China`s bid to join the submicron era
Elizabeth Schumann, SEMI, Mountain View, California
Although China still faces challenges to an active IC sector, the country is investing in the future with its recent launch of Hua Hong Microelectronics and is setting development goals to last through the country`s Ninth Five-Year Plan. Despite certain restrictions, China is welcoming influxes of foreign technology and capital.
China is now halfway through the second year of its Ninth Five-Year Plan period. During the Eighth Five-Year Plan period (1990-1995), the Chinese electronics industry experienced rapid increases in productive capacity, technological capability, electronics output, and international trade volume. By the final year of the Eighth Five-Year Plan, the total output of the Chinese electronics industry reached RMB 247 billion (US$30 billion), a growth of about 25% over the previous year. In 1995, China experienced a record year in foreign trade of electronic products, with US$17 billion in exports and US$16 billion in imports. It was the first year that China experienced a trade surplus in the electronics sector.
The Chinese electronics industry celebrated another banner year in 1996. According to figures released by China`s Ministry of Electronics Industry (MEI), total electronics output reached RMB 298.2 billion (US$35.9 billion) in 1996, a 20.7% increase over the prior year. Total sales revenue for the sector in 1996 was RMB 194.7 billion (US$23.5 billion), up 18% over 1995.
In 1996, the semiconductor sector was very active, with several new semiconductor facilities in the planning, construction, or early production phases. Most of the major new facilities are partially or wholly owned by foreign chip manufacturers (see Table 1).
In general, China welcomes the investment of foreign companies since their involvement intensifies competition while upgrading the overall technical level of IC products in the marketplace. At the same time, however, China is concerned about being overly dependent on foreign suppliers for the chips needed for its own burgeoning electronics industry. At present, Chinese companies produce only about 20-25% of the IC devices demanded by Chinese electronics manufacturers (see Table 2). Because Chinese manufacturers are predominantly involved in the production of lower end devices, on a value basis this difference is more pronounced. It is estimated that China`s IC market is worth about US$5 billion today, but the value of production in China is only about US$0.4 billion. By the year 2000 this relationship should improve somewhat, with a projected IC market of US$15 billion and production value reaching US$3 billion.
Challenges to an active IC sector
According to Tony Liu, formerly of ASMC and now VP of the newest Chinese semiconductor fabrication facility, Hua Hong Microelectronics, China had failed in its efforts of the past few years to enter the IC industry because it was not quite ready to support an active IC sector. Speaking at a recent semiconductor conference in Silicon Valley, Liu cited several factors that challenged the development of the Chinese IC sector. One of these was the Chinese electronics market, which, although potentially quite large, is relatively difficult to access and not uniform. A second difficulty is that the existing IC industry in China is geographically quite diffused, which impedes cross-cultivation. In addition, Chinese companies have lacked sufficient financial resources to fund the high investment required, including high-tech management skills equal to those of US, European, and Japanese firms, and the technology required to engage in leading-edge mass production. Finally, development of a local IC industry has been hampered by typically long decision cycles.
Hua Hong - a domestic solution
In December, China launched its largest development project to date for integrated circuits in the Pudong New Area of Shanghai. This facility, dubbed Hua Hong Microelectronics, is aiming to help stem the flood of imported products now dominating the Chinese market and to lead China into advanced semiconductor manufacturing. With an investment greater than RMB 10 billion (about US$1.2 billion), this would be the largest-ever project undertaken in China`s electronics sector, according to published reports. The project includes a production line with an eventual monthly capacity of 20,000 wafer starts, producing advanced logic devices using 0.5-?m design rules on 200-mm wafers. Hua Hong Microelectronics is just one piece of a larger project known as Project 909, sponsored by the MEI. Other aspects of Project 909 include a 200-mm single crystal wafer manufacturing facility and several IC design companies.
Project 909 is expected to go a long way in helping China reach the microelectronics goals of the Ninth Five-Year Plan. Five general goals related to the electronics sector are part of the Plan:
1. to maintain high output growth rates of =20% in each of the five years;
2. to optimize the structure of the electronics industry to support an independent world-class information technology system;
3. to upgrade the technological level of current electronics products to be on a par with world technology levels, or at least considerably shorten the gap in some of the more leading-edge areas;
4. to put greater emphasis on research and development; and
5. to establish large enterprises comparable to the world`s largest electronics firms.
Within this framework, there are four key areas of development focus: ICs, new types of electronic components (such as flat panel displays, hybrid ICs, silicon-based sensors, etc.), computers and software, and telecommunications. The IC industry is viewed by the Chinese government as a basic, strategic industry and the core of the modern electronic information sector. As such, it is a key industry in the Ninth Five-Year Plan. Some of the specific goals for the Chinese IC industry during the current Plan period are:
to reach large-scale production levels for the 0.8-?m, 150-mm wafer technology generation;
to enter industrial production of the 0.5-?m, 200-mm wafer technology generation at specific project locations;
to increase IC design capabilities substantially in order to develop the whole range of IC products currently demanded by the Chinese electronics sector;
to reach 0.3 ?m and advanced packaging technology in China`s research and development centers; and
to develop 200-mm single crystal wafer technology and begin domestic production.
High hopes for Hua Hong
According to Liu, there is great confidence that Hua Hong Microelectronics will succeed where past efforts have failed. First, unlike other Chinese device manufacturers, Hua Hong will focus on addressing the external market, at least initially. China has recognized, through the example of countries like South Korea, Taiwan, and Singapore, that the worldwide semiconductor markets offer tremendous growth opportunities. To this end, Hua Hong has plans to open various facilities around the world, including a sales and marketing office and a design center in the US, and an additional center in Japan.
Second, by locating in Shanghai`s Pudong science park, along with other microelectronics industry players, Hua Hong can take advantage of the external economies of scale that have been so important for success in regions such as California`s Silicon Valley, Scotland`s Silicon Glen, or the Hsinchu Science Park in Taiwan. Whereas lack of sufficient resources had been a problem in the past, Hua Hong Microelectronics has about US$1.2 billion available for investment, and is planning an initial public offering in the near future to raise additional funds. High-tech managers are being recruited to the facility with the opportunity for high salaries comparable to those commanded by Silicon Valley personnel. Hua Hong has reached an agreement with Japanese semiconductor maker NEC Corp. to ensure that access to advanced processing technology is available. (Under the terms of the agreement, Hua Hong Microelectronics will hold about 70%, while NEC will retain the balance. NEC will transfer advanced 0.5-0.35 ?m technology to Hua Hong and will assume a great deal of the management responsibility for the facility.) Finally, the long decision cycle time problem is being addressed by directly involving high-ranking Chinese government officials on the Board of Directors for Hua Hong.
Chinese IC production technology currently lags world-class producers by about seven or eight years. If Hua Hong is successful in its development plans, that technology lag will be reduced to only about two years by the year 2000.
In order to achieve its goals, China must rely on the technological know-how of foreign semiconductor manufacturers, while at the same time taking steps to protect its large market from foreign domination. Thus, while foreign direct investment, such as the semiconductor facilities mentioned previously, is welcomed in China, some restrictions still apply. Wholly owned foreign firms, such as the Motorola (China) facility, are subject to regulations that require them to export a significant portion of their output. Joint venture approval is often restricted to those companies that promise a certain level of technology transfer. This means that the potential exists for China`s total semiconductor productive capacity someday to exceed its internal market needs, as foreign firms take advantage of land and labor resources to build semiconductors for export, and Chinese firms build a semiconductor infrastructure to meet the country`s growing domestic market needs.
ELIZABETH SCHUMANN received her master`s degree in international economics from the University of San Francisco. She is senior market analyst at SEMI, which she joined in 1992, after several years with international market research and consulting firm Schmidt Consulting Services. In addition to performing market analysis for SEMI, Elizabeth is the editor of the Executive Summary Report and manages the SEMIworldwide materials data collection program. SEMI, 805 East Middlefield Road, Mountain View, CA 94043-4080; ph 415/940-7905, fax 415/967-5375.