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China A Giant In Semiconductors

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    • 1. China – A Giant in Semiconductors As China moves to establish as a leader in Semiconductors, -- An Impact Study by Arun Kottolli
    • 2. Government Policy Initiatives
      • Make China nearly self-reliant in semiconductors
      • Enable to source its own chips domestically for everything from tape recorders to computers.
      • Beijing designated the semiconductor industry as one of China's pillars of economic growth.
      • Government is funding and bankrolling construction of new “Fabs”.
      • Provide the world with 20% foundry capacity.
    • 3. Venture Capital
      • Chinese Government is establishing a 1 Billion Yuan (per year) Venture fund to support semiconductor startups
      • Walburg Pincus LCC, an US Venture Capital firm has invested $70million in Datanag Microelectronics based in Beijing – to design chips for cell phones
      • The fund would mainly target chip design and research companies
      • Government is considering giving domestic chip producers an income-tax holiday for their first five profitable years
    • 4. Tax Incentives
      • Chip makers pay no income tax in the first five years of investment.
      • Pay half of the regular tax in the next five years
      • The standard income-tax rate is 15%
        • Well below that of many developed countries, including Taiwan's 25% income tax rate
      • These tax incentives, along with lower land and labor costs, give Chinese companies a 10% cost advantage
    • 5. Industry Consolidates in China
      • International semiconductor giants are consolidating their businesses in China
      • Fujitsu Microelectronics Co has a new Fab operating in Shanghai
      • Infineon Technologies AG built chip packaging & testing plant in Suzhou City
      • ST Microelectronics will build a 12-inch wafer plant
      • IBM plans to set up a new Fab in 2005
      • Powerchip Semiconductors of Taiwan plans to build a 8” memory fab in China in 2005
    • 6. China has huge Fab Capacity
      • SMIC, China's largest manufacturer has 3 eight-inch Fabs in Shanghai & will increase capacity by 70% this year.
      • A 12-inch Fab in Beijing will go online in the 4th quarter, and two more 12-inch Fabs scheduled for 2005 and 2006
      • Chinese will increase Fab capacity by 60% in 2004
      • Chinese fabs hold about 9% of foundry market's capacity today
      • China is expected to produce 15% of the world’s chips by the end of 2004, and over 20% in 2005.
    • 7. SMIC – China’s Leading Fab
      • SMIC has built capacity to process ~150,000 wafers per month
      • More than 70% of wafers was for Logic chips
      • Fab1 at Shanghai went from ground breaking to production in just 1.5 years
      • SMIC is ISO9001:2000, ISO/TS16949 certified; TL9000 certification will be completed in Q12005
      • Plans 90nm process by Q2 2005, & 65nm process by Q1 2007
      • 130mn process is currently in full production
      • SMIC also offer mask making, packaging, testing & ASIC design services
    • 8. Massive Investments
      • Firms have invested more than $10Billion
      • Additional $5Billion investments is being committed for years 2004-2005
      • 19 new fabs will be operational this year
      • New fabs use cutting edge 0.13 micron technology or smaller on 300mm wafers
      • China is concentrating on memory chips & ASIC’s
    • 9. Public Funding
      • Chinese Fabs are planning to go public in 2005.
      • Proceeds from the IPO will be used to expand capacity
      • ASMC (Advanced Semiconductor Manufacturing Corp) is planning an IPO in Hong Kong in Q1 2005
      • SMIC went public in 2004
      • CSMC is stated to go public in Q2 2005
    • 10. Industry is also adding Capacity
      • TSMC is raising its capital expenditure by 60 percent this year to $2 billion
      • UMC, the world's second-largest foundry is spending $1.5 billion
      • TI is building a new Fab in Dallas for $3 billion
      • Intel is expanding capacity & spending $4.8 billion
      • Sony is spending $1.1 billion on a 65nm Fab in Japan
    • 11. Some New Players in China
      • TSMC Shanghai – Subsidiary of TSMC
      • Grace Semiconductor -- Shanghai
      • He Jian Technology -- Suzhou
      • SMIC -- Shanghai, Beijing, and Tianjin
      • CSMC Technologies -- Wuxi, Jiangsu Province
      • Shanghai Hua Hong NEC -- Shanghai
    • 12. Demand Grows
      • China imports 80% of its needs
      • Current Government Policy is to encourage domestic production
      • Large Domestic Market exists for home entertainment products, cell phones and computers
      • OEM & Contract Manufacturing adds to drive up demand
    • 13. Current Demand
      • China is the 2 nd Largest Consumer of IC’s
      • Almost 80% of China's demand, totaling $22 billion in 2003 was imported
      • Chinese government hopes to raise self-sufficiency above 50% in the coming years
      • World market is expected to grow less than 20% this year & 13% in 2005
      • Enormous increase in supply, but demand growth remains slow
    • 14. Related Industries
      • China is a major power in semiconductor testing & packaging.
      • Greater Beijing and Shanghai has about 25 IC testing & packaging plants
      • Low wages, cheap credit & active government support offsets a relative lack of infrastructure
      • Japanese & Taiwanese firms are providing high tech photo masks, manufacturing equipment, training support.
      • Huge supply of engineering talent is fueling a fast growing IC design industry
    • 15. Size of Packaging Industry
    • 16. Design Capability
      • Currently China lags US, Taiwan & Japan in design Capability – but is rapidly catching up
      • Philips, Intel, Infineon have setup design centers in China
      • Datanag Microelectronics based in Beijing is designing chips for 3G cell phones
      • Spreadtrum Communications became the first company to develop a chip to run mobile phones using TD-SCDMA, a Chinese standard for 3G wireless services
      • Market-research firm iSuppli Corp. estimates that China has nearly 500 semiconductor-design companies
      • iSuppli expects China's chip-design industry to grow at an average of 30% a year through 2008
    • 17. Alliances with others
      • Chinese Fabs are actively establishing tie ups with leading IP vendors:- ARM, Artisan, Chip Idea, Synopsys, MIPS etc.
      • Chinese Fabs are forming strategic alliances with leading semiconductor companies to develop new manufacturing technologies;
        • Freescale, Infinion, Toshiba, Elpida, Fujitsu have R&D tie up with SMIC
      • Leading customers such as TI, Samsung, ST etc are helping Chinese fabs to ramp up on new technology
    • 18. Quality Improvements
      • Chinese Fabs are aggressively pursuing International Quality certification; By end of 2005 all fabs in China will have:
        • ISO9000-2001 certification
        • ISO14001 certification
        • OHSAS18001 certification for auto parts
        • TL9000 certification
      • Continuous quality improvement has led to higher yields and yield in 2005 will be same as global standards
      • Chinese fabs are investing massively in employee training to reduce defects, improve yield & win user acceptance
    • 19. Protection of IP
      • Chinese fabs are taking steps to protect Intellectual property
      • Chinese government has implemented new set of laws to enforce protection of Patents, Trademarks & Copyrights
      • Customs has been empowered to seize goods which are suspected of IP infringement
      • Companies are using firewall, encryption and VPN technologies to protect 3 rd party IP
    • 20. Education Initiatives
      • The School of Microelectronics at Shanghai's Fudan University has tie ups with Agilent technologies & Novellus Systems
      • Fudan University recently unveiled a Digital TV chip designed in collaboration with Industry
      • Tsinghua University has tied up with Chartered Semiconductors to develop 0.18um RF process
      • East China Science and Technology (S&T) University is building a nanotech Fab at a cost of $217 million
      • Government is actively encouraging University – Industry tie ups to promote Design engineering skills
    • 21. Universities in China
      • Hong Kong University of Science and Technology
      • National Natural Science Foundation of China
      • University of Electronic Science and Technology of China
      • Peking University, Xidian University
      • Institute of Semiconductors & Microelectronics
      • Nanjing University
      • Zhejiang University & Tsinghua University
    • 22. Employee profile
      • China graduates more engineers per year than the US
      • This has enabled Chinese fabs to recruit the best talent
        • SMIC has ~150 employees with PhD (~2% of staff)
        • ~15% of employees have Master’s Degree
        • ~30% of employees have bachelor degree
      • Abundant supply of talent has kept wages low. Average salary for an engineer is only $16,000
    • 23. Likely short term Impact
      • Chinese chip making Overcapacity will hurt others
        • "The pricing power of Taiwan's foundries in this sector should just about disappear" says Morris Chang CEO of TSMC
      • Will cause a serious glut that will drive down prices, slash profit margins and suppress ROE
      • China foundries sell at about 20-30% lower than the industry as a whole
        • Foundries are unlikely to see a return to the days of ROEs in the 20% range.
      • An Industry wide recession possible in Q2-4 2005.
        • 2-5% revenue drop in 2005, mainly caused by excess supply
      • Industry will enter into a corrective stage in 2005 as companies apply brakes on capital spending
    • 24. Medium Term Impact
      • Foreign companies will have tie ups with Chinese fabs to procure semiconductors
      • Support infrastructure industry for semiconductors – Equipment makers, test houses etc, will develop rapidly in China
      • China will develop a solid chip design capability
      • Chinese Fabs will ramp up capacity in 2006-2007
      • China will use its success in semiconductors as a springboard into Nanotech
    • 25. Impact on Asian Countries
      • In short term, foundries in Singapore, S.Korea, Taiwan will be hard pressed for profits
      • Glut in ASIC and memory supply will bring down profits for other manufacturers
      • Existing manufacturers in Asia will move to more specialized, proprietarily semiconductors, leaving generic markets for China
      • India, Taiwan & Singapore will develop a large fabless semiconductor industry
      • Singapore, Korea & Taiwan can benefit from providing supporting services, photo masks etc to China
    • 26. Impact on US
      • US will see further migration of semiconductor manufacturing to China
      • US ability to maintain technology lead Semiconductor technology will be at risk
        • Shortage of design engineers & High cost of R&D
        • US may maintain technology leadership, but manufacturing will be in China
      • Most US firms will go Fabless
        • Intel, IBM, TI & Micron being the exceptions
    • 27. Impact on Europe
      • European manufacturers have already moved their manufacturing to China and will be remain competitive due to their Chinese plants
      • Globally Distributed R&D will help keep European firms from maintaining their current status
      • Semiconductors from China will increase competition for US & European Firms
      • European Firms will see a drop in market share
    • 28. Long Term Impact
      • China’s rise in semiconductor design & manufacturing will change industry landscape
      • Asia-Pacific is already the largest market for semiconductors, soon it will be the largest manufacturer
      • US lead in semiconductor technology will erode
      • US firms may move to Nano-technology to maintain their margins
      • Rise of Fabless IC vendors will continue with new firms emerging from India, Singapore, Korea
    • 29. Thank You
      • This presentation is a work in Progress
      • More information will be added as more data is revealed