Chinese foundries: How much global impact?
10/01/2002
After many years of development, the foundry industry in China is growing explosively, with multiple 200mm fabs expected to commence production in 2002 and 2003.
We believe, however, that these foundries are unlikely in the near term to be competitive with cutting-edge semiconductor-manufacturing operations run by overseas competitors. Rather, the Chinese manufacturers will likely find their niche in commodity chipmaking.
A short history
Semiconductor manufacturing in China has come a long way in a short time. The first effort to establish the industry in China came in 1990, with Project 908, a Chinese government-sponsored program to develop the domestic chip industry. It resulted in the formation of China's first joint venture foundry, Wuxi Huajing Microelectronics.
By most accounts, Project 908 was far from a success. Despite that, it was the first step toward establishing what has become the most feared low-cost-manufacturing semiconductor engine in the world.
Prior to 2001, when the first 200mm fab in China came on line, the Chinese semiconductor industry had only one true pure-play foundry player: Wuxi CSMC-Huajing Co. The other semiconductor manufacturers were joint ventures between domestic and multinational companies.
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The leaders in developing joint ventures in China were NEC, Motorola, and Philips. Each worked with local concerns and the Chinese government to secure incentives to build facilities in China. Each used its Chinese factory to produce high-volume, low-cost, second-generation technology that was then exported into global markets.
Although this strategy did spur growth in semiconductor technology within China, most capacity installed was captive, and its output did not find its way back into the domestic Chinese market. A side effect of this strategy, which was the opposite of the Chinese government's hopes, was the prevention of the development of fabless semiconductor companies and design companies.
Most design activity had to be exported to Taiwan for manufacturing. There, Chinese companies were forced to deal not only with technical issues, but also with political issues, some of which still exist today.
The first 200mm fab in China opened in 1999 as a DRAM production joint venture between Shanghai Hua Hong and NEC. Only after the decline in the DRAM market did this joint venture fab open its doors to foundry activity.
Chinese foundries today
There are now three 200mm fabs in China that have installed equipment and are at least in pilot production: Shanghai Hua Hong NEC, Motorola, and SMIC. A fourth fab, Grace Semiconductor, is installing equipment. The figure identifies the 200mm fabs in production and scheduled to become operational over the next four years.
Two companies, Taiwan Semiconductor Manufacturing Co. (TSMC) and United Microelectronics Corp. (UMC), have not officially filed intentions to build manufacturing facilities in mainland China with the Taiwanese government, but both are expected to do so in 2H02. Both companies are expected to operate fabs as early as 2H04.
The impact on global supply
What will be the impact of these Chinese foundries on global semiconductor supply over the next five years?
To answer this question, one needs to look at the technology available in China. The country's foundries are trying to install 0.18µm technology while leading-edge manufacturers overseas are already moving to sub-100nm geometries. China remains two generations behind the industry leaders.
It will take several years before China achieves a technology base rivalling the rest of the world. Until it is able to adopt leading-edge technology in both its design tools and manufacturing processes, it will have to focus on low-cost, second-generation commodity technology.
The potential threat of the Chinese foundries has not gone unnoticed at second-tier global foundry suppliers. Foundries in Asia, Korea, and Europe are reacting by modifying their business models to become full-service foundries, delivering high-value-added products and, in some cases, forming alliances with other foundries to better manage customer demands.
Len Jelinekis a principal analyst at iSuppli Corp., 1700 E. Walnut Ave., El Segundo, CA 90245; e-mail [email protected].
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