Fears for Chinese Semiconductor Capital Equipment and Chemical Supply Chain Are Overblown | Cautionary Tale On Trusting Industry Analysts

China has been pumping money into the semiconductor industry like mad with subsidized loans, equity, subsidized construction costs, and tax advantages. These subsidies and investments have totaled about $200B since 2014 according to the CCP backed China Securities Journal. In addition, there are no import taxes or income taxes for 10 years for >28nm technology, and 15 years for those working on 28nm or more advanced technology. This massive flow of cash and mandates like Made in China 2025 have led to the pop up of semiconductor companies from all angles of the ecosystem.

IP and fabless firms are doing fine despite some overvalued firms, there are a handful of successful firms who have carved out a niche. Foundries, equipment, and chemical suppliers have boomed disproportionately. There have been a few high-profile failures in the foundry space such as HSMC and CXMT, but the equipment and chemical space have not seen this happen yet. The firms here have been bid up to the moon erroneously.

With all this hype, there has been fears in chemical suppliers, sub-equipment suppliers, and even some of the semiconductor capital equipment players. These fears of China coming into the market and subsidizing their way into a market position have concerned many investors outside of China. There are Chinese equivalents for all major semiconductor capital equipment firms.

As a quick primer, we will run down some of the biggest name as there are nearly 70 firms on the Shanghai Star related to chip making.

Shanhai Micro Electronics Equipment is perhaps the most hyped firm out there due to their role as a lithography tool maker. They have 0 successful tools and even their claimed technology is 20 years back. They have a long way to go before they should be taken seriously.

ACM Research (ACMR) is perhaps the most successful firm because they operate in wafer cleaning, a market with a lower barrier to entry.

Advanced Micro-Fabrication Equipment (AMEC) operates in etch mostly, and they haven’t had too much success either. Additionally, they have also been engrossed in some alleged accounting scandals.

Naura Technology Group claims to operate in Etch, Chemical Vapor Deposition (CVD), and Physical Vapor Deposition (CVD). Their success here is quite limited.

Kingstone Semiconductor operates in ion implantation. As far as semiconductors, they have had little to no success, but their products do sell to the massive Chinese solar market. We do not have the expertise to evaluate the solar business, but from our research, it seems legitimate.

Shangyang Piotech, Hwatsing Technology, and Sizone Technology operate in Physical Vapor Deposition (PVD) and Chemical Mechanical Planarization (CMP). SemiAnalysis has investigated and found that CMP is the only area where they have a usable product.

In chemicals and other usable materials, there is a lot more claimed success. These firms have sky high valuations. Anji Microelectronics is one of those firms. They manufacture 2 critical liquid chemicals, CMP slurry and photoresist. CMP slurry is the chemical used when thinning wafers or polishing them. In the simplest terms, CMP tool can be thought of as a circular buffing tool that spins very fast. The slurry is like a a lubrication and the grit of the sandpaper. Photoresist is put on the wafer and blocks the photolithography tools light in certain parts of the wafer. Check out our article on the Lam Research’s dry deposit and resist innovation for more details on photoresist.

According to data from mainland experts, the total market cap of China’s A-shares and photoresist-related companies has reached nearly $88B. China’s photoresist is entirely imported. For reference, the two Japanese firms that dominate this market and are valued at roughly $10B. The two firms, JSR Corporation (4185) and Tokyo Ohka Kogyo (TOK) (4186) control roughly 75% of the photo-resist market as well as a wide array of other chemical related businesses. SK Materials, a South Korean firm, is also entering the photoresist market. This is because of a trade spat between Japan and South Korea that involved the weaponization of the Japanese dominance in this sector.

Photoresist may sound like a simple chemical, but any contamination can lead to critical losses. TSMC posted a $550M loss in 2019 on the 16nm and 12nm nodes due to an issue related to photoresist.

Recently on a social media forum, Yang, a photoresist expert and department head of SMIC got into a battle with one of the leading China chip analysts, Chen Hang, the chief analyst of Founder Securities Electronics. Analysts tend to believe company hype too much and miss the actual technology usage and trends.

The battle started with Chen Hang talking up Chinese photoresist, but Yang quickly put him down by correctly stating it is unusable. Given he is the subject matter expert, we are going to side with him. It got pretty heated with statements such as “How old are you?”, “You know too little", and "You go and ask all the domestic lithography workers, I dare not say that" being thrown around.

This is a cautionary tale. We at SemiAnalysis pride ourselves on being very close to the nitty gritty details but have fallen prey to this as well. Company statements and market research only go so far. The ultimate tool for discovery is talking to technology experts and channel checks. The second-best tool is talking to us, because we do that work.

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This article was originally published on SemiAnalysis on August 3rd 2021.

Clients and employees of SemiAnalysis may hold positions in companies referenced in this article.