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.
Musical chairs and golden parachutes many times over....
No doubt that that is part of the problem, but many of the CEOs are in and out of gov't service themselves.
Many also support those in Congress who pass these restrictive laws, since they harm small business (competitors) more than big business.
There really isn't much difference between politicians and CEOs of large companies. They are two sides of the same coin.
Neither group has any loyalty to the United States or the Constitution.
All they have to is utter the words "free trade" and it is sufficient to sucker enough conservatives into supporting these trade bills.
The only Senator who bothered to actually read one of these bills wound up voting against it.
The problem as I see it, isn't fixing those problems, it's abandoning the US for foreign shores. The corporations should have worked within the system to fix those problems. Instead they worked within the system to make it possible for them to leave the US high and dry. I would that they had spent half as much of their energy on fixing the US corporate climate. Now it's f'd up needlessly in many areas, creating more impetus to flee the country.
The US government now finds itself in the untennable position of having to take CEOs and their staffs to court, but realizing that if they take to strong of actions, corporations may simply abandon the US.
We have a real problem here.
This is key to remember in light of the doom and gloom guys.If America loses it lead, it'll be because we can't develop new technology in large part because liberals have destroyed our educational system.
We have not had a trade surplus since 1975.
IMHO, the decline roughly coincides with the Arab Oil Embargo and the creation of the EPA and OSHA.
Much of what technical advancement we had during the '80s was fueled by massive deficit spending on military buildup which spilled over into the telecom/computer electronics. But even that's migrating offshore now with not much in sight to replace it.
The US signed a trade agreement with Mexico that open the doors to Mexican fruit. Thus NAFTA was used as the shield for inferior produce to enter the US. Raised with fecal matter contaminated water, the strawberries made US citizens sick. Relief under NAFTA? No.
We will now see inferior trucks and drivers from Mexico enter the US and gutt the trucking industry. Withing ten years the Mexican truck will carry most of the United States merchandise. Lower wages, inferior training, inferior trucks, inferior regulations, you name it, we're subject to it because of NAFTA.
How is this maintaining the United States in a superior role? It is subjegating the US to third world status. Most US citizens don't approve. Who cares? Did they think NAFTA was representative? NAFTA boards are not voted on by US citizens. None the less they make the decisions that affect our nation. Welcome to One World (read that third world) Order.
It evidently refers to products made in the US and sold abroad. If I'm reading the thing correctly, the US exports much less than it used to.
Is my take on that correct? Give me the straight scoop.
That's OK. We are transistioning to a service economy. Want ketchup with that?
Besides Intel and IBM, the big players are Micron, TI and Motorola.
Kudos to people like you who were smart enough to see this coming >10 years ago.
That's impossible because some of the corporations are causing the biggest problems for other corporations. For example, corporations of lawyers are destroying other corporations, often through idiotic law suits with outragious settlements. Corporate competition works against corporate cooperation.
Bingo.
Once the traitors have brought America down and turned us into a third world country, a political Pan-Am union will be possible.
Notice when they speak of globalism, they never talk of exporting our Bill of Rights; only importing the garbage (habits, people, and goods) from the third world sh!tholes.
Why is this always said with a sneer as if service work is somehow beneath the dignity of us?
It's pretty straightforward.
Basicly, it's just another form of debt.
We bought more goods from "them" than "they" bought from us.
So they're left holding our paper money which is nothing more than an IOU.
Of course, a lot of that comes back as foreign "investment" in the U.S.
But you gotta remember that one of the more popular forms of foreign "investment" is when they buy our T-bills to finance our government's budget deficits and National Debt.
So in a roundabout way, when we pay taxes a growing portion of it goes to service the interest payments on the National Debt which is not unlike paying interest on those IOUs created by the trade deficit. The spaghetti of financial transactions that can occur can be confusingly more complicated than that, but that's what it boils down to in a nutshell.
Ain't that the truth! The real wealth generation engine of capitalism is manufacturing. Capitalists share that wealth with the people through labor. Blue collar manufacturing jobs raise the standard of living and aggregate wealth of a nation. But the combination of regulations, unions, taxes, etc.....and the opening of borders to move manufacturing offshore is destroying this wealth creation and sharing mechanism in America. Now the owners (stock holders)get their action, but the wealth shared through labor is going to Mexico, China, etc. As this trend continues, America will drift towards third world status, as citizens of other countries enjoy new prosperity. This is a great idea if you own a piece of a multinational corporation...or you are a globalist. But if you care about the health and future of our nation....it is bad news.
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.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.