Semiconductor exports topped $40 billion for the first time on a monthly basis, but South Korea's exports of domestic semiconductor manufacturing equipment to China fell. As China bypasses U.S. lithography equipment restrictions by localising back-end processing equipment, cracks are emerging in the export structure to China for South Korea's materials, parts and equipment sector.

According to the Korea Customs Service, semiconductor exports in June surged 196.9 percent from a year earlier to $44.95 billion. It was the first time on a monthly basis that exports exceeded $40 billion and it marked 16 straight months of gains. The momentum continued into July. In its July 1 to 20 trade report released on Monday, the customs service said semiconductor exports during the period rose to $22.113 billion, about 2.8 times the level a year earlier. Semiconductors accounted for 40.3 percent of total exports, up about 1.8 times from 21.9 percent a year earlier.

While the export boom continues, semiconductor manufacturing equipment is not keeping pace. A breakdown of June exports to China shows memory semiconductor exports jumping 339.5 percent, while exports of equipment for semiconductor manufacturing fell 1.9 percent. That means equipment exports moved in the opposite direction at a time when demand for finished semiconductors is surging.

The same pattern is seen in imports of equipment. In June capital goods imports, memory semiconductors increased 146.5 percent, while the growth rate for imports of manufacturing equipment was limited to 51.4 percent. Preliminary data for July 1 to 20 also showed semiconductor imports rising 54.9 percent and imports of semiconductor manufacturing equipment climbing 56.9 percent, failing to keep up with the expansion in finished product trade. Semiconductor products are selling rapidly, but trade in the equipment to make them is not receiving the same boost.

Analysts say China's localisation of back-end processing equipment lies behind the trend. As the United States tightened exports of advanced-process lithography equipment such as extreme ultraviolet (EUV) and deep ultraviolet (DUV) tools, China focused capital and manpower on back-end processes where restrictions were relatively looser. It chose a detour strategy centred on chiplets and advanced three-dimensional (3D) packaging to boost performance by precisely linking multiple chips, instead of making wafers finer. In effect, U.S. restrictions have funneled clear localisation targets and funding into China's back-end materials, parts and equipment ecosystem.

A key element of China's detour strategy is hybrid bonding. In general, there are 2 main paths to improve semiconductor performance. One is miniaturisation by etching circuits more densely onto a single chip, and the other is to stack or bond multiple chips closely together. As U.S. lithography restrictions blocked China in the miniaturisation route it was pursuing, it chose the latter approach to improve performance.

Hybrid bonding is a joining technology that implements that latter approach, directly bonding copper (Cu) wiring and insulators that serve as pathways between chips. That allows for much denser input/output (I/O) pathways for signals. It is seen as a key to producing chips such as high bandwidth memory (HBM) and artificial intelligence (AI) accelerators that must exchange large volumes of data quickly.

The technology is drawing attention because of limits in existing methods. Previously, tiny protrusions known as bumps were placed between chips and used to connect signals. But as chips become more sophisticated there are physical limits to narrowing bump spacing, and problems arise such as signal delays and heat buildup. Hybrid bonding removes the protrusions and directly bonds chips, reducing bonding thickness and boosting integration density. For that reason it is emerging as an essential process for next-generation advanced packaging. It is drawing particular attention as a core technology as the introduction of hybrid bonding is being discussed starting with the HBM4 generation.

◆China accelerates back-end equipment self-reliance by bypassing U.S. lithography restrictions

China's localisation push does not stop at hybrid bonding. According to the industry, China is accelerating localisation of equipment across the entire back-end process, including through-silicon via (TSV) etching that drills vertical pathways in wafers to connect chips top and bottom, and chemical mechanical polishing (CMP) that smooths chip surfaces at the atomic level.

In practice, NAURA is reported to be increasing its share by supplying deposition and etching equipment to China's domestic market, while Hwatsing is doing the same with CMP equipment. It is effectively filling back-end process equipment needs one by one with domestic products.

The problem is that as localisation advances, South Korea's materials, parts and equipment sector could see its foothold shrink. So far, small and mid-sized domestic suppliers have provided large volumes of equipment and materials to Chinese packaging and back-end processing (OSAT) companies. But if China replaces the overall back-end value chain, from hybrid bonding to TSV, CMP and inspection equipment, with its own supply chain, dubbed the red supply chain, South Korean companies could be pushed out of China's semiconductor supply chain, analysts say.

Concerns are also being raised that if Chinese equipment makers backed by government subsidies succeed in advancing hybrid bonding, South Korean suppliers' price and technology edge could be shaken in the global OSAT market and the mid- to low-end packaging segment. Critics say China could narrow the gap in next-generation bonding technologies while the domestic back-end industry focuses on existing technologies such as thermocompression (TC) bonders, leaving South Korea slow to respond. An industry official said, "For now, the semiconductor boom is masking changes in the industry's equipment and materials, parts and equipment segment," and added, "We need to pay attention to how quickly China's back-end localisation progresses."