Thu, Apr 03, 2003 page11

• China's fabs face uphill struggle

  CHIP CHALLENGES The wafer foundries on the mainland are being touted as the future of the semi-conductor industry but are still a far cry from the plants in Taiwan

  • REUTERS
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  Whistling a somber tune as he strides through echoing halls, Richard Chang (張汝京) could pass for any one of his 3,000 employees in China's first full-fledged semiconductor foundry.

  The chief of Semiconductor Manufacturing International Corp (SMIC, 中芯國際集成電路) -- a US$1.5 billion foundry symbolizing China's aspirations to become a global chip powerhouse -- lives in company quarters, sports a cheap digital watch and wears a plain plastic name tag.

  Chang's unassuming ways belie the hype surrounding the country's chip sector. China is touted as the market of the future, but many analysts say its chip makers still have a long way to go before they can approach the sophistication of Japan or Taiwan.

  "China's market is huge, but regarding profits in this business, there are plenty of uncertainties," Chang said in an interview at his factory in Shanghai's eastern financial district, built on what used to be vegetable farmland.

  Since construction of their factories began to much fanfare in 2000, SMIC and cross-town rival Grace Semiconductor Manufacturing Corp (宏力半導體) have been in the vanguard of a government thrust to develop the nascent chip industry.

  Industry experts say SMIC and other domestic operators may initially have trouble securing long-term clients used to Taiwan foundries, and that they could incur high labor costs because of a lack of expert local engineers.

  "I think they'll rack up incredible losses in DRAM," a senior executive at a China-based chipmaker told reporters. "They're building production lines, but they have no customers."

  SMIC, hoping to prove them wrong, aims for monthly capacity of 40,000 wafers by June, from 32,000 now, making it the country's largest operation. That should shoot to 85,000 wafers by next year.

  But Taiwan Semiconductor Manufacturing Corp (TSMC, 台積電), the world's top foundry, makes hundreds of thousands of wafers per month.

  "Because China has a huge domestic economy, it can sustain growth in chip demand for very long," said Chang, who set up his first foundry in Taiwan in the early 1980s.

  Semiconductor demand in China is likely to grow an average of 16 percent a year and hit US$46.7 billion in 2007, technology research group Gartner estimates.

  The country, which uses up to 8 percent of the chips made worldwide, imports more than 80 percent of its chips, signalling huge potential for domestic production to replace that.

  Experts say there's no denying the promise, but talk about the inflated expectations inherent in China's ambition to mould itself into a global chip powerhouse.

  The industry has come a long way.

  David Wang (王寧國), executive vice president of Applied Materials Inc, recalls how he visited a factory in Wuxi in 1988, only to discover it supported a massive workforce of 6,000.

  It really needed just 500 workers, Wang said. The state firm's schools, hospitals and movie theaters employed the rest.

  "The quantum leap in the semiconductor industry really happened back in 1999," Wang said.

  SMIC has since become a barometer for the burgeoning chip industry. It has forged deals with Germany's Infineon Technologies AG and Japan's Elpida Memory Inc, and is gunning for a listing sometime late this year or early next year.

  "A listing this year might be challenging," Chang conceded.

  SMIC has not disclosed its shareholder structure, but Taiwanese investors are believed to hold a significant stake.

  It also has financial backing from Goldman Sachs and Shanghai Industrial Holdings.

  Now for the bad news. China still lacks many elements essential elements to drive its chip industry -- mass capacity, a viable design industry and a critical mass of the companies that supply the equipment to convert the silicon wafers into chips.

  Without those suppliers, global giants like Intel Corp are unlikely to start making chips there.

  Most domestic players now make simple chips for appliances and remote controls.

  But things could change. TSMC is seeking final approval to set up a US$900-million plant in China, which would be a milestone for the country's chip industry.

  "We believe that by 2006, 2008, China will play a significant role on a worldwide basis," said Edward Braun, chief of US chip equipment maker Veeco Instruments Inc.

  "We're in the first or second year of a 10-year development cycle," he said. "We need to be patient and allow growth."

  Chang says there is another daunting challenge.

  "Inertia in government is huge. It's hard to get it moving," said Chang, former boss of Worldwide Semiconductor Manufacturing Corp (世大半導體), sold to TSMC in 2000.

  "Top leaders are clear what needs to be done, but a lot of lower officials haven't caught up yet," he said.
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