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.
Nah, that's not quite right.
The green line is exports as a % of GDP, so we're actually exporting more than we used to. (reflecting overall increased trade activity.) But the red line (imports) has increased even more dramaticly, and the difference between the two (the deficit -- blue line) is what is putting us down the crapper.
Not at all true. The real weath generation mechanism of capitalism is the ability of free people to use their minds to better the world through free trade and voluntary action. One hundred years ago people believed that the end was nigh because we were losing all our farms to industry.
We haven't starved.
Now job should be beneath us. The question is, do we as adults want to spend our time working for $15 to $20 dollar an hour full-time jobs with benefits, or $8 to $12 dollar part time jobs without benefits?
Service work = selling hamburgers and changing the bedsheet of foreign master.
That sounds nice. But it is obvious you have a globalist perspective here. I am for free people and free trade. And for that matter, bettering the world. However, I am for America first! And when manufacturing is moved to China, good paying American jobs are lost....and some Chinese person's standard of living has improved. A globalist...like yourself...says that's a good thing. I worry about the American folks who lost their job.....and the new wealth that went with it.
Manufacturing was the engine of growth. Why? Whoever had the R&D and the best manufacturing sold product to others. The R&D couldn't progress rapidly unless the manufacturing it supported developed the funds to execute it.
In the 1970s and 80s, large pharmaceutical houses used their funds to execute different policies. Those that spent a larger share of their profits to attract the best R&D brains, are today placing products on the shelves of pharmacies that see their parent organizations highly profitable. Those that didn't have little to offer today, to keep the income stream coming.
Even in certain service sector jobs, creativity equals higher income. The most profitable food services have an active R&D department. If our manufacturing leaves the US, we're in a world of hurt in many important areas.
This is not about class distinction. The fact is that service jobs tend to be low paying. Service jobs are filling the void left by higher paying manufacturing jobs. What does a checker at Walmart make...$8 dollars/hr? What did a mill worker make...$25 dollars/hr.? Which one would give a young father the better opportunity to house and feed his family??
One hundred years ago, the federal government wasn't confiscating half your income in order to:
1) make it more difficult for local businesses to operate, and
2) send it overseas to our competitors.
One hundred years ago, a bunch of globalist, NWO psychopathic freaks weren't running our government.
It hasn't.
The following data is from:
U.S. Department of Labor
Bureau of Labor Statistics
Consumer Price Index
All Urban Consumers - (CPI-U)
U.S. city average
All items
1982-84=100
1930 = 17
1940 = 14
1950 = 24
1960 = 30
1970 = 39
1980 = 82
1990 = 124
2000 = 167
1971 marks the beginning of the "free trade" era. The CPI has gone up since then at a nearly exponential rate (sorry I can't provide a graph of the data).
Free trade is not free.
Regards
J.R.
I think that was true in the past - just as agriculture was before it. But now everybody can manufacture everything - there's not a lot of money in it anymore - just a lot of overcapacity. It was a lot better (at least for us) when most of the world's industrial power was devastated by 2 world wars. Now we have to compete with the rest of the world.
Well they don't necessarily have to buy T-bills, and they're certainly free to spend or exchange it with whomever they want for whatever they want. But it's still basicly our paper IOUs that they're using and sooner or later those IOUs would have to come back to us for redemption. Now one of the things that happens with so many IOUs floating around out there is that "the full faith and credit of the United States" eventually becomes worth less. For us, that is bad because everything we buy as consumers (imported) will wind up costing more. For them, it is good because everything we sell to them will seem cheaper. Good for exports, I suppose, but (in the extreme) what if we're no longer making anything? I suppose maybe we could sell them OUR aircraft carriers to redeem those IOUs. Or we can sell them Alaska along with the Alaskan oil.
Granted, I'm exagerating (I hope) to illustrate the example. But it still boils down to the same old globalist mantra of Americans becoming more "competitive" means we have to work harder and harder for lesser and lesser until we reach some kind of equilibrium with the developing nations.
Let's try to avoid truth here. LOL Nice one.
I'm hedging my bets, because there are plenty of once-civilized corners of the world that are now bombed out hell holes (remember the Sarajevo Olympics in '84? It was a beautiful city that reminded me of my home town in Tennessee. Most recently it was depicted in the movie Behind Enemy Lines as "just another Beiruit".)
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