The Chinese Opportunity in Silicon Carbide

How long will it take China to replicate 60 years of U.S. IT infrastructure? Not long, if recent history is a guide.
Bill DixonOct 15,2020,15:53

On August 17, the U.S. Commerce Department banned Huawei from obtaining foreign-made chips and other electronic components developed or produced using American software or technology. This effectively closed third party loopholes from the announcement in May. Much has been made of Huawei’s need to build out a Chinese supply chain, and few commentators doubt the Chinese resolve to do so. Using Chinese efforts in memory as a roadmap, it will probably take considerable time to replicate 60 years of American infrastructure, IP, and efficiencies before they become competitive. However, there is a new technology where the Chinese stand a good chance of leapfrogging the Americans as capacities are built out over the next five years: Silicon Carbide (SiC).
SiC started making headlines when Tesla (Nasdaq: TSLA) chose a SiC-based drive inverter for its Model 3, proclaiming that this was key to range extension and cost reduction. A drive inverter in an electric vehicle is used to convert DC current from the battery pack into AC current for the motor, and its efficiency affects energy consumption. 

Compared to conventional silicon-based power semi devices, SiC has 10 times the breakdown field strength and three times the thermal conductivity, making it ideal for high-voltage applications, and specifically electric vehicles.  
Without getting too technical, silicon and carbon share four electrons, which provides a strong covalent bond and allows energy to travel much more efficiently. Importantly, it also has thermal properties that allow the inverter to operate at higher temperatures. For EV drive trains this is a windfall as it not only allows the car to travel farther, but the cooling system can be considerably smaller, providing design flexibility for the OEM.
Gallium Applications Galore
There are other applications as well. Gallium Nitride (GaN) is built on SiC substrates and its power-efficient qualities make it very attractive for 5G RF communication infrastructure. It can efficiently handle higher voltage in a smaller footprint and reach a much wider range of mmWave frequencies than standard silicon. SiC is also used in fast charging stations, able to handle more voltage in less time. In short, there are very attractive end markets.
Consultant Yoel Development published a paper last year titled “Power Silicon Carbide (SiC): Materials, Devices and Applications – 2019 Edition."

The report predicts that, by 2024, the market for SiC power semiconductors will grow to $2 billion by 2024 at an annual growth of 29%; in 2018, the market was around only $400 million.

This growth assumes EV penetration of 16%, with SiC taking around 50% of total device market share in 2024.  Depending on your assumptions for EV and SiC penetration, Yole suggests the market could hit $6 billion in size by 2030.
This has led to a wave of capacity expansion. For example, as part of its $1 billion investment plan, Cree (Nasdaq: CREE) will expand its SiC fab capacity up to 30X by 2024. It will also increase its SiC materials production by 30x.  Meanwhile, Rohm (OTC: ROHCY) last year announced a 150mm fab expansion plan within a new building. In total, Rohm will increase its SiC production capacity by 16X at a total investment of 60 billion yen ($546.1 million) by 2025. ST Microelectronics (NYSE: STM), On Semiconductor (Nasdaq: ON), Infineon (OTC: IFNNY), and other western players are seeking to build out capacities.

China Versus the West
This rush to build out capacities has not been lost on the Chinese players. Tank Blue, FICC, BYD (OTC: BYDDF), and Sanan (SHA: 600703) are all seeking to build out their own capacities. Importantly, in 2018 China produced ~70% of the SiC materials and this may be an opportunity to turn the tables on the West, giving preferential treatment to their own wafer makers.
As it happens, there are few opportunities for investors in the expansion of Chines SiC fabs.  Most SiC capacities are being built out in-house by major western semiconductor players.  Indeed, vertical integration is cited as one of the keys to cost reduction. However, there is one world leading supplier that remains independent: Germany’s PVA Tepla.

A German Play
PVA Tepla Group (ETR: TPE) is headquartered in Werttenberg, Germany, and its core competency is the handling of industrials materials in high-temperature, high pressure and vacuum applications. It is a leading independent equipment supplier for SiC crystal growing processes. As it happens, it is also an excellent play on China’s efforts to become self-sufficient in semiconductors through its traditional Si-crystal puller business.  
The technical barriers to entry for SiC equipment are extremely high. The SiC growing process involves SiC powder heated up to 2700 degrees Celsius (half the temperature of the surface of the sun) in the controlled environment of an electric resistance furnace. SiC-rich vapor is collected at the top of the furnace to form crystal structures. This process usually takes two weeks to form the ingot.  A highly complex process, fraught with challenges, no doubt.

Indeed, there are very few players capable of this technical know how, and only one is an independent supplier capable of providing the Chinese new entrants with the rapid roll out of SiC capacities.  
Don't Count China Out Just Yet
The road forward is clear. Who will get there first remaiins the biggest question. Cree, having effectively invented and commercialized SiC, is the world leader with 60% of market share...for now. But that will not last long.

Given China's conviction and its success rapidly rolling out new industries and its recent experience with sourcing from foreign supply chains, Chinese players might quickly build a substantial footprint in this new technology.

Topics:Sic, semiconductor, Huawei, Cree