Modest Growth Ahead for Chipmakers in 2020

The semiconductor industry’s concentration at home provides it with some insulation from the direct effects of the U.S.-China trade war.

Taiwan’s crucial semiconductor industry is set to grow 5% in 2020 on the back of rising demand for artificial intelligence applications and 5G telecommunications infrastructure. Overall industry output value is expected to reach NT$2.8 trillion (US$87 billion), up from NT$2.6 trillion in 2019, according to the semi-governmental Industrial Technology Research Institute (ITRI).

The local IC sector’s projected growth largely mirrors that of the industry worldwide. Research firm IHS Markit estimates that global semiconductor revenue will rise to US$448 billion in 2020, up 5.9% from $423 billion this year.

Taiwan’s chipmakers are an outlier in the local tech sector in terms of their modest China exposure. As a result, the U.S.-China trade war has not disrupted their businesses to the extent it has other Taiwanese manufacturers. Reshoring is not an issue because most of the production capacity never left Taiwan.

Peng Mao-jung, manager of ITRI’s Industry Science and Technology International Strategy Center, notes that only about 10% of Taiwan’s semiconductor production capacity is located in China, and it’s there primarily to serve local customers. In contrast, the semiconductors that Taiwanese companies export to the U.S. are made here, with the result that the increased American tariffs “have had no direct impact on Taiwan’s semiconductor industry,” he says.

Yet Taiwanese chipmakers are not immune to the tensions caused by the trade war, especially as their clients include both major U.S. and Chinese companies. Adroit strategies will be required to avoid upsetting the apple cart.

Media reports in October and November suggested that Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s largest contract chipmaker, had been pressured by the U.S. government to halt chip sales to Chinese telecoms giant Huawei. Washington has blacklisted Huawei and considers it to be a major security threat. The Taiwan government has denied the reports.

HiSilicon Technologies, a Huawei subsidiary, is TSMC’s second-largest customer after U.S. tech giant Apple. HiSilicon generated 8% of TSMC’s revenue in 2018 and 11% in the first half of this year, according to the Chinese-language Commonwealth News. 

Amid the trade tensions with the U.S., Huawei is moving to reduce its reliance on U.S. suppliers and is establishing an Asian supply chain with partners from Korea, Japan, and Taiwan, says Eddie Han, a senior industry analyst at Taiwan’s Market Intelligence & Consulting Institute. “This is expected to benefit Taiwan’s IT industry,” he says.

A perennial challenge for Taiwanese IC makers is staying two steps ahead of China’s own innovation plans. Beijing has made plain its intentions to develop self-sufficiency in semiconductors. Yet five years after it announced that goal, foreign suppliers still provide China with 86% of its ICs, just a 4 percentage-point increase from 2014. Last year, China imported US$312 billion worth of semiconductors.

Slow progress hasn’t prevented Beijing from doubling down. In October, China announced it had established a new US$29 billion semiconductor fund, $9 billion larger than the first fund set up in 2014. The initiative is bound to irk Washington, one of whose stated objectives for the trade war is to change China’s many unfair trade practices. Foremost among these are technology import substitution and the heavy state subsidies to designated “national champions.”

For Taiwanese IC makers, China continues to offer opportunities in the short term, especially in the premium market. “China is highly dependent on Taiwanese foundries and OSAT [outsourced semiconductor assembly and testing] for high-end ICs,” says Chris Hsu, an analyst at Taipei-based market intelligence firm TrendForce. “It is difficult in the short run for Chinese manufacturers to fulfill China’s domestic demand for high-end ICs.”

With their focus on AI applications, Chinese IC firms are expected to continue to rely heavily on Taiwanese manufacturers, which excel in relevant advanced wafer manufacturing and packaging processes, Hsu says. For that reason, TrendForce sees the premium IC market as remaining favorable to Taiwanese suppliers in 2020.

In the low- and mid-range IC segments, the market will be tougher for the Taiwanese. Hsu expects that Chinese manufacturers will increasingly aim to produce ICs for home appliances or electric vehicles. Although EV demand is currently weak in China, “this may give Chinese IC companies some room to improve their manufacturing technology to catch up, since all the suppliers suffer from the same adverse effect,” he says. 

SEMI, the electronics industry supply chain association, forecast in September that China would overtake Taiwan next year to become the world’s largest semiconductor equipment market. By raising its IC equipment investment 21% in 2020 to more than US$14 billion, China would surpass Taiwan (US$11.6 billion) and South Korea (US$10.5 billion), SEMI said.