Undermining American Industrial Excellence: Controls on Wafer Fab Equipment and China

This post will examine the implications of Trump’s actions against Huawei and now SMIC for America’s wafer fab equipment industry.  With the August 17 Final Rule on Huawei, American technology embodied in capital equipment cannot be sold to foundries serving Huawei (assuming no licenses are forthcoming from the Department of Commerce).  With American dominance across a large swathe of critical capital equipment, one might think that this move would hurt Huawei with little cost to American industry. Unfortunately, actual planning already underway by American industry and other plausible scenarios tell a more pessimistic story pointing to the potentially high costs of this policy for America.

American Dominance in Chipmaking Equipment?

In wafer fab equipment, American firms have a very strong position. Three of the five largest firms, comprising 71 percent of 2018 revenue, are American: Applied Materials, Lam Research, and KLA. Applied Materials is the largest firm with 18 percent of global revenue. Nevertheless, going forward, ASML of the Netherlands is likely to be the largest firm because it monopolizes high-end lithography, which is called extreme ultraviolet (EUV) lithography, and dominates lithography generally. America withdrew from the lithography market in 2001 when ASML acquired Silicon Valley Group (SVG), the last American lithography equipment producer.

America’s predominance in this industry, even excluding lithography, has been neither continuous nor dependent on America’s own share of fabrication capacity. In the 1980s, Japanese firms looked poised to wipe out the American capital equipment makers along with much of the rest of the American industry. Between 1983 and 1990, America’s share of global IC capital equipment revenue declined from 66 percent to 44 as Japanese suppliers pulled ahead. What worried so many American semiconductor firms at the time was the perception that the big Japanese equipment producers prioritized their Japanese customers leaving American chips producers at a disadvantage.  What worried American semiconductor equipment makers was the perception that Japanese chipmakers favored their homegrown capital equipment providers.  Many inside the American chip industry thought it was their end days. Sematech was in no small part what rescued the American industry, including American lithography production, from oblivion by organizing vertical and horizontal cooperation among the American industrial participants and conducting a number of successful projects to improve product and process technologies (see Browning and Shetler’s history of Sematech). In the wake of this successful public–private partnership to revive American industry, the one major error was, arguably, the approval of the sale of the last American photolithography maker, SVG, to ASML in 2000. At the time, SVG was ahead of ASML in EUV lithography research.

Today, the most prominent American firms have large market shares across a number of categories of wafer fab equipment (see Table 1). American firms as of 2018 monopolized production of four product areas: optical mask-making lithography (not IC lithography and not included in Table 1), bevel edge removal, gate stack tools, and ultra-high-dose doping equipment. In other areas, such as etch, metrology, and inspection, American firms maintain a monopolistic position in certain high-end products. This sounds like a very dominant position, but interviewees have stressed to me that they believe that these monopolies are not secure ones. In their view, Japanese firms and others can make every one of these pieces of equipment if given some time, and one type of equipment, bevel edge removal tools, is an optional tool in fabrication rather than a necessary one.

Table 1 2018 American Share in Wafer Fab Equipment Markets (%)

 Applied MaterialsLAMKLAOther US FirmsTotal US Share
Plasma Chemical Vapor Deposition (CVD)52.135.5  88
Sputtering74.4   74
Electrochemical Deposition16.176.5  93
Bevel Edge Removal 100  100
Conductor Etch32.753.2  86
Chemical-Mechanical Planarization (CMP) and post-CMP cleaning70.3   70
Gate Stack Tools100   100
Doping Equipment68.2  17.886
Ultra-High-Dose Doping Equipment100   100
Process Control11.5 51.17.870
Thin-Film Metrology  40.630.771
Optical Metrology  46.430.377
Macro Defect Inspection  68.516.585
Unpatterned Wafer Inspection  96.3 96
Patterned Wafer Inspection15.8 68.2 84
Optical Patterned Wafer Inspection6 87.5 94

To give an example of how latent or trailing competitors can come back, we can look at the experience of American companies. In 2010, Applied Materials lagged far behind in conductor etch products. By devoting R&D resources and working closely with key customers, Applied Materials was, within five years, again able to become an industry leader in selling this type of equipment for advanced process nodes. Huawei does not have five years to wait if cut off from American equipment-laden fabs, but industry insiders think the Japanese firms only need two years to fill the gaps left by eschewing American equipment. And this assumes market-based competition. If concerned countries are willing to throw money at inducing this transition, the catch-up of foreign capital equipment could be even faster.

What Tokyo Electron did in the wake of the United States placing Fujian Jinhua on the Entity List illustrates the capabilities of competitors of American firms. As American capital equipment makers pulled out of Fujian Jinhua, Tokyo Electron made a big show of staying put in Fujian Jinhua’s fab, meaningless though this show of support was given that there were few other tools available to see fabrication through to the end. Building on this publicity stunt, Tokyo Electron went around to other fabs in China saying that American equipment could not be trusted because it carried political risk. For Tokyo Electron’s American competitors, the problem with this sales pitch is that it is the best kind—the truth. Consequently, American equipment vendors have claimed that they lost sales to Japanese vendors in the wake of Fujian Jinhua. To be clear, these sales were in products where Tokyo Electron already had competing products, but it is a large and capable firm with many such products.

Corporate Strategies to De-Americanize Fabs: Two Timelines

There has been a private industry study, which must remain anonymous, involving active industry players that has emphasized a somewhat slower replacement rate than what interviewees reported. By this estimate, to ready equipment for a cutting-edge de-Americanized fab would take four to six years. The major hurdles for replacing American equipment are high-end inspection, process control, and etching equipment, so this study suggested that rather than replacing American firms, the faster approach would be to replace American content. All the major American vendors have some production overseas, principally in Southeast Asia, and the idea would be to reorganize production of these American MNCs to remove American content. Such a move would result in the capital equipment vendors remaining compliant with the Entity List while still being able to provide equipment legally to foundries serving Entity List–designated firms. Executives from KLA, the leading supplier of metrology, inspection, and process control tools, admitted to considering using the firm’s manufacturing sites outside of the US to maintain business as usual.[1]

This scenario assumed that the foundry for this de-Americanized line would be TSMC. This solves two problems.  First, TSMC is unlikely to be cut off from ASML’s EUV equipment. Second, TSMC is at the cutting edge of fabrication so it is the best foundry partner with which to set up an advanced line.

Having been briefed on this private group’s report but not privy to the detailed contents of the report, I would like to add a note of caution before accepting the report’s pessimistic conclusions forecasting limited participation by non-American capital equipment vendors in this de-Americanization process. The report seems to approach de-Americanization with the historically reasonable assumption that firms are still generally on a commercial footing even with government subsidies playing a role as they always do in fabrication. With Sino-American technological rivalry heating up, this assumption may not hold any longer. When pressed into a corner, China might provide such large subsidies that less inefficient and thus more costly alternative equipment might become a viable alternative. The countries providing such equipment might also try to seize the opportunity by providing their own subsidies as well. 

How long would it take TSMC or another fab, such as Samsung’s foundry services, to create a fab line that designed out American equipment? Assuming the foundry would not build a whole new fab building on a greenfield site,[2] the amount of time needed to move in new equipment and get the new fab line up and running is one year to fifteen months.[3] Of course, for any equipment for which an immediate off-the-shelf replacement from a non-American company is not yet available, the time to develop the equipment would have to be added to the fifteen months needed to move in and ramp up production. Thus, the minimum amount of time would be more than three years if the estimates of interviewees concerning their non-American rivals’ capabilities are accurate. 

This timeline means that there is unlikely to be any de-Americanized fab savior in time for Huawei because Huawei is very unlikely to have existing chip inventories that can last so long.[4]  However, the expanding scope of controls give firms incentives to pursue this whether or not Huawei is the end customer.

Notice that I have not brought up the possibility of Chinese capital equipment saving the day.  I’ll write a post about that soon, but the short answer is Chinese capital equipment firms will not play any but minor roles in de-Americanization of wafer fabs in the next five years.  In order to de-Americanize fabs, one of three things has to happen: American firms will have to de-Americanize their supply chains, Japanese and other vendors will have to plug the gaps or a mix of these non-American vendors and American offshoring will have to occur.

Conclusion

The American government’s moves against Huawei and SMIC provide perverse incentives for American firms to accelerate the offshoring of research and production of what is the final bastion of American-made machine tool excellence. On top of that, these moves open up opportunities for American competitors to supplant American semiconductor capital equipment firms even in areas of their greatest competitive strength.  Flipping MAGA on its head, Trump has stumbled upon the precise policy to undermine one of the remaining areas of American industrial “greatness”.


[1] “KLA Corporation (KLAC) CEO Rick Wallace on Q1 2020 Results – Earnings Call Transcript.”

[2] There are a lot of fab shells (fab facilities without any equipment) sitting empty in East Asia, so it is a fair assumption that the foundry undertaking this project would not have to build a greenfield fab.

[3] This estimate assumes six months for equipment move-in and six to nine months for testing and pilot production (or approximately twelve months to go from equipment installation to ten thousand wafers per month), which is moving at the rapid foundry-in-Asia speed. Former and current fab managers and/or top executives from Asian foundries provided these estimates. TSMC’s Nanjing fab was able to move in equipment in under six months. 

[4] For some chips, Huawei may have built chip inventories that can last eighteen months or more.

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