Setting the foundations: a look at China's infrastructure development for the semiconductor industry.

In March 2003, Shanghai hosted the 13th SEMICON China, highlighting the growth of the semiconductor manufacturing industry infrastructure in China. The show, sponsored by Semiconductor Equipment and Material International (SEMI), has come a long way over the last decade, and so has China's semiconductor industry.

China's New Semiconductor Wafer Fabs

China has seen an unprecedented surge in plans for semiconductor industry growth. Since 2000, four new wafer fabrication facilities have moved into production, seven are currently under construction and another seven are planned, according to China's Ministry of Information Industry) The total investment is calculated to exceed 513.5 billion. Six of the new plants are in Shanghai; other locations include Beijing, Changzhou, Hangzhou, Huzhou, Leshan, Ningbo, Shenzhen, Suzhou, Tianjin and Zhuhai. Additional facilities from overseas companies are also anticipated. Both Taiwan Semiconductor Manufacturing Co. (TSMC) and United Microelectronics Corp. (UMC) of Taiwan are planning to construct wafer labs in China, in Shanghai and Suzhou, respectively.

IC Imports Remain Strong

China still imports most of the semiconductors used in its manufacturing facilities. Chinese leaders recognize that the country must build its own domestic semiconductor industry in order to prosper in the global electronics business of the future. China's consumption of integrated circuits (ICs) increased 20% in 2002 to 36.69 billion units, driven by strong growth in consumer electorates, mobile phones and computers. (2) Imports made up more than 80% of the unit volumes. The China Center of Information Industry Development (CCID) predicts that demand will grow almost 25% in monetary value in 2003. (3) Recognizing the need to grow its domestic semiconductor industry, the Chinese government and private firms have launched programs to improve semiconductor manufacturing, many of which include IC design capability.

China will see massive expansion not only in wafer labs, but also in the infrastructure to support the semi conductor industry. While China claims 22 material and equipment companies, additional growth is essential. Given this need, many U.S. companies are targeting China for semiconductor materials and equipment sales, a strategy evident at the recent SEMICON China show. While many companies have "China fever," patience is required when selling into this market. The front-end equipment market did not see any growth in 2002 compared with 2001, but hope remains for the future.

According to Art Zafiropoulo, Ultratech chairman and CEO and chairman of the board for SEMI, "There is no doubt that China will become a significant entity in the world consumption and manufacturer of semiconductors. However, this may be several years away." Building the infrastructure will be a key part of the strategy.

IC Package Assembly Expansion

Increased production of semiconductors also requires expansion in the IC assembly business. Many IC package contract assembly houses are already located in China, Merchant companies include Amkor, ChipPAC, Carsem and Global Advanced Packaging Technology (GAPT). Captive assembly lines include AMD and Intel. Intel plans a $100 million expansion of its assembly and test facility in the Shanghai area--and expects to employ 3,000 by 2004. Fairchild Semiconductor's new assembly and test facility in Suzhou is scheduled for completion in the second quarter of 2003. National Semiconductor has started construction of its first manufacturing facility in China in the Suzhou Industrial Park. The number of assembly companies will increase as companies, such as Taiwan's Advanced Semiconductor Engineering (ASE), construct new assembly and test facilities.

While early assembly operations located in China focused on low-end package assembly, new facilities and additions focus on advanced packages such as ball grid arrays (BGAs), chip scale packages (CSPs) and flip chip. Intel's facility assembles the Pentium 4 and merchant houses such as GAPT offer wire bond plastic BGA assembly services. Bumping facilities do not yet exist in China, but several companies are expected to install bumping operations over the next few years. Organizations such as Advanced Packaging and Interconnect Alliance (APIA) are helping to develop the infrastructure by offering seminars exposing attendees to the latest in advanced packaging.

Expansion also means the infrastructure to support the IC package assembly business in China will grow. ASM has a well-established wire bonder production operation in Hong Kong. Kulicke and Sofia has started shipments of wire bonding tools from its production facility in Suzhou. Printed circuit board production facilities are common in China, but few IC package substrate operations have been established.

Board-Level Assembly

Major board level contract assembly houses such as Flextronics, Jabil, Sanmina-SCI and Solectron have large manufacturing operations in various parts of China. Some board level assembly operations from Taiwan that produce personal computers and servers are also located in China. Companies such as IBM, Hewlett-Packard, Motorola and Nokia have manufacturing operations in China.

Infrastructure building for board level assembly is also on the increase. In February 2003, Universal Instruments opened a $5 million, 5,000 sq. m. manufacturing facility in Shekou, Guangdong Province, for the production of its GSM line of surface mount equipment. The company has also invested $1.5 million in an assembly and failure analysis lab located in the Suzhou Industrial Park.

Prospects for the Future

Prospects for China's electronics industry are bright. China offers a large workforce and plenty of land to build factories. Investments in the infrastructure will be critical to future success. While labor rates are low today, they will rise over time--as is already the case in areas such as Shanghai. Engineering talent is abundant, and, with exposure to new technologies, great achievements lie ahead.

References

(1.) Shanghai Daily Friday, March 14, 2003, p.3.

(2.) A. Baston. China's Use of Integrated Circuits Surged in 2002. Dow Jones Online. Feb. 19, 2003.

(3.) Namgyal, Tersing. DigiTimes Online. http://www.digitimes.com/ NewsShow/Article2.asp? datePublish = 2003/03/11 &pages = PR&se q = 211.

E. Jan Vardaman is president of Tech-Search International, Austin, TX; e-mail: [e-mail]