200 150 126 asia technology strategy

Asia Technology Strategy China: Can it gain tech independence?

CIC Special Technology | Strategy

Figure 1: China tech net trade (imports minus exports) waterfall, 2018 (USD bn)

Source: CEIC, Credit Suisse estimates

■ Tech is the largest Chinese import; localization a national priority. Technology

sector forms the largest part of China's import basket (21%) and semiconductors account

for 70% of all its tech imports. This is despite the fact that China's own production of

semiconductors has grown at a 20% CAGR since 2011. This heavy dependence on

technology imports has led to several policy initiatives since 2000 from the Chinese

government to help grow the domestic technology industry for multiple reasons including

national security, assured supply availability, and an interest to continue economic and

human capital advancement growing capability in higher value add / IP areas. Rising

geopolitical issues have added urgency to these efforts.

■ A deep-dive report. In this in-depth report, leveraging our global technology analyst team,

we outline the current market structure of various key tech sub-sectors, highlight China's

game plan to localise production and then provide our conclusions about the likelihood of

China's success in these sectors.

■ China localization: Some success; but some areas remain a work in progress.

China has achieved a lot of success in telecom equipment, hardware manufacturing,

display, several key components and some success stories in IC design mainly in mobile

and consumer. It is devoting a lot of resources in localising semi production and design, but

so far with only modest success outside Huawei (and is likely to remain modest even in the

medium term). Its dependence on imported equipment and certain key materials is likely to

remain unchanged over the medium term as well. While this report is meant more as a

primer on the topic laying out the developments in key tech sectors and outlining our

conclusions, on pages 4 and 5 we summarise the global tech supply chain map, indicate

our estimate of China's chances of success in various areas and its likely leaders.

12 11

80

126

( 141 )

( 36 )

( 25 ) ( 3 )

8

(52) (20)

(50)

-

50

100

150

200

250

SPE Display

Equip

Semi-

Memory

Semi/IC ex

Memory

Mobile

Handset

Telecom

Equipment

Display Printed

Circuits

Passive

Component

Others Total Tech

Net Imports

4 November 2019

Equity Research

Asia Pacific

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS,

LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business

with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

The Credit Suisse China Investment Conference

(CIC) is one of the most exclusive business

gatherings in the Greater China region, bringing

together business leaders and entrepreneurs from

around the region, as well as global institutional and

private investors. This year, the Credit Suisse China

Investment Conference will explore the theme of

‘Great Expectations’ – a topic that embraces the

continued progression of China and the

advancement of some of the country’s most

dynamic companies against the current geopolitical

and macroeconomic backdrop.

Research Analysts

Manish Nigam

852 2101 7067

[email protected]

Randy Abrams, CFA

886 2 2715 6366

[email protected]

Keon Han

82 2 3707 3740

[email protected]

Kyna Wong

852 2101 6950

[email protected]

Chaolien Tseng

852 2101 6795

[email protected]

Jerry Su

886 2 2715 6361

[email protected]

Clive Cheung

852 2101 7069

[email protected]

Please see sub-sectors for all contributing analysts

4 November 2019

Asia Technology Strategy 2

Focus charts

Figure 2: China total imports breakdown, 2018 (%) Figure 3: China semi industry revs and YoY growth

Source: CEIC, Credit Suisse estimates Source: CEIC

Figure 4: Technology supply chain – a map of Chinese suppliers

Source: Company data, Credit Suisse Research

Other

Manufactuered Goods, 10%

Machinery &

Transport Equipment, 18%

Tech, 21%

Textile, Rubber,

Minerals, 7%

Chemicals, 10%

Animal & Vegetable

Oils, 0%

Mineral Fuels &

Lubricants, 16%

Non Food Raw

Materials, 13%

Beverages &

Tobacco, 0%

Food & Live

Animals, 3%

305 321255

142

382466

600

707

843

996

1,221

1,487

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

200

400

600

800

1,000

1,200

1,400

1,600

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

China Semi Sales (Rmb bn) YoY（%）

Networking:Huawei, ZTE

CM / ODMs

PC Brands

Smartphone Brands

Networking OEMs

Back-end package & test

IC Distributors

Components

Fabless IC Design

Foundries

Semi Cap Equipment

EDA Tools

Tech Downstream Distributors

Hyperform

Exposure: SMEEDeposition: Naura, PiotechInspection: Grand, RaintreeEtch: AMEC, NauraPhotoresist processing: KingsemiClean: ACM

SMIC, Hua Hong, Shanghai Huali, ASMC, CSMC, SiEN, Silan, CanSemi, CR Micro, Yantai Raytron

JCET, Tianshui Huatian, Tongfu, China Wafer Level CSP, SJ Semi, Kaifa, Biwin

HQ Mart, Will Semi, FortuneTech, Wuhan P&S, INtron, Apex Ace, Smart-core, Techtronics, Wisewheel, Sunray

Huaqin, Wingtech, TINNO, BYD, Longcheer, USI

Panel: BOE, Tianma, CEC Panda, CSOTCasing: BYDE, Ju Teng, Tongda, FIITouch/Fingerprint: O-Film, Truly, Q-TechLens: Sunny Optical, AACAcoustic: Goertek, AACConnector: Luxshare, Everwin, FITSurveillance: Hikvision, DahuaAntenna: Luxshare, SunwayLEDs: Sanan Handsets: Huawei,

Oppo, Vivo, Xiaomi, ZTE, Coolpad, Lenovo, TCL

PC / Server:Lenovo, Inspur, Dawning, Razer, Huawei

Synnex (Taiwan listed), Digital

China, VST

Mobile Processor: HiSilicon, Spreadtrum, ASR, Pinecone, ZTE (Sanechip)Servers/AI: HiSilicon, Cambricon, Montage, Alibaba, Eeasy Tech, Huaxinton, Big Fish, ThinkForce, Illuvatar, Cambricon, Bitmain, Zhaoxin, Loongsan, eBangGPU: Jingjia, ZhoaxinMCU: Gigadevice, Ingenic, Unigroup Guoxin, SinoWealth, Silan, Goodix, Datang, Huada, Giantec, Yixin, MindMotion, Winner MicroRF IC: RDA, Vanchip, Huawei, Maxscend, SanechipsConsumer: Rockchip, Allwinner, Amlogic, ActionsTouch/Fingerprint IC: Goodix, Silead, Fortsense, Betterlife, Chipone, BYDCMOS image sensor: Will Semi (OVT), GalaxyCore, Superpix, ArtivisionAnalog: Awinic, SG Micro, BYD , OnBright, Silergy, Nexperia, Huada, ChiponeDriver IC: SinoWealth, Solomon Systech, ChiponeSmartcard: Tongfong Guoxin, Datang, Huada, Nationz, Fudan, Hua Hong ICMemory: GigaDevice, YMTC, Changxin, Fujian Jinhua, Reliance Memory (Rambus/Giga JV), ISSI, GiantecSurveillance/Video: Huawei, Fullhan, Vimicro, Ingenic, Artosyn, Goke, Eeasy, Dahua, Yitu, Horizon RoboticsFPGA: Gowin, Fudan Micro, Unigroup Guoxin, Huada

End Consumer

Retail: Gome,Suning

Online: Alibaba, JD.com

Semi Materials

Substrate: Access, Fastprint, SCCWafer: AST, Ferrotech JV, ESWIN, Simgui, Zing Semi, Zhonghuan Lithography related: Kempur, RuihongSputtering: KFMICMP Slurry: AnjiChemicals: Runma, Jingrui, Huayi, Sinyang

TV Brands

TV: Skyworth,Changhong, Haier,

Hisense, Konka,TCL

4 November 2019


China: Can it gain tech independence?

A net tech exporter; but a heavy semi importer

Import of technology products constitutes the largest proportion of total imports by China for any

given sector. This proportion has grown from high-teens a few years ago to 20-23% in recent

years. Within technology, import of semiconductors by far constituted the largest proportion

(US$311 bn; ~70% of total tech imports). Import of semis and display equipment was another

important part of total imports (5%). While China is a large importer of technology products, it is

also a large exporter, actually exporting US$20 bn more of tech products than it imported in

2018—it is a large net importer of semiconductors and equipment but is a large net exporter of

downstream products such as handsets and consumer electronics, and also telecom equipment.

Localising semi production a national priority

While the Chinese local semis production has been growing at a 20% CAGR in recent years,

China remains a large importer of semis, and hence, the need to continue to focus on

developing the local industry. Geopolitical developments in recent years, particularly the inclusion

of several Chinese entities (notably Huawei, Hikvision amongst others) by the US on its

restricted Entity List, further adds urgency to this localisation drive. The government has had

several policy initiatives over the years culminating in its 'Made in China 2025' initiative in 2015.

Substantial funding is behind the National IC Development Guideline initiative, including

establishing the National IC Fund which raised US$20 bn in 2014 and is now a second round

for US$29bn, along with US$120-140 bn from public/private funds. The fund has invested in

creating national champions that can compete globally across memory, foundry, back-end,

suppliers, and design companies. To supplement the National IC Fund, the Chinese government

believes a strong policy support, growing ecosystem, and national fund backing in the

semiconductor industry will attract an even greater amount of investment from the private sector,

financial institutions, and overseas investors. Local private VCs are also working in conjunction

with the government and the National IC Fund. Tsinghua Unigroup is the largest fund and is

focused on establishing memory companies in China.

China localisation: A mixed success story

China has already shown success with the emergence of companies across the tech supply

chain, with some notable ones in hardware and components. The presence of a large and growing hardware sector is pushing the national interest to also develop its semiconductor

sector for economic benefits moving into higher value areas and lessening requirement on imports. A locally strong semiconductor sector also helps China's national security interest in

controlling its information technology infrastructure. While we discuss in greater detail the

dynamics at play in each of the tech subsectors later in the report, our conclusions for each of

these sectors are as follows: (1) Memory semiconductors: China still has some distance to

go before tasting any success, (2) Logic semiconductors: China has pockets of strength in

IC design, backend and mature foundry nodes, but still lags in several areas, (3) Semi

equipment and wafers: China is lagging in wafers and far behind in equipment and is likely to

remain so, (4) Enterprise and servers: Chinese vendors strong in networking; server

expansion internationally may face challenge, (5) Display: China to dominate TFT panels; may

succeed in OLED but still lag key tools and raw materials; Korea will largely leave TFT space,

(6) Components: China is largely self-reliant. Within specific components, our conclusions are:

(a) Acoustics: Most parts likely to be localised, (b) Antenna: Self-reliant, work in progress to move to more advanced designs, (c) Casing: Lagging in metal casing but a leader elsewhere;

still dependent on casing equipment imports, (d) Camera Module: Largely self-reliant; will increase global share, (e) CMOS Image Sensor (CIS): A credible Chinese player now, and

hence, can be self-reliant, (f) Lens: Largely self-reliant, (g) MLCC: Chinese are lagging and

likely to do so in the medium term too.

On pages 4 and 5, we summarise the global tech supply chain map, indicate our estimate of

China's chances of success in various areas and highlight Chinese companies (in bold) that are either the current or the likely future leaders within their respective sectors.

Tech imports are ~21% of total Chinese

imports…

… Semis are ~70% of all tech imports

Several policy initiatives since 2000 supporting

the development of a local tech industry

Support from multiple sources: National IC

Fund, policy initiatives, R&D and capex

subsidies, local government, and investments

from private VC

China is still far off from closing the gap on

semi manufacturing at leading edge (both

memory and logic) and would likely still be

importing most of its semi equipment in the

foreseeable future

China will increase its dominance in display

(TFT-LCD) and networking and make some

progress in servers and OLED panels

China will continue to localise a higher

proportion of components, though would still

be dependent on some imported parts over the

medium term

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Global tech supply chain

Figure 5: Tech Supply Chain – China vs World

Note: * = Names in bold are either already or likely to be leader in supply chain in 5 years’ time


Chances of China's

success in 5 yearsChina Supply Chain* US - Key Suppliers Non-US Key Suppliers

Semiconductor

Lithography SMEEEUR: ASML

JP: Nikon, Canon

Deposition Naura, Piotech Lam Research, Applied MaterialsKR: Wonik IPS, TES, Eugene Tech, PSK

JP: Tokyo Electron

Inspection Grand, Raintree KLA-Tencor, Applied MaterialsKR: Unitest, Techwing

JP: Hitachi Hightechnologies

Etch AMEC, Naura Lam Research, Applied MaterialsKR: Wonik IPS, TES

JP: Tokyo Electron, Hitachi Hightechnologies

Photoresist Processing Kingsemi JP: Tokyo Electron, SCREEN

Clean ACM Lam Research, Applied Materials JP: SCREEN, Tokyo Electron, Shibaura Mechatronics

Substrate Access, Fastprint, SCC KR: SEMCO, LGI

Wafer NSIG (?), AST, Ferrotech JV, ESWIN, Simgui, Zhonghuan

KR: SK Siltron

TW: GlobalWafers, Formosa SUMCO, Wafer Works

JP: Shin-Etsu Chemical, SUMCO, Ferrotec, RS Technologies

Lithography Kempur, RuihongKR: Dongjin Semi

JP: JSR, Tokyo Ohka Kogyo

Sputtering KFMI

CMP Slurry AnjiKR: Soulbrain, KC Tech

JP: Fujimi Incorporated

Chemicals Runma, Jinrui, Huayi, Sinyang Photronics KR: SK Materials, Soulbrain, Wonik Materials, DNF

EDA Tools Minimal Hyperform Synopsys, Cadence Design Systems

Mobile Processor HighHiSilicon, UniSOC, Pinecone (Xiaomi), ZTE (Sanechip), Allwinner, Rockchip, Leadcore,

ASR MicroQualcomm

KR: Samsung

TW: Mediatek

Servers/AILow (servers);

Medium (AI)

HiSilicon, Cambricon, Montage, Alibaba, Eeasy Tech, Huaxinton, Big Fish, ThinkForce,

Illuvatar, Bitmain, Zhaoxin, Loongsan, eBangIntel, AMD, ARM (certain technologies) EUR: ARM

GPU Limited Jingjia, Zhoaxin NVIDIA, AMD

MCU MediumGigadevice, Ingenic, Unigroup Guoxin, SinoWealth, Silan, Goodix, Datang, Huada,

Giantec, Yixin, MindMotion, Winner Micro (Fragmented market)Microchip, TI

EUR: NXP, Infineon,STMicroelectronics

JP: Renesas

RF IC, RF Front End Medium Vanchip, HiSilicon, Maxcend, Sanechip (ZTE), UniSOC, Will Semi, Espressif Systems Qorvo, Skyworks, Qualcomm, BroadcomTW: Win Semi, VPEC, AWSC, Richwave, Mediatek (Airoha), ACX

JP: Murata, Taiyo Yuden

Consumer High Rockchip, Allwinner, Amlogic, Actions, UniSOC, HiSilicon (Fragmented market) AMBA (Ambarella), Microchip, Cypress Semi TW: Mediatek, Realtek

Touch/FP IC High Goodix, Silead, Fortsense, Betterlife, Chipone, BYD Microelectronics Synaptics TW: Egis, Elan

CMOS Image Sensor High Will Semi (OVT), Galaxy Core, Superpix, Artivision, BYD Microelectronics, SmartSens ON Semi, ST Micro

KR: Samsung, SK Hynix, PixelPlus

EUR: Melexis

JP: Sony, Panasonic, Canon

Analog / Discrete Medium HiSilicon, Awinic, SG Micro, BYD, OnBright, Silergy, Nexperia, Huada, ChiponeTI, Analog Devices, Maxim Integrated, ON Semi, Cirrus Logic,

Vishay

EUR: STMicroelectronics, Infineon

JP: Mitsubishai, Rohm, Toshiba

TW: Mediatek (Richtek)

Smartcard High Tongfong Guoxin, Datang, Huada, Nationz, Fudan, Hua Hong IC (Fragmented market)

Surveillance HighHiSilicon, Fullhan, Vimicro, Ingenic, Artosyn, Goke, Eeasy, Dahua, Yitu, Horizon

RoboticsON Semi

FPGA MediumGowin, Fudan Micro, Unigroup Guoxin, Huada, Anlogic, Hercules Micro (leadership

undecided)Xilinx, Altera, Intel, Lattice Semiconductor, Microchip

FoundriesLow (leading edge);

High (mature nodes)

SMIC, Hua Hong, Shanghai Huali, ASMC, CSMC, SiEN, Silan, CanSemi, CR Micro,

Yantai RaytronGlobalFoundries, IBM TW: TSMC, UMC, Vanguard

Back-end

package & testHigh JCET, Tongfu, Tianshui Huatian, China Wafer Level CSP, SJ Semi, Kaifa, Biwin Amkor, R&D Altanova

TW: ASE, King Yuan, SPIL, Powertech, ChipMOS, Chipbond, KYEC,

Kingpak, CHPT (probe)

KR: Unitest, Techwing, Lbsemicon

Memory LimitedYMTC, CXMT, Changxin / Gigadevice, Fujian Jinhua, Reliance Memory (Rambus/Giga

JV), ISSI, GinatecMicron, Intel, Western Digital

KR: Samsung, SK Hynix

TW: Nanya Tech, Macronix, Winbond

JP: Kioxia (ex-Toshiba Memory)

Limited

LimitedSemi Materials

Fabless

IC Design

Semi Cap

Equipment

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Figure 6: Tech Supply Chain – China vs World (Con’t)

Note: * = Names in bold are either already or likely to be leader in supply chain in 5 years’ time


Chances of China's

success in 5 yearsChina Supply Chain* US - Key Suppliers Non-US Key Suppliers

Others

Panel High BOE, Tianma, CEC Panda, CSOT, Truly, Visionox, EDO, Royole, Olightek

KR: Samsung, LGD

TW: AUO, Innolux, HannStar

JP: Sharp, Japan Display, JOLED

Casing High Lens, Biel Crystal, BYDE, AAC, Everwin, Tongda, CN InnovationsTW: Foxconn/FII/FIH, Casetek, Catcher, Everwin, Ju Teng

KR: Khvatec

Touch / Fingerprint High O-Film, Truly, Q-tech, Speed, Holitech KR: Partron, Mcnex, Dreamtech, Crucialtec

CCM High Sunny Optical, O-Film, Q Tech, Truly, Luxvision, Holitech, Shine, SZSeasonsON Semi, Omnivision, Lumentum, Finisar, Vertilite, Viavi, Jabil,

IIVI

KR: SEMCO,LG Innotek, JAHWA, Patron, Mcnex, Powerlogics, Cammsys

TW: Largan, Genius, PTOT

JP: Kantatsu, Mitsumi, TDK, Alps, Shicoh, Sharp

Lens High Sunny Optical, AAC (?), O-film, Star JuYu, LceOptic, Huaxin

TW: Largan, Genius

KR: SEMCO, Sekonix, Elcomtec, Kolen

JP: Kantatsu

Acoustic High Goertek, AAC, Luxshare, NeoMEMS, MEMSensing, Speed Knowles, InvenSense

EUR: STMicroelectronics, Bosch

KR: EM-Tech, Bluecom

TW: Merry, Inventec

JP: Hosiden

Connector High Luxshare, Sunway, Everwin TE Connectivity, Amphehol, MolexJP: Hirose, JAE, Kyocera, Panasonic, Daiichi Seiko, Iriso

TW: FIT

Surveillance High Hikvision, Dahua, Uniview TW: Geovision

Antenna High Sunway, Speed, AAC, Luxshare, JESONcom, Deman Amphenol, Skycross, Sky-Wave

EUR: Ethertronics

KR: Partron, Wisol, SEMCO

TW: Auden

JP: Sumitomo, Murata

MLCCLow (high-end);

High (commodity end)

Fenghua (?), Chaozhou Three Circle (?), Torch, Hongyuan, Sinocera, Sunlord,

Hongda, TianliAVX, Kemet, Vishay

KR: SEMCO / Samwha

TW: Yageo, Walsin Tech

JP: Murata, TDK, Taiyo Yuden, Kyocera

PCB High Shengyi, Shennan Circuit, MFLEX, Victory Du Pont, TTM

KR: SEMCO, BH, Korea Circuit, Daeduck, Interflex

TW: Taimide, Wus, Mortech, Taiflex, Thinflex, AEM, Avary, Flexium,

Career

JP: UBE, Mitsubishi Gas, NOK, Fujikura, SEI, Ibiden, Kyocera

Equipment Low Naura, Han's Laser, Dalian Zhiyun, Liande

KR: APS, SFA Engineering, Wonik IPS, Viatron

JP: Canon, Hirata Corporationi, Tokyo Electron, SCREEN, ULVAC, V-

technology, Shibaura-Mechatronics

Materials / Components Low to mediumJilin Optical, RuiYuan, Puyang Huicheng, Valiant, Selen, Eternal Material, Kangdexin,

Dongxu Opto, CaiHong OptoCorning, Universal Display, Dow Chemical, Merck

KR: Duksan Neolux, LG Chem, Samsung, SDI, KH Vatec, SKC Kolon PI

TW: TPK, Cheng Mei, BenQ Material, GIS

JP: New Nippon Steel, Idemitsu Kosan, Nitto Denko, Sumitomo Chem

Driver IC Low to medium SinoWealth, Solomon Systech, ChiponeTW: Novatek, FocalTech, Himax, Ilitek, Fitipower, Raydium

KR: Siliconworks, Magnachip, Samsung LSI

LEDs High Sanan, HC Semitek, Canyang Opto, Changelight Cree

EU: Osram

KR: Seoul SemIConductor, Samsung, LG Innotek

TW: Epistar, Lextar

JP: Nichia, Osram, Toyoda Gosei

ODMs / EMS High Huaqin, Wingtech, TINNO, BYDE, Longcheer, USI Flextronics, Jabil Circuit TW: Compal, Hon Hai, Inventec, Pegatron, Quanta, Wistron

Smartphone High Huawei, Oppo, Vivo, Xiaomi, ZTE, Coolpad, Lenovo, TCL, Transsion AppleKR: Samsung, LGE

JP: Sony, Sharp

PC High Lenovo, Haier, Hasee, Huawei (?), Tongfang, Xiaomi (?) HP, Dell, Apple, Microsoft

TW: Acer, Asus, MSI

KR: Samsung, LG

JP: Sharp

Enterprise /

ServerMedium

Huawei, Great Wall, H3C, Hikvision, Inspur, Lenovo, Powerleader, Tongfang, Sugon,

ZTE HPE, Dell, Supermicro, Cisco

TW: Inventec, Quanta/QCT, Wistron/Wiwynn

JP: Fujitsu

Networking OEMs High Huawei, H3C, ZTE, TP-Link Cisco, Arista, HPE, Juniper, Extreme KR: Samsung

Display

Components

4 November 2019


Table of Contents

Focus charts 2

China: Can it gain tech independence? 3

A net tech exporter; but a heavy semi importer ................................................................. 3

Localising semi production a national priority .................................................................... 3

China localisation: A mixed success story ........................................................................ 3

A net tech exporter; but a heavy semi importer 8

China is by now a net tech exporter ............................................................................... 10

Localising semi production a national priority 12

Chinese IC industry policy timeline ................................................................................. 13

Made in China 2025: Semis and IT sectors the focus ..................................................... 14

Funding of semis localisation initiative ............................................................................ 15

China localisation: A mixed success story 18

Memory semiconductors – still some distance to go ........................................................ 18

Logic semiconductors: pockets of strength in IC Design, backend and mature foundry

nodes.......................................................................................................................... 19

Semi equipment and wafers: lagging in wafers and far behind in equipment ..................... 21

Enterprise and servers: Chinese vendors strong in networking; server expansion

internationally may face challenges ................................................................................ 21

Display: China to dominate TFT panels; may succeed in OLED but still lags in key tools and

raw materials ............................................................................................................... 22

Components: largely self-reliant .................................................................................... 24

Memory semiconductors 27

Current market structure .............................................................................................. 27

China's game plan ....................................................................................................... 29

Conclusion .................................................................................................................. 34

Logic Semiconductors 37

IC design: China’s presence rising in consumer and mobile, still lags in higher value areas 37

Foundry: China lags on advanced capacity, more competitive on the mature nodes ........... 42

Back-end: China has used M&A to gain a stronger presence .......................................... 48

Funding of semi ambitions ............................................................................................ 50

Conclusion: China’s presence lagging in foundry, rising in OSAT, varying in IC design ...... 54

Semi equipment and wafers 59

China's game plan ....................................................................................................... 61

Conclusion: Lagging in wafers and far behind in equipment............................................. 61

4 November 2019


Enterprise and servers 63


China's game plan ....................................................................................................... 67

Conclusion .................................................................................................................. 69

Display 71


China game plan .......................................................................................................... 74

Conclusion: Chinese display makers becoming more meaningful but still lag key tools and

raw material ................................................................................................................. 79

Components 84

Acoustic ...................................................................................................................... 85

Antenna ...................................................................................................................... 89

Casing ........................................................................................................................ 91

Camera module ........................................................................................................... 95

CMOS Image sensor (CIS) ......................................................................................... 101

Lens ......................................................................................................................... 103

MLCC ....................................................................................................................... 106

PCB/substrate .......................................................................................................... 108

4 November 2019


A net tech exporter; but a heavy semi

importer

Import of technology products constitutes the largest proportion of total imports by China for any

given sector. This proportion has grown from high-teens a few years ago to 20-23% in recent

years.

Figure 7: China tech imports as percentage of total imports

Source: CEIC

Technology import totaled up to US$449 bn in 2018, growing 19% YoY. Tech remains the

largest part of the total China imports pie. Machinery & transport equipment, Oil and other fuels,

and non-food raw materials constituted the other major sectors of imports.

Within technology, import of semiconductors by far constituted the largest proportion (~70%) of

imports, with memory semi totaling up to US$122 bn (~27% of total tech imports) and other

semis totaling up to US$189 bn (~42% of total tech imports) in 2018. Import of equipment—

to produce semis and display parts—was another important part of total imports (US$23 bn; 5%

of total). China also imports a large part of its telecom equipment (US$41 bn in 2018; 9% of

total tech imports), while at the same time is a large telecom exporter to the world, highlighting

the interdependencies of the global technology sector.

Figure 8: China total imports breakdown, 2018 (%) Figure 9: Total China tech imports breakdown, 2018 (%)

Source: CEIC, Credit Suisse estimates Source: CEIC, Credit Suisse estimates

22%

19%

20%

19%

17%

18%

19%

18%

22%23%

20%

21%

15.0%

16.0%

17.0%

18.0%

19.0%

20.0%

21.0%

22.0%

23.0%

24.0%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Other


Machinery &


Tech, 21%

Textile, Rubber,

Minerals, 7%

Chemicals, 10%

Animal & Vegetable

Oils, 0%

Mineral Fuels &

Lubricants, 16%

Non Food Raw

Materials, 13%

Beverages &

Tobacco, 0%

Food & Live

Animals, 3%SPE, 3%

Display Equip, 2%

Semi-memory, 27%

Semi/IC ex memory,

42%

Mobile Handset, 0%

Telecom

Equipment, 9%

Display, 0%

Printed Circuits, 3%

Passive

Component, 3%

Others, 10%

4 November 2019


A rise in memory ASPs over the past two years, and strong growth in the market share for

Chinese smartphone brands such as Huawei (which in turn consumes a lot of memory), led to a

strong growth in import of memory semiconductors over the past two years—from US$64 bn in

2016 to US$122 bn in 2018. A combination of subdued growth in computing markets and a

higher localisation of non-memory semis (see more details later in the report under the logic

semiconductor section), non-memory semi import has been flattish in recent years—ranging

from US$172 bn to US$192 bn in the past five years.

Importantly, China's push to create a domestic semi and display production industry has meant

that equipment imports have continued to grow rapidly from just US$8 bn in 2014 to US$23 bn

in 2018.

Figure 10: Equipment, Memory and Other Semis – China import growth (YoY %)


While China is a large importer of technology products, it is also a large exporter of technology

products, actually exporting US$20 bn more of tech products than it imported in 2018 (more on

that later). Technology exports (US$469 bn) constituted 19% of total Chinese exports in 2018,

growing 11% YoY. Exports of machinery and transport equipment form ~30% of total Chinese

exports with other manufactured goods accounting for another 23% of total exports.

Within technology export, export of mobile handsets (US$141 bn) constitutes the largest part of

the pie, followed by exports of other consumer electronics products (US$99 bn) and telecom

equipment (US$77 bn). Growth in Huawei's (and also other Chinese brands) global market

share has driven growth in export of handsets over the past two years, though share gains are

starting to slow, given the already high share for Chinese brands, and incrementally, as the full

impact of the Huawei's inclusion in the US Entity List starts to show.

20

37

17

10

38

60

21 18

13

4

36 40

20

(9)

3

(3)(8)

9

(20)

(10)

-

10

20

30

40

50

60

70

2013 2014 2015 2016 2017 2018

Equipment Semi-memory Semi/IC ex memory

YoY%

4 November 2019


Figure 11: China total exports breakdown (as of 2018) Figure 12: Mobile Handset, Telecom Equipment and Others –

China import growth (YoY %)


China is by now a net tech exporter

Over the years, China has become a net exporter of technology products, though that balance

has been reducing since 2015.

Figure 13: China tech net imports (USD bn)

Source: CEIC

Looking at the US$20 bn net trade surplus in technology for China, it becomes obvious that

China is a large net importer of semiconductors and equipment but is a large net exporter of

downstream products such as handsets and consumer electronics and also telecom equipment.

Given the above, it becomes obvious why China has been focusing on growing its local

semiconductor industry.

Other


Machinery &


Tech, 19%

Textile, Rubber,

Minerals, 16%

Chemicals, 7%

Mineral Fuels &

Lubricants, 2%

Non Food Raw

Materials, 1%

Food & Live

Animals, 3%

17

21

8

(7)

10 11

13

(2)

14

(4)

9

4

(4)

(2) (1)

(3)

3

7

(10)

(5)

-

5

10

15

20

25

2013 2014 2015 2016 2017 2018

Mobile Handset Telecom Equipment Others

YoY%

10.5

2.3

(2.4) (2.6)

(11.5)

(29.0)

(37.9)

(49.3)

(66.4)

(47.6) (46.0)

(20.1)

(70.0)

(60.0)

(50.0)

(40.0)

(30.0)

(20.0)

(10.0)

0.0

10.0

20.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

4 November 2019


Figure 14: China tech net trade (imports minus exports) waterfall, 2018 (USD bn)


Telecom equipment is one high technology area where China has made significant progress

over the past decade and has closed its technology gap with other global leaders, largely

courtesy of Huawei and ZTE. This also provides some context to the friction that we are seeing

between the US and China regarding Chinese equipment companies on the world stage. It is

also worth noting, that despite China's significant success in telecom equipment, it still imported

about US$41 bn of telecom equipment in 2018, underlining the point that it still depends on

imported technology even in areas where it has made significant progress, to be able to even

export US$77 bn worth of product.

In semis, China has made some progress in developing its domestic fabless industry, though is

still dependent on importing the final manufactured product in several cases. It has also reduced

its import dependence in some areas by encouraging global producers to set up manufacturing

within China to serve both its local demand as well as use China as an export base. Most

noticeably in recent years has been the setting up of memory plants by Samsung, Hynix, and

Intel in China that has resulted in a strong CAGR of memory exports from China. However,

given the continued growth of domestic tech demand as well as Chinese brand's rising share of

end tech products in the global market has meant that China's demand for semiconductors has

outpaced the growth of its domestic semis production and has increased demand for semi parts

that it does not locally produce, resulting in larger net import of semis.

It also noteworthy that the strongest CAGR in import is in the area of semi and display

equipment, albeit the value of imports still remain small in the context of overall tech imports—

necessary import to create a domestic manufacturing base.

Figure 15: China imports CAGR, 2010-15 and 2015-18 (%) Figure 16: China exports CAGR, 2010-15 and 2015-18 (%)


12 11

80

126

( 141 )

( 36 )

( 25 ) ( 3 )

8

(52) (20)

(50)

-

50

100

150

200

250

SPE Display

Equip

Semi-

Memory

Semi/IC ex

Memory

Mobile

Handset

Telecom

Equipment

Display Printed

Circuits

Passive

Component

Others Total Tech

Net Imports

0%

12% 12%

7%

19%

1%

7%

34% 35%

26%

-1%2% 1%

6%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

SPE DisplayEquip

Semi-memory

Semi exmemory

TelcoEquip

Others Total

2010-15 2015-18

20%

9%

22%

10%

4%

11%

25%

-7%

4%3% 2% 2%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Semi-memory

Semi exmemory

MobileHandset

TelcoEquip

Others Total

2010-15 2015-18

4 November 2019


Localising semi production a national priority

As highlighted in the previous section (and also reproduced in the chart below), 70% of all tech-

related imports by China are of semiconductor products, thus, making it highly dependent on

foreign-sourced parts. Several of these imported semiconductors are also meant for powering

its technology related exports (handsets, telco equipment, and consumer electronics). China

also imports most of its equipment required for semi and display manufacturing and currently

has limited capability to manufacture any of these equipment locally. Thus, not surprisingly, the

focus of Chinese authorities, in the past decade or more, has been to develop a local

semiconductor industry.

Figure 17: Total China tech imports breakdown, 2018 (%)


While the focus on developing a domestic Semi industry has borne some fruit – local semis

production has been growing at a 20% CAGR in recent years (including semi production by

global players out of their China-based facilities) – China, as discussed in the previous section,

remains a large importer of semiconductors, and hence, the need to continue to focus on

developing the local industry. Geopolitical developments in recent years, particularly the inclusion

of several Chinese entities (notably Huawei, Hikvision amongst others) by the US on its

restricted Entity List, further adds urgency to China's initiatives to localise the tech industry and

reduce its import dependence.

Figure 18: China semi industry revs and YoY growth

Source: CEIC

SPE, 3%Display Equip, 2%

Semi-memory, 27%

Semi/IC ex memory,

42%

Mobile Handset, 0%

Telecom

Equipment, 9%

Display, 0%

Printed Circuits, 3%

Passive

Component, 3%

Others, 10%

305 321255

142

382466

600

707

843

996

1,221

1,487

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

200

400

600

800

1,000

1,200

1,400

1,600

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

China Semi Sales (Rmb bn) YoY（%）

4 November 2019


Chinese IC industry policy timeline

The government has had several policies before, starting notably with State Council Document

18 to develop its IC industry in 2000. This policy offered favourable tax treatment for domestic

IC chips and government investment in infrastructure, education, and basic research. In 2005,

the US petitioned the WTO to drop the VAT rebates for China IC producers, however, some of

the favourable industry policies stayed in effect, with the full document in effect through the end

of 2010. The policy did lay the ground work for the domestic industry, building it up to close to

10% of industry production by the financial crisis and US$23 bn of sales, according to CCID.

Figure 19: China IC industry policies progress since 2000

Source: SEMI

China's State Council supplemented the policy with its guidelines on Scientific Technology

development in 2006 for the next 15 years. It set a target for R&D at 2.5% of China's GDP,

with interim targets by 2020 to increase science and technology to 60% of the country's

development and lowered reliance on foreign technology to less than 30%. The policy

supported a Science and Technology development programme with projects to develop core

devices, high-end chips, equipment and materials, China prioritised technology development

and set targets to reach Top 5 in patents.

The China government passed the National IC Development Guideline in 2014 and ‘Made in

China 2025’ initiatives in 2015, jumpstarting the latest wave of industry development to build

the local semiconductor industry, this time directing more public and private resources for the

initiative. Key outcome from the guidelines is to achieve 20% of semiconductor industry revenue

growth to US$143 bn by 2020 (Rmb870 bn), raising China's internal supply of silicon from

one-third to half to reduce import dependence and stimulate the economy to move up the value

chain from manual labour intensive to high-skilled technology intensive industries.

The national policy laid out aggressive plans behind its 20% growth rate to achieve global

competitiveness across chip manufacturing, fabless IC design, back-end package and test,

materials and equipment. By 2020, the target is to move up from one third to half of its chips

from domestic production, reach competitiveness in a number of advanced silicon capabilities

(IoT, networking, cloud computing, big data), enter FinFet mass production and have back-end,

equipment and materials solutions to be competitive enough to serve the global supply chain.

Ultimately by 2030, China's target is to have a world class IC value chain with a set of top-tier

global chip players.

China's policy target in 2006 was to ramp R&D

and technology investments

4 November 2019


Figure 20: China's 2014 National IC Guideline set aggressive targets for its chip industry

Source: SEMI, China's National Guideline 2014, Credit Suisse research

Made in China 2025: Semis and IT sectors the focus

The Chinese government in May 2015 also laid out the first of three 10-year plans to transform

China into a leading high-quality manufacturing powerhouse by 2049, transitioning the country

from a volume-based labour intensive chain into a high-tech integrated manufacturing base with

leading global innovation. The country is looking to follow Germany's Industry 4.0 push to move

towards more automated, efficient, networked, and connected manufacturing that also

integrates production, supply chain, and customers.

The first ten-year initiative in the Made-in-China 2025 campaign targets strengthening China's

industrial base to enhance the quality of the manufacturing, foster Chinese brands and improve

manufacturing innovation. The government prioritised ten sectors although semiconductors and

information technology are key focus areas in the programme. To promote the Made-in-China

2025 campaign, the MIIT will facilitate the industry consolidation to allocate the resource more

efficiently and encourage the financial support from local government and private funds on the

local semiconductor ecosystem development.

The plan will combine some state planning for the framework but also market forces including

IP protection and industry standard creation and broader push to participate in international

standards. Localisation is another goal of the programme, with a plan to raise the domestic

content of core components and materials to 40% by 2020 and 70% by 2025.

Figure 21: Improvement targets for Made in China 2025 Figure 22: Made in China 2025 domestic champions

Source: Refinitiv, Credit Suisse Global Strategy Research Source: Refinitiv, Credit Suisse Global Strategy Research

2015 2020 2030

Semiconductor Revenue >350bn RMB (US$55bn) >870bn RMB (20% Growth CAGR) World class IC industry value chain

IC Manufacturing 32/28nm mass production 16/14nm mass production A set of leading tier 1 global semi players

IC Design

Approach international standards in some

technologies (smartphones, networking)

Reach international leading edge in key

technologies (mobile, networking, cloud

computing, IoT, big data)

IC Package and Test >30% of sales from advanced packaging Competitive with the global leaders

IC Materials 12" silicon wafers in the production line Competitive in the global supply chain

Semi. Equipment 65-45nm tools in the production line Competitive in the global supply chain

Target Indicator 2015 2020 2025

R&D intensity as (% of sales) 0.95 1.26 1.68

Patents per 100m of core

business revenues0.44 0.7 1.1

Manufacturing quality

competitiveness index83.5 84.5 85.5

Manufacturing value added

growth rateNA 2% > 2015 4% > 2016

Manufacturing labour productivity

growth rateNA

+/-7.5 (13th

5YP CAGR)

+/-6.5 (13th

5YP CAGR)

Broadband penetration (%) 50 70 82

R&D digital design tool

penetration58 72 84

Utilisation rate for numerical

controls in critical processes (%)33 50 64

Energy consumption per unit of

industrial value addedNA 18%<2015 34%<2015

C02 emissioins per unit of


Water consumption per unit of


Utilisation rate of solid industrial

waste (%)85 73 79

Innovation

Quality

efficiency

Integration of

Industrialisation

and IT

Environmental

Improvements

Sector Target and focus areas Existing capability

Information

Technology

Technological Innovation, particularly

semiconductors

Limited but key focus sector for creating

leadership in technology

Numerical control tools

and robotics

Low and medium level automation

capability. Focus on NC tool capability

to improve manufacturing quality and

productivity

Already a leader in low and medium level NC

tools

Aerospace equipment

Focus on satellite capabilities and

passenger jet transportation including

aircraft engines

One passenger jet C919-2,400 planes possible

by 2045

Marine engineeringOffshore infrastructure and high-tech

ships

Existing investment and capabilities in South

China Seas infrastructure

Railway equipment

Existing high speed train production.

"One Belt, One Road" projects to

improve competitiveness

High speed rail equipment sales to Russia and

Malaysia. In discussions with over 20 countries

for potential high speed railway equipment sales

including US

Energy efficiency and

electric vehicles

Domestic environmental clean-up

priorities and long established domestic

car manufacturing aspirations

Existing environment clean-up and emission

reduction targets should support this segment.

Visibility of innovation new fuel vehicles limited

Power equipmentCore priorities of smart grid and smart

city technologiesCurrently exporter of power equipment to India

New materialsKey government focus on "invention"

and "innovation" in materialsResearch into new materials in its infancy

Biopharma and medical

devices

Existing success in low tech medical

devices. Likelihood of success in

biopharma and medicines less certain

Rapid growth in medical equipment market of

20% pa since 2009 from small base. Medical

device capability currently small, low technology

equipment and supplies

Agricultural machinery

Focus on improving quality in current

manufacturing and potential export

sector. Potential for international

demand less clear

Domestic industry concentrated on low power

tractors and small to medium machinery.

Exports predominantly from JVs

Made in China 2025 targets

transforming industry to a

high-end integrated value

chain

4 November 2019


The Made in China programme ultimately targets making Chinese companies more competitive,

production and components more localised and China firms higher up on the value chain moving

towards International brand recognition and status.

Funding of semis localisation initiative

China National IC Fund established in August 2014

Substantial funding is behind the National IC Development Guideline initiative, including

establishing the National IC Fund which raised US$20 bn in 2014 and now a second round for

US$29 bn, along with US$120-140 bn from public/private funds. The fund has invested in

creating national champions that can compete globally across the foundry, back-end, suppliers

and design companies, with 60% of the funding to designated IC manufacturing due to the

foundries central role in the ecosystem, and 40% for packaging & test, IC design, equipment,

material, and local IC funds.

Local Private Equity funds supplement the National IC fund

To supplement the National IC Fund, the Chinese government believes a strong policy support,

growing ecosystem and national fund backing in the semiconductor industry will attract an even

greater amount of investment from private sectors, financial institutions, and overseas investors.

The Chinese government expects 5x more investments beyond the National IC Fund. The

Shanghai government has been aggressive on semiconductor industry development as it already

has a relatively sound ecosystem of international manufacturers, local and overseas foundries,

back-end and IC design. The IC fund that it established last year made its first acquisition target

of ISSI in March to bring more memory IP into China. The first phase of the fund has been

largely been deployed. SMIC and UMC Xiamen fab expansions next year will use the second

phase of the fund.

Figure 23: China semiconductor industry is supported by National IC Fund and increasing capital from private sectors

Source: Company data, Credit Suisse estimates

The Beijing IC Fund also has Rmb30 bn to acquire Omnivision and is developing a 28nm 12"

JV fab with SMIC now at 17k WPM with an eventual target for 35K in the first of the three

phases. The Shanghai government has also announced a JV fab with SMIC, and Ningbo is

developing an R&D centre that could convert to a fab capacity focused on specialty

manufacturing technology. The Nanjing government has also supported TSMC's 20k fab

investment, Xiamen government formed a JV with UMC for a 50k WPM fab in that province,

and Chonqing government has invested in the Globalfoundries fab in China.

National IC Fund Regional Funds Tsinghua Unigroup PDSTIChina Fortune-

Tech Capital

Beijing E-Town

CapitalSummitView Capital BJ Semi Fund Hua Capital

Start Date 2014 2014-2015 1988 1999 2014 2009 2011 2014 2014

Mandates

- Supports China's

IC industry

development

- Encourages

private sectors to

invest in

semiconductors

- Shanghai $8.0bn,

Beijing $4.7bn,

Wuhan $4.7bn,

Sichuan $1.7bn,

Shenzhen $3.1bn,

Wuxi $1.7bn,

Nanjing $150mn

- Build up the China

semiconductor IDM

ecosystem

- Supports

China's IC

development with

acquisitions

- Focuses on

emerging fabless

investments to

expand SMIC's

markets

- Supports China

technology

companies'

development

- Invests in semi and

internet start-ups

- The fund is co-set up

with the Shanghai

givernment mainly for

semiconductor M&A

- Focus on Ics, IT,

manufacturing,

energy and medical

- Supports China's

semiconductor

development

through

acquisitions

Fund SizeRMB139bn

(US$21bn)

RMB150bn

(US$24bn)

RMB300bn

(US$46bn) planned

in 5 years

RMB10bn

(US$1.5bn) for

semiconductors

RMB500mn

(US$76mn)

RMB1.2bn

(US$180mn) for

semiconductors

RMB10bn (US$1.5bn)

for semiconductorsRMB4bn

RMB2bn

(US$310mn) for

semiconductors

Investments

- Stake

investments:

SMIC, ZTE Micro,

JCET

- Business deals:

Tsinghua Unigroup

Stake investments:

- Shanghai with

ISSI,

Beijing/Shenzhen

with SMIC, Wuhan

with XMC, Nanjing

with TSMC

- Acquisition:

Spreadtrum, RDA,

H3C

- Stake

investments:

Western Digital, 3

Taiwan OSATs

- Acquisition:

Montage

- Stake

investments:

SMIC,

Spreadtrum

- Stake

investments:

EtraSemi, CISTA,

Senodia

- Acquisition:

Mattson- Acquisition: ISSI

- Investments:

SMIC, Actions,

Montage, SPRD,

Chipsbank,

TechFaith, CSMC,

Waveguider, Fortune

Techgroup, Sinosun

- Acquisition:

Omnivision

4 November 2019


Figure 24: China IC Focused Funds


Private VCs also an important form of capital

Local private VCs are also working in conjunction with the government and National IC Fund.

Tsinghua Unigroup is the largest fund and is focused on establishing memory companies in

China. The fund had earlier invested in RDA/Spreadtrum, attracted Intel's investment in 2014

and expanded its acquisition targets into memory with a JV with ChipMOS in packaging,

acquisition of XMC for NAND flash and development of a DRAM fab backed by local funds.

Tshinghua has continued to invest in the Yangtze Memory Technology. Beijing ETown was

involved in acquiring Mattson, a US-based smaller equipment company.

Figure 25: Top 10 Chinese semiconductor private placements: 2016-18

Source: S&P Global Market Intelligence

Funds Amount (Rmb,bn) Amount (US$,bn) Source

China Integrated Circuit Industry Investment Fund (CICIIF) 138.7 20.8 Central Government

Tsinghua Unigroup 300.0 45.0 Private sectors/Central Government

Beijing Semiconductor Industry Development Fund 30.0 4.5 Beijing Government

Shanghai IC Fund 50.0 7.5 Shanghai Government

Shanghai IC Investment Fund 28.5 4.3 Shanghai

Shanghai Pudong Science and Technology Investment 10.0 1.5 Shanghai

China Fortune-Tech Capital 0.5 0.1 SMIC

Beijing E-Town Capital 20.0 3.0 Beijing Government/Private sectors

BJ Semi Fund 4.0 0.6 Beijing Government/Private sectors

Hua Capital 2.0 0.3 SMIC/Tsinghua Holdings

Shenzhen IC Industry Fund 20.0 3.0 Shenzhen Government

Beijing IC Overseas Fund 2.0 0.3 Beijing

Xiamen Tsinghua IC development Fund 16.0 2.4 Xiamen, Tsinghua Unigroup

Fujian Province Anxin Industry Fund 50.0 7.5 Fujian

Guangdong Province IC Fund 15.0 2.3 Guangdong

Wuhan Industry Development Fund 30.0 4.5 Wuhan

Sichuan Industry Investment Fund 10.0 1.5 Sichuan

Nanjing Pukou IC Industry Fund 1.0 0.2 Nanjing

Nanjing IC Industry Fund 50.0 7.5 Nanjing

Hubei Investment Fund 30.0 4.5 Hubei

Wuxi IC Industry Fund 20.0 3.0 Wuxi

Tianjin IC Industry Fund 200mn a year 30mn a year Tianjin

Shijiazhuang IC Industry Fund 10.0 1.5 Shijiazhuang

Shanxi IC Industry Fund 30.0 4.5 Shangxi

Liaoning IC Industry Fund 10.0 1.5 Liaoning

Summitview Capital 10.0 1.5 Private

Other local government and PE 30-80bn 5-12bn Gov, Private, SOE etc.

Total estimates: RMB850-950bn US$120-140bn

4 November 2019


Other sources of funding and support

Other than broad level and significant funds available from the National IC Fund, local private

equity funds and private VCs, these semiconductor players in China also stand to gain funding

and help from the following sources, and we discuss these in more detail later in the report

under the logic semiconductors section:

o Setting up joint ventures between fab/foundry operators and local governments

o Providing R&D and equipment subsidies

o Incentivising talent to move to China and improving local talent output; increasing local

R&D spend

o Easing access to capital markets

Setting up localised standards to support industry

development

The Chinese government also believes that large domestic demand from the local market

provides it an opportunity to support the local semiconductor industry by setting up localised

industry standards. The government successfully promoted TD-LTE in the communications

segment to build its domestic equipment industry early in the 3G era to pave the way for its

more competitive position on 4G and now 5G. It now believes that it is in a leading position to

drive standards in 5G development and has issued licenses and is targeting an aggressive

domestic roll-out to build its local equipment and smartphone brands. It also set up a new

standard in the financial cards market to support the local smartcard fabless in 2014.

4 November 2019


China localisation: A mixed success story

China already has companies emerge across the tech supply chain, with more success in

hardware and components. In tech hardware, China's smartphone brands have taken 55-60%

of the global smartphone market, has leading PC brand Lenovo, networking suppliers Huawei

and ZTE and leading regional TV brands in TCL, Changhong, Skyworth, Konka, Haier and

Hisense. The component sector has also been seeing competition rise across acoustics, casing,

lens/camera module, optical components and connectors. The country is also leading in EMS,

with most of the industry's TV and notebook production in China. The presence of a large and

growing hardware sector is pushing the national interest to also develop its semiconductor

sector for economic benefits, moving into higher value areas and lessening requirement on

import, and also national security controlling its processing, communication and storage links.

Figure 26: Technology supply chain – a map of Chinese suppliers


While we discuss in greater detail the dynamics at play in each of tech subsectors later in the

report, we summarise our conclusions for each of these sectors in the following paragraphs.

Memory semiconductors – still some distance to go

While there are many Chinese entities that have indicated interest to engage in production of

memory semiconductors, we conclude that currently there are only two likely players that will

pioneer the memory semi development in China: Changxin Memory Technologies (CXMT) for

DRAM and Yangtze Memory Technologies (YMTC) for NAND. Overall, for both DRAM and

NAND, we see very little supply impact from China by 2020.

Networking:Huawei, ZTE

CM / ODMs

PC Brands

Smartphone Brands

Networking OEMs

Back-end package & test

IC Distributors

Components

Fabless IC Design

Foundries

Semi Cap Equipment

EDA Tools

Tech Downstream Distributors

Hyperform

Exposure: SMEEDeposition: Naura, PiotechInspection: Grand, RaintreeEtch: AMEC, NauraPhotoresist processing: KingsemiClean: ACM

SMIC, Hua Hong, Shanghai Huali, ASMC, CSMC, SiEN, Silan, CanSemi, CR Micro, Yantai Raytron

JCET, Tianshui Huatian, Tongfu, China Wafer Level CSP, SJ Semi, Kaifa, Biwin

HQ Mart, Will Semi, FortuneTech, Wuhan P&S, INtron, Apex Ace, Smart-core, Techtronics, Wisewheel, Sunray

Huaqin, Wingtech, TINNO, BYD, Longcheer, USI

Panel: BOE, Tianma, CEC Panda, CSOTCasing: BYDE, Ju Teng, Tongda, FIITouch/Fingerprint: O-Film, Truly, Q-TechLens: Sunny Optical, AACAcoustic: Goertek, AACConnector: Luxshare, Everwin, FITSurveillance: Hikvision, DahuaAntenna: Luxshare, SunwayLEDs: Sanan Handsets: Huawei,

Oppo, Vivo, Xiaomi, ZTE, Coolpad, Lenovo, TCL

PC / Server:Lenovo, Inspur, Dawning, Razer, Huawei

Synnex (Taiwan listed), Digital

China, VST

Mobile Processor: HiSilicon, Spreadtrum, ASR, Pinecone, ZTE (Sanechip)Servers/AI: HiSilicon, Cambricon, Montage, Alibaba, Eeasy Tech, Huaxinton, Big Fish, ThinkForce, Illuvatar, Cambricon, Bitmain, Zhaoxin, Loongsan, eBangGPU: Jingjia, ZhoaxinMCU: Gigadevice, Ingenic, Unigroup Guoxin, SinoWealth, Silan, Goodix, Datang, Huada, Giantec, Yixin, MindMotion, Winner MicroRF IC: RDA, Vanchip, Huawei, Maxscend, SanechipsConsumer: Rockchip, Allwinner, Amlogic, ActionsTouch/Fingerprint IC: Goodix, Silead, Fortsense, Betterlife, Chipone, BYDCMOS image sensor: Will Semi (OVT), GalaxyCore, Superpix, ArtivisionAnalog: Awinic, SG Micro, BYD , OnBright, Silergy, Nexperia, Huada, ChiponeDriver IC: SinoWealth, Solomon Systech, ChiponeSmartcard: Tongfong Guoxin, Datang, Huada, Nationz, Fudan, Hua Hong ICMemory: GigaDevice, YMTC, Changxin, Fujian Jinhua, Reliance Memory (Rambus/Giga JV), ISSI, GiantecSurveillance/Video: Huawei, Fullhan, Vimicro, Ingenic, Artosyn, Goke, Eeasy, Dahua, Yitu, Horizon RoboticsFPGA: Gowin, Fudan Micro, Unigroup Guoxin, Huada

End Consumer

Retail: Gome,Suning

Online: Alibaba, JD.com

Semi Materials

Substrate: Access, Fastprint, SCCWafer: AST, Ferrotech JV, ESWIN, Simgui, Zing Semi, Zhonghuan Lithography related: Kempur, RuihongSputtering: KFMICMP Slurry: AnjiChemicals: Runma, Jingrui, Huayi, Sinyang

TV Brands

TV: Skyworth,Changhong, Haier,

Hisense, Konka,TCL

4 November 2019


In DRAM, while CXMT's first fab is designed up to 120K wafers based on announced 19nm

technology plan, the initial ramp of 20K to 30K wpm has already been delayed by over a year.

CXMT is going to provide output only on 19 nm (we cannot yet confirm if this is an industry

accepted 19nm) by next year, but by mid-2020, 19 nm would not be competitive to industry

leaders producing mostly on 1y nm and with Samsung potentially moving on to 1z nm. Also,

within such a small production scale and lack of engineers, it is unlikely that CXMT can

simultaneously work on various DRAM architectures such as mobile, PC, Server, etc. Most

likely, CXMT, even if it is successful in commercially producing 18nm DRAM, will find itself

competing in the consumer specialty DRAM segment which would require less advanced nodes

and speed. Therefore, the Taiwanese consumer DRAM makers would be the first in line in

terms of competitive threat, however, as we said, only if CXMT is successful. From a capacity

planning perspective, 20K to 30K wpm on higher nodes does not represent overall DRAM

industry supply threat. However, if CXMT were to be successful and ramp to its maximum

120K by end of 2022, then it could represent as high as ~8% of global DRAM wafer capacity,

although likely significantly less in terms of bit shipment market share. While we believe CXMT

remains the designated DRAM champion in China, in recent weeks, we have seen some signs,

given the relatively slow progress in DRAM at CXMT that China may be looking to back another

group (partly funded by Gigadevice – 603986.SS) as well for DRAM development.

YMTC's 3D NAND mass production roadmap is less clear. Having 64L TLC design at this

juncture of NAND industry development puts its technology far behind industry leaders who are

already producing on 92L/96L and investing in 128L. The industry leaders are already

dismantling 6xL capacity as any hope of return to profitability fades, given the sharp fall in ASPs

over the past two years. This technology (6x layers) would have no cost advantage and has

limited use in the end-market applications. Although YMTC has begun R&D of 128L NAND

and targets risk production from 4Q20, given its history, we expect more time is needed. It may

be working on the successful of 64L development for a while. While the long-term goal of

ramping to 300K wpm has been indicated by the company, it would first need sizeable

customer wins in order to produce NAND in that magnitude. YMTC has announced that it

began sampling its NAND products with various client SSD makers but success of any

qualification is unknown currently. Capacity ramp schedule would be difficult to project without

confirmation of a commercially viable product.

Logic semiconductors: pockets of strength in IC

Design, backend and mature foundry nodes

The Chinese semiconductor sector is seeing varying degrees of success establishing self-sufficiency in its domestic ecosystem due to high barriers in the advanced manufacturing and

chip design. In foundry, market share has been stable around 9% the past decade, despite National IC fund investments and heavy attention on this sector as the centre of China’s

industrial development. TSMC’s wide lead on process technology, and increasingly high-end advanced packaging, allows it to address the high-end compute, mobile and networking

demand. The Chinese foundries have kept up with market growth, but largely by leveraging their

more legacy 8” and mature 12” process nodes to address high-volume consumer and wireless/wired connectivity, and specialty high-volume applications (CMOS image sensors,

power management, bank cards, specialty memory).

In the back-end space, China has increased share following the M&A of overseas companies,

and through a combination of aggressive pricing, targeting of SiP with high sales contribution

but low margin, and addressing the growing base of local fabless and international companies with supply chains in China. The companies, following acquisition, can address the mainstream

high-volume packaging—including flip chip and wafer level packaging—though lag foundry leader TSMC integrating high-end applications on its silicon interposers and high density fan-out

process. Market share has been rising, and now approaching 20%, although profitability is still a concern with China players operating at low- to mid-single-digit operating margins.

In IC design, traction has been steady, to lift share from 4% in 2010 to 16% in 2018,

although it has been concentrated in select areas of the semiconductor space. Market share is the highest in mobile segment (processor, modem, wireless power management, connectivity,

4 November 2019


CMOS sensors), wired connectivity (led by Huawei) and some new high-volume applications

seeing strong support in China (crypto-currency and AI). Market share is still below 5% in

approx 70% of the overall industry – most notably processors, memory, GPU, FPGA, analog,

MCU and RF.

Figure 27: China semiconductor industry continues to outgrow global peers


Likely growth areas over the next three years:

1. Continued growth in its core wireless-related semis. We expect China to have

the most growth from its existing strong hold in wireless, through higher content in

mobile processors, connectivity, image sensor and gradual traction in RF. The move to

5G networks should drive both content and volume growth.

2. AI could be a new high-volume category for fabless. Replicating their success in

the crypto-currency ASIC market, we expect these companies to target AI inference

and some cloud-acceleration applications, which could drive another revenue cycle

addressing the evolution toward smarter products capable of voice recognition and

image/object detection.

3. Growth from a low-base in analog, RF, and MCUs. China has an opportunity to

target more mature mainstream analog and discretes, and MCUs, including at

domestic companies looking for a local-source alternative to the global IDM. The

presence of local foundry capacity with Hua Hong’s 8” and new 12” mature fab and

back-end capacity should help. The Asian RF foundries like Win Semi and AWSC

along with Sanan’s development should also help the emerging RF suppliers to target

some of the discrete RF components and mature 2G-4G cellular layers and Wi-Fi RF.

4. Local foundries to grow on specialty applications/mature nodes. We expect

China’s foundries to expand their position with the growing local IC design companies

using their mature lines (power management, flash memory, CMOS sensor, digital

consumer). Hua Hong’s expansion of its Wuxi fab would double its revenue base in

the next five years on still-mature technology nodes, while SMIC should keep its

mature lines relatively full with the growth of the domestic market. The advanced

technology may, however, take more time.

5. China back-end takes a larger share of local customers. China’s back-end

sector is seeing increasing opportunities as it leverages the more advanced technology

capabilities picked up from its acquisitions to target domestic companies adding local

sources. Profitability though, may still lag a bit due to on-going competition.

6. A few longer term (three-to-five years) possibilities:

a. SMIC’s aggressive push on technology at the expense of near-term

profitability, heavy government support, and drop-off of advanced technology

competition from UMC and GF gives it a chance to emerge as a capacity

source for more advanced applications. SMIC will need to endure high capex

and difficult profitability but may emerge in three to five years as a more

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4 November 2019


competitive foundry capable of supplying some of the more advanced

mobile and networking applications.

b. China’s design houses are working on alternatives to Intel/AMD CPUs using

ARM and RISC-V processors and NVIDIA accelerators with a host of AI

inference and training chips. Within three to five years, the push for a local

source—for national security and economic reasons—could allow local

suppliers to gain some traction.

c. We would view the build-up of more local teams and domestic diversification

as allowing local suppliers to gain further market share in broad markets in

MCUs and analog.

Semi equipment and wafers: lagging in wafers and far

behind in equipment

There are two relevant Chinese equipment companies, but both with negligible shares currently:

AMEC (Advanced Micro-Fabrication Equipment) which develops and manufactures dielectric and

TSV etch tools for semiconductor manufacturers, and MOCVD tools for LED makers; and Naura

(Naura Technology Group) which has been set up with a mission to establish China’s capabilities

in various equipment fields and is developing a wide range of semiconductor equipment (including

etch, PVD (physical vapour deposition, CVD (chemical vapour deposition), diffusion, cleaning tool,

UV curve, indexer, gas measuring control, ALD (atomic layer deposition) etc.).

For equipment, we estimate China players are at least 5-10 years behind global suppliers, or

even longer for areas where there is no volume production by China companies so far. We

expect the 5-10 years gap to continue in the foreseeable future, given the long development

and complex qualification process required by chipmakers. That said, given China’s strong

momentum in domestic replacement, we expect some China players to shorten their technology

gaps vs global players (i.e., AMEC), while some may require an even longer time. Importantly,

price of equipment is not a critical issue to change suppliers in the equipment market as

production yield is quite an important parameter for semiconductor makers.

Similarly, we think local Chinese wafer makers may not be able to close the technology gap with

the wafer majors and significantly boost their market share over the next one to three years.

Given also the size of the market shares commanded by Japanese, European, Taiwanese and

Korean makers, we do not envisage any noteworthy change in market share distribution. Our

view is based on the scale of the technological barriers. At this point, we have ascertained the

following major developments, although in all three cases we understand there are unresolved

technological issues. (1) Zingsemi is shipping 300mm test wafers to customers, but these are

not ready for use in commercial mass production. (2) Having hired engineers from outside of

Japan, RS Technologies has improved its 200mm wafers technology, but not enough to catch

up to the five market leaders. (3) Ferrotec has increased the competitiveness of its product by

licensing in technology from GlobalWafers, but appears to mainly ship test and prime wafers

and to a few China chipmakers that are not particularly fussy about product quality.

As China chipmakers get up and running, demand growth in the mature segment of the

semiconductor market that does not require high-end wafers should provide business

opportunities for China wafer-makers.

Enterprise and servers: Chinese vendors strong in

networking; server expansion internationally may face

challenges

For the networking market, we expect to see Chinese vendors take more share over time, and

in the higher networking speeds of 100GB+ from the low level today (currently Chinese vendors

has 10% market share at this speed), and we expect to see more pressure on the market share

of US-based vendors as political tensions persist. Where we see additional opportunities for

Chinese vendors are European developed markets, where Germany recently announced that

China vendors will gain more shares long-term

in Ethernet switch from the US vendors, with

also increasing pressure to the higher ports

speed segment

4 November 2019


they will not ban Huawei from their 5G build-outs, giving Chinese vendors more global

opportunities for the networking stack. For overall US switching, we expect to see Cisco,

Juniper Networks, and HPE to continue dominating US share, with limited opportunity in China

given the political tensions. Finally, given the degree of R&D investments and supply chain ramp

taking place in China, we expect Chinese vendors to continue dominating in China driven by

domestic government policy.

China is already nearing self-sufficiency in servers from a hardware vendor perspective, with

Chinese vendors accounting for >80% of the domestic x86 market, per IDC. Given the

government’s China First strategy and its intention to break away from the US supply chain, we

expect China server vendors will continue to expand their dominant position domestically. On the

international front, Chinese vendors’ share remains relatively small at ~6%—70% of which is by

Lenovo, who purchased IBM’s x86 business in 2015. Inspur has been making good progress

internationally, supported by its JDM business model and alignment to OCP standards; however,

we believe rising security concerns—especially after a Bloomberg report in mid-2018

speculated on a hacking incident allegedly involving China-produced motherboards used in

Supermicro’s servers—will slow the progress of Inspur’s expansion at US-based customers in

both cloud/enterprise segments. By the same token, Huawei should also see more obstacles

expanding internationally, especially for the roll-out of its 5G infrastructure, and we believe it

could take longer for Lenovo’s DCG business to break even. We also see limited room for other

Asian vendors to meaningfully displace more tradition market leaders; Fujitsu, which is the

largest, only has 2% global x86 revenue share. On the other hand, ODM Direct vendors

supplying cloud operators, specifically Quanta and Wiwynn, will continue to take share from

traditional server brands, leveraging their enhanced customisation and hardware-design

capabilities, on top of lower total cost of ownership.

For supply chain localisation, we expect Chinese server vendors will increase their sourcing

from local component-makers in the next few years; nevertheless, we expect a majority of the

BOM should still be dominated by the US suppliers. Specifically, we see 40-50% of the total

server BOM associated with the chipset (Intel/AMD); 20-30% in memory (Micron, Samsung,

SK Hynix, etc.); and a majority of the remaining from storage (WD and Seagate). While we

believe China vendors are gradually catching up in their design capabilities and production

know-how—as their learning curve scales along with international market share expansion—we

do not expect China to have a complete back-up solution, especially on the chipset; however,

we do expect sourcing of memory to shift to Japanese/Korean players, as they move away

from Micron. Domestic sourcing will be encouraged, if CXMT/YMTC are able to deliver a

successful product, but our analysts believe that it is unlikely over the next five years (outside of

some consumer-level parts). Beyond the CPU, the other major obstacle to true Chinese self-

sufficiency in servers is operating systems where Windows and Linux continue to dominate.

Display: China to dominate TFT panels; may succeed

in OLED but still lags in key tools and raw materials

China to dominate TFT-LCD

Chinese display panel makers have obviously caught up on producing TFT-LCD panels,

especially for the commodity and lower-entry-barrier products. We expect their market share to

further increase as they ramp up new fabs, especially amid Korean panel makers’ strategy

change.

China’s central government started pushing the construction of new panel fabs in 2009. Since

then, leading players for large-size display applications like BOE and CSOT have built new

facilities with support from the central/local government. Moreover, smaller players like CEC-

Panda, HKC, CHOT, etc., were also supported by different provincial governments and

constructed several new fabs in the past few years. As of 1H19, Chinese panel makers

accounted for 41% of area shipment for LCD TV, 36% for NB/tablet, and 30% for monitor.

We expect China vendors to gain more shares

in servers especially domestically with policy

support; however, they may see more

obstacles internationally from recent security

and trade tension

Dell focusing on expanding leading shares;

HPE focusing more on protecting profitability

China will take long time to achieve supply

chain localization with key components

supplies still dominated by US suppliers

4 November 2019


Although the industry has been in oversupply, Chinese panel makers are still building new large

size panel fabs (mostly Gen 10.5) and will begin mass production in the next one to two years.

Koreans to exit TFT-LCD; focus on OLED

We fully expect Korean LCD makers to exit the TFT-LCD panel manufacturing over time. Most

LCD products are no longer profitable and Korea's strategy is to shift up on the technology

curve to pure OLED production base while phasing out the existing LCD facilities. Both Chinese

and Taiwan TV LCD panels are at sufficient quality, where major TV brands such as Samsung

and LG Electronics (LGE) have been expanding panel procurement for TVs at lower price points.

High-end TV panels will move to OLED TVs for both brands, with LGE enjoying a head start.

For small TFT-LCD and LTPS LCD display, Samsung began phasing out production from 2014.

Today, Samsung produces no smartphone LCD displays internally. Instead, its early shift toward

the future of OLED displays enabled the company to enjoy near-monopoly status for more than

a decade. OLED offers less competitors and is a more difficult technology to master. The near-

monopoly status also enables the company to keep tight control over its equipment and material

suppliers. OLED has grown into a W25 bn revenue per annum, with much more stable 10% to

12% sustainable OPM for the company.

Similarly, LG Display has closed its P2, P3 and P4 lines in Paju and Kumi with most of the AP2

line used to make LTPS-LCD now being converted for the usage of OLED production. While

the company still runs a profitable business in the oxide based LCDs for AAPL's PC monitors

and laptops, the mobile LTPS display has also been phasing out as Apple began to adopt more

OLED displays into its iPhone models, and LGE’s smartphone volume has shrunk considerably.

As a LG Group strategy, developing OLED TVs was emphasised first, followed by flexible

mobile OLED transition following Apple's iPhone shift.

Chinese good with rigid OLED; but lagging in flexible OLED

Chinese panel makers started to spend significant capex from 2017 to expand OLED capacities,

triggered by Apple's adoption of OLED panel along with a massive subsidy from the

government. Several panel makers have announced accelerating their OLED capacity build-up

plans including BOE, Tianma, EverDisplay (privately held), Truly, Visionox, Royole (privately

held) and CSOT. We estimate over Rmb400 bn of investment in OLED panel manufacturing.

We see a majority of projects are setup with government bodies, with listed companies holding

approx. ~10% stake; this could help lessen the financial burden for listed companies. Chinese

OLED panel makers rely on overseas suppliers for raw material and equipment.

Among Chinese OLED panel makers, Everdisplay and Tianma were successful in delivering rigid

smartphone OLED panels in 2016. Everdisplay has started with non-smartphone applications

such as smart watches, industrial and other handheld devices, and taken 2 years for a ramp up.

Tianma only shipped a small volume in 720p resolution to begin with, but now their Wuhan

OLED fab can deliver rigid smartphone OLED panels at a reasonable yield rate. BOE started

mass production of flexible OLED smartphone panels from 4Q17 but ramping took long time

without a flagship model. We see Chinese OLED panel makers are struggling for yield

improvement and cost reduction. Longer-term, we expect more Chinese OLED panel makers

could deliver rigid OLED panels, while BOE remains the leader in flexible OLED panels in the

China market.

China to rely on Japan, Korea, and the US for key raw

materials, especially OLED

We believe Chinese panel makers might use more local material and components for

manufacturing in the next few years, although they will still rely on overseas vendors for certain

high-end components that require more fundamental research in material science. We believe

material/components such as ultrathin cover glass (Corning’s Gorilla glass or Asahi’s

Dragontrail glass), large size glass substrate (Gen 10.5), OLED polariser (film-type circular or

liquid crystal pattern), high-end optical film (quantum dot film), OLED materials, etc., will still be

Chinese LCD makers’ share could further

increase as Korean players exit the market

4 November 2019


dominated by overseas suppliers, given their know-how in raw material, formulation, and end-

customers’ preference. From a long term perspective, China would evolve its domestic supply

chain to get a meaningful contribution from local panel makers and reduce its reliance on

overseas suppliers, especially US vendors.

For OLED materials/components, we believe it will take longer for Chinese panel makers to

establish their own supply chain, primarily due to Samsung’s black box strategy to protect its

core technology. OLED itself is a much more difficult technology to master in general, requiring

a lot of trial and error due to the nature of its analogue manufacturing processes. Furthermore,

the pioneer and the leader, Samsung Display has wanted to strictly control the supply chain,

including building up its IP portfolio on production methods, equipment advancement and

upgrading organic materials science. In particular, for OLED materials, some key suppliers such

as Universal Display, Dow Chemical, Idemitsu Kosan, Duksan Neolux, etc., are already

dominant players in sub-segments where Samsung Display is unlikely to supply advanced

materials to Chinese panel makers.

Components: largely self-reliant

Acoustics: Most parts likely to be localised

We see China has low reliance on imported acoustic components but it still relies on overseas

codec chips and MEMS chips in mid- to high-end smartphones. We expect Chinese players to

continue gaining share in key areas, after having successfully gained dominant share in Apple’s

acoustics supply chain for speakers and receivers. AirPods production is also expected to be

largely divided between Luxshare and Goertek. For MEMS microphone market, Chinese players

are quickly catching up with Knowles. Goertek and AAC are producing MEMS IC, and looking

to increase the self-supply ratio of MEMS IC. We expect it will take longer for Chinese players

to realise domestic substitution for MEMS IC, and it is likely to be a medium term effort (3-6

years). For the smart speakers market, we already see the market share increase from both the

end-product perspective (with Baidu, Alibaba and Xiaomi entering the top 5 global brands), as

well as the supply chain (with increasing share being taken by Chinese players such as AAC

and Goertek).

Antenna: work in progress to move to more advanced designs

We believe China will strengthen its domestic value chain and ecosystem by moving upstream

of the FPC antenna industry, somewhat overlapping with the PCB industry. We think the

industry/enterprise investment will move from FPCB and antenna module assembly to CCL

midstream in the next 1-3 years. Besides, local governments/ research institutes are likely to

continue investing in R&D for 5G antenna design and materials/resin development, etc. In the

long term, China might close the gap with Japan/US chemical companies on resin and film

manufacturing.

Casing: lagging in metal casing but a leader elsewhere; still

dependent on casing equipment imports

Chinese players are already the market leaders, in terms of market share and technology,

across different casing materials for Android smartphones and tablets. For the Android supply

chain, BYDE leads metal, plastic, and glass casings, and BYDE is aggressively pursuing an

aggressive pricing and capacity expansion strategy. In terms of quality and segment, FIH and

AAC are targeting high-end metal mid-frame casing, BYDE focuses on the mass market, and

Tongda focuses on the mid-to-low-range segment. Lens Tech is expanding its share in Android

glass casing with new products delivering rising precision, strength and more colour options;

Tongda leads in ‘glastic’ casing and innovating with ICM and 3D glastic casing materials. For

Apple glass cover/casing also, Chinese companies (Lens Tech and Biel Crystal) are the market

leaders, with advanced new products on rising precision from unibody design and higher

strength/more colour options. However, Chinese players are trying to get into Apple metal

4 November 2019


casing but still lag behind their peers in Taiwan, and it’s unlikely Chinese players could get into

the Apple metal casing supply chain in the short-term due to lagging in technology advancement

and precision manufacturing.

In the Android supply chain, we see low reliance on overseas suppliers. Domestic vendors

dominate in plastic, metal, glass and ceramic casing. However, reliance on overseas equipment

makers is still high, as the casing manufacturing process involves multiple steps, and requires

proprietary machines with specific/high-entry-barrier technology. Some of these can only be

sourced from foreign suppliers so far, such as for certain coating, photolithography and silk

printing machines. However, BYDE has developed and adopted some in-house equipment

including CNC machines, and is also adopting more general equipment that can be used for

multiple materials/product lines.

Camera Module: Largely self-reliant; will increase global

share

Chinese players already have well-established capability in CCM (multi-cam) and handset lens,

and we think in the near-term (within 3 years), Chinese players will likely establish their

leadership in 3D sensing and advanced optical solutions, such as WLO and periscope-style

products. However, in the CCM value chain, key components such as CIS and VCM are still

largely dominated by Japanese and Korean players, despite some Chinese players making

progress in these products; e.g., Win Semiconductor for CIS and ZET, JSS Optical Technology

and Shanghai B.L. Electronics for VCM. For handset lens, Sunny Optical is an important

supplier to Chinese branded smartphones. In the long-term, we believe will see Chinse players

establish their ecosystem and build a domestic supply chain for optical components, including

CIS, high-end lens and VCM, and gradually increase their share and technology leadership.

Hence, Chinese local camera modules makers such as Sunny Optical, Q Tech etc. are already

taking a major share at local Chinese handset makers (i.e., Huawei/Oppo/vivo/Xiaomi) not just

for mid/low-range phones but for high-end flagship phones as well. Meanwhile, a growing

Chinese camera modules industry, as well as its improving technology curve, is offering better

growth opportunities out of China, by penetrating into the Samsung handset supply chain, for

instance. Considering rapidly rising multi-cam penetration at SEC—even for mid/low-range

phones (i.e. Galaxy A series), relevant camera module makers (both Korea or China camera

modules suppliers) are all enjoying the total addressable market growth through shipment

volume as well as blended-ASP hikes.

However, in the mid to long term, we believe the existing Korea handset supply chain will likely

face more headwinds amid intensifying competition at the major client (SEC), either through

market-share loss or ASP-cut pressures. Recently, Samsung is even testing the ODM

outsourcing strategy to Chinese makers. While we believe total smartphone volumes outsourced

will remain controlled (~20 mn in 2019, and up to 40 mn in 2020) and only applicable to the

very low-end A series (which has little chance of ever becoming profitable). However, it still

seems a downside risk to the existing Korea camera-module supply chain (mainly for mid/low-

range) such as Partron, Mcnex, Powerlogics, etc. In contrast, the strategy will likely give better

growth opportunities for local Chinese camera modules makers, in our view. For high-end

flagship phones at Samsung, SEMCO may remain as key supplier for longer, considering the

need for key optics technology protection. However, more ASP-cut pressure seems inevitable,

given emerging alternative options from Chinese module makers with a better technology

readiness.

CMOS Image Sensor (CIS): a credible Chinese player now

CIS is one of the very few semiconductor areas where China has a top-tier player. We think

OmniVision’s (now owned by a Chinese company, Will Semiconductor) CIS technology could be

1-2 years behind Sony, but at a similar level to Samsung. In the automotive segment,

OmniVision is ahead of Sony and Samsung, and only behind On Semi. Driven by the

geopolitical tension, OmniVision has been taking over the mid/high-range spec smartphone

segment from Samsung since mid-2019, and also growing its share in the China automotive

4 November 2019


market. OmniVision’s gap vs Sony should continue for 1-2 years as most OEMs customise CIS

chips for flagship models, so it will take time for OmniVision to regain position in the premium

segment. In five years, we expect OmniVision’s technology to be slightly behind, but close to

Sony, and its market share to grow from 12% in 2018 (per Gartner data) to high-teens or

twenties percentage in 2023.

However, in the near term, we expect existing CIS suppliers to continue expanding production

capacity to cater to the growing demand. Sony plans to increase monthly capacity to 130,000

by March 2021 (up from 105,000 in Apr–Jun 2019, based on 300mm wafer). Over the

medium and longer term, we see Sony focusing on the functional fusion of sensors for

automotive applications (to integrate data taken from cameras, LIDAR and millimetre-wave

radar). Through its alliance with Microsoft, the company is also targeting a business model that

generates recurring income by channelling development resources into CMOS image sensors

with embedded edge AI processing capabilities.

Lens: Largely self-reliant

The overall reliance on government is small, and leaders such as Sunny have become No. 2 in

terms of market share in the smartphone lens market, with continuous R&D investment of their

own. The biggest competitors include Largan and Genius, which have entered the Apple supply

chain (Sunny not yet). We believe Chinese players are gradually improving their capabilities in

lens, and investing in R&D for high-end models, and should be able to penetrate the high-end

market over the next 1-3 years.

MLCC: The Chinese are lagging and likely to do so in the

medium term too

Despite the fact that China is one of the largest MLCC-consuming markets, the self-sufficiency

rate is relatively low. Currently, MLCC supply is mainly dominated by Japan (Murata/TDK/Taiyo

Yuden/Kyocera), Korea (SEMCO / Samwha Capacitor) or Taiwan manufacturers (Yageo /

Walsin Tech). A growing number of Chinese players are trying to break into the market—

Fenghua Advanced Technology (000636.SZ), Tianli Holdings Group Limited (0117.HK),

Chaozhou Three-circle (300408.SZ), Fujian Torch Electron Technology (603678.CN)—but

their combined global market share is only still around ~5%. These Chinese companies are

largely addressing MLCC demand from consumer electronics, mainly for the mid/low-range

segment, (i.e., larger size / low capacitance) where leading JP or KR MLCC makers are

withdrawing for production optimization (i.e., A/V, PC, appliances or low-end handsets).

In the MLCC arena, while Japanese-owned MLCC makers and SEMCO are working to lock in

technology by manufacturing materials and equipment in-house, Taiwanese- and Chinese-

owned makers are dependent on Japanese materials and equipment suppliers for the majority

of their raw materials and production equipment. This makes it highly unlikely that Chinese

MLCC makers will close the technology gap to the Japanese and Korean frontrunners anytime

soon. Our focus in the near term is on how they can shrink the gap between themselves and

Taiwanese makers.

4 November 2019


Memory semiconductors

Current market structure

Manufacturing DRAM locally is historically symbolic

Historically, not only did the DRAM industry follow a distinctive pattern of capex, but it also

produced the country's industrial policy cycle. Having the ability to adopt, develop and

manufacture DRAM semiconductors on-shore usually symbolised a country's "arrival" into the

upper echelons of high-tech manufacturing. This was the case where the US, the originator of

DRAM, once dominated the industry but was displaced by Japan over time. Korea has now

displaced Japan, and dominates DRAM production. Taiwan also once had a thriving DRAM

industry, which eventually collapsed under the weight of a perpetual need for capital and an

unforgiving need to succeed in developing the next generation of technology through constant

R&D. The result was similar for the Japanese DRAM industry. Micron, in the end, became the

consolidator for the Taiwanese and Japanese DRAM assets by acquiring the deeply-discounted

residual assets.

The DRAM has industry consolidated further since the financial crisis. Samsung, Hynix and

Micron now combine to control 96% of the industry capacity – creating an oligopolistic structure.

This followed the bankruptcies that forced Elpida, Qimonda and Promos out of the industry. The

remaining, smaller, Taiwan producers such as Nanya, Winbond and Powerchip shifted to a

more concentrated strategy away from advanced DRAM production of DRAM for specialty

applications.

Figure 28: The DRAM industry now has the fewest producers in its long history


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Qimonda ProMOS Powerchip Others

Keon Han

82 2 3707 3740

[email protected]

Chaolien Tseng

852 2101 6795

[email protected]

Hideyuki Maekawa

81 3 4550 9723

[email protected]

mailto:[email protected]



4 November 2019


Figure 29: Global DRAM revenue M/S in 2019E – Korea dominates

Source: DRAM eXchange, Credit Suisse

Figure 30: Global DRAM production- Consumer segment likely

China's focus area

Figure 31: Specialty (Consumer) DRAM market share in 2019E

– Threat to Taiwan first

Source: DRAM eXchange, Credit Suisse Source: DRAM eXchange, Credit Suisse

Different history for NAND

The initial battle among various types of flash memories finally settled on NAND flash design due

to its economical scalability required in anticipation of data storage demand explosion. NAND's

role is to alter the way data is stored—from hard disk drives, which will eventually be displaced by

flash-memory-based data storage. NAND storage device penetration—such as USB, UFS and

SSD—continues to rise as the dollar-per-bit storage continues to fall over time. Other

advantages—such as weight, smaller form factor, faster read/write speed, less heat generation,

higher storage density per area—all make NAND preferable vs HDDs as a storage medium as the

price gap narrows. While the concept of NAND flash memory was developed by Toshiba and

Sandisk (now Western Digital), Samsung was quick to seize and replicate Japan's success under

IP licensing from both companies. Micron joined hands with Intel (but are now going their

separate ways) in order to compete in the industry, while Hynix continues to try and remain a

relevant player. All NAND makers pay some IP royalties to Toshiba and Sandisk, but the amounts

vary depending on the strength of the individual company's patent portfolio filing that payment

could be netted out. Today, global NAND production is dominated by Samsung and

Toshiba/Sandisk with combined M/S of 67%. Micron and SK Hynix are smaller producers, with

Samsung44%

SK Hynix29%

Micron23%

Nanya2%

Others2%

Mobile41%

Server33%

PC13%

Consumer8%

Graphic5%

Nanya Technology

39%

Winbond18%

Micron14%

Samsung13%

SK Hynix10%

China IDM vendors

3%

Other Taiwan fabless vendors

3%

4 November 2019


Intel carving out a niche in the enterprise SSD segment. The majority of NAND is consumed by

either the smartphone or SSD segments in both PCs (client) and Servers (enterprise).

Figure 32: Global NAND M/S in 2019E – more balanced competitors


Figure 33: NAND Flash demand—concentrated in handsets and SSDs


China's game plan

China's turn next in DRAM/NAND

Competition in the memory industries, both DRAM and NAND, is tough, requiring ever-

increasing capital. The next-generation technology development is not only more difficult, but

more time-consuming, to a point that Moore's Law has clearly slowed down in DRAM, although

re-acceleration is seen in NAND due to the advent of the 3D NAND architecture. Having the

capital is no longer a guarantee of success, given these barriers and technology difficulties. The

DRAM industry has consolidated to a point where the three remaining producers are

comfortable with the status quo in market share, with enough pricing control to give them

sustainable profits even through a cyclical downturn. With the end-market demand now enjoying

~15-20% CAGR, the industry seems mature enough that it can no longer accommodate

another major supplier who could again disrupt the balance of the market.

Samsung35%

Toshiba18%

WDC14%

Micron13%

SK Hynix10%

Intel9%

Others1%

0%

20%

40%

60%

80%

100%

1Q19 2Q19 3Q19E 4Q19F 1Q20F 2Q20F 3Q20F 4Q20F

Others Solid State Drives Digital Still Cameras

USB Flash Drives Portable Media Players Tablet PCs

Handsets

4 November 2019


For NAND, the major players are still jockeying for a leading position, with each supplier very

capable of producing quality NAND chips. The NAND industry is still not ripe for consolidation,

as the weaker NAND players partially fund their loss-making (and now cash-burning) NAND

businesses with highly profitable DRAM products (in the case of SK Hynix and Micron). NAND

memory is technically a side business for Intel, while Toshiba has restructured its semiconductor

division with fresh capital injection through a consortium of private equity investors. While

Samsung is operationally slightly loss-making, NAND is sufficiently cash-flow positive, given the

company’s earlier commitment to shift to 3D NAND production, its technology lead, and

broader customer base.

The rationale for China's move into memory semiconductors

So, facing these industry dynamics, what is the motivation for China to join the DRAM/NAND

race; and can China succeed as a late entrant? If so, when can China influence the

DRAM/NAND industries and what are the implications for the incumbents? It is already clear

that China is at the onset of developing its own DRAM and NAND industry. It has already

selected its DRAM champion in CXMT, and YMTC for NAND. Initial fabs have been built, with

some WFE installation in order to test-produce both DRAM and NAND products. The key

motivation for China to develop its own memory semiconductor industry could revolve around

the various reasons below.

1. Memory is part of the IC industry development. In 2014, the China government

issued a National IC Development Guideline. It is segmented into four broad areas of

IC industry development: (1) design; (2) manufacturing; (3) packaging/test and

equipment; and (4) materials. In short, advancement of the semiconductor industry

value chain is a formally stated industrial policy. While China has been somewhat

successful in developing its own logic/foundry semiconductor industries through SMIC,

Grace Semiconductor (in the past), etc., memory semiconductor development has not

been explicitly stated. However, capital allocation toward the memory industry seems

to be the natural outcome given the: (1) attractive size of the addressable end-market;

(2) break-away from 100% reliance on imports; (3) commoditised nature of

DRAM/NAND chips, which helps capital allocation to be more focused; and

(4) perceived relative ease of memory design/manufacturing compared to logic (the

memory industry has other, complicated, industry dynamics). Also (ironically), the

memory industry is attractive given it has fewer competitors (at least in the case of

DRAM).

Figure 34: 2014 China government national IC development guideline

Source: Government of China, Credit Suisse

Key words Development strategy

Design(1) Supply chain collaboration

(2) M&A

Near term: Mobil smart terminal and network communication: mobile

terminal, digital TV, network communication, smart wearable and OS

Mid-term: Cloud computing, IOT, and big data

Break-through: Smart card/electricity/transportation, satellite

navigation, industrial control, financial electronics, automotive, medical

and embedded software

Mfg(1) CAPEX

(2) Advanced node

Speed up the 45/40nm foundry capacity ramp up and 32/38nm line

set up, 3D process R&D, capability set up of 22/20nm and 16/14nm

foundry production capability

Excel the specialized production line such as Analog and mix circuit,

MEMS, high voltage and RF

Pkg/Test(1) M&A

(2) EvolutionCSP, WLP, TSV and 3D stack

Equipment/Material(1) Key equipment/material break-through

(2) Mfg synergy

R&D in key equipment such as lithography, etching and implant R&D of

key material such as photoresist and large wafer

4 November 2019


Figure 35: Memory semi value as % of global total semi value

Source: SIA, Credit Suisse

2. Lacking domestic source. As the world's largest tech manufacturing base, China is

either importing or relying on supply from the domestically-based foreign producers—

such as NAND chips from Samsung's Xian fab or DRAM chips from Hynix's Wuxi fab.

Overall semiconductor imports in China, including memory semiconductors, reached

US$260 bn in 2017 and exceeded the value of oil imports that year. Domestically

produced chips made up less than 20% of that value, which partly drives the

motivation to rely less on foreign imports going forward. Over time, China has

internalised the manufacturing of tech components from lower value chains such as

PCBs, HDIs, LEDs, TFT-LCD panels, etc. Its logic and foundry industry development

is ongoing. Memory semiconductor is the next area of focus.

3. Diversify supply risk. Without domestic memory chip supply, China companies often

cite their businesses being negatively impacted by volatile memory prices and supply

shortages. For example, during the 2016 – 2018 up cycle, DRAM and NAND prices

surged on a global shortage, which damaged many of the Chinese smartphone OEMs’

cost structure. Also, some Chinese smartphone makers perceive that Samsung

controls the supply and price of DRAM and NAND as a competitive tool to keep

Chinese smartphone makers in check. These are some of the reasons for Chinese

companies to support the development of a domestic memory chip supplier.

Past failed attempts to acquire/invest in global companies force internal development

The 2015 attempt by China's Tsinghua Unigroup (a controlling shareholder of YMTC) to acquire

Micron for US$23 bn, is well documented. The acquisition attempt was not realistic, because

the US authorities—such as Committee on Foreign Investment in the US (CIFIUS)—would have

blocked the deal on concerns of national security, given that Micron was the last-remaining US

memory semiconductor maker. Therefore, the potential deal never reached a formal offer stage.

Later in 2015, Tsinghua Unigroup offered to buy 20% of SK Hynix for ~US$5.3 bn. One of the

conditions required SK Hynix to also set up a NAND fab in China, where Tsinghua was to

become one of the manufacturers of Hynix's NAND products. This offer was also rejected by

Hynix. No incumbent producer so far has shown any willingness to either set up JVs or engage

in technology/engineering agreements with Chinese entities. These rejections are logical, given

the pains the remaining DRAM makers have gone through to survive to the end, in order to

finally enjoy a more profitable industry. Furthermore, the last thing the NAND industry would

need is another large supplier, in what already looks like a crowded field that is already facing

potential industry consolidation. While acquiring or investing in global companies, setting up JVs,

or acquiring IPs by entering into engineering agreements would have been an easier path of

entry; most global competitors are keen to keep China out of the industry as long as possible,

due to the potential supply disruption risk.

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Memory Other semis

4 November 2019


CXMT and YMTC the selected memory champions

While there are many Chinese entities that have indicated interest to engage in production of

memory semiconductors, we conclude that currently, there are only two likely players that will

pioneer the memory semi development: Changxin Memory Technologies (CXMT) for DRAM,

and Yangtze Memory Technologies (YMTC) for NAND. The memory market is highly cyclical

and requires endless capital investment. Returns are not guaranteed, and could be very low for

a very long period of time, with laggards seldom reaching a level of technology sufficient to

become profitable). From the China central government’s perspective, it may not be desirable to

redundantly invest heavily in the same technology areas; such was the case in the TFT-LCD

and LED industries that rapidly created overcapacity conditions, even among Chinese start-ups.

Most of these companies have yet to reach profitability, after 10 years of operation, and are

now consolidating. Furthermore, while some provincial governments expressed support and

have a desire to co-invest in new memory start-up companies, they may lack a sufficient capital

base to support projects sustainably. Additionally, the engineering talent pool remains thin,

which has been one of key issues in China for its general semiconductor industry advancement.

Memory is no exception. There are simply not enough NAND and DRAM engineers in China to

rapidly expand production, because the industry is at an infant stage.

For China, instead of targeting a certain global market share within the next five years, we think

the priority will be to establish its own supply chain and fulfil the domestic consumption needs.

YMTC has been engaged in developing NAND since 2015. It is most likely that YMTC’s

technology will still be behind Samsung and Toshiba for the foreseeable future. Therefore, while

the technology may not be cost-competitive compared to the global leaders, the initial goal of

supplying the domestic demand could be satisfied, if the final product has the quality to be

consumed in the local end-markets. CXMT’s initial goal as a DRAM maker is similar to YMTC’s.

It wants to capture some of the domestic DRAM supply, likely in the area of specialty DRAM. If

this stage is successful, it can plan to broaden the range of products to compete in broader

global markets. So far, NAND development appears more advanced than DRAM. From a global

competition perspective, we do not see Chinese memory producers disrupting the current

market structure, either in DRAM or NAND given its current ramp-up schedule, lack of product

commercialisation, and having no clear next-generation technology roadmaps.

CXMT 19nm DRAM close to mass production

Founded in May 2016, CXMT’s DRAM development started with Qimonda, according to the

company. Qimonda is the previous global leading DRAM tech provider, the inventor of Buried

Word Line, and pioneered the advanced DRAM technology. CXMT said it has transferred 10

mn technical files (2.8TB of data) from Qimonda. Besides Qimonda, CXMT indicated close

partnerships with industrial leaders such as AMAT, ASML, KLA, LAM, Tech Insights, and TEL.

It also jointly released technical papers with ASML at the SPIE conference. The company claims

it has spent over US$2.5 bn so far on R&D expenses and capex.

CXMT’s first-generation technology is 19nm DRAM. Initially, the company had aimed to begin

production in 2018 but the schedule was delayed for a year. It has been sampling products with

some potential domestic customers. If successful, mass production could begin in early 2020.

Its next process node will be 17nm DRAM, although there is no clear timeline.

CXMT’s target customers include large and small domestic OEMs. It plans to produce LPDDR4

for mobile devices as well as DDR4 for PC and Server use eventually. Large OEMs likely will

require more time for qualification. Given CXMT's plan to only produce on a small scale initially,

any order wins from smaller OEMS could be sufficient to fill their initial capacity.

CXMT’s current DRAM fab is built for maximum 120k wpm. In early 2019, it aimed to build 20-

30k/month capacity by mid-2019, but the schedule has been delayed to early 2020. Its longer-

term plan includes building another fab capable of 120k wpm production capacity, but currently

there is no timeline when the second fab will begin construction.

4 November 2019


YMTC prioritises on 64L qualification and 128L R&D

YMTC developed 32L MLC NAND in 2015 and it collaborated with Spansion for its first

generation 32L NAND. It then built a fab in early 2017, began tool move-in from mid-2018 and

started risk production from 1Q19. That said, as the technology didn’t have any cost advantage,

only a small volume was produced. Currently it has only around 10k/month capacity for 32L

NAND production and its yield is likely 70%+.

YMTC is now in trial production of 64L TLC NAND and sampling with domestic SSD

companies. While its 32L NAND is mainly consumer grade, its 64L NAND is trying to qualify

with Huawei for enterprise grade now. Currently its fab capacity is about 30k/month capacity,

including the 10k capacity for 32L NAND. If YMTC should pass 64L NAND qualification with

Huawei or another top domestic customer, and improve its fab yields to 85%+, it could begin

another round of financing to support more capacity build.

That said, we note that it is unclear if it will enter volume production on 64L, even if qualified,

given the cost constraints. 64L TLC NAND would not have any cost advantage at the current

market price, compared to global memory makers already moving on to 92L/96L and 128L

production. While the company believes that the cost structure of its 64L TLC NAND will be

sufficient enough from a positive cash flow point of view, we understand that it could decide to

develop 128L before entering volume production.

YMTC’s 64L NAND is based on its Xtacking technology. YMTC proclaims that Xtacking’s

independent processing eliminates thermal and stress impacts and enables higher NAND I/O

speed. Xtacking 64L TLC NAND enables more efficient use of die area and smaller die size (by

20-30%) than conventional 3D NAND. Xtacking could achieve higher bit density, the best bit

density of all TLC 64L products in the market, according to the company's presentation material.

Xtacking adopts a modular approach to accelerate process development. Periphery and array

wafers are produced independently, and then stacked. Development time is reduced by at least

three months, according to the company. It also estimates manufacturing cycle time is reduced

by 20-25%, as CMOS and array wafers are manufactured at the same time. While each NAND

producer will proclaim advantages of its own design, ultimately performance, cost advantage

and reliability will be determined by the customer choosing the product. While we do not have

details of its royalty payment, it is believed that YMTC pays royalty to some international

memory companies to use their IP. YMTC’s next generation technology could be 128L, but

there is no clear timeline.

YMTC has begun R&D for 128L NAND, and risk production is scheduled for 4Q20. Additionally,

the company has also kicked off another project to build an initial DRAM R&D team with 300

engineers, while using XMC’s existing facility as its DRAM pilot line. The drive for its DRAM

project is the same as its NAND development; YMTC is expected to help the country to achieve

the mission of memory self-sufficiency. Their long-term plan is to build nine fabs in 10 years,

targeting 15% market share in 8-10 years. The company has about 4,000 employees, with

1/3 being R&D engineers, while XMC has 1,200 employees.

Figure 36: YMTC’s 3D NAND R&D journey

Year Highlights

2014 3D NAND kicked off in XMC

2015 9L test chip validation

2016 32L test chip tape-out. YMTC founded

2017 32L product tape-out. 1st Si validation. YMTC 32L 64Gb MLC 3D NAND flash ES

2018 64L product tape-out. 32L production. 64L First silicon

2019 64L TLC NAND sampling and trial production

Source: Company data, Credit Suisse

4 November 2019


Conclusion

How big can China be in DRAM and NAND, in 1 to 3 years?

For DRAM and NAND, we see very little supply impact from China by 2020. In DRAM, while

CXMT's first fab is designed for up to 120K wafers based on announced 19nm technology plan,

the initial ramp of 20K to 30K wpm has already been delayed by over a year. Additionally, only

providing output on 19 nm (we cannot confirm if this is industry standard 19nm yet). By mid-

2020, 19nm would not be competitive to industry leaders who will be producing mostly on y nm

with Samsung potentially moving on to 1z nm. Also, with such a small production scale and

lack of engineers, it is unlikely CXMT can simultaneously work on various DRAM architectures

such as mobile, PC, Server, etc. Most likely, CXMT will likely find itself competing in the

consumer specialty DRAM segment which would require less advanced nodes and speed.

Therefore, the Taiwanese consumer DRAM makers would be the first in line, in terms of

competitive threat, only if CXMT is successful. From capacity planning, 20K to 30K wpm on

higher nodes does not represent overall DRAM industry supply competitive threat. However, if

CXMT were to be successful and ramp to its maximum 120K by the end of 2022, it could

represent as much as ~8% of global DRAM capacity, although likely significantly less in terms

of bit shipment M/S.

YMTC's 3D NAND mass production roadmap is less clear. Having 64L TLC design at this

juncture of NAND industry development puts its technology far behind industry leaders that are

already producing on 92L/96L, and investing in 128L. The industry leaders are already

dismantling 6xL capacity as any hope of return to profitability fades. This technology would have

no cost advantage and have limited use in the end-market applications. Although it has begun

R&D for 128L NAND and targets risk production from 4Q20, given its history, we expect more

time is needed as it may be working on the successful development of 64L for a while. While

the long-term goal of ramping to 300K wpm has been indicated by the company, it would first

need sizeable customer wins in order to produce NAND in that magnitude. YMTC has

announced that it began sampling its NAND products with various SSD-maker clients but

success of any qualification is unknown currently. Capacity ramp schedule would be difficult to

project without confirmation of a commercially viable product.

Key issues to consider

Government ready for long-term investment, and losses

Semiconductors require long-term, sustainable investment in both R&D and capex. We believe

that the Chinese government is aware of such industry dynamics and is prepared for (or

accepts) losses for years in order to build its own memory semiconductor ecosystem. The LCD

industry development and support for BOE is a good example. BOE, after purchasing its initial

TFT-LCD technology from SK Hynix (Hyundai Electronics back then) developed its LCD

business for over a decade but remains loss making operationally today (excluding government

subsidy). While not efficient on a return-on-capital metrics, China has succeeded in developing

its own formidable TFT-LCD industry with BOE as its champion. This ensures at least a steady

source of TFT-LCD supplies for its smartphone and TV market, the world's largest. Not having

to worry about trade frictions and other potential supply limitations are also important

considerations. The fallout from the perpetual over-investment in the industry is now having the

effect of driving historically-strong LCD makers such as Samsung Electronics and LG Display to

abandon their TFT-LCD production.

Sources of Capital

The capital support from the government includes bank loans and equity investments. The

capital from the private sector is often in the form of equity investment. The central government

can help top-priority companies secure bank loans at lower, subsidised interest rates than what

is available through normal commercial bank channels. In the past decade, many provincial

governments and companies have generated profits from selling government owned real estate

assets. Given the recent slowdown in the real-estate markets, provincial governments and larger

4 November 2019


companies need to turn to other industries to re-invest the proceeds, with direct equity

investment being the preferred method. From 2017-19, many of these entities have chosen to

invest in the new semiconductor projects. Sources of capital include: China Development Bank,

Hubei Government, Wuhan Government, China IC Fund, Tsinghua Unigroup, etc.

Addressing the lack of engineering resources

The semiconductor engineer talent pool is shallow in China, and this is especially true in

memory semiconductors. Various DRAM project start up attempts were spearheaded by

pooling Taiwanese and Japanese engineers and managers, from companies that were

consolidated or finally exited the DRAM industry. DRAM and NAND chip design engineers from

Samsung or Hynix are highly coveted. While incentives such as huge pay increase, several free

trips home every year, and heavily subsidised apartments are offered to critical engineers, the

Taiwanese engineers are normally highly prized given the common language and cultural

background. Acceleration of the memory industry development could have a honing-out effect

of some Korean engineering talent, which has been stated as a key risk by both Korean

manufacturers and government policy makers. Nevertheless, the integration of various

engineers who have never worked together before, in a brand new fab setting, will pose some

challenges and high cost burden of maintaining mostly foreign labour in the beginning.

Potential IP disputes

With the lack of any known acquisition of major DRAM/NAND IPs, China is essentially starting

from scratch. This brings the burden of developing its own technology, while not infringing on

countless patents already filed in DRAM and NAND, in both design and manufacturing

processes. Generally in the technology IP battle, new producers are seldom blocked initially.

Rather, the lawsuits requesting for blocking sales come when products actually become

competitive. In China's case, the current sources of chip design in DRAM and NAND are

actually unknown. Bringing in chip designers from abroad nearly always risks patent

infringement. New Chinese start-ups have been busy announcing the success of their own chip

designs, but any IP infringements will not be known until the final products show up in the

market place. Nevertheless, any disputes maybe silent for several years given the initial

production plans are relatively small in scale, on lagging technological designs and largely

targeted to niche domestic buyers. Even if scale grows significantly enough to impact global

supply, if the consumption is largely based domestically, not much IP protection is expected.

Only when products find their way into final exportable items such as smartphones or servers

can competitors contest any type of patent infringements, if any, which could be years away.

Sustainable equipment support

Development of memory industry requires a high degree of support from global memory WFE

makers. Historically, China has been a big investor in any area it chooses to endeavour into,

such as in the TFT-LCD and LED industries. Therefore, development of the Chinese memory

industry could be a sustainable and lucrative event for global semi equipment makers. However,

as seen the in case of Fujian Jinhua's, the entire DRAM project was halted to a point of

extinction by the action of the US government banning any US semi equipment sales to the

company. While the reason is purely company-specific, involving IP theft from Micron, similar

perception of risk will linger for CXMT and YMTC, particularly if any IP infringements are to be

found. Therefore the Chinese companies are accelerating their own R&D and IP development

and increasing the number of patent filings/acquisitions.

Support from customers

From a pure business perspective, there is no clear reason why even a domestic buyer of

DRAM/NAND would bother supporting new memory start-ups. In the case of Korea, it really

did not have a large domestic demand to fulfil and the memory semi industry was developed

purely as an export item. While the long-term view of having a reliable domestic producer is in

the interest of both the Chinese government and system integrators, final products will not be

made using inferior memory components in the name of nationalistic sentiment. There will be

different levels of quality requirement depending on end-usage, but without an explicit national

4 November 2019


campaign to incentivise support for domestic suppliers—such as import limitations, tariffs, or

subsidies to the buyers—we see no reason why customers would take that product

performance risk. Such is the case today with flexible OLEDs, where many Chinese

smartphone makers are abandoning BoE and purchasing Samsung products in order to make

more globally competitive smartphones.

What if China fails?

China failing in DRAM/NAND development would be industry neutral, while success could bring

about a global over-supply risk in the future. Currently, the consensus expectation is for China

to succeed in NAND on a limited basis, while DRAM development would likely to prove more

challenging. Ever since the final stage of industry consolidation, DRAM makers are generating

highest profits in the history of the industry. Any hope and chance of DRAM producer's stock

price multiple expansion in the future will likely be eliminated. Investors continue to debate if the

DRAM industry's profit margins and sustainable FCF have shifted upwardly on a sustainable

basis to justify a higher valuation multiples. Any entry by China in mass scale will likely erode

that confidence. China's success in NAND will likely trigger industry consolidation in the future,

particularly for the highest-cost producers such as Micron and SK Hynix. This would be true if

Chinese companies are willing to invest through 10 years of losses, driving capital depletion in

the weakest producers.

4 November 2019


Logic Semiconductors

To move up the value chain, China has also been developing its foundry, back-end and fabless

IC design sectors to a varying degree of success—barriers are the highest in foundry due to the

high capital intensity, established ecosystem of IP, design and customer base at the existing

foundries and manufacturing challenges ramping up an ever more advanced technology node

every two years where equipment companies also put their highest focus and earliest

investments enabling the leaders. The IC design sector also has varying barriers by application

due to requirements for the integration of multiple IPs, support for complex and evolving industry

standards, design complexity and know-how on advanced geometries and also established

customer relationships. Back-end assembly and test has traditionally been higher in advanced

packaging due to IP, customer service and technological capability, although M&A has

accelerated the Chinese back-end suppliers’ entry. We profile China's varying success catching

up across the logic foundry, back-end and IC design sectors.

IC design: China’s presence rising in consumer and

mobile, still lags in higher value areas


The China IC design market has had a steadier and gradual penetration as compared with the

flat market share in foundry and M&A-accelerated growth from the China OSATs. The local

fabless companies are benefiting from a combination of domestic R&D and wafer subsidy

support, recent desire for localised and non-US sources of technology, rise of China brands in

mobile and consumer and a gradually improving IP and engineering base of talent supplemented

by foreign hires and returning Chinese engineers from overseas corporates and academia. At

the policy level, China is targeting a number of the high growth areas, including mobile

communications, networking, cloud computing, Internet of Things and AI/machine learning.

China fabless has grown in importance in the global rankings, improving from only 1 company in

the top 50 fabless in 2009 (Hi-Silicon) to 11 in the top 50 in 2018 (HiSilicon, Unigroup, ZTE

Micro, ISSI, CIDC, Nari Smart Chip, Datang, GigaDevice, Montage, Rockchip and Allwinner).

According to iSuppli, China fabless also represented 5 of the top 10 growing companies in

2018, with ISSI #1 up 32% YoY to US$645 mn, Allwinner #3 up 29% YoY to US$207 mn,

Hi-Silicon #4 up 25% YoY to US$5,880 mn, and GigaDevice #9 up 18% YoY to US$360 mn.

The five other fastest growing fabless were NVIDIA, AMD, MegaChips, Nordic Semi and Elite

Semiconductor.

Figure 37: China has 11 of the top 50 fabless Figure 38: China represents 12% fabless share

Source: IC Insights Source: IC Insights

We estimate the top 20 fabless companies in China reached US$16.8 bn sales in 2018,

representing 16% global fabless share of our global fabless sample of US$104 bn sales.

China fabless has been outgrowing the global average, showing a 23% CAGR since 2010 vs

5% for the Top 10 global fabless and 6% for the broader fabless sector.

Randy Abrams, CFA

886 2 2715 6366

[email protected]

Chaolien Tseng

852 2101 6795

[email protected]



4 November 2019


Figure 39: China's IC design growing at a 23% CAGR to take 16% market share in 2018

Source: Gartner, PwC, Credit Suisse estimates

IC design traction varies by application

China has outgrown the global industry, although at a 16% market share in fabless and with no

major established IDMs joining manufacturing and design, the success and market penetration

varies by application with a number of major semiconductor categories barely addressed by the

local supply chain.

Figure 40: China has grown its IC design share to 16% in 2018


Areas with reasonable success for Chinese companies

■ Mobile communications. IC design in China is led by Huawei’s chip division HiSilicon,

which alone represents 35% of China’s fabless sales. HiSilicon currently supplies about

70% of Huawei’s smartphones including the mid-high-end and its newly launched Mate 30

China

IC Design Companies

2010

revenue

2011

revenue

2012

revenue

2013

revenue

2014

revenue

2015

revenue

2016

revenue

2017

revenue

2018

revenue

CAGR

2010-18 Major products

Shenzhen HiSilicon Technologies $652 $1,032 $1,178 $2,120 $2,950 $3,299 $3,881 $4,480 $6,035 25% Networking/Set-tops

Bitmain $0 $0 $0 $0 $0 $137 $278 $2,518 $4,268 NM Cryptocurrency mining machine

Spreadtrum Communications $346 $674 $725 $1,050 $1,110 $1,640 $1,866 $1,587 $1,286 23% Mobile processors

RDA Microelectronics $191 $289 $391 $380 $339 In SPRD In SPRD In SPRD In SPRD NM Connectivity and RF

Goodix NA $13 $86 $102 $127 $167 $448 $545 $522 NM Fingerprint ICs

ZTE Microelectronics NA NA $25 $45 $470 $520 $600 $775 $520 NM Networking / Wireless

CEC Huada Electronic Design $74 $128 $123 $169 $183 $504 $507 $368 $463 27% Smart card ICs

Hangzhou Silan Microelectronics NA $238 $203 $263 $263 $300 $343 $402 $425 NM Communications ASICs

BYD Microelectronics NA $144 $125 $105 $275 $345 $424 $403 $383 NM Image Sensor / fingerprint

Galaxycore $124 $190 $201 $295 $367 $350 $385 $365 $380 15% Image Sensors

Beijing Nari Smartchip Microelectronics $180 $220 $280 $350 $400 $436 $480 $408 $347 13% Industrial ICs

Vimicro $91 $64 $76 $65 $100 $276 $302 $293 $346 16% Consumer ICs

Tongfang Guoxin NA $97 $90 $142 $180 $187 $198 $247 $330 NM Smart card / ASIC

GigaDevice Semiconductor NA $75 $97 $96 $93 $178 $215 $240 $283 NM NOR Flash Memory

Montage $0 $0 $0 $100 $150 $200 $220 $225 $270 NM Memory interface design

Leadcore Technology $117 $128 $103 $152 $115 $218 $228 $235 $242 9% Mobile processors

Allwinner Technology NA $50 $168 $246 $185 $181 $187 $179 $206 NM Tablet/audio processors

Fuzhou Rockchip Electronics $58 $82 $108 $216 $152 $152 $191 $179 $182 16% Tablet/audio processors

Datang Microelectronics Technology $74 $92 $116 $151 $131 $146 $132 $86 $89 8% Smart card ICs

Beijing Ingenic NA NA NA NA NA $11 $16 $26 $37 NM Acquired Omnivision

Top 20 China fabless $2,153 $3,768 $4,359 $6,357 $7,928 $9,601 $11,262 $13,731 $16,808 23%

YoY Growth 75% 16% 46% 25% 21% 17% 22% 22%

Top China fabless market share 3.8% 6.0% 6.4% 8.4% 9.3% 10.7% 12.7% 14.1% 16.2%

BRCM $6,818 $7,389 $8,006 $8,305 $8,388 $8,472 $13,292 $17,665 $20,029 9% Networking/Broadband

AVGO $2,093 $2,336 $2,364 $2,520 $4,269 $4,300 In BRCM In BRCM In BRCM NM RF/Storage/Networking

LSI (Acquired by Avago) $1,870 $2,044 $2,506 $2,370 In Avago In Avago In BRCM In BRCM In BRCM NM Storage/Networking

QCOM QCT $7,204 $9,828 $13,177 $17,211 $19,291 $16,008 $15,415 $17,029 $16,581 10% Mobile Processors

NVDA $3,543 $3,998 $4,280 $4,130 $4,682 $5,010 $6,910 $9,714 $11,716 9% Graphics

MediaTek $3,605 $2,956 $3,358 $4,586 $7,030 $6,718 $8,549 $7,832 $7,902 11% Mobile/Digital Home

AMD (+ ATYT) $6,668 $6,748 $5,616 $5,481 $5,668 $4,111 $4,272 $5,253 $6,506 -5% Processors/Graphics

XLNX $1,896 $2,437 $2,315 $2,256 $2,485 $2,447 $2,334 $2,485 $2,658 3% Programmable Logic

MRVL $2,808 $3,612 $3,393 $3,169 $3,404 $3,707 $2,726 $2,393 $2,416 0% Networking/Connectivity

ALTR $1,954 $2,064 $1,783 $1,733 $1,932 $1,971 $2,010 $2,050 $2,091 0% Programmable Logic

Novatek $1,153 $1,193 $1,253 $1,397 $1,784 $1,602 $1,416 $1,548 $1,820 3% Driver ICs/Display

Top global fabless $39,613 $44,605 $48,052 $53,158 $58,933 $54,346 $56,924 $65,969 $71,719 5%

YoY Growth 13% 8% 11% 11% -8% 5% 16% 9%

Top global fabless market share 69.5% 70.5% 70.6% 69.9% 69.4% 60.5% 64.3% 67.6% 69.0%

China top 20 fabless $2,153 $3,768 $4,359 $6,357 $7,928 $9,601 $11,262 $13,731 $16,808 23%

Overseas fabless revenue $54,833 $59,526 $63,688 $69,656 $77,045 $80,172 $77,288 $83,883 $87,197 4%

Global fabless revenue $56,986 $63,294 $68,047 $76,013 $84,973 $89,773 $88,550 $97,614 $104,005 6%

YoY Growth 11% 8% 12% 12% 6% -1% 10% 7%

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Top 20 China fabless Overseas fabless revenue

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China has had more

success in mobile,

networking and consumer

4 November 2019


5G smartphone with internal Kirin 990 modem built on TSMC 7nm+ as the first high

volume customer on that node. Huawei has also internalised its RF transceiver, low-end

power amplifier and connectivity chipsets to lessen reliance on the US supply chain,

following its placement on the entity list.

Elsewhere in mobile chipsets, UniSOC (formerly Spreadtrum) has somewhat lagged on 4G

after developing a competitive presence on 2G/3G, although it is still pushing ahead with

commercialising its 12nm modem in 1H20 and developing its first 5G SoC on 7nm by the

end of 2020. UniSOC also acquired RDA which also gives it capability on the connectivity

and RF. Beyond these mobile chipset providers, China has developed a competitive

footprint in other mobile peripherals including CMOS image sensors (Omnivision,

GalaxyCore), fingerprint IC (Goodix, Silead) and RF (Vanchip, RDA).

■ Networking. HiSilicon also leads China’s networking IC sector with internal supply to

Huawei’s base stations and infrastructure including its own high-end ASIC which is

displacing some of the FPGA content. ZTE Microelectronics and Datang have also

emerged as infrastructure suppliers to their parent companies and Montage has developed

a leading memory interface solution for cloud computing systems.

■ Consumer electronics. Lower entry barriers for mature high volume consumer products

have also enabled entry of a number of Chinese designers, including several application

processor suppliers that initially reached a high volume on tablets and are currently moving

into connected audio and video and IoT applications including Rockchip, Allwinner, Actions,

AM Logic, Zhuhai JieLi and BES.

■ Crypto-currency/AI inference. China’s local IC design companies including Bitmain,

Pansemi and eBang commanded 95%+ of the crypto-currency ASIC market. The

companies along with start-up Cambriconare currently using their processing and low

power design capability and software algorithm work in crypto-currency into AI inference

processors for smart buildings, smart home and smart city applications.

■ Flash memory. China has worked with several sources of IP for flash memory.

Gigadevice produces NOR flash and NAND flash through SMIC and Huali. YMTC is also

developing 3D NAND flash by leveraging multiple international chipmakers’ NAND flash

IPs. Integrated Silicon Solution Inc (ISSI) is also being acquired by Ingenic. These together

will bring China’s capacity in flash memory. Ingenic is in the process of acquiring ISSI.

YMTC also has recently showcased a 64-layer sample for its own SSD for its volume

production planned in 1H20. ChangXin (CXMT) has also been sampling its 19nm DRAM

and has an initial volume production planned in early 2020.

■ Smart card ICs. China is developing its local smart card IC vendors to embed flash on a

secure card for use in transportation, social security/National ID cards, and financial IC

cards. The company has qualified six vendors for mobile payments, including Tongfang

Guoxin, Datang, Huada, NationZ and Hua Hong IC.

Despite success in these high volume markets in mobile, networking and consumer, China is

still a small player in a number of strategic and high value areas in the industry, with low-single-

digit share in a number of critical semiconductor categories including microprocessors, graphics

processors, microcontrollers, programmable logic, MEMs sensors, analog, automotive

components, memory, storage ICs and display drivers. We estimate that these markets where

China has less than 5% market share represent about US$333 bn of sales, and over 70% of

area in the semiconductor industry for China to target through building up its in-house teams

and supplementing with hiring overseas talent, M&A or equity stakes to accelerate development.

China's share is still low in a number of large

chip segments including processors, analog,

graphics and sensors

4 November 2019


Figure 41: China’s success higher in mobile, consumer and wired applications, low in

analog, RF processors, memory, FPGAs and GPUs


Areas where Chinese companies still lag

CPU – dominated by Intel and AMD. The processor market is dominated by Intel and

AMD, with their x86 architecture as the basis for running the PC and server operating

systems. China’s opportunity in the core processor is to leverage ARM’s core for servers

tailored to China domestic applications. Huawei’s Kunpeng server chipset is the highest

performing ARM core and may be its solution to mitigate the impact from its ban on US

technology. Zhaoxin has also licensed the x86 core as a JV with Via and the Shanghai

Municipal Government for a home-grown processor based on Intel’s well-established x86

instruction set for compute. Loongson is also targeting MIPs 64 bit CPUs for general

purpose computing.

FPGA – Xilinx and Altera/Intel lead. Xilinx and Altera have over 80% market share,

followed by Microchip (acquired Microsemi/Actel) and Lattice each with about 5% market

share, and negligible share for the Chinese players. The FPGA market has higher barriers

due to the software platforms used to programme the FPGAs and now increasing amount

of embedded IP and requirement to manufacture high-end FPGAs at large die size (more

difficult to use) on the advanced technology nodes. Several Chinese players including

Gowin, Fudan Micro, Unigroup Guoxin and Huada are developing FPGAs.

Analog/Discretes – Chinese design houses focusing initially on high volume IT.

China is following the route of Taiwan analog companies a decade prior by focusing on

high volume IT markets initially in computing, mobile, consumer/IoT, display and LEDs and

later focusing on auto/industrial. China has several emerging companies including SG

Micro, Silan, and Silergy and ZTE’s Microelectronics (SaneChips) that are gaining traction

and growing both as a lower cost alternative for global companies or a local source

domestically in China. In standard products, Wingtech’s purchase of Nexperia’s standard

products group also gives it a high position in discrete.

Graphics – barriers high, a couple of Chinese design houses trying to address.

The graphics has had high barriers as both NVIDIA and AMD have built their GPUs as

platforms for gaming, in close collaboration with the leading game developers and in

extensive marketing to build up the consumer base for their systems. The graphics requires

a long design cycle, large die size, complex architecture and advanced manufacturing and

marketing capabilities, raising the barriers to entry. China has a couple of IC design

companies working on graphics including Jingjia Micro developing a high performance GPU

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Overseas China China Share

US$mn China share (%)

4 November 2019


starting with 28nm (vs NVIDIA on 12nm and AMD on 7nm). Zhoxin has also integrated

Via’s GPU technology for an integrated processing unit with graphics.

Figure 42: China’s 2018 market share was still relatively low in many of the large semiconductor categories

Source: Gartner, Company data, Credit Suisse estimates

MCU – a broad fragmented market dominated by global IDMs makes penetration

slow. China has a low-single-digit share in the MPU market dominated by global IDMs

including Renasas, NXP, Microchip, STM, TI and Infineon. The MCU customer base is in

thousands and relies on a large catalog of products and takes time to build up the

customer base. China has multiple MCU suppliers including Gigadevice, Ingenic, Silan,

Datang and Huada and can use Hua Hong/SMIC’s embedded flash capability. The MCU

companies can target the large domestic China market looking for a domestic source and

also some of the higher volume markets such as home appliances and toys.

Market Size US$mn Overseas players Share Chinese players Share Market Size US$mn Overseas players Share Chinese players Share

Samsung Electronics 42.8% YMTC <1% Robert Bosch 13.5% Goodix 4%

SK hynix 29.5% CXMT <1% Infineon Technologies 7.8% Silan <1%

Micron Technology 22.9% Fujian Jinhua <1% STMicroelectronics 7.8% Shanghai Belling <1%

Nanya Technology 2.8% TDK 4.9% Yangjie <1%

Overseas subtotal: 98.0% Chinese subtotal: <1% Knowles 4.4%

Samsung Electronics 37.8% YMTC <1% Overseas subtotal: 38.4% Chinese subtotal: <5%

Western Digital 15.5% GigaDevice <1% Qualcomm 54.0% HiSilicon Technologies 15%

Toshiba Memory 14.6% ISSI / Ingenic <1% MediaTek 13.8% UniSoC Technologies 4%

Micron Technology 11.1% Samsung Electronics 13.8% Allwinner <1%

SK hynix 11.0% Overseas subtotal: 81.6% Chinese subtotal: <20%

Toshiba 4.9% NVIDIA 81.4% Jingjia Micro <1%

Intel 4.1% AMD 18.1% Zhaoxin <1%

Overseas subtotal: 98.9% Chinese subtotal: <1% Overseas subtotal: 99.5% Chinese subtotal: <1%

Intel 91.2% HiSilicon <1% Broadcom 26.9% HiSilicon Technologies <1%

AMD 5.4% Cambricon <1% Qualcomm 18.6% UniSoC Technologies <1%

NXP 0.8% Alibaba <1% MediaTek 6.7% Maxscend <1%

Texas Instruments 0.5% Montage <1% NXP 5.1% Goodix <1%

Marvell 0.8% Eeasy Tech <1% Cypress Semiconductor 4.0% Will Semi <1%


Renesas Electronics 18.2% CEC Huada 1% Broadcom 36.4% Sanechips Technology 7%

NXP 17.4% Gigadevice <1% Intel 9.2%

Microchip Technology 14.1% Unigroup Guoxin <1% Marvell Technology Group 8.4%

STMicroelectronics 11.2% SinoWealth <1% HiSilicon Technologies 7.0%

Texas Instruments 9.7% Silan <1% Realtek Semiconductor 3.0%

Infineon Technologies 9.0% Goodix <1% Overseas subtotal: 64.0% Chinese subtotal: 7%

Overseas subtotal: 79.7% Chinese subtotal: <2% Skyworks Solutions 22.4% Sanechips <1%

Texas Instruments 41.7% Qorvo 17.3% Vanchip <1%

NXP 22.6% Qualcomm 14.7% Xinyi Semi <1%

Analog Devices 21.6% Broadcom 13.9% Smarter Micro <1%

Overseas subtotal: 86.0% Chinese subtotal: <1% NXP 5.2% Lansus <1%

Xilinx 51.1% Unigroup Guoxin <1% Murata Manufacturing 4.4% UniChip <1%

Intel 35.8% Fudan Micro <1% Overseas subtotal: 77.8% Chinese subtotal: <1%

Microchip Technology 5.2% Huada <1% Texas Instruments 15.7% HiSilicon Technologies 3%

Lattice Semiconductor 5.0% Gowin <1% Qualcomm 9.8% Silergy 3%

Overseas subtotal: 97.1% Chinese subtotal: <1% Dialog Semiconductor 8.4% SG Micro <1%

Samsung Electronics 28.4% Huada 3% Infineon Technologies 6.7% Shanghai Belling <1%

Novatek 16.1% SinoWealth <1% STMicroelectronics 6.4% Silan <1%

Himax Technologies 9.5% Solomon Systech <1% Overseas subtotal: 47.0% Chinese subtotal: <10%

Silicon Works 9.1% Chipone <1% Intel 27.5% Bitmain Technologies 5%

Synaptics 6.7% STMicroelectronics 4.6% HiSilicon Technologies 4%

Overseas subtotal: 69.9% Chinese subtotal: <5% Infineon Technologies 3.6% Montage Technology 1%

Texas Instruments 29.0% ON Semiconductor 3.0%

Analog Devices 20.3% Renesas Electronics 2.8%

Maxim Integrated 4.6% Texas Instruments 2.7%

ON Semiconductor 4.1% Overseas subtotal: 44.2% Chinese subtotal: <15%

Cirrus Logic 3.0% Apple 28.7% HiSilicon 2%

STMicroelectronics 2.5% MediaTek 11.8% Unisoc N/A

Overseas subtotal: 63.5% Chinese subtotal: <1% Broadcom 7.6%

Infineon Technologies 14.4% Nexperia 5% AMD 6.9%

ON Semiconductor 10.4% Jilin Sino-Micro 1% NVIDIA 5.3%

STMicroelectronics 5.9% HiSilicon <1% Intel 3.4%

Mitsubishi 5.6% SG Micro <1% Overseas subtotal: 63.8% Chinese subtotal: <5%

Vishay 5.4% Silan <1% Intel 39.3% UniSoC Technologies 9%

Rohm 5.2% Shanghai Belling <1% Qualcomm 37.0%

Toshiba 5.0% Will Semi <1% MediaTek 6.1%


Sony 47.0% Will Semiconductor 11%

Samsung Electronics 20.1% Galaxycore 3%

ON Semiconductor 5.9% BYD Microelectronics <1%

SK hynix 2.3% SmartSens <1%

Overseas subtotal: 75.2% Chinese subtotal: <1%

4,153

11,431

ASICs 24,801

Discrete AP 25,264

11,362

Wired 22,122

RF 11,831

10,489

Mobile

Processor14,829

GPUs 8,262

Discretes 22,731

CMOS

sensors12,281

Sensors

Connectivity

PMIC

Discrete

modem

FPGA 5,683

Driver IC 6,060

Analog 24,401

MCUs 19,211

DSP 1,453

DRAM 99,872

NAND 57,951

MPUs 54,151

4 November 2019


RF – advanced specialty technology requires an experienced team. RF design is

increasingly complex supporting multiple bands across 2G-5G, integration of multiple

components and use of specialty compound semiconductor materials requiring experienced

radio frequency chip designers. China’s RF suppliers (HiSilicon, RDA, Maxscend, Vanchip)

are now competitive on 2G and 3G but only supply the entry-level 4G. The supply chain will

also rely on Murata (PA filters) and Taiyo Yuden (BAW filters) to mitigate risk of US

technology exposure.

Display drivers. Taiwan and Korea lead in driver ICs with established position from years

of supplying their domestic panel makers. Market share is led by long-time suppliers

Novatek, Himax, Synaptics, FocalTech, Magnachip and Samsung’s internal division. China

does have a few suppliers seeking entry including SinoWealth, Galaxycore, Solomon

Systech and Chipone, though it lags in capacity support (at times tight on 8”) and panel

makers’ confidence relative to the established suppliers already with a large purchasing

scale and design advantage.

Foundry: China lags on advanced capacity, more

competitive on the mature nodes


China has been committed to the foundry sector for more than a decade, with Hua Hong

founded in the late 1990s and SMIC and Grace Semiconductor in 2000 charged with creating

local champions for contract semiconductor manufacturing. Despite consistent government

support, several industry cycles of investment and management teams, the China foundry

sector's share in 2018 remains 9.5%, virtually unchanged from the 9.6% share it held in 2008,

although has clawed back 170 bp of share since bottoming in 2015 at 7.8%.

Figure 43: China foundries led by SMIC and Hua Hong, but still modest in the global picture

Source: Company data, Gartner, Credit Suisse estimates

Foundry 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

CAGR

2011-2018

SMIC $1,354 $1,070 $1,554 $1,319 $1,702 $2,069 $1,970 $2,229 $2,914 $3,101 $3,351 14.2%

Hua Hong (plus Grace) $513 $357 $620 $610 $572 $585 $665 $651 $721 $808 $929 6.2%

CSMC $142 $151 $225 $230 $212 $210 $341 $328 $418 $456 $492 11.5%

Shanghai Hauli $0 $0 $0 $0 $37 $111 $305 $280 $310 $587 $676 NM

XMC $0 $0 $0 $0 $0 $180 $210 $200 $250 $250 $300 NM

ASMC $136 $95 $130 $124 $137 $128 $132 $120 $116 $124 $180 5.5%

Shanghai Belling $23 $14 $20 $20 $13 $15 $15 - - - - NM

China foundry sales (US$mn) $2,168 $1,687 $2,549 $2,303 $2,673 $3,298 $3,638 $3,808 $4,730 $5,326 $5,928 14.5%

YoY Growth -22.2% 51.1% -9.7% 16.1% 23.4% 10.3% 4.7% 24.2% 12.6% 11.3%

China foundry share (%) 9.6% 8.4% 9.0% 8.0% 7.9% 8.4% 7.9% 7.8% 8.8% 9.0% 9.5%

TSMC $9,575 $8,396 $12,141 $12,359 $14,621 $17,213 $22,396 $25,100 $29,451 $32,155 $34,208 15.7%

GlobalFoundries $1,743 $2,422 $3,662 $3,005 $4,013 $4,121 $4,352 $5,016 $5,495 $6,176 $6,209 10.9%

UMC $3,188 $1,786 $1,873 $2,484 $3,596 $2,900 $3,203 $3,261 $4,579 $4,909 $5,021 10.6%

Samsung Foundry $515 $486 $390 $770 $1,295 $3,200 $3,339 $2,621 $3,700 $4,475 $4,721 29.6%

Japanese IDMs $1,265 $972 $1,095 $992 $940 $954 $1,111 $1,261 $1,291 $1,289 $1,318 4.1%

Powerchip Logic $190 $140 $149 $431 $614 $862 $917 $985 $987 $1,057 $1,152 15.1%

TowerJazz $436 $298 $509 $613 $639 $505 $828 $961 $1,249 $1,387 $1,303 11.4%

Vanguard $490 $400 $546 $514 $579 $697 $755 $736 $802 $819 $959 9.3%

Dongbu $432 $370 $512 $483 $478 $464 $540 $590 $667 $611 $615 3.5%

IBM $566 $383 $500 $545 $634 $495 $519 $280 - - - NM

Magnachip $310 $265 $410 $338 $390 $400 $400 $291 $274 $320 $327 -0.5%

X-Fab $368 $211 $317 $278 $297 $290 $310 $290 $461 $582 $588 11.3%

Silterrra $157 $160 $180 $180 $160 $172 $160 $150 $130 $120 $190 0.8%

Other $1,185 $2,165 $3,473 $3,460 $2,789 $3,778 $3,385 $3,542 $184 $131 $133 -37.2%

Global foundry sales (US$mn) $22,588 $20,141 $28,305 $28,754 $33,716 $39,349 $45,852 $48,891 $53,999 $59,357 $62,673 11.8%

YoY Growth -10.8% 40.5% 1.6% 17.3% 16.7% 16.5% 6.6% 10.4% 9.9% 5.6%

4 November 2019


Key barriers to entry

■ High capex requirements. TSMC's capex at US$10-12 bn per year is a 5x multiple over

SMIC's recent US$2-2.5 bn range. Equipment cost for the most advanced leading-edge

capacity is now US$150-200 mn per 1,000 WPM capacity, limiting SMIC to 10-15,000

capacity additions per year at its current budget, paling in comparison to TSMC's installed

400,000 wafers per month capacity at 28nm and below. While SMIC has used its

Shanghai and Beijing JVs to share the capex and initial losses, the capex, even including

those JV investments, still implies that the scale gap only widens in the coming years with

TSMC continuing to outspend.

The higher scale base also translates to a wide difference in revenues. SMIC's revenue

base is still only 8% of TSMC's and is also playing out in investment capability, with

operating cash flows also only 6% of TSMC's operating cash flow and capex staying

around 20% of TSMC's overall capex. At a US$2-2.5 bn budget, SMIC can add about

15,000 14nm wafers, enough to generate US$500 mn on the advanced node, still less

than 1.3% of TSMC's projected 2020 sales.

Figure 44: SMIC <10% of TSMC's sales and cash flow Figure 45: TSMC capex is much higher than that of SMIC's

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

■ Capacity additions committed from the government, but not yet needed. Contrary

to memory where fabs are kept loaded to minimise unit costs, foundry requires specific

wafer demand from unique customers that have qualified product, all subject to having

effective and competitive capacity. SMIC has available government commitments for it to

have another 35k Beijing JV capacity, 70k Shanghai JV capacity, and 35k available in

Shenzhen with only 10k built out as management will only ramp up as customer

commitments come through. Our tracker of China capacity shows only 191k WPM of

capacity built out by foundries in China, out of the 565k available capacity planned.

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4 November 2019


Figure 46: China has sizeable committed capacity, but only gradually building it out


■ Technology gap remains high. Technology and scale shows up as a sizeable gap both

on mature and leading nodes. SMIC has done quite well to fully load 8" and its mature 12”

capacity with specialty and 2nd wave applications (fingerprint IC, smart cards, power

management, image sensors, NOR flash, RF transceivers) but is still only 20% of TSMC's

revenue base. On the advanced nodes, SMIC has only 3% of sales on 28nm and no sales

below that node, keeping its sales base limited in areas that account for 70% of TSMC's

sales. SMIC is no longer aggressively targeting 28nm expansion due to low profitability,

although will expand its 3k WPM pilot line on 14nm to 15k WPM over the next year as

customer orders ramp up, giving that node a chance to scale to US$500 mn sales, though

still only one-sixth the size of TSMC’s 16nm capacity and not able to access the 110k

capacity being built on 7nm and 50k on 5nm.

Figure 47: TSMC's revenue on legacy nodes is still much

higher even with SMIC’s progress

Figure 48: TSMC has a significant leading-edge scale

advantage over SMIC


■ Ecosystem development has posed a barrier. The challenges of ramping up a new

node every two years and increasingly a half node every year requires development across

equipment, materials, design software (EDA), IP developers, foundry and customers,

keeping an advantage for the incumbents ahead on technology. TSMC has noted a rising

number of titles now approaching 21,000 IP blocks qualified on its manufacturing platform

and a stepped up rise in IP qualification, architecture design and system verification. The

Chinese foundries are working to put in place that ecosystem, but the size of revenue base

Company Location Node 4Q17 4Q18 4Q19Max

CapacityStatus

SMIC Beijing 90nm-28nm 46.0 42.0 50.0 50.0 Fully built

SMIC Shanghai 45-28nm 17.0 10.0 8.0 20.0 Fully built

SMIC Beijing 2A JV 40nm 29.0 33.0 36.0 35.0 Ramping

SMIC Beijing 2B JV 40nm 0.0 0.0 0.0 35.0 Ramping

SMIC Shenzhen 90-40nm 6.8 6.8 6.8 35.0 Pilot Line

SMIC Shanghai JV 28-14nm 0.0 0.0 6.8 70.0 Future

SMIC capacity build-out in China: 98.8 91.8 107.5 245.0

Hua Hong/Huali Shanghai F5 55-40nm 35.0 35.0 35.0 35.0 Fully built

Hua Hong/Huali Shanghai F6 28nm 0.0 0.0 0.0 40.0 Construction

Hua Hong Wuxi F7 90-65nm 0.0 0.0 5.6 40.0 Planning

TSMC Nanjing 16nm 0.0 10.0 10.0 80.0 Starts 2Q18

UMC Xiaman: F12X 40-28nm 11.5 17.0 17.0 50.0 Ramping

Powerchip Hefei 90nm 0.0 6.0 6.0 40.0 Starts 2018

GlobalFoundries Chengdu 22nm FDS 0.0 10.0 10.0 65.0 Starts 4Q18

Guangzhou Yuexin Guangzhou 40-28nm 0.0 0.0 0.0 30.0 Starts 2019

Other foundries capacity build out in China 46.5 78.0 83.6 380.0

Total capacity build out in China 145.3 169.8 191.1 625.0

0

500

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TSMC - 0.18/0.15um SMIC - 0.18/0.15ium

0

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TSMC - 65nm and below SMIC - 65nm and below

4 November 2019


with TSMC at US$35 bn vs SMIC at US$3 bn places a huge gap in resources committed,

even with the government and IC fund backing and subsidy support.

Figure 49: TSMC qualifying a large IP pool on its process Figure 50: TSMC has built a wide ecosystem of partners

Source: Credit Suisse (TSMC – 2018 ARM Forum) Source: Credit Suisse (TSMC – 2018 ARM Forum)

TSMC captures a large share of the opportunity

China IC design growth helps the foundry sector, though TSMC capturing high share

The foundry opportunity from domestic IC design companies in China has increased at a 23%

CAGR to US$8.5 bn, representing almost 15% of the foundry market and an opportunity for all

the players. Due to its scale and leadership on advanced capacity, TSMC has grown even faster,

increasing its share of China local customers from 20% in 2010 to over 60% in 2018. We

estimate TSMC’s China sales currently at US$5.5 bn vs US$1.8 bn for SMIC and US$500 mn

for Hua Hong.

Figure 51: TSMC gaining share at the Chinese fabless Figure 52: China foundry share flat due to TSMC’s lead


TSMC also has a 12” fab to address the China opportunity

TSMC is also building out a fab in Nanjing China in four phases. The first of four phases is

capable of ramping up to 20k WPM at an initial cost of US$3 bn. The company will also have a

design service centre to support local IC design companies. The revenue contribution will be

modest at only 4% of sales once built out, but can allow TSMC to stay competitive addressing

local customers for its 16nm FinFET process as SMIC starts its Shanghai line for its 14nm in

4Q19.

0%

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2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

TSMC SMIC UMC Hua Hong TSMC's China share

Foundry sales in China (US$mn)

23.2% CAGR from 2010-2018

0%

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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018China foundry sales (US$mn) Global foundry sales (US$mn) China foundry share (%)

Foundry sales (US$mn) China foundry market share (%)Foundry sales (US$mn) China foundry market share (%)

TSMC currently investing in

a 12" fab in China

4 November 2019


Figure 53: China foundry share small vs its opportunity Figure 54: China trying to build a locally sufficient chain

Source: SMIC Source: SMIC

China players SMIC/HuaHong invest to raise competitiveness, TSMC still the lead supplier

SMIC – high spending mode to improve its technology position. China’s domestic

foundries still have about 9% market share, led by SMIC and Hua Hong. SMIC is in a high

investment phase, reversing course from its strategy a few years back to fill its mature 12” and

8” with differentiated technology and gradually migrate to the advanced nodes. The company

has hired Dr. Liang, formerly at TSMC and Samsung, to improve its foundry process and R&D

capability. Since the stepped up efforts, it is spending at a high capital intensity and R&D level

and growing its ability to receive government R&D grants to advance its process towards 14nm

and n+1 technology (~8nm) to target more advanced mobile and high performance computing

applications.

The company’s profitability is only slightly positive even with the government support, with

management conceding a need to take time for sustainable solid profitability or cash flow, but

investing for a long-term improvement in technology competitiveness that can lift its

performance long term.

Hua Hong – focused on specialty technology on mature 8”/12”, privately held Huali

pushing advanced technology. China's other top foundry Hua Hong has carved out a role in

China's development as a specialty foundry focused on leveraging more mature technology on

8” and 12”. The foundry achieved good scale on 8” foundry manufacturing through the merger

of Grace and Hua Hong Semiconductor with differentiated specialty technology and particular

capabilities both in applications using embedded flash (over 40% of sales) and in supplying

domestic Chinese customers (over 50% of sales). The company’s technology roadmap focuses

production on a wide range of specialty applications including microcontrollers, power

management, RF, smart cards, discretes and MEMS. The company has licensed Super Flash

from SST, a Microchip subsidiary, and SONOS from Cypress to develop a competency in

eNVM (embedded Non-Volatile Memory) used in smart cards (SIM cards, bank ICs, mobile

payments, ID cards, social security cards) at 35% of sales and targeted to reach 50% of sales

long term.

4 November 2019


Figure 55: SMIC sales from China customers Figure 56: Hua Hong sales from China customers


Hua Hong is now moving ahead more aggressively on the first 10k WPM of its new 12” fab for

first volume production late this year and maintains plans to ramp up 40k WPM 12” fab by

2022 to double capacity to US$2 bn. Its sister company Huali is also building a 2nd advanced

12” fab with an eventual capacity for 40k for 28-14nm.

Figure 57: Hua Hong's technology portfolio Figure 58: Hua Hong has grown embedded flash (eNVM)

Source: Hua Hong Semiconductor Source: Hua Hong Semiconductor

Aside from the leading players, China is also investing in several communal IDMs which would

combine manufacturing, chip design and partnerships with other IDMs and IC design companies

to address growing market opportunities in the industry. Dr. Chang, former SMIC founder and

Chairman, is building up a commune IDM in Qingdao China. The company will form a

partnership with system companies and chip designers to target an application to develop a chip

to jointly sell to the customer base. Requests are market driven, coming from end users and

manufacturers for SiEn to design, develop and produce the wafers for customers’ needs. In the

early 1990s, HP and Canon had collaborated with TI and the Singapore Economic

Development Board (EDB) to form a TECH company on the same business model.

SiEn plans to build 1 12” fab, 1 8” fab and a photomask shop. The 8” fab will ramp up initially to

30k WPM and 12” fab will ramp up to 40-45k WPM, with the first phase set at 10k WPM. The

company plans pilot start from August 2019-December 2019 and production start during

2020-21. The company also has land to develop living quarters and a school in an adjacent

area to assist in talent retention. Staff levels are up to 300 as of March 2019, with 30% having

PhD and Masters’ degree and 48% bachelor’s degree. The company has started up projects

for Microcontrollers, OLED Driver ICs, IoT chips for home appliances, and analog/power

management chips for industrial electronics. The company believes that several global IDMs will

partner with it for some new chip designs.

$0

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6

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Sep

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8

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Mar-

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9

US$mn

Embedded flash Logic & RF Discrete

Analog & PM Standalone NVM Others

4 November 2019


Back-end: China has used M&A to gain a stronger

presence


Since 2013, the back-end sector has seen the faster emergence of China OSAT (Outsourced

semiconductor assembly and test) players following the local players’ acquisition of overseas

companies to gain capability and customers. Some of the key M&As in the sector included

JCET’s acquisition of Stats-Chippac, which moved its market share up from 3% to 10%,

Tongfu’s acquisition of AMD’s factories which gave it a high growth CPU customer and

advanced flip chip packaging and final test capabilities, and Tianshui Huatian closed on Flip

Chip International for flip chip bumping and wafer level packaging.

The wave of acquisitions in the 2013-15 period lifted the back-end companies’ market share

from 5% in 2012 to 20% in 2019, making it a competitive force and source of self-sufficiency

on mainstream and reasonably advanced technology (flip chip, fan-out packaging) for China.

The one area of lag is still in the high-end advanced packaging, where TSMC has also emerged

over the past five years by supplying the high density fan-out (InFO) process for Apple’s

application processor and CoWoS (silicon interposers) for advanced graphics integrating high

bandwidth memory and high-end FPGAs.

Figure 59: China accelerated share gains with M&A in 14-15, though now stabilising a bit


The Chinese OSATs after their aggressive M&As were initially aggressive to expand capacity

and gain share even at the expense of pricing and margins operating near break-even levels

and helping trigger several points of gross margin erosion for the whole sector. Due to that

expansion and also taking on some high dollar value but low margin SiP projects, China

companies have grown at a 25% CAGR (19% excluding M&A) to reach 20% market share.

0%

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China back-end Total back-end sales China % of back-end

Back-end sales (US$mn) China % of Back-end

4 November 2019


Figure 60: China’s back-end sector has grown at a 25% CAGR to reach 20% share in 2019 (+20% CAGR excluding M&A)

Source: Company data, Credit Suisse estimates, (2014 revised to show the impact of JCET + Stats)

In the past year, the China suppliers became a bit more selective on bidding for SiP projects,

spending on capex and more restricted from large M&As on greater national protectionism, and

therefore may have more limited share gains. Key opportunity would be to continue outgrowing

the industry with the emergence of more local IC design companies.

China’s key OSATs intend on growing their position

We expect the China OSATs to continue to show outgrowth and target a combination of

growing domestic opportunities and International customers seeking either more localised position or a lower priced solution:

Figure 61: Comparison of ASE-SPIL with JCET and Tongfu

US$mn Revenue GM OPM FCF Top customers & revenue %

2018 2018 2018 2018

3711.TW ASE/SPIL 13,187 17% 7% 70 Apple 19% (including USI module revenue)

ASE/SPIL

ex-USI

8,114 21% 10% 178 QCOM 8%, Broadcom 7%, Huawei HiSilicon 6%, Mediatek 6%, NVIDIA 4%, Infineon 3%, STM 3%,

NXP/Freescale 3%

600584.SS JCET 3,608 11% 1% (300) Apple 23%, QCOM 7%, Broadcom 4%, Huawei HiSilicon 4%, Spreadtrum 3%, Bitmain/Cannon 3%,

Samsung/Hynix 1-2%

002156.SZ Tongfu 1,092 16% 1% (230) AMD 45%, MediaTek 7%, Broadcom 3%, Huawei HiSilicon 2%, STM 2%, TI 2%, NXP 2%

Source: Company data, Credit Suisse

1. JCET – targeting to be China’s strongest competitor and key global player.

JCET through its acquisition of Singapore headquartered Stats-Chippac became #3 in

back-end scale, after ASE/SPIL and Amkor. The company gained both advanced

technology with the fan-out, flip chip and advanced test and global customers

including Apple, Qualcomm and HiSilicon.

The company had been growing revenue over the past few years, adding low margin SiP

business to Apple, but is currently refocusing on improving its competitiveness and

execution to better serve its International and local Chinese customers in the core assembly

and test business. The company is looking to jump start sales as it is tracking flat to slightly

down this year, with below average margins (12% GMs/1% OpMs).

Sales comparison 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 '06-'10 CAGR 10-'18 CAGR

JCET $311 $343 $347 $535 $582 $703 $830 $1,043 $1,713 $2,875 $3,540 $3,607 $3,226 21% 27%

Tianshui Huatian $105 $107 $114 $172 $203 $257 $399 $536 $616 $824 $1,039 $1,081 $1,228 20% 26%

Tongfu Micro $167 $171 $181 $255 $251 $252 $288 $339 $369 $689 $967 $1,093 $1,225 13% 20%

China back-end $583 $621 $642 $962 $1,035 $1,213 $1,517 $1,918 $2,698 $4,388 $5,545 $5,781 $5,679 18% 25%

YoY Growth 18% 6% 3% 50% 8% 17% 25% 26% 41% 63% 26% 4% -2%

China % of back-end 3% 3% 4% 4% 4% 5% 6% 7% 9% 15% 18% 18% 19%

China organic back-end $583 $621 $642 $962 $1,035 $1,213 $1,517 $1,918 $2,253 $2,951 $3,944 $4,121 $4,092 18% 20%

YoY Growth 18% 6% 3% 50% 8% 17% 25% 26% 17% 31% 34% 4% -1%

ASE $3,081 $3,007 $2,608 $3,992 $4,345 $4,401 $4,829 $5,273 $4,873 $4,982 $8,035 $8,230 $8,040 7% 9%

YoY Growth 0% -2% -13% 53% 9% 1% 10% 9% -8% 2% 61% 2% -2%

% of back-end 15% 14% 15% 17% 18% 18% 19% 19% 17% 17% 26% 26% 26%

Amkor $2,739 $2,659 $2,179 $2,939 $2,776 $2,760 $2,956 $3,129 $2,885 $3,894 $4,186 $4,316 $3,910 2% 5%

SPIL $1,968 $1,925 $1,729 $2,026 $2,084 $2,188 $2,336 $2,743 $2,613 $2,640 N/A N/A N/A 4% N/A

Powertech $744 $993 $908 $1,202 $1,342 $1,407 $1,267 $1,321 $1,339 $1,500 $1,960 $2,072 $2,303 23% 7%

TSMC $246 $318 $270 $466 $654 $772 $1,006 $1,384 $1,596 $1,913 $2,247 $2,496 $2,548 18% 23%

UTAC $756 $711 $601 $925 $981 $978 $748 $734 $878 $875 $874 $888 $901 10% -1%

ChipMOS $698 $522 $352 $546 $620 $651 $652 $726 $627 $571 $589 $613 $649 -3% 1%

Chipbond $178 $168 $159 $399 $450 $508 $533 $584 $532 $536 $605 $621 $671 33% 6%

KYEC $441 $465 $382 $561 $516 $496 $495 $537 $540 $623 $647 $820 $941 8% 5%

J-Devices $474 $498 $523 $549 $576 $532 $825 $923 $822 N/A N/A N/A N/A 5% N/A

Carsem $372 $370 $275 $394 $360 $356 $350 $336 $360 $378 $384 $389 $395 3% 0%

Walton $315 $258 $256 $286 $279 $280 $299 $330 $249 $272 $310 $317 $324 -1% 1%

Unisem $285 $373 $300 $433 $380 $354 $315 $319 $323 $340 $345 $350 $355 23% -3%

Orient Semi $281 $327 $265 $357 $369 $360 $322 $456 $507 $490 $457 $467 $478 5% 3%

AOI Electronics $246 $248 $211 $234 $304 $331 $343 $363 $392 $336 $414 $385 $394 0% 6%

Formosa Advanced $274 $313 $276 $376 $404 $360 $302 $304 $276 $264 $259 $265 $271 17% -4%

Kingpak $3 $4 $30 $96 $58 $42 $42 $40 $81 $73 $71 $78 $91 82% -3%

Major Players (ex-China) $13,103 $13,157 $11,322 $15,782 $16,500 $16,777 $17,619 $19,502 $18,894 $19,687 $21,385 $22,307 $22,273 7% 4%

YoY Growth 8% 0% -14% 39% 5% 2% 5% 11% -3% 4% 9% 4% 0%

% of back-end 64% 62% 66% 67% 69% 68% 70% 72% 66% 66% 69% 71% 73%

Other suppliers $6,914 $7,430 $5,186 $6,850 $6,489 $6,536 $5,946 $5,710 $6,895 $5,836 $3,878 $3,337 $2,530 1% -9%

YoY Growth 5% 7% -30% 32% -5% 1% -9% -4% 21% -15% -34% -14% -24%

Total back-end sales $20,600 $21,209 $17,150 $23,593 $24,024 $24,526 $25,082 $27,130 $28,487 $29,911 $30,808 $31,425 $30,482 5% 4%

YoY Growth 7% 3% -19% 38% 2% 2% 2% 8% 5% 5% 3% 2% -3%

4 November 2019


2. Tongfu – advancing its capacity leveraging its AMD acquired assets. Tongfu

Micro is leveraging the acquisition of AMD’s China back-end operations in 2016,

giving it close to 50% of its revenue and more advanced operations, along with flip

chip assembly and final test. The company is spending at a high R&D level to develop

fan-out, driver IC, memory and packaging to support 7nm processors. Tongfu has

been improving its customer base with good position at global customers Mediatek,

Broadcom, Huawei, STM, TI and NXP.

The company is currently seeing accelerated growth including with Huaweidue to the trade

tension, Mediatek due to its share gains on low-mid-end smartphones, and recently

qualified Infineon’s high-end automotive chips. The company is on pace to grow 15-20%

on the back of growth from AMD and its better position at China and International

customers, though margins are still relatively low at 13% GMs and 1% OpM in 2019.

3. TSHT - focused on mainstream packaging and better profitability. Tianshui

Huatian (TSHT) traditionally has a higher level of profitability focusing on specialty ICs

including RF, CMOS image sensors, NOR flash and sensors. The company also

acquired Unisem (22% of sales in 1H19) which gave it access to international

customers Qorvo, Skyworks and Broadcom/Avago. The company expects

opportunities from domestic Chinese customers, replacing overseas headquartered

OSATs ASE and Amkor. CS projects 15-20% YoY.

Funding of semi ambitions

Other than broad level and significant funds available from the National IC Fund, local private

equity funds and private VCs (see earlier in the report), these semiconductor players in China

also stand to gain funding and help from the following sources.

JV fabs ease the investment burden for advanced

manufacturing

The China municipal funds have been helping the foundries build out capacity through JV fabs

which allow the foundry operator to have operating control, but the JV contributes up to half of

the capex outlay. During the first few years of fab investment, the high depreciation burden ensures losses but benefits the foundry P&L by sharing the loss of that operation with the JV

partners. The contracts often allow the foundry to inject more capital over time to assume a larger ownership once the fab turns more profitable. Key JV fabs in the foundry sector include

SMIC’s JV 12” fabs in Shanghai and Beijing, Hua Hong’s JV fab in Wuxi and UMC’s JV in Xiamen. GlobalFoundries had established a JV fab in Chengdu although we believe it is now up

for sale with the foundry focusing more on generating positive free cash flow and paring off

some of the more speculative investments.

4 November 2019


Figure 62: Fab investment in China across logic IC and memory from domestic and foreign companies

Source: Company data, Credit Suisse research

R&D and equipment subsidies help manage the high cost of

advanced technology development

China also provides support in term of grants for the manufacturers tied to R&D projects and

also investment grants that can offset interest expense. Our analysis of SMIC shows a steadily

rising amount of government grants in the past five years since China’s National Guideline for

the IC industry in 2014 and its Made in China 2025 programme were implemented. The

company’s income statement recognition of grants for R&D, interest and other income has

increased from US$40-50 mn range during 2011-15 to US$200mn in 2018. The funding for

R&D, as the company also steps up meeting the national goal for FinFET commercialisation by

2020, has also accelerated, ramping up from US$250 mn on the balance sheet during 2013-

15 to over US$600 mn in 2018, with new funding up from US$$40 mn in 2015 to US$265

mn in 2018.

Figure 63: SMIC government grants rising since 2015 Figure 64: SMIC’s government funding of R&D rising


Origin

CountryCompany Fab Site

Wafer

sizeSegment Node (nm)

Installed

(WPM)

Next phase

planned

Final Capacity

(WPM)

China Fujian Jinhua Fujian 12" DRAM 25nm On Hold 0 60,000

China Hua Hong JV Wuxi 12" Foundry 90-55nm 10,000 10,000 40,000

China Huali Micro Pudong 12" Foundry 28-14nm 10,000 10,000 40,000

China CXMT Hefei 12" DRAM TBD 5,000 40,000 125,000

China SiEn Qingdao 8" Foundry 110nm+ 0 0 30,000

China SiEn Qingdao 12" Foundry 55/40nm 0 0 40,000

China SMIC JV Beijing 12" Foundry 40/28nm 35,000 0 35,000

China SMIC JV Shanghai 12" Foundry 14nm 3,000 12,000 70,000

China SMIC Shenzhen 12" Foundry 55nm 6,800 0 40,000

China Tsinghua Unigroup Nanjing 12" NAND/DRAM 2x nm TBD 0 100,000

China YMTC Wuhan 12" 3D NAND 3D NAND 20,000 60,000 300,000

Upcoming fabs by domestic companies 89,800 132,000 880,000

US Alpha & Omega Chongqing 8" Discretes 130nm+ 25,000 0 25,000

US GlobalFoundries JV Chengdu 12" Foundry 22nm FDS On Hold 0 65,000

Korea Hynix Wuxi C3 12" DRAM 1x nm 0 60,000 130,000

US Intel Dalian 12" NAND 3D NAND 80,000 20,000 100,000

Taiwan Powerchip Hefei 12" Logic 90nm 6,000 5,000 40,000

Korea Samsung Xian 12" 3D NAND 3D NAND 100,000 20,000 120,000

Taiwan TSMC Nanjing 12" Foundry 16nm 10,000 10,000 80,000

Taiwan UMC JV Xiamen 12" Foundry 28nm 17,000 0 50,000

Upcoming fabs by overseas companies 238,000 115,000 610,000

0%

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0

50,000

100,000

150,000

200,000

250,000

2011 2012 2013 2014 2015 2016 2017 2018

P&L grants - other operating income P&L grants - interest expense

P&L grants - R&D expenses Grants as % of Net Income

US$mn % of net income

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

2011 2012 2013 2014 2015 2016 2017 2018

Government funding on the balance sheet New government funding on R&D projects

US$mn

4 November 2019


Technology and IP from existing countries and companies supplemented by growing in-country talent

China is also looking to follow in the footsteps of other countries that developed their

semiconductor industry leveraging the insights of existing players. The electronics chain has had three major migrations of electronics’ value and production, with the US leading in the 1950s-

60s, a first migration to Japan and West Germany in the 1970s-80s, a second migration to the Asian Tigers in the 1990s-00s (South Korea, Taiwan), and a migration with evolution to China

in the 2010s. The Chinese lead companies have been aggressively offering packages to existing engineers from established companies to accelerate their build-up of know-how.

According to H&L Management Consultants, a Taipei recruitment firm, more than 300 senior

engineers from Taiwan moved to mainland Chinese chip makers in 2018 and more than 1,000 since Beijing set up its National IC fund in 2014.

Figure 65: Technology transfer through regions has been on-going since the 1950s

Source: Hua Hong Group

China has doubled its gross expenditure on R&D from 1% to 2% in the past decade (closer to

the 3-3.5% for the US and Korea) and currently is in the lead in granted and total patents.

China is also now graduating 7.5mn citizens from college vs. 3.3mn in the US and may raise its

global share of graduates from 18% in 2010 to 29% by 2020. In addition, China established

the Thousand Talents program in 2008 to attract foreign researchers and incentivise the return

of Chinese scientists from abroad with a background in STEM.

Figure 66: China has more applications and granted

patents than any other country

Figure 67: China has overtaken the EU in R&D spend as a % of GDP (OECD data)

Source: Refinitiv, Credit Suisse Global Strategy research Source: Refinitiv, Credit Suisse Global Strategy research

M&A activity another source of development, though now

more difficult

The Chinese supply chain went through an aggressive series of M&As through 2012-15 and

some selective deals in the past few years to build up its capabilities in acquiring established

4 November 2019


foreign companies. The high degree of activity has attracted attention and also caused

government regulators to slow the approvals of deals, including the US CFIUS on the grounds

of national security concerns. Before the M&A window narrowed, China completed deals

including RDA (RF/Connectivity/DTV), Spreadtrum (Mobile), Montage (Set-tops) ISSI (specialty

memory), Omnivision (CMOS image sensors) and NXP's RF Power and Standard Products

divisions (Nexperia). In the back-end, JCET acquired Stats Chippac to become the #3 global

back-end supplier, Tianshui Huatian closed on Flip Chip International (flip chip bumping and

wafer level packaging) and Tongfu Micro acquired two AMD advanced packaging facilities in

China. In equipment, the E-Town Dragon Fund has also acquired Mattson, an equipment

supplier of dry strip, etch, RTP and annealing used in front-end semiconductor manufacturing.

ARM also spun off its China unit into a locally controlled company with better local access.

Figure 68: China supply chain has completed M&A to improve its technology position, although some larger deals cancelled


Companies currently view large-scale M&As as more difficult as either US may block the deal or

China may ask for concessions. Companies are wary of larger deals currently in light of US

CFIUS and Presidential actions to block Broadcom-QCOM and China’s Mofcom failure to

approve Qualcomm-NXP. We expect the industry to still pursue acquisitions but political

pressure increasingly will limit large scale global M&As or Chinese companies gaining IP quickly

through acquisition, forcing it to maintain targets on smaller companies or acquiring IP or

seeking lower profile JVs.

Capital markets: new listings provide capital and recognition to China’s suppliers.

We expect 2019-20 to see one of the largest waves of semiconductor IPOs in China in history,

with strong support from the central/local governments and SOEs for the new Sci-Tech

Innovation Board, a capital market in China for emerging companies to list. The board may allow

much earlier-stage companies to list, including some small-scale, loss-making China

semiconductor suppliers, later this year.

As per our earlier analysis, A-share companies have traded at a 200%+ premium to the A-

share market in the past five years so the high valuations could give a good source of funds for

companies even at a relatively low profitability. There have been seven semiconductor

companies’ IPOs in A-share between March and July 2019, including equipment (AMEC),

materials (Anji Micro), IC design (Montage, Amlogic, Expressif, Beken, Maxscend). There will

Announced

dateTarget Acquirer

Value

(US$mn)Deal status

Announced

dateTarget Acquirer

Value

(US$mn)Deal status

12-Apr-12 Leadcore, Uniscope, Yousi Datang $289 Completed 15-Apr-16 Tongwei Tongwei Solar $770 Completed

12-Jul-13 Spreadtrum Tsinghua Unigroup $1,780 Completed 14-May-16 NXP Standard Products Wise Road Capital $2,750 Completed

11-Nov-13 RDA Tsinghua Unigroup $907 Completed 8-Jun-16Shandong Luyitong Intelligenet

EletronicsHangzhou Jianan Yunchi $459 Completed

1-Apr-14 NXP's auto IP Datang & NXP JV $60 Completed 26-Jan-17 YaGuang Technology Chengdu Yaguang Electronics $496 Completed

11-Jun-14 Montage Technology PDSTI $693 Completed 6-Jun-17 Jinglong Group JA Solar $1,408 Completed

14-Aug-14 OmniVision Will Semiconductor $1,900 Completed 30-Jan-18 GigaDevice Silead $424 Completed

3-Sep-14 Gerad Suzhou Wafer Level CSP $53 Completed 5-Jun-18 Undisclosed ARM Technology (China) $775 Completed

25-Sep-14 Tsinghua Unigroup Intel $1,470 Completed 27-Sep-18Asia Pacific Resources

Development InvestmentJiangsu Shunfeng Photovoltaic $692 Proceeding

6-Nov-14 STATS ChipPAC JCET, SMIC, IC Fund $780 Completed 13-Jul-15 Micron Technology Tsinghua Unigroup $23,000 Cancelled

16-Dec-14 FlipChip Int'l (FCI) Huatian $41 Completed 30-Sep-15 Western Digital Unisplendour (Tsinghua) $3,775 Cancelled

20-Jan-15 Sunplus' STB unit Availink Inc. $11 Completed 30-Sep-15 Pericom Montage Technology $430 Cancelled

20-Jan-15 Availink Inc. Sunplus' STB unit $10 Completed 30-Oct-15 Powertech Tsinghua Unigroup $600 Cancelled

12-Feb-15 SMIC National IC Fund $400 Completed 7-Dec-15 Mattson E-Town Capital $300 Cancelled

12-Mar-15 ISSI Uphill (SummitView) $764 Completed 9-Dec-15 Fairchild Hua Capital, CR Semi $2,460 Cancelled

28-Apr-15 Mic Led Light Huatian $8 Completed 11-Dec-15 ChipMOS Taiwan Tsinghua Unigroup $368 Cancelled

11-May-15 Static Control (SCC) Apex Microelectronics $63 Completed 11-Dec-15 Taiwan OSAT company Tsinghua Unigroup $1,700 Cancelled

19-May-15 HP's H3C HK Unisplendour $2,300 Completed 23-May-16 AIXTRON Grand Chip Investment $749 Cancelled

28-May-15 NXP's RF Power JAC Capital $1,800 Completed 26-Jul-16 Henan Yicheng New Energy Jiangxi Ldk Solar Hi-Tech $395 Cancelled

13-Jul-15 Silex Microsystems GAE N/A Completed 11-Jan-17 Qinchengda Investment Eging Photovoltaic $426 Cancelled

13-Aug-15 ISSI's Chingis MediaTek $27 Completed 22-Nov-17 Huaxin Investment Goodix $428 Cancelled

15-Oct-15 AMD's 2 ATMP facilities Tongfu Micro $371 Completed Proposed: $56,511

24-Nov-15 ZTE Microelectronics National IC Fund $380 Completed Completed: $21,189

https://plus.credit-suisse.com/s/V7gleF4AF-ZSIz

4 November 2019


be more A-share semi IPOs in late 2019-20, including but not limited to IC design (UNISOC,

Giantec, Fudan Micro), IDM (China Resources Microelectronics and Yantai Raytron), wafer

(National Silicon Industry Group), IC design service (VeriSilicon) and equipment (Accotest,

Kingsemi). BYD is also reported to have planned the spin-off of its semiconductor business

(BYD Microelectronics) to list in A-share.

Conclusion: China’s presence lagging in foundry,

rising in OSAT, varying in IC design

The Chinese semiconductor sector is having varying degrees of success establishing self-sufficiency in its domestic ecosystem due to high barriers on the advanced manufacturing and

chip design. In foundry, market share has been stable around 9% in the past decade, despite National IC fund investments and heavy attention on this sector as the centre of China’s

industrial development. TSMC’s wide lead on process technology and increasingly high-end

advanced packaging allows it to address the high-end compute, mobile and networking demand. The Chinese foundries have kept up with market growth, largely by leveraging their more legacy

8” and mature 12” process nodes to address high volume consumer and wireless/wired connectivity, and specialty high volume applications (CMOS image sensors, power management,

bank cards, specialty memory).

In the back-end space, China has increased share following M&As of overseas companies and

through a combination of aggressive pricing, targeting of SiP at high sales contribution but low

margin, and addressing the growing base of local fabless and International companies with supply chain in China. The companies following acquisition can address the mainstream high

volume packaging including flip chip and wafer level packaging though lag foundry leader TSMC integrating high-end applications on its silicon interposers and high density fan-out process.

Market share has been rising and now approaching 20%, although profitability is still a concern with China players operating at low-mid single digit operating margins.

In IC design, traction has been steady to lift share from 4% in 2010 to 16% in 2018, although

has been concentrated in select areas of the semiconductor space. Market share is the highest in mobile areas (processor, modem, wireless power management, connectivity, CMOS sensors),

wired connectivity (led by Huawei) and some new high volume applications seeing strong support in China (crypto-currency and AI). Share is still below 5% in areas representing about

70% of the industry, most notably processors, memory, GPU, FPGA, analog, MCU and RF.

Figure 69: China semiconductor industry continues to outgrow global peers


What happens in the coming years?

A few key trends we expect in the next 1-3 years:

China’s semiconductor expansion in its core wireless market. We expect China

to have most of its growth from its existing strong hold in wireless, higher content in

the mobile processor, connectivity, image sensor and gradual traction into RF. The

move to 5G networks will allow higher content in mobile devices and stimulate more

0%

5%

10%

15%

20%

25%

30%

0

50,000

100,000

150,000

200,000

250,000

300,000

2010 2011 2012 2013 2014 2015 2016 2017 2018

China foundry China back-end China fabless

Global foundry Global back-end Global fabless

China foundry share China back-end Share China fabless share

Semiconductor sales (US$mn) China market share (%)

4 November 2019


spending in the infrastructure, with benefit for the local ecosystem from launching in

the first wave vs lagging on 4G by a couple years.

AI emerges as a new high volume category for fabless. The China fabless were

successfully dominating the crypto-currency ASIC market by leveraging advanced

foundry capacity at TSMC and design service companies in Taiwan (GUC, Alchip), and

eventually Samsung and its design service ecosystem. We now see those companies

targeting AI inference and some cloud acceleration applications, which could drive

another revenue cycle, addressing the evolution towards smarter products capable of

voice recognition and image/object detection.

Growth from a low-base in analog, RF, and MCUs. China has an opportunity to

target more mature mainstream analog and discretes and MCUs, including at domestic

companies looking for a local source alternative to the global IDM. The presence of

local foundry capacity with Hua Hong’s 8” and new 12” mature fab and back-end

capacity should give it a base of competitive manufacturing to gain traction and grow

sales from a low base in these areas. The Asian RF foundries like Win Semi and

AWSC along with Sanan’s development should also help the emerging RF suppliers in

targeting some of the discrete RF components and mature 2G-4G cellular layers and

Wifi RF.

Local foundries continue to grow on specialty applications, still limited

advanced technology success. We expect China’s foundries to expand their

position with the growing design companies on their mature lines (power management,

flash memory, CMOS sensor, digital consumer). Hua Hong’s expansion of its Wuxi

fab would double its revenue base in the next five years on still mature technology

nodes, while SMIC should keep its mature lines relatively full with the growth of the

domestic market. The advanced technology may take more time, as SMIC’s

management admits that profitability on its upcoming 14nm FinFET ramp may still lag

due to time gap from TSMC’s launch in 2015 (now nearly depreciated) and requiring

development of n+1 and beyond to gain competitiveness and materially better

pricing/profitability.

China back-end takes more share of local customers. China’s back-end sector

is seeing increasing opportunities as it leverages the more advanced technology

capabilities picked up from its acquisitions to target domestic companies adding local

sources. Although, profitability may still lag a bit due to the on-going competition from

ASE’s higher scale post-merger with SPIL and from TSMC continuing to take some of

the highest value advanced applications with its wafer level system integration.

We also highlight a few trends possible beyond three years for China:

A possible advanced technology expansion for SMIC. SMIC’s aggressive push

on technology at the expense of near-term profitability, heavy government support,

and drop-off of advanced technology competition from UMC and GF gives it a chance

to emerge as a capacity source for more advanced applications. SMIC will need to

endure high capex and difficult profitability but may emerge in 3-5 years as a more

competitive foundry capable of supplying some of the more advanced mobile and

networking applications.

Domestic data centre silicon. China’s design houses are working on alternative to

Intel/AMD CPUs using ARM and RISC-V processors and NVIDIA accelerators with a

host of AI inference and training chips. Within 3-5 years, the push for a local source

for national security and economic reasons could allow local suppliers to gain some

traction.

More penetration into broad markets particularly in China. We would view more

build-up of local teams and domestic diversification to allow local suppliers to gain

further market share into broad markets in MCUs and analog.

4 November 2019


Still limited success in some high barrier applications. We still view barriers on

the platform in graphics, FPGAs with software and high-end integrated RF for 5G

requiring a higher hurdle of engineering talent and incumbency in market position to

gain strong traction.

Opportunities and challenges

We summarise the opportunities and challenges for China in achieving self-sufficiency. The key

opportunities include:

Foundries grow scale on the mature nodes. Key opportunities for China foundries

are to address and continue grow on the mature nodes requiring lower capital intensity

and with large domestic base of customers, with Hua Hong/SMIC already having

>50% of sales from local Chinese customers.

SMIC on the advanced nodes. SMIC has an opportunity if it can bear the high

expense in the next few years to leap frog UMC and GlobalFoundries on technology

and address more of the advanced mobile, networking and compute applications.

Back-end gaining from localisation. The Chinese back-end suppliers can continue

to gain share with their local supply chain and growing domestic market leveraging the

M&As they completed before the acquisition window narrowed with the recent political

sensitivity.

IC design - leverage ARM and RISC-V for server, networking, mobile,

connectivity. The IC design companies have lower entry barriers in some markets

through the support of ARM and the growing RISC-V consortium, with more access to

license the core IP for processing and connectivity applicable to data centre,

networking, mobile and IoT markets.

Embrace advanced packaging, SiP and chiplet architectures. The foundry, EDA

companies and back-end suppliers are providing more tools for integrating IP across

smaller more manageable and easier to fabricate chiplets and joining in packaging, a

possible opportunity to avoid the complexity in designing monolithic large system on

chips. China may be able to target further opportunities if more systems take a system

in package (SiP) or chiplet approach.

While China can capitalise on some of these opportunities, it also faces some risks:

Wide gap to TSMC in capex and R&D scale. TSMC’s 5x spending advantage on

capex and R&D and 10x advantage on revenue and even higher magnitude of free

cash flow likely keeps the resource, technology and ecosystem gap wide.

Overseas fabless and IDMs also have a scale advantage. The Chinese will also

face competition from established IDMs and fabless with embedded base of qualified

design wins, global customers and also IP blocks that allow them to integrate some

technology into the main chip – opposite trend of chiplets but still prevalent, for

example, the mobile SoC companies now integrating the AI processing unit.

Global customer access may drop. The Chinese may gain share at local

customers, but similar creation of two supply chains and overseas security

concerns/US pressure may limit some of the market opportunities for Chinese

suppliers into global customers.

Potential US restrictions on advanced technology. A risk for China would come

from the widening of export restrictions of US technology or advanced manufacturing

technology or equipment. The reliance on advanced tools for the fab or EDA tools

would severely hamper the local supply chain.

4 November 2019


Global alternatives to supply China if the domestic chain falls short

We believe the attempt for China to localise its supply chain or limit supply from the US if the

trade tensions continue to escalate will lead it to reach out to overseas non-US suppliers for its

development. We highlight Asian suppliers potentially gaining share displacing Western

companies:

Foundry: TSMC with only independent source of advanced manufacturing should

remain key supplier to the Chinese design companies on silicon for advanced

applications in mobile, networking, and high performance computing.

Back-end: We expect ASE, with 15% of sales in China and the largest industry scale

at 30% market share in the back-end plus 77% owned USI Shanghai subsidiary, to

also supply the local supply chain. King Yuan is also well placed for localisation with

15-20% of sales from Huawei’s chip division and 10-15% from Mediatek.

Mobile chipsets: Mediatek has a good opportunity, with Hi-Silicon’s mobile chipset

captive to Huawei and UniSOC still lagging on mobile processors. Mediatek has a

local advantage relative to Qualcomm if China continues to look for diversification from

US supply sources.

Analog: We expect Silergy and Mediatek’s Richtek division to see opportunities to

gain share, with Silergy competing against global analog companies and Mediatek

having opportunity to bundle its own power management content on its platforms.

Probe cards: Chunghwa Precision competes with US suppliers such as R&D

Altanova on probe card PCBs for advanced semiconductors, so it is already gaining a

bit of share in Huawei following the customers’ US entity list restrictions.

RF: In RF, the Japanese suppliers Murata and Taiyo Yuden can gain content share

from US suppliers, including Qorvo, Skyworks, Qualcomm and Broadcom. In Taiwan

Win Semiconductor, VPEC and AWSC have higher market share, with local fabless

versus the US IDMs.

Test equipment. In test equipment, Chroma and Anritsu have an opportunity to gain

some share from US supplier Keysight from diversification. In semiconductor test,

Advantest also can be an alternative Japanese test source to its rival Teradyne.

VCSEL. In VCSEL, Osram and Chinese based Vertilite can gain share from US

suppliers Lumentum and Finisar in the local market.

4 November 2019


Figure 70: China IC Design by application type

Source: Credit Suisse Research

Mobile processor Ticker MCU Ticker Memory Ticker

Huawei HiSilicon Private Gigadevice 603986 Gigadevice / ChangXin 603986

Unigroup Spreadtrum-RDA (Unisoc) Private, IPO Ingenic 300223 YMTC / XMC (Tsinghua Unigroup) Private

Allwinner 300458 Unigroup Guoxin Microelectronics 002049 Fujian Jinhua Private

Rockchip Private SinoWealth 300327 Reliance Memory (JV of Rambus and Gigadevice) Private

Leadcore Private Silan 600460 Montage Technology 688008

ASR Micro Private Goodix 603160 Unigroup Guoxin Microelectronics 002049

Pinecone (Xiaomi) 1810 HK Datang Microelectronics Private ISSI / Ingenic 300223

Sanechips (ZTE Microelectronics) Private Huada Semiconductor Private Giantec Private, IPO

Cloud, Server, NPU, AI Giantec Private, IPO SSD/eMMC controller

Huawei HiSilicon Private Yi-xin Private Huawei HiSilicon Private

Cambricon Private MindMotion Private Goke Microelectronics 300672

Montage Technology 688008 WinnerMicro Private Jiangsu Huacun Electronic Technology Private

Alibaba BABA Fingerprint sensor & touch controller Tsinghua Dera Private

Eeasy Tech Private Goodix 603160 SinoChip Semiconductors Private

Huaxintong Private Silead / Gigadevice 603986 Yeestor Private

Big Fish (Xiaomi) 1810 HK Fortsense Private StoreArt Private

ThinkForce Private Betterlife 835288 Power, MOSFET, IGBT

Iluvatar Private Chipone Private Huawei HiSilicon Private

Video, audio, surveillance, image BYD Microelectronics (within BYD, to IPO) 1211 HK SG Micro 300661

Huawei HiSilicon Private CIS (CMOS image sensor) Silan 600460

Fullhan 300613 OmniVision / Will Semi 603501 Shanghai Belling 600171

Vimicro Private Galaxycore Private Nexperia / Wingtech 600745

Ingenic 300223 SuperPix / Will Semi 603501 Silergy 6415 TT

Artosyn Private BYD Microelectronics (within BYD, to IPO) 1211 HK Will Semi 603501

Goke Microelectronics 300672 SmartSens Private Yangjie 300373

Eeasy Tech Private DDI (Display driver IC) BYD Microelectronics (within BYD, to IPO) 1211 HK

Dahua 002236 SinoWealth 300327 Good-ARK 002079

YITU Private Solomon Systech 2878 HK Xiaocheng Tech 300139

Horizon Robotics Private Chipone Private Sun.King Power Elec 580 HK

Sanechips (ZTE Microelectronics) Private RF, BLE, WiFi, connectivity Unigroup Spreadtrum-RDA (Unisoc) Private, IPO

Bestechnic Private Huawei HiSilicon Private Huada Semiconductor Private

FPGA Unigroup Spreadtrum-RDA (Unisoc) Private, IPO Tianyi Hexin Private

Gowin Private Maxscend 300782 Beijing Zhisi Microelectronics Private

Fudan Micro 1385 HK Goodix 603160 Sanechips (ZTE Microelectronics) Private

Unigroup Guoxin Microelectronics 002049 Will Semi 603501 Chipone Private

Huada Semiconductor Private Espressif Systems 688018 Global Semiconductor Limited Private

Anlogic Private Siflower Private Jiangsu CAS-IGBT Technology Private

Hercules Micro Private Etra Semi Private Secure IC for bank card, sim card, security card

DeePhi (Acquired by Xilinx) XLNX Tianyi Hexin Private Nationz Technologies 300077

CPU WinnerMicro Private Unigroup Guoxin Microelectronics 002049

Zhaoxin Private Xinyi Semi Private Shanghai Fudan 1385 HK

Montage 688008 Power amplifier Huada Semiconductor Private

Loongson Private Sanechips (ZTE Microelectronics) Private Giantec Private, IPO

GPU Vanchip Private LED driver, MEMS sensor, discrete

Jingjia Micro 300474 Xinyi Semi Private Silan 600460

Zhaoxin Private Kangxi Communication Private Shanghai Belling 600171

Cryptocurrency ASIC Smarter Micro Private Yangjie 300373

Bitmain Private Lansus Private Automotive

Canaan Private UniChip (Will Semi's subsidiary) 603501 NavInfo / AutoChip 002405

Ebang Communication Private Aerospace, satellite IC BYD Microelectronics (within BYD) To IPO

STB Orbita 300053 Horizon Robotics Private

Goke Microelectronics 300672 UniStrong 002383 Huawei HiSilicon Private

Amlogic 688099 Drone, robot SoC Sanechips (ZTE Microelectronics) Private

Availink Private Artosyn Private Allystar Private

Sanechips (ZTE Microelectronics) Private SiC (Silicon Carbide) Yi-xin Private

Yangjie 300373

4 November 2019


Semi equipment and wafers

Current market structure—equipment

The global semiconductor equipment market is dominated by a few major players, including

Applied Materials (the US), KLA (the US), LAM Research (the US), ASML (Europe) and Tokyo

Electron (Japan). There are a few suppliers in Korea, but those mainly serve Samsung and

Hynix. In China, China has only two established equipment companies, Naura and AMEC,

though both scales are very small compared with global semicap.

Figure 71: China equipment suppliers still very small vs global players

Source: Company data, Gartner, Credit Suisse estimates

Current Chinese players

AMEC (Advanced Micro-Fabrication Equipment Inc. China): Founded in 2004 and

headquartered in Shanghai, AMEC develops and manufactures dielectric and TSV etch tools for

semiconductor manufacturers and MOCVD tools for LED makers. It has shipped etch tools to

many semiconductor companies, including TSMC, SMIC, YMTC and Hynix. In December 2015,

AMEC announced that its etch tool passed TSMC qualification for 5nm and the company

expected a bigger opportunity at 5nm than at 7nm. In memory, AMEC indicated that etch tool

can be used in 64L NAND production. For MOCVD, the company claims that it is one of the

Top 2 suppliers, with the other one being Veeco. As of June 2019, AMEC had applied 1,280

patents, including 1,118 invention patents. It has been granted 961 patents, including 814

invention patents.

Naura (Naura Technology Group Co., Ltd): Naura is formed through the consolidation and

restructuring of Beijing Sevenstar Electronics and Beijing North Microelectronics in 2016 and

the group was renamed Naura in 2017. Different from AMEC which was founded by a group of

industry veterans, Naura and its previous entities assumes the nation’s mission to establish

China’s capabilities in various equipment fields, from semiconductors, new energy resources,

new materials and other fields. The more recent and important mission of Naura is to develop

equipment for semiconductor manufacturing, as China has barely any domestic supplies. Naura

develops a wide range of semiconductor equipment, including etch, PVD (physical vapor

deposition), CVD (chemical vapor deposition), diffusion, cleaning tool, UV curve, indexer, gas

measuring control, ALD (atomic layer deposition) and so on. That said, we note it has only

0-1% market share in these tools. Further, while AMEC’s etch has been qualified by TSMC’s

most advanced node, Naura is still far behind and its equipment is more used in production of

matured nodes. First, the company is too ambitious in development of a wide range of tools.

Insufficient R&D talents issue is an industry-wide problem, with no exception to Nuara. Second,

due to its history and management culture, Naura is more like an SOE (state-owned enterprise).

Its SOE culture is tough for it to recruit and keep leading R&D researchers to develop advanced

semi equipment.

Applied

Materials ASML

Lam

Research

Tokyo

Electron

KLA

Tencor AMEC Naura

Lithography 0.2% 83.1% - - -

Photoresist Processing (Track) - - - 88.5% -

Etch, Clean, and Planarization 19.0% - 34.7% 25.2% - ~1% 0~1%

Deposition 37.6% - 21.0% 12.7% - ~40% MOCVD

Ion Implanter (Doping Equipment) 68.2% - - - -

Process Control 11.5% 5.9% - - 51.1%

Manufacturing Automation and Control 4.0% - - - -

Total Wafer Fab Equipment 18.5% 16.4% 15.1% 15.1% 5.5% ~1% ~1%

China Player

Chaolien Tseng

852 2101 6795

[email protected]

Hideyuki Maekawa

81 3 4550 9723

[email protected]

Yoshiyasu Takemura 81 3 4550 7358 [email protected] Haas Liu 886 2 2715 6365 [email protected]





4 November 2019


Figure 72: AMEC’s key customers by product

Equipment Customer type Major customers

Etch IC manufacturers, OSAT TSMC, SMIC, UMC, Huali, Hynix, YMTC, Winbond, China

WLCSP, GF, Bosch, STM

MOCVD LED chip, power discrete

manufacturers

Sanan, HC Semitek, Canyang Opto, Changelight


Figure 73: AMEC revenue by etch and MOCVD Figure 74: AMEC shipments by etch and MOCVD


Current market structure—silicon wafers

The wafer market is dominated by the five majors, which collectively control over 90% of the

market. Shin-Etsu Chemical and SUMCO are the two companies that have taken the lead in

wafers for cutting-edge nodes. Both companies have about 30% share of this market. For

Globalwafers, the company also gained share to 18% since the acquisitions of Topsil and

SunEdison in 2016, which also allow them to have global production base and support leading

edge foundries and memory makers.

There have been some regional players establishing joint ventures in China. Ferrotec has

established a 200 mm production base in Shanghai licensing technologies from GlobalWafers

since 2017. They further set up another joint venture as a sales agent for the 200 mm

production base, with 60% ownership by GlobalWafers and 40% by Ferrotec. Ferrotec also has

plan to build a 12” raw wafer fab to support local semiconductor demand. Additionally, RS

Technologies has invested in GriTek (GRINM Semiconductor Materials) in Beijing to make 200

mm prime silicon wafers. GriTek is 45% owned by RS Technologies, 49% by GRINM and 6%

by Fujian Kuramoto.

Figure 75: China silicon wafer suppliers far behind global suppliers

China players Market share Global players Market share Asian players to

displace Western

NSIG 0% for 12". 1-2%

for 8"

Shin-Etsu 30% ✔

Tianjin Zhonghuan

Semiconductor

<3% SUMCO 27% ✔

Regional players in

China

Market share GlobalWafers 18% ✔

Ferrotec –

GlobalWafers JV

5% for 8” Siltronic 15%

GRINM Semiconductor

Materials

~1% for <8”? SK Siltron 10% ✔

Source: Siltronix, Credit Suisse estimates

-

200

400

600

800

1,000

1,200

1,400

2016 2017 2018

Rmb mn

Etch MOCVD

0

50

100

150

200

2016 2017 2018

Shipments

Etch MOCVD

4 November 2019


For China domestic players, local wafer companies include NSIG and Tianjin Zhonghuan

Semiconductor. They are working to boost their product competitiveness by recruiting engineers

from overseas with detail below.

NSIG (National Silicon Industry Group): NSIG is formed through the consolidation of three

entities, including Zing Semiconductor, Shanghai Simgui and Okmetic. The company also tried

to acquire Siltronic in 2016 for technology and capacity though didn’t come through due to

concerns on IP leakage and the industry was at the inflection point for pricing upturn from more

balanced supply/demand following years of loss.

Currently, Zing Semi develops 12” silicon wafer. It was qualified to supply test wafers to some

customers in 2017, but our channel checks suggested that it hasn’t yet begun real volume

production. Its first phase of 100k 12-inch wafers/month capacity was built in 2018 and it has

begun building the next phase of 200k capacity. Zing Semi plan to reach 1 mn capacity in next

few years. It recorded Rmb25 mn/Rmb188 mn revenue in 2017 and 11M18. Shanghai Simgui

produces <8” EPI and SOI wafers and it licenses SOI technology from SOITEC. Based in

Finland, Okmetic is the seventh-largest silicon wafer supply for wafers used in manufacturing

MEMS, sensor, discrete and analog circuits. Its revenue is over €85 mn. NSIG’s consolidated

revenue was Rmb694 mn and Rmb1,010 mn in 2017 and 2018, mainly from the sales of 8”

wafers.

Tianjin Zhonghuan Semiconductor: Zhonghua is another China company which has

indicated strong ambition in developing and producing similar wafers. The company has 300k

WPM 8” raw wafer capacity in Tianjin in 2019 and targets to grow to 500k WPM in 2020. In

addition to 8” raw wafer capacity, the company also targets to grow its 12” raw wafer capacity

in its Yixin fab which is still under qualification by its customers. Although the company claims its

raw wafer technology and production capability has been qualified by 60 8” customers and is

under qualification by 20 12” raw wafer customers, we believe most of the raw wafers they

produce is still only for testing purpose and its technology and quality are lag by its global peers

by three to five years.

China's game plan

China government, either central or provincial, does not have separate policies specifically

supporting semi equipment or wafers. In general, for the semiconductor industry, the IC

Development Guideline is the top-level policy document. That said, it is widely recognised that

domestic customers (chip manufacturers) are encouraged to adopt equipment or wafers made

by China suppliers. China companies across all semiconductor sub-sectors have made efforts to

recruit international experienced talents to accelerate their R&D and expand their business.

For raw wafers, China government appears to subsidise around 20% of the purchase price

when China chipmakers purchase locally manufactured wafers. In addition, we believe local

government would encourage foreign raw wafer suppliers to set up fabs locally to ensure

sufficient supply amid macro uncertainty from the trade war.

Conclusion: Lagging in wafers and far behind in

equipment

Equipment still lagging 5-10 years behind global peers

For equipment, we estimate China players are at least five to ten years behind global suppliers,

or even longer for areas where not yet any volume production by China companies. We expect

the five-to-ten-year gap to continue in the foreseeable future, given the long development and

complex qualification required with chipmakers. That said, given China’s strong momentum of

domestic replacement, we expect some China players to shorten their gaps vs global players

(i.e., AMEC), while some may require even longer time.

Further, we remind that semiconductor makers are so keen on production yield and they have

relied on current global equipment suppliers to improve yields. It has been quite difficult to

change the suppliers unless China suppliers prove a huge technology advantage (less than 10%

4 November 2019


of performance gap may not be a trigger to change supplier). Price of equipment is not a critical

issue to change suppliers in the equipment market as production yield is quite an important

parameter for semiconductor makers.

Opportunities and challenges for China equipment and wafer suppliers are similar to all the other

semiconductor sub-sectors. Their great opportunities now are mainly driven by the strong

momentum of import substitution and domestic chipmakers are willing to try domestic solutions.

Key challenges are insufficient R&D talent in China and IP infringement risk.

China wafer makers unlikely to close technology gap

Although raw wafer is seen as a more commoditised product in the semiconductor supply chain,

we believe local Chinese wafer makers are unlikely to be able to close the technology gap with

the wafer majors and significantly boost their market share over the next one to three years.

Given also the size of the market shares commanded by Japanese, European, Taiwanese and

Korean makers, we do not envisage any noteworthy change in market share distribution. In

addition, we believe the raw wafer customers wouldn’t risk to switch raw wafer suppliers only

based on pricing as the raw wafers are essential and important for semiconductor

manufacturing, while only representing a small portion of the manufacturing (10-15% for 8”

foundries and mid-to-high-single-digits for 12” foundries).

At this point, we have ascertained the following major developments, although in all three cases

we understand there are unresolved technological issues. (1) Zingsemi is shipping 300 mm test

wafers to customers, but these are not ready for use in commercial mass production. (2)

Having hired in engineers from outside, RS Technologies has improved the technology of its

200 mm wafers, but not enough to catch up to the five market leaders. (3) Ferrotec has

increased the competitiveness of its product by licensing in technology from GlobalWafers, but

appears mainly to ship test and prime wafers and to a few China chipmakers that are not

particularly fussy about product quality.

As China chipmakers get up and running, growth in demand in the mature segment of the

semiconductor market that does not require high-end wafers should provide business

opportunities for China wafer makers.

4 November 2019


Enterprise and servers


US leadership in server declining

The global x86 server market had been on a favourable uptick trend with total units and vendors’

revenue growth of 6% and 14% CAGR from 2013-2018, respectively, driven primarily by the

growing infrastructure build-out from increasing cloud service penetration. Coming off

significantly above-trend 15%/35% unit/revenue growth in 2018, we expect the x86 market to

pause in 2019 as buyers digest excess capacity. However, longer term, we continue to be

believers in the rising value of data structurally increasing compute/server demand. US brands,

including HP and Dell, continue to dominate the x86 market with 12.8% (or 15.7% including

H3C) and 19.3% unit share, respectively. However, both of their market shares have been in

decline (Dell by 3.9 pp and 12.9 pp by HP/H3C from 2013 to 2018), due to the rise of ODM

Direct business models, particularly in the public cloud space, given concerns on total costs of

ownership supported by cloud operators’ in-house design and software capabilities. During the

same period, Chinese vendors’ market share has grown by 16.6 pp to reach 27.2% in 2018,

driven by: (1) an increase in China’s domestic share of the overall server market (6.9 pp); (2) an

increase in Chinese vendors’ share within the domestic market (4.4 pp); and (3) Chinese

vendors’ growth outside China (5.3 pp), most of all of which is from Lenovo who purchased

IBM’s x86 business in 2015. Supportive government policy has also been a key enabler of

growth.

Figure 76: US vendors HP and Dell still leading the market

despite overall shares declining…

x86 server market share % by total shipments

Figure 77: …due to the rise of new ODM Direct business

model and China vendors expansion

x86 server market share % by total vendor revenues

Source: Company data, IDC, Credit Suisse research Source: Company data, IDC, Credit Suisse research

For China vendors, we have included Great Wall, H3C, Hikvision, Huawei, Inspur, Lenovo,

Powerleader, Tongfang, Sugon, and ZTE into our analysis. According to IDC, the total unit

shipments from these China vendors grew by 19% CAGR from 2015 to 2018, representing

closer to 30% of the global units vs 20% in 2015. However, most of their shipments remain in

Asia-Pacific and more specifically China, in our view, with only three of the ten vendors,

including Huawei, Inspur and Lenovo, shipping to overseas markets. In 2018, only 18% of total

server shipments from China vendors were destined for markets outside of the APAC-region,

but up from 6-7% range from 2009 to 2013.

25.2%

12.8%

21.6%

19.3%

17.1%

25.5%

13.3%

19.8%

24.4% 24.2%

27.2%

10%

12%

14%

16%

18%

20%

22%

24%

26%

28%

30%

2014 2015 2016 2017 2018

HP Dell ODM Direct China

26.9%

15.5%

19.7% 20.6%18.1%

26.0%

8.2%

14.8%

17.8%19.3%

22.9%

0%

5%

10%

15%

20%

25%

30%

2014 2015 2016 2017 2018

HP Dell ODM Direct China

Jerry Su

886 2 2715 6361

[email protected]

Matthew Cabral

1 212 325 1754

[email protected]

Sami Badri

1 212 538 1727

[email protected]

Kyna Wong

852 2101 6950

[email protected]

US brands market share declining from the

rise of ODM Direct and China competition





4 November 2019


Figure 78: Only 3 of the 13 China vendors in our analysis have shipments outside of

APAC regions and shipments from most of which are still domestically focused

% of shipments


Among all the shipments made by the China vendors, the majority of them are volume servers

with an average selling price of below US$25,000, based on IDC definition. On the blended

basis, China vendors have an average selling price at US$5,826, or nearly 20% discount of the

global average of US$6,902. In the mid-range segment for pricing in between US$2,500 and

US$250,000, the market continues to be led by US vendors, including HP (39%), Dell (15%)

and Cisco (28%), and China vendors as a whole represent 11.5% of the total mid-range units.

High-end x86 enterprise servers (i.e., ASP above US$250,000) account for ~1% of the overall

market, with Huawei and Lenovo the only Chinese vendors competing. Oracle dominates the

overall market, representing 72% of the total units, followed by HP/Super Micro for 11%/7%

of the total units.

Figure 79: China vendors as a whole with majority of shipment still concentrate in the

volume segment

Source: Company data, IDC, Credit Suisse research

1% 6% 7% 5% 6% 6%17% 21% 18% 16% 18%

0%

20%

40%

60%

80%

100%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Exposure in APAC Exposure in non-APAC

Total High-End Enterprise Midrange Enterprise Volume

HP 12.8% 11.3% 38.8% 12.4%

Dell 19.3% 0.1% 15.1% 19.4%

ODM Direct 25.5% 0.0% 0.0% 25.8%

China 27.2% 4.1% 11.5% 27.4%

Inspur 7.7% 0.0% 2.1% 7.8%

Lenovo 6.5% 0.0% 6.6% 6.5%

Huawei 6.1% 3.5% 2.7% 6.1%

H3C 2.9% 0.2% 0.0% 3.0%

Sugon 2.6% 0.0% 0.5% 2.6%

4 November 2019


Figure 80: Global x86 server still selling at a premium of nearly 20% vs China

ASP in US$ (L-axis) and % of premium of global vs China

Source: Company data, IDC, Credit Suisse research

China vendors also catching up in networking

The Global Ethernet switch market has also been on an upward trajectory with total port units

and sales growing by 7.9% and 5.6% CAGR from 2013 to 2018, respectively, primarily driven

by builds-out of cloud infrastructure, proliferation of cloud services, and increasing wireless end-

point devices (we cover this extensively in our networking sector primer: Cloud Network Fabrics

Proliferate). In this market, US-based vendor Cisco is the single-largest player, constituting

about half of the market total sales, despite only shipping 22-23% of the total ports. Cisco’s

ability to have a large revenue share relatively to their port share is predominantly a function of

their enterprise business made up of the Fortune 1,000 companies across developed markets.

Additionally, Cisco’s dominant channel sales strategy with core value added resellers is a

strategic advantage for the company, capable of boxing out competing vendors out of core

enterprise deployments in most cases. Comparatively, China vendors as a whole including

Huawei, H3C, ZTE, TP-Link and Alcatel-Lucent Enterprise are trailing behind Cisco by a wide

margin. But the gap against Cisco has been narrowing from over 55 pp to ~32 pp in

2018/1H19, supported majorly by the home market demand growth along with a more

favourable government policy.

Figure 81: Narrowing total sales gap between Cisco and China

vendors

Market share as % of total sales

Figure 82: China total ports shipments already surpassing

Cisco in 2016

Market share as % of total ports

Source: Company data, IHS, Credit Suisse research Source: Company data, IHS, Credit Suisse research

0%

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$0

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$8,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1H19

China Global Global ASP premium vs China vendors

0%

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1H19

Cisco China

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40%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1H19

Cisco China

China Ethernet switch vendors also catching

up with support of home market demand and

more favourable government policy

https://plus.credit-suisse.com/r/V7cRzs2AF-e

https://plus.credit-suisse.com/r/V7cRzs2AF-e

4 November 2019


Figure 83: H3C, Huawei and TP-Link largest ethernet switch players in China

% of total China sales

Source: Company data, IHS, Credit Suisse research

According to IHS, China Ethernet switch vendors total sales increased by 37.8% CAGR for the

past five years vs ports units growth of 19.5% CAGR for the same period. Nevertheless, as

contrary to the server market, China vendors overall have been more reliant on the home market,

with total sales from China growing from ~20% in 2010-11 to over 70% in 2018, driven by the

rapid demand growth domestically, with China market sales tripling from 2013 to 2018 vs 30%

growth for the same period for the global markets. Specifically, H3C is the only brand deriving

all of its sales from China, while the overall reliance of other vendors, including Huawei, ZTE,

TP-Link and Alcatel-Lucent Enterprise, on the home market all declined from the 2010 level.

Figure 84: Increasing domestic reliance from the China

vendors driven by increasing China market size…

% of total sales (L-axis) and % of China vs global market

Figure 85: …however, H3C is only vendor with 100% of sales

from China; other vendors reliance from China declining

% of sales derived from China market

Source: Company data, IHS, Credit Suisse research Source: Company data, IHS, Credit Suisse research

Among all the port shipments made by the China vendors, the majority of them focus on the

50GbE and below port speed segment (i.e., 90% of total sales), despite that they are making

good progress into the 100GbE port speed, representing over 10% of the total market share in

2018. Comparatively, Cisco continues to dominate across the board despite larger share

erosion from the 100GbE port speed segment by the whitebox players and Arista Networks.

However, Arista is solely focused on high-speed switching of 100GbE and above currently, with

the majority of its share flowing in from major cloud providers.

0%

20%

40%

60%

80%

100%

2013 2014 2015 2016 2017 2018 1H19

Huawei H3C ZTE TP-Link Alcatel-Lucent Enterprise

24% 18%

37%46%

55% 53%65% 69% 72% 70%

7%

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6%

8%

10%

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100%

2010 2011 2012 2013 2014 2015 2016 2017 2018 1H19

Exposure in China Exposure in non-China % of China sales vs global

69%

58%

100% 100%100%

71%

42%37%

8%2%0%

20%

40%

60%

80%

100%

120%

2010 2011 2012 2013 2014 2015 2016 2017 2018 1H19

Huawei H3C ZTE TP-Link Alcatel-Lucent Enterprise

4 November 2019


Figure 86: Cisco dominating in ethernet switch; China players catching-up

% of market share


Figure 87: China vendors narrowing the pricing gap from global market

ASP per port in US$ (L-axis) and pricing gap (R-axis)


China's game plan

China MIC 2025 laying out concrete targets

China officially released the Made-in-China 2025 plan in 2015, aiming to support China

economic transformation, with key focus on promoting innovation, building internationally

competent companies, localising production and data, etc., through the use of state resource

and provision of financial policies, funds and subsidies support. Specifically, within the ten major

focus industries, China disclosed plans to have global market share for domestically produced

high-performance computers/servers to reach 30%, while the domestic market share to reach

60% by 2020, and the shares to reach 40% and 80% by 2025, respectively. It also aimed to

have domestically made high-end servers to represent over 50% of the domestic market; and

servers with domestically produced CPU to reach above 30% of the domestic market.

Figure 88: Overview of MIC 2025 targets set forth by China government on high-performance computers and servers

Source: U.S. Chamber of Commerce, Credit Suisse research

Total 100ME & 1/2.5GE 10/25/40/50GE 100GE

Cisco 50.4% 56.9% 50.0% 31.5%

Whitebox 2.8% 0.0% 1.7% 14.3%

Juniper 3.4% 1.3% 5.5% 4.8%

HPE (Aruba) 6.6% 9.0% 5.9% 0.7%

China 15.9% 15.7% 17.9% 11.2%

Huawei 9.1% 8.3% 10.5% 7.6%

H3C 4.8% 4.8% 5.3% 3.4%

ZTE 0.7% 0.2% 1.5% 0.2%

TP-Link 0.8% 1.7% 0.0% 0.0%

Alcatel-Lucent Enterprise 0.6% 0.8% 0.6% 0.1%

0x

10x

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$50

2011 2012 2013 2014 2015 2016 2017 2018 1H19

China ASP per port Global ASP per port Global ASP premium vs China

Timeline Overall market share targets Other industry specific targets

20201) International market share for domestically produced servers reach 30%;

2) domestic market share reach 60%

1) Achieving domestically produced servers for financial services and

telecommunications industries to reach 75% market share;

2) Achieve domestically produced servers for financial services and

telecommunication industries to reach 90% market share

2025

1) International market share for domestically produced servers reach 40%;

2) domestic market share reach 80%;

3) domestically made high-end servers share reach 50% in China

n.a.

China MIC 2025 set forth tangible market

shares targets by 2020 and 2025

China government supporting key domestic

leaders to develop high tech projects with

subsidies

4 November 2019


According to IDC, China server vendors total share internationally seems to be on a good track

to achieve the targets set forth under MIC 2025 plan with their total shares reaching over

27.2% in 2018 and 26.6% in 1H19 vs less than 20% in the end of 2015, while revenues

shares were lower given higher concentration from China vendors in the volume server segment.

Comparatively, China server brands total shares picked up more materially by over 12 pp in the

domestic market to over 62% in 2018 and 1H19 vs 50% in 2015 by unit shipments, or 17-19

pp to 62-64% in 2018/1H19 vs 45% in 2015 by sales.

Figure 89: China servers vendors global shares by unit

shipments increase 6-7 pp from 2015 to ~27% now

China vendors market share %

Figure 90: China server vendors’ shares increase even more by

over 10 pp domestically to represent over 60% of total shares

China vendors market share %

Source: Company data, IDC, Credit Suisse research Source: Company data, IDC, Credit Suisse research

China government subsidy supporting growth of domestic

leaders

In China, subsidy would typically be granted if companies develop high-tech projects that meet

the key milestones under the government policy or requirement for government, while the China

government tends to support key domestic leaders to achieve the targets. As server/switch are

involved with concerns on national security, we see key players have certain government

background from the management or major shareholders. For example, despite Huawei is a

private company, it is the national champion in the ICT industry. Also, Lenovo is a public

company but its ultimate shareholder, CAS Holdings, owns 29% of Legend which then owns

24% of Lenovo. Sugon’s major shareholder is a subsidiary of Institute of Computing

Technology Chinese Academy of Sciences; Inspur is owned by Shandong government (39%

stake); and H3C is under Unisplendour which is ultimately controlled by Tsinghua University.

Given such strong relationship with government among Chinese server vendors, we could

expect their milestone and mission in both the near-term and long-term timeframes are well set,

while subsidy serves to be source of sustainable capital to support the business development.

19.8%

27.2% 26.6%

14.8%

22.9% 23.0%

0%

5%

10%

15%

20%

25%

30%

2015 2018 1H19

Units share Revenues share

50.3%

62.5% 62.8%

45.1%

62.0% 63.5%

0%

10%

20%

30%

40%

50%

60%

70%

2015 2018 1H19

Units share Revenues share

4 November 2019


Figure 91: Government subsidies increased from Rmb1.26 bn

in 2017 vs Rmb232 mn in 2011

Subsidies in Rmb mn (R-axis) and capex % of subsidies (L-axis)

Figure 92: Subsidies received by Huawei exceeded combined

subsidies for Inspur, Lenovo and Sugon

Subsidies income in Rmb mn


Note: Total government subsidies by Inspur, Sugon and Lenovo


We compile total government subsidies received by the leading China server vendors including

Inspur, Sugon and Lenovo, from 2011 to 2018, while we exclude H3C and Huawei from our

time series comparison given the lack of historical data. Overall, total government subsidies from

the three leading server suppliers saw a significant pick-up along the years to Rmb1.26 bn in

2017, from Rmb232 mn in 2011. However, the total subsidies came down in 2018 due to

lower Lenovo contribution (i.e., down nearly 60% to 65% of total subsidies vs 87% in the prior

year), despite flattish amounts received by Inspur (12% of total), while Sugon subsidies income

increased by 1.1x (23% of total). Comparatively, Huawei’s subsidies income nearly doubled in

2018 from 2016 to Rmb3.0 bn, already 60% higher than the total amounts received by the

other three leading China servers supplier.

Conclusion

Server: China vendors may see more obstacles expanding

internationally

China is already nearing self-sufficiency in servers from a hardware vendor perspective with

Chinese vendors accounting for >80% of the domestic x86 market, per IDC. Given the

government’s China First strategy and its intention to break from the US supply chain, we

expect China server vendors to continue to expand their dominant position domestically. On the

international front, Chinese vendors’ share remains relatively small at ~6%, 70% of which is

Lenovo who purchased IBM’s x86 business in 2015. Inspur has been making good progress

internationally, supported by its JDM business model and alignment to OCP standards.

However, we believe rising security concerns—especially after a Bloomberg report in mid-2018

speculated on a hacking incident allegedly involving China-produced motherboards used in

Supermicro’s servers—will slow the progress on Inspur’s expansion at US-based customers in

both cloud/enterprise segments. By the same token, Huawei should also see more obstacles

expanding internationally, especially for the roll-out of its 5G infrastructure, and we believe it

could take longer for Lenovo’s DCG business to break-even. We also see limited room for other

Asian vendors to meaningfully displace more traditional market leaders; Fujitsu, which is the

largest, only has 2% global x86 revenue share. On the other hand, ODM Direct vendors

supplying cloud operators, specifically Quanta and Wiwynn, will continue to take shares from

traditional server brands, leveraging their enhanced customisation and hardware design

capabilities, on top of lower total cost of ownership.

0%

5%

10%

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25%

30%

$0

$200

$400

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2011 2012 2013 2014 2015 2016 2017 2018

Government subsidies (Rmb mn) Government subsidies % of total capex

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

2016 2017 2018

Inspur/Sugon/Lenovo subsidies Huawei subsidies

We expect China vendors to gain more shares

in servers especially domestically with policy

support; however, they may see more

obstacles internationally from recent security

and trade tension

4 November 2019


US server vendors adopting different strategies to secure leading shares

The two major US vendors, are likely to retain the largest market shares outside of China (ex-

ODMs) for the foreseeable future, though we’d note each is taking a slightly different strategic

approach to the market. Dell has been focused on expanding their leading market share with

trailing 12-month server revenue share having risen for the past ten quarters from a trough in

2016, though more recently, the momentum stalled in 2Q19 due to share loss in China where

they noted an increasingly competitive pricing environment. Going forward, we think there is

scope for Dell to continue to gain share, leveraging the EMC storage footprint to expand deeper

into enterprise accounts along with their “family” approach that better aligns innovation and

roadmaps across “core” Dell, VMware, and Pivotal. HPE has been more focused on margins

than share, working to shift their mix to higher ASP/higher-value areas of the market such as

high-powered compute, software defined, composable, etc. Part of this strategy involved exiting

the very low-margin Tier 1 (hyperscaler) market, which accounted for roughly half of their share

loss over the past two to three years, and is now essentially complete. Within the remaining

“Core” enterprise business we expect continued share loss ahead (CSe: ~1 pp annually through

2020) as they continue to focus on optimising mix and due to their outsized (~70%) exposure

to Windows based systems that have been ceding share to Linux systems.

Supply chain localisation a longer-term target

For supply chain localisation, we expect Chinese server vendors will increase their sourcing from

local components makers in the next few years; nevertheless, we expect majority of the BOM

should still be dominated by the US suppliers. Specifically, we see 40-50% of the total server

BOM associated with the chipset (Intel/AMD); 20-30% in memory (Micron, Samsung, SK

Hynix, etc.); and the majority of the remaining from storage (WD and Seagate). While we

believe China vendors are gradually catching up in their design capabilities and production

know-how as their learning curve scales along with international market share expansion, we do

not expect China to have a complete back-up solution, especially on the chipset. However, we

do expect sourcing of memory to shift to Japan/Korean players, as they move away from

Micron. Domestic sourcing will be encouraged, if CXMT/YMTC are able to deliver a successful

product, but our analysts believe that it is unlikely over the next five years (outside of some

consumer-level parts). Beyond the CPU, the other major obstacle to true Chinese self-

sufficiency in servers is operating systems where Windows and Linux continue to dominate.

Networking: Increasing competition pressure across all port speeds from China vendors internationally

For the networking market, we expect to see Chinese vendors to take more share overtime and

in the higher networking speeds of 100 GB+ from the low level today (10% of Chinese vendor

share in this speed) and expect to see more pressure on market share on US-based vendors as

political tensions persist. Where we see additional opportunities for Chinese vendors are

European developed markets where Germany recently called out that it will not ban Huawei

from its 5G build-outs, giving Chinese vendors more global opportunities for the networking

stack. For US overall switching, we expect to see Cisco, Juniper Networks, and HPE to

continue dominating the US share, with limited opportunity in China given the political tensions.

Finally, given the degree of R&D investments and supply chain ramp taking place in China, we

expect Chinese vendors to continue to dominate China, driven by domestic government policy.

Dell focusing on expanding leading shares;

HPE focusing more on protecting profitability

China will take long time to achieve supply

chain localization with key components

supplies still dominated by US suppliers

China vendors will gain more shares long term

in Ethernet switch from the US vendors, with

also increasing pressure to the higher ports

speed segment

4 November 2019


Display


China’s central government started pushing the construction of new panel fabs in 2009. Since

then, leading players for large-size display applications like BOE and CSOT have built new

facilities with the support of the central and local governments. Moreover, smaller players like

CEC-Panda, HKC, and CHOT were also supported by different provincial governments and

constructed several new fabs in the past few years. As of 1H19, Chinese panel makers

accounted for 41% of the area shipment for LCD TV, 36% for NB/tablet, and 30% for monitor.

Although the industry has been in oversupply, Chinese panel makers are still building new large-

size panel fabs (mostly Gen 10.5) and will begin mass production in the next one to two years.

Figure 93: Chinese panel makers grabbed 38% share for large-sized display in 1H19

Source: Company data, IHS, Credit Suisse

Adoption of flat-panel displays started from smaller-size handheld devices, such as PDA, laptop

computer and other consumer electronics. LCD panel replaced the CRT, becoming the

mainstream for monitors in 2005-06, and proliferated into TV since 2008-09. In 2009, Chinese

panel makers BOE and CSOT announced the making Gen 8.5 fabs, targeting TV applications.

These two fabs entered mass production in 2011-12 and China’s area market share for TV

panel increased from 1% in 2010 to 18% in 2015.

During the same period, Korean panel makers built two Gen 8.5 fabs in China, and Taiwanese

panel makers added some capacity to their existing lines, rather than constructing new fabs. In

2015-18, several new Chinese players started constructing new Gen 8.5/8.6 lines, while

BOE/CSOT also announced to build Gen 10.5/11 fabs. For the next few years, we still expect

Chinese panel makers to construct multiple new fabs for LCD TV and smartphone OLED

panels, although over-capacity continues in the industry.

OLED TV

LCD TV NB/Tablet Monitor Public Display

Samsung a r a a 13.7%

LGD a a a a a 21.1%

AUO a a a a 11.7%

Innolux a a a r 13.0%

HannStar a r 0.1%

Sharp a a r r 2.2%

BOE a a a a r 18.8%

ChinaStar a r r r 9.2%

CEC Panda a a a 4.2%

HKC a 2.3%

CHOT a 3.0%

Tianma a a 0.1%

Infovision a 0.1%

China's area share (1H19) 41% 36% 30% 8% 0% 38%

Large-area LCD Large size area

share (1H19)

Jerry Su

886 2 2715 6361

[email protected]

Keon Han

82 2 3707 3740

[email protected]

Kyna Wong

852 2101 6950

[email protected]

Sang Uk Kim

82 2 3707 3795

[email protected]

Mika Nishimura

81 3 4550 7369

[email protected]

China’s market share for LCD panels has

increased significantly in the past decade






4 November 2019


Figure 94: We see at least 10 fabs under construction/planning and will start production in next five years


As a result of aggressive capacity builds, Chinese panel makers have dominated the commodity

TV segment, such as 32”, 39”, 43” and 50”, as their capacity is more economic for producing

these sizes, as well as smaller sizes have lower technological entry barriers. As of 1H19, China

accounted for 41% of the LCD TV area market share, but 78% of the unit shipment comes

from 50” and below.

BeijingBOE:

G8.5G5

ChengduBOE:

G6G4.5

Tianma:G4.5

CEC-PandaG8.6

ChongqingBOE:

G8.5G6

HKC:G8.5 Fuzhou

BOE:G8.5G6

GuangzhouLG Display:

G8.5G8.5

Foxconn/Sharp:

G10.5Visionox:

G6

GuizhouHH/Century:

G6

HefeiBOE:

G10.5G8.5G6

Visionox:

G6

KunshanAUO:

G6Visionox/K&D:

G5.5IVO:

G5MianyangBOE:

G6HKC:

G8.6

NanjingPanda:

G8.5G6

OrdosBOE:

G5.5

ShanghaiTianma/AVIC:

G5.5G4.5G5

EDO:G4.5G6

ShenzhenCSOT:

G8.5G8.5G11

G11HH/Century:

G5Royole:

G6

SuzhouSamsung Display:

G8.5

WuhanBOE:

G10.5CSOT:

G6

G6Tianma:

G6G4.5

XiamenTianma:

G6G5.5G6

ZhengzhouHon Hai:

G6HKC:

G11

Under productionUnder constructionPlanning

ShanweiTruly:

G5G2

Huizhou:Truly:

G4.5

XianyangIRICO:

G8.6

ChuzhouHKC:

G8.6

MeishanTruly:

G5G6

GuanVisionox:

G8.6

In 1H19, China accounts for 41% of LCD TV

area share but 78% of unit shipments were for

50” and below

4 November 2019


Figure 95: Chinese panel makers’ TV panel unit share

surpassed Korean peers in 2017

Figure 96: …but its area share lagged behind Korean peers

until the crossover in 1H19

Source: his Source: his

For the IT panel market (NB/tablet and monitor), Chinese panel makers’ share expansion has

been slower than the TV in the recent years. We believe this is due to the fact that IT panels,

especially tablet and NB, are smaller and requires a thinner design, which is more suitable for

producing these panels in earlier-generation fabs (mostly Gen 5 and 6). Given China’s focus on

capacity expansion was on higher-generation fabs (Gen 8 and above), Chinese panel makers

have only seven Gen 5 and Gen 6 LCD fabs (~20% of global Gen 5/6 capacity). As a result,

we think its market share for IT panels would remain stable in the near term.

Figure 97: Chinese panel makers catching up on IT panel

shipment with 35% unit share in 1H19…

Figure 98: …but its area share still falls behind Taiwanese

peers

Source: IHS Source: IHS

For the small-/medium-size applications, Chinese panel makers have decent market shares

in most of the consumer products that use LCD display, such as smartphone (59% area share

in 1H19), tablet (53%), and smart watch (60%), especially for the mid- to low-end segments.

This is because of the lower entry barriers, as these products can be produced using the legacy

Gen 4, Gen 5, and Gen 6 fabs, and do not require the more advanced LTPS substrates.

Figure 99: Chinese panel makers have higher share for commodity LCD smartphone/tablet/wearable applications

Source: Company data, IHS, Credit Suisse estimates

14% 12% 6% 8% 8% 7% 5% 4% 3% 2%

46% 49%48%

30% 31% 29% 26% 26% 24% 24%

39% 37%34%

45% 43%40%

38% 35% 32% 29%

1% 2%11% 17% 18% 24% 31% 36% 40% 45%

0%

20%

40%

60%

80%

100%

2010 2011 2012 2013 2014 2015 2016 2017 2018 1H19

TV panel unit shipment share

China

Korea

Taiwan

Japan

15% 13% 8% 9% 8% 7% 5% 5% 4% 2%

51% 54%52%

31% 31% 28% 26% 25% 24% 22%

33% 32%31%

48% 48%47%

44% 42%39%

35%

1% 1% 8% 12% 13% 18% 24% 28% 34% 40%

0%

20%

40%

60%

80%

100%

2010 2011 2012 2013 2014 2015 2016 2017 2018 1H19

TV panel area shipment share

China

Korea

Taiwan

Japan

1% 0% 2% 1% 1% 2% 2% 5% 5% 5%

51% 54% 53%38% 39% 38% 39% 38% 38% 37%

41% 38% 35%50% 45% 44% 35% 26% 24% 23%

7% 8% 11% 11% 15% 17% 25% 30% 33% 35%

0%

20%

40%

60%

80%

100%

2010 2011 2012 2013 2014 2015 2016 2017 2018 1H19

IT panel unit shipment share

China

Korea

Taiwan

Japan

0% 0% 1% 1% 1% 1% 1% 3% 2% 3%

51% 52% 50%41% 40% 37% 37% 37% 37% 36%

42% 40% 38% 47% 45% 46%39% 32% 31% 30%

7% 8% 12% 11% 14% 16% 23% 29% 30% 32%

0%

20%

40%

60%

80%

100%

2010 2011 2012 2013 2014 2015 2016 2017 2018 1H19

IT panel area shipment share

China

Korea

Taiwan

Japan

Smartphone Tablet Automotive Industrial Smart watch Smartphone AR/VR Smart watch

BOE a a a a a a a a

ChinaStar a r

CEC Panda a

Tianma a a a a a a r

EverDisplay a a

Visionox a a

Infovision a a a

Truly a a a r a

Mantix a

Royole a

China area share (1H19) 59% 53% 25% 0% 60% 11% 0% 45%

S/M-sized LCD S/M-sized OLED

4 November 2019


For the LCD displays used in high-end products, such as iPhone, iPad, automotive, and

avionic, Chinese panel makers have relatively lower market shares. LCD iPhone displays are

supplied by LGD, JDI, and Sharp, while LCD panels for iPad are supplied by LGD and Sharp.

BOE entered the iPad supply chain in 2018, though limited to the lower-cost models. On the

OLED side, Chinese panel makers’ market shares have been increasing, especially for smaller-

size applications such as wearable watches, while OLED displays for smartphones is still

dominated by Korean suppliers for both rigid and flexible OLEDs.

Figure 100: Chinese panel makers lead in smartphone

shipment…

Figure 101: …but Koreans still dominate OLED panels


Although Chinese panel makers have established decent market positions in most of the end-

applications in the past few years, they still heavily rely on overseas companies to supply

processing equipment and key materials. For example, processing tools such as stepper for

LCD panels are supplied by Nikon and Canon from Japan, while the deposition equipment for

making OLED panels are sourced from Canon Tokki. For the key materials, Chinese panel

makers still rely on Corning, Asahi, and NEG for glass substrates, although there are some

domestic players such as Dongxu and Caihong that are able to supply glass substrates for

smaller-generation fabs. Other key components such as polariser, driver IC, and optical films

are also in a similar situation, wherein overseas suppliers remain in a dominating position given

the higher technology barrier and greater scale.

Using polariser as an example, Japanese supplier Nitto Denko mainly supplies polarising film

and other high-functional films for high-end models in smartphone. The company currently

supplies products to Chinese panel manufacturers for high-definition LCD and OLED

smartphone screens, and the share gain by Chinese panel makers will be a positive for Nitto

Denko.

China game plan

Focus shifting from LCD to OLED

The decision of constructing new display panel fabs in China is largely related to government

policy and incentives, as well as domestic market demand/self-sufficiency. China has been the

largest country for manufacturing TV since the CRT-era and it has accounted for over half of

global TV market in the last decade amid the LCD TV take-off. However, China lacked

indigenous panel-production capacity during the replacement of CRT TV with LCD TV. As a

result, the Chinese government announced its support of building high-generation panel fab in

2010 and implemented various measures to support the industry.

BOE and CSOT announced building their Gen 8.5 lines in 2009, and construction started in

2010 and mass production in 2H11. The central and local governments offered initial funding,

as well as subsidy, accounting for 30-35% of total investments. In 2010, China’s NDRC

decided to issue two more licenses for high-generation fab construction, with Samsung Display

(Gen 7.5, subsequently upgrading to Gen 8.5 in Suzhou) and LG Display (Gen 8.5 in

Guangzhou) selected, while other companies (BOE, Sharp, Foxconn) applied but didn’t qualify.

25% 24% 17% 15% 12% 9%

19% 17%

10% 9% 10%7%

27% 31%

37%34% 33%

32%

29% 29% 37% 42% 45% 52%

0%

20%

40%

60%

80%

100%

2014 2015 2016 2017 2018 1H19

Smartphone panel area shipment share

China

Korea

Taiwan

Japan

0% 0% 0% 0% 0% 0%0% 0% 0% 0% 0% 0%

100% 99% 98% 98% 95% 89%

0% 1% 1% 2% 5% 11%

0%

20%

40%

60%

80%

100%

2014 2015 2016 2017 2018 1H19

OLED smartphone panel area shipment share

China

Korea

Taiwan

Japan

China’s market share for high-end panels

remain low in 1H19

Key component and equipment are still

sourced from overseas suppliers

Government subsidies play an important role

on new fab construction

4 November 2019


Later in 2013, the approval power was released from the central government to the provincial

governments, consequently boosting the take-off of new fab constructions as local

governments offer various subsidy and incentives to attract investments for boosting local job

employment and tax revenue. For example, BOE announced the construction of 90k

substrates/month Gen 10.5 fab in Hefei in April, 2015, with a total investment of Rmb40 bn

(US$6.45 bn), where 45% of the investment is funded by Hefei government, 45% from local

banks, and only 10% from BOE.

Figure 102: Structure for new fab construction

Source: Credit Suisse Research

Another example is HKC, a TV set assembler with annual capacity of 22 mn LCD TVs, which

built a new Gen 8.6 TFT-LCD fab in Chongqing with capacity of 140k substrates/month and

started mass production in 2017. The total investment of the Chongqing Gen 8.6 fab is around

Rmb24 bn, where the local government subsidises half of the funding. HKC then announced its

second Gen 8.6 line in Chuzhou in 3Q17, with capacity of 120k substrates/month for mass

production in 2019. Total investment of the Chuzhou Gen 8.6 fab is around Rmb24 bn, with

local government funding 70% of the investment.

China government has continued to subsidise TFT-LCD fabs in recent years, but the amount

has been declining and it has become more difficult to get funding for new fab constructions

due to industry oversupply. Instead, the China government and the industry now aim to break

the dominance of OLED panels by Korean panel makers, with the construction of multiple new

lines, despite the poor production yield.

Focus is now shifting to OLED

China display industry is backed by China National High Technology Research and

Development Program, and Made-in-China 2025 policy. China has set a target to produce

300ppi small-to-medium-sized AMOLED panels with curve dimension of <1cm by 2020 and

foldable displays by 2025. Despite the Made-in-China 2025 turning low profile since the US-

China trade dispute, the progress of moving to OLED and building domestic display ecosystem

is still on track. Chinese panel makers started to spend significant capex from 2017 to expand

OLED capacities, triggered by Apple's adoption of OLED panel along with a massive subsidy

from the government. Several panel makers have announced to accelerate their OLED capacity

build-up plans including BOE, Tianma, EverDisplay (privately held), Truly, Visionox, Royole

(privately held) and CSOT. We estimate over Rmb400 bn of investment in OLED panel

manufacturing.

Hefei government funded 45% of BOE’s Gen

10.5 fab

Local government funded 50-70% of HKC’s

new fabs in Chongqing and Chuzhou

China is investing over Rmb400 bn in OLED

panel capacity

4 November 2019


Figure 103: Over Rmb500 bn investment from China panel makers

Company Fab Gen Type Production schedule Designed capacity

(K/M)

Total investment

(Rmb bn)

BOE Ordos 5.5 LTPS/AMOLED 4Q13 4.00 22.00

Chengdu 6 Flexible AMOLED 3Q17 48.00 46.50

Mianyang 6 Flexible AMOLED 3Q19 48.00 46.50

Chongqing 6 Flexible AMOLED 1H21 48.00 46.50

Fuzhou 6 Flexible AMOLED TBC 48.00 46.50

Visionox Kunshan 5.5 Rigid/Felxible AMOLED 2017 15.00 15.00

Gu'an 6 Rigid/flexible AMOLED 4Q18 30.00 30.00

Hefei 6 Flexible AMOLED 2021 30.00 44.00

Guangzhou 6 Flexible AMOLED TBC 10.00 11.20

EverDisplay Shanghai Quarter 4.5 Rigid AMOLED 4Q14 21.00 7.50

Shanghai 6 Flexible AMOLED 2019 30.00 27.28

Tianma Shanghai 5.5 Rigid AMOLED 4Q15 4.00 1.00

Wuhan 6 Flexible AMOLED 2H21 37.50 26.50

Xiamen 6 Flexible AMOLED 2022 48.00 48.00

Truly Huizhou 4.5 Rigid AMOLED 4Q16 15.00 6.30

Meishan 6 Flexible AMOLED TBC 30.00 27.90

Royole Shenzhen 6 Rigid/flexible AMOLED 2H18 50mn module 11.00

CSOT Wuhan 6 Flexible AMOLED 2020 45.00 35.00

Shenzhen 11 LCD/AMOLED 2021 90.00 42.68


China is aggressively moving to OLED, as (1) Chinese panel makers are able to obtain capital

resources from the government and the stock market, (2) OLED development is well supported

by National high-tech policies, and (3) Chinese players aim to surpass global peers by cutting

corners. We see a massive capex roll-out since 2017, mainly driven by BOE, while other OLED

makers also ramped up their production.

Shanghai’s EverDisplay started mass production of OLED panel for mobile applications in end

2014. Kunshan Visionox started production in end-2015. Tianma also started shipping OLED

panels for Chinese smartphone makers in 2016 from its Shanghai OLED fab, and mass

production of its Wuhan OLED fab in 2018. Truly announced its OLED production line to start

production in 4Q16. BOE started mass production of Chengdu flexible AMOLED panels in

4Q17 which was the first Chinese company to commercialise flexible OLED.

We note that the majority of the projects have been set up with government parties and listed

companies mainly hold a tens percentage of stake, which could help lessen the financial burden

of listed companies. We estimate Rmb25 bn/56 bn/53 bn of capex for OLED fabs during

2017-19 in China and expect Rmb74 bn/93 bn/65 bn in 2020/2021/2022.

Figure 104: Estimated OLED capex in China


0

20

40

60

80

100

2017 2018 2019 2020 2021 2022

(Rmb bn)

4 November 2019


Among Chinese OLED panel makers, Everdisplay and Tianma were successful in delivering rigid

smartphone OLED panels in 2016. Everdisplay started with non-smartphone applications such

as smart watches, industrial and other handheld devices and has taken two years to ramp up.

Tianma shipped only a small volume in 720p resolution at the beginning, but now its Wuhan

OLED fab can deliver rigid smartphone OLED panels at a reasonable yield rate. BOE started

mass production of flexible OLED smartphone panels from 4Q17 but ramping up took a long

time without a flagship model. Huawei Mate 20 was the first flagship model it successfully

shipped in 2H18, and now we see BOE is facing another technical issue on Mate 30 display

requirement. We see Chinese OLED panel makers are struggling to improve yield and reduce

cost. Longer term, we expect more Chinese OLED panel makers could deliver rigid OLED

panels, while BOE remains the leader in flexible OLED panels in the China market.

Figure 105: Chinese panel makers now account for 12% of

smartphone OLED panel shipments…

Figure 106: …with faster share gain for flexible OLED as BOE

ramps up its capacity


On top of financial support from the government, the Chinese panel makers also hired R&D and

process control talents from Taiwan (Chinese Taipei), Japan, and Korea in the past decades to

shorten the learning curve and catch up on premium products. As shown in figure 102, China’s

TV panel unit and area shipments have surpassed Taiwan in 2017, but it still lags behind in 4K

TV panels. Nevertheless, with the continuous R&D effort, it has now caught up with the 4K TV

panel shipment share, having surpassed Taiwan and on a par with Korean peers.

Figure 107: Chinese panel makers also catching up on 4K TV Figure 108: BOE’s R&D expense is now on par vs AUO+INX

Source: IHS Source: Company data

Government pushing the localisation of key component and raw material

Despite the success in taking over leadership on TFT-LCD panels over Taiwanese and Korean

peers, the majority of the key components and processing material for Chinese panel makers to

produce TFT-LCD still relies on foreign suppliers. However, the government has launched

subsidies and incentives since 2017 to boost the adoption of key materials from local vendors.

Global polariser makers like LG Chem and Samsung have set up production sites in China,

while Japanese Nitto Denko SDI is working with several local players by licensing its production

0% 0% 0% 0% 0% 0%0% 0% 0% 0% 0% 0%

100% 99% 99% 98% 94% 88%

0% 1% 1% 2% 5% 12%

0%

20%

40%

60%

80%

100%

2014 2015 2016 2017 2018 1H19

OLED smartphone panel unit shipment share

China

Korea

Taiwan

Japan

100% 98%89%

0% 2%11%

0%

20%

40%

60%

80%

100%

2017 2018 2019E

Flexible OLED smartphone panel unit shipment share

China

Korea

3% 5% 5% 6% 3% 2%

38%26% 25% 25% 24% 22%

48%59% 54% 51%

46%39%

11% 11% 16% 17%27%

37%

0%

20%

40%

60%

80%

100%

2014 2015 2016 2017 2018 1H19

4K TV panel area shipment share

China

Korea

Taiwan

Japan

0

200

400

600

800

2011 2012 2013 2014 2015 2016 2017 2018 1H19

AUO+INX's R&D BOE's R&DUS$ mn

Chinese OLED panel makers rely on overseas

supplier for raw material and equipment

Government encouraging the adoption of

localised material

4 November 2019


technology. Based on IHS’ estimate, China’s polariser capacity would reach 40%+ of global

capacity by 2021, up from 17% in 2017, although this is likely to lead to a severe oversupply

from 2021 onward.

For Nitto Denko, Korean and Taiwanese TV manufacturers account for a high share of its

business, and Chinese makers currently account for a low share. However, with Chinese panel

makers gaining ground, Nitto Denko opened a new plant in Shenzhen, China to manufacture

ultra-thin polarizing plate (volume production started 2018). The company is also reinforcing its

royalty business, including licensing out roll-to-panel technology to Chinese polarizing plate

makers and forming business partnerships in the industry. In 2017, Nitto Denko formed a

technology alliance with China’s Jinjang group, which will see Nitto Denko receive up to ¥15 bn

in royalties during the five-year agreement period.

In terms of the display driver IC, A-share-listed Sino Wealth and H-share-listed Solomon

Systech are two IC design houses shipping LCD and OLED driver ICs to domestic panel

makers, while BOE has set up a design house ESWIN. Nevertheless, their market shares

remain limited and Chinese panel makers still source driver ICs mainly from Taiwanese players

such as Novatek, Himax, Raydium, etc. Driver IC fabless design houses are also encouraged to

use local foundries for wafer processing and panel makers could also offer higher allocation if

the production of the driver ICs are done in China. Novatek has taken advantage of its strong

engineering capability and completed the qualification ahead of its peers at Hefei Nexchip’s 12”

fab for large-size DDI, which helped it to gain share over its peers at BOE in 2H18-1H19.

BOE’s affiliate ESWIN originally focused only on display driver IC design, but it has announced

to form a strategic partnership with Chipbond in Dec-2017 and has expanded into driver IC

backend packaging by acquiring a majority stake in Chipbond’s China subsidiary Chipmore.

BOE and Chipbond have also set up a new JV named ESWIN material, focusing on COF tape

manufacturing. Post the transactions, ESWIN now has a COF tape capacity of 50 mn

units/months, 8” bumping capacity of 40k wafers/month, and TCP/COF backend capacity of

40 mn/month.

Figure 109: Driver IC maker’s share in 1H19 (LCD+OLED) Figure 110: AMOLED driver IC market share in 2Q19

Source: IHS, Company data Source: IHS, Company data

In 2017-18, the China’s MIIT also encouraged display makers to use local processing materials

(chemicals, photoresist, gas, substrates, OLED materials, etc.) by offering cash incentives to

panel makers if they adopt a certain amount of local materials. The policy was changed in late

2018 to compensating panel makers if the local material/components failed and thereby

caused yield-loss during mass production. The new policy could potentially increase the

adoption of local materials, as previously, some panel makers would just buy some local

materials and store those in the warehouse without using those for production to apply for the

subsidy.

Samsung

28.6%

Novatek

20.4%Himax

8.0%SiliconWorks

7.7%

Sitronix

5.3%

Synaptics

6.0%

Raydium

5.6%

MagnaChip

4.0%

FocalTech

2.9%

Ilitek

2.6%

Fitipower

2.6%

ROHM

1.3%

Solomon

Systech1.2%

Others

3.7%

Samsung LSI

60.0%

MagnaChip

24.5%

Raydium

6.0%

Novatek

5.5%

Synaptics

3.0%Others

1.0%

4 November 2019


For OLED, Chinese panel makers still see limited supply from domestic vendors and purchase

equipment and raw materials from overseas vendors. We believe the lack of local supply chain

will likely prolong the cost reduction progress for panel makers. The quality of equipment and

materials also affects the yield of production. We expect Chinese panel makers to continue to

rely on overseas suppliers in consideration of the risks of production in terms of mature

materials, proven equipment and IP concerns. But in the long run, China aims to build up its

ecosystem through cooperation with overseas suppliers, M&A and government subsidy.

Figure 111: China OLED panel supply chain

Equipment Materials Driver IC AMOLED Panel 3D glass casing Handset

NAURA (002371.SZ) Jilin Optical (private) Sinowealth (300327.SZ) Tianma (000050.SZ) Lens Tech (300433.SZ) OPPO (private)

Han's Laser (002008.SZ) RuiYuan (private) Solomon Systech (2878.HK) BOE (000725.SZ) Biel Crystal (private) vivo (private)

Dalian Zhiyun (300097.SZ) Puyang Huicheng (300481.SZ) ESWIN (private) Truly (0732.HK) Tongda (0698.HK) Huawei (private)

Liande (300545.SZ) Valiant (002643.SZ) Visionox (002387.SZ) AAC (2018.HK) Xiaomi (1810.HK)

Selen (002343.SZ) EDO (private) Meizu (private)

Eternal Material (private) Olightek (private) ZTE (000063.SZ)

Kangdexin (002450.SZ) TCL (000100.SZ)

Lenovo (0992.HK)

Tecno (688036.SS)


Conclusion: Chinese display makers becoming more

meaningful but still lag key tools and raw material

Chinese display panel makers obviously have caught up on producing TFT-LCD panels,

especially for the commodity and lower entry barrier products. We expect their market share to

further increase as they ramp up new fabs, especially amid Korean panel makers’ strategy

change, although there is a concern that some smaller TFT players might not survive without

government subsidy.

Korean LCD makers to exit TFT-LCD manufacture

We fully expect Korean LCD makers to exit the TFT-LCD panel manufacturing over time. Most

of the LCD products are no longer profitable, and Korea's strategy is to move up the technology

curve to pure OLED production base while phasing out the existing LCD facilities. Both Chinese

and Taiwanese TV LCD panels have attained sufficient quality, where major TV brands such as

Samsung and LG Electronics (LGE) have been expanding panel procurement for TVs at lower

price points. High-end TV panels will move toward OLED TVs for both brands, with LGE

enjoying a head start. For example, While LGE still largely sources TV panels from its subsidiary

LG Display (LGD), the proportion has been declining, from 70% in 2015 to about 60% in 2018

and heading toward 50%, with Chinese suppliers gaining the bulk of the increase. This is to

improve the cost structure of TV sets. Generally, premium TV LCD panels will still be sourced

by LGD, while 100% of WOLED panels will be sourced from LGD as it moves to improve the

mix of OLED TVs to improve the TV profits.

Chinese LCD makers’ share could further

increase as Korean players exit the market

4 November 2019


Figure 112: LGE's TV panel technology hierarchy


Figure 113: LGE's TV panel procurement


Figure 114: Samsung's LCD revenue continues to slide


LTPS LCD production nearly phased out

For small TFT-LCD and LTPS LCD display, Samsung began phasing out production in 2014.

The company shut down the L4 (2014) and L5 lines (2015) in Cheonan mainly producing

displays for low-end smartphones. In November 2016, Samsung proceeded to shutdown L7-1

fab mainly producing LCD panels for laptop PCs and PC monitors, including oxide substrate

OLED TV

Ultra HD LCD TV (Nano Cell)

LCD TV

LG Signature

LG OLED TV

LG Super Ultra HD TV

LG Ultra HD TV

LG LED TV

40%

30%

70% 60%

Other Panel Makers;BOE, Innolux and etc.

LG Display

2015 2018

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1Q08 4Q08 3Q09 2Q10 1Q11 4Q11 3Q12 2Q13 1Q14 4Q14 3Q15 2Q16 1Q17 4Q17 3Q18 2Q19 1Q20E 4Q20E

Large Panel TFT-LCD Revenue

(W bn)

4 November 2019


based LCD. The equipment was sold to Truly of China. Additionally, in 2017, Samsung

proceeded to convert its L7-1 LCD line in Tangjung into an OLED facility.

Similarly, LG Display has closed its P2, P3 and P4 lines in Paju and Kumi, with most of the

AP2 lines used for making LTPS-LCD now being converted for the usage of OLED production.

While Samsung had sufficient internal smartphones to sell its LCD products, the strategic shift

to move toward OLED for the majority of its smartphones has prompted the move. Today,

Samsung produces no smartphone LCD displays internally. Instead, its early shift toward the

future of OLED displays enabled the company to enjoy near-monopoly status for more than a

decade. The OLED space is marked by fewer competitors and more advanced technology. The

near-monopoly status also enables the company to keep a tight control over its equipment and

material suppliers. OLED has grown into a K25 bn/year-revenue segment, with a much more

stable 10-12% sustainable OPM for the company.

Figure 115: Samsung: OLED has displaced LCDs and display revenue driver


Similarly, LG Display was initially the top LTPS LCD display supplier for Apple's iPhones. It also

supported its parent, LGE's smartphone initiative as well as supplying to the Chinese brands.

While the company still runs a profitable business in the oxide-based LCDs for AAPL's PC

monitors and laptops, the mobile LTPS display has also been phasing out as Apple began to

adopt more OLED displays in its iPhone models and the smartphone volume of LGE has shrunk

considerably.

As an LG Group strategy, developing OLED TVs was emphasised first, and then flexible mobile

OLED transition following Apple's iPhone shift. Currently, LG Display is the sole supplier of

WOLED panel maker enabling many flagship models for global TV brands such as LG, Sony,

Panasonic, B&O, etc. Much of the initial WOLED capacity was built by converting its 8G LCD

capacity into OLED production facility, and the brand-new fab is just starting production in

Guangzhou, China.

Figure 116: LGD's TV OLED capacity build-up


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2014 2015 2016 2019E 2020-2021ELGD - OLED TV capacity (K/mon, 8G)

P10?

4 November 2019


Conversion from LCD fabs to OLED capacity

Starting with the L7-1 conversion to flexible OLED line, Samsung has begun shutting down

more Gen 7 and Gen 8 LCD capacities, starting with L8-1. Potential planed capacity elimination

could run as high has over 200k 8G substrates, which could represent ~30% of the Samsung's

Korea LCD capacity. Much of the capacity loss is expected to be retrofitted to production of

QD-OLED, Samsung's version of TV OLED technology. The company has officially unveiled a

W13 tn capex plan for the next seven years, with about W10 tn expected to be spent mostly in

the OLED area and W3 tn in R&D. While TV OLED technology is largely still in R&D phase,

about 20k to 30k in 8G capacity will be built from the converted LCD fab for the initial trial run.

Given Samsung's vast experience in more difficulty mobile OLED R&D and production, the

company will likely enter successful mass production toward the end of 2021. Large LCD panel

business is currently loss-making and no is longer attractive for Samsung given the continual

supply ramp in China pressuring global LCD prices.

LG Display is in a more dire position as the majority of its revenue is still being generated from

large LCD panel sales. Given the current market price of various LCD panels, virtually all of its

products are loss-making, except for its oxide-based LTPS LCDs for special laptop and desktop

monitor use. While LGE has transitioned to TV OLED early, it has just now reached the B/E

point in the Korea operations, while the new China facility is expected to post losses in the near-

term due to high ramp-up costs and low initial yields. Additionally, in order to regain the loss of

LTPS-LCD sales to iPhones, the company has built three new 6G flexible OLED fabs (two for

AAPL) to address the growing OLED usage in the smartphone market and rising demand from

the auto industry. However, until the new OLED production sites are on a sound footing,

restructuring that will include executive layoffs, voluntary retirement of LCD manufacturing staff

and job reassignment are likely to continue. YTD, the company has accepted over 300

voluntary retirement requests from it fab personnel.

Figure 117: Both Samsung and LGD loss-making in LCDs


China to rely on Japan, Korea, and the US for key raw

material, especially OLED

For the higher-end LCD panels (such as 4K narrow border TV panels, in-cell touch display,

large-size TV panels, etc.), we believe Chinese panel makers could become the main suppliers

in the next two to three years as they overcome the production yield issues. For the more

advanced TFT-LCD panels, such as smartphone panel with full-screen fingerprint sensing, 8K

TV panels, miniLED BLM, high-refresh-rate displays, etc., we believe it will take more than

three years for Chinese panel makers to catch up with its Taiwanese and Korean peers.

In near-to-mid-term (one to three years), China display industry will likely focus on (1) building

its capability and scale in OLED panel manufacturing and high-end TV panels (55” or above, 4K

and 8K TVs) and (2) incubating domestic display supply chain. BOE will remain the national

champion in TFT LCD and flexible OLED, reach international footprint, and gain global

recognition. Entering iPhone OLED panel supply chain is a key milestone.

-40%

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1Q08 4Q08 3Q09 2Q10 1Q11 4Q11 3Q12 2Q13 1Q14 4Q14 3Q15 2Q16 1Q17 4Q17 3Q18 2Q19 1Q20E 4Q20E

Samsung LGD

More capacity to be shut down by Korean

panel makers

4 November 2019


We believe Chinese panel makers might use more local material and components for

manufacturing in the next few years, although they will still rely on overseas vendors for certain

high-end components that requires more fundamental research on material science. We believe

material/components such as ultrathin cover glass (Corning’s Gorilla glass or Asahi’s

dragontrail), large-size glass substrate (Gen 10.5), OLED polariser (film-type circular or liquid

crystal pattern), high-end optical film (quantum dot film), OLED materials, etc., will still be

dominated by overseas suppliers, given their know-how of raw material, formulation, and end-

customer’s decision. Despite US suppliers like Corning leads in glass substrate/cover glass and

3M leads in optical films, we believe Chinese panel makers could also source these materials

from Japan to reduce dependence on US technology. Form a long-term perspective, China

would grow its domestic supply chain to get a meaningful contribution from local panel makers

and reduce reliance on overseas suppliers, especially US vendors.

For OLED materials/components, we believe it will take longer for Chinese panel makers to

establish their own supply chain, primarily due to Samsung’s black-box strategy to protect its

core technology. OLED is generally a much more difficult technology to master, as it involves

much trial and error due to its analogue manufacturing processes. Furthermore, the pioneer and

the leader, Samsung Display, has wanted to strictly control the supply chain, including building

up its IP portfolio on production methods, equipment advancement, and upgrading organic

materials science. Samsung has even acquired some key OLED materials/equipment supply

chain (i.e., Vitex Systems or Novaled) and invested in some critical equipment suppliers with

~5-10% ownership and disallowed them to sell the most advanced OLED materials/equipment

to potential Chinese competitors. That said, even if a leading Chinese OLED panel maker such

as BOE keeps trying to mass produce flexible OLED panels, it will find it difficult to stabilise

yield rates or it will lag behind the technology curve as it will be tough to procure the

latest/advanced technology equipment/materials due to patent issues.

Particularly for OLED materials, some key suppliers such as Universal Display, Dow Chemical,

Idemitsu Kosan, Duksan Neolux, etc., are already the dominant players in its sub-segments

where Samsung Display is unlikely to approve of them providing advanced materials supply to

Chinese panel makers.

Figure 118: Advanced OLED panel components/materials supply chain (i.e., Galaxy Fold)


Samsung’s blackbox strategy for OLED will

slowdown China to build its own raw material

supply chain

4 November 2019


Components

We see China has dominated smartphone manufacturing, making half of the world’s

smartphones. China is also building its ecosystem and strengthening its global presence and

leadership in component makers. The Chinese smartphone market started with whitebox

smartphone manufacturing back in 2011-2012 and has passed through several generations

and brand reshuffles. At that time, the market was driven by operators with central procurement

on Rmb1,000 phones and the Top 4 domestic smartphone brands were ZTE, Huawei, Coolpad

and Lenovo. In 2014, operators cut handset subsidy which created open-channel opportunities

and intensified smartphone competition. Xiaomi successfully created its online business model;

while Oppo and Vivo are strong in the open channel, down to lower-tier cities in China. Huawei

was relatively sustainable in past generations and remains a top-tier smartphone brand. The Top

4 Chinese brands (Huawei, Oppo, Vivo, and Xiaomi) accounted for 39%/45% of global

smartphone shipments in 2018/1H19. Huawei, Oppo and Xiaomi are also ranked among the

global Top 5 smartphone makers.

Figure 119: Increasing brand concentration (Top 5: 67% in

2018)

Figure 120: Rising penetration of Chinese brands smartphone


China grows its smartphone supply chain by entering Apple supply chain and leveraging the

learning experience from making feature phones for Nokia and Motorola. We have seen Apple

shifting its component supply chain from Japan to Taiwan (Chinese Taipei) and then to China in

past decade. Domestic smartphone brands like Huawei, Oppo, Vivo and Xiaomi have also

grown their domestic supply chain along with increasing manufacturing scale.

Figure 121: China/HK: 21% of total no. of Apple suppliers Figure 122: Almost half of production sites based in China


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US China Taiwan Japan Korea Others

Kyna Wong

852 2101 6950

[email protected]

Pauline Chen

886 2 2715 6323

[email protected]

Sang Uk Kim

82 2 3707 3795

[email protected]

Mika Nishimura

81 3 4550 7369

[email protected]

Akinori Kanemoto

81 3 4550 7363

[email protected]

Jerry Su

886 2 2715 6361

[email protected]







4 November 2019


We have seen Apple supply chain moving from the US and Japan to China in the past five years.

China suppliers accounted for 21% of the total number of Apple suppliers in 2018, from 12%

in 2013. 47% of manufacturing locations were based in China in 2018, vs 44% in 2013. As

the major EMS is located in China, its supply chain has established production capacity in China

in order to shorten the lead time and reduce logistics cost.

Chinese components suppliers are well established in certain components such as acoustic

(speaker, receiver), haptic, cover glass, wireless charging module, connector/cable, battery

module, etc., in the Apple supply chain, with a major share allocation (over 50%). We see

domestic supply chain as sufficient to supply key components for Chinese smartphones and we

believe domestic substitution is a key trend for components supply chain. We see components

still relying on foreign suppliers including CIS, VCM, MEMS chips, HDI/SLP PCB, battery cell

and MLCC. We analyse the current market structure, how China would develop its home

industry and the near-to-long-term prospects by key sub-sectors—camera components (lens,

module, CIS, 3D sensing), PCB/substrate, casing, antenna, acoustic, power supply/battery

and MLCC. Display is discussed in a separated session.

Figure 123: Domestic smartphone component suppliers


Acoustic


For miniature acoustic products, including receiver, speaker and MEMS microphones, we see

the Apple supply chain relatively concentrated, and the Android market relatively fragmented. A

few major products are driving growth and upgrade trends in the acoustics area.

Cover glass

Lens, Biel Crystal

Camera

Lens: Sunny, AAC,

O-film, Star JuYu, LceOptic, Huaxin

Module: O-film, Sunny, Q Tech,

Holitech, Truly, Luxvision, Shine, SZSeasons

CIS: Omnivisoin, Galaxycore,

SuperpixVCM: Hozel, ZET,

Shicoh, JssOpitcal

Display

BOE, Tianma,

CSOT, Visionox, Everdisplay, Truly

Acoustic

AAC, Goertek,

Luxshare

Casing

Lens, Biel Crystal,

BYDE, AAC, Everwin, Tongda, CN

Innovations

Antenna

Sunway, Speed,

AAC, Luxshare, JESONcom, Deman

EMS/ODM

BYDE, Huaqin,

Wintech, Longcheer, SIM Tech

Fingerprint

Module: O-film, Truly,

Q Tech, HolitechSensor: Goodix, Silead,

Fortsense

Haptic/vibrator

AAC, Luxshare,

Jinlong

Battery

Sunwonda, Desay,

ATL

Connector

Luxshare, Sunway

PCB/substrate

SYE, WUS, SCC,

Avary

MLCC

Fenghua, Three

Circle, Torch, Hongyuan,

Sinocera, Sunlord, Hongda

4 November 2019


We expect an upgrade trend for Android acoustics, e.g., AAC’s SLS or Goertek’s SBS

penetrated mid-tiered models, expecting uptrend in both shipment/ASP. AAC also

released Classic SLS speaker for high-end smartphones, with increased vibration area,

new metal housing design, offering 40% improvement in acoustic performance and better

noise cancellation and waterproofing abilities.

High-end Android speaker/receiver ASP is ~US$1-2, or about half the ASP of similar

components of iPhone. For low-end, ASP is only ~US$0.5. We estimate the Android

acoustic market by our Android shipment units, and the market share of AAC acoustic

components among Android supply chain is ~17%, and Goertek ~5% in 2018, and expect

AAC’s share to expand to 30-40% and Goertek’s market share to 9-12% in 2020/21E.

We see another strong growth driven by TWS earphones in the acoustic area. Counterpoint

forecasted TWS shipment to reach 27 mn units globally in 2Q19, up 54% vs 17.5 mn in

1Q19. 2019 shipment is expected to reach ~120 mn units, with YoY growth of 160%+.

For Apple AirPod, we forecasted global shipment to reach 40-50 mn/55-60 mn units in

2019/20E. For Android TWS, Samsung (Galaxy Bud) is the leader in the Android camp

and Counterpoint estimated it having ~8% market share. With the release of Huawei TWS

FreeBuds 3, together with the release of new Android smartphone models, from Huawei

and Xiaomi, we expect the market share from Android TWS to increase.

For global smart speakers, Canalys estimates continuous strong growth in 2Q19, with

global shipment reaching 26.1 mn units, up 55% YoY, with Amazon Echo still the market

leader (25.4% share), followed by Baidu’s 17.3% market share. Within the Top 5 players,

three Chinese players accounted for 44% share in 2Q19 (up from 31% in 2Q18). We

believe that smart speaker growth will mostly benefit MEMS microphone and speaker

module suppliers, as smart speakers usually use MEMS microphone arrays (usually from 2-

12 MEMS microphones). MEMS microphone arrays provide better far-field voice

recognition, noise reduction, reverberation elimination, echo reduction, etc. Goertek

mentioned it has a large order pipeline and targets mass production in 2020.

MEMS microphones are seeing a growth trend, driven by wide adoption in smartphones

(e.g., iPhones), and strong growth of smart speakers and smart home appliances, as their

voice recognition function relied on MEMS speaker arrays, which also helped realise the

noise reduction function. We estimate the MEMS microphone market size to be US$1.2

bn-1.7 bn in 2019, with expected CAGR in the low-teen level over 2019 -2025. MEMS

microphone has a smaller package size, lower impedance, and more scalable with better

sound quality than traditional (ECM) microphones, and is widely adopted in smartphones,

laptops/PCs, cameras, and automobiles.

Competitive landscape

Acoustic product GM varies in the range of 25-40% in recent years, and we see AAC’s

acoustic components’ average GM higher than Goertek’s. MEMS components GM is in the

25%+ level in 2018. However, the Luxshare/Merry joining the Apple acoustics supply chain

has driven down the acoustics GM, especially for AAC which lowered from ~41% in 2017 to

~37% in 2018 and ~27% in 1H19, and we expect it to stay in the 30%+ level up to 2021.

In the Apple supply chain, we see AAC, Goertek and Merry/Luxshare as the Top 3

suppliers for acoustics products, including receivers and speakers, for different products

such as iPhone, iPad and Apple Watch. In the speaker market, Goertek is still the market

leader, with 40% or higher market share, but is likely to reduce to below 40% from

2020E—Merry and Luxshare have quickly gained market share (more from AAC) since late

2017 by entering the Apple supply chain to supply for iPhones. In the receiver market, we

expect Merry and Luxshare to quickly gain share from 2018 and rise to the No. 1 position

from 2019, with ~40% market share. Overall, Merry and Luxshare were the biggest share

gainers since 2018 in the Apple supply chain.

4 November 2019


Figure 124: Speaker market share and estimates Figure 125: Receiver market share and estimates


For Android acoustic (speakers and receivers) supply chain, we estimate market leaders

AAC and Goertek accounting for ~17%/5% in 2018; other players include Knowles

(KN.O), Merry (2439.TT), Hosiden (6804.TYO). The market for Android micro speakers

and receivers is still more fragmented than Apple acoustics.

For TWS, we believe Luxshare and Goertek will continue to gain market share from

Inventec and become the dominant suppliers for AirPods from 2020. Goertek sees strong

growth in its hearable business in the next two to three years, driven by AirPod and other

brands. The company’s investment in common equipment for AirPod with process and

efficiency reached the industry level, and it claims that its TWS’ yield and efficiency have

exceeded customer request.

Figure 126: AirPod shipment estimate by supplier


MEMS microphone: The Top 3 suppliers of MEMS microphones are Knowles, AAC and

Goertek. In terms of global market share in MEMS microphone, we estimate

Knowles/Goertek/AAC to be ~50%/15%/9%. Other players include ST Microelectronics,

BSE, NeoMEMS, Hosiden, Sanico Electronics, Bosch, MEMSensing, and InvenSense. The

core competitiveness for MEMS microphone is the MEMS IC. For a long time, the MEMS IC

supply was largely dominated by Knowles. But we saw AAC invested in Vesper Tech to

produce MEMS IC, ~10% MEMC IC is self-designed, and we expect this share to continue

to go up. We believe this technology advantage could help increase AAC’s market share in

smart speakers.

For speaker/receivers, as the technology has been more mature, we see the growth is

more tempered. Luxshare focuses on earphones for entertaining-use and high-power

speakers. Luxshare’s product offering focuses on high-quality speakers, capturing the

strong demand from smart speaker growth. The entertainment business sector will also

benefit from the smart home-related demand. Luxshare’s JV leverages the client base and

resources from parent companies.

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4 November 2019


Divergence in development directions for Chinese acoustic leaders: Goertek and AAC have

different development directions besides their major products in acoustics—Goertek

focuses on expanding its footprint in wearables, AR/VR products, integrating capabilities

for components, accessories and overall solution assembly; while AAC is focusing on

expanding its components offering to optics, such as WLG lens and precision components

for antenna uses for 5G smartphones.

The Chinese game plan

Similar to other components sectors such as casing and camera modules, government

grants/subsidies have been in the single-digit % of NI for AAC and Luxshare in recent

years; but for Goertek, it was much higher, at double-digit %, reaching 30% in 2018. Also,

the government grants/subsidies % of NI for Luxshare are relatively low and in a

decreasing trend, while that for AAC and Goertek were in an increasing trend for the past

few years, implying a lower reliance on government subsidies for Luxshare and stronger

execution vs its peers. The majority of Goertek’s government subsidies was from the

Weifang City or Shandong Province—for example, 81% in 1H19 subsidies was from

Weifang City’s Corporate Innovation Development Fund, and 57% in FY18 subsidies was

from Shandong Province’s special fund to support the growth of super-large-scale

companies in the province. The subsidies usually came in the form of awards or grants, and

mainly support R&D, equipment upgrade/expansion, commercialisation of new

technologies, talent attraction, etc. Similar to other high-technology companies, acoustics

players also enjoy VAT refund and preferential tax treatment from the Chinese government.

For Luxshare, the government subsidies include support for technology revamp/upgrade,

and some refunds regarding land use. For AAC, the government grants are related to

engagement in high-tech business, employment of expatriates, and technologically

advanced staff, as well as for acquisition of PP&E.

To reduce reliance on overseas IC supplies, Chinese players also have

developed/developing their own chipset—for example, Goertek has built a factory to

produce MEMS chips. However, the relatively lower reliance on government funding

indicates Chinese players’ have developed in-house technology organically, which helped

them achieve global leadership positions in the acoustics market. Such in-house

capabilities will likely support them to further enhance new technology capabilities. We see

a high R&D expense share % to revenue from the Chinese acoustics providers: AAC

reached 11%, while Luxshare reached 7% and Goertek ~5% by 1H19 results. Continuous

R&D provides a strong support for the technology advancement of Chinese acoustics

players.

Figure 127: Government subsidies as % of NI for leading

Chinese acoustics companies

Figure 128: R&D expense as % of revenue of leading Chinese

acoustics companies

Source: Company data Source: Company data

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4 November 2019


View on near-term and mid-to-long-term development

We see low overseas reliance on acoustic components, but continuing reliance on overseas

codec chip and MEMS chip in mid-to-high-end smartphones. We expect Chinese players to

continue to gain shares in key areas and see that they have already achieved dominant market

shares in the Apple acoustics supply chain, for speakers and receivers. AirPod production is

expected to be also largely divided between Luxshare and Goertek. In the MEMS microphone

market, Chinese players are quickly catching up with Knowles. Goertek and AAC are producing

MEMS IC and looking to increase the self-supply ratio of MEMS IC. We expect the Chinese

players to take longer to realise domestic substitution for MEMS IC—more of a medium-term

effort (three to six years). In the smart speakers market, we are already seeing an increase in

market share from both the end-product perspective—with Baidu, Alibaba and Xiaomi entering

the Top 5 global brands—and the supply chain perspective—with increasing share gains by

Chinese players such as AAC and Goertek.

Overall, we think the opportunity for China to realise domestic substitution in acoustic

components is high, with the majority to be realised in the short term (within three years),

except for key components such as MEMS IC which may take longer, likely in the medium term

(three to six years).

Antenna


We focus on antenna for mobile devices in this section. The major driver for mobile antenna

is still from smartphones, with trends of a rising number of antennae and of modularisation

(integrated packaging with other components). We forecast a 10% CAGR for the market

(shipment demand) over 2018-21, driven by 5G upgrade. The top vendors in the mobile

phone antenna market are Amphenol, Pulse, Molex, Skycross, Galtronics, Sunway, Speed,

JESONcom, Auden, Deman, Ethertronics, Sky-wave, 3gtx, and Southstar.

Figure 129: Global mobile device antenna shipment to grow at 10% CAGR for 2018-

21E

Source: Credit Suisse estimates

FPC antenna is a common type of antenna used in mobile devices. Polyimide (PI) is the

major type of materials used for flexible antenna, given its cost advantage, high resistance

to humidity, and good heat dissipation. In the value chain of PI or modified PI, we see the

US, Taiwan (Chinese Taipei) and Japan companies dominating in material/film supply

space, and the US and Taiwan (Chinese Taipei) companies dominating in the flexible

copper clad laminate (FCCL) space. China and Taiwan (Chinese Taipei) companies are

mature in flexible board manufacturing for PI type antenna.

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4 November 2019


Figure 130: PI/MPI antenna value chain

Material/film FCCL Flex board

Du Pont (US) Du Pont (US) Avary (TW)

Taimide (TW) Shengyi (CN) MFLEX (CN)

Mortech (TW) Taiflex (TW) Flexium (TW)

UBE (JP) Thinflex (TW) Career (TW)

Mitsubishi Gas (JP) AEM (TW)


Apple adopted liquid crystal polymer (LCP) antenna from 2H17 iPhone and then moved

one LCP to MPI in 2H19 for LAT (Low Antenna) on cost concerns, while UAT (Upper

Antenna) remains using LCP materials. In iPhone antenna supply chain, we see as Murata

dominant in upstream supply and involved in FPC and module assembly. Amphenol and

Luxshare are another two LCP module suppliers. In the general LCP antenna value chain,

Japan companies are dominant in LCP resin/film supply. Chinese companies are able to

provide downstream processes such as FPCB and module assembly. Sunway could get

30-40% share allocation in Macbook and iPad FPC antenna, while Luxshare could get 40-

50% share allocation in iPhone LCP antenna module, in our view.

Figure 131: LCP antenna value chain

LCP resin LCP film LCP FCCL LCP flex board LCP module

Sumitomo (JP) Sumitomo (JP) Sumitomo (JP) Sumitomo (JP) Sumitomo (JP)

Rinkuru (JP) Murata (JP) Murata (JP) Murata (JP) Amphenol (US)

Toray (JP) Kuraray (JP) Rogers (US) Rogers (US) Murata (JP)

Polyplastics (JP) Du Pont (US) Shengyi (CN) MFLEX (CN) Luxshare (CN)

UENO (JP) Gore-Tex (JP) Thinflex (TW) Kinwong (CN) Sunway (CN)

Mitsubishi (JP) WOTE (CN) Career (TW) ECT (CN)

Celanese (US) Pret (CN) Speed (CN)

Solvay (EU) AAC (CN)

WOTE (CN) Forewin (CN)

Pret (CN)


Chinese game plan

We think FPC antenna is a component that China learns from and grows with its

customers. Back to 2000, or the Nokia and Motorola generation, Laird, the largest

antenna supplier, entered the China market and set up production plants in China. Sunway

acquired Laird (Beijing) in 2012 and entered the Apple supply chain later. Chinese

companies entered the market by mergers and acquisitions in the early stage.

Under the Made-In-China 2025 policy, we do not see a specific roadmap and goal setting

for FPC antenna, but it identifies the key technology, including large-scale array antenna

for communication infrastructure. Given the target China has set to build up its capability for

5G network, antenna design is also a key technology to develop its in-house capability.

The upstream supply chain is still dominated by overseas vendors, while China has been

building its capability downstream, including flexible boards and module assembly. Shengyi

is the domestic vendor that is able to supply FCCL. We see Sunway, Speed, Luxshare,

JESONcom, Deman as the major domestic players, and AAC as an emerging player.

We do not see a massive subsidy supporting this industry development—it depends on the

local government’s investment promotion and industry development plan. For the 5G

antenna development project, local companies can apply for R&D grant and subsidy. We

also believe the Chinese government would support the upstream development on

materials/film as well as CCL.

4 November 2019


View on near-term and medium-to-long-term development

We believe China will strengthen its domestic value chain and ecosystem by moving

upstream in the FPC antenna industry, somewhat overlapping with the PCB industry. We

think industry/enterprise investments will move from FPCB and antenna module assembly

to CCL midstream in next one to three years. Besides, local government or institute will

continue to invest in R&D for 5G antenna design, materials/resin development, etc. In the

long term, China would like to catch up with Japanese or US chemical companies in resin

and film manufacturing.

5G smartphone antenna upgrade and local substitution are two opportunities for local FPC

antenna suppliers. Challenges remain in terms of insufficient domestic materials supply, but

M&A or equity investments in overseas suppliers would be a way to build up a connection in

the upstream supply chain.

Casing


In the casing industry, current major materials include plastic, metal, glass, glastic and

ceramic. Plastic is commonly used for mid-to-low-end smartphones, while metal casings

are used in mid-end models, glass casings are used more in mid-to-high-end models.

Glastic casing offers a cheaper solution than glass but assembles some qualities similar to

glass, which has been adopted in mid-to-low-end models. We see 3D glass casing in the

uptrend, driven by (1) improving yield, (2) decreasing costs (cheaper than ceramic), and (3)

better suited for 5G smartphones as glass casing will not block RF signals as metal casings

do. Ceramic casing still faces the challenge in scale production and yield, leading to higher

ASP, so it is adopted more by flagship models. Glass casing is also suitable for wireless

charging as it does not block electromagnetic waves.

Within glass casing, 3D glass is gaining popularity along with rising adoption of flexible

OLED panels. Glass casings are also adopted in smartphones, tablets, smart TVs and

wearable products, due to their pricing and quality advantages. Heat bending machine is no

longer the bottleneck for 3D glass manufacturing, with a lower share in the overall cost

structure on technology maturity in the past two years.

In global smartphone back-cover shipment, penetration of plastic casing for smartphone

back-cover decreased from 89% in 2011 to 35% in 2018 and will likely rebound to 40%

due to glastic technology. Metal casing replaced plastic along with the launch of unibody

metal casing in iPhone. The adoption increased to 45% in 2017, but decreased in 2018

and will further decrease in 2019-21. The trend of metal cover will become the mid-frame

mechanical structure, supporting glass-casing smartphones. Glass casing’s share reached

34% in 2018, surpassing metal casing’s 30.2%, and it is expected to further expand to

39% in 2019E, mainly driven by 3D glass casing, whose share is expected to reach ~20%,

almost on a par with 2D/2.5D glass casing’s share. We forecast ceramic casing reaching

6% share by 2021.

4 November 2019


Figure 132: Global smartphone back cover share – increasing

share of glass casing mainly driven by 3D

Figure 133: Glass to achieve 40%+ penetration on back-casing

in China in 2021

Source: Credit Suisse estimates Source: Credit Suisse estimates

Android glass casing: We see the majority of HOVX flagship and high-end models

(roughly US$500+ models) adopting 3D glass casing in 1H19, and shipment could add up

to ~27 mn units. We think this trend will continue next year. We think competition in 3D

glass is still manageable, with Biel Crystal (private), Lens Tech and BYDE sharing the

Android market. However, we have seen slow growth with flattish market share and

intensified competition in the US$300-500 segment, which could limit the adoption of 3D-

glass unless ASP can be significantly reduced. For Apple glass casing, our check

suggests a more complicated process and potential composite change in 2H20 iPhone

glass casing. In terms of ASP change, our check suggests 40%+ ASP increase in back

glass, and next year we expect another double-digit growth on composite change.

Glastic casing: An important direction is the development of glastic casing, which offers a

lighter weight but look and feel close to glass cases. Leading Chinese players in this field

include CN Innovation and Tongda. Tongda’s IMT (In-Mold Transfer) technology could

improve anti-fingerprint, wear resistance qualities. Tongda also expects rising ‘glastic’

adoption and its share gains at Samsung and Vivo (a new customer from 2019). Tongda

will also unveil a next-generation 3D ‘glastic’ casing, ICM (injection compression moulding)

in 2H19. Despite average glastic casing pricing likely to decline ~US$0.5 per year, as for

the current 2.5D glastic, the new 3D ICM glastic, with 20%+ higher pricing, should help

stabilise the corporate ASP.

Figure 134: Global smartphone glass demand (front + back) Figure 135: China smartphone metal-casing peaked in 2017


89%80% 80%

76%68%

51%

39% 35% 40% 42% 41%

3%10%

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2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Plastic Metal casing Glass 2/2.5D Glass 3D Ceramic Others

100% 100% 98% 92%83%

57%

41% 39% 42% 44% 42%

2%6%

13%

37%

51%

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2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Plastic Metal casing Glass 2/2.5D Glass 3D Ceramic Others

0

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2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

mn units

2D 2.5D 3D

0

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2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

mn units

Metal casing Metal mid-frame

4 November 2019


Ceramic casing: Besides the cost/yield issue, we see another challenge—the

electromagnetic shield of ceramic casing is stronger than glass but weaker than metal, yet

it is to be tested for the applicability for 5G smartphones. We expect the penetration rate to

be in single-digit % by 2021E. Currently, Lens Tech and Three Circle (300409.SZ, not

covered) have implemented production lines for ceramic casing.

Figure 136: ASP trend down across multiple casing materials Figure 137: Metal mid-frames growing fast globally/in China


Competitive Landscape

Overall, the casing market is fragmented, and we see Taiwan suppliers

(Foxconn/Catcher/Casetek) mainly focusing on metal casing for Apple products, including

Macbook, iPad and iPhone. Taiwanese suppliers hold over 90% share (in terms of value) in

the MacBook business, with Everwin supplying the bottom casing for Macbook. Our

channel check indicates Apple watch casing could be provided by Chinese suppliers with

plants in Huadong region, Taiwan suppliers have less exposure, and Casetek getting into in

2H19 and 2020, probably starting with small shares. We see Everwin wanting to enter the

Macbook casing chain but not qualified yet on lagging in metal casing technology. Thus we

see the two groups of players competing in different fields. In Android, FIH, BYDE, Tongda,

Everwin and AAC are the major players.

For Apple products glass casing, we think Lens and Biel remain the two key players, with

difficulty continuing to increase. BYDE and Foxconn are still lagging much behind and are

finding it hard to get in as they do not meet the quality standard and yields are very low. In

the Android supply chain, Lens, Biel and BYDE are the major players for Android phone

casing. Lens Tech is the leader in iPhone/iPad cover glass, with 55%+/45% share

expected through 2019-21E, while it’s also increasing its market share in Chinese

smartphone/tablet cover glasses.

0.00

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Plastic Metal casing (front + back) Metal midframe 2.5D 3D Ceramic

-100%

-50%

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2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E

Global shipment China shipment Globa YoY % China YoY %

4 November 2019


Figure 138: Lens Tech’s share in iPhone cover glass of 55%+,

and increasing for Chinese smartphone cover glass

Figure 139: Lens Tech’s high market share for iPad and

Chinese tablet cover glass


BYDE is a well-rounded casing material provider, covering all major casing materials. It’s a

market leader in metal/plastic/glass casing for Android smartphones. As per the company,

its metal casing market share increased from 30-35% in 2017 to 37-28% in 2018 and

40%+ in 1H19 (despite revenue decreasing), and it’s also the No. 1 provider of plastic

casing. The company expects its market share in glass casing to be near 30% for FY19,

and was ranked in the Top 3 in terms of capacity and shipment in the past three years for

glass casing. BYDE also expects glass casing and ceramic casing to report strong double-

digit % YoY growth, and ceramic materials to expand their use from external/decoration

materials to functional components, such as in RF modules for 5G.

Tongda is one of the major players in glastic casing. Its management maintains a 140

mn/80 mn-200 mn smartphone unit estimate for 2019/2020, in which ‘glastic’ casing is

expected to account for 70%/75-80% of its shipment, implying 50% unit growth.

Chinese game plan

Chinese government subsidies for smartphone casing companies were in double-digit % of

NI in 2018, with that for Lens Tech and Everwin much higher than peers. The subsidy %

of NI generally increased during the past few years—for example, BYDE’s subsidy % of NI

increased from 2% in 2016 to 13% in 2018. The dependency on foreign suppliers is more

in the equipment-end—CNC machines can be internally developed by BYDE, but other

machines such as AF/PET coating and PVD (physical vapor deposition) coating machines

are mostly provided by foreign suppliers.

Figure 140: Government subsidies/grants as % of revenue Figure 141: Government subsidies/grants as % of NI


0%

20%

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2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

iPhone cover glass Samsung smartphone cover glass Chinese smartphone cover glass

0%

10%

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30%

40%

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60%

2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

iPad cover glass Samsung tablet cover glass Chinese tablet cover glass

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2015 2016 2017 2018 1H19

BYDE Lens Tongda Everwin

(150.0%)

(100.0%)

(50.0%)

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%

2015 2016 2017 2018 1H19

BYDE Lens Tongda Everwin

4 November 2019


Government grants and subsidies come more from local governments in the provincial and

city levels (particularly where their headquarters or factories locate), and in the form of

grants or awards, to the company itself or its local subsidiaries. The government grants and

awards come by projects, and are mostly related to key product R&D, automation,

equipment upgrade and other projects, and each grant/award varies by size. For example,

BYDE’s total government grants and subsidies for FY18 was of Rmb287 mn and it was

divided between assets and income. The total is an aggregate of multiple subsidiaries in

Huizhou, Shantou, Xi’an, etc., and of other entities including the Bureau of Human

Resources and Social Security, for the purpose of technical transformation, R&D, employee

stability, logistics and opex.


In the casing market, Chinese players are already the market leaders in terms of market

share and technologies across different casing materials for Android smartphones and

tablets. For the Android supply chain, BYDE leads in metal, plastic, and glass casings, and

is aggressively pricing and has capacity expansion strategy. In terms of quality and segment,

FIH and AAC target high-end mid-frame/metal casing, BYDE focuses on mass market

and Tongda focuses on mid-low-end segments. Lens Tech is expanding its share in

Android glass casing, with new products of rising precision, strength and more colour

options. Tongda is leading in glastic casing and innovating with ICM and 3D glastic casing

materials. For Apple glass cover/casing, Chinese companies (Lens Tech and Biel Crystal)

are also the market leaders, with advanced new products with rising precision from unibody

design and higher strength/more colour options. However, Chinese players are trying to

get into Apple metal casing but still lag behind their peers in, and it’s unlikely for Chinese

players to get into Apple metal casing supply chain in the short term as it is lagging in

technology advancement and precision manufacturing.

In the Android supply chain, we see low reliance on overseas suppliers. Domestic vendors

dominate in plastic casing, metal casing, glass casing and ceramic casing. But reliance on

overseas equipment makers is still high as the casing manufacturing process involves

multiple steps and require custom machines with specific/high-entry barrier technology,

some of which can be sourced only from foreign suppliers so far, e.g., for a certain coating,

photolithography, and silk printing machines. However, BYDE has developed and adopted

some in-house equipment, including CNC machines, and it is also adopting more general

equipment that can be used for multiple materials/product lines. The current geopolitical

situation, including the US-China trade dispute, will likely accelerate domestic substitution,

but many equipment can be procured in Japan and Korea.

Camera module


The CCM (Compact Camera Module) market is expected to grow from US$27.1 bn in 2018 to

US$45.7 bn by 2024, with a five-year CAGR of 9.1%, according to Yole. CCM shipment

growth is entering a slower and stabilising growth phase, yet the upside mainly comes from

dual/triple/quad cams. We have observed several trends in the smartphone lens industry:

Increasing multi-cam adoption with more complex designs: TSR forecasts multi-

cam (including dual cam) adoption to increase from 5.3% in 2016 to 85.9% in 2021, with

52.2% of dual cam and 33.7% triple cam or above, representing a 75% five-year CAGR

of multi-cam smartphone unit shipment for the period. Chinese CCM makers benefit from

rapid multi-cam adoption among Chinese smartphone makers. Sunny, Luxshare, O-film

and Q Tech are capable of dual-cam/triple-cam production. Globally, LG Innotek and

SEMCO are the leading in high-end CCM products, while Sunny and Luxshare are leading

in the China market.

4 November 2019


Figure 142: Global smartphone CCM shipments (by single

CCM)

Figure 143: Multi-cam penetration increasing in smartphone

shipment

Source: TSR Source: IDC

Module assembly technology trends: Within the current CSP (chip size package), COB

(chip on board) and FC (flip chip) technologies, with a decreasing module size, thickness

and increasing light transmittance. The cost of assembly line for FC is also 30-50% higher

than that of COB assembly line, and the yield for FC is lower due to the higher technical

difficulty. COB is still the mainstream technology among Android smartphone cameras.

With the penetration of full-screens comes higher demand for miniature and thinner CCMs

and with better cost. So far, mainly iPhones have adopted FC in its cameras, and suppliers

include LGI, Sharp, O-film (Sony) and Cowell. O-film acquired Sony’s factory in South

China and gained the FC technology. Sunny developed its MOB (Molding on Board) and

MOC (Molding on Chip) technologies for full-screen front cameras, while O-film developed

CMP (Chip Molding Package).

Dual and triple cameras require higher precision and algorithms: Dual/triple

cameras have higher algorithm requirement and packaging precision for image sensors,

lenses and VCM, which can be realised by active alignment (AA). AA equipment are mainly

provided by in-house tooling, ASM Pacific, Pioneer and HyVision. Sunny Optical has

developed its own AA equipment. It claims that its in-house AA equipment is used for high-

end models, while the ASM Pacific equipment is used in mass models.

New technology innovations increasing: ToF penetration is increasing in high-end

smartphone models, driving the growth of WLO (wafer level optics) and VCSEL technology

development. Periscope-style products are also gaining popularity. WLO techniques is

mostly adopted by ams, Himax, and AAC, driven by 3D camera growth. As per a Yole

report, WLO is expected to grow at a CAGR of 55% in the next five years and reach

US$1.6 bn, primarily driven by smartphone growth demand. We see limited supply chain in

the domestic market, including VCSEL wafer fabrication, DOE, and sensor for 3D sensing

measurement. However, Vertilite has designed its own VCSEL chip and outsourced to

VPEC and Win Semi. It has passed Huawei's qualification and started volume production in

3Q19. Other components for 3D depth sensing, such as CMOS IR camera, have lower

entry barriers and can be provided by domestic module suppliers like Sunny, Q Tech or O-

film.

CIS increasing share of higher resolution: Based on a TSR report, for rear cameras,

we see 13MP+ CIS sensors share increasing, in particular for 40-48MP CIS, which is

expected to reach ~23% by 2023E; while 10-13MP CIS is still mainstream, its share is

expected to decrease from 50%+ in 2018 to ~29% in 2023E. In front cameras, although

5MP and 7-8MP CIS are still mainstream, the share of 10MP+ CIS is increasing quickly

and is expected to exceed 7-8MP and take the largest share of ~32% in 2020E. The

trend of rising resolution is benefiting CIS, lens, and module suppliers.

3.2 3.3 3.5

4.0

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Single or below Dual Triple or above % of dual or above

(mn units)

4 November 2019


Figure 144: 10-16MP still mainstream but 32MP+ share

increasing quickly (rear camera)

Figure 145: 5MP and 7-8MP still mainstream, but 10MP+

shares increasing quickly (front camera)

Source: TSR Source: TSR

Apple CCM makers: In high-end module, LGI has the majority of share (over 70%) in

triple-cam and 3D sensing supply. In dual-cam and single-cam, Sharp could take over

50% share, while O-film is the new entrant. However, Apple is concerned about O-film’s

capability and financial risk and is looking for an alternative.

Android CCM makers. O-film has the largest CCM capacity, while Sunny and Q Tech are

expanding. We see the three major players are key suppliers to HOVX CCM. As per TSR

forecast, for CCM counted by single camera, O-film and Sunny will have the biggest

market shares of 17% and 13% in 2019, respectively. Sunny supplies more on the high-

end, while O-film and Q Tech have higher share of mid-/low-tier CCM supplies. In Huawei,

O-film is the major supplier for mid-to-low-end phones, and Luxvision and Sunny are for

high-end models. In OPPO/Vivo, Truly and Q Tech are for mass models, while Sunny is for

high-end models. O-film is a major CCM supplier for Redmi, while Xiaomi also uses

SEMCO, Luxvision and Sunny for the Xiaomi series.

Figure 146: CCM market share of 2019E Figure 147: LGI/Sharp dominated iPhone CCM supply (2020E)

Source: Techno Systems Research, Credit Suisse estimates Source: Techno Systems Research, Credit Suisse estimates

Increasing concentration by top players: Market concentration is expected for the top

players in the CCM segment, and TSR forecasts the Top 3 players (O-film, Sunny, Q-Tech)

to take 39% market share in 2019E from 19% in 2016. This is expected to be driven by

the higher technology requirement and barrier from dual/triple and even quad cameras, in

terms of higher precision and better algorithm and automation, while maintaining a relatively

high yield and lower costs, which require R&D investment and technology accumulation.

The small companies are disadvantaged in this competition.

0% 0% 1% 10%

17% 22%

27% 33%

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2016 2017 2018 2019E 2020E 2021E 2022E 2023E

<10MP 10-16MP 20-32MP >32MP

3.9% 11.8%

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31.9% 35.6% 41.5%

48.7%

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2016 2017 2018 2019E 2020E 2021E 2022E 2023E

<5MP 5MP 7-8MP 10-13MP 13MP+

O-film17%

Sunny13%

Q Tech9%

Holitech6%LGI

6%

Truly5%

PowerLogics4%

MC Nex4%

Cammsys3%

Luxvision/ Lite On3%

SEMCO3%

Foxconn3%

Sharp3%

Patron3%

Others18%

25% 28%

78% 70%

65% 58%

23% 30%

10% 15%0%

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60%

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Single camera Dual camera Triple camera 3D sensing

LGI Sharp O-film

4 November 2019


Top Chinese players leading and gaining shares: When classifying the CCM by single

cameras, we also see Chinese players leading in market share, with O-film and Sunny

leading with 17%/13% share in 2019E respectively, followed by Q Tech/Holitech/LGI to

reach 8.6%/6.0%5.8% share respectively, and other players in single digit % share

according to TSR forecasts. This is driven by more system makers purchasing single

cameras and assemble them into multi-cameras. forecast, We also see shares of many

Japanese/Korean players (e.g., Sony, Cowell and CMK) have been shrinking, while top

Chinese players are the biggest share gainers, including O-film, Sunny, Q Tech, and

Holitech, comparing 2018 vs 2016.

Sunny and O-film lead in multi-cameras: Sunny, O-film and LGI lead in multi-camera

CCM shipment, while Q Tech and Truly have a higher share % of single-camera CCMs. A

higher share % of multi-camera will also help increase the ASP of overall CCM.

Figure 148: Sunny, O-film and LGI with highest multi-camera

shipment expected for 2019

Figure 149: Top Chinese players gaining shares while most

other players are losing shares (2018 vs 2016)

Source: TSR Source: TSR

Chinese game plan

Similar to camera lens, we have observed that most of the Chinese players have developed

from lower-spec products such as lower-resolution single camera, with a lower entry barrier, to

gradually enhancing their capacity and expanding into more complex structures and higher-spec

products, such as dual/triple cameras.

Higher risks for players with higher reliance on government funding: Government

grants/subsidies are mainly related to technology enhancement of production lines and

R&D. For the Top 4 Chinese CCM suppliers (O-film, Sunny, Q Tech and Holitech),

government grants/subsidies % of NI has a diverse range, and we see O-film and Holitech

having relatively high reliance on government subsidies—O-film with an average of ~20%

of profit from 2015-17, and spiked to 150%+ in 1H19, and Holitech with average ~22%

from 2015 to 1H19. Sunny and Q Tech have a relatively lower grants/subsidies % of NI,

indicating a self-reliance of development path for both companies with higher

competitiveness. Sunny’s government subsidies % of NI were 2.8%/8.0% in 2017/2018,

and Q Tech’s were 3.8%/721.6% in 2017/2018 (2018 was a challenging year for Q

Tech, with a very low earnings base), but down to 3.6% in 1H19 on earnings recovery. For

Q Tech, the government grants were received from several local government authorities as

a recognition of the company’s contribution towards the local economic development. Due

to the large revenue scale of CCM players, government subsidies % of revenue was on

average 1-2%, with Holitech much higher than its peers. As the CCM market has entered

a slowing growth stage due to sluggish smartphone demand, and decreasing dividend from

the industry with GM pressure in the upcoming years, even some large players such as O-

film and Holitech are facing financing risk in adverse market conditions, impacting the

performance of these companies. We see O-film has received significant

0

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100

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Sunny O-film LGI PowerLogics SEMCO Sharp Luxvision Primax Truly Darling Q Tech

2019E

(mn units)

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60%

O-film Sunny Q Tech Holitech LGI Truly MC Nex Luxvision/Lite On

Foxconn Sharp Others

2016A 2018A

4 November 2019


investments/financings from the governments (e.g., Nanchang government) and credit

lines from local banks in 2019 to support its cash position.

Figure 150: Government subsidies was on average 1-2% of

revenue across major Chinese CCM suppliers

Figure 151: O-film and Holitech with highest government

subsidies as % to NI among major Chinese CCM suppliers

Source: Company data, Credit Suisse estimates Source: Company data

M&A was another method of expanding business footprint: Luxshare acquired the

CCM business from Lite-On in June 2018 and formed Luxvision, expanding into the CCM

market. Lite-On was one of key suppliers to Chinese Android brands such as Huawei and

Xiaomi. As per TSR, Luxvision’s market share was ~3-4% from 2016 to 2018, and is

expected to reach 3.4% in 2019E.

Preferential tax treatment for tech companies: Most Chinese technology companies

that qualified as National High-Tech firms, will receive a preferred taxation treatment

(rather than the usual 25% corporate income tax rate). For Sunny Optical, its effective

corporate income tax rate was in the range of 11-12%, and for other CCM peers’ in the

low-teen % in general, with preferential tax treatment.

Figure 152: CCM value chain

CCM 3D sensing module

CIS Lens VCM CCM Assembly VCSEL DOE NIR sensor Filter Module Assembly

Sony (JP) Largan (TW) Mitsumi (JP) O-film (CN) Lumentum (US) TSMC (TW) STM (Switzerland) Viavi (US) O-film (CN)

Samsung (KR) Sunny (CN) SEMCO (KR) Sunny (CN) Ams (AT) Ams (AT) Sony (JP) PTOT (TW) Q Tech (CN)

Omnivision (US) Genius (TW) JAHWA (KR) Q Tech (CN) Win Semi (TW) Himax (TW) Omnivision (US) Truly (CN)

ON Semi (US) Sekonix (KR) TDK (JP) Holitech (CN) IIVI (US) Himax (TW) Jabil (US)

Galaxycore (CN) Kantatsu( JP) Alps (JP) LG Innotek (KR) Finisar (US) Sunny (CN)

SK Hynix (KR) AAC (CN) Shicoh (JP) Truly (CN) Vertilite (US) Luxvision (CN)

G2Hysonic (KR) SEMCO (KR) LG Innotek (KR)

LG Innotek (KR) Patron (KR) Sharp (JP)



Chinese players have well established their capability in CCM (multi-cam) and handset lens. We

think, in the near term (within three years), they will likely establish their leadership in 3D

sensing and advanced optical solutions, such as WLO and periscope-style products. However,

in the CCM value chain, key components such as CIS and VCM are still largely dominated by

Japanese and Korean players despite some Chinese players making progress in these products,

for example, Win Semiconductor for CIS and ZET, JSSOptical Technology and Shanghai B.L.

Electronics for VCM. For handset lens, Sunny Optical is an important supplier to HOVX

smartphones. We believe that in the long term we will see Chinese players establishing their

ecosystem and building a domestic supply chain for optical components, including CIS, high-

end lens and VCM, and gradually increasing their share and technology leadership.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2015 2016 2017 2018 1H19

Sunny O-film Q Tech Holitech

(100.0%)

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2015 2016 2017 2018 1H19

Sunny O-film Q Tech Holitech

4 November 2019


Hence, Chinese local camera modules makers such as Sunny Optical and Q Tech are already

taking a major share at local Chinese handset makers (Huawei/Oppo/Vivo/Xiaomi), not just for

mid-to-low-end phones, but for high-end flagship phones as well. Meanwhile, a growing

Chinese camera modules industry as well as its improving technology curve is offering better

growth opportunities out of China by penetrating into the Samsung handset supply chain, for

instance. Considering a rapidly rising multi-cam penetration at SEC, even for mid-to-low-end

phones (i.e., Galaxy A series), relevant camera modules makers (both Korea or China camera

modules suppliers) are all enjoying the total addressable market growth through shipment

volume as well as blended ASP-hikes.

Figure 153: SEC handset camera suppliers have enjoyed blended ASP-hikes on

rapidly rising multi-cam adoption.


However, we believe that in the medium-to-long-term, the existing Korea handset supply chain

will likely face more headwinds amid intensifying competition at the major client (SEC), either

through market shares loss or ASP-cut pressures. As of recent, Samsung is even testing the

ODM outsourcing strategy to Chinese makers. While we believe that the total smartphone

volume outsourced will remain controlled (~20 mn in 2019E and up to 40 mn in 2020E) and

only applicable to the very low-end A series which has little chance of ever becoming profitable,

it seems there still is a downside risk to existing Korea camera modules supply chain (mainly for

mid-to-low-end) such as Partron, Mcnex, and Powerlogics. In contrast, the strategy will likely

provide better growth opportunities for local Chinese camera modules makers, in our view. For

high-end flagship phones at Samsung, SEMCO may remain a key supply chain for longer,

considering the needs for key optics technology protection. However, more ASP-cut pressure

seems inevitable given the emerging alternative options from Chinese module makers with

better technology readiness.

Figure 154: Samsung – Galaxy A series-mix by models (production units base)


$0 $10 $20 $30 $40 $50 $60

Single-cam (front)

Single-cam w/ iris scanner (front)

Dual-cam (front)

Dual-cam (mid/low-end, rear)

Triple-cam (mid/low-end, rear)

Quad-cam (mid/low-end, rear)

Single-cam (high-end, rear)

Dual-cam (high-end, rear)

Triple-cam (high-end, rear)

4 November 2019


CMOS Image sensor (CIS)

Current market status

According to data from Gartner, Sony was the leader of the CMOS image sensor (CIS) market

in CY2018, with a 47% value share, followed by Samsung Electronics in the second and

Omnivision in third positions. Sony commands a technical lead in high-resolution sensors for

smartphones, supplying products fitted to many of the leading handsets on the market. Demand

is expected to remain strong in the near term for CMOS used in smartphones. The trend toward

equipping handsets with multiple and more advanced cameras is not only driving CIS volume

growth, but also allowing suppliers to charge higher unit prices as the technology shifts to larger

formats. Besides smartphone applications, demand is also expected to grow for sensors used in

automotive applications, industrial machinery, and surveillance cameras. ON Semiconductor is

the leader in automotive CIS.

Figure 155: Market share (value, all application) Figure 156: Market share (volume, >13MP, only for mobile

phone)

Source: Gartner, Credit Suisse Research Source: Techno Systems Research, Credit Suisse Research

Figure 157: Diffusion rate by camera resolution in global

smartphone market

Figure 158: Multi camera diffusion rate in global smartphone

market

Source: IDC, Credit Suisse Research Source: IDC, Credit Suisse Research

Sony47%

Samsung Electronics

21%

Omnivision12%

ON Semiconductor

6%

Galaxycore3%

SK hynix2%

Others9%

Sony56%

Samsung38%

OmniVision5%

SK Hynlx1%

Others0%

0%

20%

40%

60%

80%

100%

120%

2010

Q1

2010

Q3

2011

Q1

2011

Q3

2012

Q1

2012

Q3

2013

Q1

2013

Q3

2014

Q1

2014

Q3

2015

Q1

2015

Q3

2016

Q1

2016

Q3

2017

Q1

2017

Q3

2018

Q1

2018

Q3

2019

Q1

20MP< 16MP< 12MP< 8MP<

0%

10%

20%

30%

40%

50%

60%

70%

2015

Q1

2015

Q2

2015

Q3

2015

Q4

2016

Q1

2016

Q2

2016

Q3

2016

Q4

2017

Q1

2017

Q2

2017

Q3

2017

Q4

2018

Q1

2018

Q2

2018

Q3

2018

Q4

2019

Q1

2019

Q2

% of multi total % of triple or more

4 November 2019


Chinese game plan

Huawei and other Chinese smartphone manufacturers are speeding up the adoption of multiple

cameras per handset. More of their flagship models include a high-resolution sensor of at least

40MP. Along with Apple’s new iPhone, this is likely to drive demand in the CIS market. Going

forward, we think demand will also increase for time-of-flight (ToF) sensors. This year, Sony

has already begun supplying ToF sensors to Huawei, Oppo and other Chinese handset

manufacturers for high-end models, and we think that Apple could introduce ToF functionality to

the iPhone range in 2020. A rear ToF sensor could become a standard feature of high-end

smartphones, potentially giving a further boost to demand in 2021 and beyond. Given that the

Chinese CIS vendors are focusing their business development on 2–5MP products (for models

such as the Galaxy Core), we think the market share status quo in the high-resolution CIS

segment is unlikely to shift substantially going forward.

Figure 159: % of multi camera (triple and more) in major

Chinese smartphone makers

Figure 160: Estimates for multi camera diffusion rate

Source: IDC, Credit Suisse estimates Source: IDC, Credit Suisse estimates


In the near term, we expect CIS suppliers to continue expanding production capacity to cater to

the growing demand. Sony plans to increase monthly capacity to 130,000 units by March 2021

(up from 105,000 in Apr–Jun-2019, based on 300 mm wafer). Over the medium and longer

term, we see Sony focusing on the functional fusion of sensors for automotive applications (to

integrate data taken from cameras, LIDAR and millimeter-wave radar). Through its alliance with

Microsoft, the company is also targeting a business model that generates recurring income by

channelling development resources into CMOS image sensors with embedded edge AI

processing capabilities.

CIS is one of the very few semiconductor areas where China has a top-tier player. We think

OmniVision’s CIS technology could be one to two years behind Sony, but at a similar level to

Samsung. In the automotive segment, OmniVision is ahead of Sony and Samsung, and only

behind On Semi. Driven by the geopolitical tension, OmniVision has been taking in the mid-to-

high-end-spec smartphone segment from Samsung since mid-2019 and also growing its share

in China automotive market. OmniVision’s gap vs Sony should continue for one to two years as

most OEMs customise CIS chips for flagship models, so it will take time for OmniVision to

regain position in the premium segment. In five years, we expect OmniVision’s technology to be

slightly behind, but close to Sony’s and its market share to grow from 12% in 2018 (per

Gartner data) to the high-teens or 20s percentage in 2023.

0%

5%

10%

15%

20%

25%

30%

35%

40%

2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2

Huawei Xiaomi vivo OPPO

0%

10%

20%

30%

40%

50%

60%

70%

80%

2015 2016 2017 2018 2019E 2020E

% of Multi Camera total % of Triple Camera

4 November 2019


Lens


Strong volume growth from accelerated lens upgrade: According to TSR,

Smartphone lens saw 6% YoY shipment growth in 2018, and Chinese lens suppliers saw

the strongest growth of 56% YoY, driven by the faster multi-camera adoption, as

triple/quad camera has become a mainstream feature for flagship smartphones, and

triple/dual camera further penetrated into mid-end smartphones. We think the proliferation

of other lens technology, including TOF lens and under-display optical lens, also

contributed largely to the high shipment growth of Chinese lens suppliers. TSR forecasts

that total smartphone shipment lens will grow 16% YoY in 2019, leaded by growth in 6P+

(which is estimated to grow 40% YoY), driven by accelerated lens upgrade including 7P

launch and continued MP migration. 5P and 3P shipment are also expected to grow

double-digit YoY in 2019, driven by triple camera set-up and depth sensing demand.

Largan remains the largest player and dominates 5-7P lens market: Largan

remained the largest smartphone lens supplier, with 32.8% market share, followed by

Sunny optical (23.6%) and Kantatsu (5.9%), in 2018. The Top 3 suppliers’ market share

is forecasted to decline slightly to 61.0% (from 62.3%) in 2019, but market share for the

Top 3 in 5-7P lens market will stay at 78%. Largan is the largest vendor in 5-7P lens, with

48% market share in 2019, while Sunny dominates the 4P lens, with 44% market share.

Takes time to bridge the technology gap; but good growth opportunities from

new 5G features: We believe the launch of 5G smartphone, with new features such as

video applications and VR/AR, could further accelerate lens spec upgrade. We expect 7P

proliferation in high-end flagship smartphone in 2020 and 8P lens to start emerge, as we

see lens element crucial to enhance aperture in the continued pursuit of image quality and

increasing demand for video applications. Other new features that also require higher

technology input include periscope lens (with increasing need to add more lens elements or

glass lens to solve heat problem) and under-display lens (the light and size problem). Sunny

started some shipment of 7P in late-2018; however, we don’t expect meaningful

contribution in 2019, but a good pick-up in 2020 when 7P demand is growing. AAC’s

shipment-mix, compared to other Chinese peers, sees higher exposure in 5-7P lens (61%)

driven by its 13MP/5P lens to Redmi smartphones, in our view. In the last upgrade cycle—

the migration to 6P lens—Sunny/Genius took an additional one to two years, compared to

Largan, to enter mass production, and other Chinese suppliers today still focus on the

5P/4P and lower market. We see the gap of about two years between Largan and Sunny

to achieve mass production yield for the new specs, but the gap will be gradually narrowing

along with increasing focus on camera and spec upgrade acceleration from mobile

networks. While Sunny and other advanced suppliers are going after high-end, other

Chinese suppliers will also need to improve their technology to fill in for 5P/6P in order to

support TSR’s forecasts of 16MP segment making up 30-50% of 2021-2023E

smartphones. Overall, we think it would take a longer for Chinese smartphone vendors to

rely on domestic supply.

4 November 2019


Figure 161: Lens market share (2018) Figure 162: Lens element migration

Source: TSR (1H19) Source: TSR (1H19)

Chinese players quickly taking up market shares: As per TSR estimate, comparing

market share of 2018 vs 2016, Sunny increased by 12.7 pp, AAC increased by 3.5 pp,

Huaxin Optical increased by 4.7 pp and O-film increased by 0.7 pp, while majority of other

players see a decreased of their market share during this period. AAC’s optical revenue

grew by 73%+ YoY in 1H19 to Rmb417 mn. Sunny’s handset lens shipment increased by

38% YoY in 1H19 in which 20MP+ accounted for 13.7%, optical components revenue

grew 42% YoY and takes up 22% of the total sales. Sunny’s handset lens shipment was

Global No. 2 and vehicle lens shipment is global No. 1 in 2018, with high-end

dual/triple/quad cam shipment global No. 1. On the other hand, we see Japanese and

Korean competitors’ shares are decreasing.

Figure 163: Lens industry leaders are deploying more R&D

resources YoY

Figure 164: Chinese players are gaining market share while

others decreasing

Source: Company data, Credit Suisse estimates Source: Techno Systems Research

Chinese game plan

Despite the general tax benefit such as VAT treatment for qualified high-tech companies and

R&D subsidy from local governments, the reliance on government overall is relatively small, and

most companies grew through their own organic expansion and R&D. This is partly due to a low

entry barrier for camera lens, and the product complexity only increases with more complex lens

structure and new technology innovation. We also see diversity among companies, e.g., O-film

was quite relied on Nanchang government financing support.

Relatively small reliance on government funding: Within the component segment, we

didn’t see a lot of subsidy and special support from the government. For example, for

leading Chinese lens company such as Sunny Optical, which received funding and awards

from Yuyao local government, and its government grants has been increasing gradually

every year, and totalled to ~Rmb400 mn in the past five years, with a CAGR of 78%

(2014-2018). The grants are mainly supported by the government, and such subsidies are

related to technology enhancement of production lines and R&D of tech projects.

Largan (TW)33%

Sunny Optical

(CH)

24%

Genius (TW)5%

Sekonix (KR)5%

Kantatsu (JP)6%

Others27%

0%

5%

10%

15%

20%

25%

30%

0

1,000

2,000

3,000

4,000

5,000

6,000

2016 2017 2018 2019F 2020F

5P & below 6P & above 6P+ adoption(mn pcs)

0%

2%

4%

6%

8%

10%

12%

2017 2018 1H19

Sunny Largan AAC

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Largan Sunny Huaxin Optical AAC O-film Sekonix Kantatsu CHT/Xinhjuyu Genius Xingbang Others

2016 2018

4 November 2019


Government grants/subsidies % of NI has a diverse range, and we see O-film has a

relatively high reliance on government subsidies—an average of ~20% from 2015-17, and

spiked to 150%+ in 1H19, but Sunny and AAC have a relatively lower grants/subsidies %

of NI, indicating a self-reliance of development path for both companies. For AAC, the

government subsidy was mainly to support constructing manufacturing plants and acquiring

machines. AAC’s government subsidies % of NI were 0.2%/1.2% in 2017/2018, and

Sunny’s government subsidies % of NI were 2.8%/8.0% in 2017/2018, both in much

better positions than O-film’s 17.3%/-57.5% in 2017/2018. Government subsidies % of

revenue was on average <1%, a relatively smaller impact.

Figure 165: Government subsidy was on average <1% of

revenue across Chinese lens suppliers

Figure 166: O-film has the highest government subsidy % as

of NI among major Chinese lens suppliers


M&A was another method of expanding business footprint: O-film acquired Sony’s

largest factories of CCM in 2018, and entered the Apple supply chain for handset module.

O-film also acquired Fujifilm’s Tianjin factory which are mainly vehicle lens production and

consists of certain lens patents. Sunny also supplied to Samsung, including for flagship

models such as Galaxy S9, and Sunny entered Apple supply chain in 2018. Leica handset

lens was manufactured by Sunny Optical.

Overall among Chinese lens players, Sunny is the global leader with increasing market

share, while, and will have GM upside in 2020. AAC’s optical business is still small-scale

(4% in 2018 and 6% in 1H19); while O-film is at a distant lagging position, with <1%

global market share, and currently manages to self-supply for low-end smartphones

camera modules.

Government support for autonomous driving: In China, the government also declared

that it would speed up the development and promulgation of the relevant laws and

regulations in respect of autonomous driving. Driven by policy, cross-border competition,

consumers’ needs and other factors, the penetration rate of ADAS increased rapidly. In

addition, with the further development of the driverless vehicle market, the application

demands for LIDAR, smart headlights, night vision cameras and other related products will

be increased continuously. Sunny, as a leading vehicle lens supplier (~30% market share),

continued to leverage its pioneer advantages in the vehicle field to further enhance its

technical capabilities, explore application demands for its products and make micro-

innovations in its design, material selection, processing technologies, testing and

management processes, so as to further improve its market share and consolidate its No.

1 position in the global market of vehicle lens.

Preferential tax treatment for tech companies: Most Chinese technology companies

qualified as National High-Tech firms, will receive a preferred taxation treatment (rather

than the usual 25% corporate income tax rate). For Sunny Optical, its effective corporate

income tax rate was in the range of 11-12%.

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

2015 2016 2017 2018 1H19

Sunny AAC O-film

(100.0%)

(50.0%)

0.0%

50.0%

100.0%

150.0%

200.0%

2015 2016 2017 2018 1H19

Sunny AAC O-film

4 November 2019



As the overall reliance on government is small, and leaders such as Sunny can become No.

2 in terms of market share in the smartphone lens market, with continuous R&D

investment. The biggest competitors include Largan, Genius, which entered Apple supply

chain (Sunny not yet). We think throughout development history, Chinese players have

been gradually picking up the capabilities of lens and investing in R&D for high-end models

for it. The probability is high to realise domestic substitution in the near term (one to three

years), based on the following reasons: (1) technology wise, Sunny is already the market

leader, mastering the supplies for high-end lens suppliers to major Chinese smartphone

OEMs; (2) Chinese players are gaining shares with shipment penetrating into Chinese and

non-Chinese OEMs; (3) continued investment and R&D in the new business areas and

technology advancement; (4) scale and ASP advantage which helps Chinese players

further expand market share and client base.

MLCC


The global MLCC (Multi-Layer Ceramic Capacitor) market size is expected to reach ~US$13 bn

in FY20E. Considering the majority of MLCC usage is still highly linked to IT products (i.e.,

handsets, PC, AV and appliances), China consumes the largest part of global MLCC demand,

in our view (more than 50%).

Figure 17: Global MLCC market trend

Source: TTI, Company Data, Credit Suisse Research

In particular, MLCC demand in China has rapidly grown up in the past five years in tandem with

rising smartphone penetration in the region. In addition to smartphone unit shipment growth in

China, MLCC contents value per unit has also contributed to incremental MLCC value creation.

4 November 2019


Figure 18: Smartphone shipment in China vs. as % of global Figure 19: MLCC application-mix in China (as of FY19E)


China MLCC demand growth is expected to accelerate from FY20E once 5G roll-out starts to

positively impact smartphone replacement rates. We assume 83 mn/167 mn 5G smartphone

shipment in China in FY20E/FY21E, which occupies 47%/40% of global 5G demand.

Furthermore, 5G smartphones or relevant networks investment (i.e., base station) will also likely

to lead to incremental MLCC contents growth per unit. For instance, a Taiwan MLCC maker,

Yageo anticipates an increase in 5G smartphone-related MLCC demand of 10–20% for sub-6

GHz and 20-30% for millimetre wave networks, while Korean makers (i.e. SEMCO) project an

increase of around 200 units of MLCCs per base station for sub-6 GHz services. Demand

growth from sub-6 GHz base stations is expected to be chiefly RF-related, while millimetre

wave demand growth is likely to be driven by PMIC peripherals as well as RF.

Despite the fact that China is one of the largest MLCC consuming market, the self-sufficient

rates appears relatively low. As of current, MLCC supply is majorly dominated by Japan

(Murata/TDK/Taiyo Yuden/Kyocera), Korea (SEMCO/Samwha Capacitor) or Taiwan

manufacturers (Yageo/Walsin Tech). A growing number of Chinese players are comprised of

Fenghua Advanced Technology (000636.SZ), Tianli Holdings Group Limited (0117.HK),

Chaozhou Three-circle (300408.SZ), and Fujian Torch Electron Technology (603678.CN).

Chinese MLCC manufacturers are rapidly growing in recent years but we would believe global

market shares are still only ~5% in aggregate. Also, a local Chinese MLCC maker is highly

likely to address MLCC demand in consumer electronics, mainly for the mid-to-low-end

segment (i.e., larger size/low capacitance) where leading JP or KR MLCC makers are

withdrawing for production optimisation (i.e., A/V, PC, appliances or low-end handsets).

Figure 20: MLCC global market shares (1H19E based on sales) Figure 21: MLCC global capacity trend (Top 5)


0

100

200

300

400

500

0%

5%

10%

15%

20%

25%

30%

35%

40%

2010 2011 2012 2013 2014 2015 2016 2017 2018

China smartphone shipment (mn, RHS)

China smartphone as % of global

Consumer Electronics

(inc. Handset), 65%

Industrials, 10%

Automotive, 10%

Military, 6%Others,

9%

44%

23%

14%

8%

4%

7%

Murata

SEMCO

Taiyo Yuden

TDK

Yageo

Others

0%

5%

10%

15%

20%

25%

0.0

50.0

100.0

150.0

200.0

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400.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 20182019E

(bn umits/month)

Murata Mfg Taiyo Yuden TDK

SEMCO Yageo yoy % chg.

4 November 2019


Chinese game plan and view on near-term and medium-to-long-term development

In the MLCC arena, while Japanese-owned MLCC makers and SEMCO are working to lock in

technology by manufacturing materials and equipment in-house, Taiwanese and Chinese-owned

makers are dependent on Japanese materials and equipment suppliers for the majority of their

raw materials and production equipment. This makes it highly unlikely that Chinese MLCC

makers will close the technology gap with the Japanese and Korean frontrunners anytime soon.

Our focus in the near term is on how they can shrink the gap between themselves and

Taiwanese makers.

PCB/substrate

China has larger share in conventional PCB, multi-layer and HDI: While China

controls half of the global PCB production value, Chinese PCB players have relatively

stronger presence in commodity, multi-layer, and HDI (high-density interconnection)

segments. In 2018/2019, Chinese players oversaw strong growth in the multilayer PCB

segment, thanks to strong network build out (mainly from 4G LTE). Among the players,

Shennan and WUS PCB are the major beneficiaries of the booming growth in multilayer

PCB, both having exhibited strong double-digit sales growth in 1H19 sales, with WUS

PCB noting growth in communication was highest at 37% YoY. Chinese PCB players,

however, are generally weaker in FPC (Flexible PCB) and substrates, with less than 50%

market share in these two areas. Chinese players have been aggressively building related

technology through acquisition. DongShan Precision (DSBJ) acquired US top FPC supplier,

MFLEX, in 2016, and has then grown its FPC sales from less than 20% of Avary’s

revenue to 40% of Avary’s revenue in 2018. We see high growth in the substrate market,

with double-digit sales growth seen through 2018/2019 among leading suppliers including

Shennan and Fastprint. We also see growing consolidation in the substrate market (with

Suntak acquiring PRV China) accelerating technology advancement. Nevertheless, China's

largest domestic substrate supplier, Shennan Circuit, held only 1.7% global market share in

IC substrates in 2017, vs global Top 10 suppliers' aggregate market share of 80-85% for

the same period. Shennan’s IC substrate business is mainly on smartphone application

(MEMS Mic and RF), but Shennan and Fastprint (second largest) both substrate business

have exposure in memory. Chinese customers (networking customer) have been asking

Taiwan substrate suppliers to add production in China, but given rising tension with data

security, especially on a national level, it is unlikely that significant amount of capacity would

be added in the medium term.

Government support has been a big help: China State Council stated in its 13th Five-

Year National Plan that it included PCB as one of the key technologies in strengthening its

stance in the IT industry in 2016, and China National Development and Reform

Commission incorporated HDI, FPC and specialty PCB board as the main focus in the

electronic products industry, and encouraged foreign investments in HDI, multilayer PCB,

FPC and IC substrate. China PCB suppliers have therefore enjoyed faster earnings growth,

compared to Taiwan peers, benefiting from government help, with subsidy to ease their

cost burden, as well as lower tax rate. We note that the top Chinese players, including

DSBJ, Shennan, WUS PCB, and Kinwong, received subsidy that aggregately adds up to

14% of their pretax profit.

4 November 2019


Figure 167: China PCB by technology Figure 168: China PCB global share by technology


Commodity, 20%

Multi-layer, 44%

HDI, 17%

Substrates, 3%

FPC, 17%

China PCB

0%

10%

20%

30%

40%

50%

60%

70%

Commodity Multi-layer HDI Substrates FPC

China PCB global market share by technology

China WW market share

4 November 2019


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Companies Mentioned (Price as of 01-Nov-2019) AAC Technologies Holdings Inc (2018.HK, HK$51.5) ACM Rsrch (ACMR.OQ, $12.59) AMEC (688012.SS, Rmb70.09) ASE Industrial Holdings (3711.TW, NT$80.0) ASM Pacific Technology Ltd (0522.HK, HK$103.0) ASML Holding N.V. (ASML.AS, €239.75) AU Optronics (2409.TW, NT$7.72) AVX (AVX.N, $15.32) Acer Group (2353.TW, NT$17.95) Advanced Micro Devices, Inc. (AMD.OQ, $33.93) Advanced Wireless Semiconductor Company (8086.TWO, NT$114.5) Advantest (6857.T, ¥5,130) Alibaba (BABA.K, $176.67) All Winner Tech (300458.SZ, Rmb24.77) Alps Alpine (6770.T, ¥2,334) Amkor Technology Inc. (AMKR.OQ, $12.43) Amphenol Corporation (APH.N, $100.33) Analog Devices Inc. (ADI.OQ, $106.63) Anji (688019.SS, Rmb112.63) Anritsu (6754.T, ¥2,110) Apple Inc (AAPL.OQ, $248.76) Applied Materials Inc. (AMAT.OQ, $54.26) Artivision (ARTT.SI, S$0.004) Asustek (2357.TW, NT$208.5) Auden (3138.TWO, NT$42.53) Avary Holding (002938.SZ, Rmb45.74) BYD Electronic (International) Company Limited (0285.HK, HK$13.4) BenQ Materials (8215.TW, NT$18.55) Bluecom (033560.KQ, W3,040) Bosch (BOSH.NS, Rs15327.05) CCTC (300408.SZ, Rmb18.57) CGT Group (000066.SZ, Rmb15.08) CMMT Co (4960.TW, NT$7.6) Cadence Design System (CDNS.OQ, $65.35) CammSys (050110.KQ, W2,980) Canon (7751.T, ¥2,961) Career Tech. (6153.TW, NT$38.1) Casetek Holdings Limited (5264.TW, NT$55.7) Catcher Technology (2474.TW, NT$265.0) Changelight (300102.SZ, Rmb4.38) ChipMOS Technologies Inc. (8150.TW, NT$30.55) Chipbond (6147.TWO, NT$61.1) Chroma (2360.TW, NT$143.0) Chunghwa Precision (6510.TWO, NT$960.0) Cirrus Logic (CRUS.OQ, $67.96) Cisco Systems (CSCO.OQ, $47.51) Compal Electronics (2324.TW, NT$18.2) Coolpad Group Limited (2369.HK, HK$0.231) Corning, Inc. (GLW.N, $29.63) Cree (CREE.OQ, $47.73) Crucialtec (114120.KQ, W959) DISCO (6146.T, ¥23,650) DNF (092070.KQ, W9,140) Daeduk Elec (008060.KS, W10,600) Dai-ichi Seiko (6640.T, ¥2,626) Datang Telecom (600198.SS, Rmb9.09) Delloyd Ventures (DELL.KL^G15) Delta Electronics (2308.TW, NT$133.5) Dongjin Semichem (005290.KQ, W16,500) DreamTech (192650.KS, W6,580) Duk San Neolux (213420.KQ, W22,050) EM-Tech (091120.KQ, W8,310) EPI (Holdings) (0689.HK, HK$0.1) EWPT (300115.SZ, Rmb15.1) Egis Technology Inc. (6462.TWO, NT$263.5) Elan Microelectronics Corp (2458.TW, NT$93.4) Elcomtec (037950.KQ, W1,490) Epistar Corporation (2448.TW, NT$30.0) Espressif (688018.SS, Rmb133.24) Eternal (1717.TW, NT$25.85) Eugene Tech (084370.KQ, W15,250) Extreme Networks (EXTR.OQ, $6.44) F-GIS (6456.TW, NT$117.5) FIT Hon Teng Limited (6088.HK, HK$3.18) FST (3532.TW, NT$118.0) Fenghua (000636.SZ, Rmb12.28) Ferrotec (6890.T, ¥1,074) Fitipower (4961.TWO, NT$40.51) Flexium (6269.TW, NT$113.5) FocalTech Corporation, Ltd. (3545.TW, NT$24.1) Foxconn Industrial Internet (601138.SS, Rmb15.59) Fudan Microelect (1385.HK, HK$5.91) Fujikura (5803.T, ¥473) Fujimi (5384.T, ¥2,818) Fujitsu (6702.T, ¥9,518) Fullhan (300613.SZ, Rmb165.22) GSEO (3406.TW, NT$447.0)

4 November 2019


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GeoVision (3356.TW, NT$34.0) Gigadevice (603986.SS, Rmb159.84) Globalwafers (6488.TWO, NT$370.0) GoerTek Inc. (002241.SZ, Rmb18.63) Goke (300672.SZ, Rmb41.4) Griam (600206.SS, Rmb10.26) HC SemiTek (300323.SZ, Rmb4.81) HP Inc. (HPQ.N, $17.37) Haier Electronics Grp (1169.HK, HK$23.35) Haier Smart Home (600690.SS, Rmb17.36) Han's Laser Technology Co., Ltd (002008.SZ, Rmb37.89) Hangzhou Hikvision Digital Technology Co., Ltd. (002415.SZ, Rmb32.9) Hannstar Display (6116.TW, NT$6.5) Hewlett Packard Enterprise (HPE.N, $16.41) Himax Technologies, Inc. (HIMX.OQ, $2.36) Hirata (6258.T, ¥7,620) Hirose Electric (6806.T, ¥13,730) Hitachi High-Tec (8036.T, ¥6,750) Holitech (002217.SZ, Rmb5.32) Hon Hai Precision (2317.TW, NT$84.8) Hongda Elec (300726.SZ, Rmb25.47) Hongyuan Elec (603267.SS, Rmb47.6) Hua Hong Semiconductor Limited (1347.HK, HK$15.62) Huada Automotive (603358.SS, Rmb13.01) Huayi Elec (600290.SS, Rmb3.89) Huicheng (300481.SZ, Rmb14.92) IBIDEN (4062.T, ¥2,496) II-VI (IIVI.OQ, $33.15) Idemitsu Kosan (5019.T, ¥3,170) Inari Amertron (INAR.KL, RM1.99) Infineon Technologies AG (IFXGn.DE, €17.796) Ingenic (300223.SZ, Rmb53.85) Innolux Corporation (3481.TW, NT$6.68) Intel Corp. (INTC.OQ, $56.53) Interflex (051370.KQ, W17,700) International Business Machines (IBM.N, $133.73) Inventec Co Ltd (2356.TW, NT$22.05) Irico Display (600707.SS, Rmb4.32) Iriso Electronic (6908.T, ¥5,320) JCET (600584.SS, Rmb18.75) JDS Uniphase Corp (VIAV.OQ, $15.96) JSR (4185.T, ¥2,044) Jabil Circuit Inc. (JBL.N, $36.82) Jahwa Electronic (033240.KS, W10,550) Japan Aviation Electronics Industry (6807.T, ¥2,080) Japan Display (6740.T, ¥69) Jingjia Micro (300474.SZ, Rmb54.33) KCTech (281820.KS, W19,650) KDX (002450.SZ, Rmb3.52) KEMET (KEM.N, $21.74) KFMI (300666.SZ, Rmb39.7) KLA-Tencor Corp. (KLAC.OQ, $169.04) KYEC (2449.TW, NT$37.8) Kaifa (000021.SZ, Rmb10.24) Kingpak Technology (6238.TWO, NT$149.0) Knowles (KN.N, $21.58) Kolen (078650.KQ, W1,750) Korea Circuit (007810.KS, W10,100) Kyocera (6971.T, ¥6,945) LB Semicon (061970.KQ, W7,770) LCT Holdings (LCTH.SI, S$0.5) LG Chem Ltd. (051910.KS, W309,000) LG Display Co Ltd. (034220.KS, W13,300) LG Electronics Inc (066570.KS, W67,200) LG Innotek (011070.KS, W121,500) Lam Research Corp. (LRCX.OQ, $271.04) Largan Precision (3008.TW, NT$4460.0) Lattice Us (LSCC.OQ, $19.59) Lenovo Group Ltd (0992.HK, HK$5.67) Lens Technology Co., Ltd (300433.SZ, Rmb13.6) Liande (300545.SZ, Rmb24.16) Lite-On Technology (2301.TW, NT$49.95) Lumentum Hldg (LITE.OQ, $62.66) Luxshare Precision Industry Co., Ltd (002475.SZ, Rmb32.81) MCNEX (097520.KQ, W23,800) Macronix (2337.TW, NT$32.0) Maxim Integrated Products (MXIM.OQ, $58.66) Maxis Berhad (MXSC.KL, RM5.38) MediaTek Inc. (2454.TW, NT$405.0) Melexis (MLXS.BR, €62.3) Merck & Co., Inc. (MRK.N, $86.66) Merry Electronics Co. Ltd (2439.TW, NT$150.0) Micro-Star International Co., Ltd (2377.TW, NT$90.4) Microchip Technology Inc. (MCHP.OQ, $94.29) Micron Technology Inc. (MU.OQ, $47.55) Microsoft (MSFT.OQ, $143.37) MinebeaMitsumi (6479.T, ¥2,078) Mitsubishi Corp (8058.T, ¥2,732)

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Montage Tech (688008.SS, Rmb59.25) Murata Manufacturing (6981.T, ¥6,053) NAURA (002371.SZ, Rmb70.95) NOK Corp (7240.T, ¥1,663) NVIDIA Corporation (NVDA.OQ, $201.02) NXP Semiconductors N.V. (NXPI.OQ, $113.68) Nan Ya Printed Circuit Board (8046.TW, NT$54.2) Nanya Technology (2408.TW, NT$70.6) Nations Tech (300077.SZ, Rmb6.83) Nichias (5393.T, ¥2,285) Nikon (7731.T, ¥1,377) Nippon Steel & Sumitomo Metal (5401.T, ¥1,592) Nitto Denko (6988.T, ¥5,930) Novatek Microelectronics Corp Ltd (3034.TW, NT$202.0) ON Semiconductor Corp. (ON.OQ, $20.4) On-Bright Elec (4947.TWO, NT$181.0) Orbita (300053.SZ, Rmb10.16) Osram (OSRn.DE, €40.1) PSK Hldg (031980.KQ, W8,150) PXPL (087600.KQ, W4,715) Panasonic (6752.T, ¥981) Pegatron (4938.TW, NT$60.2) Photronics (PLAB.OQ, $11.8) Power Logics (047310.KQ, W9,800) PowerLeader (8236.HK, HK$1.9) Powertech Technology (6239.TW, NT$95.0) Q Technology Group Co Ltd (1478.HK, HK$10.52) QUALCOMM Inc. (QCOM.OQ, $80.44) Qorvo (QRVO.O, $80.86) Quanta Computer (2382.TW, NT$59.9) ROHM (6963.T, ¥8,400) RS Technologies (3445.T, ¥4,495) Rambus Incorporated (RMBS.OQ, $13.845) Raydium (3592.TWO, NT$92.29) Raytron Tech (688002.SS, Rmb36.69) Realtek Semiconductor (2379.TW, NT$229.0) Renesas Electronics (6723.T, ¥725) Richwave (4968.TW, NT$234.0) SCREEN (7735.T, ¥7,700) SELEN (002341.SZ, Rmb5.46) SFA (056190.KQ, W42,000) SG Micro (300661.SZ, Rmb211.5) SHIBAURA MECHATR (6590.T, ¥3,550) SK Hynix Inc. (000660.KS, W83,100) SK Materials (036490.KQ, W185,000) SKC Kolon PI (178920.KQ, W34,000) STMicroelectron (STM.MI, €20.75) SUMCO (3436.T, ¥1,818) Samsung Electro-Mechanics (009150.KS, W114,000) Samsung Electronics (005930.KS, W51,200) Samsung SDI (006400.KS, W231,000) Sanan Optoelectronics Co. Ltd (600703.SS, Rmb15.44) Semiconductor Manufacturing International Corp. (0981.HK, HK$10.1) Seoul Semiconductor Co Ltd (046890.KQ, W12,950) Shanghai Sinyang (300236.SZ, Rmb23.53) Sharp (6753.T, ¥1,287) Shennan Circuits (002916.SZ, Rmb148.46) Shenzhen Goodix (603160.SS, Rmb183.0) Shenzhen O-film Tech Co., Ltd (002456.SZ, Rmb11.25) Shenzhen Sunway Communication Co., Ltd (300136.SZ, Rmb41.15) Shin-Etsu Chemical (4063.T, ¥12,030) Silan (600460.SS, Rmb14.79) Silergy (6415.TW, NT$844.0) Silicon Works (108320.KQ, W33,200) Sino Wealth (300327.SZ, Rmb24.55) Sinocera (300285.SZ, Rmb21.0) Skyworks Solutns (SWKS.O, $91.06) Solomon Systech (2878.HK, HK$0.16) Sony (6758.T, ¥6,619) Soulbrain (036830.KQ, W77,800) Speed (300322.SZ, Rmb21.22) Sugon (603019.SS, Rmb33.5) Sumitomo Chemical (4005.T, ¥501) Sumitomo Corp (8053.T, ¥1,664) Sun.King (0580.HK, HK$1.07) Sunlord (002138.SZ, Rmb21.18) Sunny Optical Technology Group Co.Limited (2382.HK, HK$129.4) Suzhou Good-Ark (002079.SZ, Rmb7.4) Synaptics (SYNA.OQ, $42.11) Synopsys Inc. (SNPS.OQ, $135.75) Sytech (600183.SS, Rmb23.35) TCL Corporation (000100.SZ, Rmb3.39) TDK (6762.T, ¥10,700) TE Connectivity (TEL.N, $89.5) TJ Semi (002129.SZ, Rmb11.61) TTM Technologies (TTMI.O, $11.71) TXC Corp. (3042.TW, NT$37.85) Taiflex (8039.TW, NT$44.2)

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Taimide Tech (3645.TW, NT$51.3) Taiwan Semiconductor Manufacturing (2330.TW, NT$299.0) Taiyo Yuden (6976.T, ¥2,861) Techwing (089030.KQ, W10,750) Tes Co Ltd (095610.KQ, W20,450) Texas Instruments Inc. (TXN.OQ, $117.99) ThinFlex (3144.TWO, NT$30.75) Tianli Holdings (0117.HK, HK$0.48) Tianma Microelectronics Co. Ltd (000050.SZ, Rmb13.86) Tianshui Huatian Technology Co., Ltd (002185.SZ, Rmb5.5) Tokyo Electron (8035.T, ¥22,245) Tokyo Ohka Kogyo (4186.T, ¥4,240) TongFu Microelectronics Co.,Ltd. (002156.SZ, Rmb11.63) Torch Electron (603678.SS, Rmb22.18) Toshiba (6502.T, ¥3,640) Toyoda Gosei (7282.T, ¥2,500) Truly International (0732.HK, HK$1.02) Tunghsu Optoelec (000413.SZ, Rmb4.83) Ube Industries (4208.T, ¥2,348) Ulvac (6728.T, ¥4,780) UniStrong (002383.SZ, Rmb10.71) UniTest (086390.KQ, W14,700) Unimicron Technology Corp (3037.TW, NT$47.2) United Microelectronics (2303.TW, NT$14.5) Universal Scientific Industrial (Shanghai) (601231.SS, Rmb14.74) UniversalDisplay (OLED.OQ, $200.18) Valiant (002643.SZ, Rmb12.38) Vanguard International Semiconductor (5347.TWO, NT$65.2) Viatron Technolo (141000.KQ, W9,350) Victory Giant (300476.SZ, Rmb15.32) Vishay Intertech (VSH.N, $20.15) Visionox (002387.SZ, Rmb15.22) Visual Photonics Epitaxy Co., Ltd (2455.TW, NT$123.0) WITS (4953.TWO, NT$111.5) WLCSP (603005.SS, Rmb22.58) WTC (2492.TW, NT$181.5) WUS (002463.SZ, Rmb21.85) Wafer Works Corp (6182.TWO, NT$35.7) Western Digital (WDC.OQ, $51.65) WiSoL (122990.KQ, W15,000) Will Semi (603501.SS, Rmb107.28) Win Semiconductors Corp (3105.TWO, NT$324.5) Winbond (2344.TW, NT$17.05) Wonik IPS (240810.KQ, W32,550) Wonik Materials (104830.KQ, W27,900) XC TECH (300139.SZ, Rmb8.75) Xiaomi Corporation (1810.HK, HK$8.96) Xilinx (XLNX.OQ, $90.74) Yageo (2327.TW, NT$316.0) Yangjie Elctrnc (300373.SZ, Rmb15.49) Yoke Technology (002409.SZ, Rmb18.42) ZHIYUNAUTOMATION (300097.SZ, Rmb8.5) ZJ Ruiyuan Tech (8249.HK, HK$0.169) ZTE Corporation (0763.HK, HK$22.7) ZTE Corporation (000063.SZ, Rmb34.0) Zhejiang Dahua Technology Co., Ltd (002236.SZ, Rmb16.38)

Disclosure Appendix

Analyst Certification

Manish Nigam and Clive Cheung each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as Europea n ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the re levant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and Asia stocks (excluding Japan and Australia), ratings are based on a stock’s total return relative to the average total return of the rele vant country or regional benchmark (India - S&P BSE Sensex Index); prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return pote ntial to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011.

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Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 47% (32% banking clients)

Neutral/Hold* 38% (26% banking clients)

Underperform/Sell* 13% (23% banking clients)

Restricted 2%

*For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, a nd Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

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Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse’s research that you are entitled to receive in the most timely manner, please contact your sales representative or go to https://plus.credit-suisse.com . Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: https://www.credit-suisse.com/sites/disclaimers-ib/en/managing-conflicts.html . Any information relating to the tax status of financial instruments discussed herein is not intended to provide tax advice or to be used by anyone to provide tax advice. Investors are urged to seek tax advice based on their particular circumstances from an independent tax professional. Credit Suisse has decided not to enter into business relationships with companies that Credit Suisse has determined to be involved in the development, manufacture, or acquisition of anti-personnel mines and cluster munitions. For Credit Suisse's position on the issue, please see https://www.credit-suisse.com/media/assets/corporate/docs/about-us/responsibility/banking/policy-summaries-en.pdf . The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

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Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Investors should note that income from such securities and other financial instruments, if any, may fluctuate and that price or value of such securities and instruments may rise or fall and, in some cases, investors may lose their entire principal investment. Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk

and note they may be subject to the applicable rules and regulations in Taiwan. Investment results are the responsibility of the

investor. Reports written by Taiwan based analysts on non-Taiwan listed companies are not considered as recommendations to

buy or sell securities. Reports may not be reproduced without the permission of Credit Suisse. Pursuant to the ‘Taiwan Stock

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Exchange Regulations Governing Securities Firms Recommending Trades in Securities to Customers’ and the ‘Taipei Exchange

Rules Governing Securities Firms Recommending Trades in Securities to Customers’, in order for a non-client of Credit Suisse AG,

Taipei Securities Branch to receive this research report, no provision by such non-client of the content of the report to a third

party, nor any conflict of interest, is permitted. By receiving this research report, any such non-client is deemed to acknowledge

and accept our terms and disclaimers included herein. This research report is authored by: Credit Suisse (Hong Kong) Limited ............................................ Manish Nigam ; Clive Cheung ; Kyna Wong ; Chaolien Tseng Credit Suisse Securities (Japan) Limited ......... Hideyuki Maekawa ; Yoshiyasu Takemura ; Mika Nishimura ; Akinori Kanemoto Credit Suisse Securities (Europe) Limited, Seoul Branch ............................................................ Keon Han ; Sang Uk Kim Credit Suisse AG, Taipei Securities Branch .................................... Randy Abrams, CFA ; Jerry Su ; Haas Liu ; Pauline Chen Credit Suisse Securities (USA) LLC ........................................................................................... Matthew Cabral ; Sami Badri To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the FINRA 2241 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse (Hong Kong) Limited ............................................ Manish Nigam ; Clive Cheung ; Kyna Wong ; Chaolien Tseng Credit Suisse Securities (Japan) Limited ......... Hideyuki Maekawa ; Yoshiyasu Takemura ; Mika Nishimura ; Akinori Kanemoto Credit Suisse Securities (Europe) Limited, Seoul Branch ............................................................ Keon Han ; Sang Uk Kim Credit Suisse AG, Taipei Securities Branch .................................... Randy Abrams, CFA ; Jerry Su ; Haas Liu ; Pauline Chen

Important disclosures regarding companies that are the subject of this report are available by calling +1 (877) 291-2683. The same important disclosures, with the exception of valuation methodology and risk discussions, are also available on Credit Suisse’s disclosure website at https://rave.credit-suisse.com/disclosures . For valuation methodology and risks associated with any recommendation, price target, or rating referenced in this report, please refer to the disclosures section of the most recent report regarding the subject company.

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4 November 2019


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