While chip makers elsewhere are scaling back capital spending amid a slumping market, China's semiconductor industry is rushing ahead with a spate of fab construction plans to meet what local observers say is red-hot demand.
At least half a dozen plants are under way-including a $1.6 billion fab in Tianjin that Motorola Inc. had placed on hold in 1998-with production slated to begin as early as this year.
There's little mystery as to why a damn the torpedoes mentality is gripping China while the rest of the world works to shake off the throes of overcapacity. Both industry executives and government officials interviewed here portrayed a booming local market that in the coming years will need all the components it can procure.
David Wang, vice president of equipment maker Applied Materials Inc., told attendees at last week's China Microelectronics Forum in Beijing that "semiconductor market demand in China is growing so fast that by 2005 China will account for one-third of all [chip] consumption in Asia. By 2010, China could become the second-largest semiconductor market in the world."
Yet Zheng Minzheng, deputy director general of the Department of Electronics and Information Products within China's Ministry of Information Industries, said domestic semiconductor production is only meeting 20% of the country's demand. Citing other government statistics, Richard Chang, president of IC foundry Semiconductor Manufacturing International Corp. (SMIC), said China's fabs are meeting only 14.5% of the market's needs.
Wang estimated that spending on semiconductor plants in China will peak at $5 billion in 2005. The government alone intends to invest $7 billion to $8 billion in semiconductor R&D and fab construction during the next five-year economic plan through 2006, according to Minzheng. Even at this feverish pace, domestic chip production in five years will still only meet 25% of China's market demand, he added.
At least for now, China's purported shortage of locally made semiconductors would appear to set it apart from the cyclical patterns affecting the rest of the global market. At a time when IC foundries in neighboring Taiwan are slashing capital spending and wafer prices, China's chip makers could remain relatively immune to price wars, according to SMIC's Chang.
"We have no intention of engaging the Taiwan foundries or anyone else in a price war. We can sell all the chips we can make to the China market," Chang said.
Foundries are in vogue
Many of the plants under construction will operate as foundries. SMIC and Grace Semiconductor Manufacturing Corp. are each building 8-in.-wafer fabs in Shanghai and expect to launch full production next year. Shougang Steel Co. is partnering with NEC Corp. to launch an 8-in.-wafer fab and will build its own 8-in.-wafer complex, both in Beijing.
Motorola's Semiconductor Products Sector, meanwhile, which is shelving new fab plans elsewhere in the world as it adopts a more aggressive outsourcing strategy, is moving ahead with its Tianjin facility. Motorola said the fab will run first silicon within a month and is on track to begin full production later this year.
And ON Semiconductor has signed a joint venture agreement with Leshan Radio Co. to build a 6-in.-wafer fab in Leshan, China. Government officials last week added that a long-established fab, Shanghai Belling, is considering building an 8-in.-wafer facility to expand production.
A visit to the SMIC fab revealed that a main front-end production line and a separate interconnect line will be ready for equipment installation in June. Christopher Chang, an SMIC senior fellow, said the first stage of the new Shanghai plant will have capacity for 42,000 wafer starts a month. Fab 1, with 8,000 square meters of clean-room space, will be completed by the end of this month. Fab 3C will be completed at about the same time and will be used for metalization interconnect processing.
A second fab equal in size to the first will include a 12-in.-wafer pilot line, although nodecision has been reached as to when it will come on line, Chang said.
Foreign investment abounds
Chang called SMIC "an American semiconductor company in China" because most of its investors are from the United States and its top managers are predominantly American. Some of the foundry's initial customers, which he would not identify, have also made minority investments in the company.
In what appears to be something of a departure from the norm, SMIC is fully funded by private investors, according to Chang.
SMIC's Richard Chang, an American and former head of Taiwan's World Wide Semiconductor Manufacturing Corp., spent a decade with Texas Instruments Inc. overseeing global fab construction. Christopher Chang had a 25-year run with TI's Central Research Lab, helping to develop plasma injection and gallium arsenide SRAMs and the first 200MHz GaAs microprocessor in 1990.
Going with Grace
Also setting up production in Shanghai is Grace Semiconductor. The new foundry is led by the son of China's president, Jiang Zemin, and Winston Wong, son of the chairman of Taiwanese conglomerate Formosa Plastics. Like SMIC, Grace has no investors from either China or Taiwan and is instead being financed by investors from the United States, Europe, and Southeast Asia, according to vice chairman Nasa Tsai.
"The proof that we have no financial assistance from either the government or other sources in China is the fact that we are registered here as a 100% foreign company," Tsai said in an interview with EBN. Despite the founders' powerful political connections, Grace said the company "has not gotten special treatment or financing incentives from the government. We've been treated the same as all the other new semiconductor companies coming into China."
Grace, a pure-play foundry, is building two fab shells in the Pudong area of Shanghai, and expects to begin equipping the first 8-in.-wafer plant next January. Full production with an eventual capacity of more than 40,000 wafer starts a month will be launched in June 2002. Fab 2 will remain a shell until further expansion is needed, according to Tsai.
Initial production will be at a 0.25-micron feature size. By the time the foundry has ramped up in 2002, Tsai hopes to get export control approval from the United States or another foreign government to transition to 0.18- or even 0.15-micron production.
Tsai didn't identify major investors in the new foundry, although he said many future chip customers have taken small minority stakes in the company. One such investor, Silicon Storage Technology Inc., Sunnyvale, Calif., has already announced a $15 million investment in Grace, which it will use as one of its foundries.
Tsai is no stranger to raising foreign capital for China's chip companies.
In 1998, he led an effort by Hong Kong-based venture capital firm Central Semiconductor Manufacturing Corp. to take a 50% stake in state-owned Hwaijin Electronics, a struggling company with a 6-in.-wafer fab in Wuxi, China.