Semiconductor Manufacturing delays sale

Semiconductor Manufacturing International Corp (SMIC, 中芯國際集成電路), which makes computer chips for Infineon Technologies AG and Toshiba Corp, delayed plans for an initial share sale until next year, setting back China's efforts to develop its chipmaking industry.

"SMIC is planning for an initial public offering next year," said Joseph Xie, a senior director at the Shanghai-based company.

"It is still too early to talk about details," he said.

The postponement of the company's planned public offering, even as the shares of Asian chipmaking rivals have soared this year, underlines China's difficulty in building a semiconductor industry from scratch. It may also indicate that SMIC is finding it harder than expected to compete with Taiwan Semiconductor Manufacturing Co (TSMC, 台積電) and United Microelectronics Corp (UMC, 聯電), the world's two biggest suppliers of made-to-order chips.

"The bigger companies are the ones that are making the profits," said Ronald Chan, who counts TSMC shares among the US$7.5 billion he helps manage for Allianz Dresdner Asset Management.

"It's hard for SMIC to catch up," he said.

Xie give any reason for the delay. Chief executive Richard Chang (張汝京) said last year that the company aimed to list shares on the NASDAQ, the New York Stock Exchange or the Hong Kong stock exchange this year. The company hasn't yet hired a bank to handle the sale.

The company will need to list on overseas equity markets in the future, investors said.

"Chinese chipmakers will need to have maximum foreign support," said Stewart Aldcroft, who manages US$400 million in Asia out of US$27 billion globally for Investec Asset Management Ltd.

"There's a lot of cachet in China's largest businesses getting public listings," he said.

Aldcroft shares in TSMC and South Korea's Samsung Electronics Co, the world's second-largest chipmaker.

SMIC, whose shareholders include Japanese chipmaker Toshiba, has received tax and other breaks from the China and Shanghai governments, which have designated chipmaking a strategic industry.

Value-added on the company's chips is 4.5 percent compared with 17 percent for imported chips, among incentives that have saved SMIC US$750 million and enabled it to sell its products for half what its Taiwanese rivals charge.

Still, some semiconductor makers say China's semiconductor industry lacks the scale to be competitive.

Chipmakers supplies of production equipment and materials such as chemicals and pure gases nearby to keep their operations working effectively, they say.

Motorola Inc, the world's ninth-biggest chipmaker, said in March it was delaying equipping its first semiconductor plant in China. The plant, in the eastern port city of Tianjin, is only 6 percent equipped, eight years after Motorola started building it.

Apart Japan's NEC Corp, Schaumburg, Illinois-based Motorola is the only foreign chipmaker to set up a factory in China. The top 10 suppliers to China's US$17 billion semiconductor market last year were all overseas companies, according to market researcher Gartner Inc.

The problem is that SMIC's larger rivals dominate the so-called chip-foundry business, investors including Chan said.

SMIC to expand monthly output to about 42,000 eight-inch-diameter silicon wafers by the end of this year. That's less than 4 percent of TSMC's 1.08 million installed capacity at the end of the second quarter.

Lower may not be enough to let SMIC compete. Production quality and consistency are also important to customers; as a newcomer, the Shanghai company has yet to build its track record.

SMIC deferring its share sale at a time when stocks of its Taiwanese rivals have been rising: TSMC shares have gained 55 percent this year, while those of smaller rivals UMC are up 29 percent.

TSMC have rebounded 85 percent from their October low, a slump caused partly by concerns that it would lose business to low-cost Chinese suppliers.

SMIC faces new rivals in China such as Grace Semiconductor Manufacturing Corp (宏力半導體), a company founded by the son of former Chinese president Jiang Zemin (江澤民).

SMIC production in the fourth quarter of 2001 with startup capital of US$1.5 billion, raised from investors including Goldman, Sachs & Co, Hambrecht & Quist Inc and Walden International Investment Group.

The company had a loss of HK$120.9 million (US$16 million) in the year to Dec. 31, according to Hong Kong-listed Shanghai Industrial Holdings Ltd, the chipmaker's biggest shareholder with a 17 percent stake.

Profitability be affected by its focus on older technology. The company has bought equipment from Singapore's Chartered Semiconductor Manufacturing Ltd (特許), the world's No. 3 made-to-order supplier. Chartered, which uses less advanced equipment than its Taiwanese rivals, expects to post its 10th consecutive quarterly loss in the second quarter this year.

SMIC produces memory chips for Germany's Infineon, Japan's Fujitsu Ltd and Toshiba, a business that has been unprofitable for most manufacturers since the spot price of benchmark memory chips fell below US$4 earlier this year.