China's fabs: Where are they now?
11/01/2001
China's fabs: Where are they now?
Arash of new fab investments in China, boosted by friendlier trade relations with the US, heralds the beginning of a chipmaking industry on the Mainland. The region, however, has had a chipmaking base — albeit a small one — dating back to the mid-1950s, when discrete device development began, and there have been milestones ever since.
 Figure 1. China's IC technology status, 2001. Source: CCID (5/2000) and Arthur Xu |
China's semiconductor industry accounted for less than 1% of the world IC market in 1999, when the region produced some 3 billion devices and logged sales totaling 8 billion renminbi (about US$967 million) (Fig. 1). But the country is eager to see its semiconductor industry blossom, and in July 2000, launched a policy to promote the market. This policy gives the semiconductor industry more favorable tax considerations; IC enterprises willing to invest over 8 billion renminbi or bring leading-edge (0.25µm or better) technologies to the Mainland will receive tax relief.
 Figure 2. Worker checks data at Hua Hong NEC Electronics fab in Shanghai. |
Industry observers say the policy comes in response to plans by several Taiwan-based chipmakers to set up fabs in mainland China. Grace Semiconductor Manufacturing and Semiconductor Manufacturing International Corp. have launched fab plans, with the former being launched, in part, by the son of China President Jiang Zemin. In total, there are more than 37 semiconductor companies with wafer fabrication operations, although these are all small, lagging-edge lines, generally having capacity of only 1000 3-in. and 4-in. wafers/month. China has 25 4-in. to 8-in. production lines: 10 bipolar lines, 11 MOS lines, and four bipolar and MOS lines.
The following is a brief review of several important companies.
From Huajing to Hua Hong
- Huajing. The first significant chipmaking enterprise in China arrived in the early 1980s, when China's flagship chipmaker — China Huajing Electronics Corp. (Huajing) — began producing bipolar TV ICs using wafer manufacturing technologies from Toshiba. The investment in Huajing totaled more than 3 billion renminbi (about US$362 million)— the largest investment in any of China's semiconductor companies at the time.
In the early 1990s, using process technologies from both Toshiba and Siemens, Huajing established a 5-in. MOS line. In 1995, Huajing began a technology transfer from Lucent Technologies to set up a second line, a 6-in. one, known as the "908 project." But by early 1998, with only fab equipment installed, Huajing faced excess capacity. Central Semiconductor Manufacturing Co. (CSMC), a Hong Kong-registered company, took over management of the two lines, and in August 1999, set up a joint venture (known as CSMC-HJ), with the two MOS lines becoming pure-play foundry lines. CSMC-HJ is the first dedicated wafer foundry in mainland China. With operations similar to Taiwan's TSMC, the company's wafer output has reached close to 20,000 wafers/month. The company expects to be listed on the Hong Kong Stock Exchange this year. - Hua Yue. Another semiconductor company, Hua Yue Microelectronics, began operations in 1980 with production following in 1984. Hua Yue owns a total of three bipolar lines, using 3-in., 4-in., and 5-in. wafers, respectively. By the end of September 2000, Hua Yue's 5-in. line had reached a capacity of 10,000 wafers/month. The 5-in. line has seen investments totaling 619 million renminbi (about US$74.8million) and uses technology transferred from Fujitsu.
- Shanghai Belling. Established in 1988, Shanghai Belling owns a 4-in. line, and uses process technology transferred from Alcatel. Belling is China's most profitable semiconductor enterprise, and is the first and only chipmaker listed on the China Shanghai stock exchange. Belling also has tentative plans to set up a new 6-in. or 8-in. fab in Shanghai.
- ASMC. In 1989, Advanced Semiconductor Manufacturing Corp. of Shanghai (ASMC) formed under the Shanghai Philips name. Netherlands-based Philips owned 51% of shares. ASMC began production in 1993 with China's first 5-in. line. In 1995, Canada's Nortel took an ownership stake in ASMC, and another 6-in. production line. In 1999, Nortel withdrew its investment in ASMC. Belling, with capital collected from the stock market, took over Nortel's share in ASMC. Holding a 34% stake in ASMC, Belling is ASMC's biggest stakeholder.
- SGNEC. In 1991, NEC and Beijing-based Sou Gang company invested 50 billion yen (about US$443.9 million) to launch SGNEC. NEC owns 51% of SGNEC's shares, and SG owns the remaining 49%. SGNEC began with a 6-in line and 0.56µm process technology. In 2000, the company said it upgraded its process technology to 0.35µm. SGNEC produces 64Mb DRAMs, with plans to produce 128Mb DRAMS. About 90% of the products are sold back to NEC.
- Hua Hong NEC. In 1997, the Chinese government made its biggest investment in semiconductor technology with plans to launch Shanghai Hua Hong NEC Electronics (HHNEC), the so-called Project 909 (Fig. 2). HHNEC has an 8-in. 0.35-0.5µm CMOS line, with a capacity of 10,000 wafers/month as of the end of 1999. Hua Hong Group invested US$500 million into HHNEC, having 71.4% of shares, and NEC invested US$200 million, having 28.6% of shares. — Arthur Xu
Start-ups' success will make or break China's foundry industry
The start-up foundries in Shanghai have a lot more than satisfied customers and investors riding on their success. No less than the future of China's foundry industry is tied to their fortunes.
Semiconductor Manufacturing International Corp. (SMIC) has started pilot production of 2000 8-in. wafers/month and expects to reach 25,000 wafers/month by the end of 2002. Grace Semiconductor Manufacturing Corp. is well behind SMIC, but expects to be producing wafers by Q4 next year.
"A lot of people are going to be looking at the success of SMIC and Grace. Can those fabs be brought up in a profitable manner quickly?" asks Stan Yarbro, VP of worldwide field operations for KLA-Tencor Corp. "Once that happens, the prospects are quite good for continued expansion [in China]." If the ramp up is fraught with problems, however, the message to the outside world will be: China isn't ready yet for world-class semiconductor production.
To be sure, SMIC and Grace are not the only 8-in. wafer fabs in China. Hua Hong NEC Electronics Co. (Fig. 1) opened its fab in 1999, also in Shanghai, and Motorola has been qualifying wafers at its long-awaited 8-in. facility in Tianjin, north of Beijing. But corporate restructuring at both NEC and Motorola could impact operations of their China fabs.
In any case, all of the new fabs in China are finding they are not immune to the global semiconductor malaise. "This slowdown is worldwide, it's not just isolated to Taiwan or the US," says Yarbro. The spectacular growth rates in cell phone and PC sales in China, which were held up as evidence of the resilience of the mainland market, have started to slow.
 Figure 2. China's IC volume demand forecast. Source: CCID (5/2000) and Arthur Xu |
The business plans of the new fabs in China were based on the premise that there would be enough domestic demand to support operations. China satisfies <15% of its annual demand for chips, which was about $12 billion last year (Fig. 2). The reality, at least for the short term, is that the new foundries in China need to secure a significant portion of their wafer business from outside of China. While China boasts more than 100 IC design houses, their volumes are tiny and will not provide good business for the foundries in the near term. Most of China's domestic demand for chips is coming from the mainland-based operations of foreign multinational corporations.
Joseph Xie, senior director of sales and marketing for SMIC, says the target is to have a 50/50 mix of overseas and local customers. At present, most of the company's business is from US and Japanese IDMs, and US-based fabless companies.
That means for the foreseeable future the China foundries will be competing head on with the established foundries in Taiwan and start-ups in other parts of Asia. Some are not worried. "They [the China fabs] are concentrating on 0.25µm and the prices; the volumes on 0.25 are not going to be very attractive," says an executive at a Southeast Asian foundry, who requested anonymity.
 Figure 3. UMC chairman Robert H.C. Tsao. |
Some Taiwan industry executives believe that the foundry leaders, such as Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) and United Microelectronics Corp. (UMC), could put price pressure on the China start-ups. Although TSMC is not in a hurry to build a fab on the mainland, it is moving aggressively to set up sales and marketing offices there to tap the local business. "There is no real urgency to set up diffusion in China," says C.Y. Lu, CTO at Taiwan chipmaker Macronix International. "As long as TSMC has an office in China, it will be able to get the [mainland] business."
UMC is taking one more step, with a plan to sell equipment from one of its 8-in. fabs in Hsinchu Science Park to Shanghai-based Belling Microelectronics, which operates a 4-in. fab. One limiting factor for TSMC and UMC is that as the island's flagship companies, they must heed Taiwan government rules that restrict Taiwanese investment in advanced wafer fabrication in China, though these laws are under review and are expected to relax.
The prospect of a price war with TSMC does not seem to openly bother SMIC officials. Sales director Xie believes there is enough business to go around notwith-standing the slowdown: "We think that with the China market, plus the world market, it is big enough for multiple players." In fact, SMIC officials believe the real challenge will be from within. Xie says: "The competition is not the concern; the real concern is our execution."
When it comes to competing for mainland-based orders, SMIC believes it will have a competitive advantage given its location and the generous tax breaks afforded the chip fabrication industry by the Chinese authorities. SMIC officials point to the lower costs of doing business in Shanghai vs. Taiwan, including cheaper labor rates and lower water and electricity costs. Others do not see China as being that cheap a place in which to operate once all the costs are taken into account. KLA-Tencor's Yarbro says that while mainland labor rates are lower, training and infrastructure setup costs are high. "When you have to train that labor, you train it at US rates," he says. UMC chairman Robert H.C. Tsao (Fig. 3) also believes lower labor rates are not a key factor. Instead, he says Taiwan's core competency is its foundry management skills, something the start-ups in China will not be able to replicate easily in the short term.
Apart from entrenched competition in Taiwan and the current market downturn, another barrier to China's ambitions for wafer fabrication is the country's reputation as a haven for intellectual property pirates. "You need to respect IP; otherwise, you won't get the trust of global companies," says Erin Lin, president of Taiwan IC design company Mixam Microelectronics Corp.
Then there are the Washington-imposed rules that prohibit fabs from using US equipment to produce devices beyond 0.25µm. Some industry executives believe even if the technology restrictions were lifted tomorrow, China's fabs could not quickly make the transition to 0.18µm. "If you want to be at the leading edge of technology, you have to develop it. [The China fabs] don't have the infrastructure in place or the revenue stream in place to pay for that," says Cary Halsted, KLA-Tencor's VP of field operations for Taiwan and China.
Still, the Shanghai start-ups could succeed by sheer bravado and determination. Example: In September, SMIC recruited a top Intel process technology guru, Shanghai-born Simon Yang. "The talent we have in this team is world class," says SMIC's Xie. "If we decide to jointly develop [technology] with other companies, we are going to play the major role instead of the supporting role." —Craig Addison
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China's IC assembly operations move upscale
While much of the focus on China's burgeoning semiconductor industry has been at the frontend, the mainland is also strengthening its presence in IC assembly and test. Many of the world's leading IDMs have backend facilities in China, including Intel, Samsung Electronics, STMicroelectronics, and Infineon Technologies.
The IDMs initially went into China to "test the waters" with less complex devices for re-export. However, the rapid transfer of more advanced electronics manufacturing operations to China has seen a subsequent upgrading in the technical capability of the mainland-based A&T operations. Intel recently announced it would invest a further $302 million to upgrade its Shanghai assembly and test plant in order to produce 845 chipsets. The main product at the plant has been flash memory. Intel China president Tan Wee Theng has described the flash chip operations in China as "equivalent to the best...anywhere in world." Infineon also plans to test more complex communications ICs at its backend plant in China, according to company officials.
While the IDMs have been upgrading, contract assembly and test houses have increased their China investments to benefit from lower labor costs. Amkor Technology Inc. also chose Shanghai as the site for its mainland backend plant. Taiwan's biggest A&T contractor, Advanced Semiconducutor Engineering Inc. (ASE), has big mainland investment plans. "We need to establish an operation base in China in the nearest future in order to strengthen our competitive edge," says Jason Chang, ASE chairman. While Taiwan's IC companies have had to adhere to Taiwan government-imposed restrictions on mainland semiconductor investments, those barriers are slowly coming down.
Taiwan's domestic IC assembly contractors flourished after the success of the island's wafer foundries, notes C.Y. Lu, CTO at Macronix International. He expects the same pattern to be repeated in China. If the mainland wafer foundries do well, they will attract more backend contractors keen to establish closer supply chain links.
Not every A&T house wants to rush into China. Singapore-based ST Assembly and Test Services is cautious given the mainland's immature support infrastructure and undeveloped foundry business model. Furthermore, the company is concerned that any potential savings from China's lower labor costs might evaporate through quality and yield differences, according to STATS CFO Lay Koon Tan, who spoke at a recent CSFB Technology Conference in Hong Kong. —Craig Addison