Easing US export controls won't reverse dwindling foreign capital in Chinese chip production

Eric Huang, columnist, Misha Lu, DIGITIMES Asia 0

Credit: AFP

On October 9, the South Korean presidential office issued a statement stating that it had received notice from the United States that Samsung Electronics and SK Hynix's China-based factories are designated as "verified end users" (VEU). As a result, they will not require additional approval processes for importing US chip equipment. Following the news, it was reported that TSMC has also received a similar one-year extension. Nevertheless, in the future, the growth of semiconductor production capacity in China is no longer dominated by foreign investments, but primarily driven by that of China.

Currently, South Korean and Taiwanese firms represent the majority of foreign investments in China. South Korean companies include Samsung's Xi'an plant and SK Hynix's Wuxi and Dalian plants, all of which are 12-inch fabs. Samsung's Xi'an plant has a monthly capacity of approximately 250,000 wafers, while SK Hynix's Wuxi and Dalian plants have monthly capacities of 210,000 and 60,000 wafers, respectively. Taiwanese companies include TSMC, UMC, and Powerchip. In terms of 12-inch fabs, TSMC's Nanjing plant and UMC's Xiamen plant have monthly capacities of around 30,000 wafers each, and Powerchip's joint venture, Nexchip, has a monthly capacity of over 100,000 wafers.

In 2022, the combined capacity of foreign-invested companies accounted for approximately one-third of China's total semiconductor production capacity. Samsung and SK Hynix were the major contributors, gradually shaping China's memory supply chain in recent years. In terms of wafer foundries, TSMC and UMC have relatively small scales. Powerchip is a latecomer, both in terms of development time and industry position compared to China's SMIC, which has been in operation since 2000

I believe that in the coming years, the growth of foreign-invested manufacturing capacity in China will be relatively limited for two main reasons. First, the production capacities of Samsung's Xi'an plant and SK Hynix's Wuxi plant have reached their original targets. Only SK Hynix's Dalian plant has 40,000 wafer per month of capacity remaining for expansion. Second, companies like TSMC and Samsung, which received subsidies for fab construction in the US, must adhere to US restrictions on capacity expansion in China: for advanced process technology, capacity expansion rate cannot exceed 5% in a 10-year period. For mature process, capacity expansion cannot exceed 10% in the same duration.

In the face of potential risks from a US crackdown in the future, it is expected that SK Hynix will be relatively conservative in its China investments.

As for the two mature-process foundries, UMC and Powerchip, there is a risk to face future US restrictions. UMC has planned to convert its Xiamen facility into a wholly-owned subsidiary, making large-scale expansion less likely. In comparison, Powerchip and its joint venture Nexchip have a planned maximum monthly capacity of 300,000 wafers. Nexchip has been listed on the Shanghai STAR Market in May this year, and with both public and private capital support, it is expected that they will continue to widen the capacity gap with TSMC and UMC in China.

Two-thirds of China's total chip production capacity comes from domestic companies

On the other hand, in 2022, Chinese-owned companies accounted for approximately two-thirds of China's total semiconductor production capacity. Among the two major wafer foundries, SMIC has a monthly capacity equivalent to approximately 360,000 12-inch wafers, while Hua Hong has a capacity equivalent to approximately 145,000 12-inch wafers. In terms of memory, both YMTC and CXMT have monthly capacities of around 100,000 12-inch wafers, respectively.

Examining the expansion plans of Chinese-owned semiconductor companies, SMIC's additional capacity comes from its five 12-inch fabs in Shenzhen, Beijing, Shanghai, Tianjin and Shaoxing. Apart from the Shenzhen plant, which has a production target of 40,000 wafers, the other four have a target of 100,000 wafers. Hua Hong's increased capacity comes from its Wuxi 12-inch fab, with the first phase of operation having reached the planned capacity, and the second phase is expected to expand the total capacity to 180,000 wafers. In memory, both YMTC and CXMT have set monthly production targets of 300,000 12-inch wafers each.

In addition, China-based semiconductor fabrication facilities, including Guangzhou CanSemi Technology, Hangzhou HFC Semiconductor, Hangzhou Fullsemi Semiconductor and GalaxyCore Shanghai, all aim to reach a monthly production capacity of 50,000 12-inch wafers.

Chinese semiconductor fabrication plants that have gone public this year include Huahong and Semiconductor Manufacturing Electronics (Shaoxing) Corp., with the former becoming the largest IPO on the STAR Market so far this year. Furthermore, YMTC is expected to go public this year as well. Additionally, the second phase of China's main semiconductor policy fund, which was previously halted due to corruption investigation, has resumed this year. Apart from participating in the public offering of Huahong, it has also invested in YMTC, Silan Microelectronics' subsidiary Xiamen Silan Compound Semiconductor, and Runpeng under CR Micro, among others. In terms of policy and funding, there is strong support for the expansion of Chinese semiconductor fabrication plants.

The variables for the future expansion of Chinese-invested semiconductor foundries are twofold. First is the pace of localization of key manufacturing equipment, and second is whether the United States will restrict the large-scale expansion of China's mature manufacturing capacity to avoid a replication of previous scenarios that saw China dominating LED, solar panels, and display panel productions. As long as the United States does not impose further restrictions, the market share of Chinese manufacturers is expected to significantly increase both domestically and globally in the coming years.