Tech war: Chinese chip makers ramp up capacity amid fears of more US sanctions

Chinese chip manufacturers, including Semiconductor Manufacturing International Corp (SMIC) and Hua Hong Semiconductor Group, are expanding their production capacity in response to concerns of potential US tech sanctions, as stated in a recent industry report.

Although China’s chip makers are currently trailing behind leaders such as Taiwan Semiconductor Manufacturing Co (TSMC) and Samsung Electronics in chip-processing technology, they are actively investing in new capacity to meet the increasing demand for legacy chips used in various applications, including automotive and consumer electronics.

According to a report from SEMI, a US-based industry association, the total capacity of China-based foundries is expected to grow by 15% to reach 8.9 million wafers per month this year. Furthermore, it is projected to increase by 14% to 10.1 million wafers per month next year, surpassing the average global growth rate of 6% and 7% for the same period.
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According to SEMI, China is projected to contribute around 30% of the world’s total wafer capacity next year. The association stated in their report that China is actively increasing investment in order to boost foundry capacity, partly as a response to the impact of US export controls. Chinese chip makers like Nexchip, SiEn (Qing Dao) Integrated Circuits Co, and ChangXin Memory Technologies, a memory chip manufacturer, are all expanding their operations.
The rapid pace of investment in the semiconductor industry has raised concerns about overcapacity, prompting the US to take action. The Biden administration plans to impose tariffs on Chinese imports worth $18 billion, including a 50% increase on semiconductor imports from China starting next year, in order to protect the domestic chip industry.

According to Boris Metodiev, a senior semiconductor manufacturing analyst at TechInsights, Chinese manufacturers have been stockpiling chip-making tools in anticipation of increased demand. This unprecedented demand in China has led to record-high sales of wafer fab equipment in the country. In fact, sales of semiconductor wafer fab equipment in China surged 48% last year, while the rest of the world saw a decline of 15% if China is excluded from the equation.
Following a two-year decline in semiconductor sales, China is now expanding its production capacity. This comes in the wake of a sluggish economic recovery caused by the sudden end of Beijing’s zero-Covid-19 policy in late 2022.

However, analysts have expressed concerns that this expansion could lead to overcapacity in the next two years. If Chinese fabs start selling their products on the global market, it could potentially drive down prices.

Previously, China heavily relied on imported chips to meet its demand. However, due to a push for self-sufficiency and increased US sanctions, the situation has changed. In 2023, China imported 479.5 billion integrated circuits (ICs), which marked a 10.8% decrease compared to the previous year. The import value also declined by 15.4% to US$349.4 billion, according to data from the Chinese Customs Administration.
In a recent report, it has been noted that Chinese foundries such as SMIC and Yangtze Memory Technologies Corp are reaping the benefits of the country’s push for localization. These local foundries have experienced a faster recovery in capacity utilization, which measures production activity in fabs, compared to their global counterparts. This is attributed to China’s policies promoting domestic substitution for ICs and other tech products.

Hua Hong Semiconductor, China’s second-largest foundry with a focus on mature and specialty technologies, has witnessed maximum capacity utilization and is expected to raise prices by 10% in the second half of the year, as stated in a recent note from US investment bank Morgan Stanley.
According to a research note from TrendForce published on Wednesday, some production lines at Chinese foundries are currently operating at full capacity due to strong customer demand. The research note also stated that the tight capacity situation may continue until the end of the year, as the traditional peak inventory stocking season in the second half could prolong the strain. The price adjustments mentioned in the note are aimed at alleviating profit pressure rather than indicating a full recovery in demand. This article was originally published in the South China Morning Post (SCMP), a highly reputable source for reporting on China and Asia for over a century. For more SCMP stories, please visit the SCMP app or their Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.