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Posted on 02/04/2004 7:28:21 AM PST by tallhappy
China
China set to flood the world with chips By Macabe Keliher
TAIPEI - Last September Morris Chang alarmed the semiconductor industry when he said there would be an industrywide recession in 2005 and that the Chinese chip makers would cause it. "I stand by that statement. China's capacity in 2005 will have a big impact," the chairman of the world's largest made-to-order integrated-circuit and computer-chip manufacturer, Taiwan Semiconductor Manufacturing Co (TSMC), has told Asia Times Online.
That's something of an understatement. In pursuit of a policy that will make China nearly self-reliant in semiconductor manufacturing, and enable the country to source its own chips domestically for everything from tape recorders to computers, Beijing is funding and bankrolling what is being called reckless expansion in semiconductor fabrication plants, or "fabs". Through low-interest loans, tax exemptions and even direct investment, the Beijing government has set China on pace to provide the world with 20 percent or more of its capacity next year in the made-to-order chip industry, or foundry.
This volume is enough, industrialists and analysts say, to cause a serious glut that will drive down prices, slash profit margins and suppress return on equity. From a robust 20-30 percent growth this year to more than US$200 billion, the global semiconductor industry will register only 10 percent or less in 2005, according to Chang, and some analysts are predicting negative growth. "Just as in any industry governed by supply and demand, an increase in capacity anywhere in the world will have effects," said Chang, interviewed at a TSMC investors' conference here last Thursday.
When Beijing designated the semiconductor industry as one of China's pillars of economic growth, the industry was sure to take off, and what has occurred is unprecedented on any scale. From virtually nothing a few years ago, Chinese fabs hold about 9 percent of the foundry market's capacity today, and they are expected to produce 15 percent of the industry's chips by the end of the year, and well over 20 percent in 2005.
China is sitting on a mountain of wafers
Take, for example, Semiconductor Manufacturing International Corp, China's largest manufacturer. It currently has three eight-inch-wafer fabs in Shanghai that will increase capacity by 70 percent this year. Add a recently purchased Tianjin eight-inch fab, a 12-inch fab in Beijing that is expected to go online in the fourth quarter, and two more 12-inch fabs scheduled for 2005 and 2006, and China is sitting on a mountain of wafers that the market is just not ready to absorb.
"The overcapacity will be massive. And taken with a modest fall in global chip sales, there will be a rough landing for the industry," said Rick Hsu, semiconductor analyst at Nomura Securities.
As part of the government's strategy, Chinese foundries aim to supply the local market. Currently almost 80 percent of China's chip demand, which totaled about $22 billion last year, is being met by foreign makers. The Chinese government hopes to raise the country's self-sufficiency above 50 percent in the coming years, and has invested heavily in a few of the companies. Advanced Semiconductor Manufacturing Corp, for instance, is 62 percent government-owned, and Grace Semiconductor Manufacturing Corp is partially held by the son of former Chinese president Jiang Zemin.
In addition to owning majority stakes in some of the semiconductor companies, China offers tax incentives to semiconductor investments. Chip makers pay no income tax in the first five years of investment and then pay half of the regular tax in the next five years. The standard income-tax rate is 15 percent, well below that of many developed countries, including Taiwan's 25 percent. These tax incentives, along with lower land and labor costs, give Chinese companies a cost advantage. They can manufacture about 10 percent more cheaply than their competitors elsewhere, according to Andrew Lu at Citigroup Smith Barney.
With these political and financial incentives, analysts estimate that Chinese companies will increase their wafer-manufacturing capacity by nearly 60 percent by the second half of this year. Such a trend is only expected to intensify until Chinese makers can fill more than 50 percent of the domestic demand, possibly regardless of whether there is new demand or not.
Analysts warn that the local market is expected to grow less than 20 percent this year and about 13 percent next year - a rate slower than that of the manufacturing capacity. "There is a demand shift, not the creation of demand," said Hsu, at Nomura. "Foundries are unlikely to see a return to the days of ROEs [returns on equity] in the 20 percent range."
China's mass chip production to hurt others
Although Chang said Taiwan Semiconductor Manufacturing's 2003 fourth-quarter return on equity was 19.9 percent, and that he expects more than 20 percent by this June 30, all of those high numbers may drop when Chinese companies begin mass production in their new fabs, probably some time next year. Nomura estimates that TSMC will recover to only 18 percent return on equity in 2005, the year in which the chip cycle is expected to peak. TSMC's ROE peak was in 1995, at 45 percent.
"The pricing power of Taiwan's foundries in this sector should just about disappear," said Hsu. He estimates that China foundries sell at about 20-30 percent lower than the industry as a whole, and 40-50 percent lower than TSMC.
The industry is in the midst of an upswing now, to be sure. Arizona-based Semico Research Corp forecasts 26.8 percent revenue growth for the global semiconductor industry this year, and 39.7 percent growth for the foundries. And last week TSMC announced record revenues for fourth-quarter sales in 2003, an increase of 5.3 percent over the third quarter, and Chang said he expects single-digit growth in the first quarter of 2004, monumental in an industry that peaks in December. Profits for TSMC in the fourth quarter rose sixfold over 2002.
The problem is, the industry overall is expanding. TSMC is raising its capital expenditure by 60 percent this year to $2 billion, and United Microelectronics Corp, the world's second-largest foundry, is expected to increase its capital expenditure fourfold, from $350 million to $1.5 billion. The Chinese companies are planning initial public offerings, either in Hong Kong or on the United States Nasdaq in the next year or so. China's largest manufacturer, Semiconductor Manufacturing International Corp, for instance, will float a $1 billion initial public offering (IPO) in the first half of this year. Grace is also scheduling a $3 billion IPO, probably next year.
"Enjoy it while it's great," said Dan Hutcheson, president of US-based VLSI Research Inc, "but expect a decline on the order of 30 percent to start in late 2005."
(Copyright 2004 Asia Times Online Co, Ltd. All rights reserved. Please contact content@atimes.com for information on our sales and syndication policies.)
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B, So what? This is normal industry attrition in the global marketplace, with China entering the scene, they are going to take their part in it. Forewarned, however is forearmed, so Thanks again for the excellent article.
The Chinese companies are planning initial public offerings, either in Hong Kong or on the United States Nasdaq in the next year or so. China's largest manufacturer, Semiconductor Manufacturing International Corp, for instance, will float a $1 billion initial public offering (IPO) in the first half of this year.
Most important statement in the whole article, I suggest this be viewed as a buying opportunity, which it will be.
Although not really stated as such here, it seems to me that this article is written in the spirit of "Be Scared of China". Well be scared if you want, but it seems to me that such industry will be helping a whole new group of people have more disposable cash in their hands. Cash that we should be thinking of ways to trade for.
Or. we could just allow the Trade deficit to continue to build and cry that the government will have to bail us out of our problems, should the Chinese ever decide to spend all of our cash that they are holding. (Approx 30% of Chinese Central Bank Reserves are held in American dollars.) Should we wait until they decide to come over and buy an entire years production of wheat, corn, beef, soybeans, pork bellies, etc??
Will the last US foundry please turn out the lights before they leave.
What's inside. (does Doritos really spell it "Chilli?")
That's exactly the concern we should all have.
We're workin on it....keeping those borders open...24/7...converting the middle class to lower as fast as we can... It wouldnt be prudent to do it all at once....wouldn't be prudent...
THE SKY IS FALLING ! THE SKY IS FALLING !
...thank you.
Potato or corn?
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