Despite the U.S. export control measures on semiconductor equipment, including those from the Netherlands-based ASML, a major player in advanced manufacturing tools, recent financial reports have contrastingly indicate a doubling of the revenue share from the Chinese market?

On January 24, ASML, a leading provider of photolithography equipment, released its latest financial results for the fourth quarter and the full year of 2023. In Q4 2023, the revenue reached EUR 5.683 billion, with China accounting for 39% of ASML’s total revenue. 

Source: ASML

Although slightly lower than the 46% in Q3, the annual perspective for 2023 reveals that China contributed to 29% of ASML’s revenue for the year. This marks a significant increase compared to the 14% revenue share from China in 2022, indicating a direct doubling of ASML’s revenue share in the Chinese market.

Source: ASML

ASML’s Chief Financial Officer, Roger Dassen, explained the significant increase in the revenue share from the Chinese market within a year during the interview accompanying the recent financial report. 

Dassen attributed the strong performance in China in 2023 to orders received at the end of 2022, which were executed throughout 2023. In the previous quarter, ASML had highlighted that the global order delivery rates, including the Chinese market, had been relatively low, below 50% over the past few years. 

He then emphasized that the demand from Chinese orders primarily comes from mid-critical and mature manufacturing, and this demand remains solid.

With the Netherlands imposing new restrictions on the export of advanced chip manufacturing equipment effective from January, ASML officially announced that starting from 2024, they would not be able to ship NXT:2000i and higher DUV lithography equipment to China.

Equipment below NXT:2000i, including NXT:1970i and NXT:1980i, would also be restricted from shipment to advanced process fabs in China. Dassen anticipated that this will impact 10% to 15% of sales in the Chinese market in 2024. However, he emphasized that this aligns with the financial forecasts provided in the third quarter of last year, and the demand for mature manufacturing processes remains robust.

For the full year of 2023, ASML reported a net sales revenue of EUR 27.6 billion, with a net income of EUR 7.8 billion and a gross profit margin of 51.3%. ASML estimates that the net sales for 2024 will be similar to those in 2023.

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(Photo credit: ASML)

In 2023, the downturn in terminal consumption has spread to various aspects of the semiconductor industry. While the industry generally adopted a cautious stance, some specific segments defied the trend and showed counter-cyclical growth. This attracted numerous companies to strategically position themselves, leading to a flurry of activity in various semiconductor industry projects.

In terms of project deployment, according to TrendForce’s statistics, there were over 350 new developments in China’s semiconductor industry in 2023. These projects span across areas such as third-generation semiconductors, memory, automotive chips, advanced packaging, sensors, RF chips, silicon wafers, semiconductor equipment, and more.

Flourishing Semiconductor Industry with Over 350 Projects Accelerated

Looking at the overall picture, among the disclosed investment amounts for over 350 projects, the highest investment goes to the second phase of Hua Hong Semiconductor (Wuxi) with a sum of USD 6.7 billion (approximately RMB 48.007 billion).

Following closely is Nexchip Semiconductor Corporation’s 12-inch wafer manufacturing project with an investment of RMB 21 billion (approximately USD 2.9 billion). Anhui Yangtze Advanced Semiconductor’s Third-generation Semiconductor Power Device Production Project exceeds RMB 20 billion (approximately USD 2.8 billion).

Among the 350+ projects, there are over 100 signed projects, over 90 projects have commenced, over 50 operational projects, and more than 50 projects nearing completion.

High Proportion of Upstream Projects, Concentrated Capacity in East China

From the perspective of the industry chain, last year’s semiconductor industry projects saw the highest proportion occupied by upstream semiconductor materials.

It involved companies such as Zhejiang Jingsheng Mechanical & Electrical Co., TankeBlue Semiconductor, SICC, Konfoong Materials International, Boncom Semi, Vital Micro-Electronics Technology (Jiangsu) Co., GRINM Semiconductor Materials, IV-Semitec, Zhonghuan Advanced Material & Technology, and SiFusion, among others. 

Following that is IC manufacturing, involving companies like Hua Hong Semiconductor, Nexchip Semiconductor Corporation, AscenPower, GTA Semiconductor, Jiejie Microelectronics, SMIC, CanSemi Tech, GalaxyCore, and Unicmicro (Guangzhou) Co., among others.

Companies involved in IC design include Huawei, Empyrean Technology, Loongson Technology, Corigine, 3Peak, HeYangTek, UNIM, Semitronix, Awinic, X-Chip, and Silergy Corp., among others. 

In the IC packaging and testing segment, companies like Huatian Technology, Nexperia, Forehope Electronic, Innosilicon, JCET Group, XinHenYuan Technology, ACCESS Semiconductor, and Leadyo IC Testing Co. are notable players.

From a regional perspective, the majority of semiconductor industry projects are located in the eastern regions of China, including Jiangsu, Zhejiang, Shanghai, Anhui, and Shandong. Jiangsu and Zhejiang have a relatively high proportion.

It is worth noting that a significant portion of semiconductor materials projects are concentrated in the eastern region. 

“Remarkable Advances in Specialized Sectors” – Third-Generation Semiconductors in the Spotlight

Amidst last year’s uncertain overall market conditions, notable growth in specific sectors has captured market attention. Chinese manufacturers strategically focused on various sectors last year, including semiconductor materials/equipment like photoresist, silicon-based products, quartz products, high-purity electronic specialty gasses, and ultra-pure chemicals. Additionally, areas such as silicon carbide, gallium nitride, sensors, automotive chips, and IGBT power devices were key areas of emphasis.

With the increasing trend toward electrification in the automotive sector and growing demand for efficient power systems in applications like new energy vehicles and industrial processes, the market’s appetite for advanced semiconductor materials is on the rise. 

In response, industries are transitioning to third-generation semiconductor materials represented by silicon carbide (SiC) and gallium nitride (GaN). Consequently, power devices like SiC and GaN are gaining substantial market popularity.

From an application perspective, GaN is not only expanding in consumer applications but is also making inroads into rapidly growing markets such as electric vehicles, computing (data centers, artificial intelligence, infrastructure), renewable energy, industrial power supplies, and fast-charging stations/adapters.

According to TrendForce, the global GaN power device market is expected to grow from USD 180 million in 2022 to USD 1.33 billion in 2026, with a compound annual growth rate (CAGR) of up to 65%. 

As for SiC, TrendForce anticipates the SiC power device market to reach USD 5.33 billion by 2026, with its mainstream applications still heavily reliant on electric vehicles and renewable energy.

According to previous TrendForce statistics, China has 44 foundries, and this number is expected to increase to 32 in the future, focusing on mature processes. The industry anticipates that there will be more fab capacity releases in the future, driving demand for upstream semiconductor materials and equipment.

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The Center for Strategic and International Studies (CSIS) in the United States published a new article on the January 12th, 2024, suggesting that the new battleground in the US-China tech war could be silicon photonics technology. This technology aims to enhance transmission efficiency, reduce latency, and reshape the competition landscape between the US and China in semiconductors and AI. 

According to TechNews’ report citing the author Matthew Reynolds’ notes in the article, unlike electronics, photonics uses photons instead of electrons to transmit information. When combined with electronic technology, photonics has the potential to create large-scale computing systems with higher bandwidth and energy efficiency, surpassing the physical limitations of traditional electronic chips.

However, the Chinese government has recently shown interest in photonics, seeing it as one way to bypass Western technological controls. Photonics technology is mentioned in China’s Outline of the 14th Five-Year Plan (2021-2025) for National Economic and Social Development and Vision 2035.

Yao Yang, the director of the National Development Institute at Beijing University, believes that US semiconductor restrictions are a “shooting themselves in the foot” because photonic chips will eventually make electronic chips obsolete.

He also sees this as an opportunity for China to overtake, asserting that China has the capability to take the lead in this emerging technology, as mentioned in his recent article.

However, Matthew Reynolds believes that it’s unlikely for photon chips to replace electronic chips, at least not in the near future. Photonics and electronics are more likely to coexist, forming a symbiotic relationship.

What is certain, though, is that silicon photonics technology holds the potential to become a breakthrough for China in advancing to the forefront of semiconductor manufacturing.

Reportedly, the most direct application of silicon photonics technology is in optical interconnects, replacing the copper wiring in circuits with photonics to speed the transmission of information between processors and/or memory, reducing the input/output bottlenecks currently plaguing AI computing.

In addition to optical interconnects, another application area for silicon photonics is in the emerging field of optical computing. Photon processors utilize light instead of electrons for computation. While their range of computational types is limited, they show significant promise in performing matrix multiplication operations, a crucial component, especially in large-scale language models, constituting over 90% of inference computations.

Chinese economist Chen Wenling from the China Center for International Economic Exchanges (CCIEE) stated in an article addressing the anti-American blockade that silicon photonics is the technology that China can use to overtake.

“China is preparing to build a photonic chip production line, which is expected to be completed in 2023, which means that China will be at the forefront of the world in terms of photonic chips, and even completely change the chip technology route. Photonic chips have many technical advantages. Its calculation speed is faster and its information capacity is larger, which will be more than 1,000 times higher than the current silicon-based chips.” Chen expressed.

Lightelligence, a U.S.-based optical computing company, previously received funding from the Chinese government and has recently launched the AI accelerator “Hummingbird.” Hummingbird utilizes optical interconnect components, connecting to chips manufactured by TSMC using 28-nanometer process.

Although this process may not be at the forefront of current technology, it aligns with China’s semiconductor manufacturing capabilities. Lightelligence even claims that its latency and efficiency metrics surpass those of competitors in certain AI tasks.

Additionally, Lightelligence has introduced the “Photonic Arithmetic Computing Engine” (PACE), an optical computing system. PACE integrates photonic and electronic components on a single chip and, in certain compute-intensive applications, boasts processing speeds 25-100 times faster than Nvidia’s high-end GPUs.

China’s SinTone Microelectronics is in the process of establishing a silicon photonics chip production line. Sui Jun, the president of SinTone Microelectronics, indicated that China has the capability to produce photon chips domestically because the manufacturing process does not require the use of extreme ultraviolet (EUV) lithography machines, which are subject to U.S. sanctions. 

Simultaneously, a research team at Tsinghua University in China announced a breakthrough in overcoming the traditional physical limitations of chips, presenting a new computational framework that integrates optics and electronics. They successfully developed the world’s first all-simulated optoelectronic intelligent computing chip (ACCEL).

In terms of computational power for smart visual target recognition tasks, ACCEL exceeds current high-performance commercial chips by over 3,000 times. In the realms of smart visual target recognition tasks and computations for unmanned system scenarios, its energy efficiency surpasses existing high-performance chips by more than 4 million times.

While the commercialization timeline for ACCEL remains uncertain, researchers believe it holds the potential for applications in unmanned systems, industrial inspection, and AI large-scale models in the future.

Silicon Photonics Poised to Transform the US-China Tech War and AI Landscape

Matthew Reynolds believes that silicon photonics is the foundation and driving force behind advancements in optical interconnects and optical computing, reshaping the competitive landscape in the semiconductor and AI industries between the US and China.

While US export measures aim to sever China’s capabilities in advanced chip manufacturing, silicon photonics appears to be a new opportunity for China to take a different path.

However, Matthew Reynolds notes that despite the promotion of photon processor performance, its current applicability remains relatively narrow, contrasting sharply with the universality of electronic processors.

Additionally, the application of silicon photonics technology still faces numerous technical challenges, requiring software development in operating systems and applications to enhance performance in optical computing.

Therefore, achieving optical computing may still require several years, or even decades. Given the current pace of AI development, any delays could have serious consequences. Leading semiconductor companies in the United States and allied nations are also investing heavily in silicon photonics. It remains uncertain whether China can secure a leadership position.

Matthew Reynolds points out that regardless, new technologies and architectures are likely to redefine the components of advanced chips. They may weaken the impact of existing control measures or reshape the competitive landscape.

The US export controls may inadvertently stimulate China to allocate more resources to emerging technologies, positioning itself as a key player in the next generation of semiconductors, especially as Moore’s Law approaches its limits and demand for AI computing continues to grow.

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(Photo credit: iStock)

As companies increased their investments in 2023, the Chinese semiconductor industry actively expanded, leading to a substantial increase in the import volume of China’s chip manufacturing equipment.

According to Bloomberg’s report citing official Chinese customs data, the import value of equipment used in the production of computer chips in China surged by 14% in 2023, reaching nearly USD 40 billion. This marks the second-highest import value recorded since 2015, indicating that Chinese semiconductor companies are rapidly investing in new fabs. This effort is expected to aim at enhancing capabilities and circumventing export controls imposed by the United States and its allies.

In 2023, before the implementation of new export controls, China experienced a sharp increase in the import of semiconductor equipment from the Netherlands.

Due to companies rushing to make purchases before the implementation of restrictive measures in the Netherlands, the import value of photolithography equipment from the country in December 2023, as per IJIWEI’s report, saw an almost 1000% year-on-year increase, reaching USD 1.1 billion.

Even before these restrictions took effect, Dutch company ASML complied with the U.S. government’s request to halt the shipment of certain high-end equipment to China.

In early January 2024, ASML reported that the Dutch government partially revoked previously issued licenses for the shipment of NXT:2050i and NXT:2100i lithography machines in 2023. This is expected to have an impact on specific customers in China.

Despite restrictions on China’s advanced process technology deployment, the main reason for its substantial purchases of semiconductor equipment lies in its efforts to break through in mature manufacturing processes.

According to a recent TrendForce’s data, China currently has 44 operational semiconductor fabs, with an additional 22 under construction. By the end of 2024, 32 Chinese wafer fabs will expand their capacity for 28-nanometer and older mature chips.

TrendForce predicts that by 2027, China’s share of mature process capacity in the global market will increase from 31% in 2023 to 39%, with further growth potential if equipment procurement progresses smoothly.

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(Photo credit: ASML)

NVIDIA CEO Jensen Huang has reportedly gone to Taiwan once again, with reports suggesting a recent visit to China. Industry sources believe NVIDIA is planning to introduce downgraded AI chips to bypass U.S. restrictions on exporting high-end chips to China. Huang’s visit to China is seen as an effort to alleviate concerns among customers about adopting the downgraded versions.

Experts indicate that due to the expanded U.S. semiconductor restriction on China, NVIDIA’s sales in the Chinese market will decline. To counter this, NVIDIA might adjust its product portfolio and expand sales of high-end AI chips outside China.

The export of NVIDIA’s A100 and H100 chips to China and Hong Kong was prohibited in September 2022. Following that, the A800 and H800 chips, which were further designed with downgraded adjustments for the Chinese market, were also prohibited for export to China in October of the previous year.

In November 2023, the NVIDIA’s management acknowledged the significant impact of the U.S. restrictions on China’s revenue for the fourth quarter of 2023 but expressed confidence that revenue from other regions can offset this impact.

CEO Jensen Huang revealed in December in Singapore that NVIDIA was closely collaborating with the U.S. government to ensure compliance with export restrictions on new chips for the Chinese market.

According to reports in Chinese media The Paper, Jensen Huang recently made a low-profile visit to China. The market is closely watching the status of NVIDIA’s AI chip strategy in China and the company’s subsequent development strategies in response to U.S. restrictions. The fate of the newly designed AI chips, H20, L20, and L2, to comply with U.S. export regulations remains uncertain and will be closely observed.

Liu Pei-Chen, a researcher and director at the Taiwan Institute of Economic Research, discussed with CNA’s reporter about NVIDIA’s active planning to introduce a downgraded version of AI chips in China. 

The most urgent task, according to Liu, is to persuade Chinese customers to adopt these downgraded AI chips. Chinese clients believe that there isn’t a significant performance gap between NVIDIA’s downgraded AI chips and domestically designed AI chips.

Liu mentioned that this is likely the reason why Jensen Huang visited China. It serves as an opportunity to promote NVIDIA’s downgraded AI chips and alleviate concerns among Chinese customers. 

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(Photo credit: NVIDIA)