China Update

Over the last couple of weeks, I came across various little things about China, none of which justified a blog post all on their own, but it seems a good time to give an update on what's going on over there. I consider China to be the biggest story in all of the semiconductor ecosystem.

That Bloomberg Article

I wrote about the article in Bloomberg's BusinessWeek on the day that it appeared, calling it fake news, to use the phrase du jour. You can find that post, which was a second Breakfast Bytes post that day (Lunch Bytes?) under EXTRA: Did the Chinese Really Attach Rogue Chips to Apple and Amazon's Motherboards.

Since that day, there has been more discussion. The US DHS and other equivalent agencies have said that they believe the tech companies' denials. Bloomberg published a follow-up piece and is standing by the story. People much more knowledgeable than me about motherboards and Baseboard Management Controllers have written skeptically. For example, see Investigating Implausible Bloomberg Supermicro Stories.

To me, the biggest reason for disbelief is very simple. Supposedly, these motherboards were all over Apple, Amazon, and Microsoft datacenters, not to mention the US Department of Defense. These are datacenters that contain literally hundreds of thousands of servers. Yet nobody has been able to produce one of these rogue chips, or even an actual photograph of one on a motherboard (as opposed to a component that is about the same size). It reminds me of how all those stories about UFO abductions went away once we all had smartphones with cameras.

Important Even Though Not True

Marc Andreessen has a catchphrase "Important if true" about investing in companies with wild ideas. People might be prepared to sleep in strangers' houses? And people might be prepared to have strangers sleep in their own house? LinkedIn founder Reid Hoffman's view was that he'd like to see people who would be ready to be on either side of that trade. But it turned out to be true, and thus was important, and Airbnb is a zillion-dollar company.

This story, about chips on motherboards, I think is something different, "important even though false."

I do have a lot of sympathy for the title of this Atlantic Monthly piece: The Chinese Motherboard Hack Is a Crisis, Even If It Didn’t Really Happen, although for different reasons. My reason is that something like this could happen. Our supply chains stretch deep into lots of other countries, especially China. A huge percentage of all chips, especially at the leading edge, are made in Taiwan. That's before you start to think about the possibility of infiltrating something into a chip design or an IP block. On the other hand, there is a certain "why bother" aspect to all this, since the software that runs on top is so riddled with security vulnerabilities, it seems almost pointless to worry about hardware attacks.

Journalists who cover this sort of story barely seem to know that where Taiwan is, and assume that it is insignificant since it is geographically small. For example, here is a quote from that Atlantic article I linked to above:

Even so, China has excelled in making large volumes of chips quickly and cheaply.

Er...no. Taiwan has. And China is trying, sinking over $100B into semiconductors and building a couple of dozen new fabs. China assembles a lot of electronics, but it is not (yet?) significant as a semiconductor manufacturer. Indeed, one of the reasons for kicking off the China First program for semiconductors was that China imports more semiconductors than oil. Increasingly, they consume them at home in their own phones, TVs, and other electronic devices. Obviously, a big amount is still exported again inside products like iPhones and, yes, Supermicro server motherboards.

Growth in Foundry

A research bulletin from IC Insights from the end of September looks at growth in the pure-play foundry market by region. The title is very confusing, since my initial read was that it would be talking about wafer starts by foundry company, and things like that. in fact, it is an analysis of companies that purchase chips from the foundries. Apart from the chips Intel manufactures itself, and the chips that Samsung manufactures and uses internally, I'm not sure what is excluded from the non-memory part of the market. There are some other small IDMs with their own fabs, but on this scale, at tens of billions of dollars, they are noise.

The chart above shows that purchases of wafers from every region are almost flat except for China (a tiny bit for Europe). This gives IC Insights their shock-and-awe headline that China Forecast to Account for 90% of Pre-Play Foundry Market Growth in 2018. The growth in China's business is 50%, so it's pretty significant. The IC Insights piece credits a lot of this growth with cryptocurrency (Bitcoin et al) since many of the companies designing chips for that are in China. However, this business is expected to slow in the second half since "demand for cryptocurrency devices is highly dependent on the prices of the various cryptocurrencies." They have plunged in price, just in case you haven't been following along at home.

Anyway, I think it is significant, provided it is not just an artifact of changing where orders are originated for something major like Intel processors, that there is that big of an increase in demand from inside China. Most of the fabless companies in China are always described as "small" but an increase of nearly $4B requires something big to be in the mix too. However, these numbers don't really tie together with SEMI's numbers below.

If you want to subscribe to IC Insights reports, in particular, their McLean Report—A Complete Analysis and Forecast of the Integrated Circuit Industry then you can sign up ($) at www.icinsights.com.

SEMI China Report

SEMI just announced a new China IC Ecosystem Report. Here are a few paragraphs no quite verbatim from the executive summary:

China consumes an estimated 38% of semiconductors produced globally. Semiconductors are the largest single imported source of imports into China which is considered a critical issue by the Chinese government. Although China's domestic IC production has increased at an approximately 10% CAGR between 2007 and 2017, domestic demand still outstrips internal fab capacity.

In 2014, China issued the National Guidelines pertaining to domestic semiconductor manufacturing to stimulate semiconductor industry investment. As a result, the national IC Fund was established and has accumulated more than $21.5B for investment in China's IC ecosystem. The second phase was announced at the end of 2017 with a goal to accumulate another $23-30B. The focus areas for phase 2 investments will be IC design, memory, compound semiconductor, and other strategic initiatives such as smart automotive, smart grid, AI, IoT, and 5G.

For the second year in a row, IC design continued to be the largest semiconductor segment in China in 2017 with revenues of $31.9B. There are about 1,380 IC design companies in China with the two largest being HiSilicon and UNISOC (fka Spreadtrum), both ranked in the top 10 fabless companies worldwide. However, most Chinese IC design companies are small with revenues under $1M. Newcomers in cryptocurrency and AI have shown tremendous growth potential. [However, these numbers don't tie together with the IC insights numbers above].

SEMI is currently tracking 30 new fab constructions projects fro 2017 to 2020 either underway or planned. Fifteen 300mm fabs are being tracked. Foundry, DRAM, and 3D NAND are the leading segments for fab investment and new capacity in China. With these buildout plans, capacity will grow at 15% CAGR from 2015 to 201\21 with global capacity passing 20% by 2020/21.

If you want a copy of the report ($) it is here on the SEMI website.

再见

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