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Semiconductors

China's progress in advanced semiconductor technology slows

Struggle of chip equipment makers indicates difficulty in becoming self-sufficient

China is hoping to be able to produce 70% of the semiconductors it needs by 2025, as it tries to cut reliance on overseas manufacturers.   © Reuters

SHANGHAI -- China is facing delays in miniaturizing semiconductors. In a Nikkei survey, most of the seven major Chinese semiconductor manufacturing equipment makers that responded said their mainstay products were those for making 14 nanometer to 28 nm chips, which are two or three generations behind the world's advanced chips. Some said even older generation machines were their main products.

Many of the respondents said U.S. sanctions against China had hindered their procurement of parts and materials from abroad. They also said using domestic parts and materials in place of items from overseas had resulted in lower yield rates.

"Our mainstay lithography machines are 90 nanometer models. Our 28 nm and 14 nm models have room for improvement in terms of yield rates," said an engineer from Shanghai Micro Electronics Equipment, which is almost the sole Chinese semiconductor equipment maker that has come to commercialize lithography machines. Although lithography machines are the most difficult to produce, ASML, the world's largest lithography machine maker based in the Netherlands, is expected to commercialize models which can be used for 3 nm and 2 nm products.

The interview-based survey was conducted at Semicon China 2021, a semiconductor manufacturing equipment exhibition held in Shanghai in March. Nikkei approached more than 20 manufacturers from mainland China and covered only the companies that made concrete replies.

Remarkably, the respondents frankly admitted to the delayed miniaturization of semiconductors. A researcher at Advanced Micro-Fabrication Equipment (AMEC), which has an edge in etching systems, said, "We are supplying machines for 5 nm, but we sell mostly [those] for 14 nm and 28 nm."

AMEC is one of the companies that became the first to list on the STAR Market, a stock market opened in Shanghai. The market was established in accordance with Beijing's ambition for self-sufficiency in strategic sectors such as semiconductors. AMEC posted sales of 2.2bn yuan ($340m) for the fiscal year through December 2020, making it a major semiconductor equipment maker in China, and is also ahead of other Chinese companies in miniaturization technology.

Beijing E-Town Semiconductor Technology Co., another etching system maker, produced mainly 40 nm systems and some 28 nm systems, a company official said. As China is aiming to increase the proportion of domestically produced semiconductors as a state policy, "there is strong demand even for near-general-purpose semiconductor equipment," the official said.

In the survey, Nikkei obtained replies from seven companies, including NAURA and Kingsemi as well as the three above-mentioned companies. Only AMEC has succeeded in developing a product for 5 nm cutting-edge technology, and all the other companies said they were producing 14 nm or older generation products. As a reason, many said they were placing higher priority on substituting microchips produced in China for those produced abroad.

"Semiconductors are not used only in smartphones. There is demand also for 120 nm chips," an official from Hangzhou Changchuan Technology said.

The world is experiencing an unprecedented shortage of semiconductors. This is not only because demand for chips used in servers and personal computers has rapidly increased as telework has spread amid the COVID-19 pandemic. A cold snap in Texas in the U.S., water shortages in Taiwan and fires at semiconductor plants have disrupted the supply of microchips. Most forecasters expect it will take at least a year for the supply-demand conditions in the semiconductor market to return to normal. In the current situation, Chinese semiconductor equipment makers have to increase production quickly.

For China, however, a bigger reason for the semiconductor shortage is U.S.-led sanctions against the country.

"When we are unable to obtain only one core part, our product development will suffer a great negative impact," the engineer at SMEE said. "Since it has become clear over the past several years that it is difficult to introduce technology from abroad, we will have to find solutions through our own efforts," a Kingsemi official said.

Semiconductor Manufacturing International Co., China's largest foundry company, is facing headwinds due to US sanctions. (Photo courtesy of SMIC)

The shortages of semiconductor parts, materials and manufacturing equipment have also influenced the performance of foundries, or contract semiconductor producers. At Semiconductor Manufacturing International Co., the largest foundry company in China, 14 nm and 28 nm chips accounted for 5.0% of its sales in the October-December period of 2020. The percentage had fallen sharply from 14.6% in July-September. The semiconductor industry appears to have felt the strongest impact of U.S. sanctions.

U.S. research firm IC Insights in January predicted that China's self-sufficiency ratio for semiconductors would be only 19.4% in 2025. This was a slight downward correction after the firm in 2020 predicted the ratio would rise to 20.7% by 2024. It also noted that over half of the ratio was accounted for by mainland China units of overseas manufacturers, such as Taiwan Semiconductor Manufacturing (TSMC), and South Korea's SK Hynix and Samsung Electronics, with the self-sufficiency ratio that involves only Chinese manufacturers estimated at around 10%.

China's government under Xi had put large amounts of subsidies into semiconductor projects across the country until 2020, but the results of the funding were limited, with many projects failing. The government now seldom mentions the 70% self-sufficiency target laid out in its Made in China 2025 industrial policy. It will not be easy for the country's semiconductor industry to recover from having been its Achilles heel.

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