For any country looking to seed its semiconductor industry with fabs, China is a prime example of how a good idea can go bad. Just ask James Koo.
Unfortunately for Koo, who was president of the now-defunct Nanotech Corp., China's love affair with fabs ended just as his dream of putting one here began.
In 2004, Nanotech turned heads by securing used equipment and process technology from Intel Corp. and promising to build a fab about 100 miles west of Shanghai. "We had all the official government documents saying the money was going to be there," said Koo, sitting in his Hong Kong office.
But the loans promised by China's policy banks never materialized. Koo said the government indicated the financing must come from elsewhere, but he couldn't raise the entire sum. So Nanotech will see nary a chip roll off its line. "I remain optimistic. That's my nature. But I am also realistic, so I think the likelihood is small that this project will go through," Koo said.
China has spent several billion dollars during the past few years to build its semiconductor fab dream, but that investment hasn't yielded dividends — at least not the kind that Wall Street likes. Even for China's bigger fabs, the going is rough.
After IPOs in New York or Hong Kong, none of the Chinese foundries trades above its strike price. The largest, Semiconductor Manufacturing International Corp., has lost money in four of the six years it's been around (the first year SMIC had no operations, but turned a profit from interest payments).
Observers believe this is causing China to reassess the importance
of subsidizing fabs through cheap loans, free land and generous tax breaks. In a recent report, J.P. Morgan analyst Bhavin Shah wrote, "Chinese foundries have been unprofitable despite a bucketful of incentives and tax breaks offered. Taiwan captures 65 percent of the worldwide foundry revenues, and countries such as China and India will find it very difficult to compete with the scale, ecosystem and fabless/IDM relationships that Taiwan has built up over the past two decades."
One bright spot for China may turn out to be Hejian Technology Corp., a close affiliate of Taiwan's United Microelectronics Corp. Hejian stealthily built up capacity in China, and benefited from an overlapping customer base with UMC. An IPO is in the works.
IDMs may also still find China, or even India, attractive, especially if they can sell the product directly into the local market. That's the case for a joint venture between Hynix Semiconductor and STMicroelectronics, which smoothly ramped up an 8-inch and then a 12-inch line during the past year. Intel has also applied for and received Chinese government approval to invest $2.5 billion in a 12-inch fab in northern China.
Advocates of China's push into fabs argue that they are important to a growing economy. "Just because semiconductor manufacturing is still finding its way in China doesn't mean it was a mistake to focus on it," said Paul Davis, a vice president at the Semiconductor Equipment Materials International trade group. "Our industry has helped drive a lot of economies throughout Asia, so how can one really question putting a priority on developing that industry in a growing economy like China?"
Koo agrees, but that doesn't mean he's going to rush back in anytime soon. "Other local governments have approached me, but I am a little gun-shy," he said. "Show me the money first and I will do it."