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Asia’s Dominance in the Semiconductor Industry
Overview
Asia has a strong presence in the semiconductor industry globally. The region is already the biggest market for semiconductors, accounting for 60% of global semiconductor sales. (Deloitte 2020) South Korea, Taiwan, Japan, and China are key players in Asia.
South Korea – Memory powerhouse
South Korea has built up a dominant market share in memory, leading the effort to migrate memory technology and cutting cost per bit. In 2020, Samsung and SK Hynix combined accounted for 74% of DRAM (Dynamic random-access memory) market by bit shipments, and 59% market share in NAND (UBS 2021) There is also a sizable foundry business and domestic industry supply chain to support the local ecosystem.
Taiwan – well rounded, deep technology supply chain
Taiwan has developed a closely connected manufacturing supply chain from semiconductor to hardware, which creates synergy in the region. Taiwan is competitive in chip manufacturing, IC design, outsourced semiconductor assembly and test (OSAT), raw wafer, and more. TSMC has the largest market share in the foundry business and continues to be the technology leader in node migration. MediaTek is one of the two major suppliers in smartphone SoC (system on chip). GlobalWafers, after the acquisition of Siltronic, will have a 25% market share in the raw wafer market, 2nd largest globally behind SUMCO in Japan. (MS 2020)
China – Localization
Although its global market share remains relatively low at the moment, China is catching up in the semiconductor industry with strong government support. China has already invested RMB 650bn since 2014 through its state-owned sector investment fund, the National IC Industry Investment Fund (“The Big Fund”). We see a continuous flow of funding and talents to support foundries, fabless and other semiconductor companies in China.
Japan – Upstream specialist
Japan’s strengths in semiconductors are in raw materials, equipment, and small active-passive components. In upstream semiconductor materials, companies like Shin-Etsu and HOYA are global leaders. Tokyo Electron is one of the top three semiconductor equipment makers globally. Sony remains a leader in image sensor technology.
History
1970-2000: Rise and fall of Japan
From 1976 to 1979, under the guidance of the government, Japan began to implement the VLSI (very large-scale integrated circuit) research project. The project was led by the five largest semiconductor companies in Japan, Hitachi, Mitsubishi, Fujitsu, Toshiba, and NEC, with a total investment of 72 billion yen to make breakthroughs in the core generic technology of the semiconductor industry. The result was its leadership in DRAM technology with the launch of 64Kb, 256Kb, and 1Mb DRAM products in the 1980s. Japan had over 80% of DRAM market share in 1987 (Global Times 2019), and it also surpassed the US in global semiconductor market share for the first time in 1987 (48% Japan v 39% US) (Handotai Sangyo Kenkyusho, 2000)
We think a few factors contribute to the decline of Japan’s semiconductor industry in the 90s: 1) The ongoing US-Japan trade war and the US-Japanese Semiconductor Agreement in 1986 brought unfavorable policy, tax rate, and currency impact to Japanese DRAM makers. 2) Semiconductor companies in Japan did not have a diversified product portfolio, with a high concentration in DRAM. As downstream demand in PC took off, other semiconductor products like CPU (central processing unit) and GPU(Graphics processing unit), became more important. 3) Memory producers continue to close the cost gap with Japanese makers.
1990-2020: South Korea and Taiwan leading Asia semiconductor
Korean companies invested heavily in R&D to catch up with Japan in memory technology. Samsung, for example, had an average capital expenditure over revenue ratio at around 40% between 1987-92, compared to the industry average of 21%. (Monolithic 2011) The technology gap between Korean companies and Japanese companies narrowed from four years in 1983 to zero in 1992 with the launch of 64M DRAM.
Before TSMC was founded in 1987, most integrated circuit companies operated an IDM (Integrated circuit manufacturer) model with in-house design and manufacturing. TSMC and other foundries have developed this new business model of separating chip design and manufacturing. Taiwan companies have been able to leverage the relatively lower labor cost in the region to ramp up semiconductor manufacturing. Over time, IDM has been losing market share to foundries and fabless companies. One key reason is that process node migration requires significant capital investment and a high utilization rate to be profitable, which makes it increasingly difficult for IDM companies.
Asia’s Dominance in the Semiconductor Industry
Overview
Asia has a strong presence in the semiconductor industry globally. The region is already the biggest market for semiconductors, accounting for 60% of global semiconductor sales. (Deloitte 2020) South Korea, Taiwan, Japan, and China are key players in Asia.
South Korea – Memory powerhouse
South Korea has built up a dominant market share in memory, leading the effort to migrate memory technology and cutting cost per bit. In 2020, Samsung and SK Hynix combined accounted for 74% of DRAM (Dynamic random-access memory) market by bit shipments, and 59% market share in NAND (UBS 2021) There is also a sizable foundry business and domestic industry supply chain to support the local ecosystem.
Taiwan – well rounded, deep technology supply chain
Taiwan has developed a closely connected manufacturing supply chain from semiconductor to hardware, which creates synergy in the region. Taiwan is competitive in chip manufacturing, IC design, outsourced semiconductor assembly and test (OSAT), raw wafer, and more. TSMC has the largest market share in the foundry business and continues to be the technology leader in node migration. MediaTek is one of the two major suppliers in smartphone SoC (system on chip). GlobalWafers, after the acquisition of Siltronic, will have a 25% market share in the raw wafer market, 2nd largest globally behind SUMCO in Japan. (MS 2020)
China – Localization
Although its global market share remains relatively low at the moment, China is catching up in the semiconductor industry with strong government support. China has already invested RMB 650bn since 2014 through its state-owned sector investment fund, the National IC Industry Investment Fund (“The Big Fund”). We see a continuous flow of funding and talents to support foundries, fabless and other semiconductor companies in China.
Japan – Upstream specialist
Japan’s strengths in semiconductors are in raw materials, equipment, and small active-passive components. In upstream semiconductor materials, companies like Shin-Etsu and HOYA are global leaders. Tokyo Electron is one of the top three semiconductor equipment makers globally. Sony remains a leader in image sensor technology.
History
1970-2000: Rise and fall of Japan
From 1976 to 1979, under the guidance of the government, Japan began to implement the VLSI (very large-scale integrated circuit) research project. The project was led by the five largest semiconductor companies in Japan, Hitachi, Mitsubishi, Fujitsu, Toshiba, and NEC, with a total investment of 72 billion yen to make breakthroughs in the core generic technology of the semiconductor industry. The result was its leadership in DRAM technology with the launch of 64Kb, 256Kb, and 1Mb DRAM products in the 1980s. Japan had over 80% of DRAM market share in 1987 (Global Times 2019), and it also surpassed the US in global semiconductor market share for the first time in 1987 (48% Japan v 39% US) (Handotai Sangyo Kenkyusho, 2000)
We think a few factors contribute to the decline of Japan’s semiconductor industry in the 90s: 1) The ongoing US-Japan trade war and the US-Japanese Semiconductor Agreement in 1986 brought unfavorable policy, tax rate, and currency impact to Japanese DRAM makers. 2) Semiconductor companies in Japan did not have a diversified product portfolio, with a high concentration in DRAM. As downstream demand in PC took off, other semiconductor products like CPU (central processing unit) and GPU(Graphics processing unit), became more important. 3) Memory producers continue to close the cost gap with Japanese makers.
1990-2020: South Korea and Taiwan leading Asia semiconductor
Korean companies invested heavily in R&D to catch up with Japan in memory technology. Samsung, for example, had an average capital expenditure over revenue ratio at around 40% between 1987-92, compared to the industry average of 21%. (Monolithic 2011) The technology gap between Korean companies and Japanese companies narrowed from four years in 1983 to zero in 1992 with the launch of 64M DRAM.
Before TSMC was founded in 1987, most integrated circuit companies operated an IDM (Integrated circuit manufacturer) model with in-house design and manufacturing. TSMC and other foundries have developed this new business model of separating chip design and manufacturing. Taiwan companies have been able to leverage the relatively lower labor cost in the region to ramp up semiconductor manufacturing. Over time, IDM has been losing market share to foundries and fabless companies. One key reason is that process node migration requires significant capital investment and a high utilization rate to be profitable, which makes it increasingly difficult for IDM companies.
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