SK hynix has decided to sell the equipment of its subsidiary, which operates a foundry in China, to an investment company of the Wuxi Municipal People’s Government in China. There are analyses suggesting that this move signifies the withdrawal process of SK hynix’s foundry business in China.
According to semiconductor industry sources on May 8, SK hynix System IC, SK hynix’s subsidiary operating an 8-inch foundry, recently held a board meeting and decided to sell a 21.33 percent stake in its local foundry production firm, SK hynix System IC Wuxi, and intangible assets such as process technology to Wuxi Industrial Development Group. The sale amounts to 205.4 billion won (US$150.48 million) and 120.9 billion won, respectively. Wuxi Industrial Development Group is an investment company of the Wuxi Municipal People’s Government that jointly established the local foundry venture with SK Hynix.
It has been reported that this sale includes the foundry equipment owned by SK hynix.
Additionally, the management of SK hynix System IC held a meeting related to this sale with employees to explain its future business plans. During the meeting, it also discussed the deteriorating business environment and plans to improve financial soundness by reducing debt through the stake sale.
Since 2018, SK hynix has been relocating equipment from Cheongju as part of its efforts to strengthen its foundry business. SK hynix has been operating by investing in tangible and intangible assets such as semiconductor manufacturing equipment, while Wuxi Industrial Development Group has been providing resources such as water and electricity via its local infrastructure. With this divestment, however, it seems that there will be a change in the business structure. There are even forecasts suggesting the possibility of complete withdrawal from the semiconductor foundry business in China.
SK hynix’s decision to downsize its foundry business in China is driven by the worsening semiconductor market conditions, coupled with aggressive capacity expansion by local companies, making it difficult to maintain competitiveness.
China is aggressively expanding its 8-inch wafer factories, focusing on leading foundry companies such as SMIC and Hua Hong Semiconductor. In response to the stringent regulations on advanced semiconductors imposed by the United States, China has opted to foster legacy, or general-purpose, semiconductors. The Chinese government has recently established a third US$27 billion National Integrated Circuit Industry Investment Fund for semiconductor investments and is intensively promoting domestic semiconductor equipment localization. Previously, the government had created two funds totaling US$45 billion to sweep purchasing equipment necessary for the production of general-purpose semiconductors.
The results of such aggressive investments are evident in the numbers. According to the National Bureau of Statistics (NBS) of China, China’s semiconductor production in the first quarter grew sharply by 40 percent compared to the previous year, reaching 9.81 billion units. Particularly, SMIC increased its overall production capacity by more than 12 percent last year despite a general slowdown in foundry demand. Market research firm TrendForce forecasts that China’s share in the legacy semiconductor market, with a node size of 28 nanometers (nm) or above, will rise from 29 percent last year to 33 percent by 2027.
Notably, Chinese foundry companies leverage substantial government subsidies to offer lower service prices than their competitors and secure customers. SK hynix has adopted a strategy of localization through the joint venture. However, it is inevitable for SK hynix System IC rooted in South Korea to face a disadvantageous situation.
The concern is that missing out on the general-purpose semiconductor market could result in a decline in the overall competitiveness of the domestic semiconductor industry. While advanced processes are gaining attention due to the recent demand expansion for artificial intelligence (AI), general-purpose products account for over 70 percent of the total semiconductor market. The demand for these products is broad, including in the automotive, home appliances, and defense industries. Even Samsung Electronics, which has the largest semiconductor foundry business in South Korea, is estimated to generate 70 percent of its revenue from general-purpose processes that do not utilize extreme ultraviolet lithography (EUV).
This means that it is a stable source of income that supports the advanced process competition which continuously requires an astronomical scale of investments despite relatively low profitability.
It can also entail allowing China’s technological advancement. The ultimate goal of Chinese companies, which have secured semiconductor expertise in general-purpose processes, is the complete internalization of the semiconductor ecosystem, spanning advanced processes. A prime illustration is SMIC’s feat last year in fabricating 7-nanometer application processors (AP) for Huawei smartphones without reliance on ASML’s EUV lithography equipment.