Downturn pushes China foundries toward smaller geometries, more emphasis on service

By Paula Doe
WaferNews Contributing Editor

Raise capital from global sources, hire talent from a global pool, and pretty soon even a Chinese company starts planning to produce global technology for global markets – just like the rest of the world. Even with China’s low costs and vast potential market, it looks like the only way to turn a profit making chips is with newer technologies and more value-added service. So Grace and SMIC are planning to make 0.18-micron chips, looking toward 0.13, and emphasizing customer service.

Grace Semiconductor Manufacturing Corp. now says it plans to build only two fabs, but will continually upgrade those to new generation technology – and contract everything else out to other foundries. It aims instead to differentiate itself by serving as a coordinator of many partners to supply customers with a total solution. More than 90% of Grace’s initial production will be exported, though many of the systems that the chips go into may then be re-imported back to China. Customers will likely be many of the companies that have invested in Grace, most of which are overseas electronics systems producers, and assembly and design houses.

“Our strategy is not expanding by building fabs, but by upgrading,” explains Nasa Tsai, Grace’s president and COO. Beyond that capacity, “We’ll contract to other foundries,” he says, “like ASMC for bipolar.” The other difference from the other foundries, says the Stanford Ph.D. and Mosel founder, is offering a wider range of services to the customer. He notes Grace plans more deals like its recent agreement with Avant! to provide different IP for customers, so it can coordinate the entire production process for the systems house, from design through production, test, and assembly – and even including sales. “The difference [between us and] other foundries is this kind of total solution,” says Tsai.

Grace plans to complete its cleanroom this summer, install tools in the fall, and start pilot production by year-end with mainstream 0.25 to 0.18-micron technology. Workers will go to Oki fabs in Japan this fall to learn to run the equipment, to ramp in March. Meanwhile Grace is working on developing 0.15-micron and 0.13-micron technology. “We’ll move ahead in step with the industry,” asserts Tsai. “In three to four years we’ll be on par with the most advanced technology in the world. When 0.13 is ready for mass production we want to be ready.” The two shells now under construction have enough space for capacity of up to 100,000 wafers/month.

The company’s $1.6 billion financing is to come from $700 million paid in capital, $700 million in long-term bank loans, and $200 million in short-term loans. Some $200 million is already paid, another $400 million committed.

Meanwhile, Semiconductor Manufacturing International Corp. President and CEO Richard Chang, who is in Japan soliciting money, technology, engineers, and used equipment, said his company’s yields were up to 90.4% for mask ROMs, 93.6% for 0.18-micron 4M SRAMs, and 95.6% for 0.2-micron FCRAMs.

“We don’t want to compete with other foundries on price,” Chang told Japanese institutional investors at a Mizoho Securities forum. “That’s the major differentiation from other foundries. And we’ll support the IDM company more.”

SMIC’s first round $1.5 billion investment is committed for building capacity up to 42,500 wafers/month of 0.25-micron and 0.18-micron standard CMOS. The second round of financing, not yet committed, will fund expansion to 85,000 wafers/month by June 2004, and to 0.13-micron and BiCMOS processes. The company is talking to IMEC, STMicroelectronics, and Infineon about acquiring 0.13-micron technology.

Both SMIC and Grace have recruited flocks of overseas Chinese workers with experience at big name chipmakers to Shanghai. Some 430 of SMIC’s 1,300 total employees are from abroad, 300 of those from Taiwan, 100 from the US, and 30 or so from Japan, Korea, and Europe. Subsidized housing and stock options help, with the company’s IPO planned for 4Q03. Grace has recruited about 150 engineers from overseas, mostly from Taiwan, and an equal number of Chinese. By year-end the company aims to have 400 foreign and 400 local Chinese engineers.

Still, it takes more than just money and people for a new foundry to succeed, says Bruno Guilmart, Chartered Semiconductor’s president for Asia Pacific and Japan. “The biggest challenges are ramping the fab and building trust. You have to build experience and expertise with time. You can’t underestimate the effort required.” And, he notes, “The jump to 0.13 is not an easy one for anyone.”

Main customers so far for the foundries in China are the multinational systems and chipmakers, starting now to design in China for the local market, and looking for some local manufacturing to bypass the 17% value-added tax on imports and meet the somewhat fuzzy Chinese requirements for local content. Those customers prompted Chartered Semiconductor to license its 0.18-micron technology to SMIC in exchange for some capacity. “We wanted to offer more flexibility to our customers, who tell us one day in the future they may need capacity in China,” explains Guilmart. “We thought of selling an old fab to China, or building one there, though it may well be more cost effective to produce in Singapore with a fully depreciated fab. We decided to partner, and transferred some technology for access to some capacity in case customers have need for local content, without making a big investment.”

China’s own fabless design houses are still a small market, perhaps $100 million, estimates Guilmart, but are fast moving up the ladder to more advanced technology, like Tsinghua Chip Crystal Microelectronics’ recent 0.18-micron RF CMOS chip, prototyped on one of Chartered’s multi-project wafers and made by Chartered. “This is definitely a first for us,” says Guilmart, “And it may well be a first in China.” Likely to give the sector a boost is the recent arrival in Shanghai of some US design houses run by overseas Chinese, like Silicon Storage Technology, Trident, and ESS. Toshiba also recently announced plans to transfer several hundred of its chip designers there.

Most of the $10 to $12 billion chip demand in China, however, still comes from the makers of communications gear, white goods, and brown goods, who buy chips off the shelf for things like refrigerators, TVs, DVDs, or wireless phones. But they’re expected to move increasingly, like companies elsewhere in the world, to designing their own chips, and bringing more business to the foundries. “Big changes are coming in this area over the next three to five years,” says Guilmart.


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