At the end of each year, outlook and views on the development of the global and China’s semiconductor industry in the coming year are put forward without data support—and this year is no exception. For most semiconductor companies worldwide, the soon-to-end 2019 has been a tough year: the industry as a whole has lingered at a low level, while major application markets such as AI and automotive, which thrived in the previous two years, have become sluggish. Coupled with the escalating China-US trade frictions, the Trump administration has begun to adjust its science and technology strategy toward China in depth, and forcing “technological decoupling” between China and the US has become one of the key policy options—this has also directly affected the prosperity of the semiconductor industry, which is characterized by “rational division of labor in the global value chain and each playing to its comparative advantages”. The global semiconductor industry showed starkly different trends in 2018 and 2019, with regional markets also experiencing highly differentiated performances. However, based on many data indicators in the third and fourth quarters so far, the overall development of the semiconductor industry in 2020 is expected to be more optimistic. Below is an outlook and prediction:
(I) Global Prosperity to Recover, but US Semiconductor Companies Will Find It Hard to Avoid Decline.
After the entire industry experienced a severe recession in the first half of 2019, it has moved toward steady recovery and growth since the third quarter: memory prices have stabilized, capacity utilization rates in foundry and packaging/testing have increased significantly, and various data of major leading companies have continued to rebound month-on-month. From the downstream perspective, this state has certain sustainability—thus, the signal of a recovery in the global semiconductor industry’s prosperity in 2020 is very obvious. However, from a regional perspective, the subsequent development of the US market may not be optimistic. According to regional market data released by WSTS, the demand for semiconductors in the US market fell the most sharply by 26.7% in 2019. Moreover, US companies hold a 47.5% share in China’s $158.4 billion semiconductor market and a 48.7% share in the $124.5 billion market of other Asia-Pacific regions. Given the uncertainties in the US regarding trade frictions and export restrictions on high-tech products to China in the coming year, US semiconductor companies may not be able to reverse the 2019 decline and benefit from the industry-wide recovery.
(II) 5G and automotive applications are the largest driving forces for the global semiconductor industry, as well as the most innovation-active application markets.
5G delivered a large volume of orders to the global semiconductor market as scheduled in 2019, which boosted the gradual recovery in the second half of the year to a certain extent. As large-scale mass production has not yet been achieved, the penetration rate of various 5G terminal devices remains at a low level, and various 5G applications have not been fully explored. Therefore, the semiconductor industry will continue to benefit from the ramp-up of innovations across the entire 5G industrial chain in 2020 and even in the next three to five years. Besides 5G, automotive semiconductors have maintained the fastest growth among all application segments in recent years, and this trend will continue in 2020. The development trends of safety, connectivity, intelligence and energy efficiency have gradually shifted the automotive value chain from a mechanical and powertrain structure to an electronic information system. This value chain restructuring has continued to bring forth new players in the automotive semiconductor sector. At present, autonomous driving and full vehicle electrification are the two mainstream applications driving the automotive semiconductor segment, and automotive-grade sensors, automotive intelligent computing and communications, as well as power semiconductors, will demonstrate a high level of innovation activity in 2020.
(III) The window period for large-scale semiconductor mergers and acquisitions (M&A) has passed. U.S. semiconductor enterprises are seeking mutual support in adversity, while Japanese and European players are stepping up technology and product exports to China.
In 2019, international regulatory authorities including the Committee on Foreign Investment in the United States (CFIUS) intensified their scrutiny of cross-border transactions. As a sensitive industry involving national security, the semiconductor sector naturally attracted heightened special attention. As a result, semiconductor acquisitions have become increasingly challenging, and large-scale semiconductor mergers and acquisitions (M&A) are unlikely to take place again in the future. Instead, industry consolidation will be more reflected in vertical integration across niche segments.
U.S. enterprises are likely to continue facing export restrictions stemming from trade frictions in 2020. U.S. semiconductor companies with a high degree of reliance on the Chinese market may opt to consolidate their businesses via a pattern of mutual support in adversity in certain niche business lines. Confronted with barriers in international M&A transactions, semiconductor enterprises in mainland China have also shifted their focus to the domestic market.
In the first eight months of 2019, there were 20 international M&A deals (including signed agreements) in the semiconductor industry, with a total value of approximately USD 28 billion, none of which involved mainland China. However, driven by the tangible demand in mainland China for automotive semiconductors, industrial control electronics, equipment components and materials in 2020, exchanges between mainland Chinese capital and enterprises with their Japanese and European counterparts will gradually increase. In certain sectors, Japan and Europe will replace the United States to undertake the core element export of their industrial systems to China.
(IV) The pace of Moore’s Law has slowed down, and the semiconductor industry has entered an era of heterogeneous integration.
While Moore’s Law continues to advance toward the 5nm, 3nm and 1nm process nodes, fewer and fewer industry players are able to keep pace with this roadmap of further scaling at present. The industry has also begun to pay greater attention to heterogeneous integration, including the recently highly sought-after Chiplet technologies – such as DARPA’s CHIPS Program, Marvell’s MoChi, Intel’s EMIB and Foveros – as well as silicon photonics and Micro LED. All of these are typical application cases of heterogeneous integration and consolidation in the semiconductor sector.
The concept of such heterogeneous integration originated from Multi-Chip Module (MCM), which emerged in the 1970s. It is particularly well suited to today’s fragmented market demands, enabling rapid product development and reducing chip implementation costs. Meanwhile, heterogeneous integration can also be combined with new materials to break through the physical limitations of silicon, and further extend silicon-based applications to a diverse range of fields.
It is expected that more heterogeneous ecosystems will emerge after 2020. New product form factors, new designs of data computing architectures and the integration of new materials are guiding the industry to explore entirely new possibilities in chip architecture, computing efficiency and load functions. The future will be an era where heterogeneity truly shines.
(V) Domestic substitution driven by trade frictions remains the core theme for the development of China’s semiconductor industry.
The Huawei incident in 2019 has accelerated the reshaping of the semiconductor supply chain ecosystem, which can be said to have presented a rare historic opportunity for the full domestic semiconductor industrial chain in China. Under the impact of the Huawei incident, many leading domestic system-level manufacturers across various sectors have also accelerated the domestication and adoption of local semiconductor products. Coupled with Japan’s imposition of sanctions on South Korea’s semiconductor materials sector within the year, the principle of “efficiency first” that has underpinned the globalization of the semiconductor industry chain for 30 years has been challenged. At present, the global semiconductor supply chain is increasingly guided by the core principle of “security and controllability”.
Therefore, even though China’s semiconductor industry has repeatedly emphasized its commitment to openness and cooperation, the industry players themselves have become jittery and risk-averse. In 2020, domestic substitution will continue to serve as the core theme for the development of China’s semiconductor industry. Moreover, the leading enterprises driving domestic substitution are likely to expand from Huawei to a broader range of domestic system manufacturers. The products realizing such substitution will also upgrade from mid-to-low end varieties to more strategic, general-purpose and high-volume high-end products, including memory, analog and RF semiconductors.
It has become an irresistible trend to accelerate the establishment of a complete, independent domestic semiconductor industrial system with core proprietary technologies. In 2020, the pace of domestic substitution will also be expedited for domestic semiconductor foundry, packaging, testing, as well as supporting equipment and materials.
(VI) The semi-monopolistic industrial markets with Chinese characteristics will serve as a touchstone for the high-quality upgrading of China’s domestic semiconductor industry.
Certain industrial markets in mainland China exhibit partially monopolistic characteristics, owing to their specific technical and economic attributes, resource scarcity or relevance to national security – such as high-speed rail, smart grids, the BeiDou Navigation Satellite System, ultra-high definition video and security monitoring.
As is universally acknowledged, the survival and success of the semiconductor industry ultimately rely on shipment volumes. These semi-monopolistic industrial markets with Chinese characteristics are well-endowed with a solid shipment volume base, and also feature a multi-tier industrial chain spanning from systems and software down to chips, coupled with a certain degree of discourse power in product definition. For this reason, they serve as an excellent touchstone market for domestic chips to pursue import substitution and build independent ecosystems.
Under the impact of the Huawei incident, system manufacturers in these semi-monopolistic industrial markets are expected to comprehensively advance institutional and systemic breakthroughs in 2020, and further expand their cooperation with domestic chip suppliers.
(VII) China will continue to increase investment and integration in advanced manufacturing processes, and IDM models will emerge in niche segments.
At present, the landscape of advanced process foundry has evolved into a dual hegemony between Samsung and TSMC, with only SMIC from the second tier keeping pace. UMC and GlobalFoundries have essentially abandoned their investment in the most advanced process nodes, with their primary focus on boosting capacity utilization rates. It is therefore foreseeable that there will be no major changes to the overall regional structure of the global foundry industry in 2020, and greater attention should be paid to the consolidation of China’s domestic foundry sector.
Currently, the capacity gap for mature manufacturing processes above 28nm in China stands at 350,000 wafers per month (12-inch equivalent), which is higher than the gap of 300,000 wafers per month for processes at and below 28nm. Nevertheless, there are as many as 16 under-construction and completed production lines for mature nodes, more than half of which are scheduled for production ramp-up in 2019 and 2020. As a result, the domestic capacity for mature semiconductor processes will see substantial expansion in the next two years, accompanied by intense market competition.
With the launch of the second phase of the National Integrated Circuit Industry Investment Fund, the country’s top-level planning and guidance for the semiconductor manufacturing sector are bound to be strengthened. Moreover, integration toward IDM or virtual IDM models will take shape around niche product segments such as analog (RF) semiconductors and sensors.
(VIII) China’s memory semiconductor sector ushers in its most critical year, with continued consolidation and uncertainties remaining in the DRAM segment.
Memory chip prices remained sluggish throughout 2019, prompting several major manufacturers to cut production and postpone equipment investment. Driven by robust downstream demand in 2020, both DRAM and NAND flash will gradually return to a trajectory of steady development, with supply and demand maintaining a relatively balanced relationship.
What draws particular attention is the domestic memory semiconductor segment in China. Both Yangtze Memory Technologies (YMTC) with its 3D NAND flash and CXMT with its DRAM products will enter a phase of capacity ramp-up and large-scale volume production in 2020. Although their planned production capacity accounts for no more than approximately 3% of the global total, coupled with optimistic expectations of price hikes in the coming year, domestic memory chips will not reshape the global memory semiconductor landscape in the short term.
Nevertheless, large-scale volume production also means exposure to rigorous market scrutiny, price competition, ensuing patent disputes and the ongoing capacity for sustained capital investment. For this reason, China’s memory semiconductor industry is truly facing a pivotal critical test in 2020. It is anticipated that the second phase of the National Integrated Circuit Industry Investment Fund will continue to ramp up investment in the memory sector, and the national strategic layout for DRAM will be further clarified in 2020 as a result.
(IX) The STAR Market is fueling intense competition across all segments of the integrated circuit industry, with leading enterprises taking the lead in reshuffling the niche tracks.
The launch of the STAR Market has made the semiconductor industry the most favored sector in China’s domestic capital market in 2019, and also driven the market capitalization of semiconductor enterprises listed on the main board to hit record highs repeatedly. The primary market has further benefited significantly from the profit-making effect of the STAR Market, with numerous VC/PE institutions realizing substantial paper gains on their investments thanks to the accelerated pace of IPOs on the STAR Market.
On the other hand, the introduction of the STAR Market will also help accelerate the emergence of leading enterprises in semiconductor niche segments. At present, driven by capital inflows, an overcrowding phenomenon has already emerged in sectors including Bluetooth/WiFi, RF PA, analog (power management IC), VCSEL, memory controller chips and AI chips – where both startup projects and capital allocations have become excessively concentrated. In the next two to three years, however, the STAR Market will expedite the survival of the fittest among incumbent players in these crowded niche tracks. The leading forces formed by enterprises listed on both the STAR Market and the main board will take the lead in reshuffling these semiconductor niche segments.
(X) The second phase of the National IC Industry Investment Fund has an expanded shareholder base compared with the first phase, and will collaborate with local governments nationwide to bolster leading semiconductor projects.
The second phase of the National IC Industry Investment Fund will officially launch an investment-intensive model in 2020. In terms of investment proportion and capital scale, nearly half of its capital is expected to continue to be allocated to semiconductor manufacturing sectors including foundry and memory chips.
In the chip design segment, the Fund will focus more on the high-end general-purpose chip areas that constitute genuine bottleneck technologies for China, such as EDA, FPGA and processors. Meanwhile, it will pay greater attention to the ecosystems established at the downstream application end, aiming to drive the development of the chip design industry through the traction of downstream application ecosystems.
The Fund’s second phase will also step up investment in upstream sectors such as semiconductor equipment and materials, as well as IDM projects in certain integrated circuit segments. Additionally, it is noteworthy that the shareholder base of the Fund’s second phase has expanded from 16 to 27 shareholders compared with the first phase. A notable shift has also occurred: whereas the first phase was predominantly funded by central state-owned enterprises, the second phase is mainly backed by local government investment platforms. All regions in mainland China with relatively concentrated and mature integrated circuit industries have participated in the Fund’s second phase.
It is therefore foreseeable that the second phase of the National IC Industry Investment Fund will give fuller play to its role in industrial guidance and orderly consolidation, and collaborate with local governments to invest in benchmark leading semiconductor projects in their respective jurisdictions. As a result, competition among regional governments for major semiconductor projects will continue unabated in the coming year.
Overall, the global semiconductor industry will fare better in 2020 than it did in 2019. Although there remain considerable uncertainties that the technological decoupling between China and the United States is evolving into a new normal, the globalization characteristics of the semiconductor industry will not be completely altered even if they are impacted by this trend. For China’s domestic semiconductor industry, this situation presents both challenges and opportunities. As a timeless Chinese adage goes: Sharp blades are tempered through grinding, and plum blossoms exude fragrance after enduring bitter cold. Whether it is for domestic substitution or for delivering value to the global market, this is a protracted battle. Only by constantly forging ahead and strengthening its own capabilities can the industry seize opportunities and keep pace with this era—an era that is both the best of times and the most turbulent.
Source of Information: Yejibang Performance Ranking (http://www.yejibang.com)
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