Semiconductors: The end of China’s ‘longest bull market in history’

Representatives of China’s wafer foundry industry, producers of the semiconducting wafers on which integrated circuits (ICs) or microchips are created, announced this morning that they will not be increasing prices over the short term, citing the impact of recent capacity increases and, surprisingly, slackening demand.

This marks the end of six straight quarters of a continuous rise in quotations — the “longest bull market in history” — during which semiconductor prices climbed steadily from the fourth quarter of 2020 amid a global supply crunch.

Despite price stabilization, China’s semiconductor manufacturers are still in a desperate struggle to ramp up production and manage convoluted supply chains:

• In 2020, the domestic semiconductor industry registered an unprecedented annual growth rate of 30.6% to reach $39.8 billion in total annual sales, accounting for 9% of the global semiconductor market.
• In 2021, 38 of 86 Chinese listed semiconductor companies announced net profits in excess of 90%, and according to data released by the China Semiconductor Industry Association, sales of Chinese ICs breached 1 trillion yuan ($157.08 billion) for the first time last year.

Last year was a watershed year for China’s leading wafer foundries, as they entered the top 10 of global producers:

• Semiconductor Manufacturing International Corporation (SMIC) 華虹半導體: Revenue for January and February of $1.223 billion, a year-on-year increase of 59.1%; fifth-largest global producer.
• Huahong Group 华虹半导: Revenue of $1.63 billion in 2021, a year-on-year increase of 69.64%; sixth-largest global producer.
• Nexchip 合肥晶合集成电路: Revenue of $852,79 billion in 2021, a year-on-year increase of 258.97%; tenth-largest global producer.

The context: Amid deteriorating relations between China and the U.S., microchip production — key to powering a wide range of technologies but based on a very complex manufacturing chain — has become a crucial faultline of U.S.-China geopolitical competition.

• Domestic microchip production has increased rapidly, but in 2021, China still imported $432 billion worth of chips, a increase of 23.6% year-on-year, and one estimate put China’s semiconductor self-sufficiency rate for 2020 at only 15.9%, still far removed from Beijing’s goal of attaining 70% by 2025.

The takeaway: China’s semiconductor industry is continuously increasing capital expenditures and production capacity, but it still has a very long road ahead. In 2021, China’s share of the global wafer foundry market was still only 8.5%, and while domestic wafer producers are growing rapidly, they are still far behind the likes of Taiwan Semiconductor Manufacturing Company (TSMC), Samsung Electronics, and Intel, which together account for 60% of global industrial capital expenditure in the industry.