The soaring speed of China's chip production capacity is astonishing

The semiconductor industry is entering a new round of capacity competition, with countries crazily building or expanding wafer fabs. Recent data shows that despite being restricted by the US ban, China still leads in the scale of chip factory construction and production, mainly manifested in the construction of wafer fabs and the purchase of semiconductor equipment, especially lithography machines.

According to SEMI statistics, from 2022 to 2024, the global semiconductor industry plans to have 82 new facilities put into operation, including 11 in 2023 and 42 in 2024, covering production lines for 4-inch (100mm) to 12 inch (300mm) wafers.

SEMI predicts that chip manufacturers in Chinese Mainland will start operating 18 projects in 2024, and the capacity will increase by 13% from 7.6 million wafers per month in 2023 to 8.6 million wafers per month in 2024.

That is to say, Chinese wafer fabs that will begin operating in 2024 will account for over 42% of the global market. A small portion of these mature process chips will be used for export, while the majority will be digested in the domestic Chinese market.

According to customs data, the total trade amount between China and the Netherlands in 2023 is 107.2 billion euros, and the largest commodity for both sides is lithography machines. In 2023, China imported approximately 225 lithography machines from the Netherlands; According to public data, an additional 32 lithography machines were imported in the first two months of 2024. Within 14 months, China purchased 257 lithography machines from ASML.

According to ASML's financial data in the first quarter, ASML's share of lithography machine sales revenue in the Chinese Mainland market further rose to 49% from 39% in the fourth quarter of 2023. Europe, Middle East and Africa (EMEA) became the second largest market, accounting for 20% of revenue. The revenue share of South Korea, the third largest market, is 19%.

Data shows that China has become the most important market for global lithography equipment, indicating a huge demand for domestically produced chips and semiconductor industries in China.

According to the Q1 2024 report released by SEMI, the quarterly production capacity of wafer fabs has now exceeded 40 million wafers (converted to 12 inch wafers), with a growth rate of 1.2% in the first quarter and an expected increase of 1.4% in the second quarter. China continues to rank as the fastest-growing region among all regions.

According to the data released by semiconductor research institute Knometa Research, by the end of 2023, the global semiconductor capacity share will be 22.2% in South Korea, 22.0% in Taiwan, China, 19.1% in Chinese Mainland, 13.4% in Japan, 11.2% in the United States, and 4.8% in Europe. It is expected that the share of semiconductor production capacity in Chinese Mainland will gradually increase, and will occupy 22.3% of the global production capacity in 2026, ranking first in the world.

On the other hand, Japan's share is expected to decrease from 13.4% in 2023 to 12.9% in 2026.

According to the report, although the US centered semiconductor regulations try to restrict Chinese enterprises from developing and introducing cutting-edge processes, Chinese Mainland will continue to increase wafer production capacity in the next few years, focusing on traditional or mature manufacturing processes.

With the increase in electronic sales, stable inventory, and increased wafer fab capacity, the global semiconductor manufacturing industry shows signs of improvement in the first quarter of 2024. It is expected that the industry will experience stronger growth in the second half of the year.

Morgan Stanley Securities stated in its latest report on the wafer foundry industry that the destocking of wafer foundry inventory will come to an end, and the industry's prosperity will widely recover in the second half of 2024 and further strengthen in 2025.

Gokul Hariharan, the head of research at Xiaomo Taiwan, analyzed that the economy bottomed out in the first quarter, coupled with the continuous increase in AI demand and the gradual recovery of non AI demand. More importantly, urgent orders began to emerge, including large-size panel driver ICs (LDDIC), power management ICs (PMIC), WiFi 5 and WiFi 6 chips, all of which clearly indicate that the wafer foundry industry has shaken off the bottom and turned towards recovery.

It is worth noting that the capacity utilization rate of wafer foundries in Chinese Mainland recovered rapidly, mainly because the mainland's fabless semiconductor companies began to adjust their inventory earlier. After the first six quarters of active destocking, the inventory is gradually normalized.

In terms of non AI demand, vertical areas such as consumer, communication, and computing in the 3C sector also hit bottom in the first quarter of this year; However, demand for automobiles and industries may recover by the end of 2024 or early 2025, mainly due to a later overall inventory adjustment.

SEMI pointed out that the sales of electronic terminal products increased by 1% annually in the first quarter of this year, while IC sales grew strongly by 22% compared to the same period last year. It is expected that the sales of electronic terminal products will increase by 5% annually in the second quarter. In addition, the increase in shipments of high-performance computing (HPC) chips and the continuous improvement in memory prices will also drive IC sales to maintain strong growth, with an annual increase of 21%. The IC inventory level has also stabilized in the first quarter and is expected to further improve this quarter.

However, SEMI admitted that the utilization rate of wafer fabs' production capacity is still low, especially in mature process areas, which is still a concern. It is expected that there will be no signs of recovery in the first half of this year, and the memory utilization rate in the first quarter is lower than expected, mainly due to strict supply control.

The capital expenditure of wafer fabs is consistent with the trend of capacity utilization, maintaining conservatism. The expenditure in the fourth quarter of last year decreased by 17% year-on-year, and continued to decline by 11% in the first quarter. It is expected to return to growth in the second quarter, with a slight increase of 0.7%. It is expected that the capital expenditure related to memory will increase by 8%, which is higher than that in the non memory field.

SEMI Global Senior Director Zeng Ruiyu stated that some semiconductor demand is recovering, but the pace of recovery is not consistent. The demand mainly comes from AI chips and high bandwidth memory (HBM), driving investment and capacity expansion in related fields. However, due to the dependence of AI chips on a few key suppliers, the benefits to IC shipment growth are limited.

Boris Metodiev, Director of Market Analysis at TechInsights, stated that semiconductor demand was mixed in the first half of this year due to a surge in demand for generative AI and a rebound in memory and logic. However, slow recovery in the consumer market, coupled with inventory adjustments in the automotive and industrial markets, disrupted the markets for analog ICs and discrete components.

Metodiev expects that as AI gradually spreads to edge devices, it is expected to drive consumer demand, and semiconductors are expected to fully recover in the second half of this year. In addition, as the Federal Reserve lowers interest rates, it will increase consumer purchasing power and drive down inventory levels, and the automotive and industrial control markets will return to growth in the second half of this year.