An Advisor’s Guide to the Semiconductor Industry’s Takeoff in China

The onset of the pandemic and the subsequent supply chain issues have driven many countries to focus inwards on developing their own industries at home instead of relying on overseas supplies. This is particularly pronounced in China within semiconductors; in a country that was already pushing hard to develop its own independent economy more fully, the semiconductor industry has grown at a meteoric rate in the last few years. Dr. Xiaolin Chen, head of international at KraneShares, discusses this growth in a recent video on China Last Night.

China began development of its semiconductor industry a full three decades later than the rest of the world, and, as the process to develop one chip takes 700 steps from start to finish on average, it’s needed a lot of aggressive growth to try and catch up.

Dr. Chen explains the value-chain pyramid that begins with the chip architecture, otherwise known as the core IP, then continues to design that utilizes software tools to virtually create the chip’s circuitry. Next is silicon wafer production, which creates wafers out of ultra-purified silicon; this step relies on equipment and material for the multi-step fabrication process. Finally comes assembly, testing, and packaging, which removes defective chips and finishes the chip assembly process.

Image source: China Last Night by KraneShares

“Looking across the value chain, the United States holds the number one or two leading positions in almost every main segment. Despite getting to the game late, China is a player in almost every segment now, and shares only around 6% of the entire value that compares to the U.S. at 39%, indicating a long way for China to catch up,” Dr. Chen explains.

The Chinese government has made clear its intentions to help support and build up the semiconductor industry since 2014 through its funding and industrial programs that help local firms working to grow the sector. This growth has triggered strong response from the U.S., with sanctions and restrictions being imposed on China that affect its top semiconductor firms, according to Dr. Chen.

This U.S. response has caused China to dig in and develop faster, as Dr. Chen explains. “Two things we observed: first, an even greater sense of urgency to grow the sector, and second an even bigger investment opportunity presented.”

KFVG Offers Investment in China’s Semiconductor Industry

China is one of the world leaders in 5G technology adoption as well as spending, and it is working rapidly to become self-sufficient with semiconductor production, with goals of 70% domestic use by 2025. The KraneShares CICC China 5G and Semiconductor ETF (KFVG) offers exposures to these rapidly expanding industries within China.

KFVG tracks the performance of the CICC China 5G and Semiconductor Leaders Index, an index that contains the top 30 Chinese companies by free-float market cap that are within the following industries: semiconductor manufacturing, manufacturing equipment & services, internet & data services, electronic equipment manufacturing, electronic components, consumer electronics, computer hardware & storage, communications equipment, and commercial electronics.

The top 30 securities have a cap of 10% of the fund, and KFVG minimizes turnover by not adding a company until it is ranked 25 or higher by Fuzzy Logic, doing business as FastINDX (the index provider), and a company will not be removed until it is below 35th in the ranking.

The top holdings of the fund are Xiaomi at 8.14%, Luxshare Precision Industry at 7.54%, and Foxconn Industries at 6.20%.

KFVG has an expense ratio of 0.64% with fee waivers that end August 1, 2022.

For more news, information, and strategy, visit the China Insights Channel.