China – A Giant in Semiconductors As China moves to establish as a leader in Semiconductors, -- An Impact Study by Arun Kottolli.

China – A Giant in Semiconductors

As China moves to establish as a leader in Semiconductors,

-- An Impact Study by Arun Kottolli

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.

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

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

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

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.

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

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

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

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

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

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

Sales of Semiconductors in China

0

10

20

30

40

50

60

2002 `03 `04 `05 `06 `07

Bill

ions

of U

S $

Current Demand

• China is the 2nd 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

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

Size of Packaging Industry

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

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

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

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 3rd party IP

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

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

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

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

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

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

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

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

Thank You

• This presentation is a work in Progress

• More information will be added as more data is revealed