December 30, 2011 - In a move that had been widely speculated for years, two Chinese foundries have been combined: Hua Hong NEC and Grace Semiconductor. Details of the merger were not made available -- though the companies claim the deal was actually signed in mid-September, and just now officially completed. Hua Hong takes the helm with a 51% stake in the combined entity, reports the Wall Street Journal. (Reuters picked up on rumors of a possible deal a few weeks ago.)

Updated 1/5:
A September 2011 update from IC Insights ranking foundries by estimated 2011 sales put Hua Hong NEC at 10th ($390M, 5% growth vs. 2010) and Grace at No. 16 ($280M, 8% growth). With the two firms' projected combined 2011 sales of "around $600M" (and a $100M profit) they'd be big enough to vault to No. 5 on the list just ahead of TowerJazz ($640M). That would place two of the top five worldwide foundries in China.

China's flagship foundry entity SMIC, meanwhile (No.4 in IC Insights' list at $1.3B), has multiple 300mm factories but is likely to see 2011 sales fall off dramatically after losing some business from TI. SMIC continues to lag further behind market-leading rivals TSMC, GlobalFoundries, and now Samsung -- it's at 65nm and with very little 40nm production, and losing money and unable to really fund leading-edge tech (2Xnm).

Realistically this merger changes nothing in the global foundry landscape -- it's a domestic play, and puts SMIC squarely in the crosshairs. HHNEC and Grace have combined ~145k WSPM (200mm) capacity and 130nm-90nm capabilities, and are already partners in a 300mm foundry (Shanghai HuaLi Microelectronics, prepping its own 10k wafers/month at 65nm/55nm), according to Gartner. That's enough to serve a domestic Chinese market for consumer-type chips that use mature technologies, and together they could do a better job in R&D for design tools and some specialty processes.

"China foundries should develop future business from China domestic IC design houses, rather than head on collision with TSMC, Samsung and Globalfoundries who are in 300mm capacity and advanced technology race," Gartner analyst (and former SMIC exec) Samuel Wang told SST. With the Chinese government clearly stating that it would push Chinese semiconductor R&D but not capacity expansion, "I believe that unless Chinese foundries can figure a way to distinguish themselves from the world-wide foundries, the business battle will continue to be uphill.

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"Combined the two firms project 2011 sales of "around $600M" and a $100M profit. A September 2011 update from IC Insights listing the top foundries ranked by estimated 2011 sales, put Hua Hong NEC at 10th ( $390M, 5% growth vs. 2010) and Grace at No. 16 ($280M, 8% growth). Combined they'd be big enough to vault to No. 5 on the list just ahead of TowerJazz ($640M) -- that's well behind No.4 SMIC ($1.3B), though SMIC's 2011 sales are likely to be a lot lower since they lost a lot of business this year from TI. Notably, this would mean two of the top five worldwide foundries are in China, and leaving GlobalFoundries as the sole top-five foundry not in Taiwan or China. Realistically though, the Chinese foundries are well off the leading-edge process technology curve; TSMC for example is pushing through the 2Xnm node, and SMIC has been stuck at 65nm for a while.

Both firms have fabs in the Shanghai/Pudong area, and aim to integrate manufacturing facilities and process technologies, as well as backoffice areas like HR. They claim "complementary strengths" that will widen their collective product ranges and customer base, plus increase capacity and bolster R&D capabilities. Hua Hong NEC, founded in mid-1997, says it has about 80,000 WPM capacity with two 200mm fabs (years ago it had explored a 300mm fab either on its own or via JV), and 0.35μm-0.13μm capabilities spanning embedded flash, analog, BCD, power, CMOS, and logic/mixed signal, with 65/55nm on its 2012 roadmap. Grace owns a 300mm fab, with 90nm capabilities in logic/mixed signal and embedded flash, and 0.18μ-0.13μm in other areas (RF, CMOS image sensor, display drivers, power semis).

China made a significant push to support a domestic semiconductor industry, given its massive appetite for chips and the devices that use them, with SMIC as the flagship entity (it has three 300mm fabs of its own and manages one for Wuhan Xinxin, plus four 200mm fabs either running or under construction). Growth and profitability have stagnated since around 2007, however; consolidation -- including this Hua Hong-Grace combination specifically -- been proposed since at least 2008. Ironically, foreign chipmakers have been making significant inroads into the Chinese market by putting in domestic facilities of their own, e.g. Intel, Hynix, and even rival Taiwanese top foundry TSMC. (Earlier this month it was rumored that Samsung was exploring placing a memory fab in China as well.)