Boston Consulting

China will become a global “chip factory” in the next decade From SIA&BCG

The following is the China will become a global “chip factory” in the next decade From SIA&BCG recommended by And this article belongs to the classification: Boston Consulting.

Earlier this month, the semiconductor industry association of America (SIA) and Boston Consulting Group (BCG) jointly released a research report, through more than 20 charts, to analyze and present the distribution characteristics of global semiconductor supply chain in detail. The 53 page report “strengthening the global semiconductor supply chain in an era of uncertainty” mentioned that in the next 10 years, the entire semiconductor supply chain will need to invest about US $3 trillion in R & D and capital expenditure, and semiconductor companies will need to continuously invest more than US $90 billion in R & D every year, equivalent to about 20% of global semiconductor sales, to develop more and more complex chips.

Core competence distribution of semiconductor supply chain in different regions of the world in 2019

According to the report, Japan, Korea, Taiwan and China Chinese mainland are currently concentrating about 75% of the semiconductor manufacturing capacity around the world. Chinese mainland is expected to become the largest semiconductor manufacturing base in the world in the next 10 years.

Its analysis data shows that to build a fully self-sufficient semiconductor supply chain, we need to increase the initial investment of at least US $1 trillion, which will eventually lead to an overall increase of 35% ~ 65% in semiconductor prices; If Taiwan’s Fabs are permanently shut down, it will take at least three years and $350 billion to build enough alternative capacity in other parts of the world.

In addition, the report also shows the global semiconductor supply chain R & D and talent status. At present, in the field of semiconductor research, China and the United States are each other’s largest research partners. China has the largest number of papers and patents submitted each year, and the average number of semiconductor patents cited in the United States is the highest. Many semiconductor technology breakthroughs in the United States have contributed to overseas talents.

Distribution of global wafer manufacturing capacity in 2019

1、 In the next 10 years, China is expected to become the largest semiconductor manufacturing base in the world

According to the report, the share of the United States in global semiconductor manufacturing capacity has dropped from 37% in 1990 to 12% at present. If the current trend continues, the share may drop to 6%.

In contrast, in the next 10 years, China is expected to increase about 40% of its new production capacity and become the world’s largest semiconductor manufacturing base.

A key factor behind this is the economy. The 10-year total cost of ownership (TCO) of building a new chip factory in the United States is about 25% – 50% higher than that in Asia.

About 40-70% of the total cost of ownership is directly attributable to government incentives, which are much lower in the United States than in other places.

The 10-year total cost of ownership (TCO) of reference Fabs in different regions

According to the report, the US federal government’s US $50 billion investment in domestic semiconductor manufacturing industry is expected to reverse the declining trend of us chip production, and build up to 19 advanced logic, storage and analog semiconductor manufacturing plants or wafer factories in the US in the next 10 years.

This will directly create 70000 high paying jobs and indirectly create about 350000 additional jobs in the whole economy, that is, more than 400000 direct and indirect jobs in total.

Us semiconductor consumption distribution in 2019

2、 To build a fully self-sufficient semiconductor supply chain, we need to increase the initial investment by at least US $1 trillion

According to the report, no company or even the whole country can achieve complete vertical integration at present.

Semiconductor supply chain is truly globalized. In 2019, the six regions (the United States, Korea, Japan, mainland China, Chinese mainland, Taiwan and Europe) contributed to or exceeded 8% of the total value added of semiconductor industry.

The distribution of expenditure and contribution of different regions in different semiconductor supply chain links in 2019

In the global semiconductor supply chain, different regions show different advantages and depend on each other. The typical history of semiconductors involves most of these regions.

Example: the global history of a Smartphone Application Processor

The United States is in a leading position in R & D intensive industries, such as electronic design automation (EDA), core IP, chip design and advanced manufacturing, which benefits from its world-class universities, huge engineering talent pool and market driven innovation ecosystem.

East Asia (Korea, Japan, Taiwan) has obvious advantages in wafer manufacturing, with large-scale capital investment supported by government incentives, strong infrastructure and skilled labor force.

The Chinese mainland is leading in the field of equipment, packaging and testing, and is actively investing more.

Assuming that the hypothetical alternative of building a fully self-sufficient local supply chain in each region will require at least US $1 trillion (US $900 billion to US $122.5 billion) of incremental upfront investment, and lead to an overall increase of 35% to 65% in semiconductor prices, eventually leading to an increase in consumer electronic equipment costs.

Increase in R & D and capital expenditure required to achieve a fully “self-sufficient” localized semiconductor supply chain

Specifically, according to the regional distribution, if we want to meet the semiconductor self-sufficiency, the US needs to invest 3500~4200 billion dollars in the initial investment, and Chinese mainland needs to invest 1750~2500 billion dollars.

To achieve a fully “self-sufficient” localized semiconductor supply chain, the distribution of increased expenditure cost required by each region

3、 Assuming that it will take at least three years and US $350 billion to replace Taiwan’s fabs

There are more than 50 regions in the whole semiconductor supply chain, one of which has more than 65% of the global market share.

A region accounts for more than 65% of the global share

For example, about 75% of the global semiconductor manufacturing capability, and many key materials such as silicon chips and photoresists, are concentrated in Chinese mainland and East Asia. These areas are vulnerable to high seismic activity and geopolitical tensions.

In addition, 100% of the world’s most advanced semiconductor production capacity (i.e. below 10nm) is currently located in Taiwan (92%) and South Korea (8%).

A huge global trade flow network supports the geographic specialization of semiconductor supply chain

There is a potential risk that these areas may be disrupted by natural disasters, infrastructure closures or international conflicts, and may lead to serious disruption of basic chip supply.

Under extreme assumptions, if Taiwan’s OEMs are completely interrupted for one year, they will lose us $42 billion in revenue, which may lead to the shutdown of the global electronic supply chain, and even affect the revenue of US $490 billion in different electronic equipment application markets, resulting in severe global economic disruption.

If this hypothetical disruption is to be made permanent, it may take at least three years and $350 billion of investment to build enough capacity in other parts of the world to replace Taiwan’s fabs.

4、 The United States and China are the largest semiconductor markets in the world

Semiconductors can be divided into three categories: Logic (accounting for 42% of revenue), memory (accounting for 26% of revenue), and discrete, analog and other (Dao, accounting for 32% of revenue).

In the field of mobile phones, analog semiconductors account for the highest proportion; In the fields of consumer electronics, PC and ICT infrastructure, Logic Semiconductor accounts for a high proportion; In industrial and automotive applications, Dao accounts for a higher proportion.

Sales distribution of various semiconductor sales in different application fields

Among them, the advanced processes below 10nm are all logic semiconductors, while Dao accounts for a high proportion of mature process capacity.

Production capacity distribution of various kinds of semiconductors in different chip process nodes in the world in 2019

From the perspective of geographical distribution, there are three different ways to measure the sources of semiconductor demand: the first is the headquarters of electronic equipment manufacturers, the second is the manufacturing and assembly sites of equipment, and the third is the location of end users who purchase electronic equipment.

Geographic distribution of global semiconductor demand

It can be seen that the United States and China are the largest semiconductor markets in the world.

The report estimates that in 2019, the value of semiconductors included in equipment purchased by Chinese consumers and enterprises accounts for about 24% of global semiconductor revenue. Almost equal to the United States (25%) and higher than Europe (20%).

As China’s domestic market will grow by an average of 4% – 5% more than the rest of the world in most electronic equipment categories, analysts expect China’s share of global semiconductor consumption to continue to grow in the next five years.

5、 Distribution of R & D & capital expenditure in seven links of semiconductor supply chain

The industrial supply chain involved in semiconductor creation and production is very complex and globalized. It is supported by an ecosystem composed of seven links: research, design, front-end manufacturing, back-end packaging and testing, EDA & core IP, equipment & tools and materials.

The semiconductor supply chain consists of seven different links

The report estimates that in 2019, the global R & D investment in semiconductor industry will be about US $90 billion, and the capital expenditure will be about US $110 billion, accounting for almost 50% of the global semiconductor sales (US $419 billion) in the same year.

R & D and capital expenditure of semiconductor industry in 2019

1. Pre competitive research: 15-20% of R & D expenditure in the whole industry

It is estimated that it will take 10-15 years on average for a new technology to be introduced into a large-scale commercial manufacturing.

For example, extreme ultraviolet (EUV) technology is the foundation of the most advanced semiconductor manufacturing node. It took nearly 40 years from the early concept demonstration to the commercial implementation in the wafer factory.

In most leading countries, basic research usually accounts for 15-20% of total R & D investment. For example, in the United States, basic research has been stable at 16-19% of the total R & D, while only about 5-6% of China’s R & D expenditure is spent on basic research. However, in the past 20 years, China has been narrowing the gap between pre competitive research and total R & D expenditure.

2. Chip design: 65% of R & D expenditure of the whole industry

Chip design is a knowledge and skill intensive business, accounting for 65% of R & D in the whole industry. Companies that focus on chip design usually spend 12% – 20% of their annual revenue on R & D.

As chips become more and more complex, development costs are rising rapidly. For example, the total cost of developing the latest system chip for a flagship smartphone may exceed $1 billion.

If the derivatives reuse the previous design, or manufacture new and simpler chips on mature nodes, the development cost is only 20 million to 200 million US dollars.

3. Chip manufacturing: 65% of total industry capital expenditure

Wafer manufacturing accounts for about 65% of the industry’s capital expenditure. Companies that focus on semiconductor manufacturing typically spend 30-40% of their annual revenue on capital expenditure.

A state-of-the-art, standard capacity semiconductor plant requires a capital expenditure of about $5 billion (for advanced analog Fabs) to $20 billion (for advanced logic and storage Fabs).

This is much higher than the estimated cost of a new generation aircraft carrier (US $13 billion) or a new nuclear power plant (US $4 billion to US $8 billion).

Depending on the specific product, there are 400 to 1400 steps in the whole manufacturing process of semiconductor wafer. The average time to complete a semiconductor wafer (i.e. cycle time) is about 12 weeks, but for advanced processes, it may take up to 14-20 weeks to complete.

Overview of wafer manufacturing process

4. Back end sealed test: accounting for 13% of the capital expenditure of the whole industry

Companies specializing in packaging and testing usually invest more than 15% of their annual revenue in facilities and equipment.

Overall, this segment accounted for 13% of the total capital expenditure of the industry in 2019, mainly concentrated in Taiwan and Mainland China, and recently new facilities were built in Southeast Asia.

5. EDA & core IP: 3% of R & D expenditure in the whole industry

In the design phase, EDA provides complex software and services to support semiconductor design. Core IP vendors provide licensing for reusable component design.

The R & D investment of EDA and core IP suppliers accounts for about 3% of the R & D expenditure of the whole industry, accounting for about 30% – 40% of its revenue.

6. Equipment & Tools: 9% of R & D expenditure in the whole industry

On the whole, semiconductor equipment manufacturers and suppliers accounted for 9% of the industry’s R & D in 2019 and 10% ~ 15% of its revenue.

Semiconductor manufacturing uses more than 50 different types of precision wafer processing and testing equipment, provided by professional suppliers, for each step of the manufacturing process.

Distribution of major semiconductor equipment types in the world

Among them, lithography tools represent the largest manufacturer’s capital expenditure, which can determine the advanced level of chip Fab production. In the chip manufacturing of 7Nm and below, an EUV machine can cost 150 million US dollars.

7. Materials: 6% of total industry capital expenditure

Companies engaged in semiconductor manufacturing also rely on professional material suppliers. Overall, material suppliers contributed 6% of the total capital expenditure in 2019, accounting for 5% of the industry’s added value.

The annual capital expenditure of the world’s leading suppliers of silicon wafers, photoresistors or gases typically accounts for 13% to 20% of their revenue.

The semiconductor manufacturing industry uses up to 300 different material inputs, many of which also require advanced technology to produce.

Global sales of key semiconductor manufacturing materials in front end and back end manufacturing in 2019

6、 The top three in the world usually account for 50% – 90% of the total revenue in various fields

According to their integration level and business model, semiconductor companies can be divided into four types: integrated device manufacturers (IDM), fabless, foundry and OSAT.

The complexity of technology and the demand for scale lead to the emergence of business models focusing on specific levels of the supply chain

In the manufacturing industry, the large scale of pre investment required to build new capacity is a major obstacle.

For example, from 2015 to 2019, the total annual capital expenditure of the five Fabs is about $75 billion, with an average of $3 billion per company per year, equivalent to more than 35% of its annual revenue.

Although semiconductor design does not need a lot of capital expenditure, its high R & D intensity also creates significant scale advantages and access barriers. From 2015 to 2019, the R & D investment of the top five fabless design enterprises is about 68 billion US dollars, with an average annual investment of 2.8 billion US dollars per enterprise, equivalent to 22% of its revenue.

China’s Chinese mainland and Taiwan account for 60% of the world’s largest OSAT companies, with 9 headquarters in Chinese mainland, Taiwan and Singapore, according to their income.

Only very large companies can get satisfactory returns from large-scale investment. This is why in different parts of the semiconductor supply chain, the top three companies in the world usually account for 50% ~ 90% of their respective revenue.

7、 China and the United States are each other’s largest research partners

A large part of R & D investment in semiconductor industry is used for basic research of scientific breakthrough, which is many years higher than that before its potential commercial application.

In this kind of pre competition cooperation, semiconductor companies and research institutions usually cooperate to share research costs and avoid repetitive work.

In the past 10 years, China and the United States have published the most relevant scientific papers in the semiconductor field.

According to the report’s analysis of scientific publications, basic semiconductor research often involves cross-border cooperation, and China and the United States are each other’s largest research partners.

Of the semiconductor related scientific papers published by Chinese research institutions, 36% are co authored with research institutions in other countries. Among the publications of American institutions, 60% are co authored with institutions in other countries. China is the largest partner, followed by Germany and South Korea.

Some of the most critical semiconductor technology advances have benefited from decades of global R & D cooperation. For example, the most advanced EUV lithography equipment currently contains about 100000 parts, which are provided by more than 5000 suppliers all over the world.

The EUV equipment integrates components from more than 5000 suppliers around the world

Although China has the largest number of semiconductor research papers and patents submitted each year, the United States is still the source of the most relevant innovation in the industry: the average number of citations of each semiconductor patent in the United States is 3-6 times that of any other country in the world.

Distribution of semiconductor patent applications in different regions of the world from 2010 to 2019

8、 Overseas talents contribute greatly to the development of semiconductor industry in the United States

At present, some of the most basic semiconductor technology breakthroughs used in most modern semiconductors, including MOSFET, CMOS manufacturing process, are developed by immigrants to the United States.

According to a recent study by the center for security and emerging technologies (CSET), about 40% of highly skilled semiconductor workers in the United States are currently born outside the United States.

International students account for about two-thirds of graduate students in electrical engineering and computer science, and more than 80% of them will stay in the United States after completing their degrees.

9、 Semiconductor industry faces fierce competition to attract talents

Talent has become the main focus of the semiconductor industry, and the risk of talent shortage may limit the pace of innovation in the next few years.

In 2017, a survey of semiconductor executives across the supply chain showed that about 80% of companies faced a serious shortage of candidates for technical positions. In another survey in 2018, 64% of the respondents listed talent as one of the three major risks threatening their development ability, and it was the highest risk factor.

The salary statistics also point out the limitation of talent supply: since 2001, the salary growth rate of the semiconductor industry in the United States has averaged 4.4%, significantly faster than that of the whole economy.

The semiconductor industry is also facing the challenge of aging labor force, and a large number of employees with existing technical posts may retire in the next 10-15 years.

In addition, the industry needs to attract talents with different skills, especially in software development and artificial intelligence.

Judging from the historical growth of the global talent pool of science and engineering graduates, it seems that it is difficult to meet the demand of the semiconductor industry for talents.

The historical growth of the global talent pool of science and engineering graduates seems to be insufficient to meet the industry’s demand for talents

The report analyzes the global data from the National Center for science and Engineering (ncses) of the United States. The results show that the annual growth rate of the six leading regions in the semiconductor supply chain is 4.5% from 2000 to 2015 (the most recent year with complete data).

The number of science and engineering PhDs shows a similar growth rate. This growth varies greatly in different regions: China’s talent pool is growing by more than 10% annually, while the growth rate in the United States is less than 3%.

This global talent pool is also facing fierce competition, especially the explosive growth in the number of software and consumer technology companies, which increases the challenge for the semiconductor industry to attract and retain highly skilled technical talents.

Conclusion: to solve the supply chain risk needs government stimulus measures

According to the analysis of this report, although geographic specialization promotes innovation and reduces the cost of consumers, it also causes supply chain risk. Government stimulus measures should be adopted to improve local chip production, so as to solve the supply chain risk.

The report calls on the government to take the following actions to improve the long-term resilience of the supply chain:

1. Ensure that domestic and foreign companies enjoy an equal global competitive environment, and strongly protect intellectual property rights;

2. Promote global trade and international cooperation in R & D and technical standards;

3. Invest in basic research, stem education and labor force development;

4. To formulate advanced immigration policies so that the leading global semiconductor cluster can attract world-class talents;

5. Establish a clear and stable framework to control semiconductor trade and avoid extensive unilateral restrictions on technology and suppliers.

Overall, in order to reduce the risk of major global supply disruptions, the report argues that the US government should develop a market-oriented incentive plan to achieve more diversified geographical coverage.

These incentives should be aimed at expanding US semiconductor manufacturing capabilities and expanding the supply of certain key materials, such as meeting us domestic demand for advanced logic chips for defense, aerospace and critical infrastructure.


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