China’s Fab Tool Biz Heats Up

For years, China has been a steady growth market for suppliers of semiconductor equipment. Internally, though, the country is comprised of trailing-edge fabs and IC-assembly houses, which means equipment vendors sell relatively mature tools and compete on price.

That’s about to change, however. Today, the IC equipment business is heating up in China as the nation begins to upgrade and pour billions of dollars into its semiconductor industry.

China started the ball rolling last year, when the government launched a major initiative, called the “National Guideline for Development of the IC Industry.” The plan is designed to speed up China’s efforts in 14nm finFETs, advanced packaging, memory and other technologies.

As part of the effort, China created a $19.3 billion fund to propel its IC industry. And over the next decade, the government and private equity firms could spend $100 billion across the nation’s IC sector.

“The trend in China is to manufacture higher value-added products,” said Roger T.H. Chang, president of Applied Materials China. “This has resulted in the government placing more emphasis on developing China’s domestic IC industry. Accordingly, IC design, manufacturing and packaging all are developing at a rapid pace.”

The events present some new business opportunities for fab tool vendors in China. “The IC equipment market is mostly driven by fab capacity expansion and technology upgrades,” said Er Zhuang Liu, vice president and general manager of LAM Research’s China operations. “But following the announcement of this guideline, there has been an acceleration of merger and acquisition activities, new fab project announcements, technology research joint ventures, and additional projects under discussion. We believe that technology research, wafer fab investment, and supply chain optimization will be the main theme in China for the next few years, and activities will increasingly involve more advanced technologies.”

Still, there are several challenges in China. For one thing, the nation’s economy is slowing. China’s GDP is projected to reach 6.3% in 2015, which is short of its 7% growth target, according to analysts. In addition, there are signs that demand is slowing for PCs, smartphones and other products in China, which, in turn, could impact worldwide semiconductor capital spending. And as before, the competition among equipment vendors will remain fierce in China. But going forward, multinational toolmakers will also face stiffer competition from some emerging Chinese-based equipment vendors.

There are other issues, as well. “In the past, China semiconductor manufacturers have gotten use to paying very low prices (for tools), due to the availability of used equipment on the market,” said Joanne Itow, an analyst with Semico Research. “The two main issues regarding selling equipment in China have been price and the requirement to pay for equipment IP/service contracts.”

Reaching out
China’s IC equipment market is small compared to markets in Japan, Korea, Taiwan and the United States, but small is a relative term in this industry. China’s fab tool business is projected to reach $4.2 billion in 2015, up 3.4% from 2014, according to SEMI.

Meanwhile, in the 1970s, China had a plethora of state-run chipmakers, but those concerns were far behind the West in terms of technology. So starting in the 1980s, the country introduced several initiatives to modernize its IC industry. With help from foreign concerns, China launched several joint chip ventures in the 1980s and 1990s, such as ASMC, HHNEC, Huajing, Shanghai Belling and Shougang-NEC.

Then, in the early 2000s, two new foundries appeared in China—Grace and Semiconductor Manufacturing International Corp. (SMIC) [In 2011, HHNEC and Grace merged, which, in turn, created two new chipmakers—HHGrace and Shanghai Huali.]

At that time, multinational chipmakers began building fabs in China to gain access into the booming market. Several years ago, SK Hynix built a fab that makes DRAMs in Wuxi, China.

In 2010, Intel opened a 300mm fab in Dalian, China, which produces 65nm chipsets. Then, in October of 2015, Intel announced that its China fab will be converted from the production of 65nm chipsets to 3D NAND and 3D XPoint devices over the next few years. It expects to begin selling 3D NAND products from this fab in the second half of 2016. Intel plans to invest $5.5 billion in the Dalian-based fab.

Meanwhile, several years ago, TI acquired a fab in China, which makes analog chips. And in 2014, Samsung began ramping up a new 300mm fab in Xi’an, China. The fab will make NAND chips.

Still, despite the fab announcements in China, the government’s effort to develop its IC industry has fallen short of expectations. For one thing, China continues to lag behind in IC technology. One explanation is that the United States and other nations have imposed strict export control regulations for China. This, in turn, has prevented some multinational tool vendors from shipping the latest gear into China.

Moreover, China’s chipmakers produce less than 10% of the world’s ICs today, according to analysts, so China must import about 90% of its chips from foreign suppliers. That has created a $150 billion trade deficit in ICs alone, according to Gartner.

China isn’t throwing in the towel, however. The nation’s latest initiative, called the “National Guideline for Development of the IC Industry,” hopes to address those issues on three fronts.

First, China will invest and upgrade its domestic IC industry. Second, China is embarking on an aggressive acquisition strategy to obtain key technologies. For example, a group from China recently acquired Singapore’s STATS ChipPAC, a move that propels China into the upper echelon in the IC-packaging market.

There is also a third component in China’s strategy. “As the semiconductor industry becomes increasingly significant in China, the government is making efforts to create a more favorable investment environment for both domestic and foreign companies,” Applied’s Chang said.

Fab tool battle
Besides ICs, China imports nearly all of its fab equipment from foreign companies, resulting in a massive trade gap in this arena. So, a decade ago, China launched a separate initiative. That plan, called Project 02, was designed to reduce its reliance on foreign suppliers by developing its own, domestic fab equipment industry.

Project 02 has produced modest results, however. Today, China has developed tools for every segment in the manufacturing flow. But in each segment, China remains behind. And worldwide market share for Chinese fab tool suppliers ranges from a mere 0.03% to 1.8%, according to SEMI.

Hoping to address the problem again, China recently moved to provide more investments for China’s fab tool suppliers. But will the plan work this time around?

“The investments must be smart and informed by industry experts,” said Gerald Yin, chairman and chief executive of Advanced Micro-Fabrication Equipment (AMEC), China’s largest IC equipment maker. “And the strategy must encompass the entire IC ecosystem, from design to final silicon and test. This is already happening, thanks to lessons learned in earlier, less-successful efforts to grow the IC industry.”

AMEC is one of several fab equipment suppliers in China. Basically, China consists of several relatively unknown players that compete in the following markets—SMEE (lithography); Kingsemi (resist equipment); AMEC and NMC (etch); ACM, Sevenstar and Kingsemi (surface conditioning); Sevenstar (thermal processing); CETC (ion implanters); NMC and Piotech (deposition); Tianjin Hwatsing (CMP); and Raintree (inspection).

Still, the question is clear. With backing from the government, will Chinese fab tool vendors succeed?

It’s difficult to predict the future, but the trends are clear. As before, multinational toolmakers will continue to dominate the landscape in China. The multinationals have strong technology and capital. And they are well established in the region. A few Chinese equipment makers may succeed, but most will flounder. Many simply don’t have the technology.

“Local companies are now developing and providing equipment for PVD, CVD, etch, implant, clean, and lithography, and they have achieved some acceptance in certain pockets of the market,” Lam’s Liu said. “Wafer fabrication equipment is complex, and is a sophisticated technology that requires extensive testing, refinement in development, and optimization for a mass production environment. So, experience is an important factor in this industry.”

In any case, there are two areas worth watching in the Chinese equipment market—etch and lithography for packaging.

In etch, China’s AMEC is making inroads in the market. It has a significant installed base in China and elsewhere, and the company’s dielectric etchers are being used for advanced logic, memory and packaging. “We’ve built our company from the outset to serve a global market, not just domestic customers,” AMEC’s Yin said.

AMEC is the exception to the rule among China’s fab tool vendors. Besides technology and a customer base, the company has several years of experience in the business.

Meanwhile, China’s IC-packaging market is another area to watch. “The China advanced packaging market continues to grow, and all indications are that this will continue through 2016,” said Rezwan Lateef, general manager and vice president of lithography products at Ultratech. “The growth is largely based on standard RDL and copper pillar applications, where the technology is well understood and Chinese manufacturers can offer very competitive pricing.”

Still, there are challenges in this arena. “The main challenge for a multinational equipment company will be to develop a technical support infrastructure to a regional industry that is still in its infancy and requires substantial hand holding,” Lateef said. Over time, though, China plans to inject more funds into its domestic s, which is both good and bad news for multinational equipment makers. On one hand, China’s OSATs will buy more equipment. But on the other hand, the funding will also help propel rival Chinese equipment makers.

This, in turn, will intensify the competition among equipment vendors in select markets. For example, the lithography market for packaging applications consists of several competitors, including ASML, Canon, EV Group, Nikon, Suss, Rudolph, Ultratech and Ushio.

The multinationals also compete against Shanghai Micro Electronics Equipment (SMEE), China’s sole supplier of lithography tools. SMEE has made some inroads in the IC-packaging market. But SMEE is also a thorn in the side of the multinationals, as it basically competes on the basis of price, according to analysts.

For now, China’s domestic equipment vendors will continue to plod along. But over time, China may need to consider a new strategy—it may need to buy a multinational equipment company to obtain the technology. There are several takeover targets in the equipment industry. But even if it takes this path, it might be too late for China. To be sure, today’s equipment business is a tough and maturing market.