China Semiconductor Manufacturing Equipment Import Analysis

March 2024 China Semiconductor Manufacturing Equipment Import Analysis: 2023 Imports Grow Amid Build Out of Foundational Fabs Andrew David Sarah Stewart

At this pivotal moment of geopolitical competition, the United States and its allies must actively chart a course toward economic prosperity at home and competitiveness on the world stage. Silverado Policy Accelerator works to promote these objectives by advancing bipartisan economic, strategic and technological policy solutions in three interconnected areas: cybersecurity, international trade and industrial security, and the intersection of ecological and economic security (Eco2Sec). Silverado uses a novel accelerator model that combines the expertise of a traditional think tank with the dynamism of a venture approach. The three stages of our accelerator model—Cultivating, Incubating, and Accelerating—are designed to transform fresh policy ideas into actionable policy initiatives, nurturing a new strategic and economic vision from the ground up. Silverado's Trade and Industrial Security pillar focuses on shaping trade policy to support American workers, secure America's supply chains, and advance equitable trade practices. Acknowledgements The authors would like to thank Paige Graham and Andrew Knipe for their contributions to the report. © 2024 Silverado Policy Accelerator For more information, visit www.silverado.org

Table of Contents 01 Executive summary 4 02 Select U.S. and allied semiconductor policies 6 03 Background: Semiconductor manufacturing capacity in China 8 04 Semiconductor manufacturing equipment market in China 11 05 China’s semiconductor manufacturing equipment imports 14 A1 Appendix 1: Methodology 28 3

01 Executive summary 4

Executive summary Executive summary Introduction Foundational semiconductors China was the world’s largest semiconductor manufacturing equipment (SME) market in 2023 and was the This report refers to semiconductors at 28 nm leading global SME importer. This report, a follow-up to Silverado’s Foundational Fabs report, provides a or larger as “foundational” semiconductors detailed analysis of China’s SME imports in 2023. A comprehensive set of recommendations related to the rather than “legacy” or “mature,” which implies semiconductor industry can be found in the Foundational Fabs report. that these semiconductors are less important, Key Findings and that innovation is no longer occurring. Foundational semiconductors are critical to the • China made significant investments in new semiconductor production capacity in 2023 and plans major production of nearly all the goods we consume additional investments in 2024. China is projected to account for 27 percent of global semiconductor and are used in everything from consumer production capacity in 2024. It’s share of foundational capacity is even higher. electronics to medical devices to autos. • China accounted for 31 percent of global SME sales in the first nine months of 2023. Foundational semiconductors also play an indispensable role in fulfilling vital functions • China was the largest global importer of SME in 2023, with imports totaling a record $42.5 billion. China across various defense applications, from imported almost $15 billion more than Taiwan, the second largest importer. communications systems to missile guidance. • The leading sources of imports in 2023 were Japan, the Netherlands, Singapore, and the United States. Foundational semiconductors continue to Singapore and Hong Kong reported significantly higher exports than China reported imports from these undergo innovations to adapt to new sources, indicating that some of their exports to China are likely re-exports. applications, including those that are critical to • The main supplying countries varied by product type. The Netherlands and Japan, for example, were the meeting decarbonization targets. leading suppliers of lithography equipment to China, while Singapore was the largest supplier of chemical Foundational semiconductors account for most vapor deposition equipment. of the semiconductors produced each year and • China imported a broad range of equipment types in 2023. However, a substantial increase in the value are expected to continue to account for the of lithography equipment imports was the biggest driver of the growth in imports in 2023. majority of the market in the near future. Notes/Sources: David, Andrew, Haley Ryan, Mihir Torsekar, Yumi Gambrill, and Sarah Stewart, Foundational Fabs: China's Use of Non-Market Policies to Expand Its Role in the Semiconductor Supply Chain, Silverado Policy Accelerator, Oct 2023, https://silverado.org/news/report-foundational-fabs-chinas-use-of-non-market-policies/; Global Trade Tracker; SEMI, “Q3 2023 Global Semiconductor Equipment Billings Drop 11% Year-over-Year, SEMI Reports,” Nov 30, 2023, 5 https://www.semi.org/en/news-media-press-releases/semi-press-releases/q3-2023-global-semiconductor-equipment-billings-drop-11-percent-year-over-yer-semi-reports; SEMI, “Q2 2023 Global Semiconductor Equipment Billings Dips 2% Year-over-Year, SEMI Reports,” Sep 6, 2023, https://www.semi.org/en/news-media-press-releases/semi-press-releases/q2-2023-global-semiconductor-equipment-billings-dip-2-percent-year-over-year-semi-reports.

02 Select U.S. and allied semiconductor policies 6

Select U.S. and allied semiconductor policies U.S. and allied policies restrict exports of certain advanced SME, but most SME—including for foundational semiconductors—can still be exported v October 2022: U.S. Department of Commerce (USDOC) Issues “October 7” Export Controls Interim Final Rule The new rules took effect in November 2022 and revised the Foreign Direct Product Rule (FDPR). The rules focused on four critical areas to curb the expansion of China’s advanced semiconductor industry: supercomputers, advanced computing capabilities, advanced-node semiconductors, and semiconductor manufacturing equipment (SME). v January 2023: United States-Japan-Netherlands Strike a Deal The United States reaches a deal in principle with the Netherlands and Japan to control export shipments of certain advanced SME to China. v July 2023: Japan Imposes Export Controls on SME Japan’s March 2023 announcement that it will restrict exports of 23 types of SME takes effect. v September2023: Netherlands Imposes New Export Controls on SME The Netherlands’ July 2023 announcement that licenses for non-EU shipments will be required for export of advanced SME (including deep ultraviolet (DUV) equipment) takes effect. v November 2023: USDOC Updates and Modifications to October 7 Export Control Rule Three new interim final rules published in October 2023 take effect covering advanced computing semiconductors and SME. The rules are intended to tighten previous restrictions, reduce circumvention, and prevent China from purchasing and manufacturing leading- edgesemiconductors necessary for military advantage. Notes/Sources: David, Andrew, Haley Ryan, Mihir Torsekar, Yumi Gambrill, and Sarah Stewart, Foundational Fabs: China's Use of Non-Market Policies to Expand Its Role in the Semiconductor Supply Chain, Silverado Policy Accelerator, October 2023, https://silverado.org/news/report-foundational-fabs-chinas-use-of-non-market-policies/; Federal Register notices at USDOC, Bureau of Industry and Security, 7 https://www.bis.doc.gov/index.php/federal-register-notices/17-regulations/2116-federal-register-notices-2023.

03 Background: Semiconductor manufacturing capacity in China 8

Background: Semiconductor manufacturing capacity in China China’s lead in global semiconductor manufacturing capacity is continuing to increase Change in China's semiconductor Share of projected semiconductor production capacity, 2024 production capacity from prior year 27% China 14% 13% 12% Taiwan 18% 12% 16% Korea 10% 8% Japan 15% 6% Americas 10% 4% Europe and Middle East 9% 2% Southeast Asia 5% 0% 0% 5% 10% 15% 20% 25% 30% 2023 2024 Notes/Sources: The data are by number of wafers per month. SEMI, “Global Semiconductor Capacity Projected to Reach Record High 30 Million Wafers per Month in 2024, SEMI Reports,” January 2, 2024, 9 https://semi.org/en/news-media-press-releases/semi-press-releases/global-semiconductor-capacity-projected-to-reach-record-high-30-million-wafers-per-month-in-2024-semi-reports.

Background: Semiconductor manufacturing capacity in China China is projected to account for a larger share of foundational semiconductor production capacity in 2024 Share of estimated global foundational (28 nm or larger) production capacity, 2024 China Taiwan Japan Europe Americas Southeast Asia Korea 0% 10% 20% 30% Notes/Sources: nm: nanometer. Bloomberg, “Geopolitical Risks in the Taiwan Strait: Tech Supply Chain & the Global Economy: BI Replay,” January 9, 2024, https://www.bloomberg.com/professional/blog/webinar/geopolitical- 10 risks-in-the-taiwan-strait-tech-supply-chain-the-global-economy-bi-replay/.

04 Semiconductor manufacturing equipment market in China 11

SME market in China China is the largest global SME market China: Share of global SME market, 2014–September 2023 31% 30% 29% 26% 26% 25% 23% 20% 20% 16% 15% 15% 13% 12% 10% 5% 0% 2014 2015 2016 2017 2018 2019 2020 2021 2022 Jan-Sep 2023 Notes/Sources: SEMI, “Global Semiconductor Equipment Billings Reach Industry Record $107.6 Billion in 2022, SEMI Reports,” April 12, 2023, https://www.semi.org/en/news-media-press-releases/semi-press-releases/global-semiconductor- equipment-billings-reach-industry-record-%24107.6-billion-in-2022-semi-reports; Hana Securities Co. Ltd., 중국 반도체 국산화의 주역들, 12 https://www.hanaw.com/download/research/FileServer/WEB/global/industry/2022/10/03/220930_china_semi.pdf; SEMI, “Q3 2023 Global Semiconductor Equipment Billings Drop 11% Year-over-Year, SEMI Reports,” November 30, 2023, https://www.semi.org/en/news-media-press-releases/semi-press-releases/q3-2023-global-semiconductor-equipment-billings-drop-11-percent-year-over-yer-semi-reports; SEMI, “Q2 2023 Global Semiconductor Equipment Billings Dips 2% Year-over-Year, SEMI Reports,” September 6, 2023, https://www.semi.org/en/news-media-press-releases/semi-press-releases/q2-2023-global-semiconductor-equipment-billings-dip-2-percent-year-over-year-semi-reports.

SME market in China Many global SME manufacturers derived a substantial share of revenue from China in 2023 Headquarters Company revenue and share of revenue from China, 2023 European Union Israel 70% Japan Korea 60% Singapore a Taiwan n i h 50% United States C m o r f 40% e u n e v e r 30% f o e r a 20% h S 10% 0% $0B $2B $4B $6B $8B $10B $12B $14B $16B $18B $20B $22B $24B $26B $28B $30B Revenue Notes/Sources: The data are for calendar year 2023, except Applied Materials (year ending January 28, 2024), Lam Research (year ending December 24, 2023), Kokusai Electric (share to China in April to December 2023 and projected revenue for the fiscal year ending March 2024), and Kulicke & Soffa and Jusung Engineering (year ending September 30, 2023). Lasertec Corp. revenue are sales to “Other Asia,” which accounted for 7 percent of 13 revenue. The data are based on company regional definitions as included in financial reports and may include sales of equipment or services that are not related to SME. The data include major SME equipment manufacturers for which China breakouts were available. Bloomberg Finance L.P.; company financial reports.

05 China’s semiconductor manufacturing equipment imports 14

China’s SME imports China’s SME imports reached record levels in 2023 China's SME imports, 2014–23 $45B $42.5B $38.6B $40B $35.0B $35B $30B $26.9B $25B $22.4B $21.3B $20B $13.8B $15B $10.8B $9.2B $9.1B $10B $5B $0B 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Notes/Sources: Global Trade Tracker database. 15

China’s SME imports Reported exports to China show similar trends and values Global SME exports to China, 2014–23 $45B $42.3B $40B $38.3B $34.6B $35B $30B $26.9B $25B $21.3B $21.1B $20B $14.5B $15B $10.9B $9.0B $10B $7.8B $5B $0B 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Notes/Sources: The data include all countries reporting data as of March 21, 2024. A small amount of additional 2023 exports to China may be reported by other countries after this time. Global Trade Tracker database. 16

China’s SME imports China’s SME imports in 2023 were almost $15 billion higher than the second largest country’s imports Imports of SME, 2023 $42.5B China Taiwan $28.0B $20.1B Korea United States $12.3B Singapore $8.4B Netherlands $7.1B Japan $6.4B $0B$2B $4B $6B $8B $10B $12B $14B $16B $18B $20B $22B $24B $26B $28B $30B $32B $34B $36B $38B $40B $42B $44B $46B Notes/Sources: Global Trade Tracker database. 17

China’s SME imports China’s SME imports were lower in the first half of 2023 than in the same period in 2022, but they significantly increased in the second half of the year China's SME imports, Jan 2019–Dec 2023 $5B $4B $3B $2B $1B $0B 9 9 0 0 1 1 2 2 3 3 1 1 2 2 2 2 2 2 2 2 l l l l l n n n n n u u u u u J J J J J a a a a a J J J J J Notes/Sources: Global Trade Tracker database. 18

China’s SME imports Japan, the Netherlands, Singapore, and the United States were the leading suppliers of SME to China in 2023 China's SME imports, 2014–23 $2.2B $40B $2.1B Other $35B $2.1B $2.2B Israel $2.7B Germany $2.3B $30B $4.2B Taiwan $5.9B Malaysia $3.4B $25B Korea $7.5B $6.9B United States $6.4B $3.4B $20B Singapore Netherlands $5.5B $2.8B $5.8B $3.1B Japan $15B $5.2B $7.5B $4.4B $3.4B $4.5B $3.2B $2.8B $10B $2.4B $2.2B $2.8B $2.9B $2.5B $2.5B $11.1B $10.7B $5B $2.3B $9.5B $7.0B $5.8B $5.6B $3.4B $2.6B $2.1B $2.0B $0B 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Notes/Sources: The listed countries were the top 9 suppliers in 2023. Global Trade Tracker database. 19

China’s SME imports A portion of China’s imports likely go through Singapore and Hong Kong China's reported imports China's SME imports: Comparison of China's reported imports and reported exports to China, 2023 Exports to China Japan $11.1B $11.1B $7.5B Netherlands $6.8B Singapore $6.9B $9.0B $5.9B United States $5.3B Korea $2.7B $2.7B $2.0B Malaysia $0.7B Taiwan $1.9B $1.3B $1.1B Germany $1.0B Israel $1.1B $0.5B $0.7B Austria $0.7B Hong Kong $2.4B $0B $1B $2B $3B $4B $5B $6B $7B $8B $9B $10B $11B $12B Notes/Sources: The chart shows countries that were among the top ten countries in reported exports to China or in China’s reported imports in 2023. Global Trade Tracker database. 20

China’s SME imports Imports from the four largest suppliers were higher in the second half of 2023, with a particularly large increase in imports from the Netherlands China's SME imports from the four largest suppliers, Jan 2019–Dec 2023 $1B Japan $0B $1B Netherlands $0B $1B Singapore $0B $1B United States $0B 9 9 9 99 9 9 9 9 9 9 9 0 0 0 0 0 0 00 0 0 0 0 1 1 1 1 1 1 1 11 11 1 2 2 2 2 2 2 2 2 2 2 22 3 3 3 3 3 3 3 3 3 3 3 3 1 1 1 11 1 1 1 1 1 1 1 2 2 2 2 2 2 22 2 2 2 2 2 2 2 2 2 2 2 22 22 2 2 2 2 2 2 2 2 2 2 2 22 2 2 2 2 2 2 2 2 2 2 2 2 l l l l l t t t t t r r r r r r r r r r c c c c c v v v v v y y y y y g g g g g b p b p b p b p b p n n n n n n n n n n c c c c c u u u u u a a a a a p p p p p e e e e e a a a a a o o o o o J J J J J u u u u u a a a a a e e e e e e e e e e u u u u u J J J J J J J J J J O O O O O A A A A A F F F F F S S S S S D D D D D A A A A A N N N N N M M M M M M M M M M Notes/Sources: Global Trade Tracker database. 21

China’s SME imports Lithography equipment accounted for the largest share of imports following a significant increase in imports from 2022 to 2023 China's SME imports by product type, 2014–23 $40B $8.0B $35B Other $9.7B Ion implanters $8.7B $30B Physical vapour deposition (PVD) equipment Step and repeat aligners $3.5B Oxidation, diffusion, annealing and other heat treatment equipment $25B $6.4B Other machines and apparatus, nesoi $4.1B $2.6B Other optical instruments and appliances for inspecting $2.7B $20B Parts and accessories of goods of heading 8486, nesoi $7.2B $4.3B $6.1B $3.3B Dry plasma etching equipment $6.6B $15B Chemical vapour deposition (CVD) equipment $4.4B $5.5B Other apparatus for the projection or drawing of circuit patterns $4.8B $10B $4.3B $5.9B $4.9B $4.0B $3.7B $3.3B $3.6B $3.5B $4.0B $4.2B $2.4B $5B $3.7B $7.1B $2.5B $3.6B $2.5B $0B 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Notes/Sources: nesoi: not elsewhere specified or included. The goods shown are the top 10 products imported in 2023 by Chinese 8-digit national tariff line. Global Trade Tracker database. 22

China’s SME imports The Netherlands was the largest supplier of lithography equipment in 2023, with Japan the second largest supplier China's imports of lithography equipment, by source, 2023 Japan Netherlands Notes/Sources: Based on trade in 8486.20.31 (step and repeat aligners) and 8486.20.39 (other apparatus for the projection or drawing of circuit patterns on sensitized semiconductor materials). These products are broken 23 out separately in the chart on the previous page. The size of the bubble is proportional to the value of imports. Global Trade Tracker database.

China’s SME imports Singapore was the largest supplier of chemical vapor deposition equipment in 2023 China's imports of chemical vapor deposition (CVD) equipment, by source, 2023 Singapore Malaysia Korea Italy United States Japan Notes/Sources: The size of the bubble is proportional to the value of imports. Global Trade Tracker database. 24

China’s SME imports Dry plasma etching equipment comes from a variety of sources, with Japan and Malaysia the largest suppliers China's imports of dry plasma etching equipment, by source, 2023 Malaysia United States Korea Japan Taiwan Notes/Sources: The size of the bubble is proportional to the value of imports. Global Trade Tracker database. 25

China’s SME imports The United States was the largest supplier of parts for SME, followed by Japan and Korea China's imports of SME parts, by source, 2023 Japan Taiwan Korea United States Notes/Sources: The size of the bubble is proportional to the value of imports. Global Trade Tracker database. 26

China’s SME imports The United States, Singapore, and Israel were the largest suppliers of optical equipment for inspecting semiconductors China's imports of optical instruments or appliances for inspecting semiconductor wafers or devices or for inspecting photomasks or reticles used in manufacturing semiconductor devices, by source, 2023 Japan United States Israel Korea Singapore Notes/Sources: The size of the bubble is proportional to the value of imports. Global Trade Tracker database. 27

A1 Appendix 1: Methodology 28

Appendix 1 Methodology Trade data All trade data are by value in U.S. dollars. Trade data coverage The trade data presented here are based on trade in Harmonized Commodity and Description Coding System (HS) numbers 8486.10, 8486.20, 8486.40, 8486.90, 9030.82, and 9031.41. These are the numbers that, at the HS 6-digit level, are primarily semiconductor manufacturing equipment. However, some of these HS numbers also include non-semiconductor machinery, including machines for manufacturing solar photovoltaic (PV) products and parts of machines for manufacturing flat panel displays. (Chinese companies are currently the largest global producers of solar PV manufacturing equipment.) On the other hand, there is some semiconductor manufacturing equipment that is not included in these HS numbers. The trade data include a small amount of Chinese re-imports ($244 million in 2023). Production capacity data Semiconductor production capacity data in this report are by country of production, including all manufacturers regardless of where the plant owner is headquartered, rather than by the nationality of the company. Notes/Sources: For more on the major manufacturers of solar manufacturing equipment, see International Energy Agency, Special Report on Solar PV Global Supply Chains, July 2022, 29 https://iea.blob.core.windows.net/assets/4eedd256-b3db-4bc6-b5aa-2711ddfc1f90/SpecialReportonSolarPVGlobalSupplyChains.pdf.

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