Sizing up China’s Fab Tool Biz

China is pouring billions of dollars into its semiconductor industry and is building several new fabs. As reported, China is bolstering its IC industry for good reason. China is trying to reduce its huge trade imbalance in ICs. The country continues to import a large percentage of its chips from foreign vendors.

Behind the scenes, China also continues to develop its domestic semiconductor equipment and materials industries for similar reasons. Chipmakers in China must buy most of their equipment and materials from foreign companies.

Lately, China’s move to develop its own fab tool industry has begun to heat up. Last year, a Chinese-based firm acquired U.S.-based Mattson Technology. And recently, a Chinese firm signed a definitive agreement to acquire U.S.-based Xcerra, the world’s third largest ATE vendor. Xcerra was formerly known as LTX. The deal must go through several hurdles before it is approved.

In any case, it’s time to take a quick look at China’s fab equipment and materials industries.

Over a decade ago, China launched Project 02. The goal of the government-backed effort was to reduce its reliance on foreign tool suppliers by developing its domestic fab equipment industry.

Project 02 had modest results, however. China has developed tools for every segment in the manufacturing flow. But in each segment, China remains far behind and the market share among domestic vendors remains tiny.

To solve the problem, China in 2014 launched an initiative called the “National Guideline for Development of the IC Industry.” At the time, China also created a $19.3 billion fund, which would be used to invest in its domestic IC firms.

The plan was to get China’s fab tool vendors qualified for production at 65nm and 40nm. This, of course, is not leading-edge production, but it’s a start and a move to gain some experience in the fab.

There is also another strategy. If China can’t develop that technology itself, the other goal is to buy the technology via acquisition.

To date, though, the results of the two-pronged strategy are mixed. A collection of China’s equipment makers are indeed qualified to handle 40nm processes. Some are even processing wafers in fabs. But generally, chipmakers in China still rely on foreign tool suppliers, such as Applied, ASML, KLA-Tencor, Lam, TEL and others. They simply have the most advanced technology and process tools.

There are some exceptions to the rule, however. Advanced Micro-Fabrication Equipment (AMEC), China’s largest IC equipment maker, has an installed base of etch tools and other equipment in fabs.

Other vendors in China are still struggling. So the government has taken the second route—acquisition. Last year, for example, Mattson Technology was acquired by China’s Beijing E-Town Dragon Semiconductor Industry Investment Center, an investment firm. The move gave China a foothold in several markets. Mattson is a supplier of etchers, rapid thermal processing (RTP) equipment and strip tools.

While China succeeded with its bid for Mattson, it wasn’t so lucky with Germany’s Aixtron, a struggling, cash-strapped supplier of MOCVD systems. Last year, China’s Grand Chip Investment, a subsidiary of the Fujian Grand Chip Investment Fund, entered into an agreement to acquire Aixtron.

Ironically, Aixtron has struggled when the LED bubble began to burst in China. When China moved to expand its LED industry, domestic LED vendors were given subsidies to buy MOCVD tools. Several Chinese LED vendors bought too many MOCVD systems, causing a glut of capacity in the arena. Both Aixtron and rival Veeco have never recovered from the ill-fated policy.

Meanwhile, in December, the United States blocked Grand Chip’s deal to acquire Aixtron. It’s unclear why the deal was blocked, although analysts believe Aixtron provides key technology for both commercial and military purposes. MOCVD is used to produce III-V materials, such as gallium arsenide (GaAs) and gallium nitride (GaN). GaN is used for radar and other military systems.

China’s move to buy Aixtron would have given the company fresh funds and a fighting chance. Because the deal was nixed, Aixtron’s situation is bleak. In January, Aixtron’s CEO resigned. And after reporting massive losses, the company is on the block again. It is looking for partners, joint ventures or other alternatives.

Meanwhile, in April, Sino IC Capital and an affiliate, Unic Capital Management, entered into a definitive agreement under which it will acquire Xcerra for $10.25 per share in cash. The deal is worth approximately $580 million. The transaction is subject to a number of conditions. It must obtain antitrust and other regulatory approvals, including from the Committee on Foreign Investment in the United States (CFIUS).

Time will tell if the deal goes through. If it does, China might step up its acquisition efforts in the equipment and materials arena. There is no chance that China will acquire a top-tier equipment vendor from Europe, Japan or the U.S., however. Clearly, the U.S. government and chipmakers would block such a deal.

But there are some respectable small- to mid-size acquisition candidates in the market. Mattson and Xcerra are just two examples of the low hanging fruit in the arena.

Others may find themselves in the same boat and for good reason. It costs millions of dollars to develop new tools. But the IC industry continues to mature and the leading-edge customer base is shrinking. The business model is simply broken. So look for more M&A this year. And China has the need and, of course, plenty of money.

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