This little-known Malaysian company may be a trade war prize
A key supplier in the production of chips used by BMW and Samsung, JF Technology is positioning itself to win in the era of disruptive technologies, such as 5G and IoT
At the heart of technology
Tinier than the tip of your finger, chips — also known as integrated circuits(ICs), or semiconductors — are the heart of technology. Whether you’re driving a car, making a call, scrolling through Facebook, or making a Google search, chips are being used one way or another.
If chips are the heart of technology, test sockets help make sure this heart beats properly. Everyone knows what computer chips are. But few know about test sockets, which connect chips and test equipment, enabling high-accuracy tests.
With millions of chips rolling off production lines everyday, test sockets have a super-important role: ensuring only high-quality products reach the shelf.
When the world’s top chipmakers need a new test socket...
An expert in test sockets, JF Technology Berhad(JFTech) has built up a remarkable client base of tier 1 chipmakers supplying Fortune 500 companies like Samsung, Ford, and BMW. The group also makes test sockets for other test socket companies, acting as a contract manufacturer.
Over the years, JFTech has transformed from an original equipment manufacturer(OEM) player into an original design manufacturer. With 20 granted patents and 34 pending patents, JFTech now owns highly valuable test socket designs that are sold to global chipmakers across the world.
Manufacturers are racing to make smaller, smarter chips, enabling disruptive technologies such as 5G, Internet-of-Things(IoT), flexible electronics and automated driving. As one of just a handful of test socket makers worldwide, JFTech has positioned itself to benefit from these technology trends, which are boosting demand for new chips.
Expert in low volume, high-value test sockets
Test sockets play an essential role in chipmaking
How do you know your product works? You test it. Test equipment, fitted with custom-made test sockets, is used to test new chips before they’re sent for production in large quantities, or sold in the market.
Chipmakers and test equipment companies work hand-in-hand to create test solutions for every new chip. Test equipment companies, in turn, work together to design a test socket just for that chip.
Almost every different product will need a different chip. For example, a different smartphone may use different chips, enabling different functions and features.
By testing chips at the R&D stage, a chipmaker can find out if a chip works as planned — early. If a company starts making millions of chip units, and its design is found to be faulty, it will be too late!
Test sockets, which JFTech designs and manufactures, are installed on tester machines. The purpose of a test socket is to connect the chip and tester. Chips are placed on the test sockets, and then the test process starts.
Low volume, high-value
Test sockets are a low-volume, high-value business. Even though not many test sockets are made, the global test interface market is estimated to be worth US$0.7 billion.
This is because a test socket has to be designed very precisely to meet client demands. A test socket must also be highly durable, able to withstand boiling hot temperatures and be used thousands of times over and over again.
A single socket is sold for anywhere between US$3,500 to US$6,000. Usually, a client will order three or four sockets just to test a new chip design. If the client decides to use this chip design, the client will use the same test sockets to test its chips.
Inside the test socket industry
Globally, there are just a handful of test socket manufacturers. JFTech’s foreign rivals include Micronics Japan, Rika Denshi, Johnstech International, and Cohu.
In Malaysia, JFTech has only one peer — Foundpac Group, which is also listed on the Kuala Lumpur Stock Exchange.
But there are key differences between both companies: JFTech uses cantilevers in its test sockets, while Foundpac uses pogo pins. Neither company is superior to each other — as JFTech and Foundpac’s sockets are used to test different types of chips, depending on the chip design.
In addition, Foundpac is also involved in other businesses, such as the manufacturing of circuit board stiffeners and stencils.
The 5G future is here, firing up chip demand
In a big way, JFTech’s growth has been driven by the boom in radio-frequency (RF) technology. RF is used by devices to send signals to each other wirelessly, enabling phone calls, for example. Today, 22% of JFTech’s sockets are used for RF applications — in mobile devices, and IoT, for example.
Data speeds have jumped over the last decade — and 5G will boost speeds by up to 100x. It once took 8 hours to download a high-definition, full-length movie over a 3G connection. With 5G — it would take just 3 seconds. With faster speeds and instant response time, many new technologies such as remote surgery and driverless cars can be brought to life.
As the world moves from 4G to 5G, the value of radio-frequency(RF) content in smartphones will almost double, according to U.S. chipmaker Skyworks Solutions. To use 5G, every 5G-enabled device will need many more RF parts, such as antennas and chips.
Boosted by 5G, chip industry revenue will rise 5.9% to $448 billion in 2020, according to IHS Markit. This will be a rebound for chip sales, which suffered a 12.8% decline in 2019 due to an oversupply of certain components.
Cars: driving the need for chips
JFTech supplies test sockets to some of the world’s biggest chipmakers, which produce ICs for global carmakers such as Ford and BMW. Today, 43% of the sockets JFTech makes are used to test automotive chips.
The automotive industry is very difficult to penetrate. One reason is that it takes up to 5 years to design and launch a new car model. This means a carmaker must get all its suppliers and vendors ready long before it starts making a new car.
Improvements in technology are bringing driverless or semi-driverless cars closer and closer to reality. Already, advanced driver-assistance systems(ADAS) — technology that allows cars to park themselves, or drive safer and better, are entering our roads.
From 2019 to 2022, the amount of chip content in our cars will rise by 49%, according to research firm Gartner. Sales of automotive chips are expected to hit US$42.9 billion in 2021, almost double 2016 levels, according to IC Insights.
After a stellar run, revenue growth has taken a hit
JFTech appeared to be hit hard when rival Johnstech successfully sued it in U.S. court. Johnstech alleged the group’s Zigma product had infringed a U.S. patent.
The legal case was drawn out over five years, with JFTech challenging the U.S. court’s decision to award Johnstech with damages. However, its appeal was dismissed in 2019. As a result of the court decision, JFTech is not able to sell Zigma in the U.S.
Between 2016–2019, JFTech coughed up RM8.9 million in legal fees. The company also made a provision for RM6.1 million in damages.
Worldwide sales of Zigma have hit a wall. This was an indirect impact of the legal case, despite U.S. patent laws not applying outside the U.S. JFTech is allowed to sell Zigma outside the U.S.
If we were to strip out the legal fees from its numbers, JFTech’s net profit has been much stronger than reported. Still, this event has hit the growth of JFTech’s revenue, which had surged 3x between 2013–2017.
..but new products could help JFTech bounce back
JFTech has managed to hold on to revenue by launching ETA and EZ, Zigma’s replacements. Both products are used to test 5G and RF chips and are being sold in the US market.
Within the automotive segment, JFTech’s Gamma and Alpha product ranges are performing well. New products such as Thor and Hercules will seize on demand from the automotive chip market, while upcoming ones — the Unicon and Bell Mat — are aimed at meeting demand from 5G RF and IoT industries.
Chips: the biggest prize in the trade war
As the trade war rages on, U.S. semiconductor players are shying away from selling chips and other components to Chinese companies. The U.S. government has also reportedly tried to stop Taiwan Semiconductor Manufacturing Company(the world’s largest chipmaker) from selling chips to Huawei.
China wants to make its own chips. To succeed, it must have access to important manufacturing components, such as test sockets. Although China is one of the world’s biggest electronics manufacturers — 3 out of 5 of the world’s biggest smartphone makers are Chinese — it buys most of its chips from other countries.
As of 2018, China was importing over 95% of chips it uses to make computers and servers. As part of its “Made In China 2025” plan, China aims to make 70% of its own chips. It plans to spend US$150 billion to build up its own chipmaking capacity, aiming to create a world-class chip industry.
Making a chip is really difficult. It takes years to design a single chip, and design changes are made at a microscopic level. We think this is why China has failed — so far — to overtake the U.S. as the world’s biggest chipmaker, despite China’s superb manufacturing and engineering capabilities.
In 2017, a Chinese state-backed fund tried to buy one of JFTech’s rivals. The China Integrated Circuit Industry Investment Fund tried to acquire Xcerra Corp, which is based in the U.S. But another test socket maker, Cohu Inc., asked the US government to stop the deal. Cohu said if Xcerra was sold to the Chinese fund, it could result in valuable technology being transferred to Chinese chipmakers. After the Xcerra deal was called off by the U.S. government, Cohu bought Xcerra.
We think these developments show just how important JFTech’s sub-sector is, within the global semiconductor space. As most existing test socket makers are U.S.-based, Malaysian companies could be seen as an attractive partner for Chinese chip players.
Chip R&D is growing at the fastest pace since 2008
Demand for new test sockets is driven by R&D spending, in our view. Compared to all other industries, semiconductor industry players reinvest the most revenue into R&D(research and development).
Smaller, faster, cheaper: Engineers and technicians are familiar with Moore’s Law, which predicts computer chips double speed and power every two years — while costs drop by 50%.
With smartphone and auto manufacturers racing to be the first to introduce more features into their products — such as “driverless” cars and even foldable or flexible phones — demand for thinner and more complex chips will only grow.
New chips will be needed as companies seek to differentiate themselves in the marketplace, with new, unique features.
Chip R&D spending is expected to grow at 5.5% CAGR between 2018 and 2023, according to IC Insights. This would be the fastest pace of growth since the Global Financial Crisis, when R&D spending rose at just 3.3% CAGR.
The biggest risk for JFTech is a shipment of faulty test sockets, in our view. As we mentioned earlier, there aren’t many global suppliers serving the test-socket sub-sector. A delivery of faulty or subpar sockets would deliver a big blow to JFTech’s reputation.
However, we note that JFTech’s management has racked up an impressive record of client wins. Since its establishment in 1999, JFTech has built up a customer base that includes most of the world’s biggest chipmakers. Given the high technology demands of this industry, this is no easy feat.
The five-year legal battle surrounding Zigma was a speedbump, ending JFTech’s stellar run. But with new products designed to seize blockbuster trends in 5G and auto, JFTech aims to revive sales growth.
There are only a handful of test socket players, including JFTech, that are able to meet the demands of top chip players. Without test equipment, nothing new can be developed.
Chips are now at the heart of the U.S.-China trade war. With Chinese firms potentially cut off from buying chips and related components from the U.S., the future of China’s electronics industry is in peril.
This will naturally lead to a race to ensure secure supply of test sockets. What could this hold in store for JFTech?
Meet the JFTech’s Managing Director at our upcoming event
On Dec. 11, 2019, meet JFTech Managing Director Dato’ Foong Wei Kuong at the EquitiesTracker Theatrette. Dato’ Foong will share in-depth insights into the chip industry and JFTech’s growth strategy.
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