YMTC's new 128-layer chip. Photo: YMTC

Amid the extreme reactions generated by China’s economic success and the Made in China 2025 industrial policy targets, a look at the facts is in order. A good place to start is the semiconductor industry.

At the beginning of January, semiconductor market research company IC Insights forecast that semiconductors made in China would account for a bit under 20% of semiconductors sold in China in 2025, far below the Chinese government’s 70% target.

In 2020, IC Insights estimates that $22.7 billion worth of semiconductors made in China accounted for 16% of the total Chinese market of $143.4 billion. The Chinese market in turn accounted for an estimated 36% of the $395.7 billion global market.

But Chinese companies accounted for only $8.3 billion, or 37%, of China’s IC output, the rest being produced by the local silicon wafer fabs (semiconductor factories) of TSMC, Samsung, SK Hynix, Intel and other foreign companies. That was just 6% of China’s IC market and only 2% of the global market.

The total value of semiconductor production by Chinese companies in 2020 was less than that of AMD, which ranked 15th in the industry with estimated sales of $9.5 billion. The sales of the top three companies – Intel, Samsung and TSMC – are estimated to have been $73.9 billion, $60.5 billion and $45.4 billion, respectively.

On the other hand, the value of semiconductors made in China has risen 3.9 times since 2010 and is forecast to increase another 1.9 times to $43.2 billion in 2025. According to IC Insights, this would be at least 7.5% of the global market. And it won’t stop there.

Depending on the expansion of foreign companies’ production capacity in China, the share accounted for by Chinese companies may or may not increase. Both Samsung and SK Hynix are likely to make substantial new investments in China.

What is clear is that China faces competition from a massive surge in investment by two of the world’s top three semiconductor makers, Samsung Electronics of South Korea and TSMC of Taiwan. They are also the two with the most advanced processing technology.

On January 9, Japan’s Nikkei newspaper reported that Samsung Electronics may invest more than $30 billion in its memory and logic semiconductor businesses in 2021: Chipmaking equipment manufacturers say the company has provided order plans for 2021 that point to a further 20% to 30% increase in spending.”

On January 14, it was reported that leading semiconductor foundry TSMC plans capital spending of between $25 billion and $28 billion this year, an increase of 45% to 63%. It is widely expected but not yet confirmed that some of this investment will be in anticipation of outsourcing from Intel.

The Information Network, a market research company focused on microelectronics, predicts that investments in new [semiconductor] fabs or capacity expansion will exceed US$160bn in China over the coming 5-7 years; we expect this will drive an increase in China’s equipment spending to more $40 billion in 2025.”

In other words, China’s total semiconductor investments in 2025 may be less than Samsung and TSMC’s combined investments in 2021. But China may respond by stepping up the pace.

As for spending on wafer fab equipment alone (not counting the cost of new factory buildings and related facilities), SEMI, the global semiconductor equipment and materials industry association, calculates that China accounted for 26% of the total in 2020, compared with 24% for Taiwan and 23% for South Korea. China’s share has doubled over the past five years.

In this context, keep an eye on Yangtze Memory Technologies Company (YMTC), China’s homegrown maker of NAND flash memory. (NAND stands for NOT-AND; it is a logic gate which produces an output which is false only if all its inputs are true.) YMTC is investing more than $20 billion in its fab in Wuhan. It aims to double 300mm wafer processing capacity to 100,000 per month by the end of this year.

If and when yields reach an acceptable level, this could give the company a market share of more than 5%. But the yield on its new 128-layer chips, mass production of which began late last year, is reported to be only 70%. They are almost certainly losing money.

That having been said, yields should improve with time and YMTC’s production capacity should eventually double again, or triple. This would add a significant new competitor to the current oligopoly consisting of Samsung; SK Hynix (which is buying Intel’s NAND flash business); the joint venture between Kioxia (formerly Toshiba) and Western Digital; and Micron.

According to market research company TrendForce, these companies’ shares of the NAND flash market in 3Q of 2020 were Kioxia/Western Digital 36%, Samsung 33%, SK Hynix/Intel 19%, Micron 11% and YMTC 1%.

NAND flash is a commodity used in cell phones, memory cards, USB flash drives, solid state drives (SSDs) and other products. More competition means lower prices and more innovation. What’s not to like?

Don’t ask Mike Pompeo or Peter Navarro – they will be gone soon anyway. Instead, consider the impact of a new and fast-growing competitor in China, where most of YMTC’s products are likely to be sold. A competitor focused on market share, not the maximization of profit.

Customers will like this. YMTC’s competitors will not. Weaker pricing in China will affect pricing and profitability elsewhere. Kioxia, a relatively low-margin business that was forced to postpone its IPO last September, seems particularly vulnerable. But a lot can happen in the two to three years it is likely to take for YMTC to have a significant impact on the market.

YMTC was spun off from the Tsinghua Unigroup in 2016 after two years of NAND flash development work (Tsinghua Unigroup maintains a controlling stake of 51%). It introduced its unique Xtacking® architecture and began mass production of China’s first 3D NAND flash memory in 2018. This year it should begin trial production of 192-layer chips, which could close the technology gap (although not the economies-of-scale gap) with its more experienced rivals.

YMTC products are made by its subsidiary XMC, which previously made NOR flash chips for Spansion, the former AMD-Fujitsu joint venture that is now part of Cypress Semiconductor. This is the background to the statement on YMTC’s website that its success “is the result of combining independent R&D and international cooperation.”

Like other Chinese semiconductor makers, XMC makes chips using equipment that is supplied almost entirely by American, European and Japanese companies. It is a good customer and should remain so if its capital spending plans are not hamstrung by its parent company’s financial problems. These include negative free cash flow and bond defaults.

After failing to make a $200 million debt repayment last November, Tsinghua Unigroup suspended the construction of a DRAM fab in Chongqing and a separate NAND flash memory project in Chengdu. As Electronics Weekly points out: Of China’s big fab initiatives, only two remain in play: Yangtze Memory for NAND and ChangXin Memory For DRAM.

Then there is SMIC, the largest Chinese-owned semiconductor foundry, which the U.S. sanctioned as part of its effort to stifle Huawei. For SMIC to catch up with TSMC now looks like nearly impossible. YMTC also supplies Huawei, but so far seems to have escaped the attention of America’s global economic police. 

In his essay How America Can Shore Up Asian Order, published in the January 12 issue of Foreign Affairs, Kurt Campbell wrote that “… it is neither practical nor profitable to exclude Beijing from Asia’s vibrant future.” As President-elect Joe Biden’s incoming coordinator for Indo-Pacific affairs, Mr. Campbell was presumably telegraphing a shift to constructive engagement in Washington, DC.

In any case, China’s semiconductor industry is nowhere near being a major competitor in the global market, let alone an existential threat to the international order and the American way of life. Constructive engagement in the areas of IP protection and market access is definitely called for, but U.S. policy makers might better focus on rebuilding their own country rather than trying to keep other countries down.

SEMI data also shows that North America accounted for only 9% of semiconductor wafer fab equipment spending in 2020, compared with 87% for Asia as a whole. The North American figure will probably recover a bit this year and next with the construction of two new factories in the US – one by TSMC in Arizona and one by Samsung in Texas.

Scott Foster is an analyst with Lightstream Research, Tokyo.