As we enter the 2nd half of 2020, COVID-19 continues to impact people’s lives, jobs and have a severe impact on the economy.  The pandemic is still not under control and continues to grow exponentially worldwide with over 11 million confirmed cases and over 525,000 confirmed deaths at the time of writing.  The IMF is now projecting global GDP to shrink 4.9% this year, 6.5% lower than it’s pre-pandemic forecast.

Many countries are trying to reopen economies but it is a fine line between safely opening and allowing the pandemic to spike again. In the next few months, the true toll of the pandemic will start to become visible globally as many countries start to withdraw stimulus measures that protected jobs.  In the U.S. by the end of June, there were still 19.5 million people receiving unemployment benefit and although this number is going down slowly as companies restart and rehire, it remains to be seen how long it will take to get back to pre-COVID19 employment levels.  With this as a backdrop, the U.S. announced it will extend its ban on new work visas through to the end of the year and broaden its scope to include H-1B visas for highly skilled workers, as well as L visas used by companies to transfer their own employees in an effort to protect U.S. jobs.  This policy will particularly hard hit the U.S. tech and semiconductor sector which depends on employing skilled engineers using H1 and L1 visas to fuel its growth and innovation.

The news is not all gloomy as Taiwan has demonstrated it can buck the trend, with industrial production continuing to improve for the 4th straight month in June.  The semiconductor sector has continued to do particularly well with the MOEA saying production by the electronics component industry was up 22% from a year earlier in May, marking the sixth consecutive month of double-digit increase, on the back of strong demand for 5G applications and high-performance computing (HPC) devices.  The Taiwan I.C. sector grew 7% in May compared to April and was up 37% compared to a year ago. Taiwan was one of the first countries to impose COVID-19 restrictions and enforced the wearing of masks in public and social distancing and used computer tracing to fight the pandemic. As such, the total cases were only 443, with the majority imported. As of the end of June, the country had only 6 active cases.

Also continuing to do well is the semiconductor foundry segment.  In the latest foundry rankings from market analysis company Trendforce,  foundry revenue of the top 10 foundries is expected to increase by more than 20% yoy in Q2 2020. Sequentially compared to Q1, revenue is expected to increase ~4.5%.  TSMC is expected to retain number one position with 51.5% market share, followed by Samsung (18.8%) and Globalfoundries third with 7.4% market share.

The Trade War Continues

Despite the economic impact of the pandemic the U.S. has continued its trade war with China, with several new measures announced recently.  In May, the U.S. President extended for another year the executive order signed in May 2019 declaring a national emergency and barring U.S. companies from using telecommunications equipment made by firms posing a national security risk, which includes Huawei and ZTE.  Ever since the order was first announced, the U.S. Commerce Department has issued a general temporary license which has been extended many times, allowing U.S. companies to keep doing business with Huawei.  This was further extended again in May for another 90 days, yet it is expected that this will be the final extension.

In addition, the export controls against Huawei were further tightened on 15 May, with the Department of Commerce extending the Huawei ban to include the use of U.S. technology and software to design and manufacture its semiconductors abroad.  The original ban prevented companies with greater than 20% American content from selling products to Huawei. Still, up until now Huawei has managed to keep its supply of semiconductor chips going by buying from TSMC and other overseas foundries.  These extended restrictions close this loophole as it bans any company using U.S. equipment from manufacturing for Huawei and its affiliates without a license.  TSMC immediately stopped accepting new orders from Huawei and HiSilicon (Huawei’s chip division).  The extension of the restrictions has a far-reaching impact as it effectively stops all foundries around the world from producing for Huawei. According to Credit Suisse, semiconductor equipment from U.S. companies like Applied Materials and Lam Research is used by about 40% of the world’s chipmakers, while software from the likes of Cadence, Synopsis and Mentor is used by 85%. It said it would be almost impossible to find a fabrication plant, or fab, that could still work with Huawei, including Chinese foundry SMIC.

The impact on TSMC could be quite significant as HiSilicon accounts for approx. 14% of TSMC’s revenue and this is expected to drop to zero by next year if the ban is not lifted.  Recently it has been reported that TSMC has already filled the gap in orders, and certainly the decision by Apple to start using its own processors in its laptop and desktop computers will help TSMC. The first Apple models with Apple processors are expected to be shipped by the end of this year and transitioning fully over the next 2 years.  It is expected the first Apple processors will be made on TSMC 7nm technology before switching to 5nm technology next year.  In addition, TSMC is hopeful that the current trade issues will be gradually resolved and say they will start to apply for a license to start supplying to Huawei subsidiary HiSilicon by mid-July.

The ban severely impacts HiSilicon which has only recently risen to rank in the top 10 semiconductor companies based on sales. It is unlikely to find any companies that can produce chips for HiSilicon.  HiSilicon’s Kirin processor is now rated to be equivalent to Apple and Qualcomms processors in performance, but designing next-generation processors will be hard without U.S. design software.

One unintentional consequence of the above restrictions was that it caused U.S. companies to be side-lined and potentially fall behind in setting and developing global standards for the next-generation telecommunications technology. Therefore, on 15 June, the U.S. Commerce Department amended the rules to allow U.S. companies to work with Huawei on these standards committees without requiring a license.

At the same time, as the U.S. has been trying to limit its dependence on Chinese goods, it has also been promoting semiconductor manufacturing in the U.S. and offering aid to set up factories in the U.S. This initiative culminated in the bipartisan American Foundries Act 2020 being introduced in the Senate in late June which ill champion the sector and lure high tech supply chains back into the United States.  The act will provide up to US$25 billion in federal grants, US$15 billion of which is earmarked for federal grants to states to build, expand or modernize domestic semiconductor manufacturing and R&D facilities.

Capital Expenditure Projects Continuing

Whilst the pandemic is causing short term impact, there has been still lots of good news for the semiconductor segment for the future as companies are continuing to invest in new facilities.  In recent months, several companies have announced new facilities around the world. All the big foundries are continuing to invest record amounts in capex and research and development for advance technologies.  As a result, the semiconductor equipment industry is one of the areas that is expected to grow significantly next year by up to 24% to a record US$67.7 billion spend globally.  Memory fabs will lead spending with leading-edge logic and foundry fabs close behind.

As a result of the U.S. initiative to promote manufacturing in the U.S., TSMC announced it has plans to build a 5nm Fab in Arizona.  Construction is planned to start in 2021 with production targeted to begin in 2024.  The Fab will eventually produce 20,000 wafer per month, with TSMC investing approx. US$12 billion from 2021 to 2029.

Globalfoundries (G.F.) also announced it had secured a purchase option agreement for approximately 66 acres of undeveloped land adjacent to its current Malta Fab in New York. G.F. said it is looking to expand output by utilising unused space in its existing Malta Fab or build a new Fab next to it.

In South Korea, Samsung announced that it intends to build a new chip plant in Pyeongtaek, some 70 kilometres south of Seoul, S Korea.  It is reported that it will invest US$116 billion to build a 5nm plant for foundry business to start operating in the 2nd half of 2021 to challenge TSMC’s foundry business.

In the U.K., Huawei has received approval to build a new research and development centre in the U.K.  Huawei plans to invest £1 billion (US$1.2 billion) in the first phase of the planned centre which the company will use to build state of the art chips. Huawei has acquired a 50,000 sq m site in South Cambridgeshire and will create 400 jobs according to the company.  If you remember last year Huawei laid off 600 people, three quarters of its staff were at its US R&D centre Futurewei.

New Opportunities for LED Manufacturers

For many years, the LED segment has struggled from oversupply but now there is an opportunity as the next-generation display technology is being adopted by the mainstream consumer products.   As a result, mini and micro LED are expected to be the big growth area in the coming years as companies like Apple adopt them for the next generation iPad and Mac computers. To take advantage, LED companies in both Taiwan and China are increasing their investments to build new production and research facilities for Micro LED and Mini LED R&D, production and sales.

Apple is reported to be setting up its mini-LED supply chain based around Taiwan suppliers to avoid supply issues due to the US-China trade war, with Epistar and Fittech being 2 companies identified to benefit. Recently, Taiwan-based LED wafer manufacturer Epistar announced it will spend US$200 million on capex to build new facilities.

In addition, Epistar has announced it will partner Lextar and establish a joint holding company through share conversion. Under the agreement, Epistar will focus on LED wafer production and Lextar will focus on LED packaging and modules. The companies will avoid overlapping investments by sharing production capacities.   Market Research company TrendForce estimates that after the merger, the joint company will collectively account for 12.43% of global LED chip production capacity.

What Will Happen in 2nd Half 2020

So what does the 2nd half of 2020 hold in store for the semiconductor segment?  That is a question everybody is trying to answer, but until a vaccine is developed, it is hard to predict when economies can get back to normal.  Currently, the number of people confirmed with COVID-19 is still increasing exponentially around the world. While some countries have seen success in controlling the pandemic and started to slowly open up their economies again, they are still a long way from pre-pandemic days. Being the largest economy in the world, the U.S. is still struggling to control the pandemic with over 50,000 new cases per day.

The first half of 2020 was good for semiconductor foundries but the demand further down the supply chain is not so good. Therefore, how long the strong demand for chips will last is a big question, especially as automotive and smartphone sales are significantly down this year.  There is pent up consumer demand out there but that is not likely to fully recover the lost sales from the 1st half of 2020.

We can only hope that a vaccine is found soon, and until then countries manage to control the pandemic. This will allow economies and borders to be reopened so that international travel for business and leisure can resume again.

ABOUT THE AUTHOR
Mark Dyson
Head of Global Subcon Manufacturing
Osram Optoelectronics