China's foundries may not be able to compete head-to-head against the industry's global top-three players in the most advanced process technologies, but their opportunities lie elsewhere - their own country and other emerging markets where demand for less sophisticated products will remain robust and drive their growth, according to Nobunaga Chai, author of the recently published Digitimes Research Special Report, "Greater China IC foundry industry overview."

Q: Though SMIC (Semiconductor Manufacturing International Corporation) and GSMC (Grace Semiconductor Manufacturing Corporation) ranked fourth and tenth globally in 2010, China-based foundries seem to be less competitive in cost and are unable to meet demand for leading-edge applications. Is the situation changing, and what kind of competitiveness do China's foundries have?

A: In order to improve their competitiveness, China's foundry players are eager to migrate to next-generation process technologies. Although SMIC is still lagging one to two years behind TSMC (Taiwan Semiconductor Manufacturing Company) in process advancement, it already overcame the problem of low yield at 65nm node in the second quarter of 2010 and managed to raise 65nm node's share of overall revenues to 7% in third-quarter 2010 from 2% in first-quarter 2010. GSMC also plans to volume produce at 90nm in 2011 to become the second China-based foundry to enter the nanometer club. GSMC, Hua Hong NEC and the Shanghai city government also have a plan to set up a joint venture, Shanghai Huali Microelectronics, which will build a 12-inch fab and directly enter 65nm production.

There is still a big gap between China-based foundries and their Taiwan competitors TSMC and UMC (United Microelectronics Corporation) in R&D for advanced processes, but China's foundries are in a strong position to meet the robust demand from its home market, Hong Kong and other Asian emerging markets. Demand from the Asian emerging markets will be mainly for chips made using less advanced technologies, which is the strength of China's foundries.

Q: Can you give us a picture of the Chinese foundries' capacity expansion roadmap? How fast is their capacity growing?

A: SMIC has been actively ramping its 12-inch capacity, which reached a quarterly capacity of 152,000 8-inch equivalent units in third-quarter 2010 from 138,000 units a quarter earlier. As there is still plenty of room for expansion at SMIC's 12-inch fabs in Beijing and Shanghai, it currently has no plans to build new 12-inch fabs. But Shanghai Huali will build a 12-inch fab in Shanghai with a monthly capacity of 35,000 wafers (79,000 8-inch equivalent wafers). Others, such as TSMC's subsidiary and CSMC Technologies, will also expand their 8-inch fabs.

Q: With the industry dominated by such giants as TSMC, UMC and Globalfoundries, will China's players seek to compete head-to-head against them, or look to other market segments to avoid a head-on clash? SMIC may be an exception, but how good is the chance that it will become a Top-3 player?

A: From the pace of shrinking geometry to the construction of new capacity, TSMC, UMC and Globalfoundries are taking a runaway lead in sub-65nm development against their Chinese competitors. These top players are also giving top priority to advanced nodes when expanding capacity. But that means that if demand continues expanding, low-end capacity for such products as PWMICs and LCD driver ICs - which only need 0.15 micron or more mature processes - will be insufficient. This is where the opportunities will be for China's foundries that target the lower-end segments.

Up till the end of third-quarter 2010, SMIC had a total quarterly capacity of 489,000 8-inch equivalent wafers, just about half of Globalfoundries' one million 8-inch equivalent units. Globalfoundries' Fab 8 in New York is expected to ramp up its capacity to 60,000 12-inch wafers monthly in 2012, further widening the capacity gap between Globalfoundries and SMIC. Therefore, it is unlikely that SMIC will become a Top-3 player in the near future. But SMIC will see major momentum of growth from the strong demand from its major markets - China and other emerging markets.

Q: How fast will China's foundry production value grow?

A: Demand from China, Hong Kong and Asia's emerging markets will remain strong, with the communications and consumer electronics segments to see particularly strong growth. With China's foundries ramping up their capacities, Digitimes Research predicts that China's foundry sector will have a high single-digit CAGR from 2010-2013.

Digitimes Research analyst Nobunaga Chai
Photo: Digitimes archive