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China's Chipmakers Expect the World

By Bruce Einhorn In the Shanghai offices of chip-design firm Newave Technology, each meeting room has two names -- one hearkening back to some majestic palace or pavilion of a Ming or Qing emperor. The other is an English moniker recalling a different kind of empire -- Silicon Valley. For instance, the Zhonghe Tang is also known as the San Jose Room, Fuchun Tang is the Sunnyvale Room, and Qingxia Zhai is the Cupertino Room.

As Newave's 44-year-old founder and General Manager Howard Yang explains, the double names illustrate the dual ambitions of Newave, a designer of telecom chips which last year was acquired by IDT (IDT), based in Newark, N.J. Says Yang: "We're trying to have both a Chinese culture and a Silicon Valley culture for the company."

Yang, a Beijing native who earned a PhD from Oregon State University and worked in the Valley for outfits like National Semiconductor and Intel before coming back to China in the mid-1990s, is one of many returnees helping to jump start the country's semiconductor industry. From billion-dollar chip fabs to niche design houses, these new companies are China's great hope for becoming a major player in semiconductors. "The fundamentals are really here," Yang says, "so China can move very fast."

PUSH FROM BEIJING. It certainly has room to grow. Since the country is home to so many electronics manufacturers, China is a big consumer of chips, with demand last year of about $13 billion. Most were imported, since China's mainly small and backward fabs met just 20% of the country's chip appetite.

Beijing sees a strong chip industry as an essential part of its efforts to become a power in science and technology, and is therefore throwing resources at the business. The big science park in Shanghai's Pudong district has several chipmaking plants either recently opened or under construction. Industry stalwart Taiwan Semiconductor Manufacturing Corp. (TSM) is setting up a fab of its own. As a result, China's chip output has soared to $3.5 billion this year and is likely to top $8 billion by 2005, predicts market researcher iSuppli Corp. in El Segundo, Calif. But even that will satisfy only about 35% of China's market.

American chip powers such as Intel (INTC), Advanced Micro Devices (AMD), and IBM (IBM) are also investing hundreds of millions in other chipmaking facilities in China, such as test and assembly centers. As a result, the country's chip output is soaring, growing to $3.5 billion this year and projected to hit $8 billion by 2005, according to iSuppli.

THINKING THIN. Most Chinese are happy to focus on lagging technology because older-generation chips are in demand locally. Also, the U.S. prohibits the export of more sophisticated chipmaking equipment to China on the grounds that the machinery can also be used for military purposes.

Still, some Chinese chipmakers want to take on industry leaders and grab international customers. Shanghai-based Semiconductor Manufacturing International (SMIC) has a new foundry making chips for companies looking to outsource their manufacturing. It's run by Richard Chang, a Texas Instruments veteran who oversaw Taiwanese foundry World Semiconductor Manufacturing before it was acquired by TSMC.

Chang's mission is to move into more advanced production of chips with circuit widths narrower than 0.18 microns. SMIC, which includes Goldman Sachs, H&Q Asia Pacific, and Toshiba among its investors, recently celebrated the first anniversary of its fab while simultaneously opening a second fab in Shanghai. With a combined investment of $1.5 billion, these two fabs should be producing 30,000 wafers a month by yearend.

LOCAL CHALLENGE. SMIC says it can overcome the U.S.-backed restrictions on sales of advanced chipmaking technology to China. SMIC's equipment is designed to make chips with circuits of 0.25 microns, but the Shanghai foundry can use those machines to produce chips with circuits that are narrower, says Senior Director of Business Development Joseph Xie. "It will be more difficult, but it is possible," he says. "It will take some smart engineering."

That's not the only challenge facing China's chipmakers. SMIC may have a hard time grabbing world-class customers from Taiwan, especially now that Taipei has allowed its chip manufacturers to invest in China.

In September, TSMC announced plans to invade SMIC's turf by investing $900 million in a Shanghai fab (see BW Online, 9/23/02, "China's Fabless Appeal"). The privately held SMIC won't reveal its revenues, let alone its earnings or losses, so it's hard to know how well it's doing. But given the sorry state of the industry overall -- and the difficulties that long-time also-rans like Singapore's Chartered Semiconductor have had in the foundry business -- it's hard to see how the Shanghai chipmaker will be turning a profit in the short term.

"BIG POTENTIAL." Undaunted, SMIC is looking for growth from overseas customers. It has a sales office in the San Francisco Bay Area and in September opened another one in Japan. More than half of SMIC's customers are from abroad, since few Chinese design houses are advanced enough to need its equipment. That may change in the coming years, as Chinese designers evolve. "China's home-grown [chip-design houses use] older technology," says Xie. "They need some time to migrate."

Newave's Yang has no doubts that they will. "Eventually, the industry can be really strong," he says. "Today, it's not quite there yet, not even as strong as Taiwan. But the potential is bigger than Taiwan." Lots of semiconductor industry executives in China -- and abroad -- are betting Yang is right. Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online

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