More chip production moves to China
Jim Carbone -- Purchasing, 4/17/2003 6:00:00 AM
It's no secret that China is emerging as a sourcing locale for electronics. Many electronics manufacturing services companies and component manufacturers have opened facilities in China to take advantage of low-cost labor.
Semiconductor production is also moving ahead as more foundries open and some Japanese, Korean and European chip companies build fabs or enter into joint ventures with the Chinese government to open facilities.
However, while the amount of semiconductors bought and sold in China in the next five to seven years will grow significantly, the amount of chips produced in China as a percentage of the worldwide total will remain relatively low.
Consider: the China integrated circuit (IC) market—the amount of revenue from ICs sold in China—in 2002 was $14.1 billion, according to market researcher IC Insights. That was about 11% of total worldwide IC market. By 2007 the Chinese IC market will grow to $40.4 billion and account for 22% of the worldwide IC market. However, in 2005 the dollar value of the chips produced in China will amount to $4.1 billion, or 2.4% of the worldwide IC market. By 2010 that figure will grow to $12.5 billion, but represent just 5% of the total worldwide IC market.
Analysts say the reason that China will represent only a small percentage of the world chip market is that chip production will be limited to mature products based on somewhat trailing-edge process technology. Higher cost, leading-edge parts such as 256 Mb DRAMs and Pentium 4 microprocessors require 0.13 and 0.18 micron process technology. Most of the fabs in China have 0.25 and 0.30 micron technology and tend to produce more off-the-shelf, lower-cost parts such as standard logic, analog ICs, low-end microcontrollers and older generation DRAM and flash memory among others.
Access denied
Many of the chip companies in China are foundries and would like to offer their customers leading-edge process technologies, but can't get easy access to it, according to Brian Matas an analyst with IC Insights.
"China is a communist state and there are supposed to be some restrictions on what they can receive from outside countries in terms of equipment and technology," says Matas. "For 0.18 micron they can go to Europe and get what they want. From Japan it takes a little bit more legwork. From America it takes a long while," he says.
He says because Chinese companies can't get the equipment and technology they are a generation or two behind the rest of the world in terms of chip manufacturing.
"They are at the 0.25 or 0.35 micron process technology level. Most of their ICs are built on that now. There's a little bit of 0.18 micron, but not a lot. They are producing logic parts, analog ICs, parts that don't require screaming process geometries," he says.
That trend is likely to continue for several years although some foundries operating in China hope to have 0.13 micron process technology. "Semiconductor Manufacturing International Corp. (SMIC) has an aggressive business model," says Len Jelinek, principal analyst with market intelligence provider iSuppli. "They are attempting to qualify 0.13 micron and have roadmaps which will take them lower." But SMIC may be one of the few exceptions. Some foundries such as Taiwan Semiconductor Manufacturing Company (TSMC) expect to move trailing-edge process technology such as 0.25 and 0.50 process technology to China, according to Jelinek.
Many companies may follow TSMC's lead and send production of older products to China.
"A U.S. chip company may be producing a mature part at a very high run rate," says Matas. "They may be able to make more money from the part and may be able to improve profitability on it by sending it over to China and having it built over there cheaper. The U.S. would build something smaller using their more advanced technology," he says.
Older parts go
He expects more companies to outsource production of mature parts to China to avoid overhead costs. "A lot of companies might not have the funds or might not want the overhead associated with a fab," says Matas. "To build a fab is almost becoming beyond the reach of these companies. Except for Texas Instruments or Intel. Outsourcing to places like China becomes a more viable option for these companies."
China will eventually upgrade to 0.13 micron technology, but it will lag behind the industry which will move to 0.09 and 0.065 micron process technology, says Jelinek. "That technology will remain in Taiwan, North America and Europe," he says. "China won't play in that, but China will put in capacity at 0.13 to 0.25."
However, with the amount of manufacturing moving to China, some analysts think that China will soon get leading-edge chip technology because there will be growing demand for it. Companies who move to China to build products currently have to pay a 17% import duty on parts they buy outside of China. If they buy in China they don't have to pay the duty, says Jelinek.
"A company that imports chips for cell phones, TVs and DVDs, they have to pay the import duty. Of course the duty will eventually be eliminated under an agreement with the World Trade Organization," he says.
But even if Chinese companies don't add leading-edge process technology, they will still have an impact on semiconductor supply. "It will keep the industry in overcapacity," says Jelinek.
That, of course, is good news for buyers. "The move by semiconductor companies to China is keeping availability high and pricing low," says Jelinek. "Buyers need to know what products are being manufactured in China and have at least a second source in China," he says. "They need to investigate China for two reasons: price and product availability."
However, buyers should not expect rock-bottom semiconductor prices from Chinese foundries. "Going to China is not going to mean a 20% reduction in prices for products," says Jelinek. "The Chinese are not going to undercut the market. It is not in their best interest to do it. There was a lot of belief that companies like SMIC were going to come in and clean up because they were going to undercut pricing, the truth is they are not. They have come in at competitive, but not rock-bottom pricing," he says.
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