The Coming China Chipocalypse by Robert Maire on 11-15-2023 at 10:00 am https://semiwiki.com/semiconductor-services/semiconductor-advisors/337982-the-coming-china-chipocalypse-trade-sanctions-backfire-chips-versus-equipment/
China is cornering the market on Semiconductor equipment Quarterly reports from the industry show that China was 48% of Lams business, 46% of ASML’s business and 43% of KLA’s business. We fully expect China to be a similarly large percentage of AMAT’s business when they report this week. With China approaching buying nearly half of all chip production equipment on the planet you have to question what happens when all that capacity comes on line? It would be both naïve and stupid to not assume it will add to China’s growing chip capacity. If China were buying up half the planets steel milling equipment you would bet the steel industry would be freaking out about the prospects of a flood of cheap Chinese steel coming onto the market as soon as the equipment was installed. So too should the semiconductor industry be concerned. Look at all the other industry’s that have been decimated by Chinese capacity coming on line; solar cells, LEDs, pharmaceuticals etc; etc;. However we blithely and happily continue to sell chip making equipment, everything and anything not nailed down. In fact, semiconductor equipment companies appear quite happy about the rush of business from China because it is saving them from an otherwise even uglier down cycle. Without China, the equipment industry would be cut in half. The untold truth is that China probably accounts for more than half of equipment companies profits as the prices charged in China are well above the lower prices charged TSMC, Samsung & Intel and the rest of the world. Every piece of equipment sold to China reduces chip demand elsewhere. The semiconductor industry, like many other industry’s, is somewhat of a zero sum game. Meaning that demand satisfied in one country offsets what would have otherwise been produced in another country. There is some elasticity of demand in memory but most other applications are not as price elastic. Automotive & consumer chips made in China will offset demand for those chips in the US, Japan, Korea and elsewhere. Thus all the equipment being shipped to China is at the expense of chips made elsewhere Micron & GloFo are most negatively impacted by coming China Chips Both Micron and Global Foundries are the most vulnerable US companies to the coming tsunami of chinese chips created by the flood of equipment being bought. Lets face it….memory is a commodity market. A gig of DRAM or NAND is pretty much indistinguishable as to the country of manufacture. Sure there are differences such as DDR or high bandwidth memory, but the vast majority is a fungible commodity. As such, all the equipment being sold at a high rate of speed to Chinese memory makers will hurt Micron and other memory makers such as Samsung (to a lesser extent). All the memory making equipment on boats and planes to China right now reduces the need for new Micron fabs (and jobs) in Boise and New York…its just that simple. Global Foundries is also at significant risk as they are stuck in the technology dark ages as they gave up on the Moore’s Law technology race. SMIC in China is already far ahead of GloFo in that they have already produced a 7NM chip that was a slap in the face to US sanctions. GloFo does not have EUV and neither does SMIC and SMIC is more advanced. Without doubt, SMIC and other Chinese fabs can undercut GloFo’s pricing. Yes, GloFois trying to “hide” in some specialized chips but that is not adequate protection. If you think “trusted” production for the US defense industry will save GloFo, think again, as its a relative rounding error in global chip making capacity. The bottom line is that GloFo & Micron will both be hurt as excess chip capacity comes on line from China over the next few years. Intel is in a safer, but not totally invulnerable space as they are focused on the leading edge and remain ahead of SMC and other Chinese chip companies as they pursue EUV and Moore’s Law as a renewed laser focus. California wins at New York’s & Idaho’s expense It is interesting to note that while California based companies such as Applied, Lam & KLA are reaping likely more than half of profits selling chip equipment to China, New York & Idaho will suffer. New York has GloFo and maybe (in the distant future) Micron, Idaho is scheduled to get a Micron fab in Boise before New York. With all the memory capacity coming on line in China and middle of the road foundry capacity (which GloFo specializes in) also coming on line it could indefinitely delay the need for additional fabs. At current utilization rates GloFo certainly will never need a second fab in NY and wisely is expanding overseas where it is more financially viable and competitive. In the mean time Applied is continuing to export manufacturing jobs to Singapore and Lam is exporting jobs to Malaysia quickly. Its all about the “marginal cost” As we have experienced many times in the cycles of the memory industry, pricing can and sometimes will collapse to the marginal cost of semiconductor manufacturing. This is that selling prices will fall to the marginal cost of manufacture which is raw materials , labor, electric etc; and not include equipment amortization as that is already a “sunk” cost. China has more of a propensity to “race to the bottom” to marginal cost as we have unfortunately seen in other industry’s. Its a cost of doing business and surviving in the long term. They are certainly not focused on quarterly earnings….its all about market share and market dominance and killing off the competition. Something that Korea has been very good at in the memory industry but China is even more cutthroat than Korea and will undercut them as well….. When there is excess capacity. the “race to the bottom” accelerates….and we see excess capacity coming on strong…. The cycle will almost certainly lengthen or perhaps “double dip” We have warned several times over the past year that the expansion of the Chinese semiconductor market in the face of and because of sanctions will likely worsen the current oversupply condition that causes the industry to be in its current downcycle. The current excess supply which would otherwise be offset by increasing demand may not be able to suck up all the new capacity that will come on line. Or if it does, an upcycle may be short lived until all that Chinese capacity comes on line. The Stocks As we have pointed out here we think there is significant longer term risk to both Global Foundries as well as Micron. They are quite vulnerable to the capacity being bought a a feverish pace by China and will likely be the victims as that capacity comes on line in their core markets. We can only hope that demand outpaces increasing global chip supply but we wouldn’t bet on it or invest our money based upon that false hope…its too risky a bet. Meanwhile chip equipment companies have been saved from disaster by China but will get hurt longer term as China looks to fill equipment needs internally. Unfortunately the chip sanctions placed on China have had exactly the opposite effect of the intentions……that is that China will be a much bigger , stronger player in chips with more of a threat to US players because , in large part, of the fear inspired buying of tons of equipment caused by thise very sanctions. We have effectively “scared” China in to buying much more equipment than they needed or would have otherwise bought and it will now come back to haunt the industry……. Can you say “BOO”……? Trick or treat? About Semiconductor Advisors LLC Semiconductor Advisors is an RIA (a Registered Investment Advisor), specializing in technology companies with particular emphasis on semiconductor and semiconductor equipment companies. We have been covering the space longer and been involved with more transactions than any other financial professional in the space. We provide research, consulting and advisory services on strategic and financial matters to both industry participants as well as investors. We offer expert, intelligent, balanced research and advice. Our opinions are very direct and honest and offer an unbiased view as compared to other sources. _______________________________________________ Link mailing list [email protected] https://mailman.anu.edu.au/mailman/listinfo/link
