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China fabs miss growth forecast mark

Posted: 02 Oct 2006 ?? ?Print Version ?Bookmark and Share

Keywords:China? China IC market? fabs? IC equipment? SEMI?

China's market for new fabs and IC equipment is falling short of expectations for sizzling long-term growth, as companies juggle their need for profitability with a government directive to ramp up a host of 200mm and 300mm wafer fabs that are now on the drawing board.

It's been a roller-coaster ride these past few years for equipment makers selling into China. The market first boomed in 2004, busted the following year, and is only now whipsawing back to levels just shy of two years ago. But even at $2.3 billion in expected sales this year, the market is far from the optimistic highs industry executives and analysts thought it would reach when they were polled on the subject just 18 months ago.

Why the change in fortunes? At the time, Semiconductor Equipment and Materials International (SEMI) was making its predictions, Chinese foundry Semiconductor Manufacturing International Corp. (SMIC) was aggressively ramping up, and dozens of fab projects were being announced!so the optimism was probably justified. But "many of the fabs have not been built," said Samuel Ni, an analyst for SEMI, a trade organization. "When we went to verify later, we found out the companies were not able to get access to funding or the technology they needed." A slowdown in China's chip consumption may also be putting a damper on things.

At that time, members of SEMI believed equipment sales in China would be $3.3 billion in 2006, or 40 percent higher than the trade group's most recent estimate. By contrast, SEMI now believes China won't hit $3 billion until at least 2009!inching its share of the total equipment market from 6 percent this year to just 7 percent in 2009.

The revised growth forecast is making some analysts and equipment sellers more cautious!or realistic!about the market's future, especially when it comes to advanced 300mm wafer projects. "SEMI's recent figures on IC equipment sales into China, and how the predictions have decreased over the past few years, are a good indicator on the digestion period of Chinese fabs," said Bill McClean, president of IC Insights.

In a report, McClean noted that after the "explosive" growth from 2002 through 2004, China's foundries will increase their market share only slightly this year, from 12.4 percent to 12.6 percent. McClean believes the slowdown is indicative of an industry moving from a startup phase to the moderate growth rates of established companies.

Another indicator of a moderating climate is the lull in China's market for used equipment!usually a good measure of 200mm wafer activity. "There has been a noticeable drop-off in the number of inquiries that we have received directly from Chinese companies, and from U.S. reps that do business in China," said Barrie VanDevender of SEC/N, an industry organization that monitors used-equipment sales.

Meanwhile, other regions are doing better than expected. SEMI has bumped up its mid-2006 estimates for Taiwan, Japan and South Korea by billions of dollars over its 2004 predictions. Japan is among the best performers. Reflecting the country's economic recovery and strong demand for digital consumer products, IC players in Japan!Toshiba Corp., Elpida Memory Inc., Fujitsu Ltd, Sony and NEC Electronics!have been expanding their investment plans.

Even North America has done well. In the past two years, Advanced Micro Devices, Samsung and Infineon spin-off Qimonda have announced plans to build U.S. fabs, allaying concerns about a mass exodus of fabs in the U.S. market.

China companies are juggling their need for profitability with a government directive to ramp up fabs.

SEMI projects sales in China will dip a few percentage points next year, then continue with only moderate growth through 2009. The slowdown in China's fab growth validates another recent report from SEMI that half or more of China's fab projects are likely to fail. Today, China has more than 30 fabs, including older plants, according to SEMI. Eight or nine are 200mm fabs, with only one operational 300mm plant in the nation. That fab is owned by foundry SMIC.

In the coming years, if China wants to attract new 300mm wafer projects, it will need to look beyond its borders, McClean said. "Now that TSMC and UMC!through the Chinese foundry He Jian!have 200mm capability in China, I think the next China fabs will be put up by individual or joint-venture foreign firms," he said.

Hynix-ST Semiconductor is the first major joint venture between two foreign investors. It produces memory chips on 200mm wafers, but plans to raise $750 million by year's end!part of a $2 billion budget plan!to expand 200mm wafer production to 20,000 wafers per month and to set up a chip production line based on 300mm wafers. Also joining the 300mm club will be HuaHong NEC, which will set up a pilot line running 3,000 to 5,000 wafers per month by year's end.

SEMI's Ni deems it unlikely that foreign IDMs will build advanced 300mm wafer logic fabs in China anytime soon. "There will probably be some opportunity for more memory makers, but I don't see IDMs doing logic as a possibility," he said.

A source at STMicroelectronics agreed, noting that China's strength is in back-end manufacturing, which is more labor-intensive and thus cheaper to do in China. Wafer cycle times in front-end manufacturing remain the same, or even longer, in China and finding enough senior engineers locally for a 300mm wafer fab doing 65nm or 45nm logic processing would be a challenge, he said.

Despite recent funding and staffing troubles at a handful of fab startups in China, such as Nanotech Corp., there are still new companies trying to make a go of it. Fullcomp International, an investment group, started building a 200mm wafer plant in Chengdu last August. Officials weren't available to detail their plans, but media reports said the group will initially invest $220 million and will produce 20,000 wafers per month within a year. Instead of a foundry model, it will be an IDM.

IC Spectrum will also try to survive as an IDM, believing there's no room for more foundries in China. Founder and CEO Ming Yang said the foundry model forces companies to expand too quickly to keep up with larger rivals. "That quick expansion really negatively impacts their performance. My philosophy is that you don't have to build 10 fabs to get investor return," he said.

- Mike Clendenin
EE Times

Additional reporting by Mark LaPedus and Yoshiko Hara

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