China A Giant In Semiconductors

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  • China A Giant In Semiconductors

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

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