Taiwan's semiconductor manufacturing machine is poised to enter China, but that isn't concerning the mainland's fledgling foundry service providers, which claim that access to inexpensive technology and strong customer relationships will give them an edge for years to come.
In a series of interviews with EBN, senior executives at several foundries here said the Taiwan government's ban, which before it was eased today prohibited the island's chipmakers from investing in production sites in China, has given them an early market advantage against the likes of Taiwan Semiconductor Manufacturing Co. Ltd. and United Microelectronics Corp.
"Let them come," challenged Chris Chang, a senior fellow at Semiconductor Manufacturing International Corp. (SMIC), Shanghai. "We already have a long lead in establishing ourselves in our home market. And it will take the Taiwan companies one and a half to two years to build fabs here and get them up and running. In all that time we'll be expanding our own customer base."
The impending entrance of Taiwan's chip industry into China has some observers warning of possible excess production capacity here, but China's entrenched manufacturers say they are counting on their homeland's booming electronics market to propel sales regardless of fluctuations in the global foundry industry.
"China right now produces only a small fraction of the number of ICs domestically that are consumed in the Chinese market," said Daniel Wang, executive vice president of Shanghai's Grace Semiconductor Manufacturing Corp. (GSMC), which is slated to launch production by the end of the year. "Customers increasingly will turn to foundries in China to meet their needs for local market designs, faster delivery, and lower price.
"It will take eight to 10 additional new fabs in China to even begin to meet the soaring demand here," Wang said.
China's foundries have also established close ties with the growing number of domestic and foreign-owned IC design companies that are setting up shop here. SMIC's Chang estimated there are more than 80 IC design houses in the Shanghai area alone.
In fact, China's foundries are hoping to take a page from their competitors in Taiwan, which developed a successful formula by servicing a local base of IC designers.
Already, foundries here have lined up large domestic customers and believe the burgeoning ranks of Chinese-owned and foreign OEMs and contract manufacturers will expand the demand for 8in.-wafer lines.
"We have strategic relationships with Chinese design houses that other foundries coming to China don't have," GSMC's Wang said. "As domestic IC design becomes more important in the China market, we will benefit."
The Chinese government recently tapped Shanghai Hua Hong NEC Electronics Corp. to supply custom EEPROM chips for national identity smartcards that will be required of all Chinese citizens. Hua Hong NEC will use designs from four domestic IC design houses and will supply two domestic smartcard makers. The fab, which now uses only half of its capacity for foundry work, will also supply ICs for social security smartcards for citizens in the Shanghai region.
Toshio Ohta, executive vice president of the fab, which is a joint venture between NEC and Hua Hong, said the company is benefiting from its government ties and from the celebrated China Project 909, which was aimed at building the country's first 8in.-wafer fab.
Elsewhere, SMIC claims to have garnered a raft of foundry orders from fabless companies in the United States and investment partners Toshiba Corp. and Singapore foundry Chartered Semiconductor Manufacturing Ltd. Chang said the company is also expecting large orders for fast-cycle DRAM from Toshiba and Fujitsu Ltd., which are aiming the chips at network equipment.
Beijing-based Shougang NEC Electronics Co., meanwhile, has carved out a tidy foundry business building driver ICs for thin-film-transistor LCDs. Tsuyoshi Suzuki, president of the foundry, said initially the fab supplied drivers for notebook and monitor TFT-LCDs, but is expanding into the growing market for color display drivers for mobile phones and PDAs.
Shougang NEC's strategy is to compete on price, according to Suzuki. That will be accomplished by expanding into a new 8in.-wafer fab being built on land donated and cleared by the government at no charge, Suzuki said. The company is also negotiating with UMC and Hynix Semiconductor Inc. to acquire used 8in.-wafer, 0.25-micron equipment.
"Quarter-micron [equipment] is quite adequate for logic and other foundry customers," Suzuki said. "By bringing on our new fab at a fraction of the cost of building a totally new fab, we'll be highly price-competitive in the foundry market."
Market observers expect a substantial amount of new production capacity to be brought on line in China in the next 18 months. GSMC, for example, will start production at its new 8in.-wafer fab by December and will ramp up by making commodity flash, DRAM, and SRAM before moving on to logic, mixed-signal ICs, RF chips, and LCD drivers, Wang said.
Overall, GSMC expects its total monthly capacity to reach 25,000 wafers by the end of 2003. SMIC is running 5,000 wafers a month today, and will ramp up to 30,000 by the end of the year, according to Chang. By equipping an adjoining fab, the company said wafer capacity will reach 45,000 a month in 2003.
Hua Hong NEC is completing expansion plans to equip vacant space in its fab to boost output 50%, to 30,000 wafers a month, with all of the new capacity allocated to foundry business, according to Ohta.
Shougang NEC said it is already committed to building an 8in.-wafer fab adjacent to its existing 6in.-wafer facility. A separate fab on the same site is planned by partner Shougang Steel Co., which is negotiating to secure a separate joint venture partner from either Taiwan or the United States, Suzuki said.
Moving to 0.18-micron
Although the foundries said they initially will use 0.25-micron equipment, most said they are moving to 0.18-micron linewidths imminently. While the shift presents little in the way of technical challenges, tools to enable the next-generation process node are subject to export controls in Japan and the United States, where the bulk of the equipment is made.
Some companies, such as SMIC, can circumvent the red tape with their own on-site photo-mask shops that will allow their 0.25-micron lithography systems to fabricate 0.18-micron wafers. The other foundries expect export approval for 0.18-micron equipment to be granted shortly.
"The global semiconductor industry is moving on to 0.13-micron processing," Hua Hong NEC's Ohta said. "Since export controls for China are generally kept a generation behind, that means we should be able to get 0.18-micron-level approval in the near future."
China's foundries are also starting to think about where 300mm-wafer fabs, which also require export approval, factor into their capital investment schedules. Ohta said the next fab on Hua Hong NEC's road-map is a 300mm-wafer facility that would be built using funds from an initial public offering-although no construction timetable has been set.
SMIC and GSMC are also planning 300mm-wafer fabs, and each is expecting to finance the project by issuing IPOs at some future date.
The foundries hailed China's admission to the World Trade Organization and agreed that WTO membership will accelerate the influx of foreign OEMs and contracters into the country, further increasing their customer base.
"[WTO membership] will bring China into normal global business practices," SMIC's Chang said. "Chinese business practices will become more governed by standards of law, which will benefit everyone."