With its chip consumption growing by 20 to 25 percent a year, China may account for 20 percent of worldwide demand by 2006. But the tougher question is whether chip production in China will grow alongside consumption.
Bill McClean, analyst at IC Insights, believes "things aren't going to be as rosy" as many think for SMIC, Grace, HSMC and other mainland China foundries.
At a SEMI forecast dinner recently, McClean noted that even the Singapore-based Chartered, for all of its efforts to catch up, has failed to make money, primarily because the competition from Taiwanese titans TSMC and UMC is so intense. And now that IBM and others are vying for foundry customers at the high end, competition will get even tougher.
About three-fourths of foundry revenues come from fabless semiconductor companies, and McLean noted that China has few of them. McClean, who recently traveled to Shanghai, voiced some skepticism about China's competitive position. A Shanghai government official countered by saying that he expects China's chip production to account for 2 percent of worldwide production by 2005 and 5 percent by 2010.
McClean said that sounds reasonable. If chip production hits $300 billion by 2010, China's 5 percent will be worth $15 billion. But will China's indigenous IC industry be profitable? And, if not, will the all-important IPOs fly?
Questions like that aren't stopping people like Gary Tanner, the manufacturing vice president at Legerity Inc., from considering moving Legerity's high-voltage process to foundries in China, partly to avoid all but 3 percent of China's value-added tax of 17 percent for imported chips. "Once a facility is depreciated, labor is the biggest cash cost, and China's skilled labor is a lot cheaper," Tanner said. And if Legerity makes its subscriber line interface circuits in China, it opens "increasing market opportunities for market penetration there."
A China-savvy Motorola manager concurred. "Despite the huge depreciation of a new factory, you can still get $35 million or more in labor savings from a billion-dollar fab. Labor from suppliers and support is much cheaper also." Moreover, he said, "The end market is there, as China is becoming the manufacturing spot for the world." That means "shorter time for shipments and supply chain."
McClean said that one scenario is that China's foundries become a "deflating factor" for trailing-edge wafers, much as the $99 DVD players from China have affected that sector.
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