the Big Funds, with China Electronics, a state-run company, as its largest shareholder (with a shareholding of 26.52%).

Currently, more than 90% of the EDA market was dominated by Cadence Design Systems, Synopsis, and Mentor Graphics, which are all American companies. The EDA market is forecasted to grow at a CAGR of 9% and reach US$13.4 billion by 2026.

Many famous US Think Tanks including the Rhodium Group and Carnegie Endowment have started to pay attention to China’s preparation for a likely “decoupling” from the US. China remains the largest market for semiconductor equipment and chips.

According to estimates from the US Department of Commerce, if American business with China on semiconductors is cut off completely, it will probably cost between $80~100 billion in sales and 125,000 jobs in the US.

However, judging from the current measures including banning the exports of advanced semiconductor processing node technologies and equipment to China as well as banning specific Chinese enterprises from accessing semiconductor products, the US government’s current policy is more likely to maintain a modest decoupling. Scenario as such would cost US$36 billion in US industry revenues and US$54 billion in production, according to BCG and Rhodium Group estimates.

Although trade data of IC imported by China in the first four months of the year showed a rare decline year-on-year, experts brushed aside speculations about a meaningful structural change in China’s semiconductor demand and supply. “It is more likely due to the pandemic lockdown that disrupted production and logistics,” according to an industry expert quoted by Chinese media.

Despite generous subsidies and investments from the Chinese government and being the largest market for semiconductor products in the world, it would remain tough for China to build up a comprehensive semiconductor supply chain to form a self-sustainable ecosystem, according to industry experts. Lack of semiconductor talents, lagging three generations behind in foundry technologies, US bans on advanced processing equipment, and the gap in quality between locally produced chips and market leader standards, are four main obstacles that have yet to be tackled achieve the goal. Digitimes