The market research company (New Tripoli, Pa.) also expects China to start making its own equipment for 300-mm wafer processing, regardless of apparent difficulties in obtaining relevant intellectual property.

While production of ICs in mainland China grew 34.8 percent in 2004, semiconductor manufacturing equipment purchases grew a phenomenal 146 percent, according to the report "Mainland China's Semiconductor and Equipment Markets: A Complete Analysis Of The Technical, Economic, and Political Issues," published by The Information Network.

"There was 146 percent growth to $2.83 billion in the front-end equipment market in 2004 on the strength of sales to SMIC and Grace," said Robert Castellano, president of The Information Network. "But 2005 will be another story. With the slowdown in the semiconductor industry and accompanied cuts in SMIC's capital spending, equipment sales will drop 33.6 percent to $1.88 billion."

Historically, much of the production equipment used in fab expansion in Mainland China is transferred from older lines by Japanese and Taiwanese IC manufacturers. Non-Chinese IC manufacturers will buy state-of-the-art 90-nm tools for 300-mm production for their existing facilities and transfer outdated, depreciated tools to their fabs in China. In addition, the used equipment market is huge according to the report.

"The downturn in mainland China is due to a slowdown in semiconductor demand and the fact that there are only a handful of companies buying equipment," added Castellano. "This is different from the 9.6 percent worldwide equipment downturn we forecast for 2005 due to both a slowdown in semiconductor demand coupled with the turnaround in the equipment market due to excessive purchases that we correctly identified back in June of 2004."

"Watch out for Chinese companies introducing advanced tools for 300-mm IC manufacturing in the next two years. Many domestic equipment manufacturers market advanced 150-mm and 200-mm tools and they will have the incentive to "up the ante" with 300-mm products now that fabs are in place and technology transfer restrictions towards 300-mm plants are loosening," warned Castellano.

"If SMIC can internally develop a 90-nm process to make chips, and IP protection laws in China are such that they can lift magnetic train levitation technology from the Germans, domestic manufacturers can freely and with impunity duplicate any 300-mm semiconductor tool on the market," he said.