Co-Stone Capital Partner Explains How China Can Make Breakthroughs In Semiconductors

Yang Shengjun is a partner of Co-Stone Capital and a semiconductor expert. He graduated from Fudan University and the Department of Electronic Engineering at Oregon State University. He previously worked at RDA Microelectronics and has more than ten years of industrial experience in the semiconductor industry.

Co-Stone Capital is a private equity investment institution with more than 20 years of investment experience and accumulated asset management scale of more than 50 billion yuan.

It has invested in the entire industry chain of semiconductor design, manufacturing, packaging, and testing, including image sensor chip design company OmniVision Technologies, Galaxycore, RF filter chip manufacturer Wuxi Haoda Electronic Co, and chip packaging and testing company, Fore-Hope Electronic.

In a recent interview with Chinese media, Yang Shengjun detailed his analysis of how China can make breakthroughs in the semiconductor industry. Below is a summary of his analyses.

The growth opportunities of China’s new generation chip companies can be summarized in two aspects. One is the whole nation development model, including policy drives for domestic replacement, as well as the financing options offered by the Science and Technology Innovation Board and listing registration system, which provides ample sources of capital for high tech firms.

The second is industrial upgrade and emerging industry applications. Specifically, industrial upgrade has greatly increased the amount of chip usage. Take the mobile phone industry as an example, mobile phones are currently the largest application field of the semiconductor industry. In the past 15 years, thanks to the great development of the mobile phone industry, the size of the semiconductor industry has increased from more than 230 billion US dollars to approximately 450 billion US dollars, nearly doubled.

On the one hand, global mobile phone shipments have reached 1 billion; on the other hand, the improvement of mobile phone performance and functions has greatly increased the demand for the number, performance and area of ​​chips, and required chips to achieve better functions, power consumption, performance, and lower cost optimization.

At the same time, the chips need to do a good job of power control to balance the contradiction between mobile phone performance and battery capacity.

Then, the emergence of new industrial applications such as artificial intelligence, 5G, IoT, and new energy vehicles has opened up new chip markets.

New energy vehicles are the most promising application. The new four modernizations (electrification, intelligence driving, connected, and sharing features) of new energy vehicles are the general trend of automobile development. Its functions such as intelligent driving, power transmission, body control, safety systems, and entertainment equipment require a large number of advanced chips.

EV charging piles also need chips. The richer the functions of the car, the more advanced the smart driving technology, the higher the requirements for the chip. Compared with mobile phones, the volume of new energy vehicles may be an order of magnitude lower, but the unit price is more than an order of magnitude higher. Therefore, if its growth forecast can be fulfilled as scheduled, it will support the semiconductor industry to the scale of up to a trillion yuan.

To sum up, China’s current chip production capacity is very scarce, and supplier resources have become the core demands of domestic and foreign manufacturers. Leading companies in the industry chain have achieved rapid growth. For example, OmniVision Technologies saw profits rose from only 400 million yuan in 2019 to more than 3 billion in 2020.

In addition, the third-generation semiconductor material will offer additional opportunities for China to make breakthroughs. The semiconductor industry has extreme requirements for the purity and complexity of the materials used. Therefore, materials play a pivotal role in the semiconductor industry.

The materials in the semiconductor industry are mainly divided into two categories, one is the main material, such as silicon or compound wafer materials, and the other is the auxiliary material, such as photoresist.

From the industrial accumulation in the field of domestic semiconductor materials, whether it is main materials or auxiliary materials, there is a huge gap with foreign leading companies such as the United States and Japan. Photoresist is the pain point of the domestic semiconductor industry chain.

Germanium and silicon belong to the first generation, gallium arsenide and indium phosphide belong to the second generation, and silicon carbide and gallium nitride belong to the third generation.

The third-generation semiconductor materials has the characteristics of high temperature resistance, high voltage resistance, high power, and radiation resistance. It is suitable for manufacturing microwave radio frequency, optoelectronics, power electronics and other devices. It is also suitable for high voltage and high power scenarios such as usages in photovoltaic, UHV power transmission, new energy automotive chip and control materials.

Taking new energy vehicles as an example, the data displayed by Ford Motor shows that compared to electric vehicles driven by traditional silicon chips (such as IGBT), cars driven by third-generation semiconductor material chips (such as SiC chips used in Tesla Model 3) saw energy consumption of new energy vehicles about 5 times lower, which greatly increases the cruising range.

From the perspective of energy saving, the power consumption of a large data center computer room for a year is equivalent to that of a medium-sized city. If a third-generation semiconductor chip is used to control the power supply, it will save a lot of power compared to traditional silicon chips.

Based on the above advantages, the opening of new application scenarios such as new energy vehicles, 5G, artificial intelligence, and super-large data centers will bring huge development space to the third-generation semiconductors and give rise to a potential market of trillions of dollars.

More importantly, the third-generation semiconductors will play a major role in helping mankind popularize emerging energy, develop clean energy, and achieve the great goal of carbon neutrality in the future. All these areas offer China potential opportunities to make breakthroughs in its own semiconductor industry and achieve higher degrees of self-reliance.

But any success will need time and persistent support and endeavor. According to the data of US listed companies calculated by US official organizations, the R&D investment and capital expenditures of US chip companies in 2019 totaled 71.7 billion U.S. dollars.

From 1999 to 2019, the overall capital investment of US chip companies was nearly 900 billion U.S. dollars. However, the first and second phases of the China’s National Semiconductor Investment Fund add up to 300 billion yuan, which is an order of magnitude lower.

The average annual R&D investment and sales of US chip companies in the past two decades accounted for 16.4%, while Chinese chip companies accounted for 8.3%, which is about half of that of the United States.

It can be seen that China has a long way to go to catch up with the United States in semiconductor capabilities. Looking at it from another angle, the United States became the world’s biggest economy in terms of GDP in 1894, but it did not become the number one in science and technology until after World War II. China may also need such a gradual and time-consuming process to move up the value chain.

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