Chinese Chips: "Everybody Is Gung-Ho"

Central Semiconductor's Peter Chen on building a microelectronics industry -- and his confidence that the country will soon be a global leader

By Bruce Einhorn

Peter Chen is accustomed to being a pioneer in the chip business. Chen, who was born in China, grew up in Taiwan, and was educated in the U.S. (he received his PhD from Cornell University in 1970), helped build the Taiwanese semiconductor industry as founder and CEO of Mosel-Vitelic, one of the island's leading producers of memory chips.

Today, Chen is focusing on upgrading that industry in China. He is chairman of Central Semiconductor Manufacturing Corp. (CSMC), a Cayman Islands operation that owns a Hong Kong-based subsidiary. Since 1997, it has had a joint venture with China Hua Jing Electronics Group to manage the operations and share the revenues at the state-owned company's two chip-fabricating plants in Wuxi, a city near Shanghai.

I recently visited Chen in Wuxi and asked him about why he has decided to take on the China challenge (see BW, 1/21/02, "China's Chip Binge"). Here are edited excerpts of our conversation:

Q: What was it like when you first came to CSMC?


When I came here four years ago, most government policymakers had the attitude that for microelectronics there was no hope. All of a sudden, it has changed. Now, everybody is gung-ho about microelectronics.

Q: Why?


China will be strong because, by 2010 China will be the second-largest semiconductor consumer after the U.S. If the Chinese economy wants to grow, then [its use of semiconductors] is going to increase every year. This is something that you cannot stop -- or you stop the whole economy. The Chinese government realizes that.

Q: How does China compare to Japan, Korea, and Taiwan at similar stages of development of the chip business?


In the 1970s, Japanese companies, whenever there was a contraction, they expanded. By the 1980s, they became powerful. Korea in the 1980s had the same [strategy] -- it also took 10 years. In the 1990s, Taiwanese companies did the same thing: When everyone was shrinking, they expanded. And Taiwan became a powerhouse. The leader of the next phase will be either China or India, and I believe China will easily pick up the momentum.

Q: Unlike Mosel, which focused on memory chips, at CSMC you've chosen to produce logic chips for customers and operate as a foundry, like Taiwan Semiconductor Manufacturing (TSM ) and United Microelectronics Corp. (UMC ). Why?


TSM and UMC, those guys have really provided a shining example. [When starting at CSMC] I told my guys, "It's very easy to be successful now. We don't need to reinvent the model. We just need to copy the model."

Q: What are the chances of increasing sales inside China?


The Chinese semiconductor business will grow by mimicking the foundry model in Taiwan initially. But eventually, [the foundry industry] will satisfy local demand. Down the road...the most exciting thing will be the local consumption. Chips will be made locally to support local demand.

Q: With so many companies building fabs or announcing plans for them, aren't you worried about a glut? After all, the foundry business is still hurting from the global recession, and even industry leaders like TSM and UMC are using only half their overall capacity.


I'm not sure that there is an issue. Today, foundries only account for 10% of output of the IDMs [integrated device manufacturers]. That will grow to 50%. So there is plenty of room [for more foundries]. The problems now are just temporary difficulties, a result of the artificial growth because of the Internet. I'm not sure that oversupply is such a big deal. But if we all blindly set up new factories, then it's going to be a problem.

Q: What do you say to skeptics who argue that there's no way that China can compete with Taiwan at the high end of the business? For instance, TSM and UMC are already selling chips with circuits as narrow as 0.15 and 0.13 microns, technology that nobody in China can even approach.


We don't have to go to 0.15 microns. At 0.25, there's plenty for the China market. Chinese people are known as innovative and flexible. This will be a hub for semiconductor manufacturing worldwide, except for leading components in DRAM and central processing units. Beyond these two sectors, China will be a significant player down the road within the next 5 to 10 years.

Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online

Edited by Beth Belton

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