The landscape of China's semiconductor industry has shown both remarkable growth and persistent challenges, particularly in the context of chip importsIn the first ten months of this year, the country reached an astonishing figure of 455.62 billion chips imported, marking a robust increase of 15% compared to the previous yearThe monetary value of these imports reached a staggering $315.37 billion, a notable 11.3% rise year-on-yearThis immense number underscores the thriving development of various sectors such as electronics and technology in ChinaHowever, it also starkly highlights a worrying dependency, as the self-sufficiency rate for chips hovers around a meager 30%. Low-end chips account for over 60% of self-sufficiency, yet high-end chips lag alarmingly, falling below 10%. With a projected goal of achieving a 70% self-sufficiency rate by 2025, it appears that significant hurdles still remain.

This growing dependency on foreign chips has intensified the urgency for the domestic production of core semiconductor equipment and materialsLithography machines have emerged as a focal point in this tech endeavor, a critical aspect of chip manufacturing that requires careful attentionHowever, there is one caveat to consider: while lithography machines, whether sourced internationally or developed in-house, can be utilized continuously, the consumables necessary for chip production must be consistently and reliably supplied—an aspect often overlooked yet profoundly important.

One prime example of this essential consumable is photoresist, a substance critical in the photolithography process used for semiconductor fabricationThe challenges surrounding photoresist are multifacetedGenerally categorized into three main types—semiconductor photoresists, PCB photoresists, and LCD photoresists—semiconductors are particularly noted for their high technological barriers, with various sub-types such as g-line, i-line, KrF, ArF, and EUV photoresists, where shorter wavelengths yield higher resolution and greater complexity in manufacturing.

Among these, ArF photoresist is predominantly utilized in mainstream chip manufacturing processes ranging from 130nm to 14nm, making it the most extensively used type currently available

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However, despite its critical role, the overall market size for photoresists remains relatively limitedThe global sales forecast for 2024 barely expects to surpass $10 billion, which constitutes less than 1% of the total semiconductor marketFurthermore, the lengthy product validation cycle adds an additional hurdle; transitioning from successful R&D to customer confirmation and mass production typically spans 2 to 3 yearsThis prolonged timeline, combined with necessary collaborations involving photolithography machines, masks, and other elements, increases the overall cost and complexity of R&D and validationConsequently, the slim market size, high R&D expenses, and extended verification periods contribute to a lack of interest from manufacturers in making substantial investments in photoresist production.

Further complicating the landscape is Japan's dominant position in the photoresist marketThe cost of entry into this sector remains prohibitively high, resulting in an overwhelming concentration of market power among Japanese and American companiesTogether, the top five manufacturers control a staggering 87% of the global market share: Japan’s JSR leads with 28%, followed closely by Tokyo Ohka Kogyo with 21%, Dow (formerly Rohm and Haas) at 15%, Shin-Etsu Chemical with 13%, and Fujifilm Materials at 10%. Given their early market entry, Japanese firms have amassed considerable technological expertise, holding a substantial number of patents—an estimated 46% of global photoresist patents compared to China’s mere 7%. This scenario forces domestic producers to either navigate around these patents or pay licensing fees to their Japanese counterparts, significantly increasing the challenges for R&D.

The heavy reliance on Japanese photoresists becomes evident through the data; in 2023, China imported $980 million worth of photoresists from Japan, which accounted for an overwhelming 50.7% of the total $1.93 billion in global photoresist imports

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However, an emerging trend suggests a gradual shift as domestic manufacturers ramp up their efforts to develop homegrown solutions to reduce reliance on foreign technologyA handful of Chinese companies have begun to carve a niche in the photoresist market, significantly aiming to break the monopole that has long characterized it.

Specifically, there are around 20 related companies in China listed on the A-share market, including key players like Tongcheng New Materials, NANDA Optoelectronics, and Huamao Technology, focusing on advancing domestic photoresist capabilitiesPositive strides have been made, particularly with g-line, i-line, and KrF photoresists, although challenges remainMid-range KrF photoresists, for instance, have seen substantial progress with companies such as Beijing Kehua and Xuzhou Bokan achieving notable sales milestones in 2023. Other companies like Suzhou Ruihong and Shanghai Xinyang have also made significant production breakthroughs.

Presently, the domestic production rate for KrF photoresists stands around 5%. In terms of ArF photoresists, Tongcheng New Materials is on track to commence mass production in 2024, while NANDA Optoelectronics has had two of its products certified, with other companies like Huamao Technology and Shanghai Xinyang also conducting tests for their respective productsOverall, however, the technology and production capabilities remain in the nascent stages, with current levels of domestic production barely surpassing 1% when compared to the international standards.

Despite the relatively immature state of the industry, some companies have begun to realize tangible revenue from photoresist salesFirms like Tongcheng New Materials, NANDA Optoelectronics, and Huamao Technology, having initially ventured into this domain from other principal business areas, highlight the versatility and adaptability of these manufacturers in navigating challengesFor instance, Huamao Technology primarily focuses on automotive airbags, while Tongcheng New Materials has historically specialized in specialty rubbers, and NANDA Optoelectronics is renowned for its electronic specialty gases.

In terms of revenue, Huamao Technology's photoresist segment is still in its infancy, generating almost negligible returns as its primary airbag business accounts for 94% of its income

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NANDA Optoelectronics displays a slightly better scenario, with its electronic specialty gases contributing 63.79% of revenue, complemented by precursor materials that account for an additional 24.37%, leading to a combined share exceeding 90%. Yet, Tongcheng New Materials stands out, having achieved revenues of approximately 128 million yuan in its photoresist sector, representing a remarkable 54.4% year-on-year growthThe KrF photoresist products have shown more than 60% growth, while certain I-line photoresist variants have surged by over 500%—a trend heavily driven by the rapid expansion of the storage industry.

Tongcheng New Materials has swiftly evolved into a key player in the photoresist market, due in part to its advantageous position within the supply chain through products like phenolic resinsSince 2020, the company invested over 420 million yuan to acquire a 70.49% stake in Beijing Kehua, signaling a strategic move towards strengthening its position in the semiconductor photoresist sectorIn addition, the company has invested further in acquiring significant stakes in panel photoresist businesses like Beixu ElectronicsCurrently, Tongcheng is on the verge of completing construction on projects related to annual production lines of 11,000 tons of semiconductor-grade and flat-panel display photoresists, along with another 20,000 tons of supporting reagents.

A project aimed at producing advanced semiconductor chip polishing pads is also underway, with an investment of 300 million yuan, which upon full-scale production is projected to yield 250,000 units and generate approximately 800 million yuan in sales annually.

In summary, although photoresist represents a niche segment within the semiconductor industry and boasts a relatively small market size, the competition is sparse, primarily dominated by traditional Japanese manufacturersHowever, with advancements in domestic technology and the rapid expansion of local chip demands, photoresist companies in China are poised to experience a surge of opportunity, ushering in a new era of growth and innovation in the semiconductor space.

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