(Money) Made In China - Semiconductors Part 1

Chips Are The New Oil

(This report should have arrived to you by the end of June, while I was on holiday. Unfortunately, issues with hardware and security have blocked me from working during my trip to visit family.

So this report is a bit late, my apologies.

July will see 2 reports to compensate for the delayed June report)

The Last Missing Industry

As discussed in the previous report, the new strategy for economic growth of the CPC is based on an industrial push into innovation and new technology.

The whole with a focus on the so-called 4th industrial revolution, which relies on the mass adoption of robotics and automation, as well as embraces the (eventual) productivity gain from digitalization, IoT (Internet of Things), and AI.

None of these can happen without a very solid supply of semiconductors. So for decades, the Chinese government has been hard at work to create a semiconductor industry.

As this is a complex topic, it had to fit into a report of its own.

Semiconductors

Creating an entire domestic supply chain for semiconductors is a big deal for China.

Actually, it is probably bigger than all the other sectors, as none of the planes, high-speed trains, renewables, nuclear plants, etc. can be built without a supply of chips and simple semiconductors.

The rest of its industry is equally dependent, both domestic and export, with China consuming half of the world's semiconductors.

Semiconductors can be roughly divided into 2 segments:

• Legacy: the larger type of chips and memory, built with older technology. Think about the type of electronics you had in PCs 5-7 years ago or the ones you will find in appliances, military equipment, low-cost electronic gadgets, etc.

• Edge: the most advanced chip allowed by our current technology. That’s the chips, memory, antennas, etc. found in the latest smartphones, top-of-the-line data centers, AI applications, etc.

Legacy Semiconductors

This is the bulk of semiconductors consumed in the world, going into virtually everything built and assembled today, from washing machines and alarm clocks to printers and most cars.

While a lot less glamorous, this is actually the most strategic segment.

Most missiles, nuclear plants, and other strategic components rely on tried-and-tested designs, with high reliability and relatively low cost.

China seems to target the domination of this segment.

It is also “flooding the market” with older chip types, the ones not useful for AI or smartphones, but everywhere in missiles, cars, washing machines, robots, etc. with pure-play foundries like SMIC at the forefront.

“U.S. nervous about 'flood' of older-generation chips from China” - Nikkei Asia

In the 50- to 180-nm range, China currently controls around 30% and within a decade could control around 46% of global capacity.

"Legacy chips underpin everything from dishwashers to military weapons systems," Hogan wrote. "Just as it did with solar, China could box out foreign competitors through dumping, rendering the United States -- and the rest of the world -- dependent on China for mature chips."

Edge Semiconductors

The most advanced chips are often considered in the 7nm and smaller range. Currently, 5nm is mostly the sole domain of TSMC and 3nm is in the view.

Until recently, this scale of precision seemed out of reach for Chinese manufacturers.

And an endless stream of sanctions was designed to keep it this way.

For a bit more background on the efforts by China to develop its semiconductor industry since the 1960s, I warmly recommend Asianometry’s latest video (Asianometry author is a friend and a true reference when it comes to anything semiconductors related):

Catching The Bleeding Edge Of Semiconductors

At the forefront of the efforts to make domestic 7nm chips have been Huawei (privately owned by its own employees, so no stock recommendation here).

The key partner for Huawei has been SMIC (Semiconductor Manufacturing International Corporation), in a complex saga described in this article from Ars Technica.

To resume it shortly, SMIC managed to use less advanced DUV machines to engrave chips instead of the sanctioned EUV machines from Dutch ASML.

However, this came at the cost of efficiency, with production costs of 7nm chips much higher.

So let’s talk about SMIC first.