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Chip Production Moving to China
Insight ^ | Dec. 31, 2002 | Christopher Whalen

Posted on 01/04/2003 5:28:38 PM PST by Tailgunner Joe

Despite the recent strong rally in semiconductor stocks, some pundits continue to predict the demise of the technology industry as it has been known for the past half-decade. The good news is that many managers in the technology sector generally, and the semiconductor industry in particular, see demand for chips picking up in the first half of 2003. Such demand is driven mostly by consumer products rather than sales of personal computers (PCs), and thus tracks a recovering economy. The bad news is that the manufacturing capacity needed to make the latest types of microprocessors, including memory chips and processors for PCs and other products, is rapidly moving to Asia.

The leading provider of tools and materials for chip makers, Applied Materials Inc. (AMAT), now gets more than half of its business from Asia, including Taiwan (27 percent), Japan (14 percent) South Asia and China (12 percent) and Korea (9 percent). This compares to 26 percent for North America and 12 percent for Europe. The geographic distribution of AMAT's business shows that the continuing drop in the number of working "fabs" (fabricating plants) in the United States and Europe is forcing the entire semiconductor industry, including the producers of the chemicals and other inputs required for chip manufacture, to focus investment on China and other Asian venues. Whereas only one-third of all chip wafers are started in Asian fabs today, that figure is expected to increase to more than 50 percent by 2005.

Some analysts worry that the meat of the global semiconductor industry's whole production capacity gradually is moving to Asia, particularly mainland China. Others are more concerned that, as in the market for memory chips, too much new capacity is being built by growth-hungry Asian nations, suggesting that chips are set for another round of price wars, hurting the profitability of the entire industry. Both sets of concerns may be well-founded. Korea, for example, now holds half the global market for memory chips and steadily has increased output even as prices have fallen well below cost. The U.S. company Micron Technology recently won a U.S.-government trade investigation of Korean-government support for bankrupt chip maker Hynix.

Dell Computer Corp. has announced that it soon will begin to market a generic "white-box" PC to be sold under labels of retailers worldwide. Working in partnership with Taiwan- and China-based suppliers, the U.S. PC maker is setting the pace in the PC market in terms of price competition. But one wonders if the same partners that today help Dell make the world's cheapest PCs will turn on Dell tomorrow and offer their own cut-price PCs.

When somebody says that China is going to dominate the semiconductor industry of the future, they usually refer to Taiwan's giant contract chip manufacturers, or "foundries," rather than locally owned companies on China's mainland. Taiwanese chip manufacturers such as Taiwan Semiconductor Manufacturing Corp. (TSMC) and United Semiconductor Manufacturing already control half of the world's contract chip manufacturing. Contract manufacturers are expected to account for 50 percent of all chip production by 2010, according to the Far Eastern Economic Review; but all of these manufacturers depend on U.S. technology and some are hurting badly in the current slump.

There clearly is a lot of new investment activity in China's semiconductor sector, but these investments vary as to the level of sophistication in fabrication. The type of chips made and the size of the silicon wafers used to make the computer chips are what differentiate a leading producer of state-of-the-art chips from plants that make commodity chips for telecommunications or other applications. Yet the fact of China's large and growing market for all kinds of semiconductors is an important factor in the semiconductor marketplace.

Low-cost labor, nonexistent environmental laws, lavish tax breaks, proximity to the largest and fastest-growing markets in the world and other incentives offer compelling reasons to locate chip-production capacity in China or nearby, especially for the less-expensive commodity devices. States such as California, Connecticut, Texas and New Hampshire that traditionally competed to attract new technology companies now face competition from purpose-built Chinese "cities" designed to house foreign firms and their workers. As a result, existing chip-making plants in the United States and Europe are being purchased, moved and reassembled in China, resulting in a net shift of production capacity out of the U.S. and Europe to Asia.

It is no exaggeration to say that all of the major global players in the semiconductor industry are moving relatively modern (albeit not state-of-the-art) fabs, tool-production and materials facilities to China, both to address that growing market and to lower production costs. True, the most modern chip-making plants and tool-development facilities remain in the United States, Taiwan and Europe (in that order of technological sophistication) but, over the long term, the biggest part of the semiconductor industry's productive capacity in Asia will end up in China. As one industry veteran notes: "Chinese chip plants are half the cost of anywhere else in the world."

Pay Shin King, a native of China and cofounder of a semiconductor software firm, says that the mainland Chinese are going to buy primarily used, but still capable, equipment rather than trying to acquire the leading technology. He sees Chinese firms concentrating on 1-micron or 0.5-micron devices, while foreign-owned firms pursue smaller, more costly, manufacturing processes.

"China's companies really cannot afford to play directly in the high-end semiconductor industry," says King. "The big Taiwanese foundries will dominate new technology, but they will locate many new facilities in the mainland and produce large volumes of relatively low-tech chips. The leading producers will put some facilities in China, but they will always diversify the geographic location of production capacity around the region because of earthquakes and other risks."

"A real 300 mm fab costs you $2 billion to complete," says James McKibben, head of sales for Tegal Corp., a manufacturer of plasma-etch systems used for making chips. "Only the top 10 players in the world can afford such investments." He recalls that the transition from 6-inch to 8-inch (200 mm) silicon wafers was very difficult as well, with a lot of cost upfront to perfect the production process and chemistry. McKibben says that the huge cost reductions available in Asia, starting with Singapore and Malaysia, and now in China, are what is driving foreign chip manufacturers to move new and existing facilities to Asia.

McKibben notes that China offers aggressive terms to foreign technology companies that locate there, including no mandatory local "joint-venture" partner, free electricity and water, long tax holidays and virtually free labor. He reckons that foreign companies may be able to repatriate upward of 80 percent of local profits after paying the requisite local taxes and "fees." McKibben also cautions that the Chinese officials now courting foreign equipment firms clearly want part of the local output exported, illustrating China's long-held goal of building wealth by encouraging the production of manufactured goods and a new export market for China.

"They will start with the simple chips, any products where they can add value and earn a return and build a foothold in the domestic market," says McKibben, who confirms that China provides numerous subsidies for local chip startups and encourages exports through free-trade zones. The most advanced plant in China today is a 0.35-micron fab built by NEC of Japan near the city of Shanghai, says McKibben. By comparison, Taiwanese manufacturers are struggling to keep up with the likes of IBM and Intel by moving to 0.11-micron technologies for 300-mm production lines. He reports a steady flow of Chinese government officials visiting Tegal and other U.S. semiequipment companies to cajole them into building new facilities in China.

Even with China's price advantage, though, there is an interesting trend favoring U.S. chip manufacturers. IBM, for example, has created the most advanced chip fab in the world less than 100 miles from Manhattan. No longer content to sell its advanced chip-making technology to the Asian foundries, IBM and other U.S. technology giants seem to be keeping their best technology away from the Asian foundries. Indeed, IBM now plans to expand its own foundry model to compete with the likes of TSMC, in part by withholding technology from its Asian competitors. Using 300-mm wafers and revolutionary copper technology, IBM's cost per chip at its East Fishkill, N.Y., fab reportedly will be 20 percent to 30 percent below that of the Asian competition. The reasons for the cost reduction? There are virtually no people inside the facility compared with dozens of operators for existing 200-mm fabs around the world.

Despite massive lobbying by the Chinese government, Intel Corp. confirmed earlier this year that it will not build advanced chip-making lines in China. A May meeting between Chinese Vice President Hu Jintao and Intel chief executive Craig Barrett appears to have done little to convince the U.S. chip maker to change its position on building fabrication plants in mainland China, according to the South China Morning Post. Intel hosts a continuous procession of delegations from China, often at Ming's restaurant in Palo Alto, Calif., but the U.S. technology leader has not budged on its refusal to build fabs on the mainland.

The long-term trend in the semiconductor-equipment industry implies a large-scale shift in production capacity to Asian venues such as Taiwan, China and Singapore. Today, with only one out of five chips sold in China made locally, the priority for China is to meet domestic needs. But longer term, there seems no doubt that China means to become a high-volume exporter of computer chips of all types, even if technology leadership remains in the United States and Taiwan. Makers such as IBM, Samsung and STMicro in Europe will lead the way in terms of chip design and manufacturing technology, but the volume capacity needed to make the generic semiconductors required for consumer products and other, even military, applications, increasingly resides in Asia.

In the short run, the changes are relatively subtle and hard to notice, but the long-term outlook is for a permanent shift in production capacity to Asia and for lower prices for all chips as new capacity comes on line. The global leaders in the semiconductor industry will benefit from the growing demand for chips in Asia, but within a decade most new chip-making capacity in the world will be commodity manufacturers of indeterminate brand located somewhere in Asia. A growing part of that expansion will be located in China.


TOPICS: Business/Economy; Editorial; Extended News; Foreign Affairs
KEYWORDS: techindex
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1 posted on 01/04/2003 5:28:38 PM PST by Tailgunner Joe
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To: Tailgunner Joe
Taiwanese manufacturers are struggling to keep up with the likes of IBM and Intel

While IBM is currently and always has been the leader, TSMC and UMC in Taiwan are toe to toe with AMD and Intel and don't show any sign of falling by the wayside

2 posted on 01/04/2003 5:38:50 PM PST by ContentiousObjector
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To: ContentiousObjector
"TSMC and UMC in Taiwan are toe to toe with AMD and Intel and don't show any sign of falling by the wayside"

I have never heard of a computer "Powered by TSMC". Intel and AMD develop CPU's (and hundreds of other IC's). Are these places only fabs? The major bucks are in innovation, not rote production.

3 posted on 01/04/2003 5:52:12 PM PST by lawdude
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To: lawdude
there are lots of companies in Asia who manufacture processors, although there is little incentive to get into the x86 business when there are two giants beating the shit out of each other.

The manufacturing side is just as important as what is being manufactured, how practical would a Pentium 4 die the size of a basketball court be? (for anything other than heating)

4 posted on 01/04/2003 5:59:14 PM PST by ContentiousObjector
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To: Tailgunner Joe
It is my contention that R&D will sooner or later, likely sooner, follow production abroad. When that happens the US will cease to be the driving force behind technological advances. Thus others will begin to drive certain industries that have been very important to our national goals.

Technology was going to be the be-all end-all to replace manufacturing. Some of us said that was falicy. Now we're seeing one of the major reasons why. As tech manufacturing and R&D move offshore, the US will lose it's tech advantages. As this takes place the US will lose some of the luster behind it's dollar, and investment in the United States.

China is already a growing threat to investment in the United States.

I was watching FoxNews the other day. (It was either Fox or CNBC.) It was reported that European investment in the United States fell from $54 billion in 2001, to $550 million in 2002. It was also reported that Asian investment in the United States climbed during the same period. But the gains were much less than the losses from Europe. The gains were something like $32 Billion vs $10 billion the year before.

The overall net loss of foreign investment from these to sectors was about $30 billion.

I believe the time frame was 2001 vs 2002. The actual time frame may be somewhat different, not much.

The handwriting is on the wall. We are going to have one hell of a time paying down our budget deficits if we lose foreign investment. It appears we are already headed well down that road. Globalists can pat themselves on the back for this turn of events.

5 posted on 01/04/2003 5:59:57 PM PST by DoughtyOne
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To: Thud
ping
6 posted on 01/04/2003 6:14:32 PM PST by Dark Wing
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To: DoughtyOne
Yep, it's called "killing the goose that laid the golden eggs". The US is slipping beneath the waves.
7 posted on 01/04/2003 6:38:52 PM PST by The Duke
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To: DoughtyOne
Solutions, other than put up trade barriers that will turn us into a French-style economy?
8 posted on 01/04/2003 6:54:29 PM PST by kaktuskid
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To: lawdude
I know that at least many AMD and Intel cpu's are not made in America. Some Intel cpu's are made in Malaysia.
9 posted on 01/04/2003 7:00:24 PM PST by Revel
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To: The Duke
This is what worries me:

The warning signals are there. They have been for a long time. If our leaders don't wake up and take immiediate action it will too late. China is already drawing away tens of billions of dollars in foreign investment. I'm not even sure if we could stop that process now that we've seeded and watered it.

One of the problems we now face, is that corporations at this point have an alternate decision to make. If the US tries to undo it's mistakes, they can opt to move their operations to China, abandoning the US. We set up that opportunity.

There's going to be hell to pay. One of the most prominant will be civil disorder, which our federal government recognizes and is trying to avoid at all cost as this nation becomes unstable. This may sound alarmist, but not being able to service our massive debt plus ballooning government programs will wind up in caos. The same citizens that yelled the loudest about the globalist mistakes being made, will be the ones who'll pay the heaviest as the federal government flails around not knowing what the hell to do, to rectify their gross negligence, and needing to keep discent quiet at all cost.

Once in the driver's seat, the US will have no choice but to abdicate it's world status to the UN. The outcome will not look good. We'll see things implemented in this nation that we never thought possible, because we'll need foreign help to keep us afloat.

Those that implemented these failed policies will find some way to blame the worker class. Unions, the scorn of reasoned Conservatives, will fluorish as pressures to cut wages and benefits mount. This will see Marxist policies fluorish in our nation.

The dollar will tank as the printing presses smoke under increasing pressure. It's going to be grand.

Hint: Learn Chinese. They have Krushev's rope.

10 posted on 01/04/2003 7:04:08 PM PST by DoughtyOne
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To: kaktuskid
Prior to 1992, we didn't experience the trade deficits we do today. How is it that we became the preeminant nation on the planet prior to 1992? Shouldn't it have occurred after 1992? Your supposition regarding trade cannot be true, can it?
11 posted on 01/04/2003 7:11:32 PM PST by DoughtyOne
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To: DoughtyOne
It is my contention that R&D will sooner or later, likely sooner, follow production abroad.

It's already happening.

I have a friend (he has a PhD) who was just laid off from a commercial R&D company. It turns out that they are starting an R&D division in Red China.

I despise the corporate bastards who make these decisions. And I despise the politicians who allow this to happen through their treasonous policies.

It is NOT free trade.

12 posted on 01/04/2003 7:19:33 PM PST by Mulder
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To: DoughtyOne
SELLING CHINA THE ROPE
13 posted on 01/04/2003 7:24:25 PM PST by Tailgunner Joe
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To: Mulder
I hear you bud. It beats anything I've ever seen. Our political and corporate leaders are selling out this nation and it's ideals as fast as they can. We are becoming a hollow shell that cannot sustain it's own weight.

About all we can do these days, is position ourselves for the inevitable to come.

14 posted on 01/04/2003 7:27:57 PM PST by DoughtyOne
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To: Tailgunner Joe
Thanks for the link. The truly sad thing is, you and others are able to back up what I have been saying on a moment's notice. Sure it's nice to have the facts, but the facts themselves are downright scarey.

Bush is as willing to sell this nation out as any other corporate entity or former administration.

Now in full control, it's going to be a real eye opener what this guy decides to do over the next two years. I happen to believe many solid supporters are going to see the light as it becomes even too obvious for them to ignore any longer.

We shall see.

15 posted on 01/04/2003 7:32:47 PM PST by DoughtyOne
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To: DoughtyOne
Just wait and see if he wins in 2004. If he does he will not have to worry about reelection so watch out.
16 posted on 01/04/2003 7:34:15 PM PST by Karsus
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To: DoughtyOne
Our political and corporate leaders are selling out this nation and it's ideals as fast as they can.

Both parties, at the top anyway, are selling us out.

It's hard to imagine that only 20 years, Larry McDonald (anti-NWO) was going to run for President as a Democrat. Now that party has been taken over by gays, abortionists, illegal immigrants, illiterates, and outright traitors.

And only 20 years ago, President Reagan was talking about the "government being the problem" and "reawaking this industrial giant". The GOP has abandonded both those planks in favor of quasi-socialism and full blown globalism.

About all we can do these days, is position ourselves for the inevitable to come.

Those who pay attention realize that "it's coming".

17 posted on 01/04/2003 7:38:58 PM PST by Mulder
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To: Karsus
That is a valid thought, but then his party will want to win again. Now if you believe there actually are two parties, this may carry some weight. If you believe as I do that both parties have essentially become one new ReDem-Globalist party, then it really won't matter what party takes over in 2004, 08, 12, 16...

With the FTAA in the wings, I think it's clear that the witch's brew isn't owned by either party. Global One World Government is here. We are a part of it. It will in no way resemble anything our founding fathers had in mind for us.

18 posted on 01/04/2003 7:40:20 PM PST by DoughtyOne
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To: Mulder
I despise the corporate bastards who make these decisions. And I despise the politicians who allow this to happen through their treasonous policies.

Corporate management does not look beyond the next quarterly report. Why should they? The CEO at company X this year, may be at company Y next year. Management does not have a stake in the long-term future of their companies -- they want to get the stock price up this month so they can cash in their options.

The whole situation is unstable. Huge corporations are not overseen by anybody with a financial incentive to look after the long-term interests of the stock holders. The boards of directors to a large extent are rubber-stamps for management.

19 posted on 01/04/2003 7:40:57 PM PST by SauronOfMordor
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To: ContentiousObjector
"there are lots of companies in Asia who manufacture processors, although there is little incentive to get into the x86 business when there are two giants beating the shit out of each other."

Boy, I shloshed my share of wafers in buffered HF over the years. Look at the worth of Intel and AMD an Motorola (until recently), etc. The innovators make the bucks. The wafer processors pay 5.75/hour and don't truly stimulate the economy. Device designers and the like make the bucks.

I haven't kept up with the semicon business since I bailed out in '88. Who are the big-guns now?



20 posted on 01/04/2003 7:41:10 PM PST by lawdude
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