Ties That Bind - Bay Area Council Economic Institute

Investment: Building Global Businesses in a New China
nue of less than $1 billion, and none had revenues greater than $100 million. In 2005 the top 32
Chinese semiconductor companies had combined revenues of just over $1.5 billion, and three
had revenues of $150–200 million.
Cost vs. Innovation
The Semiconductor Industry Association (SIA) forecasts a $249.6 billion worldwide chip market
in 2006. Asia-Pacific is by far the largest regional customer for semiconductor products, having
doubled its share of total global consumption from 22% in 1997 to 45% in 2005. Half of this
gain occurred in 2000–2002 as a result of a major shift in electronic equipment manufacturing
from the U.S. to Asia (excluding Japan), as U.S. companies outsourced portions of their production
to reduce costs and gain access to emerging markets such as China. The U.S., a leading
global consumer during the 1990’s, is now tied with Europe as the smallest region in terms of
semiconductor sales.
According to SIA, U.S. capital affiliated companies represented 35% of total leading-edge capacity
in 2000, when leading edge-capacity was defined as capacity capable of producing at 0.3 microns
or less. By 2005, when leading edge capacity was defined as 0.12 microns or less, that share
had declined to 14%. U.S. producers, including some who have built facilities in Taiwan, China
and other offshore locations, voice concern about foreign tax breaks and investment incentives
that have helped transfer foundry capacity to Asia. They point to as much as a $1.1 billion cost
differential to build and operate a 300-mm wafer foundry for 10 years, with 70% of that differential
in tax benefits, 20% in capital grants and only 10% in relative labor costs. As a result, twothirds
of such facilities planned or in operation are in Asia.
Incentives aside, China currently accounts for about 25% of global chip consumption, up from
7% in 2000. By 2010, however, Chinese demand is expected to account for one-third of a global
market worth $300 billion. When assessing the development of China’s semiconductor industry,
however, it is important to consider not only volume, but also technological level. While production
by multinational corporations largely focuses on global markets, most Chinese production is
for a domestic market with lower technological needs—typically a 6" wafer. While newer companies
like SMIC and Grace are producing at the 8–12" level and are beginning to sell overseas,
most older Chinese fabs are dated.
China’s 11th Five-Year Plan, which begins in 2006, calls for a $37.5 billion investment in the
domestic integrated circuit (IC)/semiconductor industry, including five IC design companies, ten
200mm wafer production lines, five 300mm lines and development of the domestic equipment
industry—most notably sophisticated 65-nanometer laser etching equipment for the 300mm
production lines.
Despite its growth, local production currently meets only 30% of China’s domestic market
needs; the rest is imported. The domestic market will therefore continue to drive China’s chip
production. While some Chinese firms will seek global markets, because of the gravitational pull
of its domestic market Chinese chip technology is expected to lag significantly behind that of the
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