Foreign-funded enterprises are optimistic about China's semiconductor market

Since 2024, the resilience and vitality of the Chinese market, as well as its clear and open attitude, have attracted the attention of global integrated circuit companies. In the first five months of this year, China imported 213.65 billion integrated circuits, worth 1.05 trillion yuan, with double-digit growth in both quantity and value, showing the momentum of recovery. CEOs of semiconductor companies such as Broadcom, SK hynix, Micron, Qualcomm, AMD, Synopsys, and Infineon Technologies have come to China to attend the conference or hold launch events, expressing their optimism about China's economic prospects and will increase investment in China or deepen innovation cooperation with Chinese partners. At the same time, a number of semiconductor companies have further expanded their business in China. On January 22, Infineon Technologies (Shanghai) Co., Ltd. officially opened in Shanghai as a new sales entity for sales and trade settlement. On March 27, Micron held a groundbreaking ceremony for a new plant in Xi'an High-tech Zone. STMicroelectronics' joint venture factory in Chongqing, an STMicroelectronics SiC device, will be lit up by the end of this year.

The reasons why foreign-funded enterprises are optimistic about China's semiconductor market can be viewed from three dimensions: policy, market and industrial chain.

First of all, while the Chinese government continues to optimize the business environment for foreign enterprises, it has also introduced blockbuster policies to inject vitality into the semiconductor industry.

In March this year, the State Council issued the "Action Plan for Promoting Large-scale Equipment Renewal and Consumer Goods Trade-in", proposing equipment renewal actions and consumer goods trade-in actions.

Among them, the equipment renewal action will vigorously promote the renewal and technological transformation of production equipment, energy-using equipment, power generation, transmission and distribution equipment, etc., which will benefit the chip category represented by power semiconductors. Power semiconductors are the core devices in many fields such as power generation, transmission and distribution, and power consumption, and are used in photovoltaic inverters, wind power converters, DC converter valves, AC and DC circuit breakers and other equipment. Yu Daihui, senior vice president of Infineon Technologies and head of Greater China of Technology Industry and Infrastructure business, said at a media day event held in May that China's new photovoltaic installed capacity is expected to remain high in 2024, and the project reserve in the wind power field is sufficient, and Infineon's power semiconductors have been adopted by more than 90,000 wind turbines in China.

The trade-in of automobiles, home appliances, and home improvement consumer goods has driven the growth of semiconductor categories such as MCUs, smart sensors, and wide bandgap semiconductors.

Taking MCU as an example, new products such as green smart home appliances, smart home products, and new energy vehicles can not only drive the growth of MCU usage, but also promote the further improvement of MCU processing power, storage configuration and other indicators, and require MCU to integrate more modules such as touch, Wifi, display and even AI/ML engine, thereby increasing the market share of high-end MCU products and bringing greater profit margins to suppliers. At present, the largest revenue area of the world's top three MCU suppliers is the Chinese market. NXP President and CEO Kurt Sievers said in the first-quarter earnings call that demand in the Chinese market is improving, and both in the core industrial segment and in the consumer IoT business segment, there is an improvement in continuity. Dave Parr, head of investor relations at Texas Instruments (the world's top 10 MCU suppliers), also said that China is a very important market, and Texas Instruments will compete with local, American and European semiconductor suppliers to maintain and gain market share.

Secondly, the innovation of terminal products represented by smart phones and new energy vehicles has excited foreign semiconductor companies.

Since the beginning of this year, domestic mobile phone shipments have picked up, and new momentum has sprouted. Globally, the wave of 5G replacement has slowed down since 2022, and 5G mobile phones in the Chinese market have been basically popularized, and smartphones with end-side generative AI functions have become another growth point in the mobile phone market. Thanks to the high-end user base, the active strategy of Honor, OPPO, vivo, Xiaomi and other manufacturers to enter large-model mobile phones, as well as the unique ecological model including model layer, platform layer and application layer, the Chinese market is becoming an important position to lead the development of AI mobile phones. According to Canalys, China is the world's top three smartphone markets with the strongest propensity for AI interest. In terms of overall shipments, in the first quarter of 2024, Greater China was the second largest regional market in terms of mobile phone shipments, second only to the Asia-Pacific region.

The world's top two mobile phone processor suppliers regard China's high-end mobile phone products as an important target market. Qualcomm President and CEO Ammon said that the Snapdragon 8th Gen 3 processor with terminal AI and generative AI technology has strong demand in the global market, especially in China. The proportion of high-end and mid-to-high-end products in the Chinese market continues to rise, and the introduction of end-side AI and generative AI for the first time in high-end devices has caused a great response among consumers. MediaTek's new co-CEO Cai Lixing believes that the trend of the Chinese market towards high-end mobile phones is very obvious and continues. He believes that in the short term, MediaTek's market share of Android smartphones and flagship smartphones in China is expected to reach 30%.

At the same time, the production and sales of new energy vehicles in China continue to grow, and the industry is accelerating its evolution in the direction of electrification, intelligence and networking. At present, the number of chips used in automobiles has increased significantly, from 600 to 700 chips per vehicle of traditional fuel vehicles to about 2,000 chips for smart cars. Therefore, market opportunities have attracted the attention of international automotive semiconductor companies.

Kurt Sievers said that the growth momentum of hybrid and battery electric vehicles is driven by the Chinese market, and Chinese companies such as BYD are very competitive and enterprising, and China will become a major market for electric vehicles. Infineon Technologies CEO Hanenbeek also said in the fiscal second quarter conference call that the adoption of electric vehicles in major Western markets is currently slowing down, and OEM orders have been delayed. On the contrary, new new energy vehicles in China continue to emerge, and the sales penetration rate has also exceeded that of the same period last year. Since the beginning of this year, NVIDIA's on-board computing platform has been adopted by Li Auto, Great Wall Motor, ZEEKR, Xiaomi and other car companies, and Infineon has signed silicon carbide supply agreements with Xiaomi, STMicroelectronics and Geely Automobile.

At the level of the industrial chain, on the one hand, the investment in mature manufacturing processes and storage in the first half of 2024 in the Chinese market is regarded by global semiconductor companies as the main enhancement engine in 2024. In the first quarter of this year, the Chinese market accounted for more than 40% of the revenue of the world's top five semiconductor equipment manufacturers (Applied Materials, ASML, Lam Research, TEL, and KLA), and they all accounted for the highest proportion of revenue of the above companies. Among them, ASML's net sales from the Chinese market accounted for 49%. Although ASML's sales in the Chinese market have been affected by 10%~15% due to export regulations, the strong demand for sub-critical nodes and mature nodes in the Chinese market is still an important support for the company's profitability. Lam Research expects global wafer equipment (WFE) spending to be around $90 billion in 2024, an increase from its previous forecast, primarily due to higher shipments of lithography machines to the Chinese market. From an industry perspective, the growing demand for high-bandwidth memory and continued investment in the Chinese market are driving WFE spending.

On the other hand, the continuous improvement of China's local semiconductor industry chain has also created favorable conditions for foreign semiconductor companies to expand their business in China. For example, NXP chose the 16nm process of TSMC's Nanjing factory to produce automotive MCUs, maintained cooperation with SMIC, and selected a third foundry partner set up in China in the first quarter of this year. Infineon has 18 front-end and 48 back-end production partners in Greater China, as well as two suppliers of silicon carbide substrates, Tianyue Advanced and Tianke Heda. The continuous improvement of local supporting facilities is conducive to the improvement of cost competitiveness of foreign-funded enterprises based on local suppliers, thereby enhancing the attractiveness of foreign-funded enterprises.

Author丨Zhang XinyiEditor丨Qiu Jiang YongmeiEdited 丨Maria Producer丨Lian Xiaodong