As the struggle between China and the United States continues, in order to avoid upcoming geopolitical risks, not only have Taiwanese ODM manufacturers begun to shift some production locations, but market research firm TrendForce has also observed that American OEM companies have started to take action, discussing with partners how to reduce the proportion of Chinese supply chains and components.

TrendForce points out that, at present, American cloud service providers (CSPs) and OEM manufacturers have not yet been able to completely cut ties with Chinese-produced components. Among these, passive components and mechanical assemblies are more difficult to relocate due to factors such as cost and yield. However, other components (such as PCBs and power management control ICs) have plans to move out of China.

But where will these component manufacturers go if they want to move out of China? According to TrendForce’s analysis, PCB manufacturers are currently eyeing shifts to Thailand, Malaysia, Vietnam, and India; power management ICs and control ICs have already moved out of China and relocated to Taiwanese factories; mechanical assemblies and MLCC capacities still mainly come from China, with the former being requested to move but facing challenges due to cost and yield considerations.

TrendForce notes that the aforementioned production line and material shifts are primarily led by American CSPs. The overall server supply chain’s subsequent changes still need to be observed. For example, major players like Google, AWS, and Meta have not only moved most of their L6 production lines to Taiwan but also plan to establish bases in Southeast Asia after 2024 to handle cases within the United States, and reserve flexible production lines along the US-Mexico border, which will significantly increase utilization within this year.

On October 7, 2022, the U.S. government imposed export regulations restricting China’s access to semiconductor technology. In particular, the sanctions pertained to manufacturing equipment required in the production of 16nm/14nm or more advanced logic chips (FinFet, GAAFET), 18nm or more advanced DRAM chips, and NAND Flash with 128 or more layers. It’s evident that the U.S. intends to restrict China’s semiconductor manufacturing to 1Xnm. Moving forward, 28nm processes are likely to be included in the next set of regulations as some equipment used in manufacturing 28nm nodes can also be utilized in more advanced processes.

TrendForce predicts that upcoming U.S. export regulations will further focus on 28nm processes. Not only can 28nm manufacturing equipment be used in more advanced processes, but tight restrictions have forced Chinese companies to focus their efforts on expanding their 28nm operations. 28nm processes can be used to produce a large variety of other products: SoCs, ASIC AI chips, FPGAs, DRAMs, NAND Flash, ISPs, DSPs, Wi-Fi chips, RF components, Driver ICs, MCUs, CISs, DAC/ADC chips, PMICs, and other core components in a wide range of applications. If the U.S. allows Chinese companies to accelerate the expansion of their 28nm processes, China’s importance in the supply chain for terminal products will continue to climb — ultimately setting back the U.S’s efforts to decouple itself from China.

China still unable to fully manufacture 28nm chips domestically as expansion exhibits signs of slowing down

China cannot fully rely on domestic production for their 28nm semiconductors. If the U.S. chooses to move forward with restricting China’s access to 28nm manufacturing equipment, expansion will surely grind to a halt. China currently possesses equipment that is able to clean, backgrind, etch, and sediment for 16nm/14nm or more advanced processes. However, this is not enough for China to achieve semiconductor autonomy. Semiconductor manufacturing is relatively complicated as it involves thousands of processes; Chinese factories are only involved in a few of the processes — the majority of which depend on American and Japanese factories. All in all, with China’s semiconductor industry largely focused on 28nm/40nm and more mature processes, it will be difficult for them to achieve semiconductor autonomy for processes more advanced than 28nm by 2028.

According to TrendForce’s latest investigation, Chinese foundries have already suspended plans to expand production capacity for advanced processes after the US government began restricting the exportation of equipment and technical support for processes related to non-planar architectures. TrendForce believes that a further tightening of the restrictions on lithography equipment will mainly affect mature processes, especially the 28nm. Chinese foundries might proceed more slowly in adding new production capacity or raising output for the 28nm process due to the prolonged reviews on their equipment purchases.

TrendForce semiconductor analyst, Joanne Chiao, said that Chinese semiconductor companies have already suspended the development of chips featuring the GAA architecture (i.e., nodes that are generally ≤3nm) after the US government began restricting the exportation of EDA tools and related technical support. If we talk about the FinFET architecture that Chinese foundries are able to produce for now, it is possible to achieve the faster computing speed of the more advanced chips by combining multiple lower-end chips. However, it might also be very challenging to raise the production yield rate of a solution that integrates multiple chips, not to mention that the power consumption of such solution might be very high as well.

Seeing the US export control, for now, US government has not imposed restrictions on the exportation of technical support for processes related to planar architectures. On the other hand, Chinese foundries might halt their advanced chip (14nm) production at any time if they encounter an equipment malfunction or another problem that requires technical support from US equipment providers.

At last, Chiao emphasized that the US sanction has definitely accelerated the development of an “all-China” semiconductor manufacturing supply chain. Nevertheless, the world’s top eight semiconductor equipment providers all come from Japan or the US. From the perspective of the foundry industry, it will be hard for China to realize a wholly or mostly native semiconductor supply chain within the foreseeable future.

Shipments of CPUs, GPUs, and chipsets have been falling due to the weakening demand for PCs, gaming devices, and cryptocurrency mining machines. This recent development has also constrained the growth of the market for ABF substrates. Currently, the demand situation for this material is exhibiting signs of uncertainty.

Regarding the distribution of the demand for ABF substrates, applications that are driving growth are cloud services, AI, and automotive electronics. CPUs, GPUs, FPGAs, and switch ICs are chips that are deployed in servers purposed for a wide range of applications related to cloud services and endpoint AI technologies. Meanwhile, other AI-related applications require high-end ASICs. At the same time, more and more high-end SoCs and MCUs are embedded in vehicles. All in all, these aforementioned applications will spur the demand for ABF substrates. Additionally, package size continues to increase for high-performance ICs. This trend, too, will sustain the demand for ABF substrates over the long haul. By contrast, the PC market has matured, so the related demand is shrinking. From a long-term perspective, the influence of the PC market on the demand for ABF substrates will gradually wane.

TrendForce forecasts that the scale of the global market for ABF substrates will expand from US$9.3 billion in 2022 to US$17.1 billion in 2026, thus showing a CAGR of 16.4%. Due to the influence of the US technology export restrictions against China, the demand for ICs purposed for HPC will be higher than expected for the period from 4Q22 to 3Q23. This, in turn, will also further raise the demand for ABF substrates.

Then, starting from 4Q23, exports of HPC chips to China will start to slow down. However, demand will continue to grow for ASICs, AI chips, SoCs, and MCUs at that time. The growth in these application segments will offset some of the negative effect of the US export restrictions on the market for ABF substrates. In terms of the supply-demand dynamics of ABF substrates, a balance will gradually be attained in 2024. However, demand will get stronger in 2025 and 2026, so supply could tighten during that two-year period.

According to a Financial Times report on October 24, 2022, as the U.S. Department of Commerce moves to restrict U.S. personnel from supporting semiconductor manufacturing “facilities” located in China to develop or produce chips without Department approval, Yangtze Memory Technologies Co., Ltd. (YMTC) has taken steps to avoid violating the ban and allowed a number of core employees with U.S. citizenship to resign.

YMTC is a domestic NAND flash memory chip manufacturer in China. In 2018, it only possessed the ability to produce 32-layer MLC 64Gb products. At that time, mainstream products offered by international manufacturers were 92-layer/96-layer TLC 256Gb/512Gb. Since then, YMTC has continued to catch up in terms of technology. By 2020, it had the capacity to mass-produce 128-layer TLC 512Gb products. The company’s new X3-9070 product, released in 3Q22, is estimated to have 232 stacked layers, equaling major international manufacturers if only in the amount of layers.

U.S. personnel played a key role in the process of YMTC’s continuous technological breakthroughs including Simon Yang, CEO since 2016. On the eve of the latest U.S. sanctions, Simon Yang resigned as CEO to become managing director. After the ban came into effect, a number of core personnel of U.S. nationality who assisted in the development of process technology resigned in succession. As sanctions continue to roil, technological development at YMTC may be delayed as a result.

Under the influence of the U.S. ban, YMTC not only faces brain drain, but will also experience difficulties expanding mass production of mainstream products and next-generation products. Since the U.S. Department of Commerce not only placed restrictions on equipment utilized to produce 128-layer (or more) NAND flash memory chips, but also maintains a “presumption of refusal” when reviewing the export of such equipment to China, YMTC may be unable to obtain sufficient equipment to produce next-generation 232-layer products or expand the production of mainstream 128-layer products.

As international NAND flash memory chip manufacturers continue to mass-produce products with more than 200 layers and move towards 300+ layers, if YMTC cannot manufacture products over 128 layers because the company continues to be limited by talent and equipment restrictions, the technological divide between YMTC and major international manufacturers will widen again and its recent efforts to keep up with technology will also come to nothing.

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