Did the semiconductor get shot when the bank crashed?

On March 10th local time, according to a statement issued by the Federal Deposit Insurance Corporation (FDIC), the California Department of Financial Protection and Innovation (DFPI) announced the closure of the Bank of Silicon Valley on the same day. As of the bankruptcy announcement, Silicon Valley Bank still had a total of 1.2 trillion yuan of user deposits outstanding, and FDIC will act as the bankruptcy administrator to carry out the aftermath work.



The sudden explosion of this thunderbolt quickly spread the crisis.



At the beginning of its establishment, Silicon Valley Bank mainly engaged in retail business, and gradually turned to providing financing services for industries such as technology and semiconductor. The bank has a high proportion of business in such industries as technology and semiconductor, and is known as one of the representatives of technology finance in the United States. The thunderbolt at Silicon Valley banks has had a significant impact on many start-ups. Garry Tan, CEO of Y Combinator, a well-known startup incubator, said in an interview with CNBC that the bank thunderstorm has affected 1000 startups, and one-third of them will not be able to pay salaries within the next 30 days.



Finance and semiconductor have always been two sharp swords of the United States. How mysterious is the relationship between the two?



01

Unexpected "major shareholders" behind semiconductor manufacturers

The Netherlands based ASML company is the only global lithography machine manufacturer, and its market share in the high-end lithography machine market has exceeded 80%, which also means that ASML company has a monopoly position in the global lithography machine field. According to the publicly available data, the largest shareholder of ASML is Capital Research and Management Company, which owns 15.81% of the shares. The second largest shareholder is BlackRock Inc. (BlackRock Group of the United States), with a 7.95% stake. The third largest shareholder is Baillie Gifford, with a 4.54% stake. The impact of American capital on lithography giants is self-evident.



Under the influence of the American Chip Act, TSMC went to the United States to build factories, which was nicknamed "TSMC". In the list of major shareholders published in TSMC's annual report, Citigroup's depository receipt account for TSMC, which ranks first, holds 20.54% of the shares. Although Citigroup is only a depository bank for TSMC's stock issuance in the United States, it cannot be said that Citigroup is a major shareholder of TSMC. Citigroup is only responsible for the transfer, custody, and liquidation of TSMC's stock issuance in the United States. However, in terms of the overall shareholder composition of TSMC, the number of institutional and individual holdings from the United States is also large, and the financial impact of the United States is evident.



And Samsung. Samsung Electronics is the largest subsidiary of Samsung Group, accounting for 90% of the profits of the entire Samsung Group. A look at the equity structure of Samsung Electronics can understand everything. From the perspective of common stocks, foreign investors account for up to 55%, most of which are American capital, mainly numerous financial consortiums on Wall Street in the United States; The proportion of major shareholders and affiliated enterprises reached 21%, while the proportion of domestic investors in South Korea was 19%. American capital accounts for half of the common stock.



Financial "Control" and Power in the United States

The semiconductor industry is also a typical capital intensive industry, with its vigorous development highly dependent on capital intensive investment, which mainly comes from the financial market. In recent years, the capital expenditure of the global semiconductor industry has shown a sharp upward trend, and has now exceeded the order of 100 billion dollars for three consecutive years. In the United States, the semiconductor industry is the second largest capital intensive industry after biomedicine, with R&D investment accounting for 18.6% of the industry's total revenue.



The reason why the semiconductor industry requires a large amount of capital expenditure is that semiconductor technology iterations are fast, and enterprises need to continuously invest in a large amount of research and development to maintain their technological leadership in order to survive market competition. If you look at the R&D investment ratio, the three American companies, Qualcomm, Broadcom, and Nvidia, have the highest R&D investment ratio, all of which are above 30%. On the contrary, Samsung and TSMC rank lower in the R&D investment ratio among the top ten semiconductor companies in the world. This further indicates that American semiconductor companies firmly occupy a dominant position in R&D investment.



The second is that the costs associated with semiconductor design and manufacturing are very high. The first is the cost of intellectual property (IP) cores. Amway is a giant in the chip IP licensing business. Semiconductor companies that purchase IP must pay a fixed license fee to Amway. After the production and distribution of chips, these companies also pay a unit price royalty, or Royalty, to Amway, which is about 1-2% of the chip price. In fiscal year 2020, Amway's revenue from these two segments reached $1.98 billion. In addition, for wafer foundries represented by TSMC, lithography machines are essential production equipment. The price of a state-of-the-art lithography machine is $200 million, and production requires 30000 kilowatt hours of electricity per day.



Third, semiconductor technology talents receive high salaries. The shortage of semiconductor talents is the "main theme" of the world, and the attendant high human capital also leads to the need for intensive capital investment in semiconductors.



It seems that whoever can control the capital structure and financing channels of semiconductor enterprises can control their development. In terms of the two dimensions of capital and access, the United States controls the most important financial resources. At present, the United States has the strongest investment institutions and the most perfect financial market system. Many enterprises around the world rely on the capital support and extensive financing channels of the United States, which has also provided the United States with super power to allocate financial resources, and can rely on this possession of capital and financing channels to dominate the global financial network, control relevant enterprises, and seek strategic benefits for itself.



02

Are chips in Asian financial centers also thriving?

Recently, foreign media reported that some Western chip manufacturers are increasing investment in Singapore to meet medium - and long-term demand growth and diversify supply chain risks. French substrate manufacturer Soitec will invest $430 million to double the capacity of its Singapore wafer factory, while American semiconductor equipment manufacturer Applied Materials has broken ground on a new factory in Singapore that has invested $450 million and is expected to be completed in 2024. The US chip OEM company, Gexin, is also building a $4 billion factory in Singapore. In addition, according to the Wall Street Journal, TSMC is also considering building a factory in Singapore to increase semiconductor production capacity to help address global supply shortages.



According to data, Singapore currently has 40 IC design companies, 14 silicon wafer factories, 8 wafer factories, 20 packaging and testing companies, and some related enterprises responsible for materials, manufacturing equipment, photomask, and other industries. According to IC Insights data, in 2021, Singapore accounted for nearly 5% of the global wafer factory capacity and 19% of the global semiconductor equipment market.



Why is Singapore favored by so many semiconductor manufacturers? As an Asian financial center, Singapore has an extensive network of Double Taxation Agreements (DTAs) with over 80 countries/regions around the world. The main benefits of a DTA are the avoidance of double taxation, lower withholding taxes, and a tax preference system, all of which play an important role in minimizing the tax burden on the holding company structure.



Singapore's tax system is considered "simple and investor friendly". The maximum corporate tax rate for taxable income in Singapore is 17%, and the capital gains tax and dividend income tax are 0%. After tax dividends paid from Singapore are not subject to withholding tax. At the same time, as long as income is taxed in a country/region with an overall tax rate of at least 15%, all income from foreign sources can be exempt from tax. Singapore's regulatory framework provides a level playing field for foreign investors, with no foreign ownership restrictions or foreign exchange controls.



Singapore provides a sound intellectual property (IP) rights system backed by a trustworthy legal system and strong intellectual property infrastructure. The government's intellectual property policy aims to encourage innovation, creativity, and development in Singapore's business sector.



The technology and capital intensive high-tech industries represented by the semiconductor industry undoubtedly benefit greatly from these preferential policies, so they are very popular.



03

What financial enlightenment does it give us?

Whether in the United States, Japan, South Korea, Singapore, or Taiwan, governments in various countries and regions have adopted a policy oriented approach to the development of the semiconductor industry, promoting its development and growth through a series of policy measures. Even during the development period of different industries in the same country, the government's support policies and strategies are also different. From the historical development experience of various semiconductor powers and regions, we can learn that the government's policy guidance plays an inestimable role in the development of the semiconductor industry. To make China's semiconductor industry bigger and stronger, we must persist in continuous self-innovation and create our own intellectual property rights and core competitiveness.



At this year's two sessions, Guo Shuhong, a member of the National Committee of the Chinese People's Political Consultative Conference and deputy chairman of the Tianjin Municipal Committee of the Democratic Revolution, proposed to support the innovation of the integrated circuit industry in the whole process of bonded supervision, and to conduct bonded management of materials and components imported by integrated circuit design enterprises, such as design, research and development, testing, manufacturing, and packaging, with reference to processing trade methods. The General Administration of Customs has approved Tianjin to carry out innovation in the bonded supervision mechanism for the entire industrial chain of integrated circuits, establish a public service platform for integrated circuit bonded R&D and testing in the Comprehensive Bonded Zone, and the customs will issue bonded R&D and testing manuals (accounts) to platform enterprises. The platform accepts the commission of integrated circuit bonded R&D and testing enterprises, and entrusts integrated circuit design schemes to overseas processing enterprises for chip manufacturing, After manufacturing is completed, the wafer is imported in bonded form and received for (accounting) management. The platform enterprise sends the wafer to the R&D and testing enterprise for testing and testing on a public service platform or through outsourced processing.



On March 2, when investigating integrated circuit enterprises, Vice Premier of the State Council emphasized that "developing the integrated circuit industry must give full play to the advantages of the new nationwide system and make good use of both government and market forces.". The government should formulate integrated circuit industry policies that are consistent with national conditions and the new situation, help enterprises eliminate worries and relieve difficulties, and guide long-term investment.



Since 2022, countries around the world have strengthened their domestic semiconductor policy support. The United States, the European Union, Japan, South Korea, India, and other countries have successively introduced industrial policies to provide policy support through fund support, equipment subsidies, tax incentives, and other methods. Global leading wafer manufacturers such as TSMC, Intel, Samsung, and Micron have announced plans to expand production. In the long run, global semiconductor capital expenditure is still expected to grow rapidly.