Analysis: Huge market potential, government policies, and fear of being left behind fuel expansion of final assembly plants.
China's semiconductor industry is raising plenty of eyebrows these days. In recent months, for example, a growing number of companies have announced plans to set up new silicon foundry ventures in that nation.
But the real action -- and intense competition -- appears to be taking place in the backend IC-packaging and -testing business in China. The rush to set up and expand chip-assembly plants and backend services for finished devices could have some serious ramifications in terms of manufacturing, the supply-chain, and distribution channels in the country as well as the region.
IC-packaging in China isn't a new business strategy. In the 1990s, a few companies--including Advanced Micro Devices, Intel, ChipPac, and others--set up IC-assembly plants in China to take advantage of the nation's low-cost labor.
But now, many more companies want a piece of the China action and for far different reasons. Late in 2000, for example, IBM Corp.'s Microelectronics Group announced major plans to build a $300 million advanced chip-packaging plant in Shanghai (see Oct. 26 story), and last week, Hong Kong's Asat Holdings Ltd. broke ground on a factory in Shenzhen for a variety of chip-scale, leaded, and ball-grid array (BGA) packages (see Jan. 11 story).
And this week there have been three major announcements in this exploding arena. On Tuesday, rival chip-assembly houses Amkor Technology Inc. and ChipPac Inc.--both based in the U.S.--announced expansions in Shanghai. Amkor officials in Chandler, Ariz., said the company would quickly start chip assembly and testing services in China during the third quarter in a new 115,000-square-foot factory. The plant will initially start production of baseband processors and then branch out to ICs for other telecom and computer applications (see Jan. 16 story).
On the same day this week, ChipPac announced $25 million investment by Qualcomm Inc. in its IC-assembly and -testing plant in Shanghai. The investment and a new supply agreement guarantees backend chip-production capacity to Qualcomm for wireless modem ICs in China. The investment will also play a role in the expansion of the three-year-old plant by Santa Clara, Calif.-based ChipPac, which claims today to be the largest merchant supplier of chip-packaging and -testing services in China (see Jan. 16 story).
Not to be outdone, IC-packaging startup GEM Services Inc. this week opened a $40 million factory for final assembly and testing in Shanghai. And it won't be long before the Taiwanese IC-packaging giants enter the China market, according to sources in the region.
What's driving the mad rush into China is obvious to some degree: the nation remains one of the world's fastest growing markets for chips, cellular phones, PCs, consumer electronics, and other products.
But there are other forces at work too. First, the Chinese government has an unwritten mandate that foreign-based system manufacturer must procure more and more components from local sources. These sources include domestic component suppliers as well as foreign entities with factories inside China.
If or when China gains entry into the World Trade Organization (WTO), the Chinese government will put that mandate in stone, say industry analysts.
As a result, OEMs are asking--if not forcing--their component suppliers to develop concrete supply-chain and distribution strategies in China. Companies with deep pockets, like Intel Corp., Motorola Inc., and NEC Corp., have also responded by also building front- or back-end chip plants in China.
System manufacturers are also nudging the IC-packaging houses to set up shop in China. One reason for this is that chip sub-contractors are beginning to provide more and more services for customers, including IC-packaging, final test, and even shipping and distribution, observes Dennis McKenna, president and chief executive officer of ChipPac in Santa Clara.
"Companies like Nokia, Ericsson, and Philips are asking themselves: 'How can we shorten the supply chain and reduce costs in China?" McKenna says. "The IC-packaging houses can help them reduce their costs. We can provide packaging and testing. We can also ship product to our customer's customer," he addes.
Right now, ChipPac is ahead of its competitors in the China market, according to McKenna. The company, which set up its large-scale plant in Shanghai back in 1997, develops BGAs, chip-scale packages, and other products in that facility.
Setting up shop in China is not a slam-dunk, however. ChipPac, for example, experienced an assortment of labor problems, government red tape, and other issues in China. So will its competitors, which have little or no choice but to enter the China fray, according to Industry observers.
Another major challenge is also in the way of expansion of chip-packaging operations in China. In the past year, some market observers and industry executives believe Asia's expanding backend assembly industry may be getting ahead of market demand as major contractors attempt to stake out new business. Chip-packaging equipment suppliers, such as Kulicke & Soffa Inc., have reported delays in some tool orders because of bottlenecks in shipments of processed wafers for final assembly in the Asia Pacific region. Test equipment suppliers are also now experiencing slow growth in sales as the backend assembly industry attempts to digest its aggressive growth in 2000.
And, a potential shakeout is in the offing, according to Amkor president John Boruch, who was speaking at last week's Industry Strategies Symposium in Pebble Beach, Calif. Given the investments needed in the business today--coupled with a possible slowdown in the IC industry--the small- to mid-sized providers of IC-packaging and test services are especially vulnerable to a possible consolidation, warned Boruch at the annual ISS summit (see Jan. 11 story).