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    VLSIinsiders on SMIC, Japan, & The Economy

      Oct 7, 2020

    VLSIinsiders’ cloudside chat — October 07, 2020

    • The Trump Administration lockdown on SMIC
    • Tech decoupling
    • Policy development in Japan’s semiconductor supply base
    • Impact on 2021: will it be down or up?
    • UMC’s capex repositioning
    • How
    • And, as always, what we’re hearing about order visibility

    About VLSIinsiders: Every week our analysts have a cloudside* chat to discuss current events and key issues of concern, while sharing what they’ve heard over the past week from the semiconductor industry insiders.

    * cloudside chat: A fireside chat without the fire and is across the clouds of the internet

    Other VLSIinsiders

    Transcript

    VLSIinsiders’ Cloudside Chat — October 07, 2020

    DAN HUTCHESON: Welcome to this edition of VLSIinsiders. It's 10 October 2020. And I've got Andrea Latti, Risto Puhakka, and John West here. And we're going to be talking about some of the exciting things, you know, kind of the unfolding of the SMIC lockdown by the Trump administration and the tech decoupling. Is it really going to decouple or not and the impact on 2021? So welcome to the program guys.

    RISTO PUHAKKA: Thank you Dan.

    DAN HUTCHESON: So anyway, Risto, what are you seeing with the tech decoupling and the lockdowns. You have some pretty insightful view.

    RISTO PUHAKKA: Well, the first thing is just that brief conversation I've had was and really still at the back of the envelope calculation. We're looking potentially about billion dollars less equipment sold in the fourth quarter so and it's actually still fits pretty well within our error margins, what we see in the fourth quarter, so not as substantially impact really. Then we start to look what's going to be next year, which is actually becomes a lot more interesting to how that folds out next year.

    DAN HUTCHESON: So, Andrea, do you see a…people fill in next year, and maybe catching up on that billion, like with Micron or what not?

    ANDREA LATI: Yeah, I think so. Because if you look at Micron, they already increased and they specifically talked about market share, they're not losing their share. And of course, that of course, raises red flags that Hynix, and Samsung, and PLC has. So I'm pretty sure that those companies will try to maintain their shares as well, which means that they'll have to spend more capex. Now the question is, is that enough to make up for the shortfall in China? Because again, China, now it accounts for about a third of WFE. And of course, maybe about half of that third is from the local Chinese companies. So if that's removed, that might mean, you know, a more, you know, difficult year for WFE in 2021. But I think with the increases that are likely to come from the current players, they'll probably offset much of that. We still may end up with a positive year there, but we had to look at a scenario actually, what happens if that half of that third is gone, essentially, because of this research...

    DAN HUTCHESON: Yeah.

    ANDREA LATI: …we're seeing.

     DAN HUTCHESON: We kind of saw that with Huawei, right? This is a lot of the offset business that went away got replaced with other people coming in and filling a vacuum.

    ANDREA LATI: Correct. And somebody else will have to make up for that shortfall. And the, we are already seeing companies, especially second tier companies that compete with SMIC, doing pretty well this second half of the year. And I believe that part of this because many customers are preferring now to stick more with a non-Chinese company and remove the uncertainty. Even though you know, SMIC might offer them pretty good pricing, they'll probably you know, pay a little bit more but have a more secure supply than be dealing with all that uncertainty in 2021.

    DAN HUTCHESON: It's kind of interesting, even UMC seems to have gotten really aggressive with spending.

    RISTO PUHAKKA: Yeah.

    DAN HUTCHESON: A surprise, right?

    RISTO PUHAKKA: Yeah.

    RISTO PUHAKKA: And, the general commentaries that the, let's call it the second-tier capacities, pretty well full. So, they, if this thing continues as it looks like, they're going to need more capacity to offset what SMIC is missing out.

    DAN HUTCHESON: So, John, you know, there's been a lot of talk about all of this slowing the economy and the COVID slowing the economy that the lack of spending is kind of slowing. The recovery is, the momentum is slowing in the US. What are you seeing in Europe?

    JOHN WEST: Yeah, I think it's the same in Europe as well actually, I think the things that are visible, highly visible like the bars, restaurants, entertainment, all of that is suffering very badly. It's the invisible businesses, you know, behind closed doors, like ours, that a lot of those businesses are actually doing really quite well right now. And a lot of this has to do with the free money that is flying around the system. So, I was speaking to one of my neighbors in our office block last, on Monday. She specializes in putting UK buyers in touch with sellers of properties in Italy and apparently that business is booming because the Italian government has just reduced all restrictions on redeveloping houses. They've been given free money, there's grants available. So that part of the business or the economy in Europe is going really strongly, but it's not something that's actually visible. So on the one hand, yes, it feels like everything is slowing down. But on the other hand, there are plenty of sectors that are doing extremely well outside of semiconductor. So it's a bit mixed. It's not all, it's not all bad for sure.

    DAN HUTCHESON: So that would tend to indicate the same thing we're seeing in the US is that there's a lot of construction investments going on.

    JOHN WEST: Yeah, it's the same. Everything's been reconfigured. So offices that have been built are probably being reconverted into housing, with the suitable for housing with offices, and everything is just changing. Even trying to find a builder, just to do some remodelling on the house, it's impossible because everybody is remodelling their house to be more convenient for running an office from home. So things are changing. It is reconfiguring is what I use.

    DAN HUTCHESON: Yeah.

    JOHN WEST: So, it's uncertain, but it's not like other, I think, downturns or recessions where everybody is down. This is it's very mixed.

    DAN HUTCHESON: Yeah, definitely, the wall shares going into us to the industry.

    RISTO PUHAKKA: And one thing is helping on that is, of course, the stimulus is helping on that, because that makes the financing available to these projects at a very low cost. So, it does support the economy, so to speak.

    JOHN WEST: Yep.

    DAN HUTCHESON: Yeah. Speaking of, coming back to the deep coupling of tech between United States and China, we've been hearing some interesting stuff about the Japanese companies aligning to what the US restrictions are.

    RISTO PUHAKKA: Yes, it's a very clear trend that and very understandable through the alliances and in the business in US, but it looks pretty clear that the Japanese equipment suppliers are aligning with the US regulations pretty naturally. And that creates its own restrictions then to for China, to China to access equipment, non US equipment as well and so from that perspective because after that it leaves very limited supply.

    DAN HUTCHESON: Yeah. Any comments, John, from the critical subsystems space?

    JOHN WEST: Yeah, so yes. So clearly, some of the big companies, makes sense for them to align with the US. And it seems that small Japanese companies in particular, who have maybe a reasonable proportion of their business with US companies, that they now have authority that they have been very, very cautious about doing business with Chinese companies. So, although the opportunities that are there for them to take, if they wish, they've made a firm decision not to, so it doesn't matter big company, even quite small companies, $20-30 million sized companies, steering clear of China.

    DAN HUTCHESON: Yeah, it's interesting, or even the Taiwanese companies are starting to pull back on investments and ASC just sold one of its Chinese groups.

    RISTO PUHAKKA: Yes. Yeah. There was news on that so they're limiting their exposure to on their manufacturing portfolio in China.

    DAN HUTCHESON: So…

    JOHN WEST: Yeah, I think it's quite clear as well, that the, you know, the supply chains are reconfiguring as we speak. So things that were in China are a bit now being moved out to Vietnam, Malaysia and other places. This is ongoing as we speak, and if anything, accelerating right now.

    DAN HUTCHESON: Yeah, certainly. The Trump administration's impact has been pretty significant on that part. And in addition to the COVID and I think it's just one that a lot of weight and everybody's sort of regrouping to figure out how they do business in the future. And China not the lowest cost place anymore. That's the other thing that's happening. What happened to Japan is happening to China, that is they're becoming a relatively high-cost manufacturing center.

    RISTO PUHAKKA: And the other issue is also you have to, there's been several articles, that actually that China is not so business friendly to foreign companies. Let's see if you compare contrast Singapore to Malaysia or especially looking to high tech industry in general. So, you start those places will look a lot more attractive because it's not the labour cost alone that defines your…

    DAN HUTCHESON: Right

    RISTO PUHAKKA: …attractiveness.

    DAN HUTCHESON: Right. And a lot of them have good knowledge workers too. Thailand.

    RISTO PUHAKKA: Yes, yes.

    DAN HUTCHESON: Malaysia. Yeah, we go through that whole area down in Southeast Asia. India is starting to pick up too.

    RISTO PUHAKKA: That's so true. That's true.

    DAN HUTCHESON: I mean, even Apple is manufacturing there. And so anyway, anything else to cover guys?

     JOHN WEST: It's been a quiet week.

    RISTO PUHAKKA: Yeah.

    DAN HUTCHESON: Yeah, it has been a quiet week. Okay. Well, thanks for taking the time today and welcome to all the insiders, all the people that want to see us talk about what's going on. Thank you.

    RISTO PUHAKKA: Thank you, Dan.

    JOHN WEST: Bye Dan.