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China Semiconductors’ Updates
Our Thoughts - Localization of a Global Supply Chain?
The idea itself sounds counterintuitive. Why are we going backward to localize the supply chain after decades of globalization? However, this is now a focus of global semiconductor leaders and a new reality companies have to face.
The technology race and trade war between the U.S. and China have exposed two things: 1) China is moving up the value chain in manufacturing and technology. Companies are no longer satisfied with low-margin, labor-intensive businesses. This challenges the existing global order and competitive landscape. 2) China is dependent on other countries/regions in semiconductor supply. The semiconductor industry has a high entry barrier and long investment cycle, and for years many companies have been unwilling to invest in the industry. This results in a small upstream semiconductor presence, in contrast to downstream global leaders in smartphone, PC, and other hardware.
The auto semiconductor shortage this year has reminded us of the vulnerability of the global supply chain, and companies have to re-think their “just in time”, lean, low inventory approach which worked well until the pandemic broke out. In the wake of these events, major countries across the world have raced to announce plans to localize their semiconductor supplies. The EU announced a new semiconductor alliance and made a commitment to fund local production. The U.S. Congress recently passed the CHIPS (Creating Helpful Incentives to Produce Semiconductors) for America Act, which aims to invest $52 billion in U.S. semiconductor chip production and research over five years. (Reuters 2021) This is part of the US$250bn U.S. Innovation and Competition Act. (Reuters 2021) The bill includes $39 billion in production and R&D incentives and $10.5 billion to implement programs including the National Semiconductor Technology Center, National Advanced Packaging Manufacturing Program and other R&D programs. (Reuters 2021) China has already invested RMB650bn since 2014 through its state-owned sector investment fund, the National IC Industry Investment Fund (“The Big Fund”). (Guoxin 2019)
The industry will change going forward, but is it practical to build a significant local semiconductor capacity across the world? First, the cost of running a semiconductor fab varies significantly across the world. Additional capacity in the U.S. and EU might not be commercially competitive without significant subsidies. While big numbers are being thrown around, most governments have a sizable debt to service, especially after Covid-19. Second, redundant capacity will inevitably result in oversupply and low utilization, which will hurt all players in the industry.
Sector Update – Mix of Structural and Cyclical Trends Lead to Longer and Stronger Upcycle
The industry has been able to enjoy a strong upcycle as the supply of semiconductors remains tight across most products since 3Q20. (Mirae Asset 2021) We think this is driven by: 1) WFH (work from home) demand leads to stronger than expected PC shipment. Global PC shipment was up 26.1% YoY in 4Q20, representing the highest growth rate in the past 10 years. (Canalys 2021) This has led to shortage in a range of PC chips which traditionally faced muted demand. 2) 5G smartphone drives semiconductor content increase, and this consumes capacity at foundries. 3) Limited mature node capacity expansion over the past few years, under-booking from auto makers, combined with supply chain disruption have led to a significant auto chip shortage. As a result, we see a high level of utilization rate across key foundries, at over 100%. (Mirae Asset 2021) Different degrees of price hikes have been seen in both foundry and fabless in light of the tight supply.
Ideas- Power Semiconductors
Power semiconductors are becoming increasingly important, as the rise of electric vehicles (EVs) and automation is expected to create strong demand for power semiconductors. In this field, Chinese companies are relatively small but gaining market share supported by local EVs and electronics companies.
The development of the local EV industry will drive local power semiconductor supply chain, similar to how domestic smartphone brands support China’s semiconductor industry. Although domestic power semiconductor players are relatively small compared to global leaders, China has already formed a local supply chain in power semiconductors with a combination of fabless, foundry and IDM (Integrated Device Manufacturer). In power management IC, Silergy and SG micro are domestic leaders. For diode under power discrete, Wingtech has acquired Nexperia which has the largest market share in small signal diodes and transistor globally. In MOSFET, Wingtech has a strong presence in low-voltage auto products. Hua Hong works with domestic fabless like CR micro to supply MOSFET (metal–oxide–semiconductor field-effect transistor). In IGBT (insulated-gate bipolar transistor), Starpower has under 5% market share globally (Macquarie 2020), and is gaining market share in industrial and auto applications. CRRC Times operates an IDM model supplying high voltage IGBT for railway and industrial applications.
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