Reconstructing the Semiconductor Industry Landscape: Opportunities and Challenges of Wafer Fab Location Recognition

1. Policy Background and Essence of the Rules

On April 11, 2025, the China Semiconductor Industry Association issued an urgent notice clarifying that the origin of integrated circuits is determined by the “wafer fab location”. This rule is not a new policy but a reiteration and refinement of the long-standing “four-digit tariff number change principle” enforced by the General Administration of Customs. According to the “Regulations on the Origin of Imported and Exported Goods of the People’s Republic of China”, the substantial change of semiconductor products is primarily based on the change of tariff numbers, with the wafer fab stage (from bare silicon wafers to unpackaged chips) being the key node for tariff number changes. Following this announcement, the market interpreted it as a positive signal, and the semiconductor sector showed an upward trend on the same day.This clarification of the rule has dual significance: on one hand, it standardizes the import customs process by unifying industry understanding, preventing companies from evading tariffs through packaging or design locations; on the other hand, amidst the turbulence of the global trade system, it strengthens domestic supply chain security and provides institutional support for domestic substitution.

2. Direct Impact on Domestic Wafer Foundry Enterprises

1. Surge in Capacity Demand, Significant Benefits for Leading EnterprisesSMIC, as the leading domestic wafer foundry, is expected to achieve a 58% market share in the domestic market and 8% globally by 2024, with a 98% yield rate for 14nm processes, and over 30% of its capacity dedicated to automotive-grade chips. Following the implementation of the policy, orders for its mature processes (such as 28nm and 40nm) have significantly increased, especially in the fields of analog chips and MCUs. For instance, a leading domestic analog chip company stated that products from US companies TI and ADI will face increased tariffs upon import due to their wafer fab location being in the US, while this company has signed a long-term foundry agreement with SMIC, expecting a capacity utilization rate of 95% by 2025.Huahong Semiconductor holds a 38% global market share in the power device foundry sector, and its second phase of the 12-inch production line in Wuxi has been put into production ahead of schedule, with mass production of 40nm and 55nm automotive-grade chips expected in the first quarter of 2025, adding a monthly capacity of 20,000 wafers. Under the favorable policy, its stock price surged by 19.75% on the day of the announcement, and foreign investment firm BlackRock increased its stake to over 5.2%.

2. Rise of Specialty Process FoundriesDomestic wafer fabs are further highlighting their advantages in specialty processes. For example, Huahong Semiconductor’s embedded non-volatile memory (eNVM) platform has become the largest MCU manufacturing base in China, with mass production of automotive-grade MCUs in collaboration with STMicroelectronics expected by the end of 2025. IDM companies like Silan Microelectronics will also benefit from the import substitution of analog chips, with their 12-inch BCD process validated by Huawei HiSilicon, and a capacity plan of 50,000 wafers per month by 2025.

3. Synergistic Effects in the Industry Chain and Accelerated Import Substitution

1. Deep Binding of Design and Manufacturing, Enhancing Competitiveness of Domestic ChipsDriven by the policy, chip design companies are accelerating cooperation with domestic wafer fabs. For instance, Huawei HiSilicon has transferred part of its 55nm RF chip production to SMIC, achieving a “design-manufacturing” closed loop, reducing costs by 15%. Dongfeng Motor’s fully domestic automotive-grade MCU chip DF30 adopts the RISC-V architecture and is based on Huahong Semiconductor’s 40nm process, with performance on par with international standards, planning mass production in 2026.2. Accelerated Localization of Equipment and MaterialsDomestic semiconductor equipment companies are seizing opportunities. Northern Huachuang’s etching machines and thin film deposition equipment have entered the supply chains of SMIC and Yangtze Memory Technologies, achieving a domestic market share of 25%. Shanghai Microelectronics holds a 15% domestic market share for its 90nm lithography machines, with breakthroughs in the development of 28nm lithography machines expected to enter the validation stage by 2026. In the materials sector, Shanghai Silicon Industry holds a 30% domestic share of 12-inch silicon wafers, and Jiangfeng Electronics has a global market share of 15% for target materials, with the localization rate continuously improving.

4. Impact and Challenges to the Global Supply Chain

1. US Chip Companies Facing Tariff BarriersProducts from US analog chip manufacturers like TI and ADI will face increased tariffs upon import due to their wafer fab location being in the US. For example, the cost of TI’s LDO (Low Dropout Regulator) will increase by 125%, while domestic alternatives (such as SGM2019 from Shengbang Co.) are priced at only 70% of TI’s, with performance parameters being comparable. This will lead to a gradual shrinkage of US products’ market share in consumer electronics and industrial control sectors.2. Restructuring of Global Capacity LayoutTo avoid tariffs, foreign companies may adjust their supply chains. For instance, Broadcom plans to transfer the production of 28nm RF chips from Singapore to Xiamen United Semiconductor, and TSMC’s Nanjing factory has received urgent orders from several domestic design companies. The EU is also studying a dual recognition standard of “wafer fab location + design location” to balance supply chain security and the risk of technology outflow.

5. Risks and Challenges

1. Continued Dependence on Imported High-End ChipsHigh-end digital chips (such as GPUs and mobile SoCs) from companies like NVIDIA and Qualcomm are produced at TSMC and Samsung, and since some production locations are in Taiwan, they are not affected by tariffs. In 2024, the import value of high-end chips in China is expected to account for 68% of total demand. However, in the future, the source of high-end chips will gradually shift towards mainland China, with some large chip manufacturers already establishing operations in China, requiring time to gain market share.2. Technical Bottlenecks and Risks of OvercapacityDomestic wafer fabs still lag behind international levels in advanced processes (such as below 7nm). Although SMIC’s 14nm process has met yield standards, there is a significant gap in power consumption and performance compared to TSMC’s 5nm. At the same time, the expansion of mature process capacity may lead to localized overcapacity, with Huahong Semiconductor expecting the domestic utilization rate of 8-inch wafers to drop to 85% by 2025.

6. Future Outlook and Investment Recommendations

1. Continuous Release of Policy DividendsThe National Integrated Circuit Industry Investment Fund Phase III will focus 344 billion yuan on equipment and materials, with local governments establishing a special fund of 12 billion yuan to support the expansion of Huahong in Wuxi and SMIC’s Lingang base. It is recommended to pay attention to companies like SMIC (domestic foundry leader), Huahong Semiconductor (leading in specialty processes), and Northern Huachuang (main force in equipment localization).

2. Balancing Technological Breakthroughs and Ecosystem DevelopmentCompanies need to increase R&D investment to break through advanced process technologies while improving the industrial chain ecosystem. For example, Loongson’s processors based on the self-developed instruction set LoongArch have been applied in the party and government sectors, and future expansion into the commercial market is necessary.3. International Cooperation and Risk HedgingWhile strengthening domestic substitution, it is essential to maintain open cooperation. For instance, Huahong Semiconductor’s collaboration with STMicroelectronics enhances technological levels while mitigating geopolitical risks.

7. A-share Market Reaction and Investment Opportunities

(1) Market Performance After Policy Implementation

1. Overall Sector SurgeOn April 11, the day the policy was announced, the A-share semiconductor sector experienced a surge, with the Shenwan Semiconductor Index rising by 6.73% in a single day, leading the entire industry. The STAR Market chip ETF (588290) saw a net inflow of over 1.3 billion yuan in a single day, with leading stocks like Huahong Semiconductor (688347) and SMIC (688981) exceeding 5 billion yuan in trading volume, indicating high recognition of the domestic substitution logic.

• Capital Flow on the Day: The semiconductor sector saw a net inflow of over 7 billion yuan, accounting for 18% of the total net inflow in the market, with leading equipment companies like Northern Huachuang (002371) and Zhongwei Company (688012) receiving net purchases exceeding 500 million yuan from institutions.
• Northbound and Leveraged Funds: The Shanghai Stock Connect increased its holdings in SMIC by 120 million shares, raising the holding ratio to 5.8%; Huahong Semiconductor’s Hong Kong stock received a net purchase of 1.6 billion Hong Kong dollars from southbound funds, setting a new high for the year; the sector’s financing balance increased by 12% in a single day, with financing purchases for SMIC and Northern Huachuang reaching 1.8 billion and 1.2 billion yuan, respectively.

(2) Individual Stock Performance Driven by Policy

1. Leading Wafer Foundry

• SMIC: The stock rose by 12.6% on the day of the policy announcement, with visibility of 14nm mature process orders extending to the end of 2025, and institutions have raised their revenue expectations for 2025 to 58 billion yuan (up from the original forecast of 52 billion yuan).
• Huahong Semiconductor: The Hong Kong stock rose by 14.07% in a single day, with the second phase of the 12-inch production line in Wuxi starting production ahead of schedule, and the proportion of automotive-grade chip capacity increasing to 45%. Huaxing Securities raised the target price to 44 Hong Kong dollars (up from 30.4 Hong Kong dollars).

Core Targets in Equipment and Materials

• Northern Huachuang: The share of etching machines and thin film deposition equipment in SMIC’s expansion has increased to 35%, with a limit-up on April 11, and four institutions maintaining a “buy” rating, with a target price having 30% upside potential compared to the current price.
• Shanghai Silicon Industry: Holding a 30% domestic share of 12-inch silicon wafers, the stock price rose by 9.3% after the policy, with a capacity plan for 1 million wafers per month by 2025, covering customers including Samsung’s Xi’an factory.

Design and Application Segment

• Shengbang Co.: As a leading analog chip company, the stock hit the limit-up of 20% on the day of the policy announcement, with the market share of automotive-grade operational amplifier products in BYD’s supply chain increasing from 10% to 30%.
• Naxin Microelectronics: The automotive-grade isolation chip has passed AEC-Q100 certification, with the stock price rising by 18% after the policy, and gross margin expected to increase by 8 percentage points in Q1 2025.

(3) Key Sectors and Investment Logic to Focus On

1. Wafer Foundry and Specialty Processes

• Core Logic: The wafer fab location recognition rule directly benefits domestic wafer fabs, with capacity utilization rates for mature processes (28nm and above) expected to exceed 95%. SMIC and Huahong Semiconductor are expected to achieve revenue growth rates of 35% and 30% respectively by 2025.
• Targets: SMIC (leader in mature processes), Huahong Semiconductor (leading in automotive-grade specialty processes), and Jinghe Integration (display driver chip foundry).

Semiconductor Equipment and Materials

• Core Logic: The acceleration of domestic wafer fab expansions will increase the localization rate of equipment from 25% in 2024 to 35% in 2025, with surging demand for etching machines and thin film deposition equipment.
• Targets: Northern Huachuang (leader in etching machines), Zhongwei Company (5nm etching machine validated by TSMC), and Shanghai Silicon Industry (main force in domestic substitution of 12-inch silicon wafers).

Analog Chips and Automotive-Grade Chips

• Core Logic: The 125% tariff increase on US products creates a domestic substitution space exceeding one trillion yuan, with the penetration rate of automotive-grade chips expected to rise to 30%.
• Targets: Shengbang Co. (covering all categories of analog chips), Naxin Microelectronics (automotive-grade isolation chips), and Silan Microelectronics (benefiting from IDM model).

AI Computing Power and Advanced Packaging

• Core Logic: The demand for AI servers drives the domestic substitution of HBM memory chips and GPUs, with breakthroughs in Chiplet technology enhancing performance.
• Targets: Cambricon (leading in AI chip R&D), Changdian Technology (15% market share in advanced packaging), and Tongfu Microelectronics (AMD packaging partner).

8. Risk Warnings and Strategy Recommendations

1. Short-term Volatility Risk: The median P/E ratio of the sector has reached 55 times, higher than the historical average of 35 times, necessitating caution against potential pullbacks due to performance not meeting expectations.
2. Technical Barriers: Equipment for advanced processes below 7nm still relies on imports, with Shanghai Microelectronics’ 28nm lithography machine expected to enter the validation stage in 2026.
3. Overcapacity Risks: Global wafer foundry capacity is expected to expand by 40% in 2025, with domestic 8-inch wafer utilization rates potentially dropping to 85%.

Strategy:

• Short-term: Focus on wafer foundries (SMIC, Huahong Semiconductor) and equipment materials (Northern Huachuang, Shanghai Silicon Industry) that directly benefit from the policy. Attention should be paid to Huahong’s pullback to the 60-day moving average (which has already broken through), while SMIC should be monitored near the 20-day moving average (currently still a resistance level), with potential for further increases if it stabilizes.
• Medium to Long-term: Layout in high-growth sectors such as AI computing power (Cambricon, Haiguang Information) and automotive-grade chips (Naxin Microelectronics, Silan Microelectronics).
• Risk Hedging: Diversify individual stock risks through semiconductor equipment ETFs (561980) and materials ETFs (516360), while also paying attention to the investment direction of the National Integrated Circuit Industry Investment Fund Phase III. ETFs are relatively stable, and for those unable to purchase STAR Market and Hong Kong stocks, ETFs are a good focus.

The above is for investor reference only and does not constitute any investment advice.

References

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