China’s Impact on the Semiconductor Industry

China’s Impact on the Semiconductor Industry

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Description: Even with the semiconductor downturn, electronic systems manufacturers in China continued to increase their consumption of semiconductors at a rate three to five times the worldwide rate. As a result, China’s semiconductor consumption market grew by nearly 17% in 2008 to reach US$104 billion, accounting for more than one third of the worldwide market. China’s consumption of semiconductors now exceeds the markets in Japan, North America, Europe….

 
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Technology industry

China's impact on the semiconductor industry: 2009 update

About PricewaterhouseCoopers
PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for our clients and their stakeholders. More than 163,000 people in 151 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice. PricewaterhouseCoopers and PwC refer to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL). Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm's professional judgment or bind another member firm or PwCIL in any way.

About our technology industry practice
PwC works with technology companies around the world to help them fulfill the promise of their great ideas. Whether it's rapid growth in a thriving economy or maximizing efficiency in challenging times, we are the trusted advisor and auditor to the majority of the Financial Times technology companies. We have made a major commitment to train our people in industry-specific issues so that we can deliver services with a global perspective, local implementation, in-depth experience and a forward-thinking approach. There is an ever-present state of change and evolution in each of the technology industries. The semiconductor industry is especially accustomed to fast growth, albeit with peaks and valleys. We're ready to help your company face the challenges the industry and the global economy throws your way. Given our significant client base and considerable resources, our technology professionals work from an experience base that far exceeds any other professional services provider. That's why more semiconductor companies choose PwC than any other professional services firm. We're in touch with your industry--and ready to work with you. For more information on how PricewaterhouseCoopers' Technology industry practice can help your company, or to get in touch with a technology industry partner in your area, please visit us at www.pwc.com/technology or contact one of the professionals listed at the back of this publication.

Welcome

Raman Chitkara Global Technology Leader PricewaterhouseCoopers Despite phenomenal growth over the last five years, China's semiconductor industry did not prove immune to the downturn of 2008. In fact, this past year marked the first time in China's semiconductor history that it noticeably experienced the impact of a worldwide industry downturn, demonstrating that as China's share of the worldwide semiconductor market has increased so has its dependence on the export market. While the consumption of semiconductors for export products has increased by almost US$50 billion in the past five years, representing 68% of the overall growth of China's semiconductor market, the consumption of semiconductors for domestic products has increased by only US$23 billion. Because semiconductors play a central role in advancements across the technology industry, PricewaterhouseCoopers developed this series of thought leadership reports, China's impact on the semiconductor industry. This is our fourth and most comprehensive update to our original study released in 2004. The 2009 update evaluates the current status of the semiconductor industry in China, assesses geographical and product category demand, reviews shifts in the semiconductor value chain and analyzes three different IC production growth scenarios. The growth of China's semiconductor market continues to be a major catalyst for change in the industry. Even with the semiconductor downturn, electronic systems manufacturers in China continued to increase their consumption of semiconductors at a rate three to five times the worldwide rate. As a result, China's semiconductor consumption market grew by nearly 17% in 2008 to reach US$104 billion, accounting for more than one third of the worldwide market. China's consumption of semiconductors now exceeds the markets in Japan, North America, Europe and the rest of the world for the fourth consecutive year, making it a key player in the global semiconductor market. Because of the significance of the China market on both the entire semiconductor sector and the technology industry overall, PwC continues this series of thought leadership reports to help our technology clients respond to market changes and plan their business strategies accordingly. To learn more about PwC's commitment to the industry, visit pwc.com/technology. If you would like further information, or to discuss any of the findings in our report and how they might impact your business, please do not hesitate to contact me (raman.chitkara@us.pwc.com) or any member of our technology team around the world, listed in the back of this document.

About this report

The 2009 update assesses the current status of the semiconductor industry in China and how it has changed since our previous update. As with our previous reports on this issue, we conducted a second-order analysis for the 2009 update. To accomplish this, first we reconciled data from different, incomplete, and often contradictory reports from various sources. These sources included industry associations as well as third-party research firms located in Asia and the West. We then analyzed the reconciled data with an eye towards filling in gaps and revealing information that was not apparent in the original source material. We also interviewed industry executives to obtain current views from various links of the value chain. This year we encountered greater differences between various sources in much of the basic data about the semiconductor market and industry in China than in any prior year. Much of this is probably a side effect of the economic crisis of 2008. The impact on China's semiconductor industry was sudden, unexpected, late in the year and significant. It disrupted many of the normal metrics and relationships used to evaluate market and industry performance at a time when year-end performance was being tabulated. In addition, it caused several local industry participants to withhold their reporting to industry associations and analysts of what they considered to be singularly disappointing results. As a result, determining a definitive direction and value for the 2008 China semiconductor market has proven challenging. Depending on the source, CCID Consulting or CSIA, (the two principal Chinese sources), China's 2008 semiconductor market measured in RMB grew by either 6.7% or 3.8% respectively. In US dollar terms, that's either 16.8% or 13.6% respectively. IC Insights reports the 2008 Chinese IC market measured in dollars grew by 4.7%; while Gartner Dataquest first reported China's semiconductor market measured in dollars grew by 0.8% and later revised that to report China's semiconductor market decreased by 2.9%. Meanwhile, iSupply reported that China's semiconductor market decreased by 5.9% in 2008. Between the various sources the reported size of China's 2008 semiconductor market in US dollar terms varied by as much as 35%, with CCID reporting the largest value and IC Insights the smallest. For our top level reporting of China's semiconductor consumption market and production industry, we have continued to utilize the values reported by CCID Consulting. Our reasons include (a) they provide the most comprehensive detail about China's market and industry available (b) their reports are the principal source of information for Chinese policymakers and (c) most industry executives we interviewed in China did indeed feel that semiconductor consumption increased in 2008. For some of our detailed analysis we have utilized alternate sources able to provide information not available elsewhere. Wherever possible, we tried to base each such analysis on a homogeneous data source. For example, for our (1) analysis of China compared with the worldwide semiconductor market by application and by device and (2) of semiconductor consumption versus purchases China versus worldwide by region: we rely on Gartner Dataquest (GDQ), as they provide database information for each of these markets that is reconciled on a worldwide basis. As a

consequence, the value of some metrics may vary slightly between different figures and tables. We acknowledge these differences and trust that they will not divert our readers' attention from the value and significance of the findings of the report. Our intent with this method remained to construct a more comprehensive, meaningful, and yet quantitatively based picture of the industry than is otherwise available. Using this method, we surfaced additional findings and considered the ramifications for multinational semiconductor industry companies. Then finally, based on this newly developed information, we formulated a current set of recommendations for industry companies. The growth of China's semiconductor market--which consists primarily of electronics manufacturing services (EMS) companies, original design manufacturers (ODMs) and original equipment manufacturers (OEMs) that consume chips in China--continues to be a major catalyst for change in the industry. For this reason, we assessed the status of the market in depth and considered its effects on semiconductor production: wafer fabs; packaging, assembly and test facilities; and integrated design manufacturers (IDMs) of the industry. We also reviewed the status of the fabless and design companies in China. Our report also examines the composition of the semiconductor value chain in China, comparing it with the worldwide value chain. As part of that analysis, the report reviews both the demand for semiconductor equipment in the country and the primary equipment suppliers to the market. We then reviewed three production forecast scenarios against actual production and consumption growth realized during the period. A couple of further points we should note on the data sources. The metrics we used or developed had to be sufficiently comprehensive and consistent to be useful for the type of report we wanted to publish. For that reason we elected to use the World Semiconductor Trade Statistics (WSTS) values for the worldwide semiconductor market wherever possible even though several other market research firms have reported greater values. The WSTS values are the only official values recognized by the various industry associations, including the China Semiconductor Industry Association (CSIA), that are members of the World Semiconductor Council. We also elected to convert the Renminbi (RMB) currency values from various Chinese data sources to US dollar values at the average foreign exchange rate for the year reported on rather than at the year-end rate. Most of the semiconductor transactions in China are originally priced in dollars or other foreign currencies and converted to RMB on a contemporaneous basis for local reporting purposes. The original 2004 report explored in detail the overall dynamics of the global semiconductor industry and various issues that make China's part of that industry different or even unique. The fundamental analysis of the 2004 report remains valid and readers who would like to gain a better understanding of these fundamentals should refer to the original as well as subsequent reports available at www.pwc.com/techcenter.

Table of contents

Executive summary Findings Recommendations The semiconductor market in China The semiconductor industry in China Design in China China and the semiconductor value chain Greater China Government Production growth scenarios Appendix 1: Interpreting Chinese semiconductor statistics Acknowledgments Of further interest PwC can help

8 11 14 17 33 50 57 67 74 81 92 97 99 100

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Executive summary

PricewaterhouseCoopers began the study series, China's impact on the semiconductor industry, in 2004 in response to our clients' interest in the rapid growth of the semiconductor industry in China. Specifically, clients wanted to find out whether China's production volumes would contribute to worldwide overcapacity and a subsequent downturn. Since then it has become clear that market growth in China is far more significant to the worldwide semiconductor industry than the nation's production volumes. The past year marks the first time in China's semiconductor history that it noticeably experienced the impact of a worldwide industry downturn--an unexpected shock. China had been relatively untouched by the 2001 downturn, as its semiconductor market grew by 18% even as the worldwide market decreased a record 32%. Similarly, its markets grew by about 25% in both 1996 and 1998 in contrast to worldwide market decreases of 9% and 8%. Probably as a result of this past immunity, most in China's semiconductor industry seemed to be slow to appreciate the significance of the 2008/09 semiconductor downturn. Following a 3% drop in 2008, the worldwide semiconductor industry was expected to decline in the double digits in 2009. Still, China expected positive single-digit growth in 2009 followed by low doubledigit growth in 2010 and 2011. Such forecasts seem highly unlikely given that China represented 38% of the worldwide market in 2008 (up from less than 2% prior to 1996). Since then China has reported two quarters of double-digit negative year-on-year market and industry

growth. Most in China's semiconductor industry have since recalibrated and now expect an 11% decrease in their 2009 semiconductor market relative to 2008. Even with the semiconductor downturn, electronic systems manufacturers in China continued to increase their consumption of semiconductors at a rate three to five times the worldwide rate. As a result, China's semiconductor consumption market grew by nearly 17% in 2008 to reach US$104 billion, accounting for more than one third of the worldwide market. China's consumption of semiconductors now exceeds the markets in Japan, North America, Europe and the rest of the world for the fourth consecutive year. After the recovery, China's semiconductor consumption market will continue to grow somewhat faster than the worldwide market and should gain at least a couple of percentage points of market share over the next five years. The 2008/09 semiconductor downturn demonstrates that as China's share of the worldwide semiconductor market has increased so has its dependence on the export market. During the past five years, since 2003, the consumption of semiconductors for export products has increased by almost US$50 billion, representing 68% of the overall growth of China's semiconductor market. Meanwhile, the consumption of semiconductors for domestic products has increased by US$23 billion. That may gradually change after the recovery. Suppose that over the next five years, the relative share of domestic versus export consumption increases at the expected GDP growth rates of China versus those of the rest of the world. In that case, China's share of

8

China's impact on the semiconductor industry: 2009

the semiconductor consumption market used in the production of electronic products for domestic use will increase by seven percentage points to almost 40%. This should further increase the importance of semiconductor companies developing products that meet the unique requirements of China's domestic market. It should also increase the government's focus and efforts to encourage the development of China's IC design (fabless) industry sector and to reduce the use of foreign-owned intellectual property. The largest suppliers to the Chinese market continue to be the same multinational semiconductor companies. There were no Chinese companies (or brands) among the top 50 suppliers to the Chinese semiconductor market in 2008. Even if the largest Chinese semiconductor companies sold all their 2008 output within China, no Chinese semiconductor company would be among the top 45 suppliers to the Chinese semiconductor market. At the same time, China's leading OEMs are purchasing a significant and increasing number of semiconductor devices. They could be important customers for many of the international semiconductor companies intending to participate in the continuing growth of the Chinese semiconductor market. Assuming the semiconductor content of their products was 24.7% (the average for all of China's electronic systems production in 2008), these 12 Chinese OEMs could be responsible for semiconductor consumption of US$18.5 billion-- equal to 17.8% of China's total semiconductor market.

On the production side, China's semiconductor industry growth was noticeably impacted by the 2008/09 semiconductor downturn, suffering a double-digit decline in the fourth quarter. Still, China's semiconductor industry's share of the worldwide industry continued to grow, accounting for 11% of worldwide production in 2008 (becoming both noticeable and significant). As was the case for the prior two years, much of this increase came from multinational rather than local domestic semiconductor companies. China's semiconductor industry remains much more heavily concentrated in OSD (optoelectronics, sensors, discretes) and IC packaging and testing than IC wafer manufacturing and IC design. When and as the recovery from the 2008/09 semiconductor downturn is realized, it is expected that China's electronic systems production will continue to grow at a greater rate than worldwide production. The transfer of electronic systems production to China is forecast to continue through the next business cycle, although probably at a slower rate. It will continue as a result of: (a) further worldwide industry cost and market driven restructuring; (b) China's very competitive support infrastructure; (c) China's longer term economic stimulus programs and (d) China's growing domestic market demand. As a result, China's semiconductor consumption market will continue to grow somewhat faster than the worldwide market and should gain at least a couple of percentage points of market share over the next five years. An increasing share of this market will come from domestic consumption.

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The post-downturn recovery of China's semiconductor industry will be diverse, varying by sector as each reacts differently to market and economic forces. During the next five years, China's IC design (fabless) sector will be strongly driven by China's semiconductor consumption market and especially China's domestic consumption. There will be sector consolidation as well as continued government incentive support for new entrants and successful survivors. Therefore we expect this sector to continue to grow faster than the other sectors of China's semiconductor industry and faster than China's consumption market. China's OSD sector has a much larger share of both the China and the worldwide OSD market and industry than any other sector. Therefore its growth will be driven by the growth of both markets as well as by the continuation of the trend for multinational semiconductor companies to transfer OSD manufacture to Chinese subsidiaries or manufacturers on a rebranding basis. Over the next five years, we expect that China's OSD industry will grow somewhat faster than the worldwide OSD industry--but slightly slower than China's OSD consumption market. China's IC packaging and testing sector will continue to be more affected by the worldwide semiconductor market than the local market. Most of the sector's capacity is owned and controlled by multinational semiconductor or SATS companies with similar facilities in several regions. If the Chinese government continues to provide competitive incentives, there is a logical reason to expect China's IC packaging and testing industry to grow faster than China's IC consumption market and to increase by at least 60% over the next five years.

More than anything else, the post-downturn growth of China's IC manufacturing sector will be determined by the availability and relative cost of investment capital. Almost all of the sector revenue is produced by foundry and IDM wafer fabrication facilities. Increasing wafer fabrication capacity is very capital intensive. The Chinese government has provided some very innovative investment funding (through separate provincial agencies) for China's largest foundries, but those foundries have yet to earn an attractive return to support further expansion. The multinational IDMs have the appropriate technology and two have made significant investments in China's IC manufacturing sector. The first had a significant impact on that sector's revenue growth during the past two years; the other will start production next year and is expected to have a similar impact during the following two years. However, there is a finite and decreasing number of such IDMs, along with intense competition between different locations to attract their next wafer fab capacity investment. Whether another IDM is attracted to invest in a major wafer fabrication plant in China will be determined by relative success of the first IDMs and the availability of attractive investment incentives. While that is a reasonable possibility, it may be several years before it has an impact on China's IC manufacturing sector. Therefore we expect that over the next five years China's IC manufacturing sector will grow along the lines of our moderate scenario, increasing by about 60%.

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China's impact on the semiconductor industry: 2009

Findings

The following is a summary of our findings for this 2009 update. These conclusions reflect secondary research, interviews with industry executives and our own analysis. The impact of the 2008/09 semiconductor downturn on China's semiconductor consumption measured in year-over-year percent change has been later and less severe than on the worldwide market. This is especially noticeable when measured in US dollars. The impact on China's semiconductor industry, which was somewhat later and less severe during the last two quarters of 2008, has since become as severe as that of the rest on the worldwide industry. China continued to outperform the global semiconductor market in 2008. China's semiconductor consumption market grew from US$89 billion in 2007 to US $104 billion in 2008, an increase of nearly 17%, while the worldwide market decreased by 2.8%. Since 2001, the bottom of the last semiconductor business cycle, China's semiconductor consumption has grown at a 29.5% compounded annual growth rate (CAGR), while total worldwide consumption has grown at only an 8.6% CAGR. China's semiconductor industry production revenues grew from US$27 billion in 2007 to US$31 billion in 2008, an increase of over 14%. As reported in US dollars, these account for about 11% of the worldwide industry. However when reported in RMB, China's semiconductor industry production revenues grew by less than 5%. Although still positive, this was China's lowest reported semiconductor industry growth rate since 2001. China's

industry growth peaked in 2004, with a growth rate of 45% and has gradually declined since--with 2008 being the first year with a single-digit growth rate. China's semiconductor performance has been noticeably impacted by currency exchange rate changes. Almost 10 percentage points of the 2008 increases were due to China's further revaluation of its currency. As reported in local currency, China's semiconductor market grew slightly less than 7%. Meanwhile, China's semiconductor industry grew slightly less than 5% in 2008. Of note, the OSD industry sector grew at 12%, offsetting a slight decrease (under 1%) in the IC industry sector. The growth rate of China's semiconductor consumption market has been decelerating for the last four years. The immediate cause of this decline is attributed to the worldwide economic crisis and the decline in transfer of electronic equipment production to China. In the longer term, China's semiconductor market has passed through its high-speed development period. Its future growth is likely to be closer to the worldwide growth rate as it represents an increasingly larger share of the worldwide market. Two of China's stimulus programs are being credited with having an immediate and noticeable impact on recovery from the 2008/09 semiconductor downturn. The countryside home appliance policy or "Electronics Go to Farmers Subsidy Program" was started on a trial basis in three provinces in 2007 and extended to a nationwide program on February 1, 2009. The program will last four years, until 2012, and is expected to drive the sale of 600

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million home appliances. This translates into 1.6 trillion RMB (US$230 billion) in sales revenue and US$50 billion in semiconductor consumption. A second initiative, the "Home Appliance Replacement Subsidy Program", was announced in May 2009. This was officially launched in five trial cities (Beijing, Shanghai, Tianjin, Fuzhou and Changsha) and four provinces (Jiangsu, Zhejiang, Shandong and Guangdong) in July 2009. This program could result in an additional US$600 million in semiconductor consumption in 2009. On a longer term basis, the Chinese government's four trillion RMB (US$586 billion) stimulus programs also target railroad and air transportation, telecom networks, rural improvements and healthcare reform. These have the potential for an even greater impact on the recovery from the 2008/09 semiconductor downturn. They will, meanwhile, need huge investments in advanced technology and should stimulate demand for semiconductor-enabled products such as computers, servers and mobile devices for the world's largest population. There appears to be a strategic opportunity for major multinational semiconductor companies to team with appropriate government agencies in addressing these needs. Integrated circuit (IC) design was the only segment of the China's IC industry to achieve positive growth in 2008. Its dollar revenues grew by 14.1% in 2008 despite a 2.8% decline in the worldwide semiconductor market. As such, IC design remained the fastest growing segment of China's semiconductor industry for this decade. IC design revenues grew from US$178 million in 2001 to US$3.4

billion in 2008, a CAGR of just over 52%. Most of the revenue in this sector can be attributed to China's fabless semiconductor companies, which in 2008 constituted about 6% of the US$55 billion worldwide fabless semiconductor industry. Much of the relative resilience of China's IC design sector during the 2008 semiconductor industry downturn has been contributed by those fabless firms that have concentrated on designing for China's growing domestic market. One consequence of the 2008 semiconductor industry downturn was the second largest annual increase in China's IC consumption/production gap--the difference between IC consumption and IC industry revenues. The downturn had a greater negative impact on China's IC industry revenue in the third and fourth quarter of 2008 than it did on China's IC market. China's annual IC consumption increased 16%, or US$12 billion, while IC production increased only 9%, or US$1.4 billion. Consequently, China's IC consumption/production gap increased by US$10.5 billion to reach US$68 billion for 2008. This gap continues to increase despite all of the Chinese government's plans and efforts to contain it. This annual gap has now grown from US$5.7 billion in 2004 to a record US$68 billion in 2008 and the Chinese authorities expect that it will continue to increase through at least 2011. It now appears that not all wafer fabs under construction in China will be completed. Moreover, not all of those starting production will be fully equipped and ramped to full production--at least not in a timely manner. The investment requirements for large, leading-edge plants have increased significantly. Meanwhile, investment sources have dried up. So physical plants are being

12

China's impact on the semiconductor industry: 2009

initially built as lower cost shells with individual modules completed only on an as-needed or as-financed basis. The fact is that equipment investment requirements are three to four times those of plant investment requirements. So investments are being limited to advancing technology capabilities rather than increasing capacity. Note: China continues to lag in wafer fabrication technology by more than two years. Though the Greater China (China, Hong Kong and Taiwan) semiconductor market grew 8% in 2008, Taiwan's fell by 16%. The combined market reached US$113 billion, constituting almost 44% of the worldwide market. And while China, Hong Kong and Taiwan exhibit a high level of interdependence and interaction, Taiwan's semiconductor consumption market declined by 16% in 2008 to US$9.3 billion. Meanwhile, China's market grew by 17% to US$104 billion. The difference between the two markets reflects the continued and sustained transfer (or offshoring) of worldwide electronics equipment production to China from other locations including Taiwan. As a result, China's consumption of semiconductors has grown to more than ten times that of Taiwan in 2008. The semiconductor downturn altered or suspended the capacity expansion of many semiconductor companies in Greater China rather abruptly during the later half of 2008. Based upon all the wafer fabs in production by Q4 2008, Greater China could have 28% of total worldwide fab capacity if and when these fabs are all fully-equipped and ramped-up to full production. This is an increase from Greater China's potential of 25% of worldwide capacity at the end of 2007 and would represent 71% of worldwide pure-play foundry capacity, 31% of 300mm capacity, 30% of 0.8) China capacity 1.98 million, or 10.1% of worldwide

16%

46%

9%

28%

11%

19%

4%

65%

Worldwide capacity in millions of 8-inch equivalent wafer starts per month including China 19.7 million

Discrete Foundry/Dedicated Foundry/IDM R&D/MEMS (1%)
Source: SEMI Wafer Fab Watch May 2009

IDM

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Capacity by process node and wafer size
From a geometry/technology node distribution standpoint, China's current wafer fabrication capabilities have not kept up with the worldwide industry. When fully equipped and ramped, China will only have 27% of its capacity at the leading edge 0.4�m nodes versus worldwide 18%.
Table 6: Comparison of current wafer fab capacity, 2008

China Capacity Geometry > 0.7 �m < 0.7 to > 0.4 �m < 0.4 to > 0.3 �m < 0.3 to > 0.2 �m < 0.2 to > 0.16 �m < 0.16 to > 0.12 �m < 0.12 to > 0.08 �m < 0.08 �m n/a Total Wafer size > 4-inch 5-inch 6-inch 8-inch 12-inch Total 151.0 138.1 345.1 580.0 501.8 1,716.0 9 8 20 34 29 100 22.7 16.5 13.4 9.5 6.5 9.6 1,716.0 345.4 114.1 160.4 64.3 145.0 215.0 215.0 456.8 20 7 9 4 8 13 13 27 0 100 14.9 12.0 13.7 5.6 22.0 13.6 15.3 5.6 0.0 9.6 % CN%WW

Worldwide Capacity %

2,311.1 953.1 1,173.7 1,152.3 658.9 1,581.0 1,406.1 8,114.7 582.0 17,932.7 665.0 836.4 2,581.2 6,111.9 7,738.3 17,932.8

13 5 7 6 4 9 8 45 3 100 4 5 14 34 43 100

Capacity = 1000s 8-inch Equivalent Wafer Starts per Month (KWSpM) Current capacity = World Fab Watch Probability > 1.0 Source: SEMI World Fab Watch, 2009

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China's impact on the semiconductor industry: 2009

In terms of wafer size, China's current capabilities continue to be more concentrated in the smaller size ranges. To illustrate, China has: � 37% of its capacity in 6-inch or smaller wafers versus the worldwide mix of 23%; � 34% of its capacity in 8-inch wafers equal to the worldwide mix of 34%; and � 29% of its capacity in 12-inch wafers compared to the worldwide mix of 43%. Of the 84 12-inch (300mm) wafer fabrication plants currently in production worldwide, only five are in China, constituting 6.5% of worldwide 300mm capacity. As a result, for at least the next three years, wafer fab plants in other nations will maintain cost leadership in low mix/high volume advanced technology (e.g., DRAM and NAND Flash) wafer manufacturing. China does have three additional 12-inch (300mm) wafer fab plants committed and under construction. But they are only three out of 13 committed worldwide. When completed and if fully equipped and ramped to full capacity--which could be three years from now--these could increase China's 300mm capabilities to constitute 35% of its total wafer fab capacity. Still, these would increase China's share of worldwide 300mm capacity to only 7.4% when all 13 of the world's committed 12-inch fabs are brought into production. Offsetting this relative lack of 12-inch (300mm) wafer fab capacity, China continues to maintain a greater than average concentration of 6-inch and smaller fab capacity. China currently has 66 6-inch or smaller wafer fabs in production, constituting 37% of total capacity compared to a worldwide average of 23%. Overall it seems China has newer wafer fabrication plants with older technology. The majority of China's current wafer fab capacity has been brought into production within the last five years. Forty-six of China's current 88 wafer fab plants started production after 2003 and represent 64% of China's current capacity. By contrast, worldwide wafer fab plants starting production after 2003 only represent 37% of total current capacity. At the same time, China lags the worldwide average in technology node and wafer size. This apparent anomaly is the result of many of China's wafer fab plants being established with used equipment and technology. From a business model standpoint, China's wafer fabrication capabilities remain noticeably different from worldwide capabilities. Foundry capacity dominates both China's current and committed capabilities. For example, when fully equipped and ramped, foundry production will account for almost 52% of China's current capacity compared to just over 22% worldwide. In the future, if all the committed wafer fab plants under construction are fully equipped and ramped to volume worldwide, foundry production will account for 55% of China's capacity versus 23% worldwide.

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China's wafer foundries accounted for about 12% of worldwide wafer foundry revenues in 2008, which was a decrease from 13% in 2007. Based upon its current capabilities, China should be able to increase its share of worldwide foundry production to almost 23% by 2011 by fully equipping and ramping to full capacity at mature yields all of their existing wafer fabrication modules. This could have a significant impact on the semiconductor industry. China could further increase it share of worldwide foundry production to 25% by 2013 if all of the committed wafer fabs under construction are completed and ramped to full production.
Table 7: Comparison of committed future wafer fab capacity, 2008

China # Fabs Geometry > 0.7 �m < 0.7 to > 0.4 �m < 0.4 to > 0.3 �m < 0.3 to > 0.2 �m < 0.2 to > 0.16 �m < 0.16 to > 0.12 �m < 0.12 to > 0.08 �m < 0.08 �m n/a Total Wafer size > 4 inch 5 inch 6 inch 8 inch 12 inch Total 1 3 3 8 80.0 189.0 272.5 1 3.5 1 0 0 29 69 100 0.0 34.5 12.3 15.2 5 12 13 33 41.2 3 8 272.5 2 3 70.0 189.0 1 1 10.0 1 3.5 1 0 0 0 4 0 26 69 0 100 15.5 0.0 0.0 0.0 28.6 0.0 79.5 12.3 0.0 15.2 33 4 2 4 2 2 2 3 14 Capacity % CN%WW # Fabs

Worldwide Capacity %

22.6 14.0 21.8 30.0 35.0 45.0 88.0 1,539.8 1,796.2 8.5 15.8 232.2 1,539.6 1,796.1

1 1 1 2 2 3 5 86 0 100 0 0 1 13 86 100

Capacity = 1000s 8-inch Equivalent Wafer Starts per Month (KWSpM) Committed future capacity = Wafer Fab Watch WFW Probability > 0.8 to < 1.0. Source: SEMI World Fab Watch, 2009

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China's impact on the semiconductor industry: 2009

China's share of current wafer fab capacity allocated to IC integrated device manufacturers (IDM) has diverged further from the worldwide average. IC IDM capacity now represents only 29% of China's current wafer fab capabilities versus the 65% average worldwide. This is primarily a result of the closure of the Hynix-Numonyx 200mm facility, but it is also impacted by the addition of the 13 facilities to the WFW database during 2008. The figure could drop still further, to 28% by 2013, if all of the committed wafer fabs under construction are completed and ramped to full production. Under any scenario, China represents only slightly more than 4% of worldwide IC IDM capacity. This divergence probably had been the result of the timing of China's opening the semiconductor sector to foreign investments, an election to mimic the Taiwan foundry model and the very weak market position of China's state-owned semiconductor companies. It is now being exacerbated by China's focus on developing the IC Design (fabless) sector. Currently there are only seven foreign IDMs with some form of invested wafer fabrication capacity in China: Hynix, Intel, NEC (Hua Hong and SG JVs), Numonyx, NXP (ASMC and JiLin JVs), ON and ProMOS. At the same time, China's share of wafer fab capacity allocated to the OSD sector has increased. OSD capacity now represents 19% of China's current wafer fab capabilities versus 12% of worldwide. It could decrease to 16% for China versus 11% worldwide by 2013 if all of the committed wafer fabs under construction are completed and ramped to full production. However, in either case, China represents more than 15% of worldwide OSD capacity. As of May 2009, WFW shows there were eight additional new wafer fabs announced and/or planned (i.e., WFW probability of =/>0.45
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