China: Threat or opportunity?
06/01/2005
Japan was the first Asian country to challenge the US in advanced chipmaking. Subsequently, other countries around the Pacific Rim were able to follow the Japanese model to become leading chipmakers themselves - first South Korea and then Taiwan. Seeing the wild swings in the DRAM market, Taiwan opted instead to develop the foundry approach that has made it a major player in semiconductors. Now China is making its move, benefiting from the lessons learned by others.
Entry into semiconductor manufacturing requires steadily greater capital investments, with costs for new 300mm fabs currently topping $2 billion. For the most advanced chips, it also means mastering cutting-edge process technology. So far, China’s fabs and foundries are not cutting edge. Instead they are mainly focused on providing some 20% of their country’s own fast-growing chip requirements while learning from Taiwan about running foundries. Buying many used process tools allowed China to gain traction without massive investments; selling public stock also helped. Partnerships with chipmakers all over the globe also aid China in climbing the learning curve.
Meanwhile, unbalanced export trade, particularly with the US, is helping China build its capital account, which is expected to top $1 trillion this year. When it does have the skills it needs, it will have enough capital to become a major player in the world semiconductor markets if it chooses. That was the strategy employed by Japan, then Korea, and then Taiwan. These countries have all become tough but respected competitors in global chip markets, although there still remains some friction with Korea over government support of Hynix. But China is different.
China looks like a potential economic colossus in the 21st century, with the world’s largest population providing manufactured goods for not only its native people but also much of the rest of the world. Corporate leaders see great potential in trading with China because its markets can easily become the world’s largest. But at the same time, there are major concerns.
Will China become a fair trading partner, or will it try to manipulate world trade to its own advantage, while allowing continued stealing of intellectual property (IP) and a raft of copycat products? Jack Welch, former GE CEO, complains that the Chinese always insist on being in a “win, win situation,” meaning that their trading partners always lose on the deal.
There is also concern about China’s military ambitions. Could its rapidly increasing technological skills help provide a military threat to their neighbors and even globally? One ironic potential benefit of China’s rampant corruption is that the Army has stakes in many businesses there, which might discourage the generals from pushing military options to settle disputes.
Aside from the military question, there is some evidence that China is not aiming to dominate future chip markets, but instead hopes to move up the food chain, becoming a leader in manufacturing advanced electronic products. This approach is suggested by the latest five-year plan, according to Peter Podesser, CEO of EV Group in Austria, who worked in China for several years. He believes the leaders have concluded that they cannot become a leader in 300mm wafer processing, and instead are looking to future growth areas like nanotechnology and MEMS-based biomedical devices. He also believes that national leaders are trying to provide better IP protection, with laws on the books, but their efforts are being thwarted by local judges.
If China moderates its bluster toward its neighbors, such as Japan and Taiwan, clamps down on grey marketers, and makes its trade policies more balanced (including gradually floating the yuan), it too could become a very tough, but respected member of the world trading community. If not, there may be some very troubling times ahead.
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Bob Haavind
Editorial Director