start living with US sanctions · TechNode
One of the bright spots when it comes to China’s semiconductor industry is its design capabilities. Yes, these companies mostly rely on US design tools, and when designing leading-edge designs, need to use foreign fabs such as TSMC and Samsung, but from a pure design point of view, there is some very skilled talent in China. It’s good enough to get sanctioned at least, with notable examples being Biren Tech and YMTC.
So, how was 2022 for China’s chip design industry then? Is it growing? What problems does it face?
The 2022 Numbers
Last year, 433 new chip design companies were established, bringing the total in China to 3,243, an increase of 15.4%, but the first growth rate drop in four years. Surprisingly, despite talk of companies struggling and sometimes failing, the total number of design companies continues to grow.
Total sales have also increased to roughly RMB 534.6 billion (USD 79 billion). Despite this, given the increase in the number of companies, this works out at sales of around RMB 165 million (USD 24 million) per company, the same as in 2021.
The Yangtze River Delta still accounts for over 50% of design industry revenue but central and western China, despite still only accounting for 15% of revenue, is growing at 49%. Cities like Wuhan, Xi’an, and Chengdu are playing ever more important roles in the industry as they have good universities and lower labor costs. It’s more cost-effective for a lot of these new companies to set up there, compared with the east coast.
Most of these design companies are very small though. Only 566 of them have revenues over RMB 100 million (USD 15 million). In fact, the total revenue of these 566 companies reached RMB 494 billion, meaning they account for roughly 92% of industry revenue with only 8% or RMB 41 billion remaining for the other 2,677 companies, leaving approximately RMB 1.5 million (USD 224,000) each. Suffice to say, the majority of semiconductor design firms in China are making close to zero revenue, have less than 100 employees, and are likely relying on venture capital and government money to survive.
In 2022, we continued to see design firms look to the stock market to raise capital. In total 25 such firms listed publicly, with a combined value of RMB 472 billion.
Overall, the year was a mixed bag, but from a macro perspective at least, Chinese firms are doing a bit better than I expected. However, consolidation would be preferable to having a large number of small firms.
Despite COVID-19 and sanctions, officially at least the Chinese design industry continues to grow. In some cases, sanctions have helped firms. Losing access to foreign technology means some Chinese design firms must either find ways around sanctions or buy local. The same can be said of their customers who now may buy local designs to have a more secure supply chain. Of course, it isn’t all rosy in this regard. Just recently, we saw Biren Tech lay off workers and simplify its product to survive. YMTC laid off 10% of its workforce directly due to the sanctions placed upon it. Being forced to buy local, either through necessity or because of orders from on high, can result in a worse end product, slower TTM, more bugs, or lower yields. There are silver linings for certain firms, but overall I’d say Chinese companies would prefer it if there were no sanctions.
Most of China’s chip companies and their revenues still come from the consumer electronics chips sector as well as from telecommunications. Many of these are simpler chips that are designed for mature process nodes. The problem China’s industry needs to overcome is how to move up the chip value chain while avoiding sanctions. At this moment, the design capability is there, but why should companies like Biren Tech bother designing for the leading-edge if they are still going to lose access to TSMC or Samsung? That would entail doing a lot of design work with no way to manufacture it. Recently, a now-blocked article written by a China industry veteran went viral in China. It outlined how China will take until 2030 at the earliest to be competitive at even 28nm for lithography, etching, deposition, and other semiconductor manufacturing equipment. The author also concluded that it would take until 2053 to fully catch up, admitting this was a conservative estimate.
This is the crux of the problem now for Chinese design firms and the Chinese government. They are fully capable of designing powerful high-end chips, but if they risk losing access to the ability to manufacture a design after spending millions creating it, why go to all the effort? On the other hand, if Chinese firms stop perusing such designs altogether, the talent will either go elsewhere or be used to work on things that can actually go to market. China needs to somehow find a way to continue funding such projects to maintain its high-level design capabilities despite being aware that there is a high likelihood of zero returns on investment, while simultaneously looking to find ways to speed up its equipment R&D. This is easier said than done, and in my opinion impossible to achieve during this decade, especially since its own equipment firms are sanctioned, corruption is common, big-fund bosses are under investigation, and private firms are unlikely to continue working on designs without the promise of returns.
Recent joint sanctions from the US, Japan, and the Netherlands only serve to exacerbate and compound the problem. While previous sanctions mainly affected firms working at 14nm and below, and focused on US equipment, new sanctions mean China loses access to Dutch and Japanese equipment that could affect China’s fab expansion for mature nodes. Some DUV machines from companies like ASML and Tokyo Electron are to be banned because they can still be used to create 7nm or even 5nm designs. If this were to be expanded to all DUV machines, it would affect mature node fab expansion in China as well and affect China’s ability to be self-sufficient even when it comes to simpler mature node designs. It will be interesting to see how far these bans go and how well they are enforced. China’s response so far has been rather tame compared to years gone by. The coming year and the rest of the decade will be an interesting watch. Personally, I can’t see any easy route out of this for China in the current climate.