The Main Contradictions and Seven Major Issues Facing the Development of China’s Equipment Industry—Insights from the “2018 China Semiconductor Materials and Components Innovation & Development Conference”

“Over the past 60 years, from vacuum-tube computers to today’s 7-nanometer devices, humanity has shrunk the area of microfabrication by a factor of one trillion. The innovation and advancement of front-end microfabrication equipment for semiconductor chips have been the key enablers behind this trillion-fold reduction.” This was a heartfelt remark made by Yin Zhiyao, Chairman and CEO of AMEC Semiconductor, at the 2018 China Semiconductor Materials and Components Innovation and Development Conference. As integrated-circuit components have evolved from “millimeter-scale processes” and “micrometer-scale processes” to “nanometer-scale processes,” the precision, uniformity, stability, and reliability of microfabrication have become critical factors determining the success rate of manufacturing microdevice products.

The equipment industry still has a long way to go in its development.

Among the many semiconductor manufacturing equipment items, two play the most critical roles: the first is the lithography machine, and the second is the plasma etching machine. The lithography machine is the core equipment for producing large-scale integrated circuits, primarily used to expose substrates coated with photoresist. The requirements for manufacturing optical lenses and reflective cups are extremely stringent, and the machines themselves command prices higher than those of large passenger aircraft. In this regard, it’s fair to say that the Dutch company ASML dominates the market. Plasma etching is also a crucial step in today’s ultra-large-scale integrated circuit manufacturing process. Plasma etching machines remove targeted material by means of physicochemical reactions on the surface, transforming the removed material into volatile reaction products that are then pumped out of the reaction chamber. Etching machines must be capable of etching a wide variety of materials and different shapes, exhibiting varying degrees of selectivity depending on the material being processed—a task that involves thousands of distinct etching processes. Moreover, during the etching process, numerous key performance indicators—including etching precision, uniformity, stability, selectivity, throughput, and etching costs—must all meet stringent criteria to achieve the desired production efficiency. Currently, the three leading global companies specializing in microfabrication equipment—Applied Materials, Lam Research, and Tokyo Electron—all originated from the development of etching equipment. In China, several companies are also working on developing plasma etching machines. Among them, the progress made by Zhongwei Semiconductor Equipment Co., Ltd. stands out as particularly noteworthy. At present, Zhongwei’s capacitive plasma etching machines and inductive plasma etching machines have both entered the international top three in terms of performance and cost-effectiveness. Yin Zhiyao explained that domestically, Zhongwei Semiconductor’s high-end equipment products are gradually replacing U.S.-made equipment, steadily increasing their market share. Zhongwei’s etching machines have already been adopted in some of the world’s most advanced 7-nanometer production lines and have received approval for etching applications targeting 5-nanometer devices; the company now ranks third in the market for dielectric etching. Furthermore, Zhongwei has developed an ultra-large-scale MOCVD system for manufacturing GaN-based LED light-emitting devices. Since late 2016, in just one-and-a-half years, this equipment has captured over 75% of the domestic market, displacing most foreign-made systems. Yin Zhiyao revealed that following a 60% increase in sales in 2016, Zhongwei’s annual sales in 2018 are expected to grow by more than 70%, far surpassing the annual sales growth rates of other domestic companies specializing in high-end microfabrication equipment. In May of this year, in VLSI Research’s global semiconductor equipment “Customer Satisfaction” ranking, Zhongwei was ranked third, behind only the Dutch company ASML and one U.S. firm. This underscores the international semiconductor equipment industry’s recognition of Zhongwei’s capabilities.

This indeed represents a major step forward for China’s equipment industry. However, against the backdrop of rapid updates and iterations in integrated circuits, China’s domestic equipment industry still has a long way to go. Currently, among China’s integrated circuit manufacturing enterprises, the equipment and materials sectors are only a few dozenths the size of those dominated by international giants; R&D investment is also just a few dozenths of theirs. The technological gap is significant, and the competitive landscape is completely asymmetrical. A development model based on “going it alone” simply won’t work.

“Our country’s integrated circuit industry needs support and assistance. It absolutely requires strong government impetus—only with access to low-cost financing, R&D grants, and supportive policies can we help enterprises address the key challenges they face during development and achieve rapid growth,” said Yin Zhiyao.

The “Principal Contradiction” and “Seven Major Issues” in the Development of China’s Integrated Circuit Industry

What are the primary contradictions in the development of China’s integrated circuit industry? Yin Zhiyao believes that for China’s integrated circuit manufacturing and equipment industries, the most significant developmental contradiction is “asymmetric competition.” This “asymmetric competition” manifests itself in nine key areas: First, there is an asymmetry in company size. Yin Zhiyao notes that domestic equipment manufacturers are growing rapidly, much like bamboo shoots after a spring rain—creating a market landscape reminiscent of the Spring and Autumn and Warring States periods, where companies vary dramatically in size, with some differing by as much as 10 to 30 times or more. Second, there is an asymmetry in market share. Third, there is an asymmetry between domestic and international markets. Fourth, there is an asymmetry in entry barriers. Fifth, there is an asymmetry in talent resources. Sixth, there is an asymmetry in R&D funding. Yin Zhiyao points out that R&D spending by Chinese integrated circuit manufacturing and equipment companies is less than 10%, and sometimes even only 5%, of that spent by leading foreign counterparts—and this gap amounts to three generations of technological advancement. Without significantly increasing R&D expenditures, it is virtually impossible for Chinese companies to catch up. International giants maintain their competitive edge by investing 10 to 30 times more in R&D than their Chinese counterparts. The severe shortage of R&D funding poses a challenge so daunting that even gods themselves would find it nearly impossible to close the gap. Seventh, there is an asymmetry in patent ownership. Eighth, there is an asymmetry in national tax policies. Ninth, there is an asymmetry in the entrepreneurial and development environment.

The development outlook for China’s integrated circuit industry is extremely promising. However, despite this favorable situation, there are still “seven major challenges” hindering the industry’s progress—challenges that revolve around the “main contradiction.” Yin Zhiyao stated that the development of the integrated circuit industry is like a tripod, requiring three key pillars: capital, talent, and policy. Capital encompasses equity investments, long-term low-interest loans, and government R&D subsidies; talent involves attracting overseas expertise, cultivating domestic talent, and identifying, supporting, and nurturing leading professionals; and policy includes investment and financing policies, income tax policies, import and export policies, labor law policies, employee stock option incentive programs, localization policies, and IPO policies, among others.

First, currently in China’s integrated circuit industry, “funding is overwhelmingly abundant, yet talent development and policy upgrades are lagging behind.” As China places increasing emphasis on the development of the integrated circuit industry and boosts related investment, policies supporting high-tech industries remain imperfect. Moreover, there is still a shortage of both talented personnel and advanced technologies. As a result, some projects have already experienced delays, thereby hindering the industry’s growth.

Second, investing in chip production lines requires substantial upfront capital, yet the investment in equipment and materials is relatively low. Ideally, investments in design, manufacturing, and equipment & materials industries should be allocated in a ratio of 20:60:20. However, today, over 90% of the funds are directed toward chip production lines, while investment in equipment and materials accounts for less than 5%. Yin Zhiyao pointed out that the insufficient attention paid to the equipment and materials sectors is a major issue. While it’s true that chip production itself represents the “big chunk” of investment needed to drive industry development, 70% to 80% of the costs associated with building a chip production line are actually spent on purchasing equipment and materials. Currently, China’s industrial sector still relies heavily on imported materials and equipment—over 75% of the technologies and equipment used are sourced from abroad. “The money is flowing overseas, yet more than 75% of the critical technologies and equipment remain beyond our control,” said Yin Zhiyao. “This development model is like building a skyscraper on sand—it simply lacks a solid foundation.”

Third, in terms of the funding structure, there’s a heavy reliance on equity capital, while there’s a shortage of long-term, low-interest loans and R&D subsidies. Yin Zhiyao pointed out that even the world’s largest chip foundry doesn’t rely heavily on equity investment; instead, it secures annual loans totaling between 3 to 4 billion U.S. dollars at interest rates as low as 1.5%. This low-cost financing has been instrumental in propelling the company to become “the world’s leading wafer fab.” Therefore, Yin Zhiyao believes that the model of long-term, low-interest loans is one approach that China’s integrated circuit industry could draw upon for its own development. Moreover, if companies rely solely on their own resources and use only the limited profits they generate to fund R&D—even if they allocate as much as 50% of their revenue to R&D—it still falls woefully short. Hence, government-sponsored special grants to support corporate R&D expenditures are crucial, especially during the early stages when companies are still small in scale.

Fourth, it is crucial to correctly recognize the fundamental differences between R&D prototypes and equipment used on production lines, and to develop and deliver to customers equipment that is reliable, stable, user-friendly, efficient, and cost-effective. Nine years ago, China began its transition from the traditional lighting industry to LED technology, and more than 50 research institutes and companies decided to embark on the development of MOCVD equipment. Yet today, only one company—Zhongwei—has successfully developed highly competitive MOCVD equipment that has completely replaced comparable models from the U.S. and Germany. Over 20 other companies have also developed laboratory prototypes, but ultimately failed to produce reliable, user-friendly production equipment. In fact, developing an R&D prototype represents only about 10% of the entire equipment product development process. From the development of the Alpha production prototype, through the Beta machine undergoing customer evaluation, to the Gamma machine for mass production, there remains an enormous amount of work to be done. Managing hundreds of material suppliers and tens of thousands of components—ensuring timely delivery, zero defects, low costs, and effective after-sales service—presents an extremely daunting challenge.

Fifth, we must place particular emphasis on developing critical components that represent “choke points.” Yin Zhiyao stated that although Zhongwei’s plasma etching equipment has already achieved 35% domestic production and its MOCVD equipment has reached 65% domesticization, the domestic production of certain key components that act as “choke points” still hasn’t received sufficient attention or active development. “This is a challenge that China’s integrated circuit industry simply cannot avoid—and we must break through it as soon as possible,” said Yin Zhiyao.

Sixth, we must truly attach great importance to the issue of intellectual property protection. Yin Zhiyao stated that in terms of intellectual property, Zhongwei Semiconductor has established a rigorous management system: every employee joining the company must sign a strict non-disclosure agreement and is prohibited from bringing any technical documents or information from their previous employer. Furthermore, Zhongwei Semiconductor has conducted an exhaustive analysis of more than 3,000 patents held by its competitors, gaining a clear understanding of which patents are insurmountable and which are invalid. All technologies and equipment developed independently must feature unique innovations, and the company has filed thousands of patents to safeguard its intellectual property rights. Additionally, Zhongwei Semiconductor must be fully prepared to face any intellectual property lawsuits that its competitors might initiate. “This is precisely why, over the past decade and a half, Zhongwei Semiconductor has been able to shift from a passive to an active stance and has consistently remained undefeated.” In Yin Zhiyao’s presentation, several intellectual property disputes were discussed. In some cases, Zhongwei Semiconductor brought these legal battles to a close with “winning judgments,” while in others, it reached favorable settlements with its opponents, securing a strong position.

Seventh, since its inception, Zhongwei has adopted an equity incentive plan featuring stock options held by all employees. The option-granting gap between each level of management and staff is 20%, creating an exceptionally flat organizational structure. Yin Zhiyao believes that “employee stock options and employee ownership are the lifeblood of high-tech enterprise development. As an ancient Chinese saying goes, ‘Those with money contribute money; those with strength contribute effort.’ Investors contribute capital in exchange for company equity, while employees and management earn company options through their labor and innovation. Stock options fundamentally transform employees’ employment mindset, enhance their sense of ownership, and motivate them to work even more effectively for the company. Moreover, the tiered exercise of options and the tiered sale of exercised shares provide a locking mechanism, enabling employees to remain committed to the company over the long term and with stability.” Many successful high-tech enterprises internationally have already adopted employee stock ownership and option-based incentive programs, demonstrating the practical effectiveness of this approach. It can effectively align the interests of company management, employees, and the company’s long-term development, thereby maximizing employee enthusiasm and sense of ownership.

Original authors: Yin Zhiyao, Gu Hongru