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.

Read more

• [News] Surge in Chip Manufacturing Equipment Imports from the Netherlands to China, Soaring Tenfold After U.S. Tightens Restrictions
• [News] ASML Reports Partial Revocation of Export Licenses for DUV Equipment

(Photo credit: ASML)

The U.S. lawmakers is reportedly attempting to further drive the “decoupling” of the Pentagon’s supply chain from China. According to sources cited by Bloomberg, the U.S. Congress has prohibited the Pentagon from procuring batteries produced by six Chinese companies, including CATL and BYD.

Additionally, the other four battery manufacturers set to be banned are Envision Energy, EVE Energy, Gotion High-Tech, and Hithium Energy Storage Technology. Based on the report, of the top 10 battery suppliers in the world, just three are non-Chinese companies.

It is noted that this regulation is part of the “2024 National Defense Authorization Act,” passed on December 22, 2023. However, commercial purchases, such as Ford’s procurement of batteries from CATL in Michigan and Tesla’s sourcing of batteries from BYD, are temporarily exempt from these measures.

As per IJIWEI’s report, the U.S. government has long been eyeing the Chinese new energy vehicle supply chain. Previously, U.S. Treasury Secretary Janet Yellen argued that China’s new energy vehicle industry posed a threat to the “national security” of the United States.

At the end of 2023, a document was signed, stipulating that from 2024 onwards, all electric vehicles produced in the U.S. are prohibited from using Chinese batteries. The signing of this document is evidently unfavorable for companies in the electric vehicle battery industry looking to expand into the U.S. market.

According to the conditions for electric vehicle subsidies under the U.S. IRA Act, starting in 2024, the use of battery components produced by entities from “Foreign Entity of Concern” (FEOC) countries is prohibited. In 2025, the prohibition extends to the use of key minerals processed or recycled in FEOC countries. FEOC encompasses China, North Korea, Russia, and Iran.

The U.S. Department of Energy, in December 2023, released a notification of a proposed interpretive rule, requesting comments to define FEOC, covering overseas subsidiaries of Chinese companies and overseas enterprises with more than 25% ownership by Chinese state-owned enterprises.

However, given the current distribution of the battery supply chain, completely bypassing the Chinese battery supply chain in the U.S. is challenging. Even if feasible, it would come with substantial costs. The result could be a short-term inability to reduce vehicle prices, further impacting the gradually weakening demand for electric vehicles in the United States.

TrendForce indicates that the combined sales of BEVs and PHEVs in the United States totaled approximately 1.46 million vehicles in 2023. Due to the requirement that many vehicles must meet local assembly criteria in the U.S. to qualify for subsidies, numerous models lost subsidies in 2023.

It is expected that in 2024, various automakers will increase the proportion of local assembly, expanding consumer options to stimulate demand. However, stringent conditions for battery adoption could become one of the variables affecting the growth of electric vehicle sales in the United States.

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• China Projected to Export 1.2 Million NEVs in 2023 amid Tightening Tariffs by the US, Says TrendForce
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(Photo credit: Pixabay)

In order to comply with new regulations on the export of chips to the United States, NVIDIA has been consistently releasing AI chips and graphics cards tailored for the Chinese market.

However, according to sources cited by The Wall Street Journal, since November 2023, major cloud service provider (CSP) in China such as Alibaba and Tencent have been testing samples of NVIDIA’s special chips. These Chinese enterprises have conveyed to NVIDIA that the quantity of chips they plan to order in 2024 will be significantly lower than their initial plans.

According to a report from The Wall Street Journal, in October 2023, the United States announced new regulations preventing NVIDIA from selling advanced AI chips to China. However, NVIDIA swiftly developed a “special edition” chip for China, allowing them to continue selling chips in the Chinese market without violating regulations.

Nevertheless, NVIDIA is facing another challenge: major Chinese CSPs are not actively purchasing the “downgraded” performance versions of the chips.

Chinese enterprises have been testing the highest-performance version, H20, of NVIDIA’s “special edition” AI chips. Some testers have mentioned that this chip enables efficient data transfer among multiple processors, making it a better choice than domestic alternatives for building chip clusters required for processing AI computational workloads.

However, testers also indicate that they need more H20 to compensate for the performance gap compared to previous NVIDIA chips, which increases their costs.

The report indicates that in the short term, the performance advantage of NVIDIA’s “downgraded” chips over domestic Chinese products is diminishing, making Chinese-made chips increasingly attractive to buyers.

Informed sources cited from the report suggest that major players like Alibaba and Tencent are redirecting some advanced semiconductor orders to domestic companies and relying more on internally developed chips. This trend is also observed with the other two major chip buyers, Baidu and ByteDance.

Looking ahead in the long term, Chinese customers are uncertain about NVIDIA’s ability to continue supplying them with chips, as U.S. regulatory authorities have committed to regularly reviewing chip export controls, potentially tightening restrictions on chip performance further.

From the perspective of China’s efforts in the independent development of AI chips, TrendForce previously highlighted in its press release that Chinese CSPs like Baidu and Alibaba are actively investing in autonomous AI chip development.

Baidu developed its first self-researched ASIC AI chip, Kunlunxin, in early 2020, with its second generation scheduled for mass production in 2021 and the third expected to launch in 2024. Post-2023, Baidu aimed to use Huawei’s Ascend 910B acceleration chips and expand the use of Kunlunxin chips for its AI infrastructure.

After Alibaba’s acquisition of CPU IP supplier Zhongtian Micro Systems in April 2018 and the establishment of T-Head Semiconductor in September of the same year, the company began developing its own ASIC AI chips, including the Hanguang 800.

TrendForce reports that T-Head’s initial ASIC chips were co-designed with external companies like GUC. However, after 2023, Alibaba is expected to increasingly leverage its internal resources to enhance the independent design capabilities of its next-gen ASIC chips, primarily for Alibaba Cloud’s AI infrastructure.

According to the data from TrendForce, currently, around 80% of the high-end AI chips used by Chinese cloud computing companies are sourced from NVIDIA. However, in the next five years, this proportion may decrease to 50% to 60%.

Read more

• [News] NVIDIA’s China-exclusive Chip H20 to Begin Production in Q2 by Wistron
• China Continues to Enhance AI Chip Self-Sufficiency, but High-End AI Chip Development Remains Constrained, Says TrendForce

(Photo credit: NVIDIA)

Dutch semiconductor equipment leader ASML Holding N.V. has announced that export licenses for certain equipment have been partially revoked by the Dutch government.

In a press release issued on January 1st, 2024, ASML stated, “A license for the shipment of NXT:2050i and NXT:2100i lithography systems in 2023 has recently been partially revoked by the Dutch government, impacting a small number of customers in China. We do not expect the current revocation of our export license or the latest U.S. export control restrictions to have a material impact on our financial outlook for 2023.”

The press release further stated, “In recent discussions with the US government, ASML has obtained further clarification of the scope and impact of the US export control regulations. The latest US export rules (published October 17, 2023) impose restrictions on certain mid critical DUV immersion lithography systems for a limited number of advanced production facilities.”

Bloomberg reported earlier on January 1^st, 2024, citing unnamed sources, that several weeks before the implementation of export controls on advanced semiconductor equipment in the Netherlands, the U.S. government had requested ASML to cancel the export of certain machines destined for China.

Previously, ASML’s CEO, Peter Wennink, stated that these limitations would exclude the vast majority of Chinese customers in response to the U.S. restrictions. This exclusion is due to the fact that these customers are involved in mature nodes, specifically in the production of semiconductors at 28nm and above.

In addition, last week, the South China Morning Post has cited data, indicating that in November 2023, China had imported critical semiconductor manufacturing lithography equipment from the Netherlands, experiencing a significant surge of 1050% in import value.

In an interview with the South China Morning Post, Jan-Peter Kleinhans, Senior Researcher and Head of Technology and Geopolitics Projects at the Berlin-based think tank “Stiftung Neue Verantwortung” (New Responsibility Foundation), mentioned that the impact on sales would not be immediate following the new U.S. restrictions.

Reportedly, this is because ASML has a lead time of approximately 18 months. This implies that the equipment shipped in the fourth quarter of 2023 would have been ordered in the second or third quarter of 2022, and ASML would apply for export licenses at some point thereafter.

Read more

• [News] Surge in Chip Manufacturing Equipment Imports from the Netherlands to China, Soaring Tenfold After U.S. Tightens Restrictions
• [News] EUV as a Strategic Asset in the Most Advanced Processes: Progress in Intel/TSMC/Samsung’s Adoptions

(Photo credit: ASML)

An increasing number of Chinese semiconductor design companies are seeking collaboration with testing and packaging facilities in Malaysia to carry out advanced chip packaging. According to Reuters’ report, this move aims to hedge the risk of potential expanded U.S. restrictions on the Chinese semiconductor industry.

As there is currently only one non-U.S. testing and packaging provider in Malaysia with advanced capabilities, namely ASE Technology Holding Co., a Taiwanese semiconductor packaging and testing firm, industry sources believe that ASE is likely to become the top choice for orders from Chinese enterprises.

Previously, the U.S. has imposed controls on China’s advanced semiconductor manufacturing processes and access to high-performance chips from major companies like NVIDIA. However, advanced packaging has not yet fallen within the restricted scope.

Two anonymous sources reportedly revealed that some of the Chinese businesses are showing interest in advanced chip packaging services. Despite the fact that the chip packaging sector has not yet faced export controls from the U.S., concerns are rising among businesses due to its involvement in sophisticated technology, fearing that it might be targeted for curbs on exports in the future.

Reuters’ report also indicates that due to the relatively affordable investment costs in Malaysia and the availability of experienced workforce and sophisticated equipment, an increasing number of Chinese chip design firms are seeking Malaysian Firms to carry out advanced chip packaging activities, including graphic processing units (GPUs).

Insiders have informed Reuters that the related contracts only involve packaging and do not violate any restrictions imposed by the U.S.. Additionally, they clarified that wafer manufacturing is not included in these contracts.

Two of the sources mentioned that some contracts have already been agreed. However, these insiders prefer not to disclose the names of the involved companies.

Meanwhile, according to a report from Taiwan’s Economic Daily News, when observing the global landscape of advanced packaging, in addition to TSMC, there are integrated device manufacturers (IDMs) like Intel and Samsung, as well as outsourcing semiconductor assembly and test (OSAT) companies like ASE Technology, Amkor, and others that possess advanced packaging capabilities. Among them, only ASE Technology, Amkor, and Intel have production capacity in Malaysia.

Reportedly, industry analysts predict that Chinese companies seeking advanced packaging support in Malaysia, due to geopolitical considerations, are likely to avoid American companies such as Intel and Amkor. Given that ASE is not an American company and can provide high-end packaging services, it is expected to be the preferred choice for Chinese companies.

ASE has previously stated that it will continue to invest in advanced packaging for AI, expecting the performance of advanced packaging to double next year compared to this year.

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• [News] Bypassing U.S. Restrictions? CXMT Showcases GAA Technology for 3nm Chips
• Malaysia: Rising Global Hub for Semiconductor Backend Testing and Packaging in Supply Chain Shift

(Photo credit: ASE Holdings)