Chip Production Moving to China: Low Costs and an Expanding Market Increasingly Are Attracting the U.S. and European Microchip Makers to China, Causing a Shift in Production Capacity to the East. (the Nation: High Technology)

Article excerpt

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 labs 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. …