In the wake of U.S. regulations stymieing China’s semiconductor ambitions the country has shifted its focus to general-purpose semiconductors. Facing challenges in acquiring advanced semiconductor technology due to equipment import controls, China is significantly enhancing its production capacity in legacy foundries (contract semiconductor manufacturing) for technologies above 7 nanometers (nm), seeking alternative routes in the tech supremacy race.
Although the fiercest battles in the foundry industry are fought over cutting-edge processes like 3 nm, legacy processes still hold a larger share of the overall market. The Chinese foundry sector’s recent expansion in legacy processes using 8-inch wafers has sparked concern in South Korea, with industry insiders feeling “hit where it hurts.”
In the foundry industry, processes using 8-inch wafers and larger than 7 nm are typically considered legacy. The high-value advanced foundry market below 7 nm is effectively a three-way competition between Taiwan’s TSMC, South Korea’s Samsung Electronics, and Intel, which resumed its foundry business in 2021.
However, the legacy foundry market is not only more fiercely competitive but also larger in size. As of the fourth quarter of last year, the top 10 global foundry companies’ revenues (including estimated figures for Samsung Electronics) suggest that the legacy foundry market, at US$21.118 billion, accounts for 62% of the total foundry market valued at US$33.53 billion. Legacy products are more widely used in electronic devices than cutting-edge products like sub-4-nm semiconductors, which are limited to specific advanced products like server chips, offering a competitive edge in securing demand.
According to TrendForce, China holds a 10.18% global foundry market share in legacy processes as of the second quarter. While this falls short of TSMC, which reportedly generates about 70% of its revenue from legacy processes, China’s potential for rapid market expansion, backed by substantial government support and a vast domestic market, cannot be underestimated, despite lower yield rates.
South Korea’s semiconductor industry views China’s foundry expansion as a non-immediate threat, given the different processes and established customer trust. Nevertheless, there are warnings that despite intense U.S. regulations, China’s firm establishment in the foundry sector poses a looming threat to Korean companies.
If China captures the general market with substantial backing, South Korean companies could suffer the most. Samsung Electronics, the world’s second-largest foundry, focuses on advanced processes and has limited capacity to compete in the legacy market. Companies like DB HiTek may not have the strength to counter China’s volume strategy. This situation mirrors the past when Chinese companies overtook South Korean firms in the display industry by dominating the Liquid Crystal Display (LCD) market.
The legacy process, while less profitable, is crucial as a stable revenue source supporting the astronomical investments required in cutting-edge process competition. TSMC generates nearly half its revenue from legacy processes. Samsung Electronics, too, is estimated to derive about 70% of its revenue from non-EUV legacy processes. Losing market share in the legacy process to China could deal a significant blow to Samsung, already struggling to keep up with industry leader TSMC, risking its second-place position.