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Chartered says it may build plants in China

Chartered Semiconductor Manu-facturing Ltd, the third-largest contract chipmaker, said China may be one of "possible" sites for future plants following the planned purchase of a stake in a Chinese chipmaker.

Chartered, which is building its sixth Singapore factory, may look outside the island for the first time to gain access to engineers and lower costs. The company said today it will transfer advanced technology for making chips to Semiconductor Manufacturing International Corp in exchange for a stake.

The Singapore-based company's entry into China will help the chipmaker tap into a lower cost base and be closer to customers such as Motorola Inc which have plants in China. Chartered's two bigger rivals Taiwan Semiconductor Manufacturing Co (TSMC) and United Microelectronics Corp (UMC) in Tai-wan also have ambitions to set up factories in the world's most populous country, analysts said.

"The companies moving into China will be able to reduce their cost structure which will be beneficial for the profitability of the individual companies," said Marc Faber, managing director of Marc Faber Ltd, which has been managing investments in Asia for more than 20 years. He doesn't hold any of the three stocks because he says they aren't attractive at current levels.

As part of the pact with the Chinese chipmaker, Chartered said it will transfer the so-called 0.18-micron process to make smaller chips than the standard 0.25-micron process. The width of these chips will be more than 200 times smaller than a strand of hair, allowing chipmakers to increase the number of chips made and pare costs.

"This is one of the steps we're taking in addressing the rapidly growing market in China," Chia Song-hwee, Chartered's chief financial officer, said in an interview. "While Singapore is an attractive manufacturing hub, looking at competitive manufacturing sites outside Singapore has been something that Chartered has always looked at."

In the past, Chartered has also looked at sites in the US and Europe, Chia said. The decision on a new site will be based on the infrastructure of the location, as well as government incentives for chipmakers, he added.

Some rivals are striking similar deals. TSMC is providing chip-making and design expertise to a government-run research center in Shanghai, which analysts say helps set the stage for manufacturing operations when Taiwan lifts the ban on chipmakers expanding into China.

Earlier this month, Taiwan Semiconductor said its second-ranking executive visited China to look at possible sites for the company's first plant in China.

"Everyone wants to move into China so this is a positive move for Chartered," said Terence Wong, an analyst at J.M. Sassoon & Co, who rates the stock a "buy."

"If they don't move into China, other companies are still going there and it will be a problem for them," Wong said.

Chipmakers are concerned that a growing number of chip plants planned in China may lead to an oversupply, hurting the recovery of the semiconductor industry from its worst slump.

Worldwide chip sales fell by a third to US$152 billion this year, Gartner Inc's Dataquest market-research unit said.

Although UMC hasn't disclosed plans for China, the company is aware of the potential in China. Chairman Robert Tsao said in September major cities in the country have aggressive plans to set up plants in the next five years, which will lead to losses among the biggest chipmakers.

Some investors say the entry of Chartered and other chipmakers may aggravate the problem.

"Each time a company expands into China, they don't usually shut down production elsewhere, so that increases the capacity and pricing will remain weak in the semiconductor field," Faber said.

For Chartered, the Chinese alliance will also give its customers access to capacity in China, the company said, complementing the five Singapore plants.
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