China’s efforts to innovate its way around U.S. export controls on sophisticated semiconductor manufacturing equipment now focus on leveraging advanced packaging (AP) technology.
However, given China’s leading position in the chip packaging market, the country’s initiatives could impact semiconductor sourcing strategies worldwide.
Innovating Around Obstacles
The U.S. export controls effectively prohibit China from importing chip equipment capable of producing logic chips using 16nm, 14nm and smaller nodes. Such process technologies are well behind the current state-of-the-art geometry of 3nm, now offered by TSMC. However, Chinese companies have been working overtime to innovate around the restrictions.
The country’s leading foundry, Semiconductor Manufacturing International Corp (SMIC), surprised the technology industry and shocked Washington D.C. in September by announcing a 7nm smartphone chip that seemingly leaped past the restrictions. However, the technique used to make the chip may not be capable of scaling to high-volume production.
A more viable path for China to mitigate the impact of the export restrictions lies in leveraging advanced packaging technology that allows the integration of multiple semiconductor dice into a single enclosure. This technique enables the production of sophisticated semiconductors that can scale to massive transistor counts while still using older process geometries.
The “Chiplet” Approach
Leading semiconductor U.S. chipmaker Intel has demonstrated this approach by offering processors that combine multiple small chip dice, also known as “chiplets,” into a single package. Intel has employed this technique in various products, including its 4th Gen Xeon CPU for data centers and its new Meteor Lake microprocessor targeted at consumer laptop PCs.
Like China, Intel’s adoption of chiplets and AP was born of necessity, with the company falling behind the state-of-the-art in semiconductor process technology but still needing to produce advanced, highly integrated processors.
In this regard, AP is taking the reins from Moore’s Law when it comes to scaling up to larger transistor counts.
This development mitigates the impact of China’s weaknesses in advanced process technology while playing to its strengths in packaging. China has ranked first in assembly, packaging, and testing in recent years, holding nearly a 40% share of the global outsourced assembly, packaging, and testing (OSAT) business.
While China is still trailing other countries like Taiwan in terms of the advancement of its chip packaging technology, the country is moving quickly to close the gap.
Global AP Market Outlook
Semiconductor buyers around the world will increasingly be purchasing devices enclosed in advanced packages capable of integrating multiple chiplets, with the global AP market set to rise to $78 billion by the end of 2028, growing at a compound annual growth rate of 10.6% from $44.3 billion in 2022, according to Yole Intelligence.
Given China’s leading role in the market, it’s inevitable that the supply chain for many chips will travel through Chinese OSAT firms. However, amid rising trade tensions between China and other nations, access to these OSATs could be curtailed as a retaliatory measure.
China has already demonstrated a willingness to engage in tit-for-tat trade actions, including its recent restrictions on exports of the critical semiconductor materials of germanium and gallium in response to U.S. export controls.
Under these circumstances, semiconductor buyers should expand engagements with alternative AP sources outside of China, using supplies from countries including the U.S., Malaysia, and Taiwan.