For the last three decades, China has very actively encouraged fabrication production through a variety of industrial policies, from the 908 Project in 1991 through the second installment of the Big Fund in 2019. For the last two decades, these policies have succeeded in increasing China’s share of global fabrication capacity from less than 1 percent of total fabrication in 2000 to 12 percent in 2018, even if much of that capacity remains foreign-owned. In 2019, China’s semiconductor capital equipment spending reached 18 billion USD, 20 percent of total global capital equipment expenditure.
Despite China’s burgeoning market for chipmaking equipment, the concentration of resources has been primarily on fabrication and, secondarily, design, with the capital equipment sector given relatively little policy support. This relative neglect of the capital equipment sector may come as a surprise to some of those among of us who have been subjected to countless pitches, lectures and even 江泽民-style serenades (courtesy of ambitious officials and interested third parties) about the importance of developing the whole silicon chanyelian/supply chain in China. The policy sequencing with an initial relative de-emphasis on capital equipment actually makes eminent sense because a new industry often tries to serve its domestic market first before selling overseas. Even established multinational firms often suffer from what international business scholars call the liability of foreignness. Thus, China has chosen to foster first domestic fabrication capacity, which in turn can serve as the initial market for China’s emerging domestic capital equipment vendors.
There were already signs that the relative neglect of the capital equipment industry by industrial policymakers was changing before the last five-plus months of tightening of American export controls. Under the first installment of the Big Fund, semiconductor material and capital equipment firms received only 4.2 percent of the total installment. Furthermore, these funds were spread among fourteen firms: seven materials firms and seven equipment makers. However, under the second tranche of the Big Fund kicking off in March of this year, the government had already aimed to channel more funds to materials and capital equipment firms and target the development of what was deemed the most “core” equipment, CMP and lithography. The government also already intended to push harder for firms to verify and purchase more local equipment. Undoubtedly, the export controls targeting SMIC on top of those targeting Huawei will now spur the Chinese government to pour money into chipmaking equipment. In this post, we will assess the state of the Chinese industry as it is today rather than speculate about the future impact of the avalanche of funds that is sure to come chipmaking equipment’s way.
Currently, Chinese producers are producing “noncritical” equipment for fabs. In other words, they are not competing with the likes of Applied Materials and LAM. They have been able to sell more equipment outside of IC fabrication for solar panel, IC A&T, and flat-panel display manufacturing. Estimates place domestic producers as accounting for only five to ten percent of the total semiconductor equipment expenditure in China in 2018.
Most of the domestic producers only produce one or two types of semiconductor equipment (see Table 1 from which I’ve excluded many small, one-product firms). Only NAURA and AMEC make a substantial range of equipment. The three firms that American competitors and equity analysts alike have identified as most promising are not surprisingly NAURA, AMEC, and the Chinese–American hybrid firm (its headquarters is still in the US) ACM.
Table 1 Major Chinese Capital Equipment Vendors and Their Products
|Type of Equipment||NAURA||AMEC||AMC||SMEE|
NAURA emerged via the mergers of a number of state-owned semiconductor capital equipment firms as well as the acquisition of an American wafer cleaning equipment firm, Akrion. Its controlling shareholder is the Beijing municipal government. In 2018, the firm reported less than 300 million USD from sales of semiconductor equipment. In comparison, Applied Materials had over 17 billion USD in revenue in 2018. In other words, China’s largest capital equipment maker is still a minnow in this sector.
AMEC was founded by returnees who left Applied Materials and other firms. Now this firm’s dominant shareholder is the Shanghai municipal government. The firm’s main business is selling deposition equipment for the production of LEDs, not IC fabrication. In LED equipment, it is the third largest supplier given its price-competitive products in China, which is the largest producer of LEDs. However, the market is only 500 million USD in sales. In the etching market, AMEC has 1 percent market share or 80 million USD in revenue as of 2018.
ACM was founded in the United States by David Wang in 1998. In 2006, he returned to China to set up a subsidiary, ACM Research. The firm focuses on cleaning tools and wafer-level packaging for A&T. Wang was the largest shareholder until new investments reduced his holdings from 25 percent to a little over 2 percent. The dominant shareholders are investment vehicles of the Shanghai government. Ostensibly, this move was done in preparation for listing the firm on Shanghai’s answer to NASDAQ, the STAR board, but it is a sign of the state encroaching on all the promising private firms in this strategic industry. ACM has 2 percent of the global cleaning market to NAURA’s 1 percent, but this firm generates the smallest sales revenues of these three promising Chinese firms at just under 100 million USD in 2018.
Last and very much least, the spin about SMEE is that this firm is the next ASML. There’s next to no evidence to back this hype. I would have ignored this firm, but the hype has been so relentless a few words are needed. What lithography equipment SMEE offers is very much of the lab rather than for the fab. The throughput of its equipment is only one tenth of the machines sold by ASML, Canon and Nikon. On top of that, SMEE’s lab also serves as its only production facility. Consequently, SMEE’s lithography equipment is far from mass production-ready both in terms of its own output and fab customers. The final strike against SMEE’s lithography equipment is that it did not offer argon fluoride (ArF) laser technology2 so could not be used for high-k metal gate (HKMG) tech typical of reasonably advanced process nodes, such as 28 nm, until recently.
 The two largest producers, Germany’s Aixtron and America’s Veeco, have respectively left and been hammered in the LED equipment business. The margins in this China-centered business are simply too low. Even AMEC, the homegrown champion, had to allow its margins to suffer to take market share.
 Correction: The original text stated that SMEE still did not have the ArF laser. Until recently, SMEE did not have an ArF laser. They have now obtained one from another spin-off of the Institute of Microelectronics at Chinese Academy of Sciences. Thanks to one reader for pointing out SMEE’s ArF and follow-up with a source. Does not solve the problem of SMEE’s equipment being for the lab instead of fab though.